IT Strategy and Success Factors

Assignment 1 P2 Page 1 of 4 BU 415 W2022 WLU

 Assignment 1 P2: IT Strategy and Success Factors

Instructions:

1. This is an individual homework. Each student must submit his/her solution using the dropbox.

2. All submissions are to be via the D2L Submission System; no other way of submission is accepted.

3. All submissions must be submitted through the dropbox by the due date or by the closure date, Clouse Date allows 3 days for late submissions.

Purpose and Objective

The purpose of this assignment is to focus on IT strategy requirements..

Success Criteria

Breadth and Completeness.

Keywords

Success Factors, IT Strategy

Readings

– Chapter 3

– You should submit an assignment report in Word File Format or Acrobat Reader File Format.

Assignment 1 P2 Page 2 of 4 BU 415 W2022 WLU

Question 1: Success Factors

Watch the Akamai: The Evolution of CDN and Cloud Services video posted in Week 3 resources, summarize the success factors that contributed to the success of Akamai in retaining its market share over the past thirty years.

Question 2: IT Strategy

General Electric, one of the largest industrial manufacturing firms in the world, is attempting to transform itself into a software company, part of the Industrial Internet.

In order to achieve this objective, GE will need to hire a new labor force, train a new management corps, develop new services that its customers will pay for, and create a new culture which is more collaborative, fast acting, and innovative. It will need to become a digital firm like other leading Internet firms such as Amazon, Google, Apple, and eBay. Unfortunately, transforming GE into a digital powerhouse turned out to be too difficult to accomplish although parts of the effort continue. The case illustrates the difficulties faced by large, capital intensive-firms in traditional industries becoming digital firms.

GE is one of the largest industrial manufacturing and engineering firms in the world. Founded in 1892 as an electrical equipment manufacturing firm producing generators designed by Thomas Edison and his Edison Machine Works Company, it operates

in 180 countries. GE’s industrial business is managed in five major segments: power

generation, renewable energy, aviation, healthcare, and capital. GE still manufactures generators, power plant and grid controls, and cat scan machines, along with over tens of thousands of other products.

Under CEOs Charles Wilson (1940-1950), and Reginald Jones (1972-1981), GE grew to become the largest industrial firm in the US and world based largely on its engineering and manufacturing expertise. Most of its products were sold in the US. In the process it became a conglomerate of heavy industry businesses that were difficult to manage efficiently by a large bureaucracy, that was expensive and slow. Nevertheless, its management training for very large Fortune 500 firms was consid- ered world class, and was the training ground for many senior managers throughout America.

Jack Welch (1981 to 2000) succeeded Jones and began simplifying GE’s corporate structure, selling manufacturing businesses that were not dominant in their markets, and reducing headcount. He became known as “Neutron Jack” for eliminating so many employees but leaving the buildings intact. Facing slower growth in the US market for heavy machinery, Welch moved aggressively to turn GE into a financial services company, in part by providing financing for customers who bought its heavy machinery, but also by expanding into other loan and leasing activities typical of banks. Welch added a new division to GE’s roster of businesses called GE Capital. Welch reduced investment in the remaining industrial businesses, focusing instead on financial products and services that required less capital to operate and maintain. At the time, it was thought financial services could spike GE’s revenues and profit, increase its share price, and return GE to the ranks of “growth companies.”

In 2005 half of GE’s profits were coming from GE Capital, and GE itself had grown away from its industrial base to become an unregulated financial services firm (a so-called “shadow bank”). By 2007 GE had become one of the top ten largest financial institutions in the United States, and the largest non-bank financial institution. Because it was not a chartered US bank, it was not regulated by the Federal Reserve or other federal agen- cies. It could take risks that regulated banks could not. And it did take these risks. Assignment 1 P2 Page 3 of 4 BU 415 W2022 WLU

The financial crisis of 2007–2008 ended the scenario of GE becoming primarily a financial services firm. It’s leases and loans declined in value as its customers could not make their payments on leases and loans. It could no longer borrow money to finance loans and leases without paying exorbitant interest rates. GE lost its triple A credit rating. In short, GE Capital was close to failure. In 2008, the federal government bailed out GE Capital by insuring $139 billion in GE debt in an effort to prevent the collapse of GE Capital, and stabilize the financial system of the United States. Warren Buffett lent GE Capital $3 billion in cash to weather the storm caused by underper- forming loans, and falling revenues at GE Capital. In 2008, in part because of Federal Reserve and congressional pressure (the Dodd-Frank Act), GE began to sell off its GE Capital division. By 2016 GE had sold most of its financial businesses, and that business now accounts for only a very small percentage of GE’s revenue and profits. Soon it will entirely disappear. Without GE Capital it was unclear how GE could return to being a fast growing firm, and its stock price suffered after 2008.

