GE needs digital to bring good things to life, just not Immelt version
GE can no longer throw money at an idea and hope it will work
Digital is the next frontier in bringing good things to life, and GE needs to play a role, one way or another.
Fresh off the announcement of its break-up plan, General Electric Co. is continuing to look for ways to streamline and simplify its business. That reportedly includes exploring options for its software arm, which uses sensors and data analytics to help manufacturing equipment run more efficiently. The Wall Street Journal reported on Monday that GE is seeking buyers for key parts of the digital business.
There’s no doubt that GE Digital as it existed under former CEO Jeff Immelt needed to be rethought. Immelt wanted GE to be a top 10 software company, a goal that necessitated broad strokes and billions of dollars. He shunned a more focused strategy, arguing a centralised digital arm endowed with the resources of the parent company would give GE’s businesses an advantage. Roper Technologies Inc. CEO Brian Jellison perhaps said it best in 2016 when he was asked about industrial giants looking to get big in a crowded digital field his firm had long catered to in a more niche way: “Trying to get into a software arena from scratch, man, that’s heavy lifting. You run ads and tell people, ‘It’s OK to work for my mouldy industry company as a programmer.’ But that’s going to be tough.”
Today, GE the conglomerate is dead, as are the spendthrift ways of the Immelt era. GE no longer has the luxury of throwing money at an idea and hoping it will work. A big, centralised digital operation has no place in CEO John Flannery’s plan to run GE’s remaining divisions more independently after he divests its health care, transportation and Baker Hughes energy businesses. Already, he’s refocused GE’s digital sales on customers in its core industrial operations and deepened partnerships with Microsoft Corp. and Apple Inc.
Competitive
But rethinking GE Digital does not mean capitulation. Immelt may have gone about it entirely wrong, but he wasn’t wrong in viewing digital as crucial to staying competitive.
Consider the other big industrial M&A news of the day as evidence: Fortive Corp., a maker of GPS tracking and motion control tools, announced on Tuesday that it would acquire software company Accruent for about $2 billion. Its software is used to extend the life cycle of real estate, facilities and other physical assets and to ensure compliance with regulations. The technical details are obviously different, but the premise is akin to GE’s Predix software platform.
The point is that digital is not a business GE can just walk away from and sell to the first private equity firm willing to open its chequebook. It’s unclear how the company would even begin to pull out pieces from digital to divest. A morefocused digital strategy can work.
Frankly, higher-margin software and services offerings are necessary to the business case for the power and aviation divisions that will be left over after its break-up, with those businesses already more vulnerable to economic downswings than the health-care unit that’s being spun off.
That said, GE’s cash crunch does put it at risk of falling behind on the digital front. Flannery has said he expects no drag on profits from digital by 2020. That’s where a financial backer could be incredibly useful. Immelt actually alluded to this possibility on the way out the door.