Why GE Is Getting Out of the Kitchen
By jettisoning one of its most iconic units, General Electric (GE) would join a small but high-profile club of companies that famously parted ways with businesses once synonymous with their brand names. Companies such as IBM (IBM) and Eastman Kodak (EK) have also—either because of financial straits or tactical maneuvering—transformed themselves by letting go of ventures that once defined them.
Analysts will probably spend the next weeks analyzing the financial details and potential bidders for such a deal. The proposed joint venture, spin-off, or outright sale of GE's appliances division could, after all, give the company a much-needed injection of as much as $8 billion. But how exactly GE exits a market so intertwined with its public image may, in the end, be more interesting than any financial fine print.
The central issue for the management at GE—as well as cohorts before it at Intel (INTC), IBM, Kodak, and Corning (GLW)—is whether to cut loose a reliable, albeit declining, generator of cash to place potentially riskier bets on innovation, research and development, and new growth. Back in the early 1980s Intel's Andy Grove took the radical step of shifting the company's focus away from basic computer memory chips, toward microprocessors, the "brains" of the machine. The decision, which was controversial and shocking to some, led to unprecedented growth of Intel revenues, profits, and prestige.
IBM, meanwhile, retooled to focus on delivering high-margin services, ultimately selling its PC hardware division to the Chinese firm Lenovo in 2004. And more recently, Kodak and Corning transformed themselves by refocusing on the digital equivalents of businesses that made them famous, morphing consumer film and glass kitchenware empires, respectively, into cutting-edge digital imaging products and high-end fiber optics gear.
Lighter on Heavy Industry
Now, GE could be at a similar crossroads. Its appliance business represents a small fraction of the company's revenues, about $7 billion of its $173 billion total in 2007. CEO Jeffrey Immelt has said the company's future growth will largely be fueled by its health-care and energy businesses, much of it from outside the U.S. By comparison, the company's industrial segment, of which appliances are a large part, accounts for only 10% of overall earnings and books the bulk of its sales inside the U.S. "In many ways," says Scott Anthony, president of Watertown (Mass.) consultancy Innosight, "GE has already changed and this is making official what the market has already sorted out."
All businesses have a natural life cycle, and many successful ones fade with time. The trick for managers is to time their entry and exit to maximize return on investment. "The creation and destruction of business is what gives these conglomerates long life," says John Kao, founder of Kao & Co., a San Francisco innovation consultancy. "The management of a corporation like GE should be complimented for entertaining this kind of transformation, even if it means turning away from an iconic business."
While millions of Americans still associate the GE name with kitchen appliances, its image has changed over time. Most twentysomethings today are probably more likely to associate the company name with a subplot of the GE-owned NBC television comedy 30 Rock. (In the program, Alec Baldwin's character, a GE executive, is head of the "Television and Oven Programming" division.) "Most young people know GE as a media company," notes Andrew Zolli, founder of New York innovation firm Z + Partners. (Rumors of a sale of NBC, meanwhile, have calmed down in the past several months, since Immelt adamantly denied that a sale was on the table.)
Still, GE's brand could become a factor in the terms of any sale. A buyer would surely be motivated to keep the GE moniker and retain the brand equity built up over many years. But GE might bristle at the prospect of refrigerators and ovens carrying its logo after it exits the market. IBM's case could provide a blueprint: Lenovo continued selling ThinkPad laptops with IBM's name on them after the 2004 deal. Lenovo had the right to use the IBM name for five years but phased it out after just two, as consumers realized the product had largely stayed the same. "Most likely," says Innosight's Anthony, "the GE appliance brand will fade out and disappear."
Company Culture and Legacy
Letting go of GE's appliance division may be long overdue. Some management gurus believe that companies typically hold on to legacy businesses longer than they should, either out of fear of giving up a steady cash flow or because of the internal or even external cultural upheaval that may ensue. IBM and Intel provide almost textbook examples: Both met outcries of concern that by exiting their iconic PC and memory-chip businesses, they were signaling surrender of key manufacturing jobs to Asian competition. In Intel's case, though, Japanese dominance of memory chips gave way to weakness as other suppliers undercut prices on what had become a commodity. And IBM has gone on to record growth with its emphasis on software and services. Ultimately, both companies' game plans were validated. "The risk to innovation," says Anthony, "is often that companies will hold on to the past far too long."
The only real surprise in GE's case is that it took so long to make this move. Change seems embedded in the company's DNA. Since December, 2002, for instance, Immelt has sold off more than $75 billion in GE businesses such as its plastics and insurance units, while spending more than $50 billion on acquisitions in faster-growing sectors including wind power and aviation. Under Jack Welch before him, GE bought and sold hundreds of companies. "GE's mark of distinction is this smartly tuned portfolio approach," says Jeneanne Rae, president of Peer Insight, an innovation consultancy in Alexandria, Va.
Under Welch's tenure, GE's appliance division was one of the company's largest consumer-facing businesses, a staple of American domestic life that made the company a household name. A sale would leave, in the near term, just GE's lighting and media divisions to fill the gap as well-known consumer brands. Health care could be the company's next big touch point, say innovation and design experts. As health care becomes more decentralized, with technologies such as defibrillators moving into the home, GE is investing heavily in products that could in the next century very well have the impact that appliances made in the last one.
"The question is about iconography," Z + Partners' Zolli says. "Does GE want to be remembered [as] an icon in the kitchen, or does it want to give itself a chance to become iconic of something in the 21st century?"
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