Answer

8.0 Introduction

Intensive competition among firms has necessitated the need for continuous creation and revision of competitive advantages. According to Lonsdale and Kane (2019), competitive advantage denotes the factors such as resources and capabilities that enable a firm to consistently produce services and goods that are better, differentiated, or cheaper than other competitors. Competitive advantages allow a business to create superior value and thus, attract higher sales and profit margins compared to the other firms. Organizations that fail to evolve are bound to lose their competitive advantage. One of the factors that contributes to the realization of an advantage is the ability to introduce disruptive services and products. This illustration points at General Electric (GE) which was a highly successful firm. The company was at one time the benchmark for other firms on how best to manage a high performing multi-business corporation. Additionally, GE served as the model firm in many areas including management, strategy formulation, and human resource management (Grant, 2016). It is upon this backdrop that this paper seeks to present a critical analysis of GE’s key and underlying issues and strategize how best to restructure the firm to achieve sustainable competitiveness. This paper achieves this goal by answering the questions; why GE was considered an exemplary organization, the nature of GE’s portfolio under Immelt and Welch, the necessity of restructuring processes, reasons for diminishing performance, and an outline of a comeback plan for the company.

• Why GE was considered an exemplary organization

The ease with which previous CEO’s have managed GE made it an exemplary organization. Their ability to manage a diversified corporation with extended products and services across industries made the company properly leveraged to withstand adverse changes in environmental condition across different industries. For instance, its investment in jet engines, healthcare products, financial services and oil and gas equipment created a distinct pool of resources that could not be matched by rivals. This statement is backed by the resource-based view framework which explains how organizations create and use strategic resources to exploit and achieve sustainable competitive advantage (Miller, 2019). In addition, GE maintained a knowledge sharing and integrated management system that enabled dissemination of knowledge and skills around the organization. As a result of the exemplary systems, GE’s stock markets thrived for years which helped attract investors. Grant (2016) adds that GE set the trend on best practices on how to manage diversified enterprises and conglomerates.

According to previous CEO’s namely Welch and Immelt, GE created value by adopting several mechanisms. These mechanisms helped the company become exemplary. The first of these mechanisms was reducing risks. The selection of the portfolios was aimed at optimizing earnings, while reducing the risks arising from changes in business cycles as they would have a negative impact of its cash flows. The second mechanism was through portfolio management. The top leaders used the Boston Consulting Group (BCG) product portfolio and growth share matrix, commonly known as BCG matrix to reconstruct their business portfolio (Hossain & Kader, 2020).  Using this model, the leaders could classify their portfolio into dogs, question marks, stars, and cash cows thus determining how best to treat each of them business units.

The third mechanism was entailed exploiting synergies between the different business units. Immelt felt the need to create a knowledge sharing system that would enable sharing of technologies and knowledge across the organization. The network consisting of eight research centers helped GE incubate new innovations that contributed towards new products and superior value proposition. The sales and market department also benefited from cross-business synergies as it explored how best to customized customer solutions. The fourth mechanism was GE’s exemplary management system. The system has undergone more than 120 years of continuous development which has enabled the main processes of the managerial practices to be embedded into the company culture and organizational behavior (Grant, 2016). At the core of this system was management development and performance management. The dedication to leadership development enabled GE to achieve succession planning by developing its senior executives internally. The performance management system focused more on quantitative performance measures and the realization of company’s objectives.

• Nature of GE’s Corporate Portfolio under Welch and Immelt

Evidently, the nature of GE’s portfolio is a key contributor to the superior results reported by the company over the years. However, the portfolio provided better results during Welch’s tenure than Immelt’s. According to Grant (2016), after ascending to the helm of leadership at GE in 1982, Welch embarked on reformulation of GE’s business portfolios by exiting manufacturing and extractive businesses which were classified as low-growth. Instead, he used the finances form the divestiture of these entities to invest in expending services especially financial services. By the time of his retirement in 2001, the company was more of a bank than an industrial conglomerate. A breakdown of GE’s business portfolio shows that by 2001, the company composition was 41% for infrastructure, 24% for capital finance, 20% for plastics, media, while insurance services represented 15% of its portfolio. The effectiveness of the restructured corporate portfolio is seen in the way GE’s share prices increased during Welch’s tenure. The positive trajectory in share prices, revenue, and profitability evidences that the portfolio contributed towards superior results.

