As with so many aspects of economics and finance, an entity’s name often says little about what it actually does or contains. The Dow Jones Industrial average, a basket of (currently) 30 stocks, has never really been an accurate reflection of the U.S. manufacturing sector. Founded in 1896 by Charles Dow (co-founder of current-day Dow Jones), the original index was comprised of 12 companies, many of which represented what today might be called basic materials: cotton oil, sugar, tobacco, rubber, lead, and coal. The “Distilling & Cattle Feeding Co” is still with us as Jim Beam, now owned by the Japanese Suntory group. Laclede Gas still provides natural gas to communities in Missouri. Any pretext of only tracking companies that made things was quickly lost: AT&T and Western Union joined in 1916; Sears Roebuck and F. W. Woolworth were added in 1924. More industrially, General Electric was one of the original 12 companies on the Dow, dropped off two years later, and readded in 1899.
GE’s long presence on the Dow belies the evolution of the company, which by 2000 was an advantageous blend of an investment bank and a heavy/advanced manufacturing conglomerate: in terms of naming accuracy, it was very “general” but not particularly “electric.” The business practices and assets of the factory-based side allowed the bank to borrow at the lowest possible interest rates at the same time that equity markets favorably valued the company more like a metal-bender than a bank. The double standard eventually disintegrated, and under CEO Jeff Immelt GE shed many of its financial services divisions in the midst of 370 divestitures; at the same time it acquired 380 companies. Bankers and lawyers were delighted — M&A fees ran an estimated $1.7 billion to fund the shuffle — while shareholders had less reason to cheer. This evolution eventually failed, and today GE faces fundamental reinvention. As it promises, Lights Out credibly tells the story of the fateful 20 years in which the company came to its moment of reckoning.
I had many questions that the book did not answer. For many years I taught whole sections of GE employees in my online supply chain masters classes at Penn State. Their devotion to Six Sigma/Lean Manufacturing was durable bordering on enthusiastic, but Lean is not usually a good tool for fostering radical innovation. I hope someday someone else is able to tell that story. Second, GE was a leader in adapting 3D printing to industrial production (not just prototyping) and while additive manufacturing wasn’t going to save the Titanic that was GE as of 2018, I wonder what is being salvaged from those pioneering efforts. The big question, which outsiders will never be able to answer, concerned the culture in which bad decisions went unchallenged by either the board or by middle managers with sufficient data to see pitfalls: the Alstom acquisition was built on shaky logic at the outset, and the EU’s pressure for concessions made GE leadership’s business case at closing completely fanciful.
Much of the book is devoted to the portrayal of CEO Immelt as global potentate, and rightly so. He flew with a spare business jet following him “just in case,” which cost shareholders many millions of dollars over his period in the job. Meetings with kings and presidents were part of the job; GE was one of those companies not only too big to fail but too big for political leaders to ignore. For all his skill in these settings, the job as Immelt defined it removed him still further from customers and their market realities.
Immelt made his name as a salesman, and the personality trait of not taking no for an answer (and the unshakable confidence a master closer must possess) led to multiple deals in which GE either overpaid or bought an asset for the wrong reasons: “synergies” that were so often promised rarely materialized on the income statement. More crucially, Immelt focused his attention far more on the share price than on his customers, and for all his desire to be valued like a tech company, GE appeared to have little of Apple’s human-centric design sense, Amazon’s customer-obsessiveness, or Google’s user-facing performance improvements. Knowing the complex financial structures of the business through the eyes of trusted lieutenants appeared to be far more important than step functions in the customer value proposition. Buying market share may work for a few quarters, but rarely did a Baker Hughes, an Alstom, or a Vivendi drive innovation and customer value.
One of Immelt’s highly visible missteps in his latter days was an apparently under-informed faith in the “industrial Internet.” This set of extremely expensive initiatives, designed more to goose the stock price than to deliver customer value, set out to establish GE as the Google of connected MRI machines, drilling platforms, and locomotives. It had all the signals of what a colleague in consulting once called “management by magazine,” the practice of a high-ranking executive reading some oversimplified account of computational magic and saying “make it so” in his or her company. Immelt showed no evidence of understanding cloud vs edge computing, networking and storage at massive scale, data curation, or the limits of data interoperability (standards and protocols). In and of themselves, these technical shortcomings shouldn’t be fatal: the Internet of Things is still in its early stages, and the challenge of instrumenting heavy machines and digesting the data they produce is non-trivial.
