Trystan Casey
The fall of General Electric (GE) from its position as an iconic American company to a shadow of its former self has been well-documented by the Wall Street Journal. In mid-2018, GE ended its more-than-100-year run as a component of the Dow Jones Industrial Average (DJIA). This came after a series of missteps following the departure of former chairman Jack Welch, including the failure to adapt to a changing industry. GE's decline was swift and sudden, and the company's reputation as superbly managed was called into question.
| Characteristics | Values |
|---|---|
| Failure to adapt to a changing industry in the new century | GE failed to adapt to the changing industry dynamics in the 21st century |
| Missteps after the departure of former chairman Jack Welch | Under Welch, GE soared with GE Capital into the 21st century |
| Aggressive financial targets | Immelt's goal of $2 EPS in 2018 was long forgotten |
| Poor investment decisions | GE paid $500 million for a subprime mortgage company called WMC in 2004 and sold it for a loss in 2007 |
| Managing reported earnings | GE was known for "managing" its reported earnings to repeatedly beat Wall Street's consensus estimates |
| High expectations | Immelt struggled to sustain the high expectations the public had under Welch |
| Poor succession planning | There were no specific succession plans when Immelt left |
| Reduced focus on core business | GE decided to reduce its exposure to financing and focus on its industrial businesses |
| Restructuring and spin-offs | GE restructured and spun off its energy operations into GE Vernova |
| Decline in reputation | GE's reputation as a superbly managed company was at risk |
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What You'll Learn
Failure to adapt to a changing industry
The decline of General Electric (GE) has been described as a "fall from grace" and a downfall by Wall Street Journal reporters. GE's failure to adapt to a changing industry in the new century is a key factor in its decline.
GE was founded in 1892 and grew to become a multinational corporation, buying up RCA and the NBC television network. By the year 2000, GE had reached its peak and was a component of the Dow Jones Industrial Average (DJIA). However, entering the 21st century, GE faced a series of challenges and missteps that led to its decline.
One of the main issues was the failure of the company to adapt to the changing industry landscape. GE had a reputation as a superbly managed company, and its business model was successful for many years. However, with the turn of the century, the industry began to change, and GE struggled to keep up. This failure to adapt was particularly notable in the years following the departure of former chairman Jack Welch.
GE's new CEO, Jeff Immelt, attempted to sustain the high expectations set by Welch while guiding the company in a new direction. However, his aggressive financial targets and focus on short-term results led to criticism. Immelt's goal of $2 EPS in 2018, for example, was not achieved, and the company's reputation for strong financial management was called into question.
In addition to failing to adapt to industry changes, GE made several other missteps that contributed to its decline. One notable example was the Alstom deal, which had negative consequences for employees, shareholders, and the company itself. GE also struggled with managing its reported earnings, repeatedly adjusting its accounting to beat Wall Street's consensus earnings estimates.
As a result of these challenges, GE has undergone significant restructuring in recent years, spinning off its energy operations and other business divisions into separate publicly traded companies. This marks a significant shift for a company that was once a powerhouse in the American industrial landscape.
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Poor financial decisions
The decline of General Electric (GE) has been described as a "fall from grace" and a "spectacular fall" by various commentators. Wall Street Journal reporters Ted Mann and Thomas Gryta, authors of "Lights Out: Pride, Delusion, and the Fall of General Electric", attribute GE's downfall to a series of missteps and a failure to adapt to a changing industry in the new century.
One of the primary factors contributing to GE's decline was its poor financial decisions. GE became known for "managing" its reported earnings, often adjusting its accounting practices to narrowly surpass Wall Street's consensus earnings estimates. This focus on short-term results was driven by former CEO Jack Welch's aggressive financial targets, which assessed executive performance.
In 2004, GE made a significant misstep by acquiring a subprime mortgage company, WMC, for $500 million. As the housing market began to decline in 2007, GE was forced to lay off most WMC employees and sell the company, resulting in a $1 billion loss for that year.
Another example of poor financial management was GE's struggle with its banking business. In 2015, the company considered making deeper cuts in this sector due to increasing investor dissatisfaction with the returns from lending. GE aimed to reduce its exposure to financing and increase the profit contribution of its industrial businesses.
GE's former CEO, Jeff Immelt, also set ambitious targets, such as the $2 EPS goal for 2018, which were not met and contributed to the company's decline. Immelt's battle to sustain the high expectations set under Welch, while guiding the company to a safer position, proved challenging.
The Alstom deal, referred to by Mann, further exacerbated the situation, resulting in detrimental consequences for employees, shareholders, and the company itself.
