GE Lights out: The message from the shocking GE fall out

This book should become standard fare for business schools.?GE, the predominant industrial company of the 20th century, shockingly stumbled into the 21st.?GE's destiny of the last 20 years somehow reflects the ails affecting America. There are precious lessons to be drawn.?In a nutshell, GE Capital overtook the industrial part of GE and literally blunted all the GE magic of running a conglomerate.?Gone were the abilities to buy low and sell high, the landmark operational excellence became financial excellence, the star power of R&D dimmed, and the guiding hands of wisdom were handcuffed on the board.?Let’s consider these elements.

1. The financial assets of GE Capital grew from $350B in 2000 to $660B in 2008 and came to account for over 40% of earnings.?This asset growth all came during the so-called golden age of private equity, a notorious period speckled with speculation and greed. Drinking Kool-Aid straight from the fountain of Wall St ended up impacting GE's culture in numerous ways:

-It became increasingly difficult to craft a corporate strategy that would serve both the industrial half and the financial services half. ?As GE Capital came to subsidize the industrial part with profits and cash, it resisted the imposition of an industrial strategy.

-Profits from GE Capital were conveniently used under Welch to massage earnings per share. This little habit of convenience grew way beyond papering over minor profit shortfalls.?It led to greater accounting manipulations under Immelt. The SEC fined GE in 2020 for irregular reporting during 2015-2017. If GE was about winning at all costs in your markets under Welch’s command, it became 'making your numbers at all costs' for Immelt. ?A culture of product performance became a culture of financial performance.?Consider that whenever this shift takes place inside organizations, dark forces are liberated:?Bad news are not tolerated, problems are kept hidden, corners are cut short and so on. ?Boeing recently provided another timely reminder of how short-term financial imperatives carry drawbacks in operations.

2. GE Capital was entirely dependent on the triple A rating of the industrial division.?Cheap commercial papers fueled GE Capital's growth: borrow at the best short-term rates and lend at higher long-term rates. This financing strategy left GE Capital was left exposed in 2 ways:?1. a drop in the triple A rating could hurt the ability to raise cheap capital, and 2. a deep financial crisis could crush the stratagem at once. As a matter of fact, both happened.?The 2008 financial crisis dramatically wiped out the commercial paper market overnight, leaving GEC with a massive hole in credit facilities. Then globalization and bad acquisitions steadily eroded profits and cash and ultimately clipped GE’s triple A rating.

3. ?In the late 1990s, GE was amongst the first proponents to extend globalization to India and China: offshore manufacturing for lower costs. This worked out well at first. ?But India and China rapidly grew their own industrial giants endowed with massive cost advantages. ?When Immelt reshuffled GE's portfolio around 2003-2005, he got out of B2C businesses because of commodization from Asia.?Other industrial units, such as healthcare, also started to feel the increasing price competition from China.?With both industrial growth and profits eroding, GE lost its prized triple A rating in 2009. Most global Western have yet to find a competitive answer to the rise of industrial China Inc. ?Bombardier Transport succumbed to the same competitive pressures.

4. Immelt reshuffled GE's portfolio again during the 2010-2015 period.?The bet on the gas turbine business was done at the peak of the cycle, just as renewable energies were chipping off growth in gas.?After the debacle in the oil business, the play into the gas business was also going the wrong way and putting the Power division in trouble.?Then GE bought Alstrom (power and grid business) for $10B in 2015. The acquisition was initially identified as a strategic move for GE’s portfolio.?It ended up ill-timed, expensive and counter strategic.

5. Lastly, the GE digital transformation play was betting on smart engines and turbines.?The new Predix operating system would usher in a new era of digital conquest.?The strategy sounded fine, but the implementation turned out to be a money pit as more than $5B was invested into it as the belief ‘Build it and they will come’ took hold!?In this project, GE made a series of strategic mistakes that a Silicon Valley native would have clearly avoided.?This was another case of promotion getting the better of operation.?

The critical conclusion about GE's fall is about culture. GE led the transformation of corporate America from 1985 to 2005 into high performance organizations.?Lean and competitive organizations could thus respond to the rise of Japan Inc, who combined a higher quality/price ratio than the West in several industries.?America simply had to become more competitive and GE led the way by shedding layers of management, pushing strategy making down the business units and benchmarking.?Today the culture of stretched goals, operational excellence and accountability all wrapped up in business units might not cut it anymore.?Business is moving at digital speed in real time, innovation is shifting from 10% improvement to 10X jumps in customer values, data is the new pivot in operations, and global competition from China is cutthroat.?If GE could not transit into this new world, what is the outlook for all the others who copied the high-performance model??As the pressures intensify in this decade for greater agility and collaborative leadership, boards might insist first to protect financial performance at the cost of cultural transformations and great product innovations. The omen for these 20th-century companies will remain dark down the road.

GE has become just an ordinary conglomerate, without all the shine, the bells and whistles it was once endowed in the 1990s.?And with little of the edge necessary to outperform in the 21st century. That is the legacy of Immelt. ?

André Du Sault, MPA Harvard, 21.09.21