Power Failure

Power Failure Plot Summary

Introduction

For more than a century, General Electric stood as the quintessential American corporation—a beacon of innovation, management excellence, and financial might. At its peak in the late 1990s, GE became the most valuable company on earth, worth nearly $600 billion, a management laboratory that produced generations of corporate leaders, and a symbol of American industrial prowess. The company's journey from Thomas Edison's electric light innovations to Jack Welch's management revolution to its eventual dismantling offers a fascinating window into the evolution of American capitalism itself. The story of GE's meteoric rise and stunning collapse provides profound insights into how leadership philosophies evolve, how financial engineering can mask fundamental business problems, and how even the mightiest institutions can crumble when they lose sight of their core competencies. Through this corporate saga, we witness the dangers of prioritizing short-term results over sustainable growth, the limitations of the conglomerate model in a specialized global economy, and the cultural dynamics that can prevent organizations from confronting uncomfortable truths. These lessons remain vitally relevant for business leaders, investors, and policymakers seeking to understand how power, ambition, and market forces shape the destiny of iconic institutions.

Chapter 1: Birth of an Industrial Giant (1892-1980)

General Electric's story begins in 1892 with a pivotal merger between Thomas Edison's Edison General Electric Company and its chief rival, Thomson-Houston Electric Company. This union brought together Edison's inventive genius with Charles Coffin's business acumen, creating an industrial powerhouse that would help electrify America. Though Edison initially resisted the merger, financial pressures and the influence of J.P. Morgan eventually prevailed. The newly formed company had a market capitalization of around $35 million, with Thomson-Houston shareholders controlling slightly more than half of GE stock. The early years were not without challenges. The Panic of 1893, the worst financial crisis in the republic's history at that time, nearly bankrupted the fledgling company. Orders for GE products declined by 75%, and two-thirds of its workforce was dismissed. Under Coffin's leadership, GE managed to survive by selling securities it owned in various local companies at substantial losses to raise cash. This near-death experience profoundly affected Coffin, who became obsessed with keeping GE financially secure thereafter—establishing a corporate DNA that would prioritize financial management alongside technical innovation. Through the early 20th century, GE expanded far beyond Edison's original vision. The company revolutionized power generation with the introduction of steam turbines and established one of America's first corporate research laboratories in Schenectady, New York. This commitment to research yielded breakthroughs in materials science, power generation, and medical technology. GE also played a crucial role in the development of radio broadcasting through its creation of the Radio Corporation of America (RCA) in 1919, though it would later be forced to divest RCA in 1932 due to antitrust concerns. The post-World War II era marked a significant transformation under the leadership of Ralph Cordiner, who became CEO in 1950. Cordiner implemented one of the largest corporate reorganizations in business history, splitting GE into twenty-seven independent divisions comprising 110 small companies. This radical decentralization was designed to push authority down to operating levels, empowering division chiefs to make important decisions with directional oversight from corporate headquarters. The approach allowed GE to act with the agility of a small company while leveraging the strengths of a large corporation. By the 1970s, under CEO Reginald Jones, GE had evolved into a true conglomerate with interests spanning jet engines, nuclear power, medical equipment, broadcasting, and financial services. Jones refined GE's strategic planning process, developing what he called "The Benign Cycle of Power," focusing on businesses that could produce electricity, transmit it, distribute it, and use it. However, the company's sprawling structure, once a source of stability, began to seem unwieldy in a changing global marketplace dominated by more focused Japanese competitors. As the 1970s drew to a close, GE had become one of the largest corporations in America, manufacturing roughly 200,000 different products in more than 170 plants across 31 states and several foreign countries. It employed some 250,000 people and had substantial revenue and profits. Yet beneath this impressive surface, challenges were mounting. The stage was set for a leadership transition that would fundamentally transform GE and, ultimately, shape the course of American business for decades to come.

