Case Study
Chapter 3
Can GE Prosper with a Digital Firm Strategy?
General Electric (GE) is the world's largest diversified manufacturer. Headquartered in
Fairfield, Connecticut, the company consists of 20 major units, including Appliances,
Broadcasting (NBC), Capital, Medical Systems, and Transportation Systems.
Jack Welch, GE's CEO and chairman from 1981 until September 2001, has been often
cited as the most admired CEO in the United States. Under Welch's leadership GE
became a company of $130 billion in revenue, earnings of $12.7 billion, capitalization of
$400 billion and 314,000 employees in 100 countries. Welch achieved spectacular results
by pressuring GE workers to stretch themselves to meet ever-more demanding quality
and efficiency standards. Welch demanded that his managers find ways of making each
of the company's major businesses rank first or second in the world. Welch tried to
overhaul the company over and over again--through globalization of the company in the
late 1980s; "products plus service" programs in 1995, which placed emphasis on
customer service; and Six Sigma in 1996, a quality program that mandated GE units to
use feedback from customers as the center of the program.
Fortune named GE "America's Most Admired Company" in 1998, 1999, and 2000.
Welch retired in September 2001 and was succeeded by Jeffrey Immelt. Well before
Welch retired, GE had already become one of the biggest corporations in the world and
an old economy business. How could it continue to throw off profits at the same furious
pace it had in the past? Welch and his management team decided to explore using
Internet technology for this purpose.
At a January 1999 meeting of 500 top GE executives in Boca Raton, Florida, Welch
announced a new initiative to turn GE into an Internet company. Welch proclaimed that
the Internet "will forever change the way business is done. It will change every
relationship, between our businesses, between our customers, between our suppliers." By
Internet-enabling its business processes, GE could reduce overhead costs by half, saving
as much as $10 billion in the first two years. Gary Reiner, GE's corporate CIO, later
explained, "We are Web-enabling nearly all of the [purchasing] negotiations process, and
we are targeting 100 percent of our transactions on the buy side being done
electronically." On the sell side Reiner also wanted to automate as much as possible,
including providing customer service and order taking.
GE had quietly been involved with the Internet years before the 1999 meeting,
conducting more purchasing and selling on the Internet than any other noncomputer
manufacturer. For example within six months after beginning to use the Internet for
purchasing in mid-1996, GE Lighting had reduced its purchasing cycle from 14 to 7 days.
It also reduced supply prices by 10 to 15 percent as a result of open bidding on the
12
Internet. In 1997, seven other GE units began purchasing via the Net. The company even
sold the concept to others, including Boeing and 3M.
Polymerland, GE Plastic's distribution arm, began distributing technical documentation
over the Web in 1994. It put its product catalog on the Net in 1995, and in 1997 it
established a site for sales transactions. Its on-line system enables customers to search for
product by name, number, or product characteristics; download product information;
verify that the product meets their specifications; apply for credit; order; track shipments;
and even return merchandise. Polymerland's weekly on-line sales climbed from $10,000
in 1997 to $6 million in 2000.
Welch ordered all GE units to determine how [Link] companies could destroy their
businesses, dubbing this project DYB (destroy your business). He explained that if these
units didn't identify their weaknesses, others would. Once armed with these answers,
managers were to change their units to prevent this from happening. Each of GE's 20
units created small cross-functional teams to execute the initiative. Welch also wanted
them to move current operations to the Web and to uncover new Net-related business
opportunities. The final product was to be an Internet-based business plan that a
competitor could have used to take away each GE unit's customers, and a plan for
changes to their unit to combat this threat. Reiner ordered GE units to "come back with
alternative approaches that enhance value to the customer and reduce total costs."
The Internet initiative started by changing GE's culture at the very top. GE's internal
newsletters and many of Welch's memos became available only on-line. To give blue-
collar workers access to the Net, GE installed computer kiosks on factory floors. One
thousand top managers and executives, including Welch (who also had to take typing
lessons), were assigned young, skilled mentors to work with them three to four hours per
week to help them become comfortable with the Web. They had to be able to evaluate
their competitors' Web sites and to use the Web in other beneficial ways. Every GE
employee was given Internet training. Welch announced in 2000, that GE would reduce
administrative expenses by 30 to 50 percent (about $10 billion) within 18 months by
using the Internet. Employees can handle all of their business travel arrangements via the
Internet and access employee information on-line through a corporate intranet.
