The Rise and Fall of General Electric and a future bright light
Lets dive into GE's past through the lens of "Lights Out" and then talk about a possible path to redemption
In my April 1st post, I shared a recording from a fireside chat last year where Charlie Munger recommended the book "Lights Out: Pride, Delusion, and the Fall of General Electric" by Thomas Gryta and Ted Mann. I promptly bought the book and have been engrossed in it ever since. Today, I'd like to discuss some key takeaways from the book and a potential path towards a brighter future for GE and its investors.
"Lights Out" offers a compelling narrative of the ascent and subsequent downfall of General Electric, once a symbol of American corporate excellence. The company's decline resulted from a combination of missteps, ill-advised strategies, and overconfidence.
Initially, GE found success by focusing on its core expertise in industrial manufacturing, technology, and finance. Over time, however, the company ventured into unrelated businesses, diluting its strategic focus and burdening management with a vast conglomerate. This lack of focus contributed to GE's eventual downfall. The important lesson here is the value of maintaining a disciplined, focused strategy that emphasizes a company's core strengths and competitive advantages.
"Lights Out" emphasizes the role that overconfidence and hubris played in GE's decline. Under CEO Jack Welch, GE developed a "cult of the CEO" and a management style that prioritized short-term wins over long-term sustainability. This culture led to unwise acquisitions and strategic errors, weakening the company. The takeaway is to cultivate humility and introspection, acknowledging one's limitations in knowledge and expertise.
GE Capital, once a significant growth driver, took on excessive risk in pursuit of short-term financial gains, resulting in massive losses during the 2008 financial crisis. The overemphasis on financial engineering, rather than focusing on core industrial businesses, was a critical mistake. The lesson is to prioritize creating real, sustainable value in core businesses and avoid overreliance on financial engineering.
The book highlights poor corporate governance and lack of accountability within GE. The insular board of directors and opaque financial reporting made it difficult for investors and regulators to gauge the business's health. The takeaway is to prioritize strong corporate governance, transparency, and accountability to align management with shareholders' long-term interests.
GE's failure to adapt to a rapidly changing business environment, including the rise of digital technologies, led to lost market share and competitive advantage. The lesson is to remain vigilant and adaptable, continuously reevaluating strategies and assumptions to stay ahead of evolving market conditions.
The book underlines the importance of a well-defined succession plan and leadership development. GE's leadership transitions, especially after Welch's departure, were tumultuous and contributed to instability. The takeaway is to invest in talent development and maintain a leadership pipeline for organizational stability through both good and bad times.
GE's decline resulted from an overemphasis on short-term performance, neglecting long-term value creation. The takeaway is to balance short-term performance with long-term vision, aligning strategic decisions with the company's enduring goals and values.
GE's strong internal culture promoted loyalty, but insularity limited exposure to fresh ideas and perspectives. The lesson is to value diverse viewpoints and seek external input to challenge assumptions and drive innovation.
Ethical lapses also contributed to GE's fall, damaging its reputation and trust with investors, customers, and regulators. The takeaway is to foster a culture prioritizing ethics, compliance, and transparency at all organization levels.
Though GE's story is cautionary, it underscores the importance of resilience and learning from failure. The company must address past mistakes and adapt to new realities as it attempts to recover. The lesson is that setbacks can provide valuable learning opportunities, and companies must embrace change, learn from mistakes, and forge a path toward a brighter future.
The rise and fall of General Electric offer numerous lessons for business leaders and investors. By understanding GE's decline factors, we can work towards building more sustainable, adaptable, and successful enterprises. From strategic focus and accountability to ethical decision-making and resilience, GE's story serves as a powerful reminder of the challenges and opportunities businesses face in a constantly changing world.
A potential path to redemption
Recent developments at GE suggest the company may be approaching a significant turning point. Under the leadership of Larry Culp, GE plans to divide into three separate entities. One of these, the aviation division, has captured my attention due to its prominent role in the aerospace industry oligopoly.
As a major player in the field, GE's aviation division designs, manufactures, and services aircraft engines. It is one of the world's largest suppliers of engines, which are used in commercial and military aircraft. Additionally, the division has a robust presence in the aftermarket, offering maintenance and repair services. This reminds me of the high margin razor and blade model used by Otis, another oligopoly I admire.
The dominant market position of the aviation division of GE has proven to be highly profitable, with expectations for continued success in the future. The global aviation market is projected to experience substantial growth as airlines upgrade to more efficient engines. GE's aviation division is well-positioned to capitalize on this expansion.
In contrast to the GE portrayed in Lights Out, the aviation division is an innovative business that consistently invests in new technologies to enhance engine efficiency and performance. The division is also focused on developing solutions to reduce emissions, fuel consumption and noise from aircraft engines which is a key desire for their customers.
The prospect of investing in this division as an independent company is quite appealing. Although the aviation division appears poised for success, GE must overcome its past to successfully execute this major organisational split. This is a story I will be following closely for the next few years.
Warm regards,
Oliver