Chapter 2: Welch's Revolution: Creating the Most Valuable Company (1981-2001)

When Jack Welch took the helm of General Electric in April 1981, he inherited a respected but sluggish industrial conglomerate that many viewed as a corporate dinosaur. At 45, Welch was the youngest CEO in GE's history. Unlike his predecessor Reginald Jones, who was described as a patrician, chain-smoking corporate CEO, Welch was gregarious, blunt, and often coarse in his language. These stark differences in personality would come to symbolize the radical changes Welch would bring to GE. Welch wasted no time implementing his vision, declaring that GE would only be in businesses where it could be number one or number two in its industry. This seemingly simple mandate guided a massive restructuring of the company. Within his first few years, Welch eliminated 25% of GE's workforce, earning him the nickname "Neutron Jack"—a reference to the neutron bomb that kills people but leaves buildings standing. By the end of his first two years, he had fired 100,000 employees. He also dismantled many of GE's sacred cows, including the Elfun Society, an organization of current and retired GE employees that he viewed as "an organization of suck-ups," and reduced the company's bureaucracy from 29 levels to just six. The 1980s saw Welch remake GE's portfolio through bold acquisitions and divestitures. He transformed GE into a mergers and acquisitions machine, buying and selling companies with abandon in a never-ending effort to construct the perfect portfolio of high-performing, high-profit assets. Between 1981 and 1989, GE divested itself of 118 businesses while making numerous acquisitions. The 1986 purchase of RCA for $6.3 billion, the largest non-oil merger in history at that time, brought NBC under GE's control and significantly expanded the company's media presence. Perhaps most significantly, Welch recognized the potential of GE Capital, the company's financial services arm. Under his leadership, GE Capital was transformed from a sleepy division that helped customers finance GE products into a financial powerhouse. By borrowing money cheaply in the commercial paper markets—thanks to GE's AAA credit rating—and lending it out at higher rates, GE Capital became a money-making machine. By the mid-1990s, it was providing nearly 40 percent of GE's pretax income and had expanded far beyond its original purpose into commercial real estate, leveraged buyouts, credit cards, and various other financial services. Welch's management innovations proved as influential as his strategic moves. He instituted a rigorous performance evaluation system that ranked employees and routinely culled the bottom 10 percent—a practice that spread throughout corporate America. His initiatives like "Work-Out" encouraged employees to challenge their bosses, while "Six Sigma" quality programs drove operational excellence. These approaches fostered a performance-obsessed culture that delivered consistent results but also created intense pressure throughout the organization to meet quarterly targets. By the time Welch retired in September 2001, he had transformed GE into the world's most valuable company, with a market capitalization exceeding $600 billion. During his tenure, GE's stock delivered returns of 23% annually to shareholders. Fortune magazine named him "Manager of the Century," and executives worldwide sought to emulate his leadership style. However, beneath this glittering success story, cracks were beginning to form in the foundation of what Welch had built—from an overreliance on financial engineering to meet earnings targets to a corporate culture that sometimes valued short-term results over sustainable growth.

Chapter 3: Immelt's Inheritance: Post-9/11 Challenges (2001-2007)

