Strategy Leader

GEWatchers (3) Results of "eliminating the bureaucracy"...

In my book The Secret to GE's Success, I describe that one of GE's historical great strengths was its strong financial and auditing organizations. These organizations enabled the company to spot problems before they became public and to avoid embarassing surprises. I also pointed out that one of Jack Welch's first actions when he became CEO was to was to attack what he called the "bureaucracy", which included finance and the auditing staffs. He reduced the auditing staff.

During the Welch era, the lack of a strong auditing staff resulted in the Kidder fiasco, in which one of the traders was able to loss over $350 million without the company's knowledge. The result was the GE had to divest Kidder.

However, it appears the lack of a strong auditing staff is still a major problem. The February 19, 2008 Wall Street Journal reported that GE has been under investigation for improperly reporting revenues since 2002. These are few of the highlights as reported in the WSJ:

" In each of the past three quarters, GE has corrected financial statements because it improperly booked income at its rail, aircraft engines, health-care, enegery and water units". It is important to note that these are GE's major growth businesses and continually lauded by Immelt and his executive team as the great hopes for the future.
"In the fourth quarter of 2003, for example, GE locomotive unit overstated revenues by 22.6% and profit by 16.6% according to SEC filing".
To show the severity of this situation, the General Electric Company has hired Wilmer-Hale LLC's William McLucas, a former head of SEC's enforcement division to investigate the situation and, simultaneously, the GE Board's auditing committee has hired its own investigative group, Cravath, Swaine and Moore, LLP. In short, there are "investigators investating investigators and everyone is trying to protect themselves."

GE has fired a number of people involved and the company will make changes including: "adding staff incorporate accounting to review revenue matters and bolstering the internal-audit department". Obvious, not creative solutions!

As a GE stockholder and fan, I have three major concerns.

First, is the fact this has happened and that GE must have reduced the strength and power of its internal auditing staff so that it is didn't know what is going on and was surprised. Surprise is one the major fatal flaws of any organization.
Second, I am even more concerned that GE's increasing complexity, which I have discussed in my book and in several GE related articles and blogs, will make it worse. As GE moves globally, transfers facilities overseas, it will become even more difficult to know what is happening. Further, each country has different accounting and financial regulations and the employees in these countries may not be aware of the regulations and so it is likely that more surprises will occur. Like or not, GE is still a US corporation and subject to US laws.
Third, everyone wants to look good and it is not uncommon to find that people will book sales before they happen or hide the real numbers. This is just human nature and will require strong financial and strategy review organizations.

I entitled the last section of my book about the Immelt era, "Back to the Future" since I believe it is critical that GE build on its past strengths as it moves into the future. I think that GE should take a close look at some of the reasons why it has been successful in the past and they will find that the financial, auditing and strategic thinking disciplines of the past were key to this success and must not be neglected.

GE and all CEOs must not classify those who do their job and bring up unpleasant issues as bureaucrats but recognize they need people who are willing to identify potential problems, help to avoid them and being surprised.

GE Watcher (2) Making GE even more complex.

In my most recent book: The Secret to GE's Success" and my article comparing Buffet and Immelt in Chief Executive magazine, I emphasized that one of GE's major strategic challenges was dealing with complexity. I truly believe that one of the reasons that GE's stock has not done well in the past seven years is that the investors don't understand GE because of this complexity and would prefer to place their bets in areas which are more understandable. My recommendation is to simplify the company, like Buffet has done.

However, it appears that the GE leaders have decided to make it even more complex. They recently announced that the GE Money's Consumer business will move its headquarters from Stamford, Connecticut USA to London. The GE Healthcare business is already located outside of London as a result of an acquisition and the promise to a senior officer that the headquarters would be in the UK.

This move adds to the complexity of managing the business, retaining key people, dealing with different government regulations, tax laws and cultures, making decisions and security problems. GE has already made its research and development complicated by having R&D facilities in China, India, Europe and the United States, which have enormous communications, cultural and SECURITY issues.

GE Watchers UPDATE (1)

A continuing part of my website http://www.strategyleader.com/ and this blog is to discuss what GE is doing today and how it relates to their past successes and failures, as described in my book: The Secret to GE's Success. I plan to discuss leadership, adaptability, talent, influencing and networks LATIN, which I have concluded summarizes the keys to any organizations success.

Leadership- GE's senior management continue to tell the world that their strategy is working and that they should invest. Unfortunately the stock has not responded and there appears to be continuing concerns about whether "GO BIG/ GO GLOBAL" is working.

