Letter to Our Share Owners

In 1996, your Company had its best year ever.

• Revenues rose to a record $79.2 billion, up 13%.
• Global revenues were up 18% to $33 billion, a record.
• Earnings increased 11% to a record $7.280 billion.
• Earnings per share increased 13% to a record $4.40.
• Operating cash flow rose to $9.1 billion, $3 billion above our previous high.

This performance translated into significant rewards for our share owners.

• Total return to share owners in 1996 was 40%, after a 45% return in 1995.
• Record cash flow allowed us to return more than $6 billion to share owners for the second consecutive year: $3.1 billion in dividends; $3.3 billion in the repurchase of GE stock.
• We increased our quarterly dividend 13%, our 21st consecutive annual increase.
• We expanded our share repurchase program from $9 billion to $13 billion, extending it through 1998.
• The Board of Directors recommended, for share owner approval in April, a 2-for-1 stock split.

Chairman and Chief Executive Officer John F. Welch, Jr. (right) and Vice Chairmen and Executive Officers Paolo Fresco (left) and John D. Opie (center) form GE's Corporate Executive Office.

The GE Growth Model

The Financial Engine

The Culture...Finding A Better Way Every Day

GE Leaders . . . Always with Unyielding Integrity:

• Have a Passion for Excellence and Hate Bureaucracy
• Are Open to Ideas from Anywhere . . . and Committed to Work-Out
• Live Quality . . . and Drive Cost and Speed for Competitive Advantage
• Have the Self-Confidence to Involve Everyone and Behave in a Boundaryless Fashion
• Create a Clear, Simple, Reality-Based Vision . . . and Communicate It to All Constituencies
• Have Enormous Energy and the Ability to Energize Others
• Stretch . . . Set Aggressive Goals . . . Reward Progress . . . Yet Understand Accountability and Commitment
• See Change as Opportunity . . . Not Threat
• Have Global Brains . . . and Build Diverse and Global Teams

Horizontal Growth Opportunities

The Model

The uniqueness of this model lies in its consistency.

The GE financial model is simple but, we believe, unique in world business. On one side is a group of 11 large businesses, virtually all #1 or #2 in their marketplaces, that consistently improve operating margins, earnings and cash flow and support the "triple A" debt rating of the parent Company. GE's "triple A," in turn, supports a huge, diverse, global financial services enterprise, also rated "triple A."

The uniqueness of this model lies in its consistency. The operating businesses in the model consistently grow their revenues, operating margins and working capital turns, while the 27 businesses that make up the financial services arm grow earnings at consistent double-digit rates.

Our model is not in itself difficult to construct, nor are we the first to put together a mix of industrial/service/media and financial services businesses. It is the consistent aggregate performance of these large #1 or #2 businesses over a diverse array of global markets that makes this model work.

While consistent growth is the output of this model, the fuel that drives it--the energy behind it-- is our culture . . . how we behave.

The Values

... the desire, and the ability, of an organization to continuously learn from any source, anywhere--and to rapidly convert this learning into action--is its ultimate competitive advantage.


Our behavior is driven by a fundamental core belief: the desire, and the ability, of an organization to continuously learn from any source, anywhere--and to rapidly convert this learning into action--is its ultimate competitive advantage.

Driven by this belief, and anxious to get at the learning opportunities that abound in, and around, a multi-business global company, we first had to deal with the myriad boundaries that were impeding the generation and transfer of ideas. There were boundaries within the Company, between management layers, functional disciplines and different national cultures. The boundaries between us and the outside were the product of an NIH (Not-Invented-Here) attitude that limited our ability to learn from suppliers, our customers and other global companies that had "best practices" that could be of enormous use to us.

We went after these barriers with a massive initiative called Work-Out, which we've described for you in detail in past letters. Work-Out flattened those barriers. It eliminated insularity in our businesses. Work-Out also went after NIH--and eradicated it. GE began to systematically roam the world, learning better ways of doing things from the world's best companies.

We supported this behavior with changes in the management appraisal and compensation systems. We introduced a 360⁰ management appraisal that focused leaders on finding and rewarding people who demonstrated an ability to get every mind in the organization into the relentless search for ideas: for finding the better way--every day.

We made major changes in the compensation system to support this learning behavior. Before Work-Out, we operated under a management philosophy that rewarded "originating" ideas and "standout" performance with bonuses and salary. Today, those bonuses, as well as salaries, reward the finding and sharing of ideas even more than their origination. Stock options--formerly held by a few hundred, now by 22,000 GE employees--provide a powerful incentive to learn and share and work together.

