An Analysis of a “General Electric” Case Study

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Introduction

Multibusiness corporations can be considered a pinnacle of the corporate world due to their complexity and extreme efforts demonstrated by the top management to ensure their successful operations. Typically, large conglomerates are susceptible to poor performance because they experience difficulty adjusting to new trends and market situations. For many decades, General Electric (GE) retained leadership in various industries and thus defied the common idea of large companies being ineffective. Nevertheless, in the 21st century, GE eventually started to fail at maintaining its leading positions and experienced a considerable downturn in its share price in 2016-2018. Thus, it becomes important to assess the experience of GE to identify sources of its competitive advantages, reasons behind the company’s failure, and the possible solutions to improve its performance.

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What Made GE an Exemplary Organization

The success of GE and its recognition as one of the best-managed companies in the world could be attributed to several factors, all of which pertain to the idea of continuous improvement. During its decades of existence, GE had been able to demonstrate exceptional performance, steady growth, and successful operations in numerous fields ranging from financial services to the production of wind turbines. Yet, despite the fact that the company always pursued extreme diversification, it managed to run all of the business units centrally. In other words, instead of delegating complete authority to the heads of the divisions, the company chose to make all major strategic decisions concerning business units at the corporate level. Essentially, GE’s HQ functioned as the main source of power within the company, which could allocate resources to each business unit and decide on its development. Additionally, the significant role of the corporate management at GE was necessary for facilitating the process of the exchange of knowledge among different divisions, as well as the implementation of changes. All of these measures were part of GE’s portfolio planning efforts targeted at increasing the effectiveness of the company and maximizing profits for the shareholders.

Nevertheless, GE did not stay rigid, and every new CEO introduced their improvements to the overall system of the company to ensure its development. For instance, under Jack Welch, the company adopted the practice of setting stretch goals, the objectives which are difficult to obtain but conducive to better organizational performance (Roose & Williams, 2018). Since the success of GE was particularly dependent on the decisions of the executives, it developed reliable mechanisms for producing highly-skilled managerial professionals. The company even built a corporate university where its future leaders were trained. Every manager’s performance was subject to assessment based on which their careers within the company were determined. Strong leaders were necessary for GE since another element of its exemplary status was the constant transformation which implied divesting the business units, which did not show any future potential, and entering markets and industries which projected to grow. By seeking new opportunities, GE was able to abandon less profitable niches and venture into the most promising ones, thus ensuring its positive progress. While by keeping all of the business units under the same corporate umbrella, GE attempted to reduce overall risks during the times when certain segments were underperforming.

The belief in the power of diversification as a remedy to business cycles had always been at the center of GE’s philosophy. Therefore, making sure that all company’s divisions work according to one corporate plan was particularly important because every successful business unit had to be always ready to compensate for the losses of the stagnating one. Moreover, GE encouraged close interactions among various business units to facilitate the exchange of technological solutions and innovative practices which could be implemented in different scenarios. Thus, GE was able to demonstrate exemplary performance by relying on continuous development.

GE’s corporate portfolio under Welch and Immelt

As it was mentioned earlier, all CEOs of GE tried to positively influence the company by offering their innovative methods and techniques to improve performance and yield better financial results. Yet these changes concerned not only management practices but also portfolios and the business units which they list. Jack Welch and his successor Jeff Immelt are two of GE’s CEOs who were largely responsible for the company’s transition from the 20th century into the 21st one and employed similar approaches to portfolio management.

Jack Welch was GE’s CEO from 1982 to 2001 and was particularly active in reorganizing the company’s portfolio, taking into consideration the latest trends and the public demand. He became the person who started a major reorganization of GE’s portfolio by replacing the poorly-performing entities with the ones with great potential. Namely, Welch decided that it would be beneficial for the company to withdraw from manufacturing and extractive businesses and venture into financial services. By 2001, the company portfolio consisted of businesses operating in insurance, capital finance, infrastructure, plastics, and media (Grant, 2018). This evidence shows that Welch supported the idea of diversification for ensuring GE’s success and focused on choosing only the areas which were projected to grow in the long run.

Jeff Immelt, on the other hand, held the position of GE’s CEO during the 2001-2017 period and, in a fashion similar to Welch’s, transformed the company’s portfolio. He decided to switch the focus of the company from services to infrastructure since he viewed aviation, power generation, and transportation as industries of the future. Thus, by 2016, the company completely abandoned the majority of its Welch-era businesses and reduced the portfolio to two segments, specifically, capital finance and infrastructure.

