Surviving Entropy through School of Fish Strategy: A Case of GE recovering its Shareholders Value

"Right from the times of Frederick Taylor and Henry Fayol to C.K. Prahalad and Michael Porter, management scholars left no stone unturned in search of sources for greater profits".

One of the central tenets of management is to increase the long-term profitability of the firm, and in turn enhance its shareholders’ wealth (Barton et al., 2017; Donaldson, 1985; Rappaport, 2006). The world of management revolves around pursuing the best methods of managing manpower, material, suppliers, capital, knowledge, and technology to increase organizational productivity, profitability, and shareholder value. Right from the industrial revolution era to the modern digital economy, no stone was left unturned by management scholars in search of sources for greater profits, be it scientific management of men, incentive designs, human relations techniques, training and specialization, agency governance mechanisms, total quality management (TQM), working-capital management, mergers & acquisitions, strategic alliances, innovation processes, information technology, decision support systems (DSS), and customer relations management (CRM), and so on.

Despite remarkable progress in the sophistication of corporate governance reinforced with management expertise and professional controls, the large firms operating in traditional U.S. industries are increasingly experiencing severe financial crises. The crises appear to have been more pronounced among the large firms operating in the scale-economy industries such as metals, transportation, construction, electrical & electronics, appliances, machine tools & industrial goods, automobiles, and durables, and there seems to be an increasing disconnect between the antecedents such as firm asset size, growth, and financial performance in these industries (Autio et al., 2021; Cutcher-Gershenfeld et al., 2015; Lincicome, 2021; Pieri & Verruso, 2019; Warrian, 2016). The financial performance of large firms is becoming more erratic due to the increased complexity of firm governance on the one hand, and the volatile industry and market environments on the other (Barton et al., 2017; Bower & Paine, 2017; Dobbs et al., 2015; Rappaport, 2006).

Speaking of pragmatism, established management practices are having a less significant impact on firm performance; and speaking academically, the validity of theories linking management/organizational antecedents and financial performance has become debatable. We argue that this troubling trend has not been adequately examined, and there is a lack of explanation of how the systemic changes in technologies, financial markets, and competition impact the organizational and financial variables that are of interest to managers (Hitt et al., 2007; Rousseau, 2000).

The following table captures the systemic changes in the relationships among assets, revenue, net income, profitability ratios, market capitalization (market cap), and the stock price-earnings ratio of U.S. public companies operating in traditional industries over 4 decades.

New research evidence corroborates this trend. The associations between the revenue, assets, employees, and market capitalization of the Fortune 1000 and the wealthiest Fortune 100 firms are steadily fading. The statistical correlations between firm assets, revenue, employees, net income, and the market capitalization of the wealthiest companies in the 2010s have declined to half their size in comparison to that of the 1970s. More specifically firms’ shareholder wealth creation did not correspond with the growth in the respective asset sizes (Josefy et al., 2015), a disturbing trend given that more than $45 Trillion, about 80% of the U.S. investment assets are vested with Fortune 1000 companies.

Despite the economic significance of firm size and growth in scale-economy industries, the VUCA environments, however,—such as the frequent technological changes, global competition, customers demanding more product variations, and volatile financial markets—have rendered many large integrated firms less responsive and dysfunctional. The emergent global competitive landscape demands a high degree of flexibility, agility, and continuous change which large companies are finding difficult to deliver (Josefy et al., 2015; Miller, 1994; Williamson, 1985). Due to their tall hierarchy and structural complexity limiting agility and changeability, organizations with large assets carry high bureaucratic costs and high investment risk (Adler, 2001; Canb?ck, 2004; Chandler, 1977; Williamson, 2002). The troubles at large firms like General Motors, Ford, Tyco, HP, Alcoa, and Xerox have been quite well-documented uncovering the adverse impact of VUCA disruptions on the firm governance and performance.

A Case of GE recovering its Shareholders Value

General Electric (GE) is one such classic case; although GE’s sales revenue increased gradually, its asset base built on numerous mergers has grown exceedingly large over the past 2 decades without generating a proportionate level of revenue and net income.

