Classification: Internal

Classification: Internal
MGT 510
Deadline (April 10, 2021) 6pm
Critical Thinking: Corporate Strategy and Diversification (105 points)
Corporate diversification strategies raise a wide range of strategic management
issues. For this week’s critical thinking assignment, read the case study found in
your textbook (Case 19): Google Is Now Alphabet—But What’s the Corporate Strategy?
Remember, a case study is a puzzle to be solved, so before reading and answering
the specific case and study questions, develop your proposed solution by following
these five steps:
1. Read the case study to identify the key issues and underlying issues. These issues are the principles
and concepts of the course area which apply to the situation described in the case study.
2. Record the facts from the case study which are relevant to the principles and concepts of the course
area issues. The case may have extraneous information not relevant to the current course area. Your
ability to differentiate between relevant and irrelevant information is an important aspect of case
analysis, as it will inform the focus of your answers.
3. Describe in some detail the actions that would address or correct the situation.
4. Consider how you would support your solution with examples from experience or current real-life
examples or cases from textbooks.
5. Complete this initial analysis and then read the discussion questions. Typically, you will already have
the answers to the questions but with a broader consideration. At this point, you can add the details
and/or analytical tools required to solve the case.
Case Study Questions:
1. What is Google’s corporate strategy? Does Google have a clear vision of what it wants to become?
2. Use Porter’s Essentials Test (Chapter 12) to determine if this strategy creates competitive advantage.
If so, how? If not, why not?
3. Look beyond the conventional sources of synergy and consider complementarities, bargaining
power, and rivals. What threats does Google face?
4. Does Google need to refocus? How should Google delineate its corporate boundaries and which
businesses, or products would you recommend abandoning or divesting, if any?
Your well-written paper should meet the following requirements:
• Be 5 pages in length, which does not include the title page or required reference page, which are
never a part of the content minimum requirements.
• Use APA style guidelines.
• Support your submission with course material concepts, principles, and theories from the textbook
and at least two scholarly, peer-reviewed journal articles unless the assignment calls for more.
• It is strongly encouraged that you submit all assignments into the Turnitin Originality Check before
submitting it to your instructor for grading. If you are unsure how to submit an assignment into the
Originality Check tool, review the Turnitin Originality Check—Student Guide for step-by-step
instructions.
Case 19 and 20 are attached
at the end of this document Classification: Internal
MGT 520
Deadline (Tuesday 13 April, 2021)
Personal Development Plan (115 points)
Employee development is critical to an organization’s and an individual’s success.
Throughout Chapter 8, we have reviewed information about personal development
plans. We all have goals and objectives that we hope to accomplish, which will allow
us to grow and develop. It is important that we create personal development plans
to ensure that we are working towards achieving the goals set forth.
For this assignment, you are required to create your own development plan, which
involves a short-term plan (spanning 1-2 years) and a long-term plan (spanning 3-5
years). In both your short-term plan and long-term plan, provide two development
objectives, details regarding how these objectives will be acquired, the timeframe
associated with skill/competency acquisition, and the type of support that you need
from a professional and personal standpoint. Consider, when developing these
objectives, utilizing SMART goals.
In total, your plan should incorporate four development objectives and associated
details (e.g., two for the short-term plan and two for the long-term plan).
Remember that the goals identified are your own. There is no right answer to the
goals and objectives that you have created. Therefore, be creative in this
assignment submission, while ensuring that you utilize the recommendations set
forth in Chapter 8.
For more information about SMART goals, which can help you when determining
your goals for this assignment, please utilize this
resource: https://www.indeed.com/career-advice/career-development/smart-goals
Your well-written paper should meet the following requirements:
• Be 8 pages in length. This should be an honest assessment of your personal and professional
needs. This assignment can be written in paragraph form or it can be submitted in a bulleted
format with expanded comments.
• Applied course material concepts, principles, theories and any applicable analytical tools along
with at least two scholarly peer-reviewed sources.Classification: Internal
MGT 510-12 Deadline (Tuesday 13 April, 2021)
Critical Thinking: Strategic Recommendations (115 points)
Managing the multi-business corporation to meet high performance expectations is
problematic. Publicly traded companies are pressured to return favorable quarterly
results and as corporations grow larger and more complex, it becomes harder to
manage such corporations effectively. General Electric (GE) was once one of the
most admired corporations in the world. Today, GE is facing a much-reduced
outlook. For this week’s assignment, read the case study found in your textbook
(Case 20): Restructuring General Electric.
Remember, a case study is a puzzle to be solved, so before reading and answering
the specific case and study questions, develop your proposed solution by following
these five steps:
1. Read the case study to identify the key issues and underlying issues. These issues are the principles
and concepts of the course area which apply to the situation described in the case study.
2. Record the facts from the case study which are relevant to the principles and concepts of the course
area issues. The case may have extraneous information not relevant to the current course area. Your
ability to differentiate between relevant and irrelevant information is an important aspect of case
analysis, as it will inform the focus of your answers.
3. Describe in some detail the actions that would address or correct the situation.
4. Consider how you would support your solution with examples from experience or current real-life
examples or cases from textbooks.
5. Complete this initial analysis and then read the discussion questions. Typically, you will already have
the answers to the questions but with a broader consideration. At this point, you can add the details
and/or analytical tools required to solve the case.
Case Study Questions:
1. Why was GE considered to be such an exemplary organization? (Discuss GE’s management systems
and performance.)
2. Discuss the nature of GE’s corporate portfolio under Welch and Imelt. Did the nature of GE’s portfolio
under Welch and Imelt provide superior results?
3. If GE’s portfolio mix gave superior results, why was it necessary to restructure the portfolio?
4. Why is GE’s performance no longer superior? What are the reasons for the collapse in GE’s financial
performance during 2016-2018?
5. What should be done to return GE to higher levels of performance? Does GE need to refocus? Which
businesses or products would you recommend abandoning or divesting, if any? Does GE need to
make additional acquisitions to supplement existing GE assets?
Your well-written paper should meet the following requirements:
• Be 9 pages in length, which does not include the title page or required reference page, which are
never a part of the content minimum requirements.
• Use APA style guidelines.
• Support your submission with course material concepts, principles, and theories from the textbook
and at least three scholarly, peer-reviewed journal articles unless the assignment calls for more.
• It is strongly encouraged that you submit all assignments into the Turnitin Originality Check before
submitting it to your instructor for grading. If you are unsure how to submit an assignment into the
Originality Check tool, review the Turnitin Originality Check—Student Guide for step-by-step
instructions.Classification: Internal
MGT 560
Deadline (April 13, 2021)
Module 12: Critical Thinking
Critical Thinking: Authentic Leadership (120 points)
Authentic leadership focuses on leadership that is genuine and real. Whether something is genuine and real
may likely be in the mind of the individual evaluating it or experiencing it.
• Examine the usefulness of authentic leadership in organizations by identifying research that
supports or refutes authentic leadership as a determinant of organizational or individual success.
• Identify elements of authentic leadership. Describe the behavioral elements that one might
objectively see in an authentic leader.
• Include the role of emotional intelligence in authentic leadership.
• Identify a nationally or internationally recognizable, currently living business figure who might be
described as an authentic leader and justify your selection of that individual.
• Next, critically evaluate your authentic leadership skills in relation to the behavioral elements and
emotional intelligence you identified as important. Identify any areas for personal growth as a result
of this examination.
Directions:
• Write an essay that includes an introduction paragraph, the essay’s body, and a conclusion paragraph
to address the assignment’s guide questions. Do not address the questions using a question-andanswer format.
Your well-written paper should meet the following requirements:
• Be 5 pages in length, which does not include the title and reference pages, which are never a part of
the content minimum requirements.
• Use and APA style guidelines.
• Support your submission with course material concepts, principles, and theories from the textbook
and at least two current, scholarly, peer-reviewed journal articles. Current articles are those published
in the last five years.
• It is strongly encouraged that you submit all assignments to the Turnitin Originality Check prior to
submitting it to your instructor for grading. If you are unsure how to submit an assignment to the
Originality Check tool, review the Turnitin Originality Check–Student Guide for step-by-step
instructions.Case 19 Google Is Now
Alphabet—But
What’s the Corporate
Strategy?
On August 10, 2015, Google’s CEO, Larry Page, announced that Google Inc. would
become Alphabet Inc., a holding company of which Google (comprising the company’s search and Internet businesses) would be the biggest operating company. Extracts
of the announcement are reproduced in Exhibit 1. The organizational structure of
Alphabet is shown in Figure 1.
The creation of Alphabet was widely viewed as Google’s top management finally
conceding to investors’ demands for greater transparency by separating Google’s primary source of profits, its search business, from Google’s other businesses. It was also
a confirmation by Google’s founders, Larry Page and Sergey Brin, that their company
was no longer simply a search company. The announcement was a reaffirmation of the
company’s commitment to developing and commercialization of revolutionary technologies. This quest had already led Google beyond search, beyond the provision of
information, and beyond software into mobile devices, home appliances, life sciences,
self-driving cars, broadband services, digital eyewear, and a host of other ventures.
Soon after its founding, Google had proclaimed “Ten Things We Know To Be True”—
a set of business principles that would guide the company’s development. Second on
the list was, “It’s best to do one thing really, really well,” to which the response was:
“We do search.”1
Google—now Alphabet—was no longer a search company. But what was it?
Founders Brin and Page had consistently emphasized that the essence of their
company was applying technology to improving the lives of people. Page had
declared, “The societal goal is our primary goal,” the challenge being to: “… use all
these resources … and have a much more positive impact on the world?”2
If Alphabet was to be described by technology—then which technologies? From
the beginning Google/Alphabet has been about algorithms. Initially, its PageRank
algorithm, but increasingly artificial intelligence algorithms that model the functioning
of the human brain. By combining machine learning and artificial intelligence, Alphabet
is identifying areas where machine intelligence can be superior to human intelligence.
The scope of these applications—from autonomous driving to medical diagnosis, to
facial recognition, to education—seems limitless.
The diversity of Alphabet’s business and technological initiatives also fueled suspicions about the motivations of the founders, Brin and Page. Despite their proclamations to pursue the good of society and to “do no evil,” it seemed to some that Google
was locked in battle with Apple, Amazon, Facebook, and Microsoft for the control of
cyberspace.
This case was prepared by Robert M. Grant. ©2019 Robert M. Grant.588 CASES TO ACCOMPANY CONTEMPORARY STRATEGY ANALYSIS
Alphabet Inc.
Google Nest* Access Waymo Calico Verily CapitalG GV X
* Nest was transferred to become part of Google in February 2018
“OTHER BETS”
FIGURE 1 Alphabet Inc.: Organization structure, March 2018
Yet, in terms of its revenue model, Google is an advertising company. In 2017, advertising accounted for 86% of Alphabet’s revenues. Common to almost all Alphabet’s
businesses is that they are either vehicles for carrying advertising or they are sources of
information that could be utilized to better target advertising.
