GE’s New Business Model

Thirty years ago, it was easy to describe the business model of General Electric (GE). They were the legacy organization that was originally founded by Thomas Edison, the inventor or developer of classic electrical products like the light bulb, the phonograph, the motion picture projector, and the power generator. A century after its founding, GE still manufactured a wide array of industrial and consumer products, ranging from washing machines to jet engines.

But then GE aggressively developed its financial services division to help customers finance their purchases. And the division grew, and grew, and grew into a $600 billion banking organization.

At its peak, GE Capital accounted for more than half of its parent corporation’s profits, and was designated a Systematically Important Financial Institution (SIFI) by the federal government. In other words, it had grown so massive that it was deemed “too big to fail” as a global finance organization.

GE also diversified into other ventures that were barely related to its core identify. The NBC television network became a GE division. So did the film studio and theme park operator Universal Pictures. Even the Weather Channel became a GE service!

For some time, the disparate business units helped GE manage its profits by engaging in a smoothing technique known as “earnings management.” Instead of simply reporting the profits of each division, the firm would rely on the unusually profitable years of certain units to off-set the unusually unprofitable years of other units. That technique enabled the corporation to present an ostensibly stable overall profit picture to investors.

But as the years dragged on, the unwieldy conglomeration of unrelated divisions became more difficult to manage effectively. Thus, GE has recently reversed its strategy, opting to divest and streamline its business portfolio.

And now this new business strategy raises a vexing question. Once an organization begins to divest itself of unrelated units, when should it stop doing so? After all, if it cuts too deeply, it might endanger its own existence as a going concern.

It’s been a little difficult to understand how GE is answering this question. Although it sold off much of its Capital portfolio, it kept much of it too. Likewise, the firm disposed of its household appliance business, but it kept its medical imaging division. And last week, it announced the sale of its Industrial Solutions business to Switzerland’s ABB Group, founded in 1883 as an inventor and developer of electrical products.

1883? At that very time, GE founder Thomas Edison was developing his American firm. And today, more than 130 years later, his corporate descendants are selling Edison’s “heritage business” unit to their Swiss rival.

It’s certainly possible that GE’s divestiture strategy is part of a clever business plan to recapture its traditional global dominance in the electrical products industry. And yet it’s also possible that, after expanding far too broadly without regard to its long term sustainability, GE is now contracting a bit too extensively for its own well-being.

Zombie Banks at Halloween

Why does Hewlett Packard spin off its personal computer and printer operations while the Bank of America remains a financial supermarket? For that matter, why is eBay compelled to shed its PayPal unit while Citigroup continues to operate retail bank branches and institutional service units under one roof?

In just the past two weeks, Hewlett Packard and eBay announced divestitures of significant ancillary operations in order to focus more intently on their core businesses. Meanwhile, Bank of America and Citigroup were preoccupied with their respective $8.5 billion and $16 million regulatory settlements while maintaining their existing lines of business.

Why is this possible? Why do technology firms cut themselves to pieces while global banks pay for past transgressions and continue practicing “business as usual”?

Well, in the turbulent technology sector, firms like Hewlett Packard and eBay must compete with numerous new rivals like Lenovo and Square. Heck, even the “venerable” Apple only emerged as a technology titan with the introduction of the iPod a decade ago.

But Bank of America and Citigroup? They and their four competitors of the American “Big Six” banks (i.e. Goldman Sachs, JP Morgan Chase, Morgan Stanley, and Wells Fargo) are all more than a century old. Only one was even founded in the twentieth century; the baby of the bunch, Bank of America, was launched in 1904 as the Bank of Italy in San Francisco.

Oddly enough, both the technology sector and the financial service industry maintain comparable traditions of innovation. After all, who can say whether the iPad and the Google Glass are more ingenious (for better or for worse) than the Interest Rate Swap and the Collateralized Debt Obligation?

So the secret of the longevity of the nation’s largest banks cannot be attributed to a superior pattern of innovation. But what other factor can explain why great technology firms perish? While ancient banking institutions continue to roam across the country like the zombie undead at midnight?

The answer may be found in federal government policy. Regulators have consistently permitted technology driven firms like General Motors, Kodak, Polaroid, Texaco, and Wang Laboratories to enter bankruptcy court. Despite reportedly becoming insolvent during the recent global economic crisis, however, none of the Big Six banks were ever permitted to do so.

Instead, with the support of TARP and other government aid programs, the banking institutions have been kept alive. Like zombies in a Halloween film, they maintain all of their limbs in perpetuity … and they simply refuse to die.