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    Lessons from the Titans: What Companies in the New Economy Can Learn from the Great Industrial Giants to Drive Sustainable Success
    Lessons from the Titans: What Companies in the New Economy Can Learn from the Great Industrial Giants to Drive Sustainable Success
    Lessons from the Titans: What Companies in the New Economy Can Learn from the Great Industrial Giants to Drive Sustainable Success
    Ebook433 pages6 hours

    Lessons from the Titans: What Companies in the New Economy Can Learn from the Great Industrial Giants to Drive Sustainable Success

    By Scott Davis, Carter Copeland and Rob Wertheimer

    4.5/5

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    About this ebook

    Three top Wall Street analysts reveal enduring lessons in sustainable success from the great industrial titans—the high-tech companies of their day—to the disruptors that now dominate the economy.

    Before Silicon Valley disrupted the world with new technologies and business models, America’s industrial giants paved the way. Companies like General Electric, United Technologies, and Caterpillar were the Google and Amazon of their day, setting gold standards in innovation, growth, and profitability. Today’s leaders can learn a great deal from their successes, as well as their missteps. In this essential guide, three veteran Wall Street analysts reveal timeless lessons from the titans of industry—and offer battle-tested survival tactics for an ever-changing world. You’ll learn:

    • how GE became the largest company on earth—only for a culture of arrogance to set in motion the largest collapse in history
    • how Boeing reassessed risks, raised profits—and tragically lost its balance
    • how Danaher avoided the pitfalls of tremendous success—by continually reinventing itself
    • how Honeywell experienced a near-fatal cultural breakdown—and executed a flawless turnaround
    • how Caterpillar relied too much on forecasting, lost billions—and rallied by recommitting to the basics

    Filled with illuminating case studies and brilliant in-depth analysis, this invaluable book provides a multitude of insights that will help you weather market upheavals, adapt to disruptions, and optimize your resources to your best advantage. You’ll learn hard-won lessons in innovation, growth, resilience, and operational excellence, as well as the time-proven fundamentals of continuous improvement for lasting success. In the end, you’ll have your own personal toolbox of useful takeaways from more than a century’s worth of data, experience, wisdom, and can-do spirit, courtesy of some of the greatest business enterprises of all time. This is how manufacturers survived the first disruptors of technology—and how today’s giants can survive and thrive during continuous cycles of disruption.

    LanguageEnglish
    PublisherMcGraw-Hill Education
    Release dateJul 14, 2020
    ISBN9781260468403

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      Lessons from the Titans - Scott Davis

      economy.

      CHAPTER

      1

      GENERAL ELECTRIC

      PART I

      The Jack Welch Years and the Cash Flow Machine That Created the Largest Company on Earth

      BY SCOTT DAVIS

      Our first case study is the biggest story of them all, the amazing and disheartening narrative of a signature American company that rejuvenated its business a number of times and then faltered, in one of the largest erosions of shareholder and reputational value in history.

      General Electric (GE) reached the pinnacle of capitalism in the 1990s. In 1999, Fortune called CEO Jack Welch the Manager of the Century. With a $600 billion market cap in 2000, it became the most valuable company in the world, about 20 times the size of other large companies at the time, like 3M or DuPont. GE came back to earth when the tech bubble burst in 2001, but it held onto its reputation as one of the best-managed companies in history, a reputation that ebbed and flowed through a spectacular crash in 2008, a short-lived resurgence by 2015, and then a stunning free fall in 2017–2018 to a value of around $50 billion in April of 2020. A once nearly $60 stock price fell to near $6 at the bottom, a shocking 90 percent drop over 18 years. It was a decline that ended with the loss of tens of thousands of jobs, the elimination of the dividend, and a full-blown SEC fraud investigation.

      GE’s fall has provoked a strong emotional response from nearly everyone with a stake in the company. Some view it as a poster child for corporate greed, others as a failure of SEC oversight. The truth is more complicated, but the lion’s share of the blame has fallen on longtime CEO Jeff Immelt, combined with inadequate board oversight.

