GE, the US conglomerate, has hit another important milestone. The company’s stock was removed from the Dow Jones Industrial Average, a US stock market index of companies. GE was a constituent of that index since its founding in 1907 and was the last of the original members. So historians, at least, would have moments of regret. This must be the least of the worries for its current management which has given turnaround priority over nostalgia.

You would recall another milestone the company went by some time ago was when it slashed its dividend, after many years as a safe company for retirees to invest in.

We could well claim an important lesson from the GE saga — that conglomerates are finally falling out of favour, and wonder why it took this company so long. Sure, most companies diversify as they grow. It could be new lines of business developed organically, or through an acquisition.

Although research more often than not advises against diversification, it continues to be popular with CEOs for various reasons, such as a desire to push revenue growth and the hubris of size. Finance experts have often argued that portfolio diversification is best done by the individual, rather than the company on his behalf.

Generally, CEOs make an impassioned case for synergy, in the mystical belief that they will squeeze out new products and generate large savings by combining several different businesses. These claims may well seem believable, especially when there are signs of relatedness between the different businesses. Commonalities can be found in technology, or customers, or even sharing similar supply chains. Yet, it takes a very skilful CEO to show the investing public that these synergies are being achieved. A former CEO of GE who did that very well was Jack Welch. He headed the company from1981 to 2001 and showed consistent increases in profitability and revenues. Welch’s era put a shine on conglomerates, even contributing a framework for analysis of conglomerates that made it into textbooks, called the GE Business Screen, to enable comparing each unit’s industry attractiveness with its competitive position within the overall portfolio.

Welch contributed other terms to management jargon, such as ‘boundary-less company’ meant to blur the borders across internal divisions and encourage cross-business and cross-functional behaviour.

His successor, Jeff Immelt, who took over the reins after that stock had peaked in 2000 had a hard time managing the beast. He made many changes, including selling many businesses but could not satisfy external pressures to improve stock price and profitability. Market conditions were changing and he had difficulty in defining a common logic for the group. The company’s value now is just about 20 per cent of that peak.

The current CEO, John Flannery, who has spent over 30 years in the company and took charge last year is leading the charge to shrink the conglomerate. For someone who made his career only knowing GE, it must be difficult making these divestitures and shows the seriousness of the situation. He overhauled the board of directors, including shrinking it and gave a seat to activist investor Trian Funds whose strategy is usually to break-up companies. Flannery’s most recent announcements are of sale of the health-care, rail-road locomotive, and oil-services divisions. These sales, along with other smaller activities that have been divested, will make GE smaller, although still a conglomerate. The remaining big businesses of GE would include jet engines, power turbines and renewable energy.

What GE continues to struggle with is to provide a logic for its existence. When asked about it, Flannery argued that those units they have gotten rid of will grow and do well outside the GE family and those they are keeping will thrive on shared technology. Let’s wait and see.

The author is a professor at Suffolk University, Boston.

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