In 2000 Jeffrey Immelt was chosen to succeed Jack Welch as CEO. Immelt took over when revenues from manufacturing were faltering due to global competition, and fluctuating demand for industrial products in the United States. There followed several years of falling profits, downsizings, and restructurings.

By 2008 it was clear to many inside GE, including the new CEO Immelt, and outside consultants, that GE was entering a new digital and knowledge-based world. In this new digital era, knowledge was just as valuable as machine tools, locomotives, and turbines. Half of the value of the S&P 500 stocks derives from intangible assets like patents, software, information, computing systems, innovation, and management expertise.

Customers were increasingly asking GE to help them maintain and manage the complex machines they purchased from GE. This was especially true of its industrial customers in developing countries who wanted not just machines but also the expertise required

to properly operate the machinery. By 2010 half of GE’s revenues originated outside the United States in part because of Immelt’s pursuit of off shore business to offset slow growth in the United States. GE is the second largest exporter in America, after Boeing.

Since the financial crisis, GE has revamped its strategy by increasing investment in its industrial manufacturing businesses, and increasing factory jobs in the United States. Analysts note that GE is “going back to the future” by investing heavily in manufac- turing R&D. The products themselves are becoming increasingly sophisticated and digital. Developing these new products and services requires a new kind of employee than the past. Employees need to be trained in new materials, manufacturing tech- niques, and technologies many of which involved the Internet and digital technologies. GE’s existing labor force were masters of material sciences and industrial engineering, but not software. The industrial world was becoming “digitized”. Immelt’s goal in 2016 was to become one of the top ten software companies in the world, focusing industrial software. He wants GE to become an apps company and a platform company.

After 2008 GE had to decide how to return to a solid growth rate. Developing foreign markets for its heavy machinery was one option. Emulating somehow the growth rates of digital Internet firms like Amazon, Google, Apple, eBay, and others was an attrac- tive option. All these firms were service firms, not heavy manufacturers. They had all built “platforms”, loosely defined as an ecosystem combining digital technology, soft- ware, the Internet, and services that attracted millions of consumers. Each of these firms were the dominant players in their markets. Services were growing far faster in the US economy than manufacturing. GE’s expertise was mechanical engineering,

not software engineering. To become high growth digital firm, GE would need a new labor force; GE’s managers would have to learn how to manage software develop ment, as well as factories, and become more innovative by inventing new services for its heavy industry customers. GE would need to define new digital products and services as part of a yet to be defined “digital industrial platform” that would dominate Assignment 1 P2 Page 4 of 4 BU 415 W2022 WLU

the marketplace. GE would have to become a software company while not ignoring its industrial origins or manufacturing base.” It was unclear what services GE could sell to its industrial customers. GE needed a new corporate culture. It needed to become a faster, simpler company; eliminate a ponderous hierarchy, and thousands of pointless management meetings that delayed decision making.

No one has ever written a shop manual on how to transform a heavy industry firm like GE into a digital firm. Few know what a “digital firm” really is, let alone what Immelt calls the “industrial Internet.” The video describes how Immelt envisions the transition to becoming a digital firm.

In June 2017 Immelt was replaced by the Board and a new CEO appointed under intense pressure from Wall Street investors who were not prepared to wait years for the results of Immelt’s digital firm program. The new CEO slashed spending on the digital firm effort by

$400 million although not totally ending the program. A year later the new CEO was fired, and another installed. In 2018 the stock fell to $7 a share, and the once most valuable company in America was breaking up. Making the transition to a digital firm turns out to be a very difficult task, and requires long term investments before results are generated.

1. What does Immelt mean by the “digitization of the industrial world” and “the indus- trial Internet?” What are the four central elements of the industrial Internet?

2. What were the three alternatives GE had for developing the hardware and software capabilities to become a digital firm?

3. Which option for developing its digital capabilities did GE choose and why?

4. Why does the new GE want to treat analytics as a company expertise just as it has always treated material science?

5. What example does Immelt use to illustrate the value of digital knowledge to GE customers?

6. What does Immelt mean when he says GE will become a “platform” and “app” company?

7. Why does Immelt believe GE will need to hire thousands of new people to achieve its goals of becoming a digital firm?

8. What is the “culture of simplification” that Immelt believes is needed at GE?

Review the “GE Becomes a Digital Firm: The Emerging Industrial Internet” video.

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