Mario's Corner - NOVEMBER 2017.  

GE's 3 Big Mistakes And

Why They Might Sink The Company

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I worked with General Electric (GE) while at the consulting firm for which I worked in the early 2000's.  At the time, Jeff Immelt had just been elevated to the CEO position succeeding the most successful CEO in business history - Jack Welch.  The expectation was that Jeff would be as successful, if not more, than Jack.  The reason for this belief is that many business pundits felt that Jack was too ruthless and that a more compassionate CEO would be a better fit for GE in the future.  


Unfortunately, GE's stock price has declined dramatically in the past two years and Jeff Immelt has left the company (some insiders say he has been forced to retire), leaving his successor with a tremendous challenge - to turn the world's most successful company in history around.


Why do I believe that GE is the world's most successful company?  To begin with, it is the only company in the top ten of the Fortune 500 list (from 1896 through 2016) that has been in that position for over a century.  It is also the only company that has had two Nobel winners (Chemistry in 1932 and Physics in 1973).  Finally, it was incorporated by the most prolific inventor (measured by number of patents) in history - Thomas Alva Edison.


During the 1980's and 1990's, when Jack Welch was the CEO, the company's value rose by 4,000% as measured by Market Cap.  He still is the CEO who has posted the most consecutive profitable quarters in history and brought multiple innovations and principles including Six Sigma and the "If you are not number 1 or number 2 in your industry, GET OUT" philosophy.


So, what did GE do under Immelt's leadership that caused its decline and challenges it is facing today?  The following are the three biggest mistakes Jeff made.

 

1.  Getting out of profitable businesses to protect the "core" -  Jeff made some critical mistakes by getting out of some very profitable businesses for the sake of streamlining GE and slimming it down to its "core."  Although many companies can claim a true core (e.g., Apple in mobility computing and Google in search engines), the reality is that GE has been a multi-national conglomerate since its founding.  It is this make-up that has allowed it to be successful in various industries including appliances, finance, jet engines, healthcare, renewable energy and countless others.  Thus, the belief that GE can get back to a "core" business is a fallacy and a surprising move made by one of the most experienced CEO's in history.


​2.  Embracing new technologies and innovation without continuing to nourish its existing businesses - Although GE has been known as the innovation company for over a century, the reality is that this innovation was a byproduct of the willingness by its previous CEO's to take risks and embrace new industries.  It was never an end in itself until Jeff came along.  You might remember a series of recent advertisement where Owen, the software engineer, explains to his parents and friends that he does not work for an "industrial" company, but rather for a company creating software solutions.  The problem with this mindset is that GE is not only a software solutions company, but also an industrial powerhouse and should be proud of it.  


Unfortunately, in today's environment, all companies want to be part of the "Internet of Things" solution.  Although this is a laudable goal, it is also important for them to realize that they need to be more than this.


3.  Allowing an activist investor to become involved and take a seat on the Board - In 2015, Trian Partners, an activist investor, bought $2.5 Billion of GE stock and started pushing to leverage the company by acquiring debt and to cut expenses to improve profit margins.  This type of "activist investor' is nothing more than a rebranded corporate raider who wants to make a quick profit by creating a short term increase in the stock price of a company to sell it and move on to the next victim.  This can be proven by the fact that no "activist investor" stays on the Board of a company for the long term, just long enough to sell the stock it holds to make a profit.  


Although Jeff did not encourage Trian Partners, he capitulated quickly and allowed it to take a seat on the Board instead of fighting it as P&G and many other companies have done.  This act allowed a short-term, myopic vision to become dominant instead of its traditional long-term strategic vision.


The result is that John Flannery is now destroying Jeff's legacy including its strategic mindset for a quick improvement in stock price and Market Cap, which will only benefit Trian Partners, not GE.


The world in which GE grew up and became a powerhouse has changed dramatically.  Activist investors, tough international competition, and daily technological advances did not exist when Thomas Alva Edison created the company or when Jack Welch ran it.  Although it is sad to recognize, I do not believe that GE will recover its market and technological leadership, or be around as a leading-edge, Fortune 500 company for its bicentennial.


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Please do not hesitate to call me at 1 (617) 391-0347 or e-mail me at mariocastaneda@bluesailconsulting.com to give me feedback on this or any other subject.  I always like to hear from clients and readers.  


Also, please don't forget to read my interview with BostonVoyager magazine.  To read it, click here.

 

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I look forward to seeing you here in December!

 

Warm Regards,

 

​Mario