Gothic undercurrents

MARNE L. ARTHAUO-DAY

ALICIA HORBACZEWSKI

FRANK T. ROTHAERMEL

Healthymagination at GE (in 2011)

Healthymagination at GE (in 2011)

• MHE-FTR-010 0077645065

Time magazine called this era "The Decade from Hell," and "when you are going through hell," Winston Churchill advised, "keep going."

-Opening statement of the GE 2009 Annual Report

IT HAD BEEN a heck of a decade for Jeffrey Irnmelt, Chairman and CEO of General Electric (GE), the quintessential American blue-chip company. Mr. Immelt' s new role as chief executive started on September 7, 2001, just four days before the 9 /11 terrorist attacks. Since that tragedy, Mr. lmmelt had spent his time putting out fire after fire. Because of 9/11, the U.S. economy was pushed into a reces- sion, and a global economic slowdown began. Several of GE's key industrial sectors such as aviation and energy were especially hard hit, and even GE's insurance business lost $600 million. The company that had repeatedly promised and delivered annual profit growth rates of 16 to 18 percent in the 1990s struggled to grow at half that pace in the new millennium.1

Beginning his tenure as CEO in 2001, Immelt continued GE's transition from a low-margin, mainly commodities manufacturer to a more lucrative services company.2 At the same time, he took several steps to unify the GE brand around a stronger focus on innovation, including changing the GE motto to "Imagination at Work." Inunelt remembered keenly what GE's former CEO Jack Welch had preached: "If the rate of change inside an organization is less than the rate outside, the end is in sight .... Leaders must develop a sixth sense, an ability to see around the comer."3 Immelt's ability to "see around the corner" was precisely the star talent that had gotten him to his job as CEO.

The global financial crisis beginning in 2008 compounded the company's troubles even further. Because the conglomerate relied on its financial services unit, GE Capital, for more than 50 percent of its profits, the company found itself in grave danger. In 2009, GE announced that it had missed its quarterly earnings forecast just weeks after Irnmelt had reassured investors the company was on track, sending shockwaves throughout the financial industry.4 GE's stock price fell by 13 percent by the end of that day, resulting in a $47 billion loss.5 One month later, Standard & Poor's downgraded GE's AAA credit rating, further underscoring the market's lost confidence in GE's financial health.6

hnmelt quickly undertook a series of drastic actions to restabilize the company, including cutting the company's dividend by 68 percent,7 downsizing the work force by 10 percent, and giving up his own bonus in both 2009 and 2010. He even asked Warren Buffett for a $15 billion liquidity injection. On March 5, 2009, GE's share price hit an all-time low of $6.66, a figure symbolizing the culmination of GE's "Decade from Hell." From his assumption of the company leadership in 2001, lmmelt had seen GE's market capitalization cut in half, to about $200 billion by 2010. (See Exhibits la through ld for financial performance data.)

Professor Marne L. Arthaud-Day, Research Associate Alida Horbaczewski (GT MBA '10) and Professor Frank T. Rothaermel prepared this case from public sources. This case is developed for the purpose of class discussion. It not intended to be used for any kind of endorsement, source of data, or depiction of efficient or inefficient management.© Arthaud-Day, Horbaczewski, & Rothaermel, 2013.

Strategy & Policy

Healthymagination at GE

As the financial crisis persisted, it became clear to both Inunelt and GE's investors that the com- pany needed to rethink its corporate strategy. Once a key resource utilized to finance acquisitions and smooth quarterly earnings for the other divisions, GE Capital's losses were now a drain on the overall health of the firm. Increasingly, Immelt saw the financial crisis as an opportunity to move the company away from dependence on GE Capital and toward a new identity for the 21st century. He believed the key to future success was to figure out how to refocus GE away from declining businesses toward the rapidly growing industries of the future. The time was ripe for GE to return to its roots and become an industrial company again.

The first step in Immelt's plan involved a series of corporate restructurings. Earlier in his tenure, hnmelt had divested business units representing 40 percent of revenues and consolidated GE's mul- tiple business divisions into just five: GE Capital, GE Technology Infrastructure, GE Energy, NBC Universal, and GE Home & Business Solutions. In 2008, he extended that process, selling portions of GE Capital and spinning off the famed GE Consumer and Industrial division, allowing GE to focus on an even narrower group of businesses. (See Exhibits 2a and 2b for changing product and geographic scope.) In 2009, Immelt announced his intent to shrink GE Capital to no more than 30 percent of the total corporate profits, and he sold a majority stake in NBC Universal to Comcast Corp. 8 (See Exhibit 3 for an organizational chart.) The funds generated from the sale of NBC were used to offset loan losses from GE Capital and to fund investments in aviation, health care, and energy.9

These efforts were met with mixed reactions. While some analysts wondered whether the company was becoming too narrowly focused and losing the ability to hedge its bets, others recommended even further divestment. They pointed out that the company's simplified organizational structure belied the fact that GE had engaged in 307 acquisitions and purchased stakes in another 105 firms from 2001- 2010, while selling only 266 business units.10 In fact, acquisitions exceeded divestitures in all but 3 of the past 10 years (see Exhibit 4). Moreover, some of the purchases (e.g., homeland security, commercial real estate, and subprime mortgages) were at best tangentially related to GE's stated focus on global technology, infrastructure, and industrial businesses.11 GE remained a sprawling conglomerate with a presence in a vast array of industries including electrical distribution, oil and gas, water and pro- cess technologies, aviation, health care, transportation, appliances, consumer electronics, lighting, and media.