EXHIBIT 1
Google Announces Plans for New Operating Structure
August 10, 2015
As Sergey and I wrote in the original founders’ letter 11
years ago, “Google is not a conventional company. We do
not intend to become one.” … From the start, we’ve always
strived to do more, and to do important and meaningful
things with the resources we have.
We did a lot of things that seemed crazy at the time.
Many of those crazy things now have over a billion
users, like Google Maps, YouTube, Chrome, and Android.
And we haven’t stopped there. We are still trying to do
things other people think are crazy but we are super
excited about.
We’ve long believed that over time companies tend
to get comfortable doing the same thing, just making
incremental changes. But in the technology industry,
where revolutionary ideas drive the next big growth
areas, you need to be a bit uncomfortable to stay relevant.
Our company is operating well today, but we think
we can make it cleaner and more accountable. So we
are creating a new company, called Alphabet. I am really
excited to be running Alphabet as CEO with help from
my capable partner, Sergey, as President.
What is Alphabet? Alphabet is mostly a collection of
companies. The largest of which, of course, is Google.
This newer Google is a bit slimmed down, with the companies that are pretty far afield of our main internet products contained in Alphabet instead. What do we mean
by far afield? Good examples are our health efforts: Life
Sciences (that works on the glucose-sensing contact
lens), and Calico (focused on longevity). Fundamentally,
we believe this allows us more management scale, as we
can run things independently that aren’t very related.
Alphabet is about businesses prospering through
strong leaders and independence. In general, our model
is to have a strong CEO who runs each business, with
Sergey and me in service to them as needed. We will rigorously handle capital allocation and work to make sure
each business is executing well. We’ll also make sure we
have a great CEO for each business …
Larry Page, CEO, Alphabet
Source: https://abc.xyz/investor/news/releases/2015/
0810.html, accessed March 21, 2018.CASE 19 Google Is Now Alphabet—But What’s the Corporate Strategy? 589
The confusion over Alphabet’s corporate strategy was no recent phenomenon. In
2009, the Mercury News reported:
Google increasingly feels like a company running in a thousand different directions
at once … The problem is that in expanding into so many different areas, the identity of Google itself has become muddled … it’s getting harder every day to articulate
what Google is. Is it a Web company? A software company? Something else entirely?3
Although comparisons have been made with other diversified giants—the Economist
proclaimed Alphabet to be “the new General Electric” and Alphabet’s Chairman Eric
Schmidt drew parallels with Berkshire Hathaway—ultimately, it seemed that Alphabet
truly was “a different kind of company.”4
Hence, the creation of Alphabet had done
little to answer the question that had tormented Google-watchers for years: What was
the corporate strategy of the company formerly known as Google?
The History of Google, 1996–2018
The Google Search Engine
Larry Page and Sergey Brin met as PhD students at Stanford University. Their investigation of the linkage structure of the World Wide Web led them to develop a pageranking algorithm that used backlink data (references by a Web page to other Web
pages) to measure the importance of any Web page. They called their search engine
“Google” and in September 1998 incorporated Google Inc. in Menlo Park, California.
Google’s “PageRank” algorithm received a patent on September 4, 2001.
Search engines met the need of the growing number of people who were turning to
the World Wide Web for information and commercial transactions. As the number of websites grew, locating relevant content became essential. Early Web search engines included
WebCrawler, Lycos, Excite, Infoseek, Inktomi, Northern Light, and AltaVista. Several of
them became portal sites—websites that offered users their first port of entry to the web.
Other portals, such as Yahoo! and AOL, soon recognized the need to offer a search facility.
The Google search engine attracted a rapidly growing following because of its
superior page ranking and simple design. In 2000, Google began selling advertisements—paid Web links associated with search keywords. Its Adwords placed “sponsored links”—brief, plain text ads with a click-on URL—which appeared alongside
Web search results for specific keywords. Advertisers bid for keywords; it was these
“cost-per-click” bids weighted by an ad’s click-through rate (CTR) that determined the
order in which the paid listings would appear. By 2004, Google became the US market
leader in Web search; by 2009 its share had reached 65.6%.
Google became a public company on August 19, 2004: an IPO of about 7% of
Google’s shares raised $1.67 bn., valuing Google at $23 bn.
Organizing the World’s Information
Google’s expansion beyond Web search was a reflection of its mission “to organize the
world’s information and make it universally accessible and useful.” Google’s IPO prospectus elaborated this intent:
We serve our users by developing products that enable people to more quickly and
easily find, create and organize information. We place a premium on products that 590 CASES TO ACCOMPANY CONTEMPORARY STRATEGY ANALYSIS
TABLE 1 Alphabet’s revenue sources, 2008–2017 ($billion)
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Google advertising revenues (total) 21.1 22.9 28.2 36.5 46.0 51.1 59.6 67.4 79.4 95.4
—Google properties 14.4 15.7 19.4 26.1 31.2 37.4 45.1 52.4 63.8 77.8
—Google network members’ properties 6.7 7.2 8.8 10.4 12.5 13.1 14.0 15.0 15.6 17.6
Google other revenues 0.7 0.8 1.1 1.4 2.4 5.0 6.9 7.2 10.1 14.3
Google total revenues 21.8 23.7 29.3 37.9 46.0 55.5 66.0 74.5 89.5 109.7
Other Bets revenuesa – – – – – – – 0.4 0.8 1.2
Total revenues 21.8 23.7 29.3 37.9 46.0 55.5 66.0 75.0 90.3 110.9
Notes:
a
Revenues from Other Bets businesses were included in “Google total revenues” prior to 2015.
Source: Google Inc. and Alphabet Inc 10-K reports.
matter to many people and have the potential to improve their lives, especially in
areas in which our expertise enables us to excel.
Search is one such area. People use search frequently and the results are often of great
importance to them. Delivering quality search results requires significant computing
power, advanced software and complex processes—areas in which we have expertise
and a high level of focus.
The result was a series of new products that allowed access to information from
diverse sources. These sources of information included images (Google Image Search),
maps (Google Maps), academic articles (Google Scholar), books (Google Book Search),
satellite imagery (Google Earth), panoramic street photographs of most of the world’s
cities (Google StreetView), news (Google News), patents (Google Patent Search), video
(YouTube), finance (Google Finance), Web logs (Google Blog Search), and many more.
However, Google’s entrepreneurial and technological dynamism led it well beyond
the accessing and organizing of information. Beginning with Gmail in 2004, Google
introduced a widening array of software and services for communicating, creating and
manipulating images, producing documents, creating Web pages, managing time, and
social networking.
These new products expanded Google’s advertising revenues by providing additional opportunities for carrying ads and improving Google’s targeting of ads. Google’s
primary source of advertising revenue was AdWords, launched in 2000. Advertisers
specify the keywords that should trigger their ads and the maximum amount they are
willing to pay per click. When a user searches google.com, short text advertisements
appear on the screen. The rank ordering of ads is determined by advertiser’s costper-click bid and the “ad quality” (its relevance to the user). The advertiser then pays
Google according to the number of clicks on the advertisement.
AdSense uses an advertisement placement technology developed by Applied Semantics (acquired in 2003) that allows Google to place ads on third-party websites. Table 1
shows Alphabet’s revenues from advertising and other sources.
In 2007 and 2008, Google’s diversification efforts took a dramatic new turn with
Google’s entry into mobile telephony and Web browsers.CASE 19 Google Is Now Alphabet—But What’s the Corporate Strategy? 591
Android and Mobile Telephony
Google acquired Android Inc. in 2005 and in November 2007 launched the development
of its Android software platform, a Linux-based operating system for mobile devices.
According to Google:
“Android is being developed … with the goal of providing consumers a less expensive, richer and more powerful mobile experience.”5
Most observers thought that
Google’s primary concern was the threat that the shift from desktop to mobile devices
posed to Google’s advertising revenues.
Android was a spectacular success: in establishing market leadership (Table 2),
it prevented Apple from dominating the smartphone and tablet market. By offering
Android as a free, open-source, mobile operating system, it was able to attract a large
number of handset manufacturers (the most important being Samsung) and an army of
application developers—by 2018, there 1.76 million Android apps.
Chrome
Google’s Chrome Web browser announced on September 2, 2008 generated huge
publicity, but little surprise. Google’s then head of product development (later CEO of
Google within Alphabet), Sundar Pichai, explained: “Google’s entire business is people
using a browser to access us and the web.” Google’s website added: “Google Chrome
is a browser that combines a minimal design with sophisticated technology to make
the web faster, safer, and easier.” By contrast, Microsoft’s Internet Explorer (IE) was
constrained by the legacy of its 15-year history.
Google’s goal for Chrome was not simply a superior user experience. Version 8 of
Microsoft’s IE launched in 2008 allowed an “InPrivate” protection mode that would
delete cookies, making it more difficult to track users’ browsing habits. This would limit
Google’s ability to use such information to target consumers with advertising.
Others saw Google’s primary intention as not so much to protect its search engine
but more to attack Microsoft’s dominance of personal computing and to speed the
TABLE 2 Shipments of smartphones: Market share by operating system
2018a
(%) 2015a
(%) 2013a
(%) 2011a
(%)
Android (Google) 86.1 78.0 75.5 36.1
iOS (Apple) 13.7 18.3 15.9 18.3
Blackberry OS (RIM) – 0.3 2.9 13.6
Windows (Microsoft) – 2.7 3.2 2.6
Other 0.2b 0.7 1.5 29.4c
TOTAL 100.0 100.0 100.0 100.0
Notes:
a
The data are for the first quarter of each year.
b
Includes Blackberry and Windows.
c
In 2011, “Other” comprised Symbian with 26.0%, Linux with 3.1% and other systems 0.3%.
Source: IDC.592 CASES TO ACCOMPANY CONTEMPORARY STRATEGY ANALYSIS
transition of computing to a new online environment. Wired magazine viewed it as:
“an aggressive move destined to put the company even more squarely in the crosshairs
of its rival Microsoft.6
The announcement ten months later that Google would add an operating system
to its Chrome browser was seen as confirmation of Google’s aggressive intent toward
Microsoft.
Google in Hardware
As Internet access transitioned toward mobile devices, Google sought to reinforce its
proprietary technology in that sphere. Its acquisition of the struggling handset maker
Motorola Mobility in 2012 for $12.5 bn., was primarily to acquire its rich portfolio of
patents relating to wireless communication.
Owning Motorola would also permit Google closer integration of hardware and
software development in smartphones and tablet computers, thereby enhancing the
user experience.
However, becoming a handset maker put Google into competition with some of its
major customers, notably Samsung, which was already developing its own operating
system. In 2012, Google sold Motorola to Lenovo, but continued to develop and market
mobile devices, including the Nexus brand of smartphones (build by HTC) and a range
of notebook and tablet computers based upon its Chrome operating system. In January
2018, Google deepened its relationship with HTC when it paid HTC $1.1 bn. for patent
licenses and an engineering unit.
