Back to the Future Part II saw Marty McFly with self-tying trainers and flying around on a hoverboard in the year 2015. Associate Professor of Strategic Management, Dr Christian Stadler writes for Forbes and thinks the sequel to the time-travelling classic may have got its predictions wrong for the future, but businesses should certainly look to the decade the 1989 film saw the dawn of.
For in 2015 the global economy is looking very much like the 1990s. The US is geared for growth while Europe is sluggish and emerging economies present a mixed picture. In the US falling oil prices contribute to growing consumer confidence, job growth, and a friendly investment climate. We are also in the midst of a technology shift where social media receives as much attention as the New Economy and the Dotcom’s did in the 1990s.
To figure out which strategies are likely to succeed in 2015 it therefore makes sense to revisit the most celebrated company of the 1990s: General Electric. GE reported nine straight years of double digit growth in profits then. Even after adjusting it 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 almost 10-folded. So how did GE excel?
Lesson #1: Efficiency above all else
At the core of GE’s success was a relentless drive towards efficiency. In a large conglomerate it takes a lot of discipline to reduce bureaucracy and consistently drive down costs. GE did so in two different ways. First, Jack Welch, the CEO since 1981, had worked hard to overcome the old hierarchical approach with its 29 layers of management. By the 1990s a new 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 comes at a price. GE was not the most innovative company, 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 aware of this and had been working hard to increase its innovation performance.
Back to the future and for 2015 my advice is to take GE’s focus on efficiency seriously. Research I did on companies succeeding for more than 100 years tells the same story: efficiency beats innovation.
Lesson #2: Businesses have to be number one or two 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 number one or two in its industry – otherwise it was sold or shut down. But the spread of activities was wider than 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 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.
Lesson #3: Expand into markets others would not
While GE focused on efficiency and costs it also expanded in the 1990s, as revenues more than doubled. A big driver was acquisitions both in in the US and abroad. Internationally an interesting pattern emerges, GE often made big acquisitions when a country had fallen out of favour. When Mexico devaluated the Peso and the economy was in turmoil, GE made 10 acquisitions and invested more than US$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. In 2015 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 Business School 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.
Lesson #4: Don’t be seduced by hypes
Finally, it is also important to mention what GE did not do. It did not try to turn itself into a Dotcom company. Sure, GE used the internet to reduce paperwork and become more efficient, but the efforts were primarily on production and less on the hyped e-commerce sector. In 2015 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 2015 don’t look at Google and Facebook – unless you are an online business. GE’s story from the 1990s is more relevant. It highlights the importance of efficiency, informality, and a focus on what you do best. You might want to include them in your new-year resolutions.
Dr Christian Stadler's article featured on the Forbes website