Jeff Immelt's tenure as GE's CEO began under the darkest possible circumstances. Just four days after he took over from Jack Welch on September 7, 2001, the September 11 terrorist attacks shook the world. For GE, the impact was immediate and severe. The company's aircraft engine business faced a crisis as airlines grounded fleets, its insurance division took massive hits from claims related to the attacks, and NBC had to suspend advertising during continuous news coverage, losing millions in revenue. In the ten days following the attacks, GE's stock lost $90 billion in value. This crisis immediately exposed vulnerabilities in GE's business model that had been obscured during the bull market of the 1990s. GE Capital, which had grown to provide nearly half of GE's earnings, suddenly faced intense scrutiny. In March 2002, bond fund manager Bill Gross publicly questioned GE Capital's heavy reliance on commercial paper—short-term, unsecured debt that could dry up in a crisis. The controversy forced GE to issue $11 billion in long-term bonds and reduce its dependence on short-term funding. Simultaneously, the Enron scandal triggered heightened scrutiny of corporate accounting practices, with particular attention paid to GE's complex financial reporting. Immelt recognized that GE needed to evolve beyond the financial engineering that had characterized the later Welch years. He articulated a vision of returning to GE's industrial roots while embracing innovation and globalization. "Jack had let the industrial company go to seed," Immelt later explained. His strategy included investing in research and development, expanding globally, and focusing on infrastructure businesses like energy, healthcare, and transportation. This strategic shift manifested in several major acquisitions, including the 2004 purchase of Amersham, a British healthcare company specializing in diagnostic imaging agents, for $9.8 billion. The new CEO also worked to reshape GE's corporate culture. He replaced Welch's famous "We bring good things to life" slogan with "Imagination at Work" and launched initiatives like "Ecomagination" to position GE as environmentally responsible. When introduced in 2005, Ecomagination faced significant internal resistance. At a presentation to GE's top executives, one shouted that the initiative would "make us look like idiots." Only Immelt and marketing chief Beth Comstock supported moving forward. Despite this resistance, Immelt insisted on proceeding, believing that environmental sustainability represented both a moral imperative and a massive business opportunity. By 2005, Immelt had begun to reshape GE's portfolio, selling most of its insurance businesses, including the creation of Genworth Financial through an IPO. However, in a fateful decision that would have long-term consequences, GE retained certain long-term care insurance liabilities rather than including them in the Genworth spinoff. The company also made a puzzling acquisition in April 2004 when GE Capital purchased WMC Mortgage, a subprime mortgage broker, for $500 million—just as the housing bubble was reaching its peak. According to former executives, "The only two guys who wanted to do it were Mark Begor, the president and CEO of GE Capital's retail finance business, and Jeff Immelt. Everybody else said, 'No. Don't do it.'" These contradictory moves reflected the fundamental challenge Immelt faced: how to transform a company as large and complex as GE while maintaining the earnings growth that investors had come to expect. The pressure to deliver consistent quarterly results often conflicted with the need for long-term strategic repositioning. As one executive explained, "We had to keep our heads down and weather the scrutiny. We had no other engines of growth." This tension between short-term performance and long-term transformation would define Immelt's early years and set the stage for the dramatic events that would follow.

Chapter 4: Financial Crisis: GE Capital's Near-Death Experience (2008-2009)

