Selling the GE monogram & Managing Earnings.

The sale of GE's Appliance business presents three problems for Immelt

• First is the need to sell the GE monogram with the business



• Second is the ability to manage the bottom line.



• Third is the continuing portfolio movement makes the company even more confusing and creates anxiety among key stakeholders, especially employees.

Selling GE Monogram and Impact on Total Company

GE has always prized and protected its "brand", which it calls "the monogram". It wasn't until Jack Welch took over that GE was willing to sell the monogram with the sale of a product business.

Welch broke tradition when he was willing to permit Black & Decker to use the GE brand on its small appliances for five years. He then gave allowed Thomson Electronics to use the GE brand when he sold the combination of RCA and GE to them.

The primary reason for not permitting others to use the GE monogram was the concern about the acquiring company's selling inferior or poor quality products or services that would reflect negatively on the entire GE company.

This is a major issue in the disposition of GE Major Appliances, which has been a 100 year consumer franchise and has contributed to GE's reputation for quality and innovation. If GE sells the brand to Korean or Chinese company it may cause brand problems. This is not to say, that Korean and Chinese companies can't produce quality products, but these companies have had some situations where the quality was not up to standards and it could be repeated.

Managing the Bottom Line.

A second issue deals with GE's ability to use its diversity to manage earnings and meet expectations. GE has had a balanced portfolio, consisting of long cycle/ large systems businesses, short cycle consumer non-durables (appliances, lighting) and financial services. This combination has enabled the company to ride out economic cycles and deliver the earnings expected. In the first quarter of 2008, Immelt was not able to meet expectations and the stock took a dive. Over his seven years in office, Immelt has changed the product mix.

He continues to sell off many of the short term consumer financial businesses and has increased his dependence on long cycle, technological systems businesses in countries that are not stable. This is what happened in the first quarter of 2008. The company was hit by the sub-prime and lack of liquidity and so was not able to meet his targets. The health care business was negatively impacted by having to close down a major component of the business for 20 months to fix quality problems.

This change in portfolio mix will make it even more difficult to manage the short term numbers.

Confusion and Insecurity.
The third issue is the continuing changes in the portfolio. Immelt brags that he has acquired over $50 billion of businesses and sold over $60 billion in his reign. This makes the company look more like a mutual fund than an operating company. It adds confusion and makes it increasingly difficult to lead. Even worse, it builds insecurity into the company, since no business seems to know whether it will continue to be in the family or will be discarded. It is clear that he holds to the Welch philosophy, "no one and nothing is sacred".

Overall, I agree that Major Appliances doesn't fit the GE long term game plan and should be spun off. But it is not easy and could have negative implications and impacts on the company and the image of management.

Bill Rothschild, author of the Secret to GE's Success (a book that tells the entire story of GE's past successes and failures and why it is still a remarkable company).