You can talk--you can preach ... about a "learning organization," but ... reinforcing management appraisal and compensation systems are the critical enablers ... if rhetoric is to become reality.


You can talk--you can preach--all you want about a "learning organization," but, from our experience, reinforcing management appraisal and compensation systems are the critical enablers that must be in place if rhetoric is to become reality.

As those of you who've read these reports in the past know, we never shut up about the great things that lie ahead of a company whose people get up every morning and come to work knowing--convinced--that there is a better way of doing everything they do--and determined to find out who knows that way and how they can learn it.

It is this learning, sharing and action-driven culture, when laid across the diverse businesses of GE, that gives us our true advantage, an advantage single-industry companies can never match--what we call "horizontal learning" across more than 250 diverse, global GE business segments.

The Horizontal Growth Opportunities

Quality, Globalization, Service, Information Technology and Consumer Savings . . . are part of our answer to the sometimes-posed question of how an $80 billion company--a $7.3 billion net income machine--can continue to grow at double-digit rates.

The biggest opportunity for us to use this horizontal learning to accelerate growth is Quality.


Quality

Just as Work-Out got us to a culture of learning and openness that defined the way we behave, quality improvement, under the disciplined rubric of Six Sigma methodology, will define the way we work.

Just as Work-Out got us to a culture of learning and openness that defined the way we behave, quality improvement, under the disciplined rubric of Six Sigma methodology, will define the way we work.

Six Sigma quality means the virtual elimination of defects from every product, process and transaction this Company engages in every day around the globe. A Six Sigma quality level generates fewer than 3.4 defects per million operations in a manufacturing or service process.

It has been estimated that less than Six Sigma quality, i.e., the three-to-four Sigma levels that are average for most U.S. companies, can cost a company as much as 10-15% of its revenues. For GE, that would mean $8-12 billion.

Six Sigma quality is already becoming part of our culture and defining how we work. The Six Sigma process is a very specific scientific methodology of measuring, analyzing, improving and controlling every process we engage in, from making jet engine blades, to executing a credit transaction with a customer, to minimizing "dead air" between segments in broadcasting. It involves enormous amounts of training, with thousands of "Green Belts," "Black Belts" and "Master Black Belts" leading projects, teaching, and widening the circle of involvement in the quality initiative throughout GE.

The methodologies of Six Sigma we learned from other companies, but the cultural obsessiveness and all-encompassing passion for it is pure GE. The intensity level involved in our decade-long struggle to achieve a boundaryless culture now seems "laid-back" compared to the near monomania with which we are approaching Six Sigma quality. Forty percent of every manager's bonus is tied to his or her progress on quality results. Quality is the top item on every agenda in every discussion in every business in this Company. For leaders who do not see how critical quality is to our future--like leaders who could not become boundaryless during the 1980s--GE is simply not the place to be.

The momentum of the Six Sigma initiative is unprecedented. From launching this initiative in late 1995, with 200 projects and massive training, we moved to 3,000 projects and even more training in 1996; and we will undertake 6,000 projects, and still more training, in 1997. The $200 million we invested in 1996 has already returned nearly that much in quality-related savings. The additional $300 million we will invest in 1997 will deliver some $400-500 million in savings, producing an additional $100-200 million in incremental margins. This snowball will pick up size and momentum in terms of people trained, projects completed, and customer and employee satisfaction--all driving sales and net income growth. Growth and more growth.


Globalization

We now have a $33 billion "global business" that grew 18% in 1996. More than 40% of GE's revenues are now derived from non-U.S. markets--markets where we have grown, and will continue to grow, at three times the U.S. rate.

In Europe, despite the less-than-robust economy, we have grown revenues 42% per year from 1994 to 1996--and almost tripled profits. That growth will continue in strong double digits in 1997. Today there is an $18 billion "European GE."

Asia also is a source of ongoing double-digit growth, and today there is an $8 billion "Asian GE," a big player in the fastest-growing market in the world.

Nowhere is the horizontal learning more important than in globalization. The constant sharing of business experiences and cultural insights, from around the world, is creating a Company whose brains, as well as its businesses, are truly global.


Information Technology

Information technology ... is making the huge transition from the "function" it was in the 1980s--with its own language, rituals and priesthood--to the indispensable competitive tool, the central nervous system of virtually every operation in the Company.

GE is a high-growth information company. Along with NBC, CNBC, MSNBC and the network's other ventures, we are well positioned in information services, in satellite leasing, and in a technology management services business created by the acquisition of AmeriData in the United States and CompuNet in Germany. In 1995, our information technology businesses had revenues of $6 billion. We expect to more than double that in 1997, in a market synonymous with seemingly endless double-digit growth.

