General Electric

The rise and fall of a manufacturing giant


General Electric: The rise and fall of a manufacturing giant
General Electric
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I. A new generation of entrepreneurs, led by visionaries such as Steve Jobs and Mark Zuckerberg, challenges Jack Welch’s style of leadership

The leading manufacturing giants of the 1980s were able to succeed in markets all over the world by investing vast amounts of capital into constructing massive facilities for production and sales, diversifying into various industries, and simultaneously minimizing risk and maximizing profit by monopolizing key technologies.

  • Product and market strategy: Instead of striving to create a perfect product, companies aimed to enter new markets by creating a product which was good enough to sell and had enough points of difference to separate itself from the competition. Companies constantly looked for new openings by analyzing the market and competition.
  • Pricing strategy: Companies priced their products at levels that maximized profits by analyzing supply-demand curves.
  • Sales and marketing strategy: In order to dominate distribution channels and customer contact points, companies invested heavily on massive marketing and sales teams and regularly ran large-scale marketing and promotion campaigns.
  • Manufacturing strategy: Companies strived to secure lower manufacturing costs relative to those of competitors through economies of scale by constructing massive manufacturing centers and purchasing raw materials in extremely large quantities.
  • Cost strategy: Companies constantly aimed to cut costs by searching for new sources of cheap raw materials, moving manufacturing bases to countries with low labor costs, and restructuring.
  • Business strategy: Companies first achieved great success with the company’s core business and then diversified into other industries using the customer base, distribution channels, and business know-how accumulated up until that point. This resulted in risk diversification and profit maximization.
  • Business expansion strategy: Companies expanded the scale of existing businesses and diversified into new ones by actively seeking mergers and acquisitions.
  • Constructing barriers to entry: Companies created technological barriers to entry by investing massive amounts of capital on research and development to develop core technologies and then protecting these technologies from being used by competitors by patenting them.
  • Organizational strategy: Securing large amounts of capital through the financial market is a critical factor in constructing large scale manufacturing facilities, operating global marketing and sales teams, constantly promoting new mergers and acquisitions, and making massive investments in research and development. Financially savvy executives consequently dominated the corporate decision-making process.

Corporations grew into massive corporate empires with the following strategy: “Attempt to corner the market on a sellable product and produce it as efficiently and economically as possible; dominate distribution and sales channels to maximize sales and profits; construct a massive corporate group by diversifying”

General Electric of the 1980s was a company that was a world leader in setting industry-wide trends. Jack Welch, the leader of GE during that period, became famous as a legendary businessman who wrote the book on corporate [1]best practices.

  • Jack Welch earned a Ph.D in chemical engineering at the University of Illinois at Urbana-Champaign and started his career at General Electrics at a department in charge of developing new plastic materials. Welch showed talent in the field and quickly rose through the corporate ranks. He was eventually named as a CEO in 1981 at the relatively young age of 45.
  • Welch believed that GE had to constantly search for industries that GE had a chance to become a world leader in. He believed that GE should withdraw from industries that GE did not have a chance to dominate. He made a judgment on all industries based on a matrix of industry growth, market size, GE’s market share, and profit margins. He created an infallible corporate empire by selling GE’s stakes in all slow growing, low profit industries and aggressively pursuing mergers and acquisitions in fast growing, high profit industries. Under Welch, GE acquired over 1,700 companies and transformed from a company centered around home appliances to a giant group with diverse interests centered on energy, finance, and industrial materials.
    • Jack Welch believed that the energy and industrial materials industries were bound to continue growing as long as the world economy continued to develop. He dominated the markets by promoting mergers and acquisitions with companies in the two industries.
    • In order to help client companies which were struggling to purchase energy and industrial materials due to lack of capital, Welch founded GE Capital and expanded into the retail banking business, offering loans and leases. Welch then expanded further, creating GE Finance, which he developed into one of GE’s most important businesses.
  • To expedite growth and maximize profits for the entire organization, Welch collected best practices from all over the world and encouraged his employees to study them and apply them in real world situations.
  • Jack Welch’s business philosophy was to pull large amounts of capital to make strategic capital investments. He worked closely with financial experts and reorganized the corporate decision-making process to one that revolved around financial analysis. In order to build a well-oiled and fast-moving corporate machine, he constructed a [2]top-down corporate structure which heavily emphasized the role of corporate leadership in maintaining corporate order and discipline

When Jack Welch became the CEO of GE in 1981, GE was worth 12 billion dollars. By 2001, its value had skyrocketed to 480 billion dollars – a 4,000% increase. Profit margins increased from 6% to 20%. GE grew from being the 10th biggest American company to being the largest.

