GE Finance

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My friend, John, sat on the patio, complaining loudly. His company had just adopted the forced ranking system that General Electric (GE) uses for personnel evaluations.

“It’s wrong for us,” John grumbled, “We work in project teams. We shouldn’t be competing with each other to see who stays and who goes.”

No less an authority than Business Week has run stories implying that when Jim McNerny went from GE to 3M, he applied the “GE toolkit” in the form of Six Sigma. The results were mixed. Profits and share price went up. The company’s reputation for innovation went down.

There was a time, not that long ago, when anything GE did was slavishly copied by companies everywhere. That time is gone. But you can still learn a lot from GE.

Whether you measure success by stock price, profits, innovation, flexibility or simply impact on society and business, General Electric is one of the world’s great companies. So forget about Six Sigma, boundaryless organization, forced ranking, and even the vaunted GE toolkit. Pay attention instead to the things that have made GE a great company for so long.

GE History

In 1890, Thomas Edison brought all his companies into a single organization. He called it the Edison General Electric Company. In some ways he would recognize today’s GE because many product lines are the same. GE has been doing business in lighting, transportation, industrial products, power transmission, and medical equipment since the beginning.

General Electric has always been seen as an important company. GE was one of the companies in the first Dow Jones Industrial Average in 1896. When the first Standard and Poor’s 500 list was published in 1959, GE was in the top 100. It’s the only company still there today.

GE has always been known for innovation. Product innovation has been important. GE established the first industrial research and development laboratory in Charles Steinmetz’ barn in 1896.

And GE’s innovation hasn’t been limited to products. Throughout its history, the company has also been a pacesetter in corporate structure, strategy and management practice. That’s one key reason why it’s a different company today than it was a hundred or fifty or even ten years ago.

A Company is Like a River

Heraclitus said, “You can’t step into the same river twice.” Companies are like that, too. GE today is different from GE fifty, or even ten, years ago. That’s illustrated by the last three CEOs.

When Reg Jones took over the top spot at GE in 1972, just about everyone outside the company thought things were great. Jones knew otherwise.

Working capital was anemic. He inherited an organizational structure where he had to work with three vice chairmen. There was no coherent strategy and there were threats on all sides.

He stopped the bleeding, solving the cash crisis within six months. Then he re-organized top management and created a coherent strategy. He left a record of 26 consecutive quarters of improved earnings and 14 percent compound growth in profits. He retired as “The Most Admired Businessman in America” and handed GE over to the youngest chairman in GE’s history.

Jack Welch inherited a company that was doing well but needed to change. To start with, Welch thought it had to get leaner. Within five years he removed one in four people from the GE payroll, earning the nickname, “Neutron Jack,” because he eliminated the people but left the buildings.

Thirty-seven thousand of those people left right along with their business unit. Jack said that a GE business should be number one or two in its industry or it should be sold. Lots of businesses got sold.

But Welch didn’t just take things away. He moved aggressively to change things. Processes like Work-Out opened up the system. The upgrades to training and the Crotonville facility gave GE a place to bring things together. And initiatives like globalization, move to services, e-business and Six Sigma changed the nature of GE as a company.

During Welch’s tenure as CEO, revenues went from $26.8 billion to $130 billion. Capitalization went from a market value of $14 billion to one of more than $410 billion. And Fortune magazine named him “The Executive of the Century.”

Now, it’s Jeff Immelt’s turn. And he’s been in the job long enough that we can begin to see just how his idea of what GE should become differs from what GE has been.

Without much fanfare, he has softened the hard-line Welch dictum to fire the bottom ten percent, even though ranking is still in place. It’s still taking shape, but one thing that looks certain is that Jeff Immelt’s GE will be a bit more human and much more team oriented than the GE he inherited.

Besides being great CEOs, these three men seem to have very little in common. Jones was controlled and statesmanlike. Welch was the hard-charging hockey player. Immelt is the Ivy League athlete and fraternity president.

They do have one important thing in common, though. All three were shaped by GE’s leadership development process.

