Sears, GE teach us that mature industries age out
WASHINGTON — General Electric and Sears have fallen on hard times, and that tells us a lot about U.S capitalism. Both were once great enterprises — symbols of American ingenuity and imagination. The temptation will be to blame their troubles on mismanagement. The real lesson is starker. It is that no business, no matter how historically innovative or powerful, is guaranteed immortality.
Here’s a summary of the companies’ troubles. Sears entered bankruptcy in October. It will either go out of business — its stores and merchandise will be sold, with the proceeds used to repay debts — or a much-smaller store chain will survive. Although GE doesn’t face bankruptcy, its profits have dropped sharply, and it is considering selling more of its business units.
Both firms helped weave America’s economic tapestry. The mail-order catalogues of Sears and its main rival, Montgomery Ward, created national markets for consumer goods, from clothes to tools. Sears issued its first multi-hundred-page catalogue in 1894. It was the Amazon of its time. By the new century, it was fulfilling 100,000 orders a day, reports economist Robert J. Gordon in his book “The Rise and Fall of American Growth.”
GE —Thomas A. Edison was one founder — promoted electrification, which reached 96 percent of urban dwellings by 1940. As early as 1917, GE was touting electric appliances as “servants, dependable for the muscle part of the washing, ironing, cleaning and sewing. They could do all your cooking — without matches, without soot, without coal.” These glory days are long gone. GE’s stock is trading at about $9 a share, down from its peak of more than $30 in the summer of 2000.
For both companies, economic pressures changed the terms of competition. Sears ultimately could not adapt to a world that included Walmart, other “big box” stores, and the internet. GE tried to diversify from its traditional industrial base of appliances, lighting, electric generators and jet engines.
There is a life cycle that applies to almost all firms, especially large successful firms. If they have introduced some important or popular product, these firms can grow rapidly for some period, often decades. But sooner or later, their market will become mature. Growth and profitability may weaken. Competition may strengthen.
This leaves firms in a precarious position. The practical question is: What do they do with their present profits, which flow from their past success? The choices are mostly unattractive.
First, corporate executives may hoard present profits and defend their existing markets as best they can. This might succeed for a while, but all the spare cash hides firms’ underlying weaknesses and encourages wasteful spending, including excessive corporate compensation.
Second, firms can pay high profits to shareholders through dividends or share repurchases. In theory, when companies buy their own stock, their share prices should increase. This minimizes the dangers of wasteful spending but doesn’t provide a path for future growth.
Third, companies can find some new growth businesses to offset their mature businesses, either by investing profits in research and development or by merging with some other company. This seems the most responsible path, but it is littered with practical obstacles. Countless billions have been wasted on mergers that didn’t succeed and R&D spending that led to dead ends.
Against this backdrop, the distress at GE and Sears is hardly unique. Sears couldn’t compete against more modern retailers. GE’s cardinal mistake was maintaining its conglomerate structure: many businesses under one corporate roof. The theory was that good managers — and GE considered itself a citadel of good managers — could master any business.
For nearly two decades, former CEO Jeff Immelt (2001-2017) sold businesses — including appliances and NBC Universal — and bought others to shift the firm’s product mix. And yet, his successor as CEO said:
“I concluded that we were running too many businesses at once to do them all justice. We had to admit we didn’t have the (needed) financial and management bandwidth.”
What this suggests is that, even in good times, American capitalism exacts a considerable human toll. To survive, Sears has already shuttered 1,700 stores involving more than 200,000 jobs, reports The Wall Street Journal. Note: The total includes Kmart stores, also owned by Sears. There is an ebb and flow to business, based on shifting technologies, consumer tastes and competition. Success in one business doesn’t guarantee success in another.
Last year, GE was removed from the Dow Jones Industrial Average. It was the last of the original 12 firms to go. The others included enterprises making shoes, refining sugar and producing lead — all mature industries. Would we be better off if they were still our leading firms? Hardly.
Capitalism’s vices are also its virtues. We pay a high price for economic flexibility but benefit enormously from the rising living standards it produces.