Back To The Future: Four Lessons From The '90s Still Relevant Today
So how did GE excel?
Back to the Future Part II saw Marty McFly sporting a pair of self-lacing shoes and flying around on a hover-board in the year…
Although many of the predictions from that time-traveling classic have yet to materialize, business leaders can gain some valuable insight by looking back to the decade that followed the 1989 film, as the global economy of today is already looking very much like a rerun from the 1990s.
Taking stock of the current conditions, we can see that the U.S. is geared for growth, while Europe is sluggish and emerging economies present a mixed picture. Falling oil prices are contributing to America's growing consumer confidence, job growth and friendly investment climate.
We are also in the midst of a technology shift where smartphones and social media are changing consumer behavior as much as the Web and dotcoms did in the 1990s.
To figure out which strategies are likely to succeed today, it therefore makes sense to revisit one of the most celebrated company of the 1990s: General Electric .
GE reported nine straight years of double-digit growth in profits back then. Even after adjusting for non-core profits, such as pension fund gains, the annual growth rate was 9.2%. The stock market responded in kind, and the share price rose almost 10-fold. So how did GE excel?
Efficiency above all else
At the core of GE’s success was a relentless drive towards efficiency. In a large conglomerate, lots of discipline is needed to reduce bureaucracy and consistently drive down costs.
GE did so in two different ways: First, Jack Welch, the CEO since 1981, worked hard to overcome the company's old hierarchical approach, with its 29 layers of management.
By the 1990s, a new culture of informality allowed people to communicate across layers and get things done quickly. Secondly, GE transformed Six Sigma from a tool that ensured manufacturing quality to one that reduced mistakes and cut out slack in all service-related activities.
Incentives and promotions were closely tied to the ability to master Six Sigma. After its introduction, operating profit margins increased from 14.4% in 1995 to 17.3% in 1999.
This focus on efficiency didn't come without a price, though. GE was not a leader in terms of innovation, an area where some of its competitors, including Siemens were stronger. In a talk I attended in 2009 at Dartmouth College Jeff Immelt, Jack Welch’s successor, noted that the company was well aware of this and had been working to strengthen its innovation performance.
My own research on companies succeeding for more than 100 years tells the same story: efficiency beats innovation.
Businesses have to be No. 1 or 2 in their industry
Performance and efficiency also guided GE’s portfolio decisions. A rule since adopted by many companies was that each business had to be No. 1 or 2 in its industry – otherwise it was sold or shut down. But the spread of GE's activities was wider than what most analysts recommend today.
Medical technology, appliances, turbines, light bulbs, and plastics all found a home in the conglomerate. Economic theory suggests that companies can move outside their core activities, as long as marginal benefits outpace marginal costs.
Looking forward, this means that some companies might define their core business too narrowly today. Particularly in emerging economies, a trusted brand or good relationships with suppliers and governments can be leveraged across a wide range of activities.
An important caveat is the ability to share best practices across businesses. GE took good ideas both across businesses and from outside the company.
Six Sigma, for example, was copied from Motorola but transformed to fit GE. From Caterpillar they learned that being disciplined in part standardization can reduce service cost structures and new product introduction time.
GE’s appliance and power system used this approach to cut the new product introduction time by half. And after the successful adoption of weekly customer feedback in appliances, it was implemented by GE Capital’s retailer financial services. This flow of ideas was fostered both through the informality of communication and the leadership’s emphasis on exchanging best practices during review meetings.
Expand into markets neglected by others
While GE focused on efficiency, it also expanded into new markets in the 1990s, more than doubling its revenues. A big driver behind this growth was the acquisitions it made both in the U.S. and abroad. Internationally, GE showed a strong preference for bargain hunting.
The company often made big acquisitions when a country had fallen out of favor. For example, when Mexico devalued the Peso, and the economy was in turmoil, GE made 10 acquisitions and invested more than $1 billion in new and existing operations there. In Europe, it picked up a number of financial service providers, such as SOVAC SA and Credit de l'Est in France, during the sluggish mid-1990s.
This counter-cyclical international growth makes sense as it is cheaper and companies that are not for sale during the good years are available. Firms might want to look for opportunities in Europe, Brazil, the Middle East and possibly Russia. It is important to note, though, that GE was an experienced global player.
Tarun Khanna from Harvard points out that industries are very different in different countries. So even if you are a strong player at home, you should not take the challenges abroad lightly.
Don’t be seduced by hype
Finally, it is also important to mention what GE did not do. It did not buy into the hype and try to turn itself into a dotcom company. Sure, GE used the internet to reduce paperwork and become more efficient, but management was focused primarily on production and much less on e-commerce.
This is important to remember. If you are not a social media company, don’t try to transform yourself into one. On the other hand, if the social media tools support your core activities, embrace them without trying to put on clothes that do not fit.
To be ready for future, don’t look to Google and Facebook – unless, of course, you're an online business. GE’s story from the 1990s is probably more relevant. It highlights the importance of efficiency, informality and focus. You might want to include them in your New Year's resolutions.