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Despite the fact that Welch and Immelt opted for different businesses to be integrated into GE’s portfolio, the nature of their portfolios was quite the same. Namely, both CEOs were determined to pursue new prospects and invest in the industries which would bring the company large profits in the long run. They made strategic decisions to exit the industries, which did not demonstrate any substantial growth. According to the BCG Growth-Share Matrix, companies which possess businesses which have low growth and low market share must divest these assets and instead invest in businesses which can offer both high growth and market share (Kader & Hossain, 2020). The nature of the CEOs’ portfolios implied the utilization of these principles. Diversification was another element inherent to the portfolios of Welch and Immelt since it served as the basis of their management approach.

Such portfolio nature provided superior results during Welch’s era since the company’s share price had been steadily rising to 2001, when it reached its peak. Yet, during Immelt’s period, GE’s share price had been decreasing and reached an extremely low level by the end of Immelt’s term.

Why GE Restructured the Portfolio

Welch’s portfolio mix demonstrated its effectiveness since the company performed well financially, yet the need to restructure it arose from the necessity for GE to take advantage of the new opportunities. Essentially, Immelt’s reasoning behind the restructuring efforts was based on the idea of capitalizing on the trends which will define the next decades. Namely, entering industries which were projected to deliver substantial returns on investment in the near future. The financial services, which were a major source of income for the company during the Welch’s era, since they did not have any significant room for growth and had to be replaced by the more promising business. Insurance was another segment targeted by Welch and GE’s business which covered this sphere constituted fifteen percent of the company’s portfolio by 2001 (Grant, 2018). To disrupt the existing status quo and define new areas for long-term growth, Immelt analyzed the market. As a result, he came up with an idea to switch GE’s primary focus from services to infrastructure. Such transformation, in his view, would help the company stay competitive in a changing global landscape.

Infrastructure implied opening operations in the spheres of aviation, power, oil and gas, medical equipment, and rail transportation. According to Immelt, venturing into these niches would be justified by the trends which were gaining traction at the beginning of the twenty-first century. World’s population was getting older and required medical assistance, emerging markets were developing rapidly, and there were considerable environment-related problems such as global warming, which required complex solutions. Thus, GE had to respond to these trends and present its innovations and technologies, as well as products and services, to stay relevant. Being ahead of a future-oriented company, Immelt could not simply utilize the portfolio of his predecessor since one of his major tasks was to improve the financial performance of the company. By employing the diversification technique, Immelt wanted to distance GE from the role of a service provider and return its status as an infrastructure enterprise.

The Reasons Behind GE’s Poor Performance

Restructuring GE’s portfolio entailed a host of problems which ultimately were not addressed by the company and led to poor performance. There are many possible explanations of why after restructuring, GE was no longer able to deliver good results. First of all, the transition process took more time than it required, eventually stretching over the years and thus delaying the company’s start in new sectors. The process of divesting the old businesses also became problematic since it did not advance during the first years of Immelt’s era. For instance, the share of capital finance in the company’s portfolio, instead of being reduced, continued to grow. Additionally, the processes of acquisition themselves had poor planning and timing, which forced GE to overpay for them since by the end of the period of negotiations and other necessary procedures, they often lost significant portions of their value.

The slow conduct on the part of GE management could partially be attributed to the excessive optimism they expressed about the future of the company. According to studies, in a run-up to the financial crisis of 2007, many investors continued to supply industries with inflows of capital due to their expectations that asset prices would continue to increase (Roy & Kemme, 2020). Ultimately, this led to considerable mispricing and the subsequent adjustment of the market. It is possible to assume that GE executives were led by this trend and also believed that the speed of the portfolio restructuring process did not play any role since the company was protected from any risks by the steady growth of the market. Nevertheless, the management proceeded to embrace an optimistic attitude even after the crisis.

The issues with financial accounting were another factor which contributed to the failure of GE to deliver a successful transition from services to infrastructure. GE engaged in accounting practices which did not reflect the actual state of the financial well-being of the company but rather in those which were intended to make investors believe that GE was performing well. Some of these practices were introduced during Welch’s era. For instance, GE utilized its business unit, which was responsible for financial services, GE Capital, as a tool to make quarterly earnings look better than they did by selling or buying the company’s liquid assets (Grant, 2018). All of these problems eventually contributed to the collapse in GE’s financial performance of 2016-2018.