Information technology is clearly an important business opportunity in itself, but equally important is the role it is playing in the success of every business in the Company. It is making the huge transition from the "function" it was in the 1980s--with its own language, rituals and priesthood--to the indispensable competitive tool, the central nervous system of virtually every operation in the Company. Information technology has drawn us closer to customers via inventory management systems. It enables our engineers to monitor and service products on-line globally. It allows new products to be designed in real time by engineers, 24 hours a day, on two or three continents.

Without the detailed information on process capabilities, our quality initiative would be more art than science, driven more by slogans than by precise methodologies where tolerances are measured in millionths.

And even beyond "changing the game" in virtually every business operation in the Company, information technology is a perfect fit for our culture, as it gets more people "into the game," learning and sharing--and allows them to execute the fruits of that learning--faster.


Consumer Wealth Accumulation and Protection
GE is a savings business, focusing on consumer wealth accumulation, with $46 billion in assets. This has been created by the acquisition of insurance and annuity companies such as First Colony, Life of Virginia, GNA, Harcourt General, AMEX-LT Care, Union Fidelity Life and Union Pacific Life.

The scale of this business can be understood in the context of the several cents a share it will add to GE's 1997 earnings growth--this from an activity in which we were not even participating four years ago. It illustrates both the power of our financial services arm as well as the horizontal approach to managing newly acquired companies. Our culture is driving these well- positioned niche players into a closely integrated, stronger whole; they are in the process of becoming a large consumer wealth accumulation business serving the huge demand for the financial, insurance, health care and other needs of the aging baby-boomer population.


Services Expansion

Services is so great an opportunity for the Company that our vision for the next century is a GE that is "a global service company that also sells high-quality products."

Looking across several manufacturing businesses, GE is an $8 billion equipment services business, growing at double-digit rates, with an advantage unique in the world: an installed base of some 9,000 GE commercial jet engines, 10,000 turbines, 13,000 locomotives and 84,000 major pieces of medical diagnostic imaging equipment.

Medical Systems has long been a world leader in remote diagnostics. Thousands of its MRI and CT scanners are on-line 24 hours a day, allowing a doctor in, say, Bombay to get help from Tokyo, Paris or Milwaukee anytime, day or night.

This on-line diagnostic technology has been transferred across all GE equipment businesses and is taking the concept of equipment service into an entirely new dimension.

In Aircraft Engines, all critical operating parameters of GE jet engines can be monitored by our service experts while the engines are in flight. As a result, any out-of-spec performance data can be quickly dealt with when the plane lands, with the engine on the wing, saving airlines millions by increasing the time between off-wing overhauls.

Two joint ventures with Harris Corporation capitalize on related diagnostic and communications technologies--one to help our electric utility customers increase the efficiency of their systems, and the other to radically improve the utilization of rolling stock for the railroad industry. Both of these service initiatives are key to the long-term success of companies in these increasingly deregulated and intensely competitive industries.

Customers will always need high-quality hardware, but what they must have more than ever are productivity solutions that help them win in their markets. Our challenge in the years to come will be to continuously find new ways to help them fight their competitive battles, by providing more sophisticated added-value services.

Services is so great an opportunity for the Company that our vision for the next century is a GE that is "a global service company that also sells high-quality products."

In giving you this picture of a few of these enormous multi-business growth opportunities, we do not for a moment minimize the terrific growth opportunities in front of our individual businesses: a new line of ultrasound products from Medical Systems growing 25% a year in a modest-growth market; a new on-line interactive network--MSNBC; a new high-technology 6000HP locomotive; a new washing machine that has grown share close to three points in a mature market; a new product nearly every day from Lighting; and all the other individual opportunities ahead for these intensely entrepreneurial, world-leading businesses.

Nor do we neglect our traditional tight management of individual business results--accountability is still a part of our culture--but increasingly the important question is not only "How is Plastics or Lighting or Employers Reinsurance or Auto Financial Services doing?" at any given moment, but also "How is GE doing?" in Europe or Asia, in Services, in Information Technology, in Consumer Wealth Accumulation and Protection, and, above all, in Quality.

What better time, with this "learning, sharing, doing" culture in our blood--and with quality growing by the hour in each of our operations around the globe--to have before us not one, but several of the biggest growth opportunities in our history. We are determined to seize them. We are determined to grow.

Thanks for your continuing support.

John F. Welch, Jr.
Chairman of the Board and
Chief Executive Officer

Paolo Fresco
Vice Chairman of the Board
and Executive Officer

John D. Opie
Vice Chairman of the Board
and Executive Officer


February 7, 1997