Rise and Fall of General Electric

Drawing back on our discussions from class a couple weeks ago, I recall Professor Kane acknowledging a need for a possible Blog Post regarding the decline of GE’s stock. The reasons behind the needed post, however, I can’t seem to remember at the moment, so if any of you seem to remember, feel free to toss it in the comments section! My guess was it had to do with their diversification strategy, but nevertheless, I’ll dive into my findings.

General Electric, once considered the quintessential American company, thrived as a sprawling conglomerate. Known for its unique diversification strategy and initial world-quality leadership, GE strongly positioned itself in many product lines, from aviation to consumer appliances to financial services. They gained considerable recognition for leading distinctly separate businesses alongside their capacity to innovate new technologies. From the incandescent electric lamp to the commercial jet engine to the first electric stove, GE continually created new technologies and disrupted established industries (before the term “tech disruption” had even been coined). So how could a company -built on American innovation and successful disruption- underperform so hard these past 20 years? Well, the main reasonings seem to lie amid two dimensions: the change in leadership and the change in the economic and competitive environment.

1981 – 2001 Jack Welch’s Reign 

  • Jack Welch’s tenure as CEO -marked by stunning growth in revenue and stock value- was heralded as transformative and inspiring for American business, and more specifically American Leadership. Of the various programs he implemented, Jack Welch’s “Fix, Sell or Close” Action Plan and extensive de-staffing and reduction of bureaucracy initiative served as GE’s jumping board into years of incredible growth. Under Welch’s headline “Be #1 or #2– fix, sell, close”, Jack Welch set the standard for each business to either be the first or second position in the industry, or else disengage. The practice enabled the company to analyze the 43 businesses under its umbrella while weaving out any businesses lacking profitability. The ones not holding a number one or number two position in their respective industry would either be sold or shut down in order to more effectively allocate resources and focus on financial responsibility. Internally, Welch’s insistence that GE become more “lean and agile” resulted in a highly disciplined destaffing process aimed at all large headquarters groups, including a highly symbolic 50% reduction in the 200-person strategic planning staff. De-staffing allowed for a mitigation of bottleneck employees, who prevented company growth, and ultimately fostered an increasing sense of  empowerment among the workforce. Through downsizing, destaffing, and delayering, GE eliminated 59,290 salaried and 64,160 hourly positions between 1981 and 1988, with divestitures eliminating an additional 122,700. Both practices contributed to an embrace of change that held a sense of high-regard for GE’s future, and also instigated a slight sense of fear for all employees (“if we don’t need you, we won’t keep you”). 

Major Drops for GE’s Financials

1. September 2001 Stock Drop

After briefly reviewing its stock price and relevant metrics, General Electric – by almost every measure – has dramatically underperformed since 2001.  

  • Change in Leadership: When Jack Welch retired in 2001 after 20 years as CEO, critics were skeptical of GE’s sustainable success. Welch had increased GE share returns by 5,200% – double that of the S&P 500- and turned a dormant industrial conglomerate into one of the most valuable companies in the world (Staley, Quartz). Looking at the stock price, it seems that GE had an incredibly volatile stock, with a sharp decrease soon after Welch retired. GE’s poor performance in 2001 and 2002 (soon after Welch retired) seemingly linked to the change in leadership and the change in social circumstances. 
  • Change in Social Environment: With 9/11 occurring just four days after the new CEO Jeff Immelt took over, General Electric took a devastating hit, dealing with both financial losses and decreased demand for air travel. Both jet engines on each of the hijacked planes were manufactured by GE, and the planes themselves were leased to the airlines under GE’s Finance division. Making matters worse, GE’s Insurance division also covered both the planes and the buildings, resulting in a total net loss of $575 million from the physical crash. The attacks brought about considerable financial devastation for GE on top of the already present emotional devastation as well. 

2. 2008 Financial Crisis

  • The 2008 Financial Crisis hit GE hard. The company’s stock fell 42% that year, and following Welch’s reign, it became clear GE wasn’t the company it used to be.  

3. 2017 – 2018 John Flannery’s Stint as CEO

  • John Flannery, the head of GE’s health care business, took over after Immelt after having been with the company for 30 years. He served as leadership for 14 months before getting fired in October 2018 due to his lack of urgency with core existential problems in several of its business units. GE had been underperforming around then and with no clear reasoning, Flannery decided to cut 12,000 jobs, stumbling the stock from about a $200-odd share down to a $100-odd share, a 50% loss. The company’s market cap, which stood at $262 billion at the time, fell significantly to $107 billion and instigated its departure from the Dow Jones industrial average in June of 2018 (Investopedia).

