INNOVATORS' INSIGHTS ISSUE

It’s rare for a less-than-$70-million acquisition to capture the attention of the popular press. But when the purchase is the lynchpin of General Electric’s strategy to compete in a disruptive way in the aircraft engine market, people take notice—for good reason.

GE announced its intention to purchase Walter Engines in 2007, and completed the transaction in June. Walter is an 82-year-old company based in the Czech Republic that makes engines for small, twin-engine turboprop airplanes. It has about 400 employees and sales of close to $30 million. It has a strong presence in niche markets like cargo planes.

Along some dimensions, it might seem strange for GE, a company who sells sophisticated, high-end jet engines that power large planes, to acquire a company that makes relatively simple, unsophisticated engines. Through the disruptive lens, however, GE’s purchase makes a great deal of sense.

GE recognizes that there is tremendous room for growth in the low-end of the aircraft engine market as continued frustration with traditional airlines spurs growth of commuter airlines, corporate aircraft, and air taxis. Pratt & Whitney, a division of United Technologies, currently owns the market for twin-engine turboprops.

A recent Wall Street Journal article described how Pratt & Whitney’s 75 percent market share allows it to charge attractive premiums for spare parts and service. Creating a viable competitor would give GE access to a growing market while making life tougher for a competitor—a virtual twin killing.

Of course, GE could have created a competitive offering from scratch. But GE said that approach would have cost $350 million. Further, GE’s acumen at creating sophisticated, high-end engines might have made it prohibitively difficult to create a simple, cheap engine for what it considers the low-end of the industry.

GE deserves credit for following an innovative approach to accelerate the development of a disruptive business. In fact, a small acquisition can be a great way to really kick-start disruption by leaping past the fuzzy front end that so often spells death for disruptive efforts. GE’s approach is a relatively inexpensive way to dip a toe into the growing low-end market.

On to the future. The Journal described how GE’s purchase amounted to “a casting plant, a spare-parts and components business and an already certified engine.” The big question going forward is whether GE recognizes that it purchased more than this—it purchased the beginnings of a low-cost, low-overhead business model.

A reasonable analogue is Cisco’s 2003 $500 million purchase of Linksys, a company that makes networking equipment for consumers and small businesses. Cisco had tried—and failed—a couple of times to move into the consumer and small business space.

As then Senior Vice President (and now the interim CEO of Avaya) Charlie Giancarlo noted, “what we learned through that entire process was that it was not a question of products, but one of business model. The high R&D, high support cost, high sales cost, which works great in an enterprise and service provider environment, is not the right one for a consumer model.”

Cisco kept Linksys quite separate from its core business for several years to make sure it realized the power of the new business model.

Similarly, GE now faces a critical choice: How tightly should it integrate Walter Engines with its existing aviation unit?

GE’s natural instinct might be to tightly integrate the two businesses. After all, tight integration would help to reduce seemingly redundant overhead and take advantage of GE’s global scale.

Because GE is really buying a business model, however, tight integration would seem to be the wrong approach. Tight integration would make it difficult to prioritize what would appear to GE to be low-value, low-margin business.

Instead, GE should inject key engineering talent and finances into Walter Engines to help it move up from its low-cost base, but should keep the company separate so it can further hone its potentially disruptive business model.

It seems like GE is following this approach. It plans to give the unit engineers and capital to develop a new engine and significantly expand capacity. If GE can successfully nurture its disruptive seedling without destroying the roots of its disruption, it could have a blockbuster success on its hands.

Typically, the sorts of acquisitions that garner headlines are things like GE’s failed $40-plus-billion acquisition of Honeywell in the early 2000s. While those acquisitions are splashy, more off-the-radar screen moves like Walter and Linksys can be significant sources of disruptive growth.

—Scott D. Anthony

For more information

“GE Takes on Jet Engine Rival,” by J. Lynn Lunsford. The Wall Street Journal. 3 July 2008.

“The Art of Acquiring Growth,” by Scott D. Anthony and Dheeraj Batra. Fobes.com. 4 January 2008.

“Developing Disruptive Ideas,” Chapter 5 of The Innovator's Guide to Growth by Scott D. Anthony, Mark W. Johnson, Joseph V. Sinfield and Elizabeth J. Altman (Harvard Business Press, 2008) describes different levers to drive disruptive growth.