Case Study

Can GE Remake Itself as a Digital Firm?

General Electric (GE) is the world's largest diversified
manufacturer. Fortune named GE "America's Most
Admired Company" in 1998, 1999, and 2000. Jack
Welch, GE's CEO and Chairman since 1981, is often
cited as the most admired CEO in the United States.
Headquartered in Fairfield, Connecticut, the company
consists
of
20
units,
including
Appliances,
Broadcasting (NBC), Capital, Medical Systems, and
Transportation Systems. With the acquisition of
Honeywell, announced in October 2000, GE became
a company of $155 billion in revenue and 460,000
employees in 100 countries. Despite GE's size and
old-economy businesses, Internet Week awarded GE
its e-Business company of 2000. Did GE transform
itself into a digital firm?
At a January 1999 meeting of 500 top GE
executives in Boca Raton, Florida, Welch announced
a new initiative to turn GE into an Internet company.
Earlier initiatives transformed GE and are partially
responsible for its phenomenal rise in profit over the
past
two
decades.
Those
initiatives
were
globalization of GE in the late 1980s, "products plus
service" in 1995 which placed emphasis upon
customer service, and Six Sigma in 1996, a quality
program that mandated GE units to use feedback
from customers as the center of the program.
Welch announced that the Internet "will
forever change the way business is done. It will
change every relationship, between our businesses,
between our customers, between our suppliers. By
Internet-enabling its business processes, GE could
reduce overhead costs by half, saving as much as
$10 billion in the first two years. Gary Reiner, GE's
corporate CIO, later explained "We are Web-enabling
nearly all of the [purchasing] negotiations process,
and we are targeting 100 percent of our transactions
on the buy side being done electronically." On the
sell side Reiner also wanted to automate as much as
possible, including providing customer service and
order taking.
GE had quietly been involved with the Internet

years before the Boca Raton meeting, conducting

more purchasing and selling on the Internet than any
other non- computer manufacturer. For example
within six months after beginning to use the Internet
for purchasing in mid-1996, GE Lighting had reduced
its purchasing cycle from 14 to seven days. It also
reduced supply prices by 10% to 15% due to open
bidding on the Internet. In 1997 seven other GE units
began purchasing via the Net. The company even
sold the concept to others, including Boeing and 3M.
Polymerland, GE Plastic's distribution arm,
began distributing technical documentation over the
Web in 1994. It put its product catalog on the Net in
1995 and in 1997 established a site for sales
transactions. Its online system enables customers to
search for product by name, number or product
characteristics, download product information, verify
that the product meets their specifications, apply for
credit, order, track the shipment, and even return
merchandise. Polymerland's weekly online sales
climbed from $10,000 in 1997 to $6 million in 2000.
In 1998 GE Industrial Systems developed an
artificial intelligence system that assigns field
engineers to customer site visits, reducing the
average dispatch time from 18 hours to four. Prior to
the system its engineers could not handle all the
customer calls for help. The system handles
thousands of constraints, such as not dispatching
bearded engineers to sites requiring the wearing of
facemasks. Industrial Systems now markets the
system to other companies.
Welch ordered all GE units to determine how
dot-com companies could destroy their businesses,
dubbing this project DYB (destroy your business).
Welch explained that if these units don't identify their
weaknesses, others would. Once armed with these
answers, managers were to change their units to
prevent it from happening. Each of GE's 20 units
created small cross-functional teams to execute the
initiative. Welch also wanted them to move current
operations to the Web and to uncover new Netrelated business opportunities. The final product was
to be an Internet-based business plan that a
competitor could have used to take away their unit's

customers, and a plan for changes to their unit to

combat this threat. Reiner ordered GE units to "come
back with alternative approaches that enhance value
to the customer and reduce total costs."
The Internet initiative started by changing
GE's culture at the very top. GE's internal newsletters
and many of Welch's memos became available only
online. To give blue-collar workers access to the Net,
GE installed computer kiosks on factory floors. One
thousand top managers and executives, including
Welch (who also had to take typing lessons), were
assigned young, skilled mentors to work with them
three-to-four hours per week to make them
comfortable with the Web. They had to become able
to evaluate their competitors' Web sites and to use
the Web in other beneficial ways. Every GE employee
was given training. Welch announced in 2000, that
GE would reduce administrative expenses by 30-to50 percent (around $10 billion) within 18 months
through use of the Internet.
Many projects came out of the initiative. For
example GE Medical Systems, which manufactures
diagnostic imaging systems such as CAT scanners
and mammography equipment, identified its DYB
threat as aggregators, such as WebMD, which offered
unbiased information on competing products as well
as selling them. GE products on these sites looked
like just another commodity. The unit's major
response was iCenter, a Web connection to
customers' GE equipment to monitor the equipment
operation at the customer site. iCenter collects data
and feeds it back to each customer who can then ask
questions about the operation of the equipment
through the same site. GE compares a customer's
operating data with the same equipment operating
elsewhere to aid that customer in improving
performance. "We can say, 'Do you know you're only
60 percent as productive as another customer using
the same equipment in another part of the world,"
explained Joe Hogan, Medical Systems' CEO, "and by
doing x, y and z, you can increase productivity?'" In
addition customers are now able to download and
test upgraded software for 30 days prior to having to
purchase it. The unit also began offering its
equipment training classes online, enabling clients to

