A Bright Idea for GE

Jack Welch is using the Net to cut costs. Perhaps his successor will be more ambitious.
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By Erick Schonfeld, March 2001 Issue

Jeffrey Immelt has his work cut out for him. As the CEO-elect of General Electric, he must live up to the extraordinarily high expectations set by the nearly impeccable 20-year performance of his predecessor. "Clearly, he has inherited the toughest job in America," opines management strategist Michael Treacy, author of the business bestseller The Discipline of Market Leaders. "He will be leading a company that has been highly configured to the unusual skills of Jack Welch." Primary among those skills has been Welch's ability to squeeze every last drop of efficiency from businesses as diverse as aircraft engines, household appliances, financial services, power generators, and TV broadcasting. He has done this by implementing a few key management concepts in a very programmatic way across GE's different businesses. These include ruthless cost-cutting, shifting from manufacturing to providing services, and the near-religious embrace of Six Sigma -- a sort of Taylorism of the 1990s -- which decrees that every business process be scrutinized and redesigned so that it can be done faster and with fewer errors. And then, of course, there has been Welch's recent fascination with e-business, which he sees as having the potential to carry all of his prior initiatives even further. One reason Welch selected Immelt to succeed him is that Immelt, as CEO of GE Medical Systems for the past three years, was Welch's star pupil: He was one of the earliest, and most successful, adopters of Welch's strategies. "I'd like to believe that Medical Systems is a microcosm for the rest of the company," Immelt says. "There just seem to be limitless opportunities to continue to drive growth into the future." Welch preached about the value of being number one in your market; at GE Medical, Immelt increased worldwide market share of its magnetic resonance imaging, ultrasound, X-ray, and other medical equipment from 25 to 34 percent in three years, keeping competitors away from the top spot. Welch wanted divisions to focus on offering higher-margin services; a full 45 percent of GE Medical's revenue comes from services such as maintenance, monitoring, and repair of equipment. Welch proselytized about wringing inefficiencies out of businesses with Six Sigma; Immelt not only spread Six Sigma efficiency practices throughout his organization, but also started offering client hospitals the benefit of this expertise, and last year saved them more than $200 million. As for e-business, Immelt saw to it that an impressive $1.5 billion of GE Medical's $7.3 billion in sales last year came in via the Internet -- that's more than one-fifth of the entire company's $7 billion in total online sales. Not bad for a business that accounts for only about 5 percent of GE's revenues. However adept Immelt may be at following Welch's programs to the letter, he will eventually have to come up with his own. Once he takes the helm, it would not be surprising if he begins to clean house and get rid of some of GE's underperforming businesses. "Jack Welch," notes Treacy, "for all his accomplishments, has kept a bunch of dog businesses, like electric motors or light bulbs. GE is number one or two in some markets you don't want to be in." And GE's $45 billion acquisition of Honeywell will undoubtedly offer further opportunities for cost-cutting and productivity improvements. But GE eventually will reach a point of diminishing returns on how efficient its businesses can become. When that day arrives, the company will require a new strategy to drive it forward, one that focuses on creating new businesses and new, more profitable sources of revenue, rather than on creating the perfect way to build a light bulb. That strategy will, in all likelihood, have something to do with the

Internet. Immelt says, "Everything we've learned about the Internet says it plays to our strengths. It's transforming everything we do. And I think it's just the beginning." Of course, Welch has already spearheaded an e-business initiative. "This becomes the business," he told eCompany Now last year -- a few months before he declared that the Web would save GE $10 billion in sales and overhead costs (a large chunk of which could come simply from layoffs, perhaps as many as 80,000 jobs). Critics have charged Welch with overstating the massive productivity gains that e-business is supposed to provide GE, while having scant evidence of it in his company's current financial statements. Yet it is really too early to make any conclusive judgments. The $7 billion of e-business at GE is a seemingly huge number -- and it represents a massive increase over the $1 billion in online sales that GE booked in 1999 -- but at this point it's still too small a portion of the company's $130 billion in overall revenues to accurately gauge its impact on the bottom line.