Adaptability-
"The February 25, 2008 issue of FORBES has an article: "Cranking Up the Volume- one reason medical costs are getting out of control: GE employs too many good salesmen".

The article describes how GE encouraged its customers to invest in more, highly sophisticated, capital intensive and expensive MRIs and other diagnostic equipment and prescribe that patients use the equipment frequently. Unfortunately the INSURANCE companies and Medicare are challenging the need for doing these tests as often.

One of the customers: summarized the situation " we really do face a crisis". GE has been forced to reduce prices, provide more services and as a result GE's Healthcare's profits dipped 4% in 2007. Immelt, who led this business and used its success as a means of gaining his current CEO position, described 2008 as a "turnaround year". It is clear that Healthcare which was one of GE's "stars" is not climbing to new heights and in fact may be a "falling star".

GE Money MOVING to London... The February 8, 2008 edition of the Financial Times reported that GE MONEY'S Consumer finance division is moving its headquarters from Connecticut to London.

The current president of the business unit, David Nissen, who has 27 years of GE service and has led the business unit for 15 years will retire early. He is only 56. It was pointed out that the move to London makes sense since three-quarters of the profits come from overseas.

This unit took a $1 billion hit because of its sub-prime gambles and is in the process of selling off all or part of its credit card business. GE continues to BET ON THE GLOBAL opportunities and increasingly is becoming less of US company.... I think the real issue is whether this business unit will ever regain its luster and profitability or should be a candidate for divestiture.

Talent- There is a class action suit being filed by women who claim they were discriminated against. This is ironic since Immelt is a member of Catalyst, a women's advocacy group and has significantly increased the number of women in key management positions.

Overall, Immelt and his team continue to believe that they are on the right track and it is just a matter of time before it will yield positive results for its key stakeholders, especially stockholders.... stay tuned as the story unfolds...
It is clear that my perceptions and those of the Immelt team are far apart and that GE has decided to become a WORLD, not a US company.... I believe this is a mistake for the long term.

Monday, November 26, 2007

Investing in Talent continues to be key element in GE's Success

In my book: "The Secret to GE's Success" I pointed out that one of the key's GE's success is its continuing investment in the development of people.

It started at the beginning when GE developed three key training programs...one for its engineering talent, the other for financial personnel and the third its apprentice system. Swope and Young established the annual "Association Island" programs and Cordiner created the first and still strong management institute at Crotonville to teach the art and science of Professional management.

All of the CEOs since the mid 1950's have used Crotonville to develop key people and to get support their selective initiatives. I spent five great years developing and leading strategic thinking and development courses and the four week Management Development Course and it contributed significantly to my own development and enabled me to be an effective leader and coach.

According to a recent November 25, 2007 Reuter's article, GE and Immelt continue to make major investments in development globally.

They reported that GE spends $1 billion in training its own people and another $1.5 billion on customers...Crotonville was updated under Welch and still serves as the center of "learning"....(It is interesting that GE has a LEARNING officer and not just a development leader... I think this is appropriate since as a teacher and consultant, it is clear that everyone can learn from a professionally developed and implemented program.)

Having the right talent, at the right time and in sufficient numbers often is the difference between winning and losing. Take a look at my extensive descriptions of GE's programs and their strengths and limitations in my book.

Monday, December 10, 2007

Time for GE to adapt and change its "GO BIG" mentality.

"Will GE Light a New Path?" This was the headline of the December 10, 2007, Wall Street Journal column: breakingviews.com/ FINANCIAL INSIGHTS... the authors recommended that GE "reduce its sprawl and enable its investors to invest in a purer play venture by spinning off NBC and merging it with Vivendi,20% owner of NBC.

This idea is similar to my recommendations in the June, 2007 Chief Executive Magazine article. This is what I wrote:

(GE needs to) Reduce Complexity

· Make It Simpler. Make the company less complex. This can be achieved by focusing more on products and services than solutions, as well as reducing the risk by participating in lower risk global areas. This strategy is not exciting, but it could build more investor confidence and increase the stock price.

· Continue to Prune the Portfolio. Continue the traditional GE portfolio management approach perfected by Welch. In this case, the company asserts that nothing is sacred and all businesses are potential divestiture or harvest candidates. Immelt has already done this. He divested the insurance and reinsurance businesses and was even willing to take losses. He sold the advanced materials business (man-made diamonds, silicones) to a private equity firm.