For instance, the loss of GE's market leadership in home-appliances business and its eventual divestment from that industry is a case in point to think about the competitive challenges within a leveled-off-field packed?with equi-capable rivals. Whirlpool, AB Electrolux, Osram Licht AG, Bosch & Siemens, Sears, Godrej, Haier, Samsung, and LG all have become?equally formidable players in this industry catering range of products across the entire value frontier. While companies that could not create cross-industry innovations are losing their turf and profits due to price wars, whereas those - such as LG and Samsung - capable of accomplishing radical innovations in product design combining smartphone technologies (wifi, touchscreen), computers and electronics, and creating cross-industry products - have made great strides in this industry.?

GE was one of the most admired companies when we entered the new century in year 2001. What made GE go from great to worse in the past two decades? A slip from $500 billion Market Cap to $90billion Market Cap"

GE’s tumble from the top is worth studying. It’s a clear evidence that large firms like GE had tough time sustaining their efficiency, innovation and financial performance in VUCA environments causing entropy.

https://www.morningstar.com/stocks/5-charts-general-electrics-fall-grace Charts on General Electric's Fall From Grace Companies at the top don't stay that way forever.

As the turn of the century approached, GE was one of the most admired companies on the planet. Before the CEO Larry Culp took over, there were popular CEOs Jack Welch (1981-2001) and James Immelt (2001-17). Jack Welch was one of the most popular CEOs in America. Despite his reputation for Corporate astuteness, "Welch seemed to have encouraged short-termism and quarterly earnings. While Immelt wanted to ignore information that didn’t jibe with his overly optimistic projections, which was particularly dangerous in the M&A context” and which played out in spectacular fashion around GE’s acquisition of Alstom’s power and grid businesses"(Morningstar, 2021). Another major setback for GE came in the form of 2008 global financial crisis. During the financial crisis, GE’s value in the stock market collapsed, falling to just 15% of its peak. GE's failure was due to economic entropy which jolted several large U.S. enterprises. The economic entropy is a resultant combination of large & lethargic corporate bureaucracy, deterioration of organization culture and short-term driven management decisions and a taxing VUCA business environments.

GE's Market Value (Before Corporate Split)

"Now, by splitting into three companies that focus on aviation, healthcare, and energy, “it allows each of its businesses to determine their own destiny and allows investors to pick which combination of GE businesses they like best.”

In light of the new competitive challenges and dynamic market landscape, the Shoaling strategy offers a new synthesis of state-of-art management practices advancing new perspectives on how a firm's value chain can be strategically configured to stretch the resources and?build creative formations to enable innovations, growth and multi-pronged competitive strategies.?(www.schooloffishstrategy.com)

Dynamic business environments, diminishing returns to assets, and high risk contexts are forcing firms to reconfigure their strategy, value chain and organization. Shoaling or school of fish formation offers a novel framework to redesign the corporations to meet the challenges of the new millennium. Uber, Airbnb, and AAA are exemplars of how large global companies can be built at once with dispersed ownership of assets.

From the investment angle, If a large public firm is sliced into smaller?firms with many listings as independent units, however the units coordinated with unifying brand or inter-locking board of directors or another holding company for the purpose of control and synergy, will help realize the benefits of both integration and diversification on the one hand and can yield higher returns to individual stocks of the sliced units on the other hand. Indirectly, it is equivalent to issuing many stocks (even new IPOs) for one?large well established public firm. To get maximum benefits of dis-aggregation and shoaling strategy however, individual entities and their stocks still need to be identified with the common brand, and coordinating group.??Given the high volume of capital that flows into the stock market expecting quicker returns, it won't be a surprise if each of the smaller unit stock will gain much higher returns than they would do under one single-larger firm stock. Shoaling is an effective framework to analyze how to slice the organizational assets into new configurations before pursuing mergers as well.

Further research and readings on this topic:

A link to an article on Shoaling (School of Fish) As Competitive Strategy https://onlinelibrary.wiley.com/doi/full/10.1002/jsc.2036

A new research article based on long-term data: Profits crisis: evolving patterns of firm size and performance in traditional U.S. industries. Journal of Industrial and Business Economics (2023) 50:575–603 https://doi.org/10.1007/s40812-023-00268-y

https://www.dhirubhai.net/pulse/designing-shoaling-strategy-dr-senthil-kumar-phd-/?trackingId=j2mLxmUaQ%2FWWmFS8y8gHww%3D%3D

For further reading and case studies, visit www.schooloffishstrategy.com ; Please share the ideas with your network.