C a s e 13<\/p>\n
How Do<\/p>\n
You Solve a Problem Like General Electric?*<\/p>\n
The appointment of Larry Culp as the chairman and CEO of the
\nGeneral Electric Company (GE) on October 1, 2018, was a clear indication of the
\nseriousness of the<\/p>\n
problems that had engulfed the company. Culp was the first
\noutsider to lead GE ni its 126-year history-each of GE’s ten previous chief
\nexecutives had been a career man-<\/p>\n
ager at the company.<\/p>\n
GE was America’s greatest industrial corporation. Its
\ninnovations, that ranged from light bulbs to electric locomotives and from to
\njet engines and medical imaging, had powered the US economy and US living
\nstandards for the entire 20th century. For decades GE had been the bluest of
\nblue-chip stocks, supported by GEs’ growing rev- enues and profits and reliable
\ndividends. In the first 10 years of Fortune’s ranking of the world’s most
\nadmired companies (1998-2007), GE topped the list seven times. GES management
\nprinciples and systems had formed the template for the management structures<\/p>\n
and processes of large corporations throughout the world.<\/p>\n
Between the retirement of its last long-serving CEO, Jef
\nImmelt, on June 12, 2017, \u2022 and the appointment of Larry Culp (previously CEO
\nof Danaher Corporation) on October 1, 2018, GE’s reputation for managerial
\nexcellence was shattered by a $23 bilion write-down in the value<\/p>\n
of its power division assets, $15 billion of charges arising<\/p>\n
from insurance companies it had sold 12 years previously,
\nand revelations concerning dubious accounting practices. Its share price
\ndeclined by 61%, its dividend was halved, and GE was dismissed from the Dow
\nJones Industrial Index after 1 years of continuous membership. (Figure 1 shows
\nGE’s share price.)<\/p>\n
During his first 30 months at the helm, Culp sought to
\nstabilize GE. This involved replacing board members and senior executives,
\naccelerating hte divestments started by predecessors Flannery and Immelt, and
\nraising operational efficiency through a program of lean production.<\/p>\n
By early 2021, these measures were producing results.
\nDespite the devastating impact of the COVID-19 pandemic (especially on the
\nAviation division), GE reported positive profits and free cash flows for 2020
\n(se Table 1). Yet, these signs of progress did little to resolve the big
\nquestions concerning GE’s future.<\/p>\n
The GE that Culp had inherited was the product of over a
\ncentury of continuous development. Its structure of separate business divisions
\nintegrated by a corporate headquarters reflected a business model that had been
\nrefined by successive CEOs. The corporate center created value through the use
\nof acquisitions and disposals 1o reshape the business portfolio, exploiting
\nsynergies between the businesses, enhancing business performance through
\ncorporate systems for strategic and financial control, developing executives,
\nand fostering innovation.<\/p>\n
The system that GE created provided a management model for
\nlarge companies, not just in the United States, but throughout the world. Its
\nmost celebrated chief exec- utive, Jack Welch (“The most successful CEO of
\nthe 20th century”) had established a status<\/p>\n
amongst managers similar to that of Warren Buffet among
\ninvestors. He even founded the Jack Welch Management Institute to disseminate
\nhis management philos- ophy through a specially designed MBA program.<\/p>\n
The collapse in GE’s performance and reputation that
\naccompanied the final years of Welch’s successor as<\/p>\n
CEO, Jeff Immelt, produced a range of diagnoses<\/p>\n
among investment analysts and business journalists. These
\ndiagnoses allocated blame among three sets of factors: external forces,
\nmisjudgment by senior executives (Immelt in particular), and the<\/p>\n
obsolescence of the GE management system.<\/p>\n
Culp’s emphasis on incremental and operational improvement
\nraised questions over his broader vision for GE.<\/p>\n
Should GE continue as a diversified, capital-intensive,
\ntechnology-based manufacturing company, or should it split up either partially
\nor com- pletely? If it was to continue as a diversified, multibusiness company,
\nshould it retain its multidivisional structure with centralized corporate
\nfunctions and a high degree of top-down intervention, or should it move to an
\nalternative structure? If an alternative structure was appropriate, should<\/p>\n
it be a looser, more decentralized structure such as that
\nemployed by Danaher or Berkshire Hathaway, or a tighter and more integrated
\nstructure such as that of ExxonMobil or Procter & Gamble?<\/p>\n
The History of GE<\/p>\n
GE was created in 1892 from the merger between Thomas
\nEdison’s Electric Light Company with the Thomas Houston Company, Its business
\nwas based upon exploit-<\/p>\n
ing Edison’s patents related to electricity generation and
\ndistribution, light bulbs, and electric motors. Throughout the 20th century, GE
\nwas not only one of the world’s big- gest industrial corporations but also
\n“a model of management-a laboratory studied by business schools and raided
\nby other companies seeking skilled executives.” Each of GE’s chief
\nexecutives contributed to the development of GE’s management system, and, for
\nseveral of them, these<\/p>\n
developments diffused well beyond GE’s corporate boundaries.