However, after the late 1990s, companies such as Apple, Google, and Facebook began presenting a totally different model of business. Instead of trying to maximize profits by diversifying, these companies began to maximize value by creating a new kind of business ecosystem. Along with this paradigm shift, GE began fading into obscurity.

  • Product and market strategy of companies from the American West Coast: Instead of developing services which were simply good enough for the market and the competition, these companies began to focus everything on creating the best product possible in order to completely satisfy customers.
  • Pricing strategy: Companies began to focus more on gathering more users rather than maximizing profits. Companies began offering products and services for free or at an extremely low price.
  • Sales and marketing strategy: Companies believed that offering an extremely high quality product for free or extremely cheap prices was the best approach to sales and marketing. They minimized marketing and sales costs and instead focused on growth through word of mouth.
  • Business strategy: Rather than aiming to be a global leader in multiple industries, companies chose to focus heavily on one or two key industries. The goal shifted from contending for global leadership in many industries to striving for total global dominance in one or two particular industries.
  • Business expansion strategy: Instead of maximizing profit through large-scale production and sales, companies aimed to become a dominant service provider on a global level. They then constructed a platform where other companies could join in to build a new business ecosystem. Companies aimed to amass a huge database of user data, charge other companies to use the platform, and create added value through passive income such as advertising.
  • M&A strategy: Companies used M&As to further improve service and business platforms and acquire technologies and talent, instead of using M&As to diversify into new industries.
  • Building barriers to entry: Instead of holding a monopoly on a certain technology, companies openly shared technologies (Open Source API) and encouraged competitors to become reliant on those technologies, thereby increasing control and influence on the industry as a whole. Companies ultimately strived to control the customer base and the business ecosystem as a whole instead of monopolizing technology.
  • Organizational strategy: West Coast companies are operated around developers in a [3] bottom-up organizational structure based on improving service through the creativity and self-direction of individual developers.

West Coast companies have provided extremely solid products and services for free or at very low prices. They have developed innovative new technologies such as big data, machine learning, and deep learning. They have shared these new technologies for free to other companies. By doing so, these companies have created new ecosystems in their industries in which they wield a tremendous amount of influence. The creation of such open ecosystems has resulted in more opportunities and wealth for everyone.

II. Jeff Immelt, Jack Welch’s successor, brings a modern management style to GE but fails to get results

Jeff Immelt, succeeding Jack Welch as CEO, made sweeping reforms within GE in an attempt to move the company away from diversification. Immelt believed that GE had to return to its essence as a company.

  • Changing GE’s Strategic Direction: Jeff Immelt boldly did away with GE’s business model of diversification in order to focus on a few key industries and construct new business ecosystems.
  • Focusing only on key industries: Immelt concluded that GE was at its essence a heavy industries manufacturer that produces cutting edge industrial and energy-related materials and equipment. Immelt began to sell off investments in unrelated industries. For instance, GE’s finance department was originally intended to simply support GE’s sales of industrial goods, but the department eventually grew to the point where it became an independent financial company. In 2008, the financial department caused huge losses to GE as a whole due to the effects of the 2008 Financial Crisis. Immelt subsequently decided to terminate everything in the department which did not contribute to GE’s manufacturing divisions. GE then sold and disposed of their B2C (business to consumer) services, insurance division (sold in 2005 for $6.8 billion), stakes in media companies (including NBC), and home appliance division (sold to Haier in January 2016 for $5.6 billion). They then turned their focus to energy, aviation, healthcare, electricity, water, transportation, and other industrial material and energy related industries.
  • Creating new business ecosystems: Jeff Immelt envisioned that GE would become more than just a leading manufacturer of high-tech industrial materials. Immelt wanted GE to evolve into a company offering an industry-wide platform that provides analysis tools, software assistance, and real-time data analysis on various facets of the manufacturing process including selecting raw materials, designing products, and choosing manufacturing processes. Immelt wanted, for example, for companies to be able to log on to GE’s industrial intranet to gain access to GE’s vast databases of information and analysis tools pertaining to industrial materials and manufacturing line operation. Immelt then invested heavily on developing tools to realize this vision, such as big data solutions to process control issues as well as GE’s own industrial intranet.

