It's all about PERCEPTIONS...

In my last blog, I emphasized that "strategy is what you do and not what you say" and raised concerns that GE's actions are not consistent with its words about organic growth and decreasing its dependence on financial services.

Obviously, it is important that successful leaders believe in what they are doing and will often have different perceptions of what is happening.

In his annual outlook presentation to investors and analysts, Jeff Immelt provided his perception of what what happening and the health of the company.

THIS IS JEFF's PERCEPTION...

• "It has been a good year...our portfolio is better... our financial strength and discipline have helped us deliver strong results in a tougher environment"


• "GE will deliver what we said we would...$172 billion in revenue (up 13%) and $22.5 billion in earnings (up 16%)..earnings per share growth of 18%.
  
• "We improved our business mix. We were able to exit slower growth businesses and make new investments in Oil & Gas, Avionics, Healthcare IT, and cable services..."
• "We returned $26 billion to investors through a dividend and buy-back program."


• "In 2008, we will face a more challenging environment that we have seen in several years." BUT, " our strategy and themes for 2008 will not change".... "even in challenging markets, we have set a target to grow earnings by at least 10% in 2008".
• "We expect Infrastructure to sustain its strong global growth"
• "Financial services- both Commercial Finance and Money- will need to closely manage the transition in those markets and may require some portfolio changes.
• "Healthcare needs a turnaround year
• "NBC's turnaround is well underway"
• " Industrial needs to drive growth with innovation and pricing"

It is clear that Immelt continues to be committed to his global "go big" strategy and believes that the major focus must be on managing and executing and not on strategic changes.

As a continuing GE fan, stockholder and alumnus, I hope that Immelt's positive perceptions and forecasts are right and that he is able to continue double digit earnings growth in a very uncertain, even chaotic, environment.

But I have different perceptions about GE's businesses and ability to compete globally in some of the key markets. I am still concerned about their dependence on financial services and highly opportunistic acquisitions.

In short, I will continue to be interested in seeing if the words, actions and results are realistic and hope, that the company will be able to increase Shareholder value in 2008.

Strategy is what you do and not what you say

Many companies develop elaborate strategies describing what they plan to do and then do something different. This has a very negative impact on creating realistic expectations and guiding the key stakeholders.

GE seems to be falling into this situation.

Organic Growth-
Immelt has stated that he wants to grow the company organically and not just through acquisitions and yet it was reported, in a recent edition of the Financial Times, that GE made 2311 deals, worth $382 billion, in 2007. Is this consistent with the stated "organic growth"?

Financial Services
GE became highly dependent on its financial services portfolios and Immelt has stated that the company would focus more on technology based business and less on financial services. Yet it continues to pick up more financial assets. This week they purchased the Merrill Lynch Capital assets which added $10 billion in assets and $5 billion in commitments to the GE Capital Commercial Finance's base of $260 billion. This is most likely a deal they couldn't refuse, but it still adds financial assets.

Further, it is interesting to note that the combination of GE Money and GE Commercial accounts for 30.6% of the first nine months 2007 overall company revenues and 36% of earnings. Both of these have increased over the first nine months of 2006, when the combination accounted for 28.% of 2006 revenues and 33% of earnings.

It is clear that GE is still highly focused on making deals and being a financial services company, though it has asserted something different.

It is vital that words and actions be consistent. When they are not it adds confusion and can be detrimental. This may be another reason that GE has had such a difficult time increasing its stock prices.

Risktaking leaders...when they are needed.

During my career I have observed various business, government and religious leaders and have concluded that there is NO ONE leader for all times. Leaders must fit the unique conditions of their organization. When an organization is embryonic and in its infancy, the leader must be a risktaker. That is willing to met their entire careers and even lives to the success of the organization.

Clearly, the early leaders in America, Washington, Jefferson, Hamilton, Burr and many others had to bet that the revolution would be successful or else they would literally "lose their heads". I call this type of leader..a RISKTAKER.

In today's world there are many such leaders in both business, government and non-profits.

I would like to lead a discussion of these leaders and what it takes to succeed.

(PS... the concept of these series of blogs, can be found in my book: Risktaker, Caretaker, Surgeon and Undertaker- the four faces of strategic leadership. If you want to acquire this book visit my site: http://www.strategyleader.com/ and learn more about the book.

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.

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.

Investing in "growing your own talent" makes sense.

Did you ever wonder why GE has a deep bench that is the envy and target of many companies?

Most American companies have adopted what I call "Just In Time" recruiting and manpower planning system. They are unwilling to invest in people and creating a loyal and deep bench and so they are forced to pirate talent from others, if and when they are needed. Their bench is shallow. When a key job opens up they call their favorite "headhunter / executive search" firm, who has a list of key people...at a price. Thus they are forced to take whomever is available and make the selection on "hyped-resumes" and biased recommendations.

The results are predictable and headlined in the media daily. The new crown prince or princess sign highly attractive contracts, for a few years, and commit to stay for a specified period of time. If they succeed, they become "free agents", like organized sports, and resell their talents to the highest bidder. If they fail, they receive handsome rewards for failure.

In my most recent book: "The Secret to GE's Success" I provide an in-depth description and assessment of the GE Way...