Subsequent diversifications also increased Google’s involvement in hardware:
● Google Glass, an Internet-enabled, optical head-mounted display controlled by
natural language voice commands, was marketed on an experimental basis between April 2013 and January 2015.
● With the acquisition of Nest in January 2014, Google became a supplier of
home security and control devices—including thermostats and smoke detectors. The goal was to build Google’s position as a central player in the “smart
home.” In May 2015, Google announced Project Brillo, an operating system to
link home devices, such as door locks, light bulbs, and security cameras, while
Project Weave would allow these devices to communicate with other products
and web services.7
● Google Home, launched in October 2016, and the Home Mini, launched
12 months later, were Google’s entrants to the fast-growing market for voiceactivated, smart speakers. Despite selling about 2 million smart speakers per
month in the closing months of 2017, Google remained a distant second to
Amazon in this market.
● Google’s involvement in smart TV has included its Google TV and Android TV
software programs and its Chromecast plug-in devices, first launched in 2013,
which allow video streaming on TV receivers.
Google+
Google’s foray into social networking began with Orkut in January 2004 and continued
with Google Friend Connect and Google Buzz. However, all were eclipsed by Facebook. When, in March 2010, Facebook overtook Google as the most visited website CASE 19 Google Is Now Alphabet—But What’s the Corporate Strategy? 593
within the United States, Google became fully aware of the threat posed by Facebook
to its online advertising revenue:
If you were an advertiser, who would you rather place your ads with? On the one
hand, you have a company that will attempt to gear ads to things like the search history of users. On the other hand, you have a company that knows where its users
went to college, where they work, who they are friends with, what they’re reading
and sharing, and their favorite bands, books, foods, and colors. Advertisers want to
target their ads to the people most likely to be receptive to them, and information is
the key to targeting. The more information available, the better the targeting.8
Launched in June 2011, Google+, the company’s fourth venture into online social
networking, had 540 million users by October 2013. However, by the end of 2017, it
was clear that, yet again, Google had failed to build a viable competitor to Facebook—
although YouTube was widely viewed as a social media platform.
Waymo
Google began developing autonomous driving systems in 2009 with applications both
to existing production cars and its own prototype cars, which lacked all driver controls. By 2017, Waymo had a fleet of self-driving vehicles in Phoenix, AZ, being driven
without a person behind the wheel. However, it was competing with at least 12 other
companies in developing self-driving systems and any commercial revenues within the
next five years seemed unlikely. In February 2018, Alphabet received $244 million in
Uber equity, settling a legal suit over Uber’s alleged theft of Waymo’s technology.
Life Sciences
Alphabet’s research activities in life sciences were organized into two businesses.
Calico’s mission is “to harness advanced technologies to increase our understanding of
the biology that controls lifespan.” In 2014, Calico formed an R&D alliance with AbbVie
to develop new therapies for age-related diseases, including neurodegeneration and
cancer. Verily’s mission to make the world’s health data useful so that people enjoy
healthier lives. It makes a smart contact lens that measures blood sugar. In January
2017, Temasek, a Singapore-based investment company, paid $800 million for a noncontrolling equity stake in Verily.
Broadband
Alphabet’s Access subsidiary combines several broadband projects whose goal is to
expand access to the Internet. The major component of Access is Google Fiber, which
offers broadband and TV service in several locations with in the United States. It also
includes Webpass, a gigabit Internet provider acquired in 2016.
Venture Capital
Google Capital was established in 2013 to make late-stage venture capital investments
in technology companies. In 2016, it was renamed CapitalG. In addition to finance,
CapitalG provides companies within its portfolio access to technological and strategic 594 CASES TO ACCOMPANY CONTEMPORARY STRATEGY ANALYSIS
advice from Google’s executives. Its investments include Survey Monkey, Lending Club,
Airbnb, Snap Inc., Stripe, Looker, and Lyft.
GV, formerly Google Ventures, is Alphabet’s other venture capital subsidiary. It
invests in life sciences, artificial intelligence, robotics, and cybersecurity companies,
mainly in the early stages of their development.
X
X, formerly Google X, is a corporate lab for developing experimental technologies
known as “moonshots.” According to The Atlantic magazine: “X is perhaps the only
enterprise on the planet where regular investigation into the absurd is not just permitted
but encouraged, and even required.”10 Because of the secrecy surrounding X, only a
few of the projects being undertaken are known. During early 2018, these included:
● Project Loon—high altitude balloons providing internet connectivity in areas
lacking broadband infrastructure;
● Project Wing—package delivery via airborne drones;
● Makani Power—generating electrical power through wind turbines mounted on
tethered kites;
● development of a revolutionary, miniature battery for powering mobile devices;
● various robotics projects.
Alphabet’s Management and Capabilities
Google—now Alphabet—had created a management system that was unique, even
by the unorthodox standards of Silicon Valley. Some of the key features of this
system included:
● Hiring policy: From its earliest days, Google committed itself to hiring only
the “brightest of the bright.” Google’s targets were not simply the highly intelligent. They were “smart creatives”—people who were “not confined to specific
tasks … not adverse to taking risks … not hemmed in by role definitions … don’t
keep quiet when they disagree … get bored easily and shift jobs a lot … combine technical depth with business savvy and creative flair.”9
As founders Page
and Brin explained: “Our employees, who have named themselves Googlers,
are everything. Google is organized around the ability to attract and leverage
the talent of exceptional technologists and business people … Because of our
employee talent, Google is doing exciting work in nearly every area of computer science … Talented people are attracted to Google because we empower
them to change the world.”11
● A “dramatically flat, radically decentralized” organization: Google structure
and systems were designed around the simple notion of “What do smart creatives need in order to be productive?” The answer was primarily about the
aspects of traditionally managed organizations that should be avoided: authority,
rules, formality, defined job roles, and hierarchical privileges. Google was a flat
organization because its smart creatives needed easy access to key decisions in
order to get things done. To minimize hierarchy, Google used a “rule of seven”:
each manager must have at least seven direct reports.
● Small, self-managing teams: The majority of Google’s employees, including all
those involved in product development, worked in small teams. Most engineers CASE 19 Google Is Now Alphabet—But What’s the Corporate Strategy? 595
were in teams of three or four. Team size was limited by the “two-pizza rule”—
teams should be small enough to be fed by two pizzas. Teams appointed their
own leaders, and engineers could switch teams without the need for permission
from the HR department.
● An environment that fosters creativity: For employees to be productive
required a working environment that stimulated and fostered their interaction. Google’s workplaces were designed to minimize separation among colleagues. Google’s opulent eating and sports facilities were similarly designed
to increase human interaction. Creativity and innovation were institutionalized
through Google’s “70–20–10” rule, which stipulated that Google would devote
70% of its engineering resources to developing the core business, 20% to extend
that core into related areas, and 10% allocated to fringe ideas. As a result,
Google employees were able to spend time working on pet projects of their
own choosing.
● Rapid, low-cost experimentation: According to Gary Hamel: “Evolutionary
adaptation isn’t the product of a grand plan, but of relentless experimentation … Google’s ‘just-try-it’ philosophy is applied to even the company’s most
daunting projects, like digitizing the world’s libraries … That kind of step-wise,
learn-as-you-go approach has repeatedly helped Google to test critical assumptions and avoid making bet-the-farm mistakes.”12
Underlying Alphabet’s capacity for innovation and the effective implementation of
new initiatives was a set of resources that few other technology-based companies could
match. With an operating cash flow of $37 bn. in 2017 and a cash pile of $103 bn.,
Alphabet was a financial powerhouse that could buy its way into almost any market
or area of technology. (Table 3 shows financial data for Alphabet.) However, most of
TABLE 3 Alphabet Inc.: Selected financial data, 2008–2017 ($ bn.)
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Revenues 21.8 23.7 29.3 37.9 43.7 50.5 59.1 75.0 90.3 110.9
Cost of revenues 8.6 8.8 10.4 13.2 17.2 22 25.7 28.2 35.1 45.6
R & D 2.8 2.8 3.8 5.2 6.1 7.1 9.8 12.3 13.9 16.6
Sales and marketing expense 1.9 2.0 2.8 4.6 5.5 6.6 8.1 9.0 10.5 12.9
General and admin. expense 1.8 1.7 2.0 2.7 3.5 4.4 5.9 6.1 7.0 6.9
Income from operations 6.6 8.3 10.4 11.7 13.8 15.4 16.5 19.4 23.7 26.1a
Other income 0.3 0.1 0.4 0.6 0.6 0.5 0.8 0.3 0.4 1.0
Income before income taxes 5.9 7.1 10.8 12.3 14.5 15.9 17.3 19.7 24.2 27.2
Net income 4.2 6.5 8.5 9.7 10.7 12.9 14.4 16.3 19.5 12.7
Cash and marketable securities 28.4 24.5 35.0 44.6 48.1 58.7 64.4 73.1 86.3 101.9
Long-term liabilities 1.2 1.7 1.6 5.5 7.7 7.7 9.8 7.8 11.7 20.6
Total stockholders’ equity 28.2 36.0 46.2 58.1 71.7 87.3 104.5 120.3 139.0 152.5
Notes:
a
Operating income was reduced in 2017 by a European Union fine of $2.7 bn.
Source: Alphabet Inc. and Google Inc. 10K reports.596 CASES TO ACCOMPANY CONTEMPORARY STRATEGY ANALYSIS
the time it was content to make small acquisitions. Owning one of the world’s most
valuable brands (Google) and the world’s two most visited websites (google.com and
youtube.com), Alphabet commanded attention in any market it chose to enter.
The holding company structure of Alphabet would allow greater autonomy and flexibility for the individual subsidiaries, but would the loss of integration undermine the
organizational capabilities that had made the company so successful?
Commenting on the transition from Google to Alphabet, the Financial Times
observed: “Further down the organization, life gets more compartmentalized. It is not
obvious that working in a silo at Company XYZ, ‘an Alphabet subsidiary’, is as attractive as working on complex issues across today’s Google.”13 Two years later, Fortune
confirmed these fears, noting that the creation of Alphabet has “changed what it means
to work for Google. Some grumble that their role now is to subsidize innovation at
their sister companies, rather than to innovate themselves. …That’s a striking shift,
especially for high-performing employees accustomed to moving about the company
almost at will.”14
The Future of Alphabet
Soon after Google’s reincarnation as Alphabet, Forbes contributor, Ken Favaro, argued
that Alphabet had failed to address the fundamental question of corporate strategy:
“How does the company itself add value to its particular businesses and ventures?” As
a result, Alphabet’s “strategy remains as opaque as ever.” In terms of the managerial
effectiveness, lack of strategic clarity may translate into loss of “coherence, insight, and
resilience” such that corporate development will “inevitably amount to a random walk
that can only be rationalized ex post.”15
These issues were especially pertinent in relation to Alphabet’s “Other Bets.” Business
Insider’s Steve Kovach noted:
The hope was that one of these Other Bets would become the next multibillion-dollar
tech company and help diversify parent company Alphabet’s revenue sources beyond
Google’s digital ads business. But this grand vision was always laden with some unanswered and uncomfortable questions: What does a successful Other Bet look like?
When will one of those companies graduate from a mere “bet” to a winner that can
stand on its own? Are they supposed to reach a point where they’re big enough to
spin out into a separate company outside Alphabet?16
Revealing the dire financial performance of Alphabet’s Other Bets (see Table 4) had
increased the tensions between Alphabet’s technological ambitions and responsibilities
to investors. These tensions appear to have been a factor in the high turnover of senior
managers in the Other Bet companies:
[T]he heads of some of Alphabet’s Other Bets, or of divisions that were on track to
become Other Bets, were frustrated by the Alphabet structure… They signed up with
the promise of being CEOs running their own startups, but were instead constrained
from the top by Alphabet’s CFO Ruth Porat, who controlled funding, as well as by the
whims of Google cofounders Larry Page and Sergey Brin…The vision of Alphabet was
to create nimble startups, but many of the entrepreneurs tasked with leading these
startups concluded that they had better prospects of accomplishing their goals outside
Alphabet than within.17CASE 19 Google Is Now Alphabet—But What’s the Corporate Strategy? 597
In principle, the holding company structure had conferred greater autonomy to
the businesses, giving them greater freedom to develop and grow. This would resolve
many of the problems arising from Google’s increasing size and complexity. By 2018,
Google had 88,110 employees, up from 16,805 ten years earlier—inevitably this strained
Google’s famously informal management processes. Yet, the impact of the decentralization in taking pressure off top management would be offset by the increasing external
pressures that Alphabet faced in 2018.
Concerns over Google’s market power had resulted in antitrust investigations in
the European Union, India, South Korea, Brazil, and Argentina. In 2017, the European
Commission imposed a fine of €2.42 bn. for anticompetitive practices regarding Google’s
display and ranking of shopping search results. It was also investigating Android distribution practices and Google’s syndication of AdSense.
Privacy issues were another area where Alphabet faced regulatory and legal threats. Privacy advocates and political activists have long expressed concern that Google’s ability to
track individuals’ search and browsing behavior, the content of their Gmail messages, and,
through Android, their cell phone usage and locations, represented a threat to individual
privacy. Initiatives to restrict Alphabet’s use of individuals’ data included the European
Court’s “right to be forgotten” judgement in 2014, which allowed individuals to require that
Google removed search results about them, the European General Data Protection Regulation to protect personal data, and a similar measure under consideration in California.
Alphabet’s vulnerability to concerns over privacy was highlighted by the crisis that engulfed
Facebook in March 2018 over its release of personal data to Cambridge Analytica.18
One indication of growing regulatory and political pressures that Alphabet faced
was its growing presence in Washington, DC. In 2017, Alphabet spent more on lobbying than any other company.
Competition provided another dimension of Alphabet’s increasingly complex external
environment. As the company diversified from search into an ever-increasing range of
activities, so it came into competition with a widening range of rivals. In advertising,
Facebook was its closest competitor; in mobile platforms and online payment systems,
it was Apple; in browsers, computer operating systems, and office software, Microsoft;
in home automation, Amazon and Honeywell; in autonomous driving, Tesla, Uber,
Ford, and General Motors; in cloud computing, all the major IT companies. Competing
with multiple companies on multiple fronts meant that Alphabet could not operate as
a set of quasi-autonomous companies.
TABLE 4 Alphabet Inc.: Financial results of business segments, 2015–2017
2015 2016 2017
Google Revenues 74,544 89,463 109,652
Operating income 23,319 27,892 32,908
Capital expenditures 8868 9417 12,605
Other Bets Revenues 445 809 1203
Operating income (3456) (3578) (3355)
Capital expenditures 850 1385 507
Source: Alphabet Inc. 10K report for 2017.598 CASES TO ACCOMPANY CONTEMPORARY STRATEGY ANALYSIS
Notes
1. https://www.google.com/about/philosophy.html, accessed
March 22, 2018.
2. “FT Interview with Google Co-founder and CEO Larry
Page,” Financial Times (October 31, 2014).
3. “Google’s Growing Identity Crisis,” (July 19, 2009), http://
www.mercurynews.com/ci_12853656?IADID, accessed
July 20, 2015.
4. “The New GE: Google, Everywhere,” Economist (January
18, 2014).
5. Google Inc. 10K Report for 2008: 4.
6. “Inside Chrome: The Secret Project to Crush IE and
Remake the Web,” Wired (October 16, 2008).
7. “Google Reveals Project Brillo and Weave to Power Internet of Things,” Fast Company (May 28, 2015).
8. “Why Facebook Is a Threat to Google’s Earnings,” (April
12, 2012), http://www.cnbc.com/id/47030496, accessed
July 20, 2015.
9. E. Schmidt and J. Rosenberg, How Google Works (London:
J. Murray, 2014): 17.
The new structure would also facilitate adding new businesses—either by acquisition or internal development—thereby setting the scene for further diversification.
This raised concerns among investors as to whether the new company would provide
greater opportunity for Page and Brin to pursue their ambitions of using technology
to change the world. In an interview with the Financial Times in October 2014, Larry
Page declared, “The societal goal is our primary goal,” and outlined the main challenge
as: “How do we use all these resources … and have a much more positive impact on
the world?” The answer seemed to be to use the money generated by Google’s search
advertising business to make bets on technologies that offered long-term solutions to
some of the world’s most pressing problems. Many of these initiatives grew out of the
curiosity and personal interests of the two founders. For example, the inspiration for
Calico came from the interests of Larry Page’s wife, Lucy, in bioinformatics and the diseases of old age.
Beyond the notion of creating a “21st century, technology-based conglomerate,”
there was little indication of the boundaries that would be established around Alphabet’s ambitions or its activities. Forbes contributor Dan Diamond pointed to healthcare
as a major area of future growth for Alphabet.
The implications of the new company for Google’s core search and advertising
business were far from clear. While investors hoped the holding company structure
would allow greater transparency and bottom-line focus for management, there was
limited evidence to support this optimism. The new Google subsidiary would include
YouTube and Android; there was no indication that financial data would be available
for the individual lines of businesses within Google.
Nor was it clear what the new structure would mean for the company’s ability
to address the challenges it faced from competitors and regulators. One regulatory
challenge was antitrust: Google’s dominant share of Internet search and Android’s
share of mobile operating systems meant it was a monopoly in terms of the competition laws of many countries of the world. The other was privacy: concerns included
the scanning of emails sent through Gmail, the use of cookies to track an individual’s
search history, the aggregation of an individual’s data across Google’s various services,
the depiction of private residences on Google’s StreetView, and the release of user data
to national government agencies.
Given the breadth of the challenges Google faced, had the time come for Google’s
leading trio—CEO and founder Larry Page, founder and director Sergey Brin, and executive chairman Eric Schmidt—to scale back Google’s ambitions and draw boundaries
around Google’s corporate strategy?CASE 19 Google Is Now Alphabet—But What’s the Corporate Strategy? 599
10. “Google X and the Science of Radical Creativity,” The
Atlantic (November 2017).
11. Letter from the Founders, “An Owner’s Manual,” for
Google’s Shareholders, http://investor.google.com/ipo_
letter.html, accessed July 20, 2015. Reproduced with permission from Google Inc.
12. G. Hamel, The Future of Management (Boston: Harvard
Business School Press, 2007).
13. “Google: hacking the structure,” Financial Times (August
11, 2015).
14. http://fortune.com/2017/06/27/google-alphabet-corporatestructure/, accessed March 23, 2018.
15. https://www.forbes.com/sites/kenfavaro/2015/09/07/
still-searching-for-the-strategy-in-alphabet-neegoogle/#16a0a49b6601, accessed March 23, 2018.
16. http://www.businessinsider.com/is-alphabet-other-betsstrategy-doomed-to-fail-2018-2, accessed March 23, 2018.
17. Ibid.
18. “Facebook and Democracy: The Anti-social Network,”
Economist (March 24, 2018).Case 20 Restructuring
General Electric
The appointment of Larry Culp as the chairman and CEO of the General Electric
Company (GE) on October 1st, 2018 was a clear indication of the seriousness of the
problems that had engulfed the company. Culp, the former CEO of the highly-successful
conglomerate, Danaher Corporation, had been appointed a GE director only six months
previously and was the first outsider to lead GE—every one of GE’s previous CEOs had
been a career manager at the company. On the same day as Culp’s appointment, GE
abandoned its earning guidance for the year and announced a $23 billion accounting
charge arising from a write-down of goodwill at its troubled electrical power division.1
Culp’s predecessor, John Flannery had been CEO for a mere 14 months—a sharp
contrast to GE’s two previous CEOs: Jeff Immelt (16 years) and Jack Welch (20 years).
Flannery’s tenure at GE has coincided with of the company’s most difficult periods in its
entire 126-year history. In November 2017, amidst deteriorating financial performance,
Flannery announced a halving of GE’s quarterly dividend, the proposed sale of its
lighting and locomotive units—two of GE’s oldest businesses—and the elimination of
12,000 jobs in the power division.
In 2018, the situation worsened. In January, GE announced that it would be paying
$15 bn. to cover liabilities at insurance companies it had sold 12 years previously. In
February, GE confirmed suspicions over its dubious accounting practices by restating its
revenues and earnings for the previous two years, while also announcing the likelihood
of legal claims arising from its its subprime mortgage lending over a decade earlier.
The outcome was a precipitous fall in GE’s share price (see Figure 1) that culminated
in GE’s dismissal from the Dow Jones Industrial Average (DJIA). Until June 2018, GE
was the sole surviving member of the DJIA when it was created in 1896.
The crisis at GE presented the board with two central questions. First, should GE
be broken up? Second, if GE was to continue as a widely-diversified company, how
should it be managed?
As a diversified corporation that extended from jet engines, to oil and gas equipment,
to healthcare products, to financial services, GE was an anomaly. For three decades, conglomerates—diversified companies comprising unrelated or loosely related businesses—
had been deeply unfashionable. CEOs, Jack Welch and Jeff Immelt, had claimed that,
by virtue of its integrated management system and knowledge sharing among its businesses, GE was not a conglomerate. The stock market seemed to agree—for decades
GE was able to defy the “conglomerate discount” that had been the trigger for many
widely-diversified companies to unbundle. GE’s ability to flout conventional wisdom
rested on its status as one of the world’s best-managed companies. In the first 10 years of
Fortune’s ranking of the world’s most admired companies (1998–2007), GE topped the
list seven times. By 2018, GE’s dismal financial performance (see Table 1), poor top-level
decision-making, and dubious financial practices have reduced that reputation to tatters.
During summer 2018, Flannery provided a partial answer to the question of whether
the company should be broken up: GE would spin off its Transportation and Healthcare
divisions and its oilfield services business, Baker Hughes, A GE Company (BHGE).
This case was prepared by Robert M. Grant. ©2019 Robert M. Grant.CASE 20 Restructuring General Electric  601
TABLE 1 General Electric: Selected financial data, 2010–2017 ($bn unless otherwise indicated)
2017a 2016a 2015a 2014b 2013b 2012b 2011b 2010b
GE consolidated
Revenues 122.1 123.7 117.4 148.6 146.0 146.7 147.3 150.2
Net earnings (7.8) 8.8 (6.1) 15.3 15.2 14.6 14.2 11.6
R & D expenditurea 4.8 4.8 4.2 4.2 4.6 4.5 5.4 4.9
Cash flow from
operating activities
10.4 (0.2) 19.9 27.5 29.0 31.0 33.4 36.1
Cash from (used in)
investing activities
2.3 49.2 59.5 (5.0) 29.1 11.3 19.9 32.4
Return on
average equity
(8.7%) 10.9% 1.6% 11.6% 12.2% 12.1% 11.9% 12.1%
Stock price range ($) 17.25–31.84 27.10–33.00 19.37–31.49 27.94–23.69 28.09–20.68 23.18–18.02 21.65–14.02 19.70–13.75
Total assets 377.9 365.2 493.1 648.3 656.6 681.7 717.2 747.8
Long-term
borrowings
108.6 105.1 144.7 200.4 221.7 236.1 243.5 293.3
Total employees
(thousands)
313 295 333 305 307 305 301 287
GE data (industrial businesses)
Short-term
borrowings
14.5 20.5 19.8 3.9 1.8 6.0 2.2 0.5
Long-term
borrowings
67.0 58.8 83.3 12.5 11.5 11.4 9.4 9.6
Shareowners’ equity 64.3 75.8 98.3 128.2 130.6 123.0 116.4 118.9
Total capital invested 166.8 159.5 205.7 145.3 144.8 141.3 129.0 133.1
Return on average
capital invested
2.7% 25.4% 16.9% 10.6% 11.3% 11.7% 11.6% 11.8%
(Continues)
60
55
50
45
40
35
30
25
20
15
10
2000 2005 2010 2015
FIGURE 1 General Electric share price, March 1998 to March 2018 ($)
Sources: General Electric Shareowners Meeting, April 25, 2012 and Annual Letter to GE Shareholders: 2014.602 CASES TO ACCOMPANY CONTEMPORARY STRATEGY ANALYSIS
Although Culp had endorsed this restructuring of GE’s business portfolio, the board’s
decision to fire Flannery and appoint him CEO was a clear indication that these measures were not enough. Culp would need to answer the fundamental questions relating
to the identity and strategic rationale of GE. If GE really did add value to its constituent
businesses, why divest these major divisions? If the synergies among GE’s businesses
really were illusory, then why not break up GE entirely?
The History of GE
GE was created in 1892 from the merger of Thomas Edison’s Electric Light Company
with the Thomas Houston Company. Its business was based upon exploiting Edison’s
patents relating to electricity generation and distribution, light bulbs, and electric
motors. Throughout the 20th century, GE was not only one of the world’s biggest
industrial corporations but also “a model of management—a laboratory studied by
business schools and raided by other companies seeking skilled executives.”2
Each of
GE’s chairmen contributed to the development of GE’s management system, and these
contributions diffused well beyond GE’s corporate boundaries:
● Charles Coffin (1892–1922) married Edison’s industrial R&D laboratory to a
business system capable of turning scientific discovery into marketable products.
● Ralph Cordiner (1950–63), assisted by Peter Drucker, established
GE’s Crotonville management development institute and decentralized GE’s
operational management to 120 departmental general managers.
● Fred Borsch (1963–72), devised GE’s corporate planning system based on strategic business units and guided by portfolio management techniques, which
became a model for most diversified corporations.
● Reg Jones (1972–81) integrated strategic planning with financial control to create
a comprehensive system for the corporate headquarters to manage its businesses.
2017a 2016a 2015a 2014b 2013b 2012b 2011b 2010b
Borrowings as % of
capital invested
48.9% 49.7% 50.1% 11.2% 9.2% 12.4% 9.0% 7.6%
GE capital data (financial services)
Revenues 9.1 10.9 10.8 42.7 44.1 45.4 49.1 49.9
Net earnings (7.1) (2.2) (15.8) 7.2 6.2 6.2 16.5 2.2
Shareowner’s equity 13.5 24.7 46.2 87.5 82.7 81.9 77.1 69.0
Total borrowings 95.2 117.3 180.2 349.5 371.1 397.0 443.1 470.5
Ratio of debt to
equity
7.06:1 4.75:1 3.90:1 3.99:1 4.49:1 4.85:18 5.75:1 6.82:1
Total assets 156.7 183.0 316.0 500.2 516.8 539.4 584.5 605.3
Notes:
a
As reported in 2017 financial statements.
b
As reported in 2014 financial statements.
TABLE 1 (Continued)CASE 20 Restructuring General Electric  603
● Jack Welch (1982–2001) had energized GE by stripping out layers of hierarchy,
introducing a rigorous, and demanding performance management system based
on stretch targets and powerful incentives for their achievement, and spearheaded a series of initiatives designed to root out complacency and to drive
change.3
Welch reformulated GE’s business portfolio through exiting low-growth
extractive and manufacturing businesses and by expanding services—financial
services in particular. By the time he retired, GE was “a bank disguised as an
industrial conglomerate.”4
● Jeff Immelt (2001–17) returned GE to its manufacturing roots through divesting
its financial service and entertainment businesses, and increasing integration
among the industrial businesses through sharing technology, increasing global
presence, and exploiting synergies in sales and marketing.
GE’s Business Portfolio
In a world of turbulence, GE had always viewed its diversified portfolio of businesses
as a source of stability over the business cycle. In 2015, Jeff Immelt stated: “Diversity
provides strength through disruptive events and commodity cycles,” thereby constituting a key “source of value from a multibusiness company.”5
The guiding theme of Immelt’s restructuring of GE’s portfolio of businesses was
exploitation of profitable opportunities for long-term growth. Immelt identified four
global trends of key importance to GE:
● Demography: The aging of the world’s population would create opportunities
for goods and services required by older people—healthcare especially.
● Infrastructure: GE anticipated massive investments in infrastructure including
energy, water, and transportation.
● Emerging markets would offer rates of GDP growth around three times those of
the world as a whole.
● Environment: The problems of global warming, water scarcity, and conservation
required new technologies and innovative business responses.
The outcome was to recreate GE as an infrastructure company—a diversified corporation directed toward global needs for aviation, rail transportation, power generation and distribution, oil and gas production, and medical hardware. Figure 2 shows
Capital Finance
25%
Infrastructure
75%
Plastics, Media
20%
Infrastructure
41%
Capital Finance
24% Capital Finance
43%
Infrastructure
34%
Plastics, Media
15%
2001 2005 2016
Insurance 15% Insurance 8%
FIGURE 2 The changing balance of General Electric’s business portfolio604 CASES TO ACCOMPANY CONTEMPORARY STRATEGY ANALYSIS
Immelt’s depiction of GE’s changing business composition. During his 16-year tenure,
Immelt reconfigured GE through the acquisition of infrastructure-related companies
and the divestment of consumer and financial service businesses. Table 2 shows GE’s
principal acquisitions and divestitures during 2004–17.
TABLE 2 General Electric’s principal acquisitions and disposals, 2004–17
Year Acquisitions Disposals
2004 Acquires entertainment assets of Vivendi
Universal for $12 bn. to form NBC Universal
(80% owned by GE).
GE Healthcare buys Amersham PLC for $9.5 bn.
GE Capital acquires Dillard’s credit card unit
for $1.25 bn.
GE Security acquires InVision Technologies
(airport security equipment).
Life and mortgage insurance spun
off as Genworth Financial.
2005 GE Commercial Finance acquires the financial
service business of Bombardier for $1.4 bn.
2006 GE Healthcare acquires IDX Systems, a medical
software firm, for $1.2 bn.
GE Water & Process Technologies acquires Zenon
Environmental Systems for $758 mn.
GE Advanced Materials sold for
$3.8 bn.
GE Insurance Solutions and GE Life
sold for $6.5 bn.
2007 GE Aviation acquires Smiths Aerospace for $4.6 bn.
GE Oil & Gas acquires VetcoGray for $1.4 bn.
GE Plastics is sold to Saudi Arabia
Basic Industries for $11.7 bn.
2008 NBC Universal buys Weather Channel for $3 bn.
GE Capital acquires Merrill Lynch Capital,
CitiCapital, and Bank BPH.
2010 GE Healthcare acquires Clarient for $0.6 bn.
2011 GE Oil and Gas acquires Dresser Inc. ($3 bn.),
Wellstream PLC ($1.3 bn.), and the well support
division of John Wood Group PLC ($2.9 bn.).
51% of NBC Universal sold to
Comcast for $13.8 bn.
GE Capital sells Mexican assets to
Santander.
2012 GE Capital acquires $7 bn. bank deposits
from MetLife.
2013 Buys oilfield pump maker, Lufkin Industries,
for $3.1 bn.
Remaining 49% of NBC Universal
sold to Comcast for $16.7 bn.
2015 Acquires Alstom S.A.’s power business
for $13.1 bn.
GE Antares Capital (private equity)
$12.0 bn.
GE Capital (vehicle services) $6.9 bn.
GE Capital (transport finance) $8.9 bn.
GE Capital (lending & leasing) to Wells
Fargo for $26.5 bn.
Synchrony (credit cards) for $21.6 bn.
2016 Sale of GE Appliances to Qingdao
Haier for $5.4 bn.
2017 Acquires 62.5% of Baker Hughes (for $32.4 bn.),
merges it with GE Oil and Gas.
GE Water & Process Technologies
sold to Suez for $3.4 bn.
Sources: General Electric press releases and Wall Street Journal.CASE 20 Restructuring General Electric  605
Shrinking GE Capital was a massive challenge given its size and contribution
to GE’s profitability. Despite Immelt’s commitment to downsizing GE Capital, it
continued to grow during 2001–07. In 2006 and 2007, GE Capital accounted for
almost half of GE’s total net profit (up from 25% in 2001). Only after the financial
crisis of 2008–09 did GE take drastic action to divest financial services. The designation of GE Capital as a “systemically important financial institution” in 2013, which
raised its capital reserve requirements, eliminated any competitive advantages it had
derived from being a nonbank supplier of financial services.6
The only businesses
that GE Capital retained were “vertical financial businesses”—those linked to GE’s
core industrial businesses.
At the beginning of 2018, GE comprised eight major sectors. Table 3 shows these
sectors’ financial performance. Exhibit 1 describes their business activities.
TABLE 3 General Electric segment financial results, 2013–2017
2017 2016 2015 2014 2013
Revenues ($mn.)
Power 35,990 36,795 28,903 27,746 26,770
Renewable Energy 10,280 9033 6273 6399 4824
Oil & Gas 17,231 12,898 16,450 19,085 17,341
Aviation 27,375 26,261 24,660 23,990 21,911
Healthcare 19,116 18,291 17,639 18,299 18,200
Transportation 4178 4713 5933 5650 5885
Lighting(a) 1987 4823 8751 8404 8338
Total industrial segment revenues 116,157 112,814 108,609 109,574 103,269
GE Capital 9070 10,905 10,801 11,320 11,267
Total segment revenues 125,227 123,719 119,410 120,894 114,536
Segment profit
Power 2786 5091 4772 4731 4437
Renewable Energy 727 576 431 694 485
Oil & Gas 220 1392 2427 2758 2357
Aviation 6642 6115 5507 4973 4345
Healthcare 3448 3161 2882 3047 3048
Transportation 824 1064 1273 1130 1166
Lighting 93 199 674 431 381
Total industrial segment profit 14,740 17,598 17,966 17,764 16,220
GE Capital (6765) (1251) (7983) 1209 401
Total segment profit 7975 16,347 9983 18,973 16,621
(Continues)606 CASES TO ACCOMPANY CONTEMPORARY STRATEGY ANALYSIS
TABLE 3 (Continued)
2017 2016 2015 2014 2013
Operating Margins (%)
Power 7.74 13.84 16.51 17.05 16.57
Renewable Energy 7.07 6.38 6.87 10.85 10.05
Oil & Gas 1.28 10.79 14.75 14.45 13.59
Aviation 24.26 23.29 22.33 20.73 19.83
Healthcare 18.04 17.28 16.34 16.65 16.75
Transportation 19.72 22.58 21.46 20.00 19.81
Lighting(a) 4.68 4.13 7.70 5.13 4.57
Total industrial segment 12.69 15.60 16.54 16.21 15.71
GE Capital –74.59 –11.47 –73.91 10.68 3.56
Total 6.37 13.21 8.36 15.69 14.51
Note:
(a) Lighting includes Appliances before 2017.
Source: General Electric, 10K report for 2017.
EXHIBIT 1
General Electric’s business segments, January 2018
GE Power. The acquisition of Alstom had made GE the
world’s biggest supplier of equipment for generating
and distributing electricity. GE Power was also GE’s biggest division with 83,500 employees in 2017. It supplied
gas turbines, steam power systems, power plants, maintenance and service solutions for power generation,
industrial gas engines for power generation, nuclear
reactors and fuel (GE Hitachi Nuclear), electricity transmission and distribution systems, and electric motors.
During 2017, GE Power was hit by a decline in worldwide demand and made a loss of $0.9 bn. arising from a
write-down of inventory.
GE Renewable Energy employed 24,000 people
in 2017 and was one of the world’s top-five suppliers to
the wind power industry, supplying wind turbines and
related hardware, software, and services for both onshore
and offshore generation. GE was a world-leader in wind
generation technology: its Haliade-X wind turbine,
launched in March 2018, is 260-m tall and can generate
12MW. GE Renewable Energy also supplies products and
services to the hydropower industry.
GE Oil and Gas, with 64,000 employees in 2017, had
been built by multiple acquisitions between 2007 and
2016. By merging with Baker Hughes, it created Baker
Hughes, A GE Company (BHGE), the world’s second
biggest oilfield services supplier after Schlumberger. Its
products include drilling equipment, oilfield fluids and
chemicals, pumps, pressure control equipment, subsea
production systems, flexible pipeline systems, equipment for production platforms, and products for refining
and petrochemicals. Oilfield services include well evaluation, drilling, downhole completion, wellbore intervention, wireline services, and decommissioning. Profits
declined in 2017 due to reduced capital expenditure by
oil and gas companies and restructuring costs arising
from the acquisition.CASE 20 Restructuring General Electric  607
Planning for a New General Electric
During his 14 months as CEO, John Flannery had taken a systematic approach to GE’s
restructuring, making it clear that a wide range of strategic options for GE were under
consideration: “That assessment is continuing and focuses on maximizing value, all
options on the table, no sacred cows.” The corporate review “could result in many,
many different permutations, including separately traded assets really in any one of
our units, if that’s what made sense.”7
Any restructuring of GE would need to address
two major questions: What were the sources of GE’s current problems? and, did GE add
value to its constituent businesses or destroy it?
The Sources of GE’s Problems
Analyses of what had gone wrong at GE were plentiful. Most of these focused on the
role of Flannery’s predecessor, Jeff Immelt, and some traced the problems further back
to the Welch era.
GE Aviation, with 44,500 employees in 2017, was
the world’s leading supplier of jet engines (together with
avionics systems and after-market services). GE Aviation’s
40-year-old joint venture with Safran of France, CFM
International, supplies its highly successful LEAP engine
for which there was an order backlog of 12,550 at the
beginning of 2018. GE’s GE9X engine, built using lightweight carbon fiber and 3-D printing, which is to be
launched in 2018, is the world’s biggest turbofan engine.
GE Healthcare, with 52,000 employees, is the world’s
leading supplier of diagnostic imaging systems using
X-rays, digital mammography, computed tomography,
magnetic resonance, molecular imaging, and ultrasound.
It also provides systems for patient monitoring, infant
incubation, respiratory care, anesthesia, and cellular and
gene therapy.
GE Transportation, with 8000 employees in 2017,
supplies diesel-electric locomotives together with
support services, parts, software solutions, and data
analytics. It also supplies diesel engines and drive systems to the shipping and mining industries. Despite GE’s
technical leadership in locomotives, the world market
was dominated by CNR and CSR of China. Following
them was CLW of India and Bombardier of Canada. In May
2018, the merger of GE Transportation with US rail equipment manufacturer, Wabtec Corp, was announced. The
combined company would be owned 49.9% by Wabtec
shareholders, 40.2% by GE shareholders, and 9.9% by GE.
GE Lighting, with 7500 employees in 2017, is comprised of a consumer lighting business focused on LED
lighting; and Current, which provided lighting solutions
for commercial, industrial, and municipal customers. At
the end of 2017, the business was put up for sale and
a management buyout had been agreed upon for GE
Lighting’s business in Europe, Middle East, and Africa.
GE Capital, with 4000 employees in 2017, had been
reduced to financial services that were closely aligned
with GE’s industrial businesses. These included Industrial
Finance, providing equipment financing for the healthcare and additive businesses; Energy Financial Services,
which offers financial solutions and underwriting for
Power, Renewable Energy, and Oil & Gas; and GE Capital
Aviation Services, the world’s biggest aircraft leasing
company. During 2018, its Industrial Finance and Energy
Financial Services would be shrunk considerably. However, it continued to be haunted by its past—during
2008–14, it would pay $15 billion to top-up the reserves
deficiencies of previously-owned insurance companies.608 CASES TO ACCOMPANY CONTEMPORARY STRATEGY ANALYSIS
It was clear that Immelt was guilty of decision-making errors—particularly with
regard to timing. Criticisms focused in particular on the following:
● Ill-judged acquisitions. Several commentators pointed to GE overpaying for
the companies it acquired. The principal evidence of this related to Alstom.
During the long delay in gaining approval for the acquisition, the market for
power-generating equipment took a downturn, and GE was forced to offer
more concessions to Alstom and the French government. Hence, by the time
the acquisition closed, Alstom was worth considerably less than the price GE
was paying. Timing was also amiss for several of GE’s acquisitions in oilfield
services: Dresser, Wellstream, John Wood, and Lufkin were all bought when oil
prices were booming. Scott Davis of Melius Research estimated that GE’s total
return on Immelt’s acquisitions were less than half of what GE would have
earned by simply investing in stock index mutual funds.8 The Economist estimated that GE was paying much more for the businesses it bought than what it
received for those it sold.9
● Poor cash flow management. During the 21st century, GE lost its reputation for
financial conservatism along with its triple-A credit rating. At the core of concerns over its financial management has been an erratic approach to cash-flow
management. The financial crisis was, of course, unexpected, but the fact that
GE was forced to obtain $3 bn. in emergency funding from Warren Buffett’s
Berkshire Hathaway Inc. and $139 bn. in loan guarantees from the federal
government appears not to have alerted GE to the risks inherent in GE Capital.
Particular criticism has been directed at GE’s stock buyback program: in the
three years prior to the dividend cut in 2017, GE spent $49 bn. on buying its
own stock.10 According to the Financial Times, GE’s free cash flows from its
industrial businesses failed to cover its dividend during 2015–17.11
● Over-optimism. GE’s failure to guard itself against risk and pay adequate
attention to early warning signs have been interpreted by some GE-watchers
as symptoms of top-management’s overconfidence and reckless optimism.
According to some current and former GE executives, Immelt and his top deputies engaged in “success theater”—they “projected an optimism about GE’s
businesses and its future that didn’t always match the reality of its operations
or its markets.”12 In particular, during 2017, when signs of flagging sales and
mounting inventory were emerging at GE Power, Immelt was slow in acknowledging the problems.
● Problems with GE’s financial accounting. If GE had been slow to recognize and
react to emerging problems, one factor might have been its accounting practices, which for decades had been designed to impress Wall Street, but may also
have insulated management from the reality of business performance. Under
Jack Welch’s leadership, GE Capital became a valuable tool for managing GE’s
quarterly earnings: “Unlike a factory, GE Capital’s highly liquid assets could
be bought or sold at the ends of quarters to ensure the smoothly-rising earnings that investors loved.”13 Dubious accounting practices also surfaced in GE’s
industrial businesses. At GE Power, sales of upgrades to make existing gas turbines run more efficiently were booked as current revenues, without taking
into account the effects of these sales would have on reducing future service
revenues.14CASE 20 Restructuring General Electric  609
Does GE Add Value to Its Businesses?
Ultimately, the question of whether or not GE should be broken up rested on the issue
of whether GE’s corporate umbrella added or subtracted value from the businesses.
At the time Culp was appointed CEO, with its share price depressed and facing a slew
of legal and regulatory problems, it was likely that GE would be worth more if it was
broken up and its constituent businesses either sold or floated as independent companies. In January 2018, the Financial Times valued GE’s constituent businesses as:
Aviation at $85 bn., Healthcare at $56 bn., and Power at $36 bn. Adding other smaller
businesses and subtracting debt and other liabilities (including pensions) gave a sumof-the-parts valuation of costs, the result was something close to $158 bn. Although
this was greater than GE’s market capitalization, the Financial Times cautioned that: “It
does not look as though there is a pot of gold there waiting to be uncovered.”15
Previous CEOs, Immelt and Welch, had argued that GE created value for its businesses through several mechanisms. These were:
1 Reducing risk. According to Immelt: “The GE portfolio was put together for a
purpose—to deliver earnings growth through every economic cycle. We’re constantly managing these cycles in a business where the sum exceeds the parts.”16
To the extent that GE’s business diversity did smooth its overall cash flows, then
it seemed that the major benefit of this was giving GE greater independence from
external financing.