Taking into account Welch’s leadership along with the company’s slow demise, I took a step back to draw attention to GE’s success correlating to their adaptive practices. General Electric prided itself on disruptive innovations, and under Jack Welch’s leadership, the company took innovation to new heights in maintaining a resilient growth mindset. However, the events following Welch’s leadership and the company’s subsequent failure to adjust to changing economic environments led to decreased profitability. As we read in Professor Kane’s Digital Transformations, “nimbleness, scalability, stability, and optionality will be valuable capabilities for all organizations”. Jack Welch held a constant growth mindset on all levels and prided GE on taking immediate and decisive action to deal with existential threats, while also recognizing the opportunity to build longer-term capabilities amid times of uncertainty. The ability to take a broad perspective and truly understand a business’ growth prospects facilitates adjustments among stages of transformation within a business, and as we saw with GE’s success in its early years, the ability to stay nimble and decisive can attribute to a company’s success.

9 comments

  1. Thank you for taking a brief discussion in class and turning it into a blog post. They say hindsight is 20-20, and I think GE is a great example of being able to look back and analyze what happened. But, when you are in the moment, you are unsure of whether a trend is temporary or an indicator of a larger shift. I wonder how Welch’s “lean and agile” approach actually resulted in “lean and agile”. I also recall from previous classes that there was intense rivalry within the corporation and within teams, which may limit collaboration and innovation. As you researched this topic, did you find any criticism of Welch’s approach?

  2. This is a great blog — I appreciate how you were able to contextualize all of the events happening outside of the business functions and how they impacted the stock prices and overall success of the company. I agree with Parker though that while Jack Welch is often heralded as a brilliant leader and innovator, I would have to imagine that type of leadership often did not come with the support that a team may require, leading to fairly intense burnout. I wonder if there is a middle ground leadership example where innovation is rewarded but employees are supported.

  3. Classic case of over diversification, sometimes it’s better to focus on your core competency. I’m hopeful that splitting into three different companies will help them return to their former glory. Anyone else that optimistic?

  4. Thank you for taking the initiative to make this post! From my recollection, this class discussion on GE originated from a question I asked about Professor Kane on what ultimately lead to GEs downfall. Reading your findings on GEs stock history is fascinating and go’s above and beyond in answering my question in class. Even though Jack Welch’s leadership approach does have its issues (see Parker’s post), it is clear that following in his footsteps was a near impossible task. Maybe GE was doomed to fail, but it also appears that the appointed leadership wasn’t up to the task of bringing GE into the 21st century.

  5. Really interesting blog, I had always looked up to Jack Welch while I was still in undergrad as he was born and raised in my neck of the woods (Peabody/Salem MA) and his success in business was always something to aspire to. As I got older and started reading more about what made him successful, you start to realize how cutthroat the company was during those years akin to some of Amazon’s late 2000’s and early 2010’s. To your point, it does seem like there was a big push to continue to expand the company footprint even if they were not #1 or #2 in a space which ultimately began their unravel.

  6. Great call on following up with a blog here…I made a note as well and have a similar one coming this week that will focus on tech firms around Boston specifically. I think the price chart you included is a perfect visual here that fits in with the timeline of your blog. Really interesting to see the sharp changes around 2001, 2008, and 2017. I hadn’t heard of John Flannerys infamous time at the helm and will definitely be looking into that further. With such clear explanations for the 01′ and 08′ price dip, it’s interesting to see how leadership turning over and a lack of decision making can lead to such quick failure. It’s a shame to see such a big local company go down, I remember being excited when news broke that they’d be flipping an old warehouse in Fort Point into their future headquarters.

  7. Similar to the other comments, this blog is an excellent follow-up to our class discussion. GE’s decline as a retail conglomerate reminds me of SEARS’ downfall. The company initially started as a mail-order catalog retailer in the late 1880s and was a distribution powerhouse in the rural market. Sears kept expanding and diversifying into other businesses, and they were complacent with its core brand. They never invested in their brick & mortar stores, were slow to convert their catalogs to e-commerce, and showed poor oversight of independent brands. Anyway’s I know this about GE, but your blog made me think about Sears.

  8. The Jack Welsh effect was a real thing. GE was simply a buyer once they began the conglomerate phase. They stopped innovating, and the companies they were buying had remarkable high betas with relatively low alphas. When constructing a plan to buy a company, GE was in it to grow, not find synergy for the long-term growth and current development. You not only but the name brand, but all of the intangibles that come with it. Some companies even buy out others just to recruit better talent for their company. Once Welsh left, the GE way no longer existed and it wouldn’t have been successful either. The business was changing, and GE refused to resemble the changes in businesses around the world. As a result, albeit a devastating one, we see the market cap fall to ATL’s. This makes me wonder, will FAANG ever become GE?

  9. Great Blog! I recently listened to a Journal podcast on this topic as well. It was mentioning how GE was basically going towards a monopoly and how Welch’s leadership eventually failed. You might enjoy it: https://www.wsj.com/podcasts/the-journal/the-end-of-the-ge-era/93607525-9e7e-4eee-87a0-6df8

Leave a Reply

Please log in using one of these methods to post your comment:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

%d bloggers like this: