Hello there, I would need help for an homework please. My question is "Do you believe that GE is better positioned than its software rivals such as SAP ?"

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Digitization of an Industrial Giant:

GE Takes on Industrial Analytics

09/2017-6313 This case was written by J. Stewart Black, Professor

. It is intended to be used as a basis for class discussion rather than to illustrate either effective or ineffective handling of an administrative situation.

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IN1395

of Management Practice in Global Leadership and Strategy, with

assistance from Anne-Marie Carrick, both at INSEAD

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On a warm summers day in 2009, Jeff Immelt, CEO of General Electric (GE), was listening to the companys scientists rave about sensors being installed on the latest GE jet engines that could generate mountains of data. A flight from New York to Chicago, for example, could

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determined GE had to be more capable in software.2

Ironically, however, the insight about the importance of software came at a time when his priority was to take GE back to its roots as an innovative industrial hardware company. From his appointment as CEO in 2001 until the unexpected announcement of his retirement in June 2017,

3 .

GE innovative industrial roots began with its founder, Thomas Edison. Though he was best remembered for inventing the first commercial light bulb, he was granted more than 2,000 patents across a variety of domains most of them industrial. In fact, it was Edison that positioned GE as an industrial (rather than a consumer) company with investments in areas such as the generation and transmission of electricity.

Despite over half a trillion dollars in acquisitions and divestitures, GEs revenues and profits under Immelt seesawed but generally trended down, especially after the financial crisis of 2008 (see Exhibit 1). The financial crisis hit GE harder than most other industrial companies largely because of GEs direct exposure to it via its massive GE Capital unit, and this was reflected in its more severe stock price decline (see Exhibit 2). However, its stocks underperformance was not confined to this this critical period but persisted across Immelts entire tenure (see Exhibit 3). Indeed there was speculation that this was the reason for his

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While impressed, he wondered how that data could be used. Would it simply help engineers build better engines in the future? Given that GE developed a new generation of jet engine only every ten years or so, that seemed a long time to wait. Couldnt GE use the data in ways that generated value today? In order to capture that value, Immelt

produce over a terabyte.

Immelt orchestrated 380 acquisitions, spending over $175 billion on industrial

companies in sectors such as oil and gas and wind power generation; and divested 370 businesses worth a total of$400 billion, including long-time GE businesses such as

appliances and plastics

unexpected retirement in 2017.

1. 1 Immelt, Jeffery and Rik Kirkland, GEs Jeffery Immelt on Digitizing in the Industrial Space, McKinsey Quarterly, October 2015, www.mckinsey.com/business-functions/organization/our-insights/ges-jeff- immelt-on-digitizing-in-the-industrial-space , accessed 25 June 2017.

2. 2 Lohr, Steve. G.E., the 124-Year-Old Software Start-Up. The New York Times, The New York Times, 27 Aug. 2016, www.nytimes.com/2016/08/28/technology/ge-the-124-year-old-software-start-up.html?_r=0 , accessed 16 Mar. 2017.

3. 3 Gara, Antonio, For GEs Jeff Immelt, Hundreds Of Deals And $575 Billion Didnt Yield A Higher Stock Price, Forbes, 15 June 2017.

4. 4 McGregor, Jean and Thomas heath, GEs CEO, Jeff Immelt, to Step Down After 16 Years, Washington Post, June 12, 2017.

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Products

At the beginning of 2017, most of the products sold in GEs main business units represented major CapEx purchases for its customers. Years of selling such products had generated an

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Product sales tended to be transactional in nature GE made the product, the customer bought it and the deal was done. Thereafter, the risks and benefits of ownership resided with the customer; for GE the after-sales risk occurred only if the product didnt perform as promised. Since many products had long life cycles, any potential damage to its reputation and sales might not arise for decades. GE sales teams primarily interacted with customer procurement professionals, and with operational executives to a lesser extent. Pricing was fairly standardized and volume discounts applied within prescribed limits. Often the sales effort was reactive in response to a detailed RFP (request for proposals) that customers put out to multiple providers for tender.

In seeking to reinvent GE, Immelt had more than tripled investment in R&D, but creating differentiated products was becoming increasingly difficult. Whereas GE had previously enjoyed a lead in the sciences associated with its products, its knowledge advantage had decreased over timenot because GE was slowing down but because rivals were catching up and in some cases overtaking. Albeit sophisticated, GEs products were increasingly being commoditized as differences with competing products were shrinking. As is the case whenever commoditization occurs, GEs operating margins had been compressed from approximately 25% when Immelt took over in 2001 to 14% in 2016.

Customer Service Agreements (CSAs)

Although product sales were important for GE, CSAs (customer service agreements) had overtaken products in terms of total backlog and profits. Jet engines were a case in point. GE could sell a jet engine only once, but it needed to be maintained and repaired multiple times over its useful life. Because GE had designed and made the engine, it argued that it could maintain and repair the engine better and cheaper than customers themselves or other maintenance service providers. This argument was made not just for jet engines but virtually all the products it sold. The fact that by 2016 CSAs accounted for 46.3% of sales (excluding GE Capital) and 74.6% of GEs $320.8 billion backlog testified to the compelling nature of the pitch.