2 Portfolio management. Both Welch and Immelt had radically changed and
reconstituted GE’s business portfolio. Welch had built a huge financial services
business; Immelt had re-created GE as an industrial corporation heavily focused
on infrastructure. The rationale was to exit slow-growing, low-margin sectors
to exploit the growth and profit opportunities of more attractive industries. In
building GE’s presence in jet engines, medical equipment, and systems for generating and distributing electricity, Immelt was widely perceived as having aligned
GE’s businesses with long-term global growth trends. However, The Economist’s
Schumpeter column doubted the effectiveness of portfolio management in creating value: “The cost of churning capital in predictable ways can be significant …
GE has paid a multiple of 13 times gross operating profits for the businesses it
has bought and got 9 times for those it sold. Some nine-tenths of its industrial
capital is now comprised of goodwill, or the premium that a firm paid above
book value for its acquisitions.”17
For portfolio management to work well, corporate management must be willing
to exit businesses whose long-term prospects are deteriorating. This is easier for
a private equity firm than for a diversified industrial corporation where longestablished businesses are likely to be protected by sentimental attachment and
entrenched political power. A feature of Immelt’s leadership was the long length of
time it took to exit from financial services and domestic appliances.
3 Exploiting synergies. A central theme of Immelt’s 16-year tenure as CEO was
building and exploiting linkages among GE’s different businesses. While Welch
had been a passionate advocate of knowledge sharing within GE, Immelt’s
emphasis was on putting in place the systems for such sharing to take place.
Sharing technology was the priority. Under Immelt’s leadership, GE built a network of eight Global Research Centers. By 2015, GE had 37,000 technologists 610 CASES TO ACCOMPANY CONTEMPORARY STRATEGY ANALYSIS
engaged in R & D within its businesses and its corporate research centers. Corporate-level research programs addressed technologies with applications to multiple
businesses. These included molecular imaging and diagnostics, nanotechnology,
energy conversion, advanced propulsion, sustainable energy, and security technologies. The greatest importance was attached to establishing GE’s leadership
in “the Internet of things”—the “interface of the physical and digital worlds …
through combining data and physics.” This involved the use of the continuous
data from embedded sensors on jet engines, locomotives, oil and gas equipment,
medical diagnostic, electricity generators, and so on, as an input to the software
that managed maintenance schedules, fuel optimization, accident prevention,
factory automation, and enterprise management.
In 2011, GE opened a new software center in San Ramon, CA to develop
applications of big data and artificial intelligence that would lead GE’s digital
transformation. The new software center formed the centerpiece of GE Digital, a
new business division created in September 2015 that “brings together all of the
digital capabilities from across the company into one organization.”18 GE Digital’s efforts focused on the development of its Predix platform, a cloud-based
operating system for industrial applications that uses sensor-generated data
within a next-generation industrial automation system. However, during 2016 and
2017, problems with the Predix platform had increased its development costs and
slowed its rollout to third-party customers. As a result, in February 2018, Flannery
announced narrowing the focus of GE’s digital business and targeting existing
customers with its Predix operating system.19
Sales and marketing provided another rich area for cross-business synergies.
Increasingly, GE bundled products and support services to offer customized
“customer solutions.” In the case of a new hospital development, for example,
there might be opportunities not just for medical equipment but also for
lighting, turbines, and financing. Such opportunities were particularly important internationally. In 2009, GE launched its “Company-to-Country” strategy
to build relationships with host governments across multiple infrastructure
development projects. This strategy involved looking beyond China, India, and
Brazil; in 2012, GE announced that “Nigeria should be our next billion-dollar
country.”20
4 The GE management system. The management system that Larry Culp
inherited was—despite its restructuring by Jack Welch and reformulation by
Jeff Immelt—a product of 120 years of continuous development. Many of its
processes were so deeply embedded within GE’s culture that they were integral to its identity and world view. At the core of GE’s management system
were management development—its “talent machine”—and its system of
performance management.
GE’s commitment to leadership development was indicated by its reliance on internally developed senior executives. Its effectiveness in developing leaders had given it the status of a “CEO factory”—former GE managers
are chief executives of companies throughout the world. Key components
of its management development system were its corporate university at
Crotonville, New York, and its “Session C” system for tracking managers’
performance, planning their careers, and formulating succession plans for
every management position at GE from department heads upward. Did
Culp’s appointment as CEO imply that GE had lost faith in its management
development capability?CASE 20 Restructuring General Electric  611
GE’s performance management system was based heavily on objective,
quantitative performance measures: “Nothing happens in this company without
an output metric,” observed Immelt. Managers were set demanding performance
targets, then given strong incentives for their attainment. However, while many
performance variables—revenue, profits, quality, safety—where conducive to
quantification, many of the performance variables that had been emphasized by
Immelt—innovation, cross-selling, knowledge sharing—were much more difficult
to quantify and monitor. If, as Immelt had claimed, GE’s performance depended
upon integration—“Our managers have to work cross-function, cross-region,
cross-company”21—then its performance management system needed to provide
the right incentives for such collaboration.
Which Corporate Model for GE?
As Larry Culp considered the restructuring initiatives that were currently underway—the
merger of GE’s Transportation division with US railroad equipment producer, Wabtech
Corporation to create a jointly-owned company and the spin off of GE Heathcare and
BHGE (Baker Hughes) as separately quoted companies with their shares distributed
to GE shareholders—he pondered the type of company that GE should become. The
obvious model was that of Danaher. Danaher was a widely-diversified, technologybased company built through acquisition. Its strong performance was the result of the
application of a common set of management principles and processes based upon lean
production and continuous improvement (kaisen)—the “Danaher Business System”—
to carefully selected acquisitions. Although Danaher’s portfolio of over 100 businesses
were clustered in four main areas: life sciences, diagnostics, dental, water quality, and
product identification, Danaher did not attempt to create the huge integrated divisions
that GE possessed.22
An alternative model was the business system created by Siemens AG. The German
giant had a similar background and profile to GE: it was founded in the late 19th
century and its biggest businesses were power generation systems (including wind
power), medical equipment, and industrial automation. However, unlike GE, Siemens
had moved toward greater decentralization rather than GE’s path of closer integration.
Siemens’ CEO, Joe Kaeser, described the Siemens model as a “fleet of ships” with divisions becoming semiautonomous and separately listed. Siemens’ medical equipment
unit, Healthineers, was listed in March 2018. Like GE, Siemens’ had suffered from the
sharp reduction in world demand for gas turbines—however, the fall in revenues and
profits in its power division was much less than that experienced by GE. During the
three years to June 2018, Siemens share price increased by 22%; that of GE’s fell by 48%.
APPENDIX: Extracts from General Electric Company Update,
June 26, 2018
As you know, we have been working to determine the appropriate longer term strategic focus for GE. There are three essential elements of this strategy: one is focusing
our portfolio for growth and shareholder value creation; the second is strengthening
our balance sheet; and the third is a market shift in how we run the company. With
respect to our portfolio, our Aviation, Power and Renewables businesses will be
the core of GE going forward. These are three formidable franchises where we’ve 612 CASES TO ACCOMPANY CONTEMPORARY STRATEGY ANALYSIS
built leadership positions over many decades. These businesses also have significant
strategic linkages. They share technologies, digital and additive strategies, and
business models.
While our core Aviation, Power and Renewable businesses can thrive inside of the
current GE framework, we think substantial value can be created by moving other
businesses outside of GE. To implement that strategy, we are creating a separate
stand-alone Healthcare company and we also intend to fully separate BHGE. These are
two strong and competitive businesses with leading positions and strong growth prospects but they both have various constraints operating inside the current GE construct.
We believe these businesses can achieve greater results for employees, customers,
and our owners as stand-alone companies. The pending merger of our Transportation
business with Wabtec was driven by the same strategic approach. We will begin the
process of separating our Healthcare business immediately. We will monetize approximately 20% and approximately 80% of Healthcare will be distributed tax free to our
shareholders through a spin or split … Oil & Gas was separated from GE in July of
2017 when we made the strategic decision to combine it with Baker Hughes. There’s
strong industrial logic for the transaction, the companies are much stronger together
and shareholders are getting the benefit of significant synergies both on the revenue
and cost side as well as benefiting from substantial combined technology. We expect
to pursue an orderly separation of the company within 2–3 years with a focus on maximizing value for BHGE and GE.
Strengthening the balance sheet of the company is a top priority for us. This will
allow us the flexibility and capacity to invest in growing our core businesses going
forward. We will reduce our net debt by about $25 billion, and this will bring our net
debt-to-EBITDA below 2.5 times by 2020. We will run the company with a substantially
higher cash balance and reduce our use of commercial paper.
Our strategy with regard to GE Capital is clear, we’re making it smaller and more
focused. We are reducing assets by $25 billion, and we’ll bring our debt to equity to
less than 4 times by 2020. We are aggressively working on actions and alternatives to
mitigate, reduce or eliminate our exposure to long-term care insurance.
As I outlined at EPG, we will run GE Company in a fundamentally different way
going forward. Our businesses will be the center of gravity and will run on a new
operating system that we believe will improve our operations and cash performance.
These changes will reduce corporate costs by at least $500 million by 2020. We expect
this number to grow over time as this velocity is applied across all levels of the company.
This is in addition to cost actions already announced in 2017 and 2018.
In conjunction with previous actions, today’s announcement marks the emergence
of a new GE, a high-tech industrial GE. A simpler, stronger and more focused company
at the core, a strengthened balance sheet, a new operating system and a bright future
for our Healthcare and BHGE businesses. This is a GE that is equipped to fight for
the future.
… As I’ve said previously, the steps we’re taking are really a means to an end, the
end being a simpler, stronger and more focused company where our quality assets
can reach their true potential and flourish in the decades ahead. We sought to position the businesses in an environment guided by 4 basic principles: the maximum
ability to pursue their organic and inorganic investment strategies; strong alignment
for management incentives linking performance and reward; reducing complexity and
cost, while improving decision-making speed; and making sure any central essential
services are subject to a market test by the business units. We are fundamentally inverting the company to make the business units the center of gravity. I want to focus the
businesses externally into the market.CASE 20 Restructuring General Electric  613
We’ll have a much smaller corporate focused on strategy and execution, capital allocation, talent development and governance. The entire fabric of the company will be
one of continuous improvement driven by operating leaders using well-proven tools,
like Lean and Six Sigma. Digital and Additive strategies will continue to drive customer
value and performance. We believe that these changes will yield substantial improvements in performance over time. There will be improved focus, better accountability,
clear capital allocation decisions, more strategic optionality and better alignment of
compensation. Our plan will create a strong, exciting and growing GE built on operational execution and robust industrial logic. Going forward, GE will be comprised
of Aviation, Power and Renewables, supported by Digital, Additive and the financing
expertise of GE Capital.
These are leading businesses solving the world’s toughest problems for our customers.