Immelt’s failing was more fundamental: he never seemed to have asked his business and technical experts for even back-of-the-envelope financial projections. Let’s assume sensors and analytics could deliver the promised 1% performance improvements — in jet engine fuel economy, in gas turbine reliability, in locomotive predictive maintenance accuracy. Who would pay for those sensors, that infrastructure, and the requisite brainpower? Companies that forked over multiple millions for a GE-made asset were (and are) not likely to pay for the privilege of letting GE siphon data from their assets only to sell it back to them in the form of more expensive service contracts: “here’s a way to run your generation facility longer between shutdowns. That’ll cost you $x million.”
The story of GE’s embarrassing commercials featuring Owen the programmer who couldn’t lift his father’s sledgehammer and eschewed writing code for layering tropical fruits into photos of small furry animals turns out to be merely the tip of the Predix iceberg. Those commercials were intended for an ill-defined audience: 20-something data scientists weren’t turning down Facebook or Uber to work for GE, and the company’s buyers of capital equipment also did not react consistently favorably to the ads. Some contended that the campaign was intended for investors, who did not react as GE hoped, and the company’s retirees were largely furious at the tone as much as the content. Below the iceberg’s waterline, as it were, the combination of a naive (at best) business model with an insufficiently robust technical team meant that Predix was doubly doomed: making such a whiteboard vision work at scale still exceeds GE’s level of digital expertise years later, and even if the technology could have worked, there was never a realistic path to profitability in the market.
In the end, three aforementioned trends converged to bring down a mighty company: GE was dropped from the Dow in 2018, replaced by Walgreens Boots. First, the company relied more heavily on financial engineering (in the process, falling prey to Wall Street’s quarterly focus) than technical innovation. Second, GE lost focus on customer markets: Immelt bought and sold companies, not generators or drilling platforms. Finally, leadership got cute, trying to achieve with M&A what it could not with fundamental strategy and execution — while silencing voices of realism and dissent. Strategy, culture, and quality of execution all contributed to the fall of GE, which raises the question of lessons.
If we assume that companies age and decay faster than before — it’s hard to image another 120-year Dow tenure — companies like Microsoft, Google, and Apple are in mid-life. Many founders have disappeared: Apple lost its resurrected co-founder/messianic CEO almost 9 years ago, Google’s co-founders have retreated from operational responsibility, and Bill Gates is a hero of public health, not a monopolist-villain; Microsoft and Apple have both executed successful succession plans (the former after a 14-year mistake). The Economist recently profiled Google at mid-life (the jury is still out on its succession plan), and investors have to be very nervous about succession at Amazon.
What can GE teach these companies? 1) Nothing can grow forever, and we see limits to scale: Dell peaked in 2006 and posted record net income in 2020 after six straight years of losses. IBM revenue peaked in 2011, arguably after its industry influence did. 2) Losing sight of customers and innovating to solve real issues can be fatal: Immelt and Steve Ballmer at Microsoft shared several characteristics, including being sales executives. 3) Managing to the share price is a real temptation that Jeff Bezos and Tim Cook (for very different reasons) have avoided. 4) Most important, you have to make the right technology bets and have the engineers who can make them work. GE had no signature customer-facing innovation for years, certainly nothing on the scale of Amazon’s cloud or Alexa platforms, Apple’s pivot to iPhone-linked services, or Google’s AI-powered operations in multiple markets. Call it revenge of the nerds, but the best CFO in the world can’t compensate for a shortfall of well-deployed and well-managed technical talent. Google has both a top-drawer CFO and terrific technical talent, but there are strains in the relationship between the two; Facebook too has cultural issues between programmers and management. It may turn out that keeping your engineers happy and well focused is the mark of a healthy company in the mid-21st century.
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