The market is bigger than we ever dreamt.
In 1980, the year before Welch took over, GE was almost entirely a manufacturing enterprise, with 85 percent of revenues coming from manufacturing and only 15 percent from services.
The company had always been involved in services, but the service sector was regarded as something of an afterthought— known, tellingly, as the “aftermarket.”
At first, GE saw the service sector as merely a source of some incremental business. But in time, company executives understood that a systematic focus on services could enlarge the potential markets of GE businesses many times over.
HIGHER RATES OF GROWTH FROM SERVICES
To Jack Welch and other GE executives, the point was not to give up on manufacturing. But it was clear that the service sector had the potential for much higher rates of growth. And service had another huge advantage: Profit margins were typically 50 percent higher on services than on manufactured products.
So a push began in the late 1980s to grow services. In 1990, GE derived 45 percent of its revenues from its service businesses—up substantially from the 1980 figure. Only 5 years later, in 1995, GE’s nonmanufacturing business (financial services, aftermarket services, and broadcasting) had grown to just under 60 percent of total revenues.
In 1995, Welch pushed the service initiative to full throttle. And by the year 2000, manufacturing made up only 25 percent of the entire GE mix, while nonmanufacturing businesses made up the rest, for total nonmanufacturing revenues of just under $100 billion.
The most important engine in this service growth—indeed, the key engine of growth for all of GE—has been GE Capital Services (GECS). In 1999, GECS revenue reached $55.7 billion, or about half of GE’s total revenue of $111.6 billion.
But also extremely helpful to GE’s efforts in the service field was a hidden asset: its installed base of industrial equipment, including 9000 commercial jet engines, 10,000 turbines, 13,000 locomotives, and 84,000 major pieces of medical diagnostic equipment.
By October 1996, GE was bringing in $7.8 billion—fully 11 percent of its total revenues—through servicing that installed base. At the end of 1998, its product-service revenue exceeded $12 billion a year.
MAKE SERVICE A PRIMARY MARKET
In 1997, Welch was asked how far he was prepared to go toward becoming service oriented. Was he prepared to abandon certain production lines?
In response, Welch noted that customer demand was pulling the company in the direction of services, but there was clearly a point of diminishing returns:
We offer them complete solutions not so much in order to increase our equipment sales, but because they have a need for them. That said, we will always be a company that sells high-tech products. Without products, you’re dead. You go out of business and become obsolete. If I fail to introduce a new medical scanner, how many hospitals are likely to come and see me for new services?
It’s worth noting that General Electric’s increased emphasis on services can run counter to one of Welch’s earlier business strategies: that all GE businesses must be either number one or two in their markets.
What’s the challenge? A company that manufactures, say, widgets can define its market quite narrowly and thereby seize the number one or number two spot with relative ease. But when that same company begins to provide services, its market share may plummet because it may put itself into a new peer group of service-oriented firms. Welch, for one, can live with these kinds of complications.
All these things you learn. If Jack Welch knew 17 years ago what he knows today, it would be a better company. This is a learning organization. I learn every day. Keep searching. I don’t know diddly. I got guys here trying to learn more.
WELCH RULES
- Think hard about the services that might be directly associated with your products. Is your company leaving money on the table by not pursuing aftermarket service opportunities?
- Think equally hard about services that are further removed from your core product lines. GE Capital Services—far from the light-bulb trade!—has been an astounding success.
- Stay flexible. As you make the move into services, be aware that some of your long-standing ideas about your business may need to be adjusted.