Without the financial economies once supplied by GE Capital, Mr. Immelt needed to persuade inves- tors that his acquisitions were justified and that there was still a strategic reason for keeping these com- panies together under the GE corporate umbrella. Otherwise, investors would be better off investing in growth markets on their own, instead of subsidizing GE's administrative costs. In the words of one analyst, "Reshaping GE [was] vital if the stock and Mr. hnmelt [were] to regain their former luster."12

History of Strategic Leadership at GE

The decline of GE's value under Jeffrey hmnelt's leadership was striking when compared to the widely acknowledged successes of his predecessors. When Reginald Jones became the seventh CEO in 1972, he shifted GE away from its traditional focus on electrical equipment and appliances and concen- trated instead on services, transportation, and natural resources. Even more important, he is credited with implementing the notion of strategic plarming at GE, having created 43 strategic business units to oversee its groups, divisions, and departments as well as manage the information generated by 43 stra- tegic plans. Over time, Reginald Jones added more management layers and finally grouped the busi- nesses into three divisions: consumer products, power systems, and technical products.13 Under his leadership, GE's sales almost tripled to $27billion, and he was named "CEO of the Decade" in 1979.14

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Healthymagination at GE {in 2011)

Healthymagination at GE

Jack Welch began working at GE in 1961 and was well known for his disdain for bureaucracy. Upon becoming CEO in 1981, Mr. Welch immediately instituted a massive downsizing effort. The restructuring did away with several layers of GE's formal reporting structure, increasing the number of direct reports per manager from 5 to 15. The number of employees at GE dropped from 404,000 in 1980 to 292,000 by 1989.15 Mr. Welch's strategy was not just to cut employees and costs, however. He envisioned a GE in which each of the businesses would be first or second in its industry in terms of market share, or else would be fixed, sold, or closed. From 1981 to 1987, he sold 200 businesses and acquired 370 businesses, for a net cost of $10 billion, 16 earning Welch the title of 'The Toughest Boss in America. "17 While Welch reigned over GE, market capitalization increased from $18 billion to over $500 billion.18 With GE's performance outshining all other companies during his tenure, he gained not only admiration but also converts and devotees to the "Welch Way."

The GE motto under Welch was "We Bring Good Things to Life." Welch implemented this success- ful slogan by introducing GE to Six Sigma (6rr), which was invented by Motorola in 1981. Six Sigma is a business-management process that focuses on improving the quality of outputs by removing the causes of potential defects and minimizing variability. The name Six Sigma comes from the statistical modeling of a manufacturing process in which the percentage of a process is 99 .99966 percent free of defects. Under Welch's leadership, every GE employee underwent extensive training to learn how to improve quality, lower costs, and increase productivity. GE now had decades of experience as a best-practice Six Sigma company and was renowned for its operational efficiency and mature management processes. Analysts estimated that the resulting performance tools that GE developed in technology, process, information, and culture brought in an additional $40 billion in revenue per year.19

A former football player for Darbnouth College and an MBA graduate from Harvard Business School, Jeff Inunelt joined GE in 1982. He was only 45 years old when jack Welch handpicked him as his successor above two other, more-experienced candidates-Robert Nardelli, who went on to become CEO of Home Depot and then Chrysler amidst considerable controversy, and Jim McNemey, who went on to head 3M and currently serves as CEO of Boeing.

Ecomagination

Im.melt saw GE as a company known for solving problems. He believed energy and health care to be two of the most pressing problems in the world today, and he placed his bets accordingly. With GE's long-standing expertise in industrial engineering, Immelt believed ·that GE was uniquely positioned to develop technological solutions for the world's future energy needs. In 2004, GE spent $700 million on clean technology. With the launch of a new ecomagination initiative in 2005, Irrunelt pledged to triple that amount over the next five years.20

The ecomagination initiative was intended to "develop tomorrow's solutions such as solar energy, hybrid locomotives, fuel cells, lower-emission aircraft engines, lighter and stronger durable materials, efficient lighting, and water purification technology."21 Immelt saw it as a way to deliver more energy- efficient products and services to GE's customers while generating reliable growth for the company. The program's goals included increasing GE's invesbnent in green technology R&D, increasing the rev- enues raised from ecomagination products, reducing GE's own greenhouse-gas emissions and improv- ing energy intensity, reducing water use and improving water reuse, and increasing communication with the public.22 In rolling out this initiative, Mr. Immelt also called upon the Bush administration to formulate a clear policy on environmental values and global warming.23

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Strategy & Policy

Healthymagination at GE

Despite GE's strong track record in industrial engineering and program management, some observ- ers received the news of the new eco-initiative with considerable skepticism. They questioned how serious GE was in its comrnihnent to a green economy, given its past reputation for large-scale air and water pollution. As of 2000, GE was the fourth-largest producer of air pollution in the United States and the fifth-largest creator of toxic waste, after companies like Honeywell and Chevron. Critics argued that "Mr. Immelt's credibility as a spokesman on national environmental policy is fatally flawed because of his company's own intransigence in cleaning up its own toxic legacy."24