Jeff Immelt took over in 2001. He focused on restructuring GE’s portfolio in a manner that returned it to its manufacturing tradition. He divested entertainment businesses and financial services. He replaced these services with increased integration and acquisition of industrial businesses. His focus was on maintaining a portfolio that could facilitate sharing of technologies, exploring synergies in marketing and sales, and increasing the global presence of GE. Immelt believed that diversity helped strengthen the firm’s portfolio and thus, its ability to withstand commodity cycles and disruptive events. He intended to achieve greater value from leading a more diversified and multi-business company than his predecessors. By the end of its tenure, GE’s corporate portfolio had extensively invested in infrastructure (75%) while capital finance represented 25% of the firm’s portfolio. By the end of Immelt’s tenure in 2017, GE had exhibited a turbulent shift in share prices. For instance, the share prices dropped from $58 after the exit of Welch to $24 by 2003 after which it increased slowly to $41 by 2008. It dropped drastically due to the 2008 Global Economic Crisis reaching the lowest value of $9 in 2009. The share prices then increased slowly reaching the highest level of $31 in 2017. The share prices have since been dropping until 2020. This critical analysis of GE’s portfolio justifies that the combination during Welch was superior to that of Immelt. As a result, the former CEO reported superior financial results than the latter.

• Necessity of Restructuring GE’s Portfolio Mix

The case study alludes that the global business environment is turbulent. For this reason, it is important that an organization reviews its portfolio from time to time and restructures it to align with these changes. It is only through restructuring that an organization can effectively position itself to attract sustainable competitive advantages (Pidun, 2019). In the case of GE, the company acknowledges a diversified portfolio as a primary source of strength especially during turbulent times and disruptive events. In this case, the essence of restructuring was to focus on constituting a portfolio that maximized value realized by the firm and that delivered to the customers. For Immelt, the restructuring process was necessary since an organization had to invest in services and products that exploited emerging opportunities in the environment. It was only by restructuring to align the businesses value proposition to the changing customer needs, that an organization can realize long-term growth. Some of the key trends that shaped Immelt’s restructuring of GE was demographic, infrastructure, emerging markets, and environment factors namely water scarcity, conservation, and global warming (Grant, 2016). A critical analysis of these sentiments shows that the essence of restructuring is mostly to align the firm so that it can sustain its superior results. Without restructuring, the firm would become static thus failing to adapt to the changes in its environment.

In answering the question on GE’s superior results and the need to restructure, Anthony (2016) cautions that when an organization is performing well, that is when it is most vulnerable. The author makes this statement citing examples where the management became too comfortable that the organization failed to anticipate and prepare for change. A famous example is Kodak’s failure which is not blamed on its superior technologies and good history of performance, but the complacency among its top leadership to anticipate and keep up with disruptive business models (Anthony, 2016). Contrary to Kodak, its second fiercest rival Fuji anticipated change and diversified its portfolio from the film business into electronics and healthcare. Today, the company still has a strong revenue stream of $20 billion while its rival Kodak went bankrupt in 2012. Referring to examples of organizations that failed to restructure to adopt to disruptive changes in the environment, Bowman and Singh (2015) cautions that corporate restructuring of portfolio should be undertaken carefully since it could have two outcomes; positive or negative. The negative outcome often strengthens its performance while the negative consequence could include a loss of competitive advantages and superior results. Above all, it is important that an organization restructures its portfolio frequently.

As evident in the case study, restructuring of GE’s portfolio has not always resulted into the best performance. Some of the reasons for the decline in performance are attributed to poor decision making by the top leadership. However, when the process is done right by analyzing the contribution margin of the current portfolios, and evaluating them against future changes in the market, it is easier to predict which ones to divest and where to invest the funds accrued from the selloff.

• Reasons for Decline of GE’s financial performance during 2016-2018

There have been plentiful of analyses trying to establish the root cause of GE’s problems. According to Gryta and Mann (2018) organizations do not underperform overnight but rather, it is a slow process that often goes unnoticed until it is late. Going by this insinuation, GE’s current problems (dating 2016 – 2018) are attributed to past instances of dubious financial practices and poor top-level decision making. These speculations lead to questioning of the role of Jeff Immelt and that of Flannery in the declining performance. On a larger scale, Immelt is blamed for the poor performance in 2016 to 2018. Some of the specific reasons for the decline include ill-judged acquisitions which were overvalued thus reducing GE’s capital while failing to create an equivalent return on investment. A case in point was when GE overpaid for the acquisition of a French Company named Alstom. The poor timing of some of the acquisitions made them costlier for GE. Because of this, the company was paying more to acquire companies that failed to attract the anticipated revenue margins.