The 2008 financial crisis struck GE with devastating force, exposing the fundamental vulnerabilities in its business model. As credit markets froze in September 2008 following Lehman Brothers' collapse, GE Capital—which had grown to provide nearly half of the parent company's profits—suddenly found itself unable to roll over its commercial paper, the short-term debt that funded its operations. The unit's reliance on short-term funding to finance long-term assets, once a source of easy profits, now threatened the entire company's survival. The severity of GE's situation became clear when CEO Jeff Immelt made an urgent visit to Treasury Secretary Henry Paulson. According to Paulson's account, Immelt confessed that GE couldn't sell commercial paper for terms longer than overnight—a startling admission from one of America's most prestigious companies. "The world is falling apart," Immelt told him, explaining that if GE couldn't access short-term funding, it might have to curtail normal business operations or face bankruptcy. The prospect of GE failing was unthinkable—it would have sent shockwaves through an already fragile global economy. In a desperate bid for survival, GE took extraordinary measures. The company raised $15 billion in new capital, including a $3 billion investment from Warren Buffett's Berkshire Hathaway that came with a steep 10% dividend. This emergency fundraising contradicted statements made just days earlier that GE had no plans to raise capital. The company also applied for access to the Federal Reserve's Commercial Paper Funding Facility and the FDIC's Temporary Liquidity Guarantee Program, government lifelines created to prevent the financial system's collapse. GE's inclusion in these government programs wasn't automatic. As a hybrid industrial-financial company rather than a traditional bank, GE had to lobby intensely for access. Sheila Bair, then FDIC chairwoman, initially hesitated to include GE in the debt guarantee program. Only after Immelt personally pleaded his case, arguing that GE's financing supported critical sectors of the real economy, did Bair relent—on the condition that GE's parent company guarantee the debt. In October 2008, the FDIC had to step in to guarantee $139 billion of GE Capital's debt. By early 2009, GE faced another painful decision: cutting its dividend for the first time since the Great Depression. The board overruled Immelt's desire to maintain the payout, reducing it by 68% to preserve cash. For a company that had prided itself on rewarding shareholders consistently for over a century, this was a profound humiliation. The stock price, which had traded above $40 in 2007, plunged to below $6 in March 2009. The company that had once been the world's most valuable, with a market capitalization approaching $600 billion at its peak, was now worth less than $100 billion. The crisis fundamentally altered GE's relationship with regulators and the market. Having received government support, GE Capital would eventually be designated a "systemically important financial institution" subject to Federal Reserve oversight. This new regulatory burden would profoundly shape Immelt's strategy in the years ahead, as he accelerated efforts to shrink GE Capital and refocus on industrial businesses. The near-death experience of 2008-2009 revealed that the financial services strategy that had powered GE's growth under Welch had become an existential liability under changed market conditions.

Chapter 5: Strategic Missteps: Power Division and Alstom Acquisition (2010-2016)

In the aftermath of the financial crisis, Jeff Immelt faced the monumental task of rebuilding GE while addressing its structural weaknesses. His strategy centered on two key pillars: dramatically reducing GE Capital's size and doubling down on industrial businesses, particularly in power generation, healthcare, and aviation. This "back to basics" approach initially seemed promising, but it would ultimately lead to one of the most disastrous acquisitions in corporate history. In 2014, Immelt announced a $13.5 billion deal to acquire the power and grid businesses of French conglomerate Alstom. The acquisition would significantly expand GE's presence in the global power generation market, particularly in gas and steam turbines. Immelt viewed the deal as transformative, giving GE unparalleled scale in a critical infrastructure sector. "This is going to be our biggest and most important industrial acquisition," Immelt declared. The deal represented the centerpiece of his strategy to refocus GE on its industrial roots. However, the Alstom acquisition proved far more complicated than anticipated. The French government, concerned about losing a national industrial champion, intervened in the negotiations. To secure approval, GE had to restructure the deal to include joint ventures with Alstom in sensitive areas like nuclear power. European Union regulators imposed additional conditions, requiring GE to divest certain businesses to preserve competition. These complications delayed closing until November 2015, creating uncertainty that affected both companies' operations. The timing of the Alstom acquisition couldn't have been worse. Just as GE was completing the purchase, the global market for gas turbines collapsed due to the rise of renewable energy and changing energy policies worldwide. Internal forecasts had projected a market for 60 large gas turbines annually, but actual demand fell to just 40 and would continue declining. The power division had responded by manufacturing "upgrade kits" for existing turbines without firm orders, building billions in inventory that couldn't be sold. More troubling were questions about GE Power's accounting practices. The division had been factoring receivables—selling future payment streams at a discount for immediate cash—to meet quarterly targets. It had also been renegotiating service contracts to recognize future profits immediately. These practices, while technically permissible under accounting rules, created a growing disconnect between reported earnings and actual cash generation. As one executive explained, "Making your earnings was just life to us. We all knew it. Jack was the one that had to get it done, and so it was part of the company culture. Make your numbers." Simultaneously, Immelt launched ambitious initiatives to position GE at the forefront of digital innovation. The company invested billions in its "Industrial Internet" strategy, seeking to transform GE from a traditional manufacturer into a "digital industrial" company. This included building a major software center in Silicon Valley and developing Predix, a cloud-based platform for industrial applications. In 2016, Immelt announced that after four decades in suburban Connecticut, GE would relocate its headquarters to Boston's Seaport District—a move symbolizing GE's desired reinvention. By 2016, activist investor Nelson Peltz's Trian Fund Management had acquired a $2.5 billion stake in the company and was pushing for dramatic cost cuts and improved performance. Immelt responded by promising to deliver $2 per share in earnings by 2018—a target that would prove disastrously unrealistic and push managers throughout the company to take increasingly desperate measures to hit their numbers. The gap between Immelt's ambitious rhetoric and GE's operational reality was becoming increasingly apparent to investors, setting the stage for a leadership reckoning.

