General Electric goes back to basics

Harold Geneen built ITT in the 1960s and 1970s into a conglomerate that eventually controlled more than 2,000 business units worldwide, from Sheraton hotels to Wonder Bread.

In 1984, four years after he gave up the helm, Geneen wrote in his self- congratulatory book Managing that time had “proven the sceptics wrong. Conglomerates are not abhorrent to nature.” He added: “One may have to work harder than the men who run single- product companies. But, once again, there are some significant advantages.”

John Flannery, chief executive of General Electric, begs to differ. This week, the GE veteran announced the final long stride away from a model that served the US company for much of the second half of the 20th century.

Though successive chief executives have declined to call GE a conglomerate, their devotion to diverse businesses — at one point ranging from aircraft engines to mortgages — bound together by superior leadership, and shared services and culture, seemed unshakeable.

At its peak, GE was a bellwether for the stock market. In the late 1990s under Jack Welch, it was the most valuable listed company in the world, boasting unbroken membership of the Dow Jones Industrial Average since 1907. It also became a model of management development, elevating carefully cultivated insiders to the chief executive job and meticulously planning the training and succession of divisional heads.

Events this month, though, seem to signal the end of an era. On June 26, GE was replaced in the Dow average — admittedly more for technical than material reasons. The same day, Mr. Flannery, unravelling many of the purchases made by his immediate predecessor Jeffrey Immelt and by Mr. Welch, announced he would spin- off operations that generated more than 30% of group revenue last year, including health care and a majority stake in Baker Hughes, its oil services company.

Contrary to Geneen’s blithe assertion that conglomerates could be managed with the application merely of a little extra executive effort, Mr. Flannery says GE has become too large and too complicated to run well. He will head a “simpler and stronger” GE consisting of power, renewable energy and aviation activities, while “unleashing several GEs” on to the market.

Once again, the death knell is sounding for conglomerates. ITT finally broke up in the 1990s and the insights applied to it then — bloated, unwieldy, sprawling — are being attached to GE, the company that seemed to have mastered the model. How did it come to this?

The long history of General Electric, descendant of Thomas Edison’s eponymous Edison Electric Light Company, founded in 1878, is full of growth crises, followed by periods of restructuring.

By the end of the second world war, GE controlled 85% of the lightbulb industry, prompting an antitrust probe. But the group began to diversify rapidly from its electrical roots. By the 1960s, GE was making, among other things, nuclear reactors, hair dryers, jet turbines and computers. With the structure under strain, it was streamlined from more than 200 units to 43.

In the 1980s, under Mr. Welch, GE began another long period of expansion, reshaping the company around the target that each operation — whether in broadcast entertainment ( NBC) or fridge- freezers ( GE Appliances) — should rank first or second in its field.

Mr. Welch is now thought of as the archetypal commandand-control leader, but, like Mr. Flannery, he tried to decentralize management, making leaders in the field more accountable. He too executed some sacred cows, selling the emblematic GE- branded line of toasters, coffee-makers and small kitchen appliances.

Under Mr. Welch, GE began a relentless search to innovate not only in products but in management. He introduced Six Sigma, a quality improvement program complete with “black belt” experts, and reinforced leadership training at a center at leafy Crotonville, north of New York City. For decades, these were vital elements that helped justify the conglomerate’s existence — and they were copied elsewhere.

“Many of the [ management methods] that became very widely popular started at GE,” says Henry Mintzberg, the veteran academic and writer. “They were the centre for innovation in management thinking, but management thinking takes you only so far when the structures you have built up are unmanageable.”

Mr. Welch also expanded what became GE Capital, which had started in the 1920s as a way of financing customers’ purchases of GE fridges, but turned into a financial conglomerate within the conglomerate. He led the charge to make improving shareholder value and the stock price a key objective. And he earned a reputation on Wall Street as the man who could produce repeated and smooth double-digit earnings growth. All these icons of his tenure were to return to haunt his successors.

In the same way that Mr. Welch dismantled some of the legacy he inherited, so Mr. Immelt reined back some of the excesses of the Welch era. He sold plastics and NBC, among other divisions. He also fought to reduce dependence on GE Capital, exposed by the 2008 financial crisis which prompted Mr. Welch belatedly to describe headlong pursuit of shareholder value as “the dumbest idea in the world.”

In the face of these headwinds, Mr. Immelt continued the tradition of management innovation. In an effort to make the group more nimble, for example, he introduced “lean start- up” techniques from Silicon Valley, testing new products in the market as they are developed, and he made the US-centric group more international.

For much of Mr. Immelt’s tenure, in fact, GE seemed to defy the cliché of conglomerates as lumbering bureaucracies. Sir William Castell was a vicechairman of GE for two years after it bought Amersham, the British diagnostics group where he was chief executive, in 2004, melding it with the health care division. “The value [ of the model] was certainly process, which worked very effectively,” he recalls.

Like Mr. Welch, though, Mr. Immelt overstayed his time at the top. He also made some poor and poorly timed bets of his own, including buying Alstom’s energy operations in 2015 and expanding in oilfield services as crude oil prices slumped.

The residue of Mr. Welch’s prized GE Capital, most of which was sold by GE in 2015, also poisoned his legacy. Earlier this year, the group surprised everybody by announcing that trailing insurance liabilities would cost $15 billion more than expected.

In a final blow to Mr. Immelt’s reputation, the Wall Street Journal reported after he stepped down last October that he sometimes used to fly on business with two corporate jets — one empty, as back- up. Mr. Flannery took the symbolic step of grounding the company aircraft.

The long tradition of new GE chief executives hacking away at the overgrown parts of their predecessors’ legacies suggests Mr. Flannery would probably have taken an axe, irrespective of outside pressure. But, he faces that, too. Trian, a vehicle for activist investor Nelson Peltz, has been on GE’s board since last year. Mr. Peltz will not give up his quest for more cuts and increased earnings. Even after a bounce this week, the shares trade at less than a quarter of their $60 peak in 2000.

In a period when other diversified industrial groups, including Tyco, Alcoa, and Siemens of Germany, have split or streamlined their businesses, it is again tempting to call the end of the conglomerate age.

But to do so would be to underestimate the persistence of diversified businesses around the world, such as India, where the likes of Tata, despite governance strains, show no sign of disintegrating, or South Korea, which still boasts powerful chaebol such as Samsung.

In the US, Berkshire Hathaway is a portfolio of operating businesses run at arm’s length by Warren Buffett, Charlie Munger and a tiny Omahabased team. Private equity groups such as Blackstone resemble diversified multi- product businesses, supported — as GE once was — by financial engineering and operational expertise from the center.

“The way you manage a conglomerate is you don’t manage it, you choose good businesses and you choose good people to run them. Period,” says Prof. Mintzberg.

Then there is a new generation of technology conglomerates, which share some characteristics of the old GE: Amazon, which has expanded from its dominant platform in online retail into food stores, web services, streaming video and music; or Alphabet, still largely dependent on the core Google search operation, but with vast ambitions, from driverless cars to health care.

The death rites have been read many times before, yet nobody has ever quite buried the model. The FT wrote in 1970 that “the conglomerate mystique has gone, probably for ever,” a full 14 years before Harold Geneen declared he and ITT had defeated the skeptics.

GE may one day consider the time has come to branch out again. When Mr. Flannery took over from Mr. Immelt last year, analysts noted he was older than either of his two predecessors when they took charge. That suggests he will have a shorter term in office. Before too long, a successor could get a free hand to reinvent GE yet again.