Sears is in a dilemma. How can GE, an industrial giant, learn from it?

Thursday, January 24, 2019

Robert Samuelson, a columnist of the Washington Post, published an article entitled "The Strict Love of Capitalism: The Real Lessons from the Fall of Sears and General Electric Company" on January 13, saying that GE and Sears are in trouble, which tells us a lot about American capitalism. Both companies were once symbols of the originality and imagination of America, a great enterprise. One of the misguides people are to blame poor management for their plight. The real lesson is even clearer: no business can guarantee eternity, no matter how innovative or powerful it has been.

The article introduces that Sears applied for bankruptcy protection in October 2018. It will either go bankrupt (stores and goods will be sold, revenue will be used to pay off debts), or it will survive as a much smaller chain. Although GE is not facing bankruptcy, its profits have fallen sharply and it is considering selling more business units.

Edison was one of the founders of General Electric Company, which promoted the electrification process in the United States. By 1940, electrification had covered 96% of urban housing in the United States. As early as 1917, General Electric promoted household appliances as "servants for the manual work of washing, ironing, cleaning and sewing." They can cook for you - no matches, no soot, no coal. These glorious periods have long passed. GE shares are currently trading at about $9 a share, below the peak of more than $30 in the summer of 2000.

The article holds that GE is trying to diversify its business from its old business (household appliances, lighting, generators and jet engines).

According to the article, almost all enterprises, especially large successful ones, are subject to a life cycle. If they come out with some important or popular products, these companies can grow rapidly for a period of time, usually decades. But sooner or later their markets will mature. Growth and profitability may weaken. Competition may intensify.

The article believes that this makes the enterprise in an uncertain state. A practical question is: what should they do with current profits derived from past successes? Most of the options are not attractive.

First, executives may hoard current profits and do their best to defend existing markets. This may be a success for some time, but all these idle funds will cover up potential weaknesses and encourage wasteful expenditure, including excessive pay.

 

Second, enterprises can pay high profits to shareholders by dividend sharing or stock repurchase. In theory, when a company buys its own stock, its share price should rise. This minimizes the risk of wasteful spending, but does not provide a way for future growth.

 

 

 

Thirdly, enterprises can invest profits in R&D or merge with other enterprises to find some new growth business to make up for mature business. This seems to be the most responsible path, but there are many practical obstacles. Countless funds have been wasted on unsuccessful mergers and research and development expenditures leading to a dead end.

 

 

 

In this context, the distress of GE and Sears is not exceptional. Sears is unable to compete with more modern retailers, and GE's main mistake is to maintain a large group structure: many businesses are in the same company's name.

According to the Wall Street Journal, Sears has closed 1,700 stores to survive, affecting more than 200,000 jobs; in 2018, General Electric was eliminated from the Dow Jones Industrial Average, the last of the first 12 companies to create the index.

 

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