Train and Develop

In over 100 years, every CEO but the first one, Thomas Edison, has come from inside the company. Eighty percent of senior managers are GE careerists. You’ve got to be good at development and make it a priority for that to happen.

At GE, it’s a boss’s job to develop subordinates and to identify high potential performers. That extends all the way to the top of the company where the CEO is involved in reviewing the performance and progress of GE’s top potential executives.

The GE helps with lifetime career development for people that want it. Development includes permanent and temporary assignments that build both skills and visibility. It also includes training.

General Electric spends more than a billion dollars a year on training for people at all levels. Training is a reward for good performance. But it’s much more than that.

GE understands that training is important for skill-building, but that it provides opportunity for other important things. At GE, training is a place to build relationships, to share ideas and to gain perspective.

Training is also the carrier of culture. It’s where the company can present the important initiative of the moment and where senior executives can share values directly with newer managers.

At GE, training is very much a gathering and scattering phenomenon. Managers come together to learn, share and meet others. They scatter to put their learning and connections to work. Then they gather again in a continuing cycle. It seems to work.

Think of it this way. A company can get lucky and wind up with a great CEO. But only a company where training and leadership development are a priority can come up with them one after another.

Leaders that come up through a program like GE’s know the company and its strengths and weaknesses because they’ve been there are awhile. They can also take unpopular positions, or survive a period with a stagnant stock price because everyone expects them to be around for a long time to come.

Leadership for the Long Term

Jeff Immelt expects to be on the job for twenty years. The board has similar expectations. That creates a situation that’s almost unique in publicly traded American companies.

Immelt doesn’t have to do short term things to look good. He can concentrate on creating the kind of company GE should be to compete profitably in the decades to come.

If you’re going to be around a long time, you can afford to resist the winds of fad. You don’t have to make your mark quickly. You can take the time to do things right.

Take the Time to Do it Right

Companies today suffer from a kind of attention deficit hyperactivity disorder when it comes to initiatives. They run from finding their lost cheese to running their business like a fish market to discovering their strengths to learning the carrot principle, searching for the magic potion that will make all things profitable. But most don’t stop long enough for anything to work. GE does.

Jack Welch was CEO of General Electric for twenty years. In that time, according to the man himself, he had four key initiatives. They were globalization, movement to services, e-business and Six Sigma.

The idea is to take the time to make sure the initiative is absorbed into the company and the culture. The values and skills that go with each initiative become part of training and performance evaluation and career development. Eventually they become part of the culture.

The Important Lessons

There are lots of lessons you can learn from GE about techniques and practices, but they’re not the most important lessons. The most important lessons are the things that have made GE consistently competitive and profitable for more than a century.

What was great before won’t be tomorrow. You have to keep constantly moving forward, changing and adapting to the world as it changes.

Growing your people is a key to long term competitive advantage. So training and development are both crucial, but training is more than skill development. It’s where you develop the company of the future by developing relationships, inculcating culture and making your initiatives into realities.

Take the long view. That means a long term look at strategy. It means limiting your major change initiatives and giving them energy and the time to become part of the culture.

It sounds simple, and it is. It’s just not easy. But GE is one good example of what it really takes to be a great company.

General Electric Company (GE) has vastly outpaced all of their competitors in intellectual property (IP) protection in many industries, but particularly wind turbines. Data from our efforts in analyzing the landscape of issued patents and pending applications from the horizontal axis, utility-scale wind sector indicates just how far ahead they are. The chart below shows the totals of the published portfolios of patents and applications from the top companies in the US. The breadth of GE’s portfolio has been a direct result of focusing of resources as well as past success in licensing and litigation.

While we won’t go so far as to say they are using the size of their IP portfolio as a scare tactic to get their competitors to license from them, the scope of their portfolio is certainly intimidating to those who have not taken to time to analyze it in depth.

It is interesting to note that while they are better than the industry averages, GE’s portfolio is not vastly superior to most of their competition on a percentage basis as it relates to the number of High risk patents and apps (3% for GE vs. 1% for the Industry) and Medium/High risk patents and apps (14% for GE vs. 10% for the Industry) represented on the chart above in red and orange respectively. However the scale that their portfolio has achieved affords them the luxury of having greater numbers of patents in key areas of technology. Put it another way, if 10% of a patent portfolio will be subject to assertion then it’s better to have 1000 patents in the portfolio than 10 or even 100.