Many projects came out of the initiative. For example GE Medical Systems, which
manufactures diagnostic imaging systems such as CAT scanners and mammography
equipment, identified its DYB threat as aggregators, such as WebMD, which offered
unbiased information on competing products as well as selling them. GE products on
these sites looked like any other commodity. The unit's major response was iCenter, a
Web connection to customers' GE equipment to monitor the equipment operation at the
customer site. iCenter collects data and feeds it back to each customer who can then ask
questions about the operation of the equipment through the same site. GE compares a
customer's operating data with the same equipment operating elsewhere to aid that
customer in improving performance. "We can say, 'Do you know you're only 60 percent
as productive as another customer using the same equipment in another part of the
world,'" explained Joe Hogan, Medical Systems' CEO, "'and by doing x, y and z, you can
13
increase productivity?'" In addition customers are now able to download and test
upgraded software for 30 days prior to having to purchase it. The unit also began offering
its equipment training classes on-line, enabling clients to take them at any time. The
aggregators were also auctioning off used equipment, which was in demand in poorer
countries. Medical Systems established its own site to auction its own used equipment,
thus opening new markets (outside the United States). GE Aircraft adapted iCenter and
now monitors its customers' engines while they are in flight.
GE Power Systems then developed its Turbine Optimizer, which uses the Web to monitor
any GE turbine, comparing its performance (such as fuel burn rate) with other turbines of
the same model anywhere in the world. Their site advises operators how to improve their
turbines' performance and how much money the improvements would be worth. The
operator can even schedule a service call in order to make further performance
improvements.
Late in 1999 GE Transportation went live with an e-auction system for purchasing
supplies. Soon other units, including Power and Medical, adopted the system. GE later
estimated the system would handle $5 billion in GE purchasing in 2000, and the company
would do at least 50 percent of its purchasing on-line in 2001. The system lowers prices
for GE because approved suppliers bid against each other to obtain GE contracts. It also
results in fewer specification errors and speeds up the purchasing process.
GE Appliances realized that appliances are traditionally sold through large and small
retailers and that the Internet might destroy that model, turning appliances into
commodities sold on big retail and auction sites. GE wanted to maintain the current
system, keeping consumer loyalty for their GE brand (versus Maytag, Whirlpool, or
Frigidaire). Appliances developed a point-of-sale system to be placed in retail stores,
such as Home Depot, where customers could enter their own orders. The retailer is paid a
percentage of the sale. The product is shipped from GE directly to the customer. GE
Appliances claims it can now ship products from its factories anywhere in the United
States virtually overnight on a cost-effective basis. Today, nearly 100 percent of its sales
take place over the Web. Instead of $5 per telephone call, each order taken over the Web
only costs 20 cents.
The corporation and its units issued a blizzard of press releases touting the successes of
each of GE's Internet initiatives and the subsequent positive effect on financial results.
CIO Reiner said, "We are not talking about incremental change. We're talking total
transformation."
A January 2001 article by Mark Roberti of The Industry Standard was skeptical. Roberti
commended GE for embracing the Internet so quickly. He also noted that, "these
endeavors are unlikely to make GE vastly more profitable . . . because the company isn't
using the Internet to reach new markets or create major new sources of revenue." Roberti
questioned the great savings through Internet-based cost cutting that GE claimed. To cut
costs by moving business processes on-line, a firm "must eliminate--or re-deploy--a
significant number of employees" and eliminate redundant systems. "GE hasn't." For
14
example, Roberti said, 60 percent of orders to GE Capital Fleet Services were being
placed on-line, but GE had not reduced its call center staff (nor has GE reduced the call
center staff of GE Appliances). GE reported that its selling and general and
administrative expenses as a percentage of sales fell for the first nine months of 2000
from 24.3 percent in 1999 to 23.6 percent, a minor drop at best. Reducing costs by having
customers and employees serve themselves via the Web has proved elusive at other
companies as well, such as IBM and UPS. Overall, Roberti pointed out, GE has achieved
genuine progress and even leadership, but the company could not be generating the
savings management had been predicting.
Since the publication of Roberti's article, GE has agreed with some of his points. In May
2001, GE acknowledged that its expected $10 billion savings would only reach $1.6
billion, a giant savings but severely short of the company's predictions. Moreover, much
of that saving resulted from internal Web use. Analysts say that perhaps $1 billion of the
savings came from Web-based production efficiencies within GE's 20 major business
units--sharing design plans and best practices, monitoring performance data, and
automating and consolidating procurement. These gains will start leveling off within the
next few years.