Chapter 6: The Unraveling: From Market Leader to Corporate Failure (2017-2018)

The process of selecting Jeff Immelt's successor unfolded with none of the careful orchestration that had characterized GE's previous leadership transitions. By early 2017, after nearly sixteen years as CEO, Immelt faced mounting pressure from investors dissatisfied with GE's stagnant stock price and inconsistent financial performance. The succession drama intensified following a disastrous presentation by Immelt at the Electrical Products Group conference in May 2017. When questioned about GE's ability to achieve its target of $2 per share in earnings by 2018, Immelt became defensive and combative. His performance alarmed the board and crystallized concerns about his leadership. On June 12, 2017, GE announced that John Flannery, the head of GE Healthcare, would succeed Immelt, becoming just the eleventh CEO in the company's 125-year history. The transition appeared rushed and driven by the board rather than Immelt. The market's reaction—GE's stock rose on news of Immelt's departure—reflected investor sentiment that after sixteen years, it was time for new leadership at one of America's most iconic companies. As Flannery prepared to take the reins, two devastating problems were quietly metastasizing within the company. The first lurked in an obscure Kansas office park where GE maintained a long-term care insurance business that most investors believed had been divested years earlier. When Immelt had orchestrated the Genworth Financial IPO in 2004, he had retained certain insurance liabilities that would prove catastrophic. CFO Jeff Bornstein, sensing trouble, ordered a comprehensive actuarial review of these policies just as the leadership transition was occurring. The results were shocking. GE had dramatically underestimated how long policyholders would live and how expensive their care would become. Every key assumption in the actuarial models had moved in the wrong direction: interest rates were lower, life expectancy longer, healthcare consumption higher, and costs per unit of care greater. By January 2018, GE would announce a $15 billion shortfall in reserves for these policies, requiring $3 billion in immediate cash contributions and $2 billion annually for seven years thereafter. Simultaneously, GE's power business was imploding. The Alstom acquisition, rather than creating a dominant global player, had saddled GE with excess capacity just as demand for gas turbines collapsed worldwide. When Flannery and Bornstein began digging into the details in summer 2017, they discovered the business was in far worse shape than previously disclosed. In October 2017, just months into Flannery's tenure, these issues forced a dramatic reset. GE slashed its dividend by 50%, cut its 2018 earnings forecast in half, and announced a fundamental restructuring. The stock plummeted, wiping out billions in market value. The final blow came in October 2018, when GE revealed it would take a staggering $22 billion goodwill impairment charge related to the power business. The same day, the board fired Flannery after just 14 months and replaced him with Larry Culp, the former CEO of Danaher and the first outsider to lead GE in its 126-year history. GE's stock, which had traded above $30 per share when Immelt stepped down, plunged below $10. The company was removed from the Dow Jones Industrial Average in 2018, ending a continuous presence that dated back to the index's creation in 1896. Culp moved aggressively to stabilize the company, cutting the dividend to just one cent per share and accelerating asset sales. In 2019, he agreed to sell GE's biopharma business to his former company, Danaher, for $21.4 billion. These measures helped halt GE's immediate crisis, but the company that had once been America's most valuable enterprise was now worth less than one-tenth of its peak value. The conglomerate model that GE had pioneered and perfected over more than a century appeared to have reached its end.

