Management Information Systems 16e

KENNETH C. LAUDON AND JANE P. LAUDON

CHAPTER 3 INFORMATION SYSTEMS, ORGANIZATIONS, AND STRATEGY

CASE 1 GE Becomes a Digital Firm: The Emerging Industrial

Internet

SUMMARY General Electric, one of the largest industrial manufacturing firms in the world, is
attempting to transform itself into a software company, part of the Industrial Internet.
In order to achieve this objective, GE will need to hire a new labor force, train a new
management corps, develop new services that its customers will pay for, and create a
new culture which is more collaborative, fast acting, and innovative. It will need to become
a digital firm like other leading Internet firms such as Amazon, Google, Apple, and eBay.
Unfortunately, transforming GE into a digital powerhouse turned out to be too difficult to
accomplish although parts of the effort continue. The case illustrates the difficulties faced
by large, capital intensive-firms in traditional industries becoming digital firms.

GE’s Jeff Immelt on digitizing in the industrial space McKinsey

Company
URL https://www.youtube.com/watch?v=hMa5YHOInIc; L=10:49

CASE GE is one of the largest industrial manufacturing and engineering firms in the world, with
revenues in 2017 of $122 billion. Founded in 1892 as an electrical equipment manufac-
turing firm producing generators designed by Thomas Edison and his Edison Machine
Works Company, in 2017 it operates in 180 countries and has 333, 000 employees
worldwide. GE’s industrial business is managed in eight segments: power generation,

continued

MIS16_CH03_Case1_GE.indd 1 17/10/19 4:36 PM

 CHAPTER 3, CASE 1 GE BECOMES A DIGITAL FIRM: THE EMERGING INDUSTRIAL INTERNET 2

energy management, transportation, renewable energy, transportation, aviation, appli-

ances and lighting, oil & gas, and healthcare. GE manufactures generators, power plant
and grid controls, locomotives, airplane engines, wind mills, kitchen appliances, and cat
scan machines, along with over tens of thousands of other products from switches to
industrial controllers, as well as consumer products. As it’s current CEO remarked, “We
make heavy things that take tons of capital to build, and last for 20 years.”

Under CEOs Charles Wilson (1940-1950), and Reginald Jones (1972-1981), GE grew
to become the largest industrial firm in the US and world based largely on its engi-
neering and manufacturing expertise. Most of its products were sold in the US. In the
process it became a conglomerate of heavy industry businesses that were difficult to
manage efficiently by a large bureaucracy, that was expensive and slow. Nevertheless,
its management training for very large Fortune 500 firms was considered world class,
and was the training ground for many senior managers throughout America.

Jack Welch (1981 to 2000) succeeded Jones and began simplifying GE’s corporate
structure, selling manufacturing businesses that were not dominant in their markets,
and reducing headcount. He became known as “Neutron Jack” for eliminating so
many employees but leaving the buildings intact. Facing slower growth in the US
market for heavy machinery, Welch moved aggressively to turn GE into a financial
services company, in part by providing financing for customers who bought its heavy
machinery, but also by expanding into other loan and leasing activities typical of
banks. Welch added a new division to GE’s roster of businesses called GE Capital.
Welch reduced investment in the remaining industrial businesses, focusing instead
on financial products and services that required less capital to operate and maintain.
At the time, it was thought financial services could spike GE’s revenues and profit,
increase its share price, and return GE to the ranks of “growth companies.”

In 2005 half of GE’s profits were coming from GE Capital, and GE itself had grown away
from its industrial base to become an unregulated financial services firm (a so-called
“shadow bank”). By 2007 GE had become one of the top ten largest financial institutions
in the United States, and the largest non-bank financial institution. Because it was not a
chartered US bank, it was not regulated by the Federal Reserve or other federal agen-
cies. It could take risks that regulated banks could not. And it did take these risks.

The financial crisis of 2007–2008 ended the scenario of GE becoming primarily a

financial services firm. It’s leases and loans declined in value as its customers could
not make their payments on leases and loans. It could no longer borrow money to
finance loans and leases without paying exorbitant interest rates. GE lost its triple A
credit rating. In short, GE Capital was close to failure. In 2008, the federal government
bailed out GE Capital by insuring $139 billion in GE debt in an effort to prevent the
collapse of GE Capital, and stabilize the financial system of the United States. Warren
Buffett lent GE Capital $3 billion in cash to weather the storm caused by underper-

continued

MIS16_CH03_Case1_GE.indd 2 17/10/19 4:36 PM

 CHAPTER 3, CASE 1 GE BECOMES A DIGITAL FIRM: THE EMERGING INDUSTRIAL INTERNET 3

forming loans, and falling revenues at GE Capital. In 2008, in part because of Federal
Reserve and congressional pressure (the Dodd-Frank Act), GE began to sell off its
GE Capital division. By 2016 GE had sold most of its financial businesses, and that
business now accounts for only 9% of GE’s revenue and profits. Soon it will entirely
disappear. Without GE capital it was unclear how GE could return to being a fast
growing firm, and its stock price suffered after 2008.

In 2000 Jeffrey Immelt was chosen to succeed Jack Welch as CEO. Immelt took
over when revenues from manufacturing were faltering due to global competition, and
fluctuating demand for industrial products in the United States. There followed several
years of falling profits, downsizings, and restructurings.