In January of this year, Immelt announced that the company’s plastics business is now on the block. It could yield $12 billion from a Saudi firm—a major financial windfall for the company, similar to the Welch RCA deal.

I think that broadcasting and even additional parts of the traditional GE lines, like major appliances and lighting, could be divested. These moves would permit the company to focus on its major solutions, technology business, while maintaining its strong financial services operations. This portfolio approach may build more confidence among investors, since they recognize that the primary goal of the company is to continue to increase the bottom line.

What if neither works? In this case, I think we need to adopt the new company motto “Imagination at Work” and look for a more creative approach that may initiate the next stage of the company.

Let’s imagine that:

· GE gives the investor an opportunity to invest in selective sectors of the company and not just in the total company portfolio. In this scenario, GE decides to offer stock in its key areas/sectors. For instance, it creates separate stock offerings in GE Healthcare, GE Infrastructure, GE Money, GE NBC/Universal, GE Commercial Financing and other key components of the company. These would replicate the current building blocks of the company. So investors could invest in either the total company or selective parts of the company. This is not unrealistic since many companies have done this and have been successful in doing so. Of course, this will require more evaluation.

· GE is major stockholder of new companies. The GE Corporation would continue. The company would only sell a part of the new companies and retain majority control over the businesses. I would recommend that GE retain 75 percent of the companies and sell the other 25 percent on the open market.

· GE would focus on maintaining GE traditional success factors. Under this new scenario, the GE corporate staff would be significantly reduced and focused on a few key areas. For instance, the company would continue to work on succession plans for the key management positions in the company and especially the next CEO. The corporate staff would monitor external changes and help the subsidiaries anticipate and respond to change, as well as change the portfolio as required. It would continue to have company-wide training at all levels, take stands on political issues as needed and continue the strong financial, strategic and manpower networks that have contributed to its past success.

The anticipated results could be very positive to all of the key stakeholders. The stock should rise overall, the investor will have more options and the company will continue to retain its AAA rating and have a strong and deep bench.

Maybe it is time for GE to consider both the WSJ idea and mine.

If they did it would reconfirm my belief that one of the GE's success factors has been its willingness to change its mind and adapt to reality.

Tuesday, October 23, 2007

GE Update- Not consistent with its past success

Not Home grown and not strategic...
In my book, The Secret To GE's Success, I emphasize that one of the five reasons that GE has been able to continue to prosper, while most of its peers have disappeared, is that GE has been able to "home grow" its own leaders and not hire them from the outside, and the company has had a very disciplined strategic thinking and review process, that had identified " potential problems" and worked to prevent or minimize their impact.

But it appears that this is not as true today in GE, as it was in the past.

In the October 29, 2007 Business Week, the headline reads: Adventure of a Sub prime Survivor. The story describes Amy Brandt and how she was able to sell her company "WMC Mortgage" to GE, become the General Manager, have the complete support of Jeff Immelt to move GE into very high risk "sub-prime" markets.

Amy became one of GE's highest- profile young women and even given a Jeff Immelt "high-five" after her Boca Raton presentation in January 2005.

"Today, Brandt is gone and GE is struggling to contain its mortgage mess." says the article. Since January 2007, "GE has sold off more than $ 4 billion of loans ($375 million is left" and closed down operations, taking a $1.4 billion charge in the third quarter and a discontinued Japanese loan operation.

But Brandt is living well.. She lives on a 30 acre ranch is starting a new career... she still thinks Immelt is "very charismatic" but recalls she hated the GE power point presentations.. "she was a kid who didn't like to go to camp".

It is clear that GE didn't do its traditional disciplined strategic thinking and evaluation process and doesn't have the internal auditing systems that made it successful in the past and its suffering the consequences.

Discipline, comprehensive thinking and challenging was a reason for GE's past success and GE must be sure that these skills and processes are still alive and well, even it inhibits some of its "dreaming sessions".

GE's Back to the Future

In my book: The Secret to GE's Success, I describe how Jeff Immelt and his team have reverted back to some of GE's successful past strategies. GE's investing in and operating generation plants was one of the early Edison strategies (pages 5-6). The Edison GE company, the predecessor of the current company, built and operated power plants. Later when it merged with Thomson Houston to form the current company, it invested heavily in Utilities to enable these emerging companies to gain a competitive position. When the company became over extended and almost went into bankruptcy, it helped create the Electric Bond and Share company (EBASCO) to provide financing and still maintain a control over its customers.