Since GE's inception in 1893, its leaders have made it a unchallenged and unchangeable policy to grow their own talent.. at all levels and in all functions of the business. This has included making people development and succession planning a continuing investment of money and executive time. GE has always had a deep bench in all areas, including the CEO level. If one of its executive or professionals leaves or unfortunately is incapacitated or dies, there are several ready, willing and able replacements.

At one time, GE executives and professionals were not willing to leave the company, but in recent years, many have left and moved to other companies. Headhunters track and monitor these key people and when there is an opening they are first on the list.

There is a continuing argument as to whether the GE system and commitment is the most economical and effective or whether they are merely training peoples to be picked off by others. As a GE alumni, I am still convinced that investing in people and GROWING YOUR OWN is the best and most important investment that an organization can make.

Seeking Advice and Sharing the Wealth

Today's headlines are full of stories of GREEDY executives, politicians and even clergy that appear to have the "ME and ONLY ME" perspective. Their major mission is to increase personal wealth and power at expense of all the other key stakeholders, which includes: investors, stockholders, employees, government and even customers.

These "self serving executives "( I can't call them leaders" since they often manipulate the books, create incomprehensible programs and are willing to harvest or sell of the assets if they benefit. Some go to jail, but unfortunately many walk away with hundreds of millions of personal wealth at the expense of everyone else.)

Thoughout history and even today there are examples of true leaders that are willing to take the opposite course of action and sacrifice their own wealth and comfort for others.

In my most recent book: The Secret to GE's Success, I describe two great leaders of General Electric, who are excellent examples of individuals that were both willing to seek the advice of others but to share the wealth.

These two individuals are Gerard Swope and Owen Young. Swope and Young led GE from 1923 to 1939. This was a period of extreme contrasts. In the early period from 1923 to 1929, the United States and the world was in a period of euphoria. Wealth was created and almost everyone benefited from it...then came the GREAT DEPRESSION and major unemployment and poverty.

Unlike many of their contemporary executives Swope and Young took several steps to share the burden and wealth. These are some of the key strategies and actions:

• Unionization- Unlike the auto, steel, transportation giant companies, Swope and Young INVITED the IUE to organize its workers. Swope wanted to have the average workers perspective and inputs and thought that this was the best way to do it.
• Trusted Pensions- they established a trust to provide and protect the pensions of their employees.
• ELFUN society was formed to get the input of the senior management outside the organizational structure and it established one of the FIRST MUTUAL FUNDS to enable GE managers and professionals to grow their wealth outside the GE stock.
• Creator of Social Security- Gerard Swope was an advisor to President Roosevelt and was the architect of the social security program. (However, his model was like the GE model and called for a separate TRUST that could not be manipulated and pillaged by the politicans and not the version that was enabled by Roosevelt.)

Unlike most companies, GE has had only 10 CEOs in its 127 years and each of them has been ready, willing and able to seek advice and share the wealth.

Wouldn't be nice if other CEOs and Government officials could learn from this success and be willing to set aside their own personal egos, power and wealth and share it....

If you want to learn more about these two great leaders and other GE leader, take a look at my book (The Secret to GE's Success, McGraw-Hill, 2007) .. it is available on AMAZON...and in all bookstores.

I encourage you to respond and start a dialog....Bill Rothschild

DON'T Mortgage the Future

Since most CEO's and their executive team are only on their jobs for an average of 4.7 years... it is obvious that they will take a short term view of the organization they lead. Thus they will look for solutions to key issues that have strong positive short term impact and they let their successor worry about the consequences.

This is very apparent when you compare General Electric's labor costs with those of General Motors and Ford. GE is not burdened by excessive labor costs and benefits. This difference can be traced to the mid 1950's. GE's management took a strong stand against labor unions and BIG government and drew a line in the sand..they told the Union and Governments what they could afford, based on in-depth studies including their long term competitive impact. They were willing to take strikes and went public to fight the governmental tax and "give a way" stands. This included the willingness to move entire plants from the expensive Northeast and Mid West to the less expensive South and even to Korea, Taiwan and other lower labor, non-unionized locations. The also hired and trained a future president, Ronald Reagan to be their spokesman. Reagan admitted that many of his ideas and actions were strongly influenced by GE's Lem Boulware and Ralph Cordiner. Lem was the head of human relations and Ralph was his boss and CEO.

General Motors and Ford took the easy way out. They gave the unions high wages, and expensive retirement and health benefits. GM and Ford were the market leaders and didn't anticipate the invasion of the Japanese into their markets. They had INDUSTRY wide settlements and therefore assumed that their give a way programs would impact all of the competitors equally. In addition, health care was very cheap at the time and their workforce was young.

Today, GE is in a strong competitive position and the auto companies have been on the verge of bankruptcy. In fact, GM and Ford were forced to set up separate organizations to operate their underfunded pension and health care programs, just to survive. It is not clear whether Ford and Chrysler will even make it.

Leaders must have a long term horizon and think about the impact of their strategies and actions for the long term and not just take easy way. However, this also means that the leaders must be on the job long enough to do the job...4.7 years is not sufficient, I recommend a ten year reign...long enough to have a long term horizon, but not long enough to become the czar.

In my book, "The Secret to GE's Success" I describe the GE labor relations and leadership strategies. Though GE's strategies also have some pitfalls, it is one of the best models we have and it is worth studying and adapting what makes sense.

The message is clear...never take the short term, easy actions that can mortgage the organization's future.