Chapter 7: Legacy and Lessons: The End of the Conglomerate Era

The collapse of General Electric represents more than just another corporate failure—it marks the end of an era in American business. At its core, GE's downfall stemmed from a fundamental contradiction: the company that had long prided itself on management excellence ultimately failed at the most basic task of managing risk and allocating capital effectively. This paradox offers profound lessons about the limitations of the conglomerate model and the dangers of prioritizing short-term financial engineering over long-term value creation. GE Capital exemplifies this contradiction. What began as a modest financing arm to help customers purchase GE appliances morphed into a sprawling financial services operation that eventually dominated the company's balance sheet and earnings. Under Welch, GE exploited its AAA credit rating to borrow cheaply and invest at higher returns—a strategy that delivered spectacular profits during good times but left the company catastrophically exposed during the 2008 financial crisis. The unit's reliance on short-term commercial paper to fund long-term assets violated a fundamental principle of financial management, yet persisted because it generated the consistent earnings growth that Wall Street demanded. The company's legendary performance management systems, once considered a source of strength, ultimately contributed to its undoing. GE's culture of "making the numbers" at all costs fostered an environment where managers resorted to increasingly aggressive accounting tactics to meet unrealistic targets. This manifested most dramatically in the power division, where executives continued to project growth even as the market for gas turbines collapsed. The pressure to deliver consistent earnings growth quarter after quarter led to a form of institutional self-deception that former CEO Jeff Immelt later acknowledged as "success theater." Leadership succession also played a critical role in GE's decline. Jack Welch's two-decade tenure made him a management icon, but his outsized personality and the cult-like admiration he inspired made it nearly impossible for any successor to establish independent authority. Jeff Immelt inherited a company at its peak valuation with nowhere to go but down, facing immediate crises from the September 11 attacks to the Enron scandal. While Immelt recognized the need to reduce GE's dependence on financial engineering and refocus on industrial innovation, he struggled to execute this transformation while maintaining the earnings growth investors had come to expect. Perhaps the most profound lesson from GE's fall is that even the most sophisticated management systems cannot overcome fundamental strategic errors. GE's board and leadership failed to recognize that the conglomerate model—managing disparate businesses under a single corporate umbrella—had become obsolete in an era of specialized global competition. The financial benefits of diversification were outweighed by the complexity costs of managing businesses with little operational synergy. By the time Larry Culp announced in 2021 that GE would split into three separate companies focused on aviation, healthcare, and energy, the decision represented not a strategic choice but an acknowledgment of market reality.

Summary

The rise and fall of General Electric illuminates a fundamental tension in corporate strategy: the balance between short-term performance and long-term sustainability. For decades, GE appeared to have solved this dilemma through superior management systems that delivered consistent growth while building enduring competitive advantages. Yet beneath this apparent success lay growing contradictions—between industrial excellence and financial engineering, between centralized control and business unit autonomy, between quarterly earnings targets and strategic investments. When these contradictions finally surfaced during the 2008 financial crisis, they revealed structural weaknesses that even the most talented managers could not overcome. The GE story offers timeless lessons for business leaders and investors alike. First, financial engineering cannot substitute for genuine operational excellence and innovation—the accounting maneuvers that boost short-term earnings often create hidden risks that eventually surface. Second, corporate culture matters enormously; GE's emphasis on making the numbers at all costs ultimately fostered a form of institutional self-deception that blinded leaders to emerging threats. Finally, even the most successful business models eventually become obsolete; the conglomerate structure that once created value through diversification and internal capital allocation became a liability in an era of specialized global competition and efficient capital markets. In this sense, GE's downfall represents not just a corporate failure but the end of a particular vision of American capitalism—one that believed the right management systems could overcome the inherent limitations of size, complexity, and human nature.

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William D. Cohan

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