Immelt invested large amounts of capital in areas that Jack Welch had not invested in. He created a digital campus in Silicon Valley and aggressively hired talented developers from companies such as Apple, Facebook, and Google.

  • After establishing a digital campus in Silicon Valley, Immelt began investing heavily into developing big data technologies and new software intended to be used by the new intranet as well as GE’s manufacturers.
  • To build sophisticated new software, GE paid large sums to aggressively hire talented developers working at top companies such as Apple, Facebook, and Google.

Unfortunately, Immelt’s vision to transform GE into the Apple and Google of industrial materials never quite materialized, and GE’s stocks continued to plummet.

  • The decline of GE’s key industries: The oil and natural gas industry, one of GE’s most important industries, fell into an extended recession due to falling oil prices. At the time, GE attempted to innovate within the oil and natural gas industry, but the energy industry had already begun moving past oil and natural gas towards eco-friendly, high-efficiency, low-cost energy solutions. As green technologies continued to develop at an ever-increasing pace, GE’s efforts to innovate within the oil and natural gas industry became largely meaningless. Efforts by competitors such as Google and Elon Musk to offer innovative energy solutions which had the potential of helping humanity as a whole were held in much higher regard compared to GE’s efforts to innovate within the existing oil and natural gas industry. While competing green technologies continued to boom, GE’s oil and natural gas businesses continued to decline.
  • The lack of support from other industrial materials companies: Google, Facebook, and Apple are companies which offer B2C services directly to individual consumers, who are captivated by the innovative services that these companies provide and use them frequently. On the other hand, GE offers B2B (business to business) services and must deal directly with other companies. Companies are in general far more conservative and averse to innovation compared to individual consumers. They are generally much less enthusiastic about the kind of innovation GE had hoped to bring. Naturally, GE’s efforts to construct a new platform for the industry failed to bring in users or expand the platform’s database of information. Individual consumers are open to innovation, but corporate consumers are wary of change. This key difference between B2C and B2B industries was an important distinction which did not work in GE’s favor.
  • Failure to reorganize: GE is a company with a long heritage as a manufacturer with an organizational structure based on that of a large manufacturing company. This longstanding structure ultimately became an obstacle to GE’s efforts to innovate. Although GE was able to bring in talented professionals from other companies through the digital campus set up at Silicon Valley, many of these new employees did not integrate smoothly into the existing organizational structure. They began conflicting with employees who had already been present at the organization. The new initiatives that the newly hired employees were supposed to work on consequently were not implemented properly and had minimal impact. As the confusion within the GE organization continued, top professionals of the West Coast tech industry began to avoid GE. The only people moving to GE were those who were not able to succeed at companies like Google and Apple. With this decline in the quality of newly recruited employees, GE’s digital departments continue to falter.
  • The lack of support from shareholders: GE’s key shareholders were made up of traditional funds that emphasized immediate results easily visible on the company’s financial statements. Unsurprisingly, they did not support GE’s pursuit of innovation.

Under Immelt’s tenure, GE stock prices fell from 41 dollars per share to 28 dollars per share. (The S&P increased by 124% from 2001 to 2016, but GE shares fell by 30% in comparison.) Immelt, facing pressure from shareholders, stepped down from his position.

III. John Flannery succeeds Jeff Immelt but fails to keep up with modern trends

GE then named John Flannery, a financial expert, as the new CEO to replace Jeff Immelt.

  • John Flannery worked for GE Capital, purchasing undervalued assets and analyzing risk in capital investments.
  • During the 1990s, Flannery led GE Capital’s corporate restructuring projects. In 1997, Flannery was put in charge of the Latin American division of GE Equity, GE’s private equity fund. In 2005, Flannery was named as the head of GE Capital’s Asia/Pacific division and successfully led the division to improved results.
  • After GE sold off its finance business, Flannery moved to the corporate restructuring and business development division. In 2013, Flannery led the $17 billion acquisition of the power and grid divisions of French multinational company Alstom.
  • Flannery was then named as the CEO of GE Healthcare in 2014. Flannery changed the focus of GE Healthcare from medical equipment sales to comprehensive medical consulting and successfully [4] turned the business around, delivering on his promise to double sales and profits.