Interestingly, they appear to use the patent process as a means of defensive publication, whereby they file on virtually every idea they generate internally in the hopes that they can get the patent, but even if the application is rejected they have prevented their competitors from patenting it out from under them. Their legal machine consisting of their in-house and outside counsels work to ensure a very high conversion rate from filings to issuances, based on the quality of claim construction during the drafting of the original application and personal engagement with the examiners to shepherd their applications through the process. They have also been one of the top utilizers of the “Green Patent Fast Track.”

Deeper analysis of their portfolio indicates the areas of focus for the components and technologies in their portfolio. Their component focus has been in those same areas which the industry has rallied around. Blade aero performance and structure, controls for performance optimization and load mitigation as well as electrical system reliability enhancement are all trends which are seen throughout every wind turbine OEM.

A look at their technology focus indicates they are mostly in line with industry trends on this as well.

Interestingly a comparison of the issued patents in their portfolio vs. the pending applications reveals some interesting trends as well. Here we offer a side-by-side comparison of the issued patents on the left and the pending applications on the right broken down by component keyword. The differences between the two charts indicate areas where innovation has occurred in the past vs. more recently. From this it is clear that while blades are the highest component on the cumulative chart, that is largely due to influx of innovation on swept blades, circulation control, as well as the serrated trailing edge being utilized on the new 1.6-100m platform.

We also offer a side-by-side comparison of the issued patents on the left and the pending applications on the right broken down by technology keyword. It is clear that certain areas of technology development have been more important based on the same comparison logic discussed above. Performance optimization has dominated their product strategy in the past few years, and their patent portfolio reflects that trend.

GE is also famous for identifying key technologies which are required within the industry at a future point in time, such as power factor control, VAR support or more recently curtailment, and then develop a multi-patent “fence” around those technologies. They also look to bracket around their competition with patents. This is accomplished by identifying the High or Medium/High risk patents or applications of their competitors and analyzing the weaknesses of those claims to determine areas of potential IP capture, coupled with assessment of competitive intelligence to determine where their competition is going technologically. Of course they are also known to get involved in cultivation of regulatory requirements and then subsequently patent a “system” which can regulate a wind turbine or farm to comply with that standard, potentially calling into question the allowable scope of protection obtained.

In developing the breadth of this portfolio they have followed some basic tenets of IP strategy in seeking blanket protection in most areas of technology and components in the industry space. This is the result of their focused brainstorming sessions and engagement of a broad swath of engineering as well as internal and external Legal/IP team members to identify patentable inventions and complete invention disclosures and applications. These protocols, established in the mid-2000s have served them well in the last few years where the number of filings has doubled compared to previous years. This was enabled by the revenue generated from their successful licensing activities, although the ongoing Mitsubishi litigation is likely draining some of that benefit away.

Nevertheless, one must ask if this pace is sustainable, since each application has a certain cost associated with it and the revenue generated from licensing must exist in order to justify the continued scope of the portfolio. The spike in filings starting in 2003 after the Enron Wind acquisition and again in 2008 with a focus on future licensing is reminiscent of the huge increase in the pace of filings from Aloys Wobben, Chairman of Enercon GmbH, in 2002 – 2003 after the settlement of the Kenetech/Zond/Enron Wind/GE International Trade Commission (ITC) matter in which they were effectively denied entry into the US market. The portfolio of Enercon patent filings proved to be unsustainable as is evidenced by the sharp drop-off in their number of filings per annum lately, in spite of new innovation being developed on their liquid cooled generator.

