GE’s Breakup Lessons

Takeaways for innovation and the future of the economy

Marco Annunziata - Apr 6, 2024

This article is republished from Just Think with permission from Marco Annunziata.

GE has completed its breakup process this week, splitting up its aviation and power businesses into two stand-alone companies, GE Aerospace and GE Vernova. GE Healthcare was spun off last year; other businesses had already been sold. GE has played a protagonist’s role in pivotal moments of our history, from electrification to the moon landing. The breakup of this 130-year old iconic company holds important lessons about the ongoing revolutions in innovation, business and economic trends. Having spent crucial years of my career at GE, I thought I’d offer my reflections. 

The kings

Debate on the triumphs and troubles of GE tends to focus on the CEOs. GE has had relatively few chief executives, and most have enjoyed a long tenure enabling them to put their stamp on the company. However, the judgement too often revolves around one single metric—the stock price. And the stock price is influenced by a lot more than the CEO’s virtues and pitfalls. I cannot be objective. I was hired by Jeff Immelt, my tenure at GE has been under his leadership and I admire the man.  

I will say this: before you rush to pass judgement on any of the CEOs, remember that running GE was a formidable job—from the outside, it’s almost impossible to understand just how demanding. It required a keen understanding of global economic, financial and geopolitical trends, to steer a gigantic company operating across the globe in strategic sectors like energy, health care and aviation. It required deep knowledge of the nuts and bolts of the different industries—the technology and product lines, the competition, the demand trends. It required the ability to interact effectively with customers, policymakers and regulators. It was a job for a few remarkable individuals.

GE was justly famous as a talent factory. With its own management academy at Crotonville and hands-on experience through its multiple divisions, it provided unparalleled professional growth opportunities—GE executives have gone on to lead other major companies. The GE culture I experienced was one of excellence, and for me the secret sauce was its remarkable blend of competition and cooperation. It created some of the best talent I have ever encountered at both the individual and team level. As talent is set to be an increasingly crucial scarce resource in our economy, we’d do well to treasure GE’s lessons in talent development. 

Innovation synergies

Are different business divisions worth more under the same roof, or as separate companies? The current consensus says as separate companies, and the breakup of GE nods in that direction. The whole is less than the sum of the parts, the consensus says. I am not convinced.

GE had certainly taken the idea of a conglomerate to an extreme: at one point it encompassed gas turbines, jet engines, insurance, a systemically important financial services unit (GE Capital) and media (NBC). This resembled more a financial portfolio approach than a coherent industrial strategy, it left the company vulnerable to a near-death experience during the 2008 global financial crisis and was then gradually reduced to a much more sensible diversified setup. 

But GE’s conglomerate structure delivered some very real synergies. I’ve already mentioned the talent development; but the most important synergies were in technology. GE’s Global Research Center brought together scientists and engineers working on different product lines. Jet engine technology inspired innovation in gas turbines design, and medical imaging technology inspired sensing and inspection solutions for oil and gas pipes. Water cooler conversations could spark serendipitous breakthroughs.

Digital innovation opened up the potential for even greater synergies, with efficiency-enhancing solutions that could be more easily ported across different industrial divisions. GE’s digital bet did not succeed, but the value proposition that the company pioneered is now generally acknowledged, and the initial skepticism has been replaced by fear of missing out. 

The value paradox  

GE was unable to convince financial markets of the value of its transformation from a traditional industrial outfit into a digital-industrial company—and the failure was not entirely GE’s fault. The transformation was difficult and demanding. GE invested heavily in digital, setting up a software division that developed efficiency-boosting solutions and an operating system for the industrial internet (Predix). It built mutually-beneficial connections with an ecosystem of tech start-ups through GE Ventures. But it also had to keep investing in its traditional businesses. 

Financial markets gave GE no credit for developing a novel data-driven approach that could deliver value throughout its own business lines and across industries. Instead, they seemed to regard the company as neither fish nor fowl, neither a software company nor a successful industrial behemoth. 

This highlights a paradox that is even more apparent with today’s AI frenzy: financial markets are breathless with excitement at the value that AI and other digital technologies can create throughout the economy. But they price that value only in companies that are mostly about data and chips, with little or no attention to where this value can be brought to fruition across industries. 

Nvidia’s advantage in the AI revolution is obvious. But companies like Google and Facebook keep commanding phenomenal valuation multiples even though their revenue comes almost entirely from advertising. Perhaps this is still a backlash to the original dot-com bubble, where any company could boost its market cap by adding ‘.com’ to its name. But it is equally blind and misguided, in my view. 

Ecosystems and conglomerates

GE’s breakup highlights another important paradox. Value is increasingly created at the intersection of traditional disciplines, partly thanks to the emergence of a new wave of general purpose technologies. Increased specialization is no longer the name of the game. And yet the breakup of GE seems to validate the specialization approach. What do we make of this?

I strongly believe that synergies and cross-fertilization of talent, expertise and innovation will be increasingly valuable going forward. I also think that GE’s conglomerate approach was well positioned to generate substantial synergic value. But this is part of the larger debate on the optimal size of the firm, namely about which functions are best brought within an organization and which are best outsourced. 

We are moving towards a more ecosystemic approach, where firms, no matter how large, will need to develop a flexible and much more extensive network of cooperations and synergies. Properly executed, this might provide a more powerful alternative to the synergies that business diversification can create within any single firm. It might eventually redefine the nature of the firm altogether. GE’s breakup might then prove to be ahead of the curve. 

Epilogue and prologue

GE’s breakup marks the end of an era; its lessons can help us set the economy on a path to greater growth; and the company will remain embedded in our economy’s DNA through its splinter units and the talent it has seeded across industries. Let’s salute the end of a remarkable era and capitalize on its lessons to mark the start of an even more impressive one.