\nAmong those who shaped corporate strategy thinking and practice:<\/p>\n
\u2022 Charles Coffin (1892-1922) married Edison’s industrial
\nresearch and development laboratory to a business system capable of turning
\nscientific dis covery into marketable products. The innovations emanating from
\nthe R&D lab oratories of large corporations such as AT&T, Siemens,
\nBASP, IBM, and DuPont were major drivers of industrial development during the
\n20th century.<\/p>\n
\u2022 Ralph Cordiner (1950-1963) assisted by Peter Drucker,
\nestablished GE’s<\/p>\n
Cro- tonville management development institute and
\ndecentralized GE’s operational management to 120 departmental general managers.
\nThe reconciliation of oper- ational decentralization with corporate control
\nwithin the diversified industrial company was the key feature of the
\nmultidivisional structure that became the dominant organizational form among
\nlarge companies during the latter half of the 20th century.<\/p>\n
\u2022 Fred Borsch (1963-1972) devised GEs’ corporate planning
\nsystem based on strategic business units and incorporated the portfolio
\nmanagement techniques developed with BCG and McKinsey &Co. This became a
\nmodel for other<\/p>\n
diver-<\/p>\n
sified corporations.<\/p>\n
\u2022 Reg Jones (1972-1981) integrated strategic planning with
\nfinancial control to<\/p>\n
create a comprehensive system for the corporate headquarters
\nto manage its businesses.<\/p>\n
\u2022 Jack Welch (1982-2001) was responsible for reenergizing GE
\nthrough combat- ting bureaucratic inertia and introducing a rigorous and
\ndemanding performance management system based on stretch targets and powerful
\nincentives. Welch stripped out layers of hierarchy and spearheaded initiatives
\ndesigned to root<\/p>\n
out complacency and to drive change. His
\n“rank-and-yank” system of firing<\/p>\n
the lowest-performing 10% of managers each year, ensured
\nintensity of moti- vation and commitment. Welch reformulated GE’s business
\nportfolio through<\/p>\n
exiting low-growth extractive and manufacturing businesses,
\nand by expanding services-financial services especially. By the time he
\nretired, GE was “a bank disguised as an industrial conglomerate.”‘
\nWelch’s status as “the greatest man- ager of the 20th century”
\n(according to Fortune magazine) rested on his impact beyond GE. According to
\nthe Economist, he “helped jolt America Inc out of the complacent
\n1970s” and “transformed American capitalism.””<\/p>\n
\u2022 Jeff Immelt (2001-2017) sought to return GE to its
\nmanufacturing roots through divesting its financial service and entertainment
\nbusinesses and increasing integration among the industrial businesses through
\nsharing know-how, increasing global presence, exploiting synergies in sales and
\nmarketing, and deploying digital technologies. However, as we shall see,
\nfailures in executing the strategy were instrumental in precipitating the
\ncrisis of 2017-2020.<\/p>\n
GE’s Corporate Strategy and Management System<\/p>\n
The Business Portfolio<\/p>\n
Diversification formed the core of GE’s corporate strategy
\nthroughout its history. Its origins lie in the flood of inventions from Thomas
\nEdison’s lab and was fueled by<\/p>\n
cash flows searching for new investment opportunities. GE’s
\ninnovations in organization and<\/p>\n
strategy was driven by the management needs of such a vast
\nand complex enterprise. However, by the 1990s, diversification had become
\nunfashionable and a dominant theme in strategic thinking was “core
\nbusiness focus.” Indeed, many diversified corpo rations were being
\ndismembered -either through leveraged buyouts or voluntarily as boards of
\ndirectors sought to release value and escape the “conglomerate
\ndiscount.” GE had resisted the dominant trend toward refocusing; it had
\nalways viewed its diversified portfolio of businesses as a source of stability
\nand strength. At the outset of his tenure as CEO, Jef Immelt declared:
\n“The GE portfolio was put together for a purpose-to deliver earnings
\ngrowth through every economic cycle. We’re constantly managing these cycles in
\na business where the sum exceeds the parts.” Thirteen years later, his
\nviews were little changed: “Diversity provides strength through disruptive
\nevents and commodity cycles,” thereby constituting a key “source of
\nvalue from a multi- business company. This commitment to risk spreading through
\ndiversification would appear to reflect GE’s desire for independence from
\nexternal capital markets.<\/p>\n
GE’s diversification also allowed it to adjust its portfolio
\nto changing opportunities<\/p>\n
for growth and value creation. Jack Welch had reconstituted
