General Electric (GE), an industrial conglomerate founded by Thomas Edison 125 years ago, is in trouble. Its market valuation, once over $400bn, is now closer to $150bn. Its share price has fallen by about two-fifths this year alone. The firm recently replaced Jeffrey Immelt, its long-serving chairman and CEO, with John Flannery (pictured), another company veteran. What went wrong at one of America’s best-known and oldest companies?

GE’s traditional strengths are in asset-heavy, engineering-oriented industries. Starting with electrical goods (Edison famously commercialised the light bulb), the firm expanded into areas such as power-generation equipment, locomotives, industrial plastics and aviation. It also built up a successful business in health-care technology, making high-end medical scanners and other fancy kit. Its global network of research laboratories is one of the world’s top generators of new patents. Under Jack Welch, who ran the firm from 1981 to 2001, GE expanded dramatically (with hindsight, analysts say recklessly) into financial services, which by 2000 contributed more than half of the profits. The diversification away from the company’s core strengths made it seem much more valuable to investors, but this proved a chimera. The financial engineering was built on unsustainably risky bets, and the distractions arising from that complicated and politicised business led bosses to ignore festering problems on the industrial side.

After GE’s finance arm had been weakened by the global financial crisis Mr Immelt wound down the company’s financial holdings. Its current troubles are primarily the result of his failure to prepare GE for heightened competition in a slowing global energy market. This has squeezed GE’s power business, its biggest division, and the firm expects operating profits in this segment to decline by over 25% in 2018. Mr Immelt also made some expensive acquisitions at a time of low oil prices. He spent $10.1bn to buy Alstom, a French company selling power-generation kit, and $7.4bn to win control of Baker Hughes, an American oilfield-services group. Neither is doing as well as hoped.

Mr Flannery unveiled a new strategy in November. It rests on three pillars: cost control, cultural change and cuts. He slashed the promised dividend by half, which will save on top of the $2bn in annual cuts Mr Immelt was forced to concede earlier this year. Mr Flannery is using carrots and sticks to restore management’s focus on financial returns. He will alter the pay structure to incentivise executives to generate free cash flow. He is also slimming down the unwieldy and toothless board of directors, even placing an activist investor on the board. But while his approach to costs and culture looks sensible, big investors wonder at his efforts to shrink the firm. Mr Flannery says he will dispose of some $20bn in assets in the next two years. That may sound like a lot, but is rather less impressive compared with GE’s total assets last year of $365bn. If Mr Flannery can defy the sceptics and turn the firm around, he will deserve to surpass even the lionised Mr Welch in the annals of American management.