General Electric – the ‘death’ of a hundred-year-old industrial icon: From the near-perfect system to the demise of Lehman Brothers

According to the Wall Street Journal, the decline and collapse of this company is quite similar to that of Enron in 2001, Lehman Brothers in 2008 or Theranos in 2018. These businesses all boomed spectacularly, going from glory to failure. defeated in the blink of an eye.

GE prides itself on its corporate governance culture, which can be elevated to a science. However, the dissolution of the company shows a fact that many directors do not want to admit: Management activities are very important, but it is actually not as they think.

Meanwhile, economic and business cycles are more decisive for a company than the actions of its managers. Furthermore, the new generation of leaders’ difficulties in overcoming the problems of their predecessors can carry a heavy burden.

The growth of GE

From the 1940s to the 1970s, corporations flourished until everything exploded. Parent companies such as International Telephone & Telegraph Corp. and Gulf & Western Industries Inc. has “gathered” dozens of businesses together, believing that “the sum of the elements combined is more effective than the elements that make up the whole .”

ITT came up with the idea that hundreds of elite managers gathered at corporate headquarters would provide expertise in accounting, shipping, recruitment, patents, inventory control, research and development.

Then, in the 1970s, investors stopped making bullish bets on corporate stocks. Diversification was born and some core business areas were specialized. Many corporations have split themselves to promote values ​​that have been eclipsed by the consolidation of businesses.

A similar wave is underway. Shortly after GE’s announcement, two other giants, Toshiba and Johnson & Johnson, said they were also splitting into separate companies, focusing on specific areas.

Jack Welch – CEO of GE from 1981 to 2001.

GE was founded in 1982. For decades, the company sought to spur growth from the stock market’s preference for corporate stocks and specialization in core businesses. The group has businesses in many areas: consumer goods, energy and electricity, financial services, infrastructure, technology (including healthcare), media.

Jack Welch, GE executive from 1981 to 2001, used both. He’s done close to 1,000 acquisitions and other deals, making sure nearly all of them fall within a few of these segments.

GE Capital, a financial services company, boomed as interest rates fell for decades. The company is in operation and deals in everything from trains to home mortgages to car loans in Thailand. All of these areas are profitable. For a long time, GE’s profits kept growing, and everything ran smoothly.

Strong belief in the way of management

Like ITT and its predecessors, GE prides itself on rigorous training for its leaders. In 1965, this company established a “leadership institute” in Hudson Valley (New York). Here, thousands of executives came and learned skills to improve GE’s operations and strategy. Since then, many “stars” of young leaders have been born, working from one business to another and in locations all over the world.

In the early 2000s, the company spent $1 billion a year on training. For almost a century, this system worked almost flawlessly.

When analyzing the 100 largest companies by market capitalization in the United States in 1912, historian Leslie Hannah found that only 21% were still in the top in early 1995. Almost half of them “disappeared”. Most of the businesses that survived had to downsize their operations.

GE not only survived, but even thrived. This company ranked 7th in the top 100 in 1912, ranked 2nd in 1995, just behind Royal Dutch Shell – a giant energy corporation.

In the spring of 2000, even as the internet companies collapsed, GE’s stock price rose and reached the largest market capitalization in the United States at nearly $550 billion. Even at the beginning of October 2008, GE was still the 2nd largest company.

Why did the industrial corporation logo collapse?

After that, things gradually got out of control. At the end of March 2009, GE’s capitalization fell from 214 billion USD to 105 billion USD because GE Capital collapsed due to too great risks. When GE was having trouble repaying its debt, Warren Buffett invested $3 billion and the US government also helped pay off tens of billions of dollars in debt.

This crisis has lasted for decades. Nicholas Heymann, a former GE internal auditor, has followed the company for nearly 40 years. He said GE’s problems took root at least from 2000-2001, when Mr. Welch decided not to retire to reshape GE by taking over Honeywell International Inc.

That $45 billion deal ended up not being the “goose that lays golden eggs” as expected. Honeywell is fine, but GE is off track, says Heymann. The company focused all its energy on a huge deal just as the economy fell into a deep recession. GE also made a series of failed acquisitions, including $14 billion for film and television assets, and nearly $10 billion for a biosciences company.

Difficulties dealing with the aftermath of several failed acquisitions and sluggish growth in some areas have forced GE Capital to take a tougher stance. The leadership team had no choice but to find a way to offset profit growth in other divisions when one place was slowing down.

Low interest rates and a long bull market make the potential risks visible when the financial crisis emerges. Investors are suddenly wary of going overboard with a business that relies heavily on debt. Therefore, GE Capital had to downsize, thereby reducing the cash flow to support the parent company.

For most of its life, GE made the “right place, right time” decisions. However, at this point, the company has taken the opposite steps. In 2015, GE had to pay $10 billion to Alstom, a French power company. In 2017, they invested $7 billion in a joint venture with Baker Hughes, an energy services company. Starting in 2018, oil prices skyrocketed and GE sold a majority stake in the joint venture in 2019.

Decades of success have led to complacency. Rita McGrath, professor of management at Columbia Business School, researches corporate change and advises GE. In the early 2000s, she said, the company’s managers often had the view that “it doesn’t matter what we do, it matters how we manage .” GE always bet that “management technology will save them”.

However, decades of bad decisions cannot be undone. Nor can they change the business.

In the early 2010s, GE spent about $5 billion developing a big data and analytics platform for the “industrial internet,” called Predix. However, this amount is still not worth much compared to other technology corporations and the plan was also launched at the wrong time.

Meanwhile, Microsoft, Amazon, and others have evolved into new-age corporations. They provide many of the same technology services as GE has long served to fill a basic industry need.

Likewise, GE’s $10 billion deal with Alstom in 2015 was made possible in part because it believes natural gas remains the primary fuel for power plants. Currently, leading the trend is green energy. GE is also participating in this race, but it is still “late”. One of GE’s three companies after the split will focus on “affordable, reliable and sustainable energy”.

On the stock market, ETFs are easily diversified. Most investors want CEOs to focus on a few businesses, not a wide range of businesses. Therefore, industrial corporations are on the decline, at least for the moment.

Refer to WSJ