\nGE’s business portfolio by exiting low-growth, commodity businesses and
\nbuilding a financial services colossus.<\/p>\n
Jeff Immelt’s restructuring of GE’s portfolio was guided by
\nthe potential offered yb three global trends:<\/p>\n
\u2022 Economic development, especially in emerging markets,
\nwould require massive investments in infrastructure<\/p>\n
including<\/p>\n
energy, water, and<\/p>\n
transportation<\/p>\n
\u2022 Environmental degradation through global warming and,
\nwater scarcity, and conservation would require new technologies and business
\ninnovations.<\/p>\n
\u2022 Demographic trends especially aging-would create
\nincreasing demand for healthcare.<\/p>\n
The outcome was to recreate GE as an infrastructure
\ncompany\u2014a diversified cor-<\/p>\n
poration directed toward global needs for aviation, rail
\ntransportation, power gen- eration and distribution, oil and gas production,
\nand medical hardware. During his<\/p>\n
16-year tenure, Immelt reconfigured GE by acquiring
\ninfrastructure-related companies and divesting consumer and financial service
\nbusinesses. Table 2 shows GE’s principal acquisitions and divestitures during
\n2004-2020.<\/p>\n
The rationale of exiting slow-growing, low-margin sectors to
\nexploit the growth and profit opportunities of more attractive industries was
\nsound. The risk, however, was that, first, GE’s corporate executives would be
\nno better than the stock market in iden- tifying the attractive industries of
\ntomorrow and, second, the costs of acquisition and divestment would dissipate
\nthe returns from such a strategy. The Economist’s Schum- peter column was
\nskeptical of the effectiveness of portfolio management in creating value:
\n“The cost of churning capital in predictable ways can be significant . . .
\nGE has paid a multiple of 13 times gross operating profits for the businesses
\nit has bought and<\/p>\n
got 9 times for those it sold. Some nine-tenths of its
\nindustrial capital is now comprised of goodwill, or the premium that a firm
\npaid above book value for its acquisitions. ” Moreover, for portfolio
\nmanagement to work well, corporate management must be willing to exit
\nbusinesses whose long-term prospects are deteriorating This is easier for a
\nprivate equity firm than for a diversified industrial corporation where
\nlong-established businesses are likely to be protected by sentimental
\nattachment and entrenched political power. A feature of Immelt’s leadership was
\nthe length of time it took to exit from financial services and domestic
\nappliances.<\/p>\n
Shrinking GE Capital was a massive challenge given its size
\nand contribution to GE’s profitability, Despite Immelt’s commitment to
\ndownsizing GE Capital, it continued to<\/p>\n
grow during 2001-2007. In 2006 and 2007, GE Capital
\naccounted for almost half of GES’<\/p>\n
total net profit (up from 25% in 2001). Only after the
\nfinancial crisis of 2008-2009 did GE take drastic action to divest financial
\nservices. The designation of GE. Capital as a “systemicaly important
\nfinancial institution” ni 2013, which raised its capital reserve
\nrequirements, eliminated any competitive advantages it had derived from being a
\nnon- bank supplier of financial services. By 2021, GE Capital retained only
\n*vertical finan- cial businesses-those linked to GE’s core industrial businesses,
\nsuch as GE. Capital Aviation Services<\/p>\n
(GECAS).<\/p>\n
Figure 2 shows the changes to GE’s divisional structure
\nbetween 2015 and 2021. Table 3shows these sectors’ financial performance, while
\nExhibit 1describes<\/p>\n
their business activities.<\/p>\n
Exploiting Synergies<\/p>\n
Both Jack Welch and Jeff Immelt were adamant that GE was not
\na conglomerate. For Immelt:<\/p>\n
GE is a multi-business growth company bound together by
\ncommon operating sys- tems and initiatives, and a common culture with strong
\nvalues. Because of these shared systems, processes and values, the whole of GE
\nis greater than the sum of its parts.’<\/p>\n
For Welch, the essence of “integrated diversity,”
\nwas the frictionless transfer of best practices and know-how across GE. His
\nvision of a “boundary-less” company was directed to this. Immelt’s
\nefforts to exploit linkages among GE’s different businesses<\/p>\n
focused on building structures and systems to facilitate the
\ncreation and sharing of knowledge. This included a network of eight Global
\nResearch Centers to develop technologies with applications to multiple
\nbusinesses. These technologies included<\/p>\n
molecular imaging and diagnostics, nanotechnology, energy
\nconversion, advanced propulsion, sustainable energy, and security technologies.