      This chapter focuses on the spectacular rise of GE under CEO Jack Welch from a middling old industrial company in the early 1980s to America’s most admired company by the late 1990s, whose size in today’s dollars is comparable to behemoths such as Microsoft, Apple, Amazon, and Google (Alphabet). (See Figure 1.1.) Chapter 2 chronicles the spectacular fall from grace under Jeff Immelt from 2001 to his firing in 2017 and extends to the company’s continued challenges today.

      Figure 1.1: GE’s market-cap equivalent at its peak was larger than most of today’s hot tech names.

      Note: GE assumes the same relative size as a percentage of the S&P 500 at peak, adjusted for 2019 year-end S&P 500 market capitalization. In other words, GE’s August 2000 peak is converted to 2019 dollars. Apple, Microsoft, Google (Alphabet), and Amazon are as of December 31, 2019.

      Source: Bloomberg

      GE’S EARLY DAYS

      GE began with the 1892 merger of the two leaders in electricity-generating equipment, Edison General Electric and Thomson-Houston Electric. In the 1920s through the 1940s under longtime CEO Gerard Swope, GE invested in management and mastered the manufacturing and installation of equipment that was, at the time, about as high tech as it got. Electricity was still new in the world, and the growth was tremendous. The young company expanded into new areas, especially lighting and household appliances, while also moving aggressively into mining and rail markets. It became an industrial powerhouse that succeeded in most areas it tried, for the better part of 50 years.

      The company found new challenges in the 1960s and 1970s from growing competition, both domestic and from overseas. By then, GE had become a slow and clumsy company, careful to get things right, but slow to respond to changing markets.

      When Welch became CEO in 1981, his goal was to trim the bloat and return GE to its nimbler roots. At the time, the press typically referred to GE as the lumbering giant, not exactly the reputation that Welch wanted to sustain. Welch was a young (mid-forties) and aggressive leader who saw much bigger potential. His first five years were spent cutting layers of management and pushing decision-making down through the organization. He also invested heavily in factory automation and pushed productivity onto the factory floor, a campaign that culminated in the 1990s with the aggressive adoption of Six Sigma (a system for extreme quality control). (See Figure 1.2.)

      Figure 1.2: The Jack Welch years (1981–2001).

      Source: General Electric filings, press reports; Bloomberg

      Meanwhile he pushed his executives to boost market share and find new areas of growth. Divisions had to be number one or number two in key markets to be kept in the mix. Welch exited slower-growth, more competitive businesses like mining and replaced them with higher-growth, often higher-tech areas such as specialty plastics. He wanted businesses with the potential for concentrated market share. His motto became Fix it, close it, or sell it.

      To win the organization over to his agenda, Welch beefed up rewards, with stock options his preferred currency, and encouraged risk taking. Those who missed their numbers went on probation and were fired if they fell short again. Those who met or exceeded the numbers saw a sizable pay bump and a faster career track. For the rest of the organization, he instituted forced ranking, with the bottom 10 percent of employees let go each year. By 1986 the company had fired over 100,000 employees, a quarter of the workforce, and despite the warnings of critics, revenues actually grew through this turmoil. No restructuring of this scale had ever been done in American history; it was thought to be impossible. (See Figures 1.3 and 1.4.)

      Figure 1.3: Jack Welch cut head count by 25 percent in his first five years . . .

      Note: Data is pro forma for cost actions and excludes the impact of the RCA acquisition.

      Source: General Electric filings

      Figure 1.4: . . . while simultaneously growing revenues by over 30 percent.

      Source: General Electric filings

      Not surprisingly, GE became a cutthroat, almost manic organization where paranoia reigned. Management embraced a work hard/play hard culture, as employees were given increasingly difficult projects with higher and higher expectations. If you succeeded, you were moved to a different job, usually in a different region, every two to three years. It was a hard life, and families paid the price; executive divorce rates were high. But financial results were outsized, and GE’s reputation for exceptional management was growing. GE’s stock price nearly doubled during this five-year time frame (up 180 percent), far outpacing the S&P 500 (up 80 percent).

