Who killed the GE model?

From the Harvard Business Review:

Who killed GE?

Of course, GE is not dead, and it may well revive and flourish as a company. After all, IBM came back from the dead in the 1990s. But the GE model is dead – and there’s a long list of possible suspects.

The GE conglomerate combined a wide range of industrial businesses under one roof. Unlike a pure holding company or a modern hedge fund, the GE model intended to create value by actively sharing capabilities among its disparate businesses, which, with one important exception, were all rooted in manufacturing.

The GE model dates back at least to the reign of Reginald Jones as CEO in the 1970s. He introduced a strategic planning process directed from the center. The model was honed by Jack Welch in the 1980s and 1990s, with new portfolio restructuring strategies and a headlong expansion into finance. Jeff Immelt tried to keep this model alive in the face of new threats in the 2000s. Now John Flannery is putting it to rest by selling off all but a core of relatively closely related businesses.

Corporate strategists have long debated how value could be created in the GE model, and others like it. Simplifying a bit, the chief explanations were these: First, that GE benefited from scale and dominant market positions in industrial businesses. Second, that GE had a technology advantage in complex industries, and that its technologies could be shared across its businesses. Third, that GE’s large portfolio gave it preferential access to funds and allowed it to allocate capital internally better than if the businesses stood alone. Fourth, some argued that GE’s advantage lay in its system of professional management, epitomized by its investments in executive education and management development.

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Depending on your theory of what made the model work, you may suspect different killers. Here are my top suspects:

China and other countries following the Chinese strategy. In that strategy, the country uses state enterprises, industrial policy, and the power of its domestic market to dramatically increase the country’s industrial production. Although China is the most important example of this strategy today, the idea is not new. It was developed by Japan and South Korea in the 1980s and is used widely by emerging markets from Brazil to India.

These strategies eroded GE’s competitive advantage in everything from consumer electronics and home appliances to trains and aircraft engines. The diffusion of manufacturing technology through global trade, investment, and education has hurt the company, too. GE had been able to maintain some of these businesses with joint ventures in the emerging markets, but the industrial conglomerate was wounded at its core.

Silicon Valley and the rise of information technology. Even if GE advertising once signaled a transition to software, it has played catch up in all the new software- and network-based industries. Even in health-care, where GE has a hardware position and was an early entry in electronic records software, it has been losing to more focused software companies, such as Epic.

In these information industries, scale and scope are still important – but often they are driven by network effects external to the company, not by manufacturing scale. And the conglomerate model is not dead in Silicon Valley, as Google’s Alphabet shows. But this game ran away from GE, which was never a real player in it.

Continue reading at the Harvard Business Review…


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