\nPriority was given to estab- lishing GEs’ leadership ni the
\n“internet-of-things”\u2014the application of machine learning and
\nartificial intelligence to the flow of continuous data from embedded sensors in
\njet<\/p>\n
engines, locomotives, oil and gas equipment, medical
\ndiagnostic, electricity generators, and GE’s other hardware in order to manage
\nmaintenance schedules, optimize fuel<\/p>\n
consumption, prevent accidents, and automate other
\nprocesses. EXHIBIT 1<\/p>\n
General Electric’s business segments, January 2021, GE Power
\nis the world’s biggest supplier of equipment and supporting services for
\ngenerating and distributing electricity and is GEs’ biggest segment with 83,500<\/p>\n
employees. It is composed of two divisions:<\/p>\n
\u2022 Gas Power offers gas turbines for utilities,<\/p>\n
independent power producers, and industrial applications.<\/p>\n
\u2022 Power Portfolio offers steam power boilers, genera-<\/p>\n
tors, steam turbines, and air quality control systems. It
\nalso provides motors, generators, automation, control equipment, and drives for
\nenergy-intensive<\/p>\n
industries such as marine, oil and gas, mining, rail,
\nmetals, test systems, and water. Its joint ventures<\/p>\n
with Hitachi provide plant, fuel, and support for nuclear
\npower generation.<\/p>\n
Between 2017 and 2020, GE Power cut employment from 83,500
\nto 34,000 as it adjusted to excess capacity<\/p>\n
and intense price competition. GE<\/p>\n
Renewable Energy , Onshore Wind provides smart, modular
\nturbines and<\/p>\n
services that use digital infrastructure to optimize wind
\nfarm performance. Grid Solutions Equipment and Services equips power utilities
\nand industries worldwide to bring<\/p>\n
power reliably and efficiently from generation to final
\nconsumers.<\/p>\n
\u2022 Hydro Solutions provides design, management, construction,
\ninstallation, maintenance, and opera-<\/p>\n
tion of hydropower plants.<\/p>\n
\u2022 Offshore Wind provides equipment and services for<\/p>\n
offshore wind farms, including Haliade-X, the world’s most
\npowerful offshore wind turbine.<\/p>\n
\u2022 Hybrid Solutions integrates storage and renewable energy
\ngeneration sources. GE Aviation is the world’s leading supplier of commercial<\/p>\n
and military aircraft engines plus avionics systems and<\/p>\n
support services. CFM International, a joint venture with<\/p>\n
Safran of France, produces the LEAP engine. In response<\/p>\n
to the COVID-19 pandemic, Aviation cut its workforce from
\n50,000 to 40,000 during 2020. <\/p>\n
GE Healthcare comprises: E Capital provides financial
\nservices to support GEs industrial businesses and their customers in developed<\/p>\n
and emerging markets. These include.<\/p>\n
\u2022 GE Capital Aviation Services, which leases aircraft.<\/p>\n
\u2022 Energy Financial Services, which provides financial and
\nunderwriting capabilities for power and renew-<\/p>\n
able energy.<\/p>\n
\u2022 Working Capital Solutions, which purchasesEG Industrial
\ncustomer receivables.<\/p>\n
\u2022 Insurance-the residue of GE Capitals insurance business
\nwas reinsurance felated to long term care<\/p>\n
policies. The liabilities from these policies requiredEC to
\ncover a $17 billion shortfall ni its reserves ni 2017, GE Healthcare comprises:<\/p>\n
\u2022 Healthcare Systems, the world’s leading supplier of
\ndiagnostic imaging systems using X-rays, digital<\/p>\n
Pharmaceutical Diagnostics provides imaging agents for the
\ndetection, diagnosis, and management of disease, and systems for patient
\nmonitoring, infant incubation, respiratory care, anesthesia, and cellular<\/p>\n
and gene therapy.<\/p>\n
However, despite top management’s evangelism of GE as a
\n“digital industrial” company and massive R&D expenditure at GE
\nDigital, Predix was beset by software problems, including inability to handle
\nthe vast data streams generated<\/p>\n
by GE’s MRI scanners, jet engines, and gas turbines. In
\nFebruary 2018, Immelt’s successor, Flannery announced a narrowing of GE’s
\nDigital’s focus. His successor, Larry Culp, proceeded<\/p>\n
to sell part of Digital and appointed a new CEO to turn
\naround the remainder of the business.<\/p>\n
Additive<\/p>\n
printing (also known as 3D printing) was another area of
\ntechnology that GE viewed as applicable across al its businesses. By<\/p>\n
2020, GE Additive was a world leader in developing and
\nsupplying metal additive manufacturing machines for use in aerospace, medical,
\nand automotive manufacture.<\/p>\n
GE also sought to exploit cross-business synergies in sales
\nand marketing. GE bun- dled products and support services to offer tailored
\n“customer solutions.” In the case of a new hospital development, for
\nexample, there might be opportunities not just for medical equipment but also
\nfor lighting, backup generators, and financing. Such opportunities were
\nparticularly important internationally where GE’s “Company-to-
\nCountry” strategy aimed to build relationships with host governments across
\nmultiple infrastructure development projects. In 2012, GE announced that
\n“Nigeria should be our next billion-dollar country.”10<\/p>\n
The GE Management System<\/p>\n
GE’s ability to resist the dominant trend toward core
\nbusiness focus rested upon its much- acclaimed management system through which
\nGE enhanced the performance of the businesses it owned. This management system
\nwas a product of over a century of con- tinuous development. It was so deeply
\nembedded within GE’s culture that it was integral to GE’s identity and world
\nview. At the core of this management system was its approach<\/p>\n
to management development-its “talent machine”-and
\nits system of performance management. Both had been refined, reinforced, and
\nrevigorated by Jack Welch.<\/p>\n
GE’s commitment to leadership development was indicated by
\nits reliance on inter- nally developed senior executives. Its effectiveness in<\/p>\n
developing leaders had given it the status of a “CEO
\nfactory” \u2014former GE managers have been appointed to lead major companies
\nthroughout the world-including Boeing, 3M, Home Depot, Honeywell, and ABB.
\nAccording to Welch:<\/p>\n
Our true “core competency” today is not
\nmanufacturing or services, but the global recruiting and nurturing of the
\nworld’s best people and the cultivation in them of an insatiable desire to
\nlearn, to stretch and to do things better every day.”<\/p>\n
Key components of its management development system were
\nGEs’ corporate uni- versity at Crotonville, New York, and its “Session
\nC”<\/p>\n
system for tracking managers’ performance, planning their
\ncareers, and formulating<\/p>\n
succession plans for every management position at GE from
\ndepartment heads upward.<\/p>\n
GE’s performance management system was based heavily on
\nobjective, quantitative performance measures. Managers were set demanding
\nperformance targets, then given strong incentives for their attainment. Under
\nWelch, bonuses became bigger and<\/p>\n
more discriminating, while stock options were extended from
\nthe top echelon into middle management. Equally, underperformance became more
\nrigorously penalized: “A company that<\/p>\n
bets its future on its<\/p>\n
people must remove that lower 10% and keep , <\/p>\n
removing it every year – always raising the bar of
\nperformance,” declared Welch.” Central to Welch’s management
\nphilosophy was the need for constant pressure on managers to uproot complacency
\nand drive change: “If the rate of change on the outside exceeds the rate
\nof change on the inside, the end is near.”‘3<\/p>\n
Under Immelt, the performance management system was adapted,
\nfirst, to take account of managers’ widening scope<\/p>\n
of responsibility (“Our managers have<\/p>\n
to work cross-function, cross-region, cross-company’*) and,
\nsecond, to nurture and reward the “growth traits” required for GE
\nmanagers ot become successful “growth leaders.” Inevi- tably, GEs’
\nperformance management process became increasingly complex. Diagnosing GE’s
\nProblems<\/p>\n
Analyses of what had gone wrong at GE abounded. Most of
\nthese centered around two sets of factors, first, the leadership of Jef Immelt
\nduring the 16 years prior to his retirement on June 12, 2017 and, second, the
\nstrategy, structure, and management sys- tems of GE.<\/p>\n
JeffImmelt<\/p>\n
One of Jack Welch’s smartest decisions was to retire when he
\ndid. Immelt took over<\/p>\n
as chairman and CEO a few days before September 11, 2001:
\n“On my second day as chairman, aplane I lease, with engines I built,
\ncrashed into a building I insure, and it was covered by a network I own,”
\nhe later reflected.SI During the decade that followed,<\/p>\n
GEs’ business was impacted by the bear market of 2001-2002,
\nthe invasions of Afghani- stan and Iraq, and the financial crisis of 2008.
\nApart from these external challenges, Immelt’s tenure was blighted by missteps
\nof his own making:<\/p>\n
\u2022 Ill-judged acquisitions. Several commentators pointed to
\nGE overpaying for the companies it acquired. The principal evidence of this
\nrelated to Alstom.<\/p>\n
During the long delay in gaining approval for the
\nacquisition, the market for power-generating equipment took a downturn, and GE
\nwas forced to offer more concessions<\/p>\n
to Alstom<\/p>\n
and the<\/p>\n
French government. Hence, by the<\/p>\n
time the acquisition closed, Alstom was worth considerably
\nless than the price GE was paying. Timing was also amiss for several of GEs’
\nacquisitions ni oilfield<\/p>\n
services: Dresser, Wellstream, John Wood, and Lufkin were
\nall bought when oil prices were booming. Similarly, with financial service
\nbusinesses: GE Capital<\/p>\n
made massive investments in commercial real estate during
\n2007-just before the financial crisis.’ Scott Davis of Melius Research
\nestimated that GE’s total<\/p>\n
return on Immelt’s acquisitions was less than half of what
\nGE would have earned by simply investing in stock index mutual funds.’ The
\nEconomist esti-<\/p>\n
mated that GE was paying much more for the businesses it
\nbought than what it received for those it sold.”<\/p>\n
\u2022 Overoptimism. GE’s failure to guard itself against risk
\nand pay adequate<\/p>\n
attention to early warning signs has been interpreted by
\nsome GE-watchers<\/p>\n
as symptoms of top management’s overconfidence and reckless
\noptimism. According to some current and former GE executives, Immelt and his
\ntop dep- uties engaged in “success theater” \u2014htey “projected an
\noptimism about GEs’, businesses and its future that didn’t always match the
\nreality<\/p>\n
of its operations<\/p>\n
or its markets.”” In particular, during 2017, when
\nsigns of flagging sales and mounting<\/p>\n
inventory were emerging at GE Power, Immelt was slow in
\nacknowl- edging the problems. Such optimism and the urge to project success
\ncontributed to Immelt’s willingness to overpay for the acquisitions and his
\npropensity 10 allow his enthusiasm for future possibilities to dominate his
\nappreciation pre- sent realities (as in the case of GE Digital).<\/p>\n
\u2022 Failures in financial management. During the 21st century,
\nGE lost its reputa-<\/p>\n
tion for financial conservatism along with its triple-A
\ncredit rating. At the core<\/p>\n
of concerns over its financial management was an erratic
\napproach to cash-flow management. The financial crisis was, of course,
\nunexpected, but<\/p>\n
the fact that GE was forced to obtain $3 billion in
\nemergency funding from Warren Buffett’s<\/p>\n
Berkshire Hathaway Inc. and $139 billion in loan guarantees<\/p>\n
from the federal goverment points to lack of awareness of
\nthe risks inherent in GE Capital. GE’s<\/p>\n
stock buyback program was particularly ill-judged: in the
\nthree years prior to the dividend cut in 2017, GE spent $49 billion on buying
\nits own stock at a time when free cash flows from industrial businesses failed
\nto cover GE’s dividend.”<\/p>\n
\u2022 Dubious accounting practices. GE’s slow responses to
\nemerging problems can be partly attributed to its accounting practices. These
\nhad been designed to impress Wall Street but may also have insulated management
\nfrom the real- ities of GE’s business performance. Under Jack Welch’s
\nleadership, GE Capital became a valuable tool for managing GE’s quarterly
\nearnings: “Unlike a factory, GE Capital’s highly liquid assets could be
\nbought or sold at the ends of quar- ters to ensure the smoothly-rising earnings
\nthat investors loved.”” Dubious accounting practices also surfaced in
\nGE’s industrial businesses-these mal- practices were motivated by the pressure
\non divisional executives to achieve their budgeted sales and profits. For
\nexample,<\/p>\n
GE Power recorded profits from its sales of upgrades to its
\ncustomers’ existing gas turbines, but without taking account of the impact of
\nthese upgrades on reducing future service revenues.2 It also booked as current
\nprofits the anticipated returns from<\/p>\n
extending cus- tomers’ service contracts.23<\/p>\n
The GE Model of the Diversified Industrial Corporation<\/p>\n
Underlying the debate over Immelt’s qualities and
\nlimitations as a chief executive was the issue of whether GE’s corporate
\nstrategy and<\/p>\n
its much-vaulted management system were appropriate to the
\nbusiness environment of the 21st century.<\/p>\n
As already discussed, GE’s corporate strategy and management
\nsystem created value from three main sources: from managing the business
\nportfolio, from exploit- ing synergies from sharing resources and transferring
\ncapabilities between the busi- nesses, and from the performance enhancing
\neffects of the GE management system.<\/p>\n
Yet, each of these sources of value seemed to be more
\nelusive in the 21st than in the<\/p>\n
20th<\/p>\n
century,<\/p>\n
In terms of portfolio management, the internationalization
\nof capital markets and the increasing role played by private equity had
\nincreased the efficiency of financial<\/p>\n
markets, making it increasingly difficult to create value
\nthrough acquisitions and divest-<\/p>\n
ments. Certainly, GE’s acquisitions and divestments during
\nthe 21st century gave little indication of GE’s top management having superior
\nforesight to that of the stock market. The synergies from sharing resources and
\ncapabilities among GE’s different busi- nesses are difficult-if not
\nimpossible-to quantify. GE pointed to substantial bene- fits from sharing
\ntechnology\u2014 especially turbine technology between Aviation, Power, and Renewables.
