New Financial and Statistical Measures to Monitor The Success of GE

New Financial and Statistical Measures to Monitor The Success of GE

To : The Board of Directors, GENERAL ELECTRIC COMPANY

After Mr. Weltch announced my new assignment, I pondered how I could go
about guaranteeing the best possible result: a creditable and well organized
work that is going to help you, the Board of Directors, plan for the future of
the company in a better way. Before starting my analysis, I must specify that
my target is not to abolish the traditionally used financial and statistical
measures but to develop new ones to be used as guidance for the corporation\'s
future development.
Our Chairman recently wrote that "the hottest trend in business in 1995
-- and the one that hit closest to home -- is the rush toward breaking up multi-
business companies and spinning off their components, under the theory that
their size and diversity inhibited their competitiveness ... breaking up is the
right answer for some big companies ... for us it is the wrong answer.²1 For us
the new trend is the entrance into the service industry. The question must then
be: is this the right answer?
GE is expecting to increase its revenue by the year 2000 to $120 billion
compared with $58 billion in 1990. In other words, if the forecast proves to be
correct, it will obtain an average annual rate of growth of 7.5%. This high
rate is mainly attributed to the expansion of the services sector of the company,
which is estimated to increase by an average annual rate of 13% compared with a
corresponding one of 2.1% for manufacturing. Today nearly 60% of GE\'s profits
comes from services -- up from 16.4% in 1980.2
This is our new direction and therefore my target is to find these
measures that are going to help us understand how the business is going to
perform in that particular field. I also consider that our attempt to expand
internationally is extremely important and in a way is something new for us.
International operating profit was $3.0 billion for 1995 compared with $2.3
billion in 1993.3 This extremely rapid expansion hides a lot of dangers, and at
the same time shows another new "trend" of our corporation. In my analysis I
will include the international sector. I will also narrow in on employees,
stockholders, goodwill and on potential investors.
1) MIEC (Manufacturing Industry Expenses Comparison)
As we know, the basic organization of the company Œs continuing
operations consists of 12 key businesses, which contain management units of
different sizes.4 From these only three are specified in the service field,
including: (a) Capital Service, (b) NBC, and (c) Information Service. On the
other hand, the manufacturing industry is divided into nine different segments,
some of which will be mentioned later. Although it is not our main concern, the
manufacturing segment of GE can be used as the yardstick for the success of the
service industry. This is so because this sector of General Electric has been
extremely successful and very well established during the past few years.
Almost $40,000 million in revenue and almost $9,110 million in profit came this
year from manufacturing operations.5 We know that what we have achieved in
manufacturing is success. So the question that arises is why should we stop
investing in "success" and enter a completely different field. The first
measure which we are going to analyze in this part of the discussion attempts to
answer that question. MIEC, the manufacturing industry expenses comparison,
compares the amount of money spent for the service industry to the expenses made
for the manufacturing industry. Thus it is equal to :

Expenses made for the service industry
MIEC = --------------------
Expenses made for the manufacturing industry

Therefore, according to the financial statements of the previous years
we would have6:

MIEC 1992 = 15842/29991= 0.52
MIEC 1993 = 18560/30657= 0.60
MIEC 1994 = 19787/30890= 0.64
MIEC 1995 = 26156/33152= 0.78

By establishing the MIEC, we can see the relationship between the amount
of money spent on service and the amount of money spent on manufacturing. MIEC
is a simple number that is does not seem to have a very important use on its one.
However, if this ratio is combined with other facts we can come to several
conclusions about what the company\'s future decisions should be. For example,
if we combine MIEC with the return on assets,7 we can see that the return on
assets is higher for