Tag Archives: Thomas Edison

What Would Thomas Edison Say About GE’s Expulsion From The Dow?

In 1896, Dow Jones created an Industrial Average of the equity values of twelve corporations that dominated the American stock market. Thomas Edison’s company General Electric was one of those twelve firms.

The other eleven corporations are long gone from the Industrial Average. Some continue to operate as smaller entities. Others merged into larger firms. And others dissolved or were broken up by court order.

Only General Electric remained in the Industrial Average until, last week, S&P Dow Jones Indices decided to expel it. Apparently, GE can no longer be characterized as a dominant American corporation.

So what would Edison, the American entrepreneurial icon who founded GE, say about this downgrade? Ironically, he’d probably wonder how his firm managed to remain in the Industrial Average until now.

That’s because GE was founded by Edison by 1890 to serve as a holding company for a variety of his electricity-related business interests. A hodgepodge of lamps, motors, and other items were tossed together under the General Electric brand name.

Had Edison been alive today, he likely would’ve explained that he always expected his application product businesses to wax and wane over time. He’d then return to his New Jersey laboratory and roll up his sleeves, determined to invent the next generation of applications.

Edison understood that the capitalist process of destruction and innovation would ensure that no application product would be popular forever. He undoubtedly realized that, just as his electric lamps and motors replaced predecessor products that ran on kerosene and steam, his own inventions would eventually yield to more efficient and effective products.

In other words, Edison would’ve likely put aside the existing application products of General Electric, and would’ve turned his attention to the solar panels and wind turbines of the future. And, while doing so, he would’ve relished the opportunity to build a better company than today’s GE.

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.