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Mismanagement of earnings
General Electric (GE) was once a stalwart of the American economy, with its products found in most American homes. However, the company's failure to adapt to a changing industry in the 21st century led to its downfall.
GE's insurance division reported a loss of $6.2 billion in 2018 due to rising healthcare costs and increased life expectancy. The company also failed to meet its earnings estimates for 2015 and the first two quarters of 2017, despite projecting a substantial increase in annual revenue. This was due to a substantial reduction in projected costs rather than increased demand for insurance policies. GE also failed to inform investors about a significant acquisition that inflated its value.
GE's management of its reported earnings has been called into question. Critics argue that the company became known for "managing" its reported earnings by adjusting its accounting practices to beat Wall Street's consensus earnings estimates by $0.01 per share quarter.
GE's failure to adapt to industry changes and its questionable management of reported earnings led to a steep drop in share value of more than 70% by 2018. The company was fined $200 million by the U.S. Securities and Exchange Commission (SEC) for misleading investors about the profitability of its power and insurance subsidiaries between 2015 and 2017.
In November 2021, GE announced it would split its remaining divisions into three stand-alone, publicly traded companies in the aviation, healthcare, and power sectors. This marked the end of GE's more-than-100-year run as a component of the Dow Jones Industrial Average (DJIA).
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Lack of succession planning
The fall of General Electric (GE) from its peak in 2000 has been attributed to a series of missteps and poor decisions, including a failure to adapt to industry changes in the new century. One of the critical factors contributing to its decline was a lack of effective succession planning, which is essential for any organization's long-term direction and growth.
Succession planning involves systematically identifying, assessing, and developing an organization's leadership capabilities to ensure a smooth transition of power and maintain stability. It is a complex and ongoing process that requires strategic talent planning, employee management, and talent assessment and development.
GE's downfall was partly due to issues arising from leadership transitions. After the departure of former chairman Jack Welch, his successor, Jeff Immelt, struggled to balance the high expectations set by Welch with guiding the company in a new direction. Immelt's aggressive financial targets for executive performance led to a focus on short-term results, and the company became known for "managing" its reported earnings to meet Wall Street estimates.
In recent years, GE has attempted to rectify its lack of succession planning. GE Appliance, a former subsidiary of GE now owned by Haier, has revamped its succession planning practices. Thomas Quick, Vice President of Human Resources, and Julie Grunduski, HR Executive Director of Organization and Talent Development, are leading this effort. They recognize the challenges, including defining high-potential talent and ensuring a shared understanding of criteria and language.
Effective succession planning is crucial to the long-term success of any organization, and GE's experience serves as a reminder of the potential consequences of neglecting this aspect of leadership. By learning from GE's mistakes, other companies can ensure they have a robust process in place to identify and develop future leaders and avoid the pitfalls of a leadership vacuum.
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Decline in reputation
General Electric (GE), an American manufacturing icon, suffered a swift and sudden fall from grace. The company reached its peak in 2000 but had a rocky entry into the 21st century. In mid-2018, GE ended its more-than-100-year run as a component of the Dow Jones Industrial Average (DJIA).
GE's decline can be attributed to a series of missteps in the years following the departure of former chairman Jack Welch. According to critics, his use of aggressive financial targets to assess executive performance led to a focus on short-term results. GE became known for "managing" its reported earnings, repeatedly beating Wall Street's consensus earnings estimates by a small margin.
The company failed to adapt to the changing industry in the new century. For example, in 2004, GE paid $500 million for a subprime mortgage company called WMC. However, as home prices started to fall in 2007, GE laid off most WMC employees and sold the company, resulting in a $1 billion loss for that year.
The Alstom deal was also ruinous to thousands of employees, shareholders, and the company itself. GE's reputation as a superbly managed company, which started in 1900 when the Wall Street Journal declared it as one of the top companies, was now in danger of extinction.
In 2015, GE considered making deeper cuts to its banking business as returns from lending were no longer worth the ire it provoked among investors. The company aimed to reduce its exposure to financing and increase the profit contribution of its industrial businesses. By 2021, GE had split its remaining divisions into three stand-alone, publicly traded companies in aviation, healthcare, and power.
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Frequently asked questions
The departure of former chairman Jack Welch and a failure to adapt to a changing industry in the new century.
Immelt took over and attempted to sustain the high expectations the public had under Welch.
Immelt's goal of $2 EPS in 2018 was not achieved, and the company's reputation as superbly managed took a hit.
The Alstom deal was ruinous to thousands of employees and shareholders and to the company itself.
GE considered making deeper cuts in its banking business as returns from lending were no longer worth the ire it provoked among investors.