The second reason for declining financial performance is because of poor management of cash flows. Lonsdale and Kane (2019) lament that GE has had an erratic approach to managing its cash flows. Because of this failure, the company was forced to obtain emergency funding amounting to $3 billion from Warren Buffett and additional $139 billion in loan from the federal government. The mismanagement of cash flows is blamed on the stock buyback program by GE which forced the company to spend more than $49 billion buying its stocks in 2017. This program reduced the firm’s cash flows from 2015 to 2017. The third reason for the decline in financial performance is over-optimism. The company’s top leadership became overconfident in GE’s abilities that it ignored early warning signs. Because of overconfidence, Immelt and his deputies failed to recognize red flags until 2017 when mounting inventory and plummeting sales raised attention among stockholders (Grant, 2016). Even at this point, Immelt failed to acknowledge the problems facing GE. Fourth, GE’s financial performance is a victim of problematic financial accounting. The large size of the organization makes it unable to anticipate and recognize emerging problems. It is speculated that GE’s accounting practices were designed to impress the Wall Street while equally insulating the management from poor performance. Dubious accounting was noted in GE’s industrial business unit where upgrades were booked as current revenues without questioning the impact of this transaction on the future service revenues by the firm.

• Returning GE to higher performance levels

Several strategies can be taken to return GE to its previous performance and restore its reputation. Grant (2016) propose that Larry Culp, the current CEO of GE should restructure GEs corporate portfolio. Some of the proposals include the merger between GE’s transportation unit with the Wabtech Corporation which is a US producer of railroad equipment. The merger will lead to a jointly owned firm that will explore opportunities presented by the anticipated changes in transport infrastructure in the USA. Secondly, GE could divest its GE Healthcare division. The most profitable move would be to sell it to BHGE or Baker Hughes as a quoted company where the shares can be sold to shareholders at GE. These proposals are likely to be successfully implemented given that Culp has effectively done restructuring at Danaher which is a widely diversified company based on digital technologies.

In addition to restructuring, Grant (2016) emphasizes the need for GE to use its management systems and processes to introduce lean thinking and continuous improvement initiatives. A lean organization will be easier to manage compared to the current state of GE which is highly integrated thus making it hard to manage all the divisions properly. In fact, lean thinking will be vital in correcting the accounting malpractices and enabling the company to optimize the effectiveness of the newly created and diversified business ventures. Lonsdale and Kane (2019) add that adopting these changes could require GE to become more decentralized. Decentralization is a trend that has proven successful to companies such as Siemens AG. The company which was founded in the 19^th century has managed to grow by transposing itself into varied and diversified business portfolios. To make these business divisions successful, the company opted to make them autonomous to not only reduce bureaucracy but also make them flexible in and adaptable to the needs of the customers on the global market. Flexibility is a desirable attribute for organizations such as GE given the increase in domestic and local competitors offering goods and services customized to the specific needs of the customers across different countries (Lonsdale & Kane, 2019). GE needs to acknowledge this change in consumer behavior, decentralize its business units, and empower them into adapting to the needs of the customers in different countries. In answering the last section of this paper, GE might be required to acquire firms in the information technology sector (figure 1) and healthcare sector (IBIS, 2020; Neufeld, 2020). The main focus in the healthcare sector is to manufacturer essential products required by frontline workers during the global health pandemic.

• Conclusion

This paper acknowledges that GE is facing challenges that have reduced its revenues and stock prices. These challenges are attributed to poor management and dubious accounting practices among other internal and external challenges. The thesis statement emphasizes the need to critically analyze GE. For this reason, the paper identifies reasons that made GE exemplary. The biggest factor being its superior management systems. It is noted that the firm’s portfolio can influence performance and thus, needs to be restructured frequently. Another significant part of the paper reinforces the reasons for GEs declining performance. Guided by this analysis, it is proposed that GE divests some business units, acquires new ones in lucrative sectors, and decentralizes its operations.