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MiniCase 8
GE: Corporate Strategy Gone Wrong

Frank T. Rothaermel prepared this MiniCase from public sources. This MiniCase is
developed for the purpose of class discussion. It is not intended to be used for any
kind of endorsement, source of data, or depiction of efficient or inefficient
management. All opinions expressed, all errors and omissions are entirely the author’s.
Revised and updated: June 10, 2019. ©Frank T. Rothaermel.

IN 2000, General Electric (GE) was the most valuable company

globally with a market capitalization of almost $600 billion (see
Exhibit MC8.1). An investment of a mere $100 in GE in April
1981, when Jack Welch took over as chairman and CEO, would
have been worth $10,679 in August 2000 when GE’s market
value peaked. Given his success in making GE the most valuable
company globally, Welch was hailed as the best CEO of the
century by business media.

EXHIBIT MC8.1 General Electric’s Market

Cap and Key Events, 2000–2019

Source: Author’s depiction of publicly available data.

 Jack Welch was known as a super-hard-charging CEO who felt
that GE was hampered by inefficient bureaucracy. To address this
problem, Welch eliminated 100,000 jobs during his tenure, which
earned him the nickname “Neutron Jack.” Welch also required
each of GE’s businesses to be either number one or number two
in their respective markets; if they failed to achieve this goal, he
would tell his leaders to “fix it, close it, or sell it.”1 He also
required each GE manager to provide a stacked ranking of all its
employees, and each year the bottom 10 percent would be fired.
Exhibit MC8.2 depicts GE’s product and geographic scope from
2001, the last year of Welch’s 20-year tenure, to 2018.

EXHIBIT MC8.2 GE’s Changing Product

Scope, 2001 and 2018*

*Pie segments show revenues in $ billion, and percentage of total revenues

(rounding).

Source: Author’s depiction of publicly available data.

Fast-forward to spring 2019, the year GE’s market valuation

dropped to $87 billion. GE had lost a whopping $507 billion
(more than 85 percent) of its market valuation. What happened?
Answer: A bad corporate strategy.
To decide how to compete as a multi-business enterprise,
strategic leaders formulate corporate strategy along the three
dimensions:

1. Vertical integration—in what stages of the industry value

chain should the company participate?
2. Diversification—what range of products and services should
the company offer?
3. Geographic scope—where should the company compete in
terms of regional, national, and international markets?

For this discussion, we will focus on diversification (product

scope) and geographic scope (where to compete).
GE, founded in 1892, was known as a maker of home
appliances, power turbines, locomotive engines, jet engines, and
MRI machines, but also TV shows (such as Seinfeld), making it an
unrelatedly diversified business. For most, it is not readily
apparent what nuclear power plants, light bulbs, and TV shows
have in common. By 2001, the year Welch stepped down as CEO,
almost half of GE’s $130 billion revenues and more than half of
its profits came from one business unit: GE Capital (see Exhibit
MC8.2 for GE’s product scope). Under Welch, the hugely
profitable GE Capital, which provided discounted capital to each
of GE’s business units, was considered the main driver behind
GE’s success. GE’s AAA credit rating also allowed it to access
capital more inexpensively than its rivals could. Albeit profitable
for many years, GE Capital would eventually become the
conglomerate’s prime weakness because it created huge
exposure to macroeconomic forces for a company that, at its
core, was an industrial company.
Moreover, under Welch, GE basically was a domestic U.S.
company with two-thirds of its revenues coming from its home
market (see Exhibit MC8.3 for GE’s geographic scope). This
prevented GE from taking advantage of significant global growth
opportunities in the emerging BRIC economies (Brazil, Russia,
India, and China), where growth was rising rapidly during the
2000s.

EXHIBIT MC8.3 GE’s Changing Geographic

Scope, 2001 and 2018

Source: Author’s depiction of publicly available data.