      The Neutron Jack image is how many people saw Welch in his early to middle years. The focus was on his ruthless management style, passed on to colleagues at GE’s famed training center in Crotonville, New York. Just as important to his longer-term success, however, was his creative and gutsy dealmaking. Welch’s lean, profitable operations generated a lot of cash, and he reinvested that cash at exceptional returns. A return on invested capital (ROIC) of 20 percent+ on his deals was not unusual, twice what was considered normal. His track record was almost uncanny.

      Welch’s most important deal was buying RCA in 1986. At $6.3 billion, it was then the largest non-oil deal in history, and it added $8 billion in revenues to GE’s existing $28 billion. Ironically, Wall Street didn’t love the move. Analysts saw Welch as just a cost-cutter who was stretching beyond his core skills. RCA held everything from mainframe computers and semiconductors to consumer electronics and a huge communications arm. Investors saw the deal as just adding more stuff to an already overly diverse portfolio.

      Welch saw an RCA that had valuable assets that he could monetize more easily than perceived. His plan was to break up the company and keep the pieces that he really wanted, notably the NBC television network. In the end, he sold all the noncore assets for a total that exceeded the purchase price, and he left himself the crown jewel, NBC, essentially for free. It was a brilliant move—and an unheard of M&A strategy at the time. Only then did Wall Street see Welch as a complete leader overall, credibility that took seven years to build. This shift in his image occurred only after massive operational fixes, the selling of low-growth assets, and a game-changing acquisition.

      The history books miss one critical component of GE’s success in that time period. By the mid- to late 1980s, GE was becoming a cash flow machine. Welch taught managers to fixate on every detail. From the productivity of the factories to every contract term, they emphasized cash flow. And that cash flow allowed for five large bets on future growth: (1) air travel, (2) gas-powered electricity generation, (3) global healthcare expansion, (4) television advertising, and (5) financial services. These areas of focus would lead GE to another 15 years of unprecedented growth and success, cementing Welch’s reputation as a visionary and helping catapult GE stock to an eye-popping 3,100 percent gain during his tenure. (See Figure 1.5.)

      Figure 1.5: GE stock outperformed the S&P 500 by 4x during Welch’s 20-year tenure.

      Source: Bloomberg

      Big Bet #1: Air Travel via GE’s Large Aircraft Engine Franchise

      Welch was convinced that future growth in air travel would be driven by two important trends. The first was toward direct point-to-point travel, the most common type of travel that occurs in developed markets today, whereby businesspeople and consumers fly on lower-cost, narrow-body jets (i.e., single aisle) from one city to the next, without connecting to a larger hub. The best early example was Southwest Airlines with its exclusive fleet of narrow-body Boeing 737s. The second trend was globalization; his view was that the world would increasingly need to connect. Welch saw this trend in his own businesses, in which his employees increasingly needed to travel around the world to see customers.

      Boeing recognized the same opportunity and was similarly investing in the future, most notably with a substantial upgrade of its 737 model, a midsized plane perfect for the type of point-to-point travel both GE and Boeing expected to dominate in the future. The 737 was then using a jet engine made by Pratt & Whitney, a company owned by the smaller, but still powerful, United Technologies. But Boeing wanted more from its engine suppliers, specifically greater fuel efficiency and noise reduction. GE had the cash flow to invest and the willingness to take on the risk. With little prodding from Boeing, Welch jumped at the opportunity and persuaded Safran, GE’s joint venture partner for narrow-body jet engines, to commit 50-50 to the heavy investments required to sharply improve on their existing engine (called the CFM56). That allowed for an even larger development budget, dwarfing the funds available to its key competitor.

      Impressed with the result and faced with the reality that Pratt & Whitney showed little interest in investing at the level necessary, Boeing deemed the CFM56 the sole engine for its 737 program. Airbus, the other maker of big passenger jets, made the CFM56 one of two options for its competing A320 narrow-body platform. Today the 737 and A320 together make up 60 percent of all commercial aircraft in the world, and GE’s engines are dominant.