But what has gone unremarked about Welch's e-business strategy is that when you get down to it, it is mainly just another way to drive costs out of the system by using the Internet to replace sales staff and back-office functions, as well as to automate transactions with customers and suppliers. That's a fine goal, but it represents only a portion of what the Internet can do for GE. Immelt's chance to really transform GE is to use the Internet to grow top-line revenues. One way he can do that is by encouraging GE's executives to use the Web to create new businesses that are information-intensive rather than capital-intensive. So far, most of the revenues GE has booked on the Web have come from existing customers. At GE Medical, for instance, Immelt's successor, Joe Hogan, figures that less than $150 million of last year's $1.5 billion in online sales came from new, incremental business. That could change, however, as he introduces more Web-based services. Already, GE Medical monitors 10,000 individual medical imaging machines electronically, often diagnosing problems before they become serious enough to shut down a piece of equipment, or downloading new software to upgrade the machines' capabilities. GE Medical can provide other information services as well. For instance, it can inform any individual hospital how its use of equipment compares with benchmarks set by the best hospitals in the world, or it can recommend how to run the machines more profitably. "As people use our equipment," explains Hogan, "we can feed information back to them." For example, a hospital could be running an MRI machine at full capacity, but an analysis by GE Medical might show that it is being used only for low-margin tests. Such Internet services are a negligible part of the business today, but are growing rapidly. Principally, this is because they augment the existing business rather than replace it. Prudential Securities analyst Nicholas Heymann thinks these sorts of new e-businesses are the next phase of GE's growth. "Pricing will be based on the productivity savings GE can supply its customers," he predicts. Even Welch, in that interview last year, agreed that one of the great potentials of the Internet is the "enormous ability to be much more intimate with your customers, and to help make them more competitive." Hints of what is possible are already evident throughout GE's various businesses. Using sophisticated software tools available via the Web, a power plant can now be designed in a matter of days instead of six months, resulting in time savings that yield additional revenues for GE Power Systems's utility customers. GE Appliances helps dishwasher and refrigerator salespeople create customized brochures on the fly from Web kiosks in their stores. Honeywell's avionics business, which GE will soon own, is developing "free-flight" navigation, surveillance, and communication systems for airplanes. If approved by the Federal Aviation Administration, these innovations could both allow more planes to fly simultaneously and improve safety, as well as result in more direct routes than the current centralized air traffic control system allows. Down the road, as GE monitors these planes and collects data on them for its customers, it might have the opportunity to stream air traffic and meteorological data directly to the airlines, helping them operate more efficiently. GE is also well-positioned to take advantage of its existing physical assets to offer new Webbased services. For instance, GE Appliances already has an infrastructure in place that is ideally suited to the Web. It owns a nationwide appliance delivery business aimed at homebuilders (a market that accounts for one-third of its revenues), complete with fleets of

trucks, installers, warehouses, and other assets. Now, thanks to the Web, it can extend this home delivery service to individual consumers who order GE appliances from select retailers' websites or in-store Web kiosks. This frees up floor space for the retailers and reduces the amount of inventory that they have to carry on their books. The store doesn't have to touch anything -- it just collects a bounty for each sale. For instance, Heymann estimates that 62 percent of Home Depot's sales of GE appliances are made this way. "This is why Wal-Mart is so eager to get into appliances," he adds. All of a sudden, white goods are a high-margin category for GE's retail store customers, which of course makes them even more eager to do business with GE. The more that GE can create new businesses that derive revenue from the Internet, the higher its overall profit margins will become. GE's operating margins on its manufacturing businesses are about 15 percent. When it is able to wrap services around its products, such as maintaining and repairing medical equipment or aircraft engines, its operating margins jump to around 25 or 30 percent. Now, it has the opportunity to earn 60 or 70 percent operating margins by streaming valuable intellectual content to its customers. Heymann speculates that by mid-decade GE's business mix could be 50 percent service, 20 percent intellectual content, and only 30 percent manufacturing. That is, if Immelt can pull it off. Not only does e-business represent an unprecedented transition for GE, but Immelt will be ascending the throne at a time when the economy may be slowing and GE is going to be digesting its biggest acquisition ever, Honeywell. (Not to mention that some of GE's airplane engines have developed the nasty habit of disintegrating in midflight. Or that the company will soon have to start footing the bill for an environmental cleanup of part of the Hudson River because it dumped PCBs there more than 30 years ago.) Fortunately for Immelt, Welch is sticking around a little bit longer -- until the end of 2001 -to oversee the integration of Honeywell. Immelt will have a lot to tend to in his first year on the job. But pushing GE into new, high-margin Internet businesses might ultimately be the most important thing he does.