Although e-commerce sales amounted to 10 percent of GE's $130 billion in total revenue,
connecting GE's suppliers and customers to its Web trading systems has been a major
problem. For example observers claim GE has only been able to connect about 25 percent
of its suppliers, with another 25 percent still using traditional private networks. That
leaves about 15,000 of the 30,000 suppliers using nonelectronic methods of selling to GE.
Suppliers appear to have two main reasons for not using the Web. First, using the Web
presents complex changes to link the GE Web purchases to the suppliers' own back-end
systems. Second, and perhaps more important, GE relies on electronic auctions, and the
increased competition by using the Web is reducing GE's purchase prices, making
electronic methods more unattractive to the suppliers. Analysts believe that only 60
percent of GE suppliers will switch to electronic methods and that the Web will not
enable GE to expand into new markets.
GE continues to have faith in e-commerce and e-business. It has budgeted about $3
billion for computer spending in 2001, an increase of about 12 percent over the previous
year. It also has indicated it will design and offer to its customers Web-based systems,
such as monitoring airline, hospital, and auto production equipment purchased from GE.
Customers will be supplied with software that they can use to constantly keep tabs on
their businesses while linking with GE systems. GE is also developing a new system that
supposedly will enable its suppliers to be paid in 15 days instead of the usual 60 days.
The effect will be that the supplier will no longer have to sell its debts to a factoring
company that charges a fee to collect these debts. GE and its suppliers would split the
savings from not selling debts, and GE projects an annual accounts payable savings of 12
percent.
Some of GE's remaining hurdles are cultural. In the past, GE achieved major
breakthroughs under Jack Welch. Will GE's bet on Internet technology pay off? Only the
15
future will tell whether his successors can provide the same kind of exceptional
leadership.
Sources: Tom Kaneshige, "New Man, Same Plan," Line56,
September 15, 2001; Matt Murray and Jathon Sapsford, "GE
Reshuffles Its Dot-Com Strategy to Focus on Internal
'Digitizing,'" Wall Street Journal, May 4, 2001; Matt Murray,
"Why Jack Welch's Leadership Matters to Business World-
Wide," Wall Street Journal, September 5, 2001; Chuck
Moozakis, "GE Scales Back," Internet Week, May 10, 2001;
Bob Tedeschi, "GE Has Bright Ideas," Smart Business, June
2001; Mark Roberti, "General Electric's Spin Machine," The
Industry Standard, January 15, 2001; Ramona Dzinkowski,
"Removing Boundaries to Learning," Knowledge
Management, May 2001; Meridith Levinson, "Destructive
Behavior," CIO Magazine, July 15, 2000; Jon Burke, "Is GE
the Last Internet Company?" Red Herring, December 19,
2000; Geoffrey Colvin, "How Leading Edge Are They?"
Fortune, February 21, 2000; Cheryl Dahle, "Adventures in
Polymerland," Fast Company, May 2000; David Bicknell, "Let
There Be Light," [Link], September 7, 2000;
David Drucker, "Virtual Teams Light Up GE," Internet Week,
April 6, 2000; David Joachim, "GE's E-Biz Turnaround Proves
That Big Is Back," Internet Week, April 3, 2000; Mark Baard,
"GE's WebCity," Publish, September 2000; Faith Keenan,
"Giants Can Be Nimble," Business Week, September 18,
2000; Marianne Kolbasuk McGee, "E-Business Makes
General Electric a Different Company," Information Week,
January 31, 2000; Marianne Kolbasuk McGee, "Wake-Up
Call," Information Week, September 18, 2000; Pamela L.
Moore, "GE's Cyber Payoff," Business Week, April 13, 2000;
Srikumar S. Rao, "General Electric, Software Vendor,"
Forbes, January 24, 2000; and Jim Rohwer, Jack Welch,
Scott McNealy, John Huey, and Brent Schlender, "The Odd
Couple," Fortune, May 1, 2000.
Case Study Questions
16
1. Use the value chain and competitive forces models to analyze GE and its business
strategy. Summarize the business and technology conditions causing GE to launch
its Internet initiative.
2. How is GE using Internet technology in its internal and external business
processes? How is the Internet related to its business strategy? How is it changing
the way the company conducts its business?
3. What management, organization, and technology issues did GE have to address in
its Internet initiative?
4. Evaluate GE's Internet initiative. Has it been successful? Is the company
transforming itself into a digital firm? Why or why not?
17