      Welch’s bet was risky because the engine improvements required huge up-front expenditures and had two degrees of uncertainty. First, GE and Safran had to succeed in reaching the fuel efficiency and sound requirements at a manageable cost. Second, they needed a big jump in jet sales to spread out those costs over many units. In fact, they needed to sell thousands of engines over a decade just to break even. In aviation, the product typically sells for low margins (in fact, often at a loss), but the manufacturer makes a lot of money providing service and spare parts over the long life of the engine. If the narrow-body 737 and A320 products had not achieved outsized growth, GE’s bet would have failed mightily. And that was certainly possible—most aerospace experts questioned the 737 upgrade. Those who were bullish on air travel expected growth mainly in wide-body airplanes, not single-aisle jets such as the 737. Others expected air travel to continue to be a novelty for the rich. Welch’s view was considered aggressive, even crazy.

      Instead, the 737 with the CFM56 engine became perhaps the most successful product launch in American history, and more than 32,000 engines have been delivered to airlines around the world. The engine continues to this day to be the most profitable product in GE’s most profitable business.

      Big Bet #2: Gas-Powered Electricity with GE’s F Series Turbine

      Welch likewise found great success with the F series gas turbine, also developed in the 1980s. He bet that natural gas would be plentiful and that electric utilities would move away from dirtier coal power—and similar to Boeing’s needs, they would want a more efficient product to help justify the shift. Natural gas was seen as a cleaner solution versus coal, and after the 1979 Three Mile Island crisis, nuclear was no longer viewed as an option. Demand for electricity spikes when it is hot in the summer, with the sharp rise in daytime use of air conditioning. Utilities need to generate electricity as cleanly as possible, but they also need to deal with sharp changes in demand—a major technical challenge.

      After a massive engineering effort, GE designed the F series power turbine to be both flexible and highly efficient, with high levels of reliability in either mode. Utilities could turn it on in a flash as a peaker unit on hot summer days. Or they could run it as base-load power 24/7 in an economical combined cycle in which excess heat powered a steam turbine. That versatility, along with increasingly cheaper natural gas, made it cost competitive with coal, and with far less environmental impact. The F series became the gold standard for gas turbines for two decades, and GE gas turbines now generate a third of all the electricity in the world.

      To get those advances in performance, GE had to invest heavily up front. Like jet engines, power turbines have low margins up front, but they last for decades with years of high-margin replacement parts and service revenues.

      By the time Welch retired in 2001, gas turbines were in extreme demand, and the F series investment paid off to a level never thought possible. The world was investing heavily ahead of what it thought would be a technology/internet-driven boom for electricity. That demand would create a bubble, one never seen before in the utility world, and a subsequent crash that helped define the early years of Welch’s successor, Jeff Immelt.

      Bet #3: Growth in Healthcare with Medical Diagnostic Equipment

      Medical equipment in the mid-1980s was a new industry for GE altogether. The 1986 RCA deal suddenly gave Welch a large consumer electronics business (notably televisions) that was viewed as very attractive by most at the time. But Welch was a contrarian by nature, and this was exactly the kind of business he did not want to be in, one with limited product differentiation and strong global competitors to contend with. Healthcare, in contrast, was a growth business without dominant players, but which needed extensive investment and engineering expertise. Welch figured that if he could dump his flashy consumer electronics business and invest the proceeds at a lower price in healthcare, that would be an ideal portfolio swap.

      Within a year of doing the RCA deal, Welch bundled GE’s and RCA’s consumer electronics businesses and sold them to Thomson, in return for its medical diagnostic business and $800 million in cash. Welch then invested the excess cash in both internal research and bolt-on acquisitions, specifically focused on diagnostics, which became the mainstay of GE Healthcare. That division grew from $1 billion in revenues in 1987 to more than $8 billion in 2001, an astounding 17% annual growth rate. Meanwhile, Thomson struggled for years in consumer electronics against tough global competition, eventually exiting most of the businesses it had purchased from GE at a steep loss. It was a brilliant trade for

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