Now that the electrical generation and distribution business is unregulated it makes sense to invest in these highly profitable and growing companies. Being the owner and operator of generation plants makes strategic sense and clearly is a major opportunity for GE globally.

One of the best ways to create new ideas and ventures is to search the past and see if what worked or didn't work in the past might work in the present and future, especially when the market, customers, competitors and regulations have changed.

GE is still highly ADAPTABLE... the NBC/ Universal story.

In my book, "The Secret to GE's Success", I emphasize that one of the five reasons that GE has been able to grow and prosper over its 127 years is that it has been adaptable. I emphasize that "nothing and no one is sacred". This was clearly demonstrated when GE sold its Plastics business, which was the home of Welch and Immelt.

In the Financial Times, January 21, 2008 edition there is another illustration of the company's adaptable strategies. This focuses on the "turnaround" of NBC Universal. Jeff Zucker, CEO of NBC Universal, describes how the company is taking advantage of the writers strike to "end long-term production contracts worth millions of dollars and is planning to go further by cutting the pilot season." He points out that NBC Universal has become "cable network" and the cable operations "now contributes more than half the earnings". The company is moving to acquire more "non-US" cable operations.

Adapting to reality has been a major strength of GE, but it also confuses the investor and other key stakeholders and re-enforces the view that the company is just another conglomerate and is in the buying and selling of assets business.

My personal belief is that the NBC Universal business needs to be continually reviewed and that it still isn't certain whether it has been really turnaround ed. Further there appears to be a highly political issue, since many believe that the organization is too liberal and therefore putting itself in the Presidential election spot light, which could negatively impact GE as a whole.

So far, it is difficult to see what NBC/Universal's real competitive advantage is. Clearly, it has not been able to develop highly creative shows and its cable programming is nothing unique.

A Unique Employee Organization being liquidated by GE

Last week I was delighted to be able to discuss my book ( The Secret to GE's Success) and evaluation of GE's current "GO BIG" strategy with 150 Senior Elfuns in Schenectady, NY.

The Elfun Society was formed by Gerard Swope in 1928 to enable the company to gain the objective insights (even criticisms) from a select group of GE managers and professionals.

This was the mission of the organization from Swope's own words: "A society which would be their own, which would be separate and independent of the company and where we can have an open form for discussion, where any question may be asked and will bring someone to his feet to answer it".

In short, Gerard Swope was interested in getting the input of his "best and brightest" and to challenge his strategies and actions. In addition, he established one of the first "mutual funds" so that GE leaders would increase their personal wealth outside of company stock and had a managerial education program.

Over the years, the Elfun Society moved into providing volunteer work for the GE communities. For instance, the Schenectady chapter has a unique personal computer program, where it salvages old computers and gives them to needy schools and students. It helps to rehabiliate community buildings, parks and so on. In short, it makes a great contribution and shows the world that GE and its employees care.

The ELFUN society is truly unique and should be encouraged and developed, but interestingly enough, GE has been trying for the past few years to liquidate the organization, even though it continues to do "volunteer work" and serve as an alumni association and place where retirees can keep their company friendships alive and learn about what is happening in GE today. It has discouraged recruiting new members and having meetings.

Most companies today, say that they want to get employees involved and have the benefit of their objective opinions and insights, but few have an organization like the Elfuns to build on and use for this purpose.

I don't understand why GE is not growing and supporting the ELFUNs and trying to liquidate it, DO YOU?

If you want to learn more about the ELFUN society review pages 43-44... and if you want to see how Swope invited the Union to organize the company...continue to read the next feww the next few pages.

Swope truly believed in having employee participation and gaining the insights of others. Many talk about it but few do it.

One of GE's Great Leaders, Charlie Reed, recently died.

I recently learned that Charlie Reed,one of GE's great leaders died. This is what I wrote about Charlie in my book (The Secret to GE's Success): "one of the major reasons that General Electric's material business succeeded was a chemical engineering Ph.D, named Charlie Reed. Reed, blessed with both creativity and leadership skills, was able to put together a team of very diverse individuals and encourage them to create a business--- one that has continued to be a major part of the GE culture. One of the by-products of this business, of course, was Jack Welch."

Charlie was Jack's mentor.

It is ironic that just about the time that Charlie died, GE sold its Plastics business, which was Charlie's creation.

GE has been gifted to have many leaders like Charlie Reed who provided the foundation and has permitted this remarkable company to prosper and grow, while its peer companies have either died or been submerged into other companies.

Friday, February 22, 2008

GEWatcher Update (4) GE Money Another falling star!!