GE: A New Way Forward? Custom Case Solution & Analysis

Evidence Brief: GE Strategic Position

1. Financial Metrics

• Total industrial debt: 121 billion dollars at the end of 2018.
• Power Division impairment charge: 22 billion dollars in 2018.
• Quarterly dividend: Reduced from 0.12 dollars to 0.01 dollars per share.
• BioPharma sale price to Danaher: 21.4 billion dollars in cash.
• Free cash flow: Negative 2.2 billion dollars in the industrial segment for early 2019.
• GE Capital liabilities: 15 billion dollars required for insurance reserves over seven years.

2. Operational Facts

• Headcount: Approximately 283000 employees globally across four primary segments.
• Primary Segments: Power, Aviation, Healthcare, and Renewable Energy.
• Corporate Structure: Recent move of headquarters from Fairfield to Boston with a focus on reducing corporate overhead.
• Management System: Implementation of Lean manufacturing principles to replace the former immersion style management.
• Asset Sales: Divestiture of the transportation unit through a merger with Wabtec and phased exit from Baker Hughes.

3. Stakeholder Positions

• Larry Culp: First external CEO in the history of the company. Focuses on deleveraging and operational improvement.
• John Flannery: Predecessor who initiated the strategic review and the separation of the healthcare unit before being removed.
• Nelson Peltz: Representative of Trian Fund Management. Pressures for significant cost reduction and asset restructuring.
• Credit Rating Agencies: Maintaining negative outlooks based on the liquidity profile of the industrial units.

4. Information Gaps

• Specific breakdown of long term care insurance liabilities within GE Capital.
• Impact of the Boeing 737 MAX grounding on the long term service agreements of the Aviation unit.
• Detailed margin targets for the Renewable Energy segment amidst global pricing pressure.

Strategic Analysis

1. Core Strategic Question

• Can the industrial conglomerate model survive the current liquidity crisis and operational decline in the Power segment?
• Should the organization pursue a total structural breakup to isolate the liabilities of the Capital and Power units?

2. Structural Analysis

The application of the BCG Matrix reveals a portfolio in deep imbalance. Aviation and Healthcare function as the primary sources of cash, while Power has transitioned from a cash cow to a significant drain on resources. The corporate center historically added a layer of complexity that hindered responsiveness. The shift to Lean manufacturing represents a move from top down financial engineering toward bottom up operational excellence. However, the conglomerate discount persists because the market cannot value the disparate risk profiles of Aviation and the legacy liabilities of the Capital unit together.

3. Strategic Options

4. Preliminary Recommendation

The preferred path is a Managed Three-Way Split. The current structure penalizes the high performing Aviation and Healthcare segments. By creating three distinct companies, management can align capital structures with the specific risk and growth profiles of each industry. This path requires a three year window to stabilize the balance sheet of the Power unit before it can stand alone.

Implementation Roadmap

1. Critical Path

• Phase 1: Complete the sale of the BioPharma unit to Danaher to secure 21 billion dollars for immediate debt reduction.
• Phase 2: Standardize Lean tools across all 500 manufacturing sites to improve the cash conversion cycle.
• Phase 3: Formalize the separation of the Power and Renewable Energy units to prepare for eventual spin-off.
• Phase 4: Finalize the wind-down of GE Capital assets to isolate legacy insurance and subprime mortgage risks.

2. Key Constraints

• Pension Deficit: The 27 billion dollar funding gap limits the ability to easily split the company without triggering massive cash requirements.
• Regulatory Scrutiny: Ongoing investigations by the SEC and DOJ regarding accounting practices in the Power segment create uncertainty for potential investors.

3. Risk-Adjusted Implementation Strategy

The execution must prioritize liquidity over margin expansion in the first 12 months. A 90-day focus on inventory reduction in the Power segment will provide the necessary buffer to avoid further credit rating downgrades. Contingency plans must include the partial sale of the Aviation segment if the Boeing 737 MAX issues persist beyond the next fiscal year. Implementation success depends on shifting the culture from a focus on quarterly earnings targets to a focus on daily operational metrics at the shop floor level.

Executive Review and BLUF

1. BLUF

The General Electric conglomerate model is no longer viable. The 121 billion dollar debt load and the collapse of the Power segment have created a structural crisis that operational improvements alone cannot fix. Leadership must execute a managed breakup of the company into three independent entities focused on Aviation, Healthcare, and Power. The immediate priority is the 21.4 billion dollar BioPharma divestiture to stabilize the balance sheet. Success depends on the aggressive implementation of Lean principles to fix the negative cash flow in the Power unit before separation. Delaying the breakup will result in further erosion of shareholder value as the profitable segments continue to subsidize the failing ones.

2. Dangerous Assumption

The analysis assumes that the Aviation segment will remain a stable cash source. This ignores the systemic risk posed by the Boeing 737 MAX grounding and the potential for a global downturn in air travel. If Aviation cash flow falters, the entire deleveraging plan collapses.

3. Unaddressed Risks

• Interest Rate Risk: A rise in rates will significantly increase the cost of servicing the 121 billion dollar debt during the transition period.
• Talent Attrition: The shift from a prestigious conglomerate to a struggling turnaround candidate may lead to a loss of top engineering talent in the Aviation and Healthcare units.

4. Unconsidered Alternative

The team did not consider a merger of the Power unit with a global competitor like Siemens or Mitsubishi. A joint venture or full merger of the Power segment could provide the scale and cost reductions necessary to survive the global shift away from gas turbines, removing the liability from the balance sheet of GE entirely.

5. Verdict

APPROVED FOR LEADERSHIP REVIEW