  We continue the study of blow-ups in generalized complex geometry with the
blow-up theory for generalized K\"ahler manifolds. The natural candidates for
submanifolds to be blown-up are those which are generalized Poisson for one of
the two generalized complex structures and can be blown up in a generalized
complex manner. We show that the bi-Hermitian structure underlying the
generalized K\"ahler pair lifts to a degenerate bi-Hermitian structure on this
blow-up. Then, using a deformation procedure based on potentials in K\"ahler
geometry, we identify two concrete situations in which one can deform the
degenerate structure on the blow-up into a non-degenerate one. We end with an
investigation of generalized K\"ahler Lie groups and give a concrete example on
$(S^1)^n\times (S^3)^m$, for $n+m$ even.