By 2008 it was clear to many inside GE, including the new CEO Immelt, and outside
consultants, that GE was entering a new digital and knowledge-based world. In this new
digital era, knowledge was just as valuable as machine tools, locomotives, and turbines.
Half of the value of the S&P 500 stocks derives from intangible assets like patents,
software, information, computing systems, innovation, and management expertise.
Customers were increasingly asking GE to help them maintain and manage the complex
machines they purchased from GE. This was especially true of its industrial customers
in developing countries who wanted not just machines but also the expertise required
to properly operate the machinery. By 2010 half of GE’s revenues originated outside the
United States in part because of Immelt’s pursuit of off shore business to offset slow
growth in the United States. GE is the second largest exporter in America, after Boeing.

Since the financial crisis, GE has revamped its strategy by increasing investment in its
industrial manufacturing businesses, and increasing factory jobs in the United States.
Analysts note that GE is “going back to the future” by investing heavily in manufac-
turing R&D. The products themselves are becoming increasingly sophisticated and
digital. Developing these new products and services requires a new kind of employee
than the past. Employees need to be trained in new materials, manufacturing tech-
niques, and technologies many of which involved the Internet and digital technologies.
GE’s existing labor force were masters of material sciences and industrial engineering,
but not software. The industrial world was becoming “digitized”. Immelt’s goal in 2016
was to become one of the top ten software companies in the world, focusing industrial
software. He wants GE to become an apps company and a platform company.

After 2008 GE had to decide how to return to a solid growth rate. Developing foreign
markets for its heavy machinery was one option. Emulating somehow the growth rates
of digital Internet firms like Amazon, Google, Apple, eBay, and others was an attrac-
tive option. All these firms were service firms, not heavy manufacturers. They had all
built “platforms”, loosely defined as an ecosystem combining digital technology, soft-
ware, the Internet, and services that attracted millions of consumers. Each of these
firms were the dominant players in their markets. Services were growing far faster in

continued

MIS16_CH03_Case1_GE.indd 3 17/10/19 4:36 PM

 CHAPTER 3, CASE 1 GE BECOMES A DIGITAL FIRM: THE EMERGING INDUSTRIAL INTERNET 4

the US economy than manufacturing. GE’s expertise was mechanical engineering, not
software engineering. To become high growth digital firm, GE would need a new labor
force; GE’s renown managers would have to learn how to manage software develop-
ment, as well as factories, and become more innovative by inventing new services
for its heavy industry customers. GE would need to define new digital products and
services as part of a yet to be defined “digital industrial platform” that would dominate
the marketplace. GE would have to become a software company while not ignoring its
industrial origins or manufacturing base.” It was unclear what services GE could sell to
its industrial customers. GE needed a new corporate culture. It needed to become a
faster, simpler company; eliminate a ponderous hierarchy, and thousands of pointless
management meetings that delayed decision making.

No one has ever written a shop manual on how to transform a heavy industry firm like
GE into a digital firm. Few know what a “digital firm” really is, let alone what Immelt
calls the “industrial Internet.” The video describes how Immelt envisions the transition to
becoming a digital firm.

In June 2017 Immelt was replaced by the Board and a new CEO appointed under intense
pressure from Wall Street investors who were not prepared to wait years for the results of
Immelt’s digital firm program. The new CEO slashed spending on the digital firm effort by
$400 million although not totally ending the program. A year later the new CEO was fired,
and another installed. In 2018 the stock fell to $7 a share, and the once most valuable
company in America was breaking up. Making the transition to a digital firm turns out to
be a very difficult task, and requires long term investments before results are generated.

VIDEO CASE 1. What does Immelt mean by the “digitization of the industrial world” and “the indus-
QUESTIONS trial Internet?” What are the four central elements of the industrial Internet?

2. What were the three alternatives GE had for developing the hardware and software
capabilities to become a digital firm?

3. Which option for developing its digital capabilities did GE choose and why?

4. Why does the new GE want to treat analytics as a company expertise just as it has
always treated material science?

5. What example does Immelt use to illustrate the value of digital knowledge to GE
customers?

6. What does Immelt mean when he says GE will become a “platform” and “app”
company?

continued

MIS16_CH03_Case1_GE.indd 4 17/10/19 4:36 PM

 CHAPTER 3, CASE 1 GE BECOMES A DIGITAL FIRM: THE EMERGING INDUSTRIAL INTERNET 5

7. Why does Immelt believe GE will need to hire thousands of new

people to achieve its goals of becoming a digital firm?

8. What is the “culture of simplification” that Immelt believes is needed at

GE?

COPYRIGHT NOTICE
Copyright © 2020 Kenneth Laudon.
This work is protected by United States copyright laws and is provided solely for the use of instructors
in teaching their courses and assessing student learning. Dissemination or sale of any part of this
work (including on the World Wide Web) will destroy the integrity of the work and is not permitted.
The work and materials from this site should not be made available to students except by instructors
using the accompanying text in their classes. All recipients of this work are expected to abide by these
restrictions and to honor the intended pedagogical purposes and the needs of other instructors who
rely on these materials.

MIS16_CH03_Case1_GE.indd 5 17/10/19 4:36 PM