Flannery, a financial expert, expectedly announced that he would begin reorganizing GE’s businesses based on the results that they produced. GE has been undergoing an intense restructuring process, boldly selling off interests in core businesses which have not been producing results.

  • Selling off interests in GE’s flagship businesses: Flannery concluded that “the oil and gas industries will eventually be supplanted by new renewable energy sources” and subsequently sold off GE’s investments in the oil and gas industries. He also sold off GE’s rail transportation businesses, believing that conventional rail transportation will lose value as trends shift towards “new transportation and shipping solutions (for example, hyperloops) and automated transportation (for example, self-driving cars)”. Flannery sold off all of GE’s existing businesses aside from its interests in aviation, healthcare, and energy. Flannery also discarded projects related to Immelt’s vision of transforming GE into a comprehensive industrial materials platform, believing that it did not offer short-term profitability.
  • Improving profit margins through cost cutting: Flannery has put in a lot of work in improving short-term profits through cost cutting. GE has reduced the number of high-ranking executives and is tightly monitoring business expenses (for example, ceasing to provide automobiles and business class flights for executives and reducing R&D expenses from around 4% of total sales to around 2%).

However, the market has not been welcoming of Flannery’s efforts.

  • Many have criticized Flannery’s management style as going against the modern management trend of world-changing companies becoming market leaders.
  • Some believe that GE’s healthcare, aviation, and energy businesses will eventually lag behind the competition unless GE strives to challenge itself through innovation and bold investments.
  • Most believe that GE’s efforts to cut costs may result in better short term profits but will fail to increase the value of the company in the long run.

IV. Implications for the Korean manufacturing industry

Korea’s biggest companies also have their roots in manufacturing industrial materials and face challenges similar to those of GE.

  • Heavy industries such as the shipbuilding, steel, construction, and machinery industries led Korea’s growth in the 1970s and continue to account for a large part of Korea’s GDP.
  • Korea’s heavy industries are arguably at an even worse position compared to GE, struggling against both Chinese competition which offer inexpensive products as well as European and Western companies which have been leapfrogging them in technology. Korean manufacturers have invested heavily in improving manufacturing efficiency through high-tech IT solutions and have pursued new business interests through the application of cutting edge IT solutions. However, they have failed to translate such efforts into tangible results.
  • The Korean automobile industry has failed to keep up with industry trends such as electric vehicle development. As a result, Krean automobile manufacturers have been bogged down with decreasing profits and share prices.

The value and share prices of Korean heavy industry manufacturers have been stagnating for an extended period of time. A variety of solutions have been offered, but none have been particularly promising.

Many predicted the fundamental stagnation of heavy industry manufacturers with the following reasoning:

  • “Manufacturing will ultimately become an industry with low added value, whereas high-tech industries will become high value-added industries” “The focus of high-tech industries is shifting from making good products to using data more effectively” “As a result, IT-based companies will come to dominate traditional manufacturing industries such as the automobile and energy industries over traditional manufacturing companies” “We are now in a new era which can be encapsulated by the fact that Elon Musk and Jeff Bezos are developing and launching rockets”

Most of Korea’s fast-growing industries are technology-based (for example, the semiconductor industry) where companies can ride the worldwide growth of technology.

  • Chemicals: Companies such as LG Chemicals have been a popular destination for chemical products and technologies such as electric vehicle batteries and high-tech renewable energy materials.
  • Display: Major players in the touchscreen and high-tech display markets have been working closely with companies such as LG and Samsung, who are widely recognized as the industry leaders of display technologies and products.
  • Semiconductors: The value of companies such as NVidia and Samsung, who produce products such as graphics cards and memory chips, have been steadily rising along with the development of mobile devices, big data and high-volume data processing technologies, and display processing technologies in VR and 3D spaces.

However, Korean high-tech manufacturers have yet to become “platform leaders” who drive industry-wide innovation.

Why has GE fallen into a long-term slump? Did Jeff Immelt miss the mark with his vision for GE, or did he fail to execute a plan that had actually been appropriate for GE? What can Korean companies learn from this case study?

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