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Namely, the company’s management was extremely slow to react to the problems which had been accumulating over the past decade. The executives were too optimistic, which prevented them from seeing the real picture and acknowledging the issues which affected GE’s operations. While the acquisitions made by GE were associated with decision-making mistakes. Finally, cash flow management errors also accompanied GE since it borrowed uncontrollably both from private investors and the government.

Solutions to GE’s Problems

GE is a large company with plenty of resources which can correct its position if it employs a reliable strategy which will ultimately allow it to improve its financial performance. The primary step for the company must concern the necessity to restructure its portfolio once again since, at the moment, it operates in too many spheres, which hinders its ability to focus. Divesting the less promising businesses which are not projected to deliver any substantial returns on investment in the near future is a necessary measure for the company. The proceeds generated after the sale of these businesses can be used to cover the debts owned to both private investors and the government, as well as to fund the dividends to the shareholders. Additionally, this money can be spent on research and development in the main areas of focus for the company. These sectors were correctly identified by the former CEO, John Flannery, who chose aviation, power, and renewables as the core businesses.

Moreover, renewables are the most important segment in GE’s portfolio since it can still be considered an emerging area which requires investments, but it is forecast to grow substantially in the near future. According to research, low-cost renewable electricity has been discovered to be the main driving source behind the inevitable global transition towards sustainability and green technologies due to rising climate concerns (Bogdanov et al., 2021). GE may suffer losses in this segment since currently, there is no great demand for renewable energy. Yet, in the near future, the lack of customers will resolve, and GE can become a world leader in the industry. Currently, the company can design, test, and build renewable energy solutions which will be needed for the transitioning economy. By starting in advance, GE will be able to achieve a completive advantage in the industry since enterprises which will enter the sector at later stages will have less expertise and knowledge. Moreover, since aviation, power, and renewables often share the same technologies, it will be beneficial for GE to keep these three business units working together.

Nevertheless, while it is still uncertain when the demand for renewables will start to increase exponentially, GE has to maintain its oil and gas operations. This business can be used as, according to the BCG terminology, a cash cow, which will provide the company with resources which can be spent on paying out dividends and supporting the renewables business. The business which needs to be divested is transportation since this industry is dominated by Chinese and Indian companies (Grant, 2018). GE will not be able to achieve the leadership position since enterprises from China and India can offer products at lower prices. Thus, GE should not change its current focus and instead has to divest transportation and keep the oil and gas business.

Conclusion

General Electric is one of the oldest and most reputable companies in the world, which had been successful throughout the 20th century but started experiencing problems in the 21st century. Its commitment to continuous improvement, innovation, and the ability to be future-oriented contributed to the enterprise’s success and helped it achieve impressive financial results. In the 1980s, Jack Welch, a newly-appointed CEO of GE, transformed the company’s portfolio by making it a service provider, thus indicating GE’s shift away from industrial businesses. While Jeff Immelt, Welch’s successor, decided to start offering infrastructure solutions and reduce the share of the financial services segment in the portfolio. He intended to focus on the industries which, according to him, were guaranteed to grow in the future and thus would provide the company with long-term success. Yet, his plan did meet the initial objectives because of a host of problems, including poor cash flow management, excessive optimism, poor decision-making, and slow management conduct. To resolve the current situation with problems at GE, the company must focus on the segments of aviation, power, and renewables and divest transportation business while exploiting its position in the oil and gas industry.

References

Bogdanov, D., Ramm, M., Aghahosseini, A., Gulagi, A., Oyewo, A., Child, M., Caldera, U., Sadovskaia, K., Farfan, J, Barbosa, L., Fasihi, M., Khalili, S., Traber, T., & Breyer, C. (2021). Low-cost renewable electricity as the key driver of the global energy transition towards sustainability. Energy, 227(15), 1–12. Web.

Grant, R.M. (2018). Contemporary strategy analysis (10th ed.). Wiley.

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Kader, A., & Hossain, H. (2020). An analysis on BCG growth sharing matrix. International Journal of Economics, Business and Accounting Research, 4(1), 245–252. Web.

Roose, K.M., & Williams, W.L. (2018). An evaluation of the effects of very difficult goals. Journal of Organizational Behavior Management, 38(2), 18–48. Web.

Roy, S., & Kemme, D. (2020). The run-up to the global financial crisis: A longer historical view of financial liberalization, capital inflows, and asset bubbles. International Review of Financial Analysis, 69, 1–27. Web.

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