General Electric finds success in Florence’s ‘tough neighbourhood’

GE’s Italian operations teach three lessons: a buy-in from top management; key customers should be brought into the R&D process at an early stage; innovation can come through company-wide programmes.

PUBLISHED : Friday, 01 April, 2016, 10:31am
UPDATED : Friday, 01 April, 2016, 10:30am

Not many people would associate the scenic Italian city of Florence, where General Electric manufactures its turbomachines and compressors, with a tough neighbourhood. Yet at GE’s annual outlook investor meeting in New York city on 16 December 2015, CEO Jeffrey Immelt likened GE’s oil and gas market to such a place.

Mr Immelt made this revealing comparison because the financial expectations for the company’s oil and gas division are particularly cyclical for the coming year.

Studying how GE’s oil and gas division managed to brew their own recipe for success in this ‘tough neighbourhood’, and at the same time demonstrated how it is possible to drive innovation in a difficult environment, three lessons emerge; innovation requires the buy-in of top management, key customers should be brought into the research and development process at a very early stage and innovation can be empowered through company-wide programmes.

GE’s turbomachinery solutions (TMS) business, one of the oil and gas division’s most important product lines, is headquartered in Florence where its centrifugal compressors are manufactured. During the investor meeting with Wall Street analysts, Mr Immelt made a reference to the challenges facing “Lorenzo’s team”. He was referring to Lorenzo Simonelli, the president and chief executive of GE Oil & Gas, a division with 40,000 employees across 120 countries which is accountable for $19.7 billion in sales, representing 12 per cent of GE’s total sales in 2014.

On the outskirts of the Italian city lies an 86.5-acre facility that employs 4,500 workers wearing the familiar GE insignia on their safety helmets. The 175-year-old plant was bought by GE more than two decades ago when the visionary Jack Welch was in charge. Not a bad move for a chief executive who knew how to spot value—during his 20-year tenure GE’s value rose an astronomical 4,000 per cent.

Since the acquisition, the turbomachinery business—still widely known by its original name Nuovo Pignone, passed down from its Italian legacy—has contributed substantially to GE’s overall growth. Currently, the oil and gas industry is going through one of its most difficult cyclical downturns due to the dramatic fall in oil prices.

Nevertheless, the highly-trained mechanical engineers in Florence do know how to hold their own in hard times.

The TMS centrifugal compressor product-line leader Davide Becherucci fittingly made the comment that “Nuovo Pignone is one of the most important brand names for oil-and-gas machinery,” while he tinkered with a deceptively heavy stainless steel impeller weighing 30 kilograms in his small office that overlooks the huge plant yard.

A team of skilled engineers consisting of experts with more than 20 years of experience led by Becherucci and Leonardo Baldassarre, the engineering leader, have been working tirelessly for the past years on an R&D project called HPRC technology that they believe can add even more lustre to the GE Oil & Gas brand.

Their innovation is a new kind of centrifugal compressor that is half the size of the standard model and a third of its weight. By using higher-design capabilities, the HPRC team created a single compressor casing that could perform the work of two traditional casings.

Applying the so-called GE Store approach, they borrowed technology from GE’s aviation division to create a new impeller family with a higher pressure ratio. Through understanding of aerospace technology and its supersonic components, the team built a faster spinning, more efficient compressor with ground-breaking advantages over traditional centrifugal compressors. With this, the groundbreaking HPRC technology was born!

The HPRC compressor is a new combination of parts already present in its standard model and is designed to generate huge costs savings from lower energy consumption and maintenance. The HPRC team’s epic journey of innovation highlights a few important learnings:

•The most crucial is that innovation is a long-term process that requires management buy-in. When the team members went to their supervisors with his innovative idea in 2009, they loved the design. So impressed were they by the HPRC innovation that financing for the idea was approved at each and every step of the R&D process, from the research and development stage to the commercialisation phase, the current and final step in the HPRC innovation life cycle.

•The second lesson is to bring major customers into the R&D process as early as possible. Their needs and desires, such as wanting a smaller and lighter compressor, can drive new product development. The HPRC team has always worked closely with GE customers, especially those in emerging markets such as Petronas in Malaysia. In June 2015, the team invited about five key customers individually to Florence to participate in the testing of the HPRC prototype. A mock gas production facility was built in the factory yard in order to take the HPRC machine through its paces. Testing went on for four weeks to six weeks, but in the end the product was fully qualified by the end-user customers who will eventually be using it in their plants.

•The HPRC team’s step-by-step approach to innovation has inspired many young engineers and thus led to another key learning that innovation can be empowered through company-wide programmes. In fact, GE put in place the Fast Works programme to speed-up new product development by incorporating continuous customer feedback from design and development. One such innovation that has just emerged from this programme is a new gas turbine engine. GE said it took only two-and-a-half years to develop the engine, which was half the time that such a product would have taken in the past.

Brian Henry, PhD, Research Fellow, and Joerg Niessing, Affiliate Professor of Marketing, INSEAD