By combining these strong franchises with a healthy balance sheet, we see numerous
avenues to invest for growth. We see sustained strength and growth in Aviation going
forward. We see growth in the overall Renewables market and in our expansion of
market share into new areas, like offshore wind and storage. We see earnings growth
in the turnaround of our Power business with 1/3 of the world’s electricity from our
installed base and 2 of every 3 flights on our engines, GE is a high-tech industrial
company that forms the backbone of a connected and electrifying world in every sense
of those words. In addition to the strength of GE going forward, we’re also unlocking
substantial value for our shareholders. GE Healthcare is a leader in the drive to more
effective and more efficient health-care outcomes. BHGE is uniquely positioned across
the value chain as a full stream, oil & gas company. Our merger with Wabtec creates
a global leader in the rail industry. As focused pure plays, they’ll have greater strategic
flexibility and more resources to pursue strategies dedicated to their industries.
I want to spend a minute touching on each of these franchises. Our Aviation business
is a market-leading business with industry firsts spanning back decades and our technology stack has never been stronger. Both the commercial and military businesses are
strong. Our fleet is young, with 61% of our engines not yet at their second shop visit.
That bodes well for our service business. We’re managing well through the LEAP ramp.
Despite the LEAP growth, we’re maintaining 20%-plus margins through the launch.
Our military portfolio is broad and we see opportunities for growth with our next-gen
technologies both in the US and internationally. We were encouraged by the strong
first quarter performance, especially in services. And finally, across the whole business,
we’re leveraging the strength of Additive, which is a game-changer for high-tech component manufacturing. Additive is allowing us to reset our supply chain cost entitlement and we’re seeing proof points across parts, systems and products. Aviation is a
premier asset with over $200 billion in backlog and good visibility to long-term growth.
We want to continue to invest and grow this franchise.
Next is Power. While our results here have been unacceptable, this is a fundamentally strong franchise with leading technology, a valuable installed base and expansive
global reach. GE generates about 1/3 of the world’s electricity and has about 1600
gigawatts of installed capacity. Gas, which is our largest segment, remains a key part of
the world’s long-term power generation mix. GE has approximately 7000 gas turbines
in our installed base and we have a 20-year plus track record that demonstrates we
can improve output, reliability and performance of those assets when we service them.
We are a big player in grid, equipping 90% of transmission utilities worldwide. There
are certainly macro and secular challenges to this business, but we are taking actions
to remediate the issues that we saw in 2017 and to right-size our cost structure for a
lower heavy-duty gas turbine market in the near term. This is a turnaround story, and
we are confident in our ability to improve the future operating performance. We have 614 CASES TO ACCOMPANY CONTEMPORARY STRATEGY ANALYSIS
a well-thought-out and detailed plan to reach the 10%-plus margins outlined at EPG.
Overall, this is valuable franchise that will be run better moving forward.
Our Renewables business is an important part of the energy mix. Sixty-seven percent
of 2017 global power capacity additions were from renewable sources, with some
sources estimating 70% of 2018–21 additions from renewable sources. We are a leading
player in onshore wind, gaining market share in 2017. We are making inroads into offshore wind and have a strong hydro business. Renewables is a competitive and evolving industry but one, we think, we’re positioned well in going forward.
Aviation, Power and Renewables are businesses that we feel are best positioned
together to deliver results and drive shareholder value. These are all businesses marked
by deep and complementary technology investment and differentiation and using that
investment to grow our installed base and build high-value service stream annuities.
Whether generating electricity on land or thrust in propulsion in the skies, the machines
from these segments share a common core set of technologies, service platforms and
global markets that make them stronger together than they would be if innovated
in isolation. In fact, the first US jet engine created by GE evolved from the industrial
gas turbine. While one is for power and one for flight, they both share a common
architecture and operating environment that allow them to naturally have a common
set of technology needs.
Wind turbines, too, share many common traits. They are large spinning machines
that generate megawatts of torque and power. That’s very familiar to GE. I’ll give you
two examples of technology synergies. First, edge controls. For decades, we’ve developed industrial controls for gas turbines, jet engines and more recently, wind turbines
to ensure each operates safely and at the highest levels of performance and efficiency
possible. With the exponential growth of computing power in the past decade, we’re
now combining controls with digital technologies in a very powerful way to further
optimize the way we operate and maintain these machines. At our global research
center, we developed a common industrial operating system called [Edge OS], which
works in a wind turbine, jet engine or gas turbine.
A second example is material science. The LEAP engine was the first to have a revolutionary new material called ceramic matrix composites, or CMCs. It’s a lightweight
ceramic material engineered to be as strong as metal but able to withstand much hotter
temperatures. It has been a real difference maker in our LEAP product offering. The
development of CMCs actually started as a project in our gas turbine business. In fact,
it was because the material performed so well in the field testing with gas turbines that
led us to discover it could work in jet engines as well. With polymer matrix composites,
or PMCs, GE Aviation first introduced lightweight composite fan blades in the GE90
engine, and we took that knowledge and quickly adapted it for Renewable Energy’s
wind blades.
On the services side, we had a massive installed base across all three businesses
with 65,000 aircraft engines, 7000 gas turbines, and 35,000 wind turbines. These products all have long lives and our services business model provides a very profitable
recurring revenue stream. We realized many common synergies around how to execute
and manage these long-term service contracts. The markets are similar, they’re global
and this is where we can tap into GE’s deep global network and experience.
Digital and Additive are substantial opportunities across all 3 segments that provide
benefits to enhance growth and lower cost.
We are certain that with focus and a strong balance sheet, GE will be a technologydriven growth story again in the coming years.CASE 20 Restructuring General Electric  615
As I said before, we’ve been methodically reviewing the portfolio and looking at
the best structure or structures to maximize value and position our businesses for success. We are excited about the future of GE Transportation, Baker Hughes GE, and GE
Healthcare.
We announced the merger of Wabtec and GE Transportation last month. We are
contributing Transportation at an attractive multiple and realizing $2.9 billion of cash
proceeds, while our shareholders will benefit from the compelling long-term prospects
and synergies of the combined platform.
The industrial logic of this deal is strong and there are good growth opportunities
with GE’s installed base and services offering combining with Wabtec’s portfolio.
We are beginning the process of separating Healthcare immediately and expect to
complete it in the next 12–18 months. We plan to monetize approximately 20%. We
expect it to have a capital structure and capital allocation aligned to its peers. As part
of the transaction, we will transfer approximately $18 billion of debt and pension
obligations to Healthcare. With respect to the impact this will have on future dividends, it’s our intention to maintain the current $0.48 dividend until the time Healthcare is established as a stand-alone entity. At that time, both GE and GE Healthcare
will determine their future dividends with an intended payout ratio in line with their
respective industry peers. Given the typically lower payout ratios in the health-care
industry, this will likely lead to a reduction in the aggregate GE dividend at that time.
We like the BHGE combination. Customer reception has been positive and we’re
gaining traction across product lines. The realization of synergies, both top and bottom line, was premised upon GE’s sharing of significant technology and expertise with
BHGE. This was contracted for at the time of the merger and is going well. BHGE is
well positioned to thrive as an independent company. As I said earlier, we expect to
substantially exit our direct ownership of this business within 2–3 years.
Running the businesses as the center of gravity is the third major point of our
announcement today. We’re implementing a new way to run the company. We will
focus all of our activity in the company around our businesses with a much smaller corporate headquarters. Corporate will focus on strategy, capital allocation, talent and governance, and we will reduce the size of corporate significantly with at least $500 million
of additional corporate cost-out by 2020. As we apply the same principle to our businesses, we expect incremental cost savings in the businesses during this period of time.
As you know, we have historically run several organizations centrally. This will
change. Centrally, run activities in shared services will be placed back in the hands of
the businesses. Our business leaders will have full accountability for and ownership of
their operations, and everything we do will be subject to a market test. There will be
no central residual cost. Global research will now align under David Joyce. Our Global
Growth Organization will be significantly smaller and focused on government relations
and developing markets where we need strong resources to play its scale and manage
risk. And GE Ventures will be refocused. It’ll be focused on only the most urgent markets and new technologies as determined and paid for by our business leaders. Our
digital strategy continues to focus on our core industries in our installed base, and we
expect no cost drag from digital by 2020. We believe these actions will result in better
execution, increased speed and additional cost reductions of at least $500 million. This
is incremental to the more than $2 billion of cost-out we’re actioning in 2018.
Source: https://www.ge.com/investor-relations/sites/default/files/ge_webcast_
transcript_06262018_0.pdf616 CASES TO ACCOMPANY CONTEMPORARY STRATEGY ANALYSIS
Notes
1. “GE Ousts CEO John Flannery in Surprise Move After
Missed Targets,” Wall Street Journal (October 2, 2018);
Lex column, “General Electric: Culp-able,” Financial
Times (October 2, 2018).
2. “What Makes GE Great?” Fortune (March 6, 2006): 90–96.
3. Welch’s initiatives included: the requirement that every
GE business should be #1 or #2 in its global industry;
“Work-out,” a process where managers allowed their subordinates to initiate organizational changes; “Six Sigma,”
a total quality management program; and “Destroy your
business dot.com,” an initiative to drive the adoption of
ecommerce.
4. htts://seekingalpha.com/article/106445-general-electricgenuine-risk-of-collapse. Accessed March 13, 2018.
5. General Electric, 10-K report for 2014: 7.
6. “GE to Cash Out of Banking Business,” Wall Street Journal
(April 11, 2015).
7. “GE Puts a Breakup on the Table,” Wall Street Journal
(January 17, 2018).
8. “How GE Went From American Icon to Astonishing Mess,”
Bloomberg Businessweek (February 5, 2018).
9. “General Eclectic,” Economist (May 27, 2017).
10. “How GE Went from American Icon to Astonishing
Mess,” op cit.
11. “GE’s new leader faces big call on behemoth’s dividend,”
Financial Times (October 15, 2017).
12. “Success Theater Masked Rot at GE,” Wall Street Journal
(February 21, 2018).
13. “How GE Went from American Icon to Astonishing
Mess,” op cit.
14. “Success Theater Masked Rot at GE,” Wall Street Journal
(February 21, 2018).
15. https://www.ft.com/content/eaf94308-fb4f-11e7-9b32-
d7d59aace167. Accessed March 15, 2018.
16. Annual Report to Share Owners, 2002: 4–5.
17. “General Eclectic,” op cit.
18. https://www.genewsroom.com/press-rrepoirt,
2017.eleases/creation-ge-digital-281706. Accessed
March 16, 2018.
19. CEO’s Letter, General Electric Annual Report, 2017.
20. “Growth as a Process: An Interview with Jeff Immelt,”
Harvard Business Review (June 2006): 63.
21. Ibid: 69.
22. For a discussion of the Danaher Business System see:
https://rctom.hbs.org/author/benfehrtomchallengethedanaherway/. Accessed October 3, 2018

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