\nIn other areas, however, these synergies were difficult to access in
\npractice-for example, the benefits from cross-selling between GE divisions.
\nMoreover,<\/p>\n
ti appeared that, through strategic alliances and informal
\ncollaborations, separate com- panies were becoming increasingly adept at
\nsharing technology.<\/p>\n
GE also<\/p>\n
derived economies from<\/p>\n
the centralized<\/p>\n
provision<\/p>\n
of support<\/p>\n
functions such as finance, HR, shareholder relations, and
\nresearch. However, such economies were ofiset by the tendency for the divisions
\nto duplicate corporate functions and by the tendency for these functions to
\nexpand under their own momentum. nI 2014, the CFO had observed: “We have
\ngot $3 billion of costs at corporate that si not allo- cated to the
\nbusinesses.” At the beginning of 2021, corporate functions (together with
\ndevelopment units such as Digital and Additive) accounted for about 11,000 of
\nGE’s total employment (down from 28,500 ni 2017).<\/p>\n
The biggest questions relate to the effectiveness of the GE
\nmanagement system ni improving the performance of the businesses. The
\neffectiveness of GEs’ “talent machine” rests upon the assumption that
\ngeneral<\/p>\n
management capability si not context specific, and<\/p>\n
it can be enriched by rotating managers through different
\nfunctions and different types of business. Similarly, the ability of the
\ncorporate headquarters to boost the performance of the constituent businesses
\ndepended upon the ability of corporate executives to under- stand the needs and
\nthe determinants of performance among those businesses.<\/p>\n
The evidence of the Immelt era casts doubt on the extent of
\ntop management’s familiarity with the financial and operational details of the
\nbusinesses they headed. This was particularly evident at GE Capital, which was<\/p>\n
GEs’ primary engine of growth for both Welch and Immelt. Yet
\nneither was fuly cognizant of the risks inherent in thist diversified financial
\nservices behemoth or of<\/p>\n
the difficulties of applying a managemen system developed
\nfor industrial businesses to financial services. So too with some of<\/p>\n
the divisional leaders. Steve Bolze, head of GE Power
\n2005-2017, was prone to unre- alistic, overoptimistic growth forecasts and a
\nwillingness to massage results ni order to<\/p>\n
boost quarterly profits.<\/p>\n
GE’s metrics-based, performance management system also began
\nto unravel during<\/p>\n
the 21st century. The system was designed to meet the needs
\nof the industrial businesses rather than financial services. Moreover, these
\nindustrial businesses became more com-<\/p>\n
plex as they transitioned from supplying equipment to
\nproviding “customer solutions”: customized packages of hardware and
\nservices. As a result, there was growing poten-<\/p>\n
tial for “gaming the system”\u2014meeting performance<\/p>\n
targets by manipulations and ruses that did not reflect
\nimprovements to underwriting performance.<\/p>\n
Even fi the performance management system had remained as
\nrobust as it was dur- ing the 1980s and 1990s, ti was clear that performance
\nmetrics were not the sole drivers of resource allocation and strategic
\ndecisions. These were strongly impacted by power politics, interpersonal
\nrelationships of friendship and hostility, and executive preferences.<\/p>\n
The Future of General Electric<\/p>\n
After Immelt’s resignation ni June 2017, both of GEs
\nsubsequent CEOs, John Flannery<\/p>\n
(June 2017-September 2018) and Lary Culp (October 2018-),
\nwere preoccupied with<\/p>\n
managing the crisis precipitated by excess debt, dwindling
\ncash flows, overcapacity , at GE Power, $15 billion in liabilities arising from
\nGE’s insurance unit, write-downs in the balance sheet values of previous
\nacquisitions, and continuing allegations over , board member.<\/p>\n
During 2018-2020, Culp accelerated the turnaround measures
\nintroduced by Flan- nery. These included top management changes including
\nrestructuring the board of directors), cost cutting, and the sale or spin-off
\nof businesses\u2014notably GE Oil & Gas (Baker Hughes), Transportation,
\nLighting, and BioPharma\u2014in order to pay off debt. In 2020, the COVID-19 crisis
\nnecessitated further crisis measures-notably a drastic downsizing of GE
\nAviation.<\/p>\n
In addition, Culp initiated internal management changes. The
\npriority was to improve operational performance. To achieve this, Culp devolved