Based on a patent budget calculator which we developed to assess the year-over-year costs for cultivation and maintenance of a patent portfolio, we have been able to determine the approximate costs for maintaining their portfolio. Certain assumptions had to be made in this analysis, so there is likely some variability in the cost, however we believe it to be accurate within an order of magnitude. Even though the patent landscape we have analyzed covered only the US, we know GE uses the US as their primary priority filing locale and their foreign filing strategy can be inferred from a look at the family members of their US patents. Assumptions are as follows:

The majority of their filings are US, CN, and EP. Filings which were categorized as L or M will follow this protocol for cost calculation. Important inventions get filed in a broader scope of countries, specifically US, CN, EP, IN, MX, JP, KR, CA, BR and AU. Filings which were categorized as M/H or H will follow this protocol for cost calculation. Filings per annum used in the calculation from 2001 – 2010 were actual numbers. Filings prior to 2001 were not very significant and were excluded from the calculation for simplicity. Filings from 2010+ were assumed at the same average rate per annum from 2008 – 2010 for filings out until 2020.

The results of this calculation based on the scope their portfolio and following the protocol outlined above shows that the cost is quite substantial particularly in the out years. In 2020 alone they will spend US$31M on prosecuting and maintaining their portfolio.

Continued turbine sales as well as licensing will clearly be necessary to support that size of portfolio. With the expiration of a core patent in February of this year, US5083039 (’039), which covered field oriented control of an induction generator as well as dynamic VAR control at the turbine, a new suite of technologies has emerged technologically, but not necessarily on the assertive license front.

Their recent acquisition of Converteam also adds to their portfolio of full power conversion and permanent magnet generator technology. This architecture is quickly becoming the most pervasively deployed platform amongst the wind turbine supply base. However, it remains to be seen if this technology architecture will be part of the next wave of assertion and licensing. If history has anything to say, then you can bet on future licensing, but the scope may be affected by the outcome of the ongoing Mitsubishi litigation. If GE is successful in upholding the validity of their patents against Mitsubishi then one will presume they will be emboldened to pursue licenses on the new technology platform. If Mitsubishi prevails, then we could see another round of lawsuits from the licensees of ’039 and the other DFIG related technologies demanding their royalty payments back. This could leave GE gun-shy to broadly license the way they did with ’039 and other related patents.

To get a deeper look into the patent landscape of the horizontal axis, utility-scale wind industry please visit the Totaro & Associates website and ask about Wind Patent Watch, a subscription service providing a weekly digest and analysis of the published patents and applications from General Electric and the rest of the industry.

The Federal Home Life Insurance Company was recently merged with GE Financial Assurance Group. The GE group acquired the company because it was a financially profitable company with a respectable name. It opened for business in 1906.

Federal Home Life still does most of its business in Illinois, California, Washington, Michigan, and Florida. It is not licensed in New York. A little over half of its business comes from the other 45 states and the District of Columbia.

By most accounts, Federal Home Life is going strong.

The company has almost twice the availability of capital as they actually need at any given time. If you have a claim with the company, they should be able to pay it with no problem. The company is getting stronger each year. The amount of capital they have and the surplus they carry has increased at a rate of 11.5% per year since 1991. This means that when you purchase a policy, you have a good reason to depend on the company to be there when it is time to make a claim. The operating performance of Federal Home Life Insurance Company is not as strong as its capital and surplus would suggest. However, the numbers still show that the company is adequate. Over five years, they had a return on investments of 0.7%. The company would be able to liquidate its assets with money left over. Its liquidity ratio is 130.9%. Hopefully, as the years go by, that number will increase. Yet, it should be an academic question. You do not want to be with an insurance company that liquidates. It is only a way to measure soundness. Federal Home Life is not limited to one part of the country. While it is true that 42% of its business goes to five states, the rest is scattered out among many other states. If you live anywhere but New York, you can have an insurance policy with Federal Home Life. This also means that it will not be devastated by a natural disaster that happens in only one state. This company has stable earnings. It has been compared with much larger companies in the reliability of its income. What this means to you is that the company is sound and can be trusted. The Federal Home Life Insurance Company is held up by GE Assurance Group. You can count on the fact that the GE group will not let Federal Home go under. Just as you count on Federal Home Life, you can count even more on GE Assurance.

There are some ways that Federal Home Life Insurance Company could improve its operations. They could work on becoming more profitable and operating more efficiently. In the meantime, you should always look at the background of a company before you buy your insurance from that company. It is the wisest thing you can do when buying insurance.