5 CNBC. CNBC Exclusive: CNBC Transcript: Microsoft CEO Satya Nadella and GE CEO Jeff Immelt Speak with CNBCs Jon Fortt on Squawk on the Street Today. CNBC, CNBC, 11 July 2016, www.cnbc.com/2016/07/11/cnbc-exclusive-cnbc-transcript-microsoft-ceo-satya-nadella-and-ge-ceo-jeff- immelt-speak-with-cnbcs-jon-fortt-on-squawk-on-the-street-today.html , accessed 17 Mar. 2017.

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installed base of over $2 trillion for GE (i.e., the replacement cost of the products in use). win these sales, its salesforce emphasized their products features, superior quality and reliability, or lower cost compared to competitors. But winning a deal could be a lengthy process. The higher the price, the longer the sales cycle which could take six to 18 months to complete. Although margins varied across GEs major business groups (Power & Water, Oil & Gas, Energy Management, Aviation, Healthcare, Transportation and Home and Business Solutions), they rarely exceeded 35% on product sales.

To

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In most cases, GE proposed the CSA when the product was sold. Most CSA contracts were standard a fixed price for maintenance and repair work, with guaranteed levels of uptime, maintenance turnaround time, and so on. Ideally the duration was tied to the products expected lifespan. Compared to product sales, CSAs were financially attractive to GE because their long-term contractual nature provided a reliable and steady stream of future revenues, unlike the cyclicality of product sales.

For many customers, lower maintenance and repair costs were not the only (or even the major) attraction; the real value was in second order cost reductions. For example, an offshore oil rig was down on average five to six days in a year and each down-day could cost $5-$7 million. If maintenance and repair could reduce the down time by just one day for a company with 100 rigs, the customer could save $500-$700 million dollars a year!

Software

When Immelt had his insight about becoming more of a software company, GE was no

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In addition, there was a team of engineers who developed software that GE sold to customers independent of GE products. In 2010, this group generated $2.5 billion (1.67% of total

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The Industrial Internet, Internet of Things, the Smart Factory, Industry 4.0

While GEs industrial transformation was playing out centre stage, in the background a digital revolution was taking shape for which various terms had been invented: the Industrial Internet, the Internet of Things, the smart factory, and Industry 4.0. Whatever the name, the basic notion was the same and covered five steps:

Step 1: Gather data via sensors from operational equipment; be it jet engines, pumps, wind turbines, etc.

Step 2: Collate and store that data on a common platform and in a common format to allow for rapid, relational analysis.

6 Bizjournals.com. Bizjournals.com, www.bizjournals.com/albany/news/2012/01/27/ge-plugs-in-big- data.html , accessed 16 Mar. 2017.

7 Bizjournals.com.

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stranger to software. In 2010, GE employed over 5,000 software engineers worldwide, the vast majority working on software that made GEs products more effective. For example, it was software that made GEs MRI machines turn magnetic refractions into the colour-coded, high-resolution images that doctors used to diagnose injury and disease. However, when it came to software, each business unit was fairly autonomous and had its own platforms, languages and development tools sometimes these even differed between products made within the same business unit.

revenue). Spread over two centres, (one in Michigan, the other in Virginia) even these did not share a common platform, language or tools, though the differences were less than those across business units.

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• Step 3: Create and use analytic tools to spot patterns, anomalies and events across data pools.

• Step 4: Create and use tools to project or predict outcomes based on the data collected and analysed.

• Step 5: Determine actions that optimize process functionality and/or reduce costs, not just for individual components but also for the operational value chain; create feedback loops that enable learning (including autonomous learning), refinement of analysis and future predictions.

  How the Industrial Internet and the related industrial digitization and analytics would develop, or even how big it might be was not yet clear in 2010. Nevertheless, GE was committed to pursuing the opportunity. Its pursuit was validated by a Boston Consulting Group (BCG) study8 that estimated that by 2020 companies would spend 250 billion adopting different aspects of the Industrial Internet. Specifically, the study identified predictive maintenance, self-optimizing production and automated inventory management as the greatest areas of spend and opportunity.

  Creating Value

  GEs own analysis produced similar conclusions to those identified in the BCG study. Specifically, GE determined that opportunities for predictive maintenance and optimized production were the biggest ones to pursue.

  Of the two, predictive maintenance offered the most immediate opportunity. For many of GEs customers, unplanned maintenance and repair had significant economic consequences. If a planes engine, for example, needed unscheduled maintenance or repair, this involved not only the direct cost of fixing the engine but also a major opportunity cost because while the plane was in the repair shop it was not generating revenue from passengers. Given the high fixed cost of a plane (and its engines), any loss in revenue meant that all the costs associated with that plane had to be amortized over a lower revenue base, with resulting higher costs per unit and lower operating margins not good for an industry where margins were already thin and when firms had little pricing power. If analytics could determine the optimal type and schedule of engine maintenance and keep the plane safely in the air for longer and avoid unanticipated repairs and revenue disruptions, this would (a) bring in more revenue, (b) increase output and thereby lower unit costs, and (c) potentially extend the useful life of the engines. All three outcomes had significant economic value to airlines. More importantly to GE, these benefits could apply to the majority of its other businesses and customers.

  The second, and potentially more valuable, opportunity was process and output optimization. Many of GEs customers had operations with high fixed costs, so optimization that increased throughput or output (independent of that occurring from predictive maintenance) was extremely valuable. For example, on average 65% of the oil in a well was left in the ground

8 Nicolas Hunke, Zia Yusuf, Michael Rumann, Florian Schmieg, Akash Bhatia, and . Winning in IoT: Its All About the Business Processes. Www.bcgperspectives.com, 5 Jan. 2017,