\nresponsibility from corporate to the businesses and applied Danaher’s lean
\nproduction principles (based upon those originally developed at Toyota) to
\n“examine processes and continually improve them by solving problems at
\ntheir root cause.”? Changes in the GE culture involved chang- ing
\nmanagers’ values: “In 2020, we committed ourselves to the leadership
\nbehaviors of humility, transparency, and focus.”26<\/p>\n
Culp also outlined a strategic vision for GE: “We’re
\nfocused on three important opportunities-the energy transition to drive
\ndecarbonization, precision medicine that personalizes diagnoses and treatments,
\nand a future of smarter and more efficient flight.”” The implication
\nbeing that power generation, medical diagnosis, and aviation would continue to
\nbe GE’s core businesses. However, the form that the new GE would take remained
\nunclear.<\/p>\n
Flannery’s<\/p>\n
plan had been to spin off GE Healthcare, leaving GE with
\nthree major divisions-Power, Renewables, and Aviation-all of which shared
\nturbine technology. Following the sale of GE Healthcare’s BioPharma business
\nand its aviation leasing business, Culp had given no indication of further
\ndivestments.<\/p>\n
Equally,<\/p>\n
he had given no indication of his preferences for
\nrestructuring GE. The lean production system he introduced was similar to that
\nhe had developed at Danaher. If Danaher was to provide the model for GE, then
\nthis would likely involve the disman- tling of GE’s divisions in favor of a
\nlarge number of smaller business units, each with profit<\/p>\n
and loss responsibility. Danaher comprised over 100
\nbusinesses that were clus- tered in four main areas (life sciences,
\ndiagnostics, dental, water quality, and product identification) but not
\nintegrated into large divisions like GE.28<\/p>\n
A more fragmented structure had also been adopted by Siemens
\nAG, whose background and profile were similar to those of GE. It was founded in
\nthe late 19th century, and its biggest businesses were power generation systems
\nincluding wind power), medical equipment, and industrial automation. However,
\nunlike GE, Siemens had moved toward greater decentralization rather than GE’s
\npath of closer integration. Its CEO, Joe Kaeser, described the Siemens model as
\na “fleet of ships” with divisions becoming semiautonomous and
\nseparately listed. Siemens’ medical equipment unit,<\/p>\n
Healthineers, its renewables division, Gamesa, and its gas
\nand power division have each been spun out as separately listed
\ncompanies.” Like GE, Siemens’ had suffered from a sharp reduction in world
\ndemand for gas turbines; however, the fall in reve- nues and profits in its
\npower division were much less than that experienced by GE. During the three
\nyears to March 1, 2021, Siemens’ share price increased by 53%; GE’s fell by
\n56%.<\/p>\n","protected":false},"excerpt":{"rendered":"
C a s e 13 How Do You Solve a Problem Like General Electric?* The appointment of Larry Culp as the chairman and CEO of the General Electric Company (GE) on October 1, 2018, was a clear indication of the seriousness of the problems that had engulfed the company. Culp was the first outsider to […]<\/p>\n","protected":false},"author":2,"featured_media":0,"comment_status":"open","ping_status":"closed","template":"","meta":[],"disciplines":[9],"paper_types":[],"tagged":[],"aioseo_notices":[],"_links":{"self":[{"href":"https:\/\/www.writemyessays.app\/blog\/wp-json\/wp\/v2\/questions\/23986"}],"collection":[{"href":"https:\/\/www.writemyessays.app\/blog\/wp-json\/wp\/v2\/questions"}],"about":[{"href":"https:\/\/www.writemyessays.app\/blog\/wp-json\/wp\/v2\/types\/questions"}],"author":[{"embeddable":true,"href":"https:\/\/www.writemyessays.app\/blog\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/www.writemyessays.app\/blog\/wp-json\/wp\/v2\/comments?post=23986"}],"version-history":[{"count":0,"href":"https:\/\/www.writemyessays.app\/blog\/wp-json\/wp\/v2\/questions\/23986\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.writemyessays.app\/blog\/wp-json\/wp\/v2\/media?parent=23986"}],"wp:term":[{"taxonomy":"disciplines","embeddable":true,"href":"https:\/\/www.writemyessays.app\/blog\/wp-json\/wp\/v2\/disciplines?post=23986"},{"taxonomy":"paper_types","embeddable":true,"href":"https:\/\/www.writemyessays.app\/blog\/wp-json\/wp\/v2\/paper_types?post=23986"},{"taxonomy":"tagged","embeddable":true,"href":"https:\/\/www.writemyessays.app\/blog\/wp-json\/wp\/v2\/tagged?post=23986"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}