take them at anytime. The aggregators were also

auctioning off used equipment in demand in poorer
countries.
Medical Systems established its own site to auction
its own used equipment, thus opening new markets
(outside the U.S.). GE Aircraft adapted iCenter and
now monitors its customers' engines while they are
in flight.
GE Power Systems then developed its Turbine
Optimizer that uses the Web to monitor any GE
turbine, comparing its performance (such as fuel
burn rate) with other turbines of same model
anywhere in the world. Their site advises operators
how to improve their turbines' performance and how
much money the improvements would be worth. The
operator can even schedule a service call in order to
make further performance improvements.
Late in 1999 GE Transportation went live with
an e-auction system for purchasing supplies. Soon
other units, including Power and Medical, adopted
the system. GE later estimated the system would
handle $5 billion in GE purchasing in 2000, and the
company would do at least 50% of its purchasing
online in 2001. The system lowers prices for GE
because approved suppliers bid against each other to
obtain GE contracts. It also results in fewer
specification errors and speeds up the purchasing
process. GE estimates it saves between 10% and
15% of purchasing costs altogether.
GE Appliances realized that appliances are
traditionally sold through large and small retailers
and that the Internet might destroy that model,
turning appliances into commodities sold on big retail
and auction sites. GE wanted to maintain the current
system, keeping consumer loyalty to their GE brand
(versus Maytag, Whirlpool & Frigidaire). Appliances
developed a point-of-sale system placed in retail
stores such as Home Depot where customers enter
their own orders. The retailer is paid a percentage of
the sale. The product is shipped from GE directly to
the customer. GE Appliances claims it can now take
products from its factories and get them shipped
anywhere in the United States virtually overnight on
a cost-effective basis. In 2000 Appliances reported

45% of its sales, totaling $2.5 billion, took place on

the Internet. It estimates 67% of its sales will be on
the Internet in 2001.
GE has been quick to let the world know of its
progress. The corporation and its units have issued a
blizzard of press releases touting the successes of
each of GE's Internet initiatives and the consequent
positive effect upon financial results. "In 1999, 30
percent of our orders came in via the Web,"
announced Marian Powell, the senior vice president
for e-business at GE Capital Fleet Services. And in
2000 "we'll have over 60 percent. That's over a
billion dollars in orders. CIO Reiner said "We are not
talking about incremental change. We're talking total
transformation."
A January 2001 article by Mark Roberti of The
Industry Standard was skeptical. Roberti commended
GE for embracing the Internet so quickly. He also
noted that "these endeavors are unlikely to make GE
vastly more profitable. . . because the company isn't
using the Internet to reach new markets or create
major new sources of revenue." Roberti questioned
the great savings through Internet-based cost cutting
that GE claimed. To cut costs by moving business
processes online, a firm "must eliminate -- or redeploy -- a significant number of employees" and "GE
hasn't." For example, Roberti says, 60% of
orders to GE Capital Fleet Services are now placed
online, but it has not reduced its call- center staff. GE
reports that its selling, general and administrative
expenses as a percent of sales fell for the first nine
months of 2000 from 24.3 in 199 to 23.6, a minor
drop at best. Moreover, he notes caution coming
from GE executives themselves. For example while
Reiner had projected a $10 billion saving over the
next 18 months in 1999, in December 2000 he
revised the 2001 savings to about $1.6 billion-not an
insignificant sum, but far from the gigantic savings
predicted. Reducing costs by having customers and
employees serve themselves via the Web has proved
elusive at other companies as well, such as IBM and
UPS.Roberti claims that the Internet has not brought
GE a significant number of new customers.
Overall, Roberti points out, "Through the third

quarter of 2000, GE still hadn't demonstrated any

significant improvement in its financial results that
can be directly attributed to e-business. Although GE
has achieved genuine progress and even leadership,
the company could not be generating the savings
management had been predicting. He speculates
that the purpose of the continuous declarations of
great savings may be to boost the price of GE's
stock. Perhaps, most importantly, Roberti claims that
while GE's Internet activities will give the company a
boost, it will take its competitors only a few months
to catch up, leaving GE without any competitive
advantage.
Case Study Questions:
1. Summarize the business and technology
conditions causing GE to launch its Internet initiative.
2. How is GE using Internet technology in its internal
and external business processes?
3. What management, organization, and technology
issues did GE have to address in its Internet
initiative?
4. Evaluate GE's Internet initiative. Is it successful? Is
the company transforming itself into a digital firm?
Why or why not?