On September 7, 2001, Jeffrey Immelt was appointed the new

GE chairman and CEO (see Exhibit MC8.1). Since then, the
external environment experienced the social and economic
effects of the 9/11 terrorist attacks followed later by the 2008–
2009 global financial crisis. Although GE is a diversified
conglomerate that spans many industries and markets, Page 496
the recession of 2001 and the even deeper recession of
2008 hit the company especially hard, with GE Capital taking an
especially hard financial blow (recall that more than half of GE’s
profits were coming from that unit at the time). During the
critical 17 months that followed, GE’s share price fell 84 percent,
from $42.12 (on October 2, 2007) to a low of $6.66 (on March 5,
2009), equating to a loss in shareholder value of $378 billion
(see Exhibit MC8.1).
 To compound matters, GE also lost its AAA credit rating. As a
result, the company had to ask for a $15 billion liquidity injection
from famed investor Warren Buffett. In addition, the U.S.
government had to bail out GE when the Federal Reserve
stepped in to ensure continued liquidity for what was Page 497
viewed as one of the largest banks in the United States,
which GE had by de facto become. Indeed, during the global
financial crisis, the Federal Reserve had designated GE a
“systemically important financial institution (SIFI),” which meant
that its failure could trigger a financial crisis (too big to fail). This
SIFI designation submitted GE to additional federal regulation
and oversight, which would limit executives’ decision-making
freedom. When GE lost its AAA credit rating, it also lost favorable
access to debt funding, which had provided a competitive edge
over other engineering companies such as Siemens. The 2008
financial crisis demonstrated clearly the risk of both selling and
financing its products, a practice that was at the core of the way
GE did business. For example, GE would build power plants in
emerging economies and provide discounted financing through
GE Capital to its customers at the same time.
Conglomerates such as GE that pursue unrelated
diversification tend to experience a diversification discount: The
stock price of such highly diversified firms is valued at less than
the sum of their individual business units. GE experienced a
significant diversification discount, as its capital unit contributed
50 percent of profits for many years. The presence of the
diversification discount in GE’s depressed stock price was a
major reason GE’s then CEO, Jeffrey Immelt, decided to spin out
GE Capital in 2015. On the day of the announcement, GE’s stock
price jumped 11 percent, adding $28 billion to GE’s market
capitalization (see Exhibit MC8.1).
The need for corporate restructuring was clear to Immelt. By
2009, GE’s five business units (Technology Infrastructure, Energy
Infrastructure, Capital Finance, Consumer and Industrial, and
NBC Universal) brought in $157 billion in annual revenues. More
than 50 percent of those revenues came from outside the United
States, and GE employed more than 300,000 people in over 100
countries. Immelt decided to refocus GE’s portfolio of businesses
to reduce its exposure to capital markets and to achieve reliable
and sustainable future growth; he attempted to achieve this by
leveraging its core competency in industrial engineering. GE sold
NBC Universal to Comcast, the largest U.S. cable operator; it also
sold its century-old appliance unit to Haier, a Chinese
manufacturer.
Immelt then used the cash injection from the sale of GE
Capital to double down on the power business: He acquired the
ailing French engineering group Alstom in 2015 for a deal valued
at $17 billion. Under Immelt’s restructuring, GE shifted its
product focus to industrial products and engineering, making
aviation, power, oil and gas, and health care its four Page 498
largest units (see Exhibit MC8.2). By 2018, GE’s
geographic scope was more diversified, with the U.S. now
accounting for less than 40 percent of annual sales, and Europe
and Asia each accounting for about 20 percent of revenues (see
Exhibit MC8.3).
Yet, GE continued to lose money. By 2018, GE’s Alstom
acquisition was its power unit and designated the second-largest
strategic business. However, by the end of the year, its revenues
fell by over 20 percent. Overall, in the third quarter of 2018
alone, GE posted a loss of $34 billion. The firm had amassed too
much debt and had too little cash flow. The diagnosis was that
Immelt overpaid on several high-profile acquisitions (Alstom,
being one, and the oil-field services company Baker Hughes,
which it acquired for $32 billion, being another). In addition to
overpaying for these firms, it also sold or spun off other GE units
for too little.
On August 1, 2017, the board of GE replaced the haphazard
Immelt with John Flannery, a 30-year GE insider who had led the
health care unit (see Exhibit MC8.1). After only one year on the
job, the board decided to let Flannery go because it felt he was
too indecisive, spending too much time in endless meetings
focusing on analysis and consensus building rather than on
taking the drastic actions they felt were needed to right the firm.
In June 2018, when morale among GE employees was already
low, GE reached its lowest point: It was dropped from the Dow
Jones Industrial Average (DJIA) and replaced by Walgreens. GE
had continuously been listed on the DJIA (the most widely cited
stock index representing the 30 most prestigious U.S.
companies) since 1907. Its replacement by Walgreens was the
final blow for the firm.
In 2019 the board appointed Lawrence “Larry” Culp as the
new CEO; he had previously led Danaher Corp., another globally
diversified conglomerate, albeit much smaller than GE. Culp is
the first outsider to be appointed CEO in GE’s 126-year history.
To GE-lifers such as Welch, Immelt, and Flannery, the
appointment of an outsider came as a complete shock; in their
minds the best managers in the world that could run any
business better than anyone else were all produced at GE.
Executives that did not ascend to the CEO job left and became
CEOs elsewhere, for example, 3M, Boeing, and The Home Depot,
among many others. Each of these firms is considered among
the greatest U.S. enterprises. GE’s current board of directors,
which now includes a seat held by the activist investor Trian
Fund (run by billionaire Nelson Peltz), is clearly wanting to shake
things up.

DISCUSSION QUESTIONS

1. What kind of diversification is GE pursuing? What are the

sources of value creation with this type of diversification?
2. How did GE lose $507 billion (more than 85 percent) of its
market valuation since its peak? What went wrong?
3. After leaving GE, Jeffrey Immelt stated in 2018: “The notion of
plugging financial services and industrial companies together,
maybe it was a good idea at a point in time, but it is a
uniquely bad idea now.”2 To what is Immelt referring? Why
does he think this is a bad idea? Do you agree? Why, or why
not?
4. In the bestseller Good to Great, Jim Collins advances the
hypothesis that the greatness of a leader is known only after
the leader has departed. The business press has celebrated
Jack Welch as the greatest CEO of the last century. After
 reading this MiniCase, do you agree with Collins’ strategic
leadership hypothesis? Why, or why not? Note: When
interviewed in 2018 about the GE situation, Jack Welch had
this to say: “I give myself an A for the operation of GE, but an
F for my choice of successor.”3

Endnotes
1. As quoted in: Gryta, T., and T. Mann (2018, Dec. 15), “GE
powered the American century—Then it burned out,” The
Wall Street Journal.
2. Gryta, T., and T. Mann (2018, Dec. 15), “GE powered the
American century—Then it burned out,” The Wall Street
Journal.
3. As quoted in: Gryta, T., and T. Mann (2018, Dec. 15), “GE
powered the American century—Then it burned out,” The
Wall Street Journal.

Sources: Gryta, T., and T. Mann (2018, Dec. 15), “GE powered the American century—
Then it burned out,” The Wall Street Journal; “General Electric powers downwards,”
The Economist (2018, Nov. 3); Gryta, T., J.S. Lublin, and D. Benoit (2018, Feb. 21),
“How Jeffrey Immelt’s ‘success theater’ masked the rot at GE,” The Wall Street Journal;
Collins, J. (2001). Good to Great. Why Some Companies Make the Leap and Others
Don’t (New York: Harper Business); and GE annual reports (various years).