GEWatcher-- my predictions came true- NOW WHAT?

I completed writting my latest book: The Secret to GE's Success in June, 2006 and it was published in August 2006 and hit the bookstores in January 2007. The book summarized the key lessons learned from GE's successes and failures over its life span of 126 years.

In order to make the book current, I described and evaluated the Jeff Immelt strategy and compared it to his predecessors. At the end of this assessment I included three pages which I entitled: "Perspectives and Insights". I started with complementing Jeff and his team and sympathized with there frustration that thought the financial results were impressive the stock price didn't respond.

My major issue was the "High Expectations" that Immelt created and promised to meet. This is what I said: "Welch created very high expectations, and Immelt, as we just said, has achieved excellent results. The issue is whether Immelt has created such high expectations that many don't believe they are realistic and can be achieved.

Listed below are four major areas of concern. I have about Immelt's ability to meet the expectations he has articulated to the world."

I wish to focus on the first concern which was : "Ability to GO BIG"
"It is clear that Immelt continues to assert that GE can grow at an 8% compounded organic growth"... "He is clearly convinced and has the missionary zeal to make it happen. However, based on my experience and study, I am not convinced that he can do it and am concerned that he has created an unrealistic expectation. It is possible that in the long term he will have doubledd the revenues every nine years, but is it really possible to add $14 billion plus revenues year after year?
What happens if he doesn't make it, even for one year? Will this have a negative impact on the stock price and put his reputation in jeopardy? I THINK IT WILL!"

This is exactly what happened last month. Immelt missed his promised results and the GE stock dropped 14% in one day and still has not recovered. My continuing concern is that Immelt and his team are still vowed and determined to show the world they are right that they may not do what their predecessors did..namely, adapt to reality and make changes if they are needed. One the best examples was the willingness of Fred Borch to recognize that his " Internal Growth Strategies" (Chapter 10) were failing and he needed to take major actions to abort many of them and install the discipline of strategic thinking and decision making". I believe the Borch and Immelt strategies have many similarities and need to evaluated in light of the changing world.

Admitting mistakes and moving on has been of the reasons that GE is still alive and prospering while the vast majority of its peer companies no longer exist.

If you wish the complete story and understanding of all my concerns: read pages 249- 252 in my book "The Secret to GE's Success" and the many blogs I have written in the past few months.

If you have any insights or different perspectives please respond...

Bill Rothschild, CEO Rothschild Strategies Unlimited, LLC

Jeff Immelt is a TRUE BELIEVER...and I HOPE HE IS RIGHT!!

Jeff Immelt announced today that he was putting ANOTHER $3.5 million of his OWN money into GE...this is both honorable and unusual. It demonstrates he believes that GE is a bargain and will increase in value, but is unusual since he is making such a public display of his commitment.

I don't know Jeff...but I am pleased he is so convinced that he has the right strategy and it will meet investor and stockholder expectations... I HOPE HE IS RIGHT.

Bill Rothschild...author of the book that tells the entire GE story...from its beginning to today..SUCCESS and FAILURES...
THE SECRET TO GE's SUCCESS...

Reducing GE's Complexity.

In June, 2007, I wrote a Chief Executive Magazine article on GE's need to reduce the complexity of the company. This is what I wrote:

"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.
In my latest book, "The Secret to GE’s Success", I describe the company as remarkable, since it has had the ability to succeed and prosper for over 127 years. I use the word “Latin” to capture the five reasons for this success. These include leadership, adaptability, talent, influence and networks. Though all are important, I think one of the most important is the company’s ability to adapt and admit mistakes."

I still believe that GE needs to think about ways to allow their shareholders the opportunity to invest in parts of the company and not just in the entire portfolio.

Bill Rothschild, author of "The Secret to GE's Success".

Influencing Public Issues...a GE tradition.

In my most recent book: The Secret to GE's Success, I summarized the reasons for GE's Success by using one word LATIN (Leadership, Adaptability, Talent, Influence, Networks).

In most of my blogs, I have focused on the first three letters: L standing for LEADERSHIP, A for ADAPTABILITY, T for TALENT...but little has been written about the fourth letter I...which focuses on how GE has INFLUENCED public and other KEY STAKEHOLDER perception and actions.

GE has had a very proactive strategy to assure that it's company interests were protected and not restricted by taking public stands on issues that impacted their ability to control their own destiny and make money for its investors.

• PUBLIC SAFETY- Starting with EDISON... his company, then called Edison General Electric, used the first electric execution as a means of showing that his technology, Direct Current or DC, was safer than Alternating Current or AC...that was being purposed by Westinghouse his key adversary, since the first electric chair used AC.


• PROTECTING WORKERS and HELPING TO RECOVER FROM THE GREAT DEPRESSION. But it was the Swope/ Young era that really got GE into politics and had the company take very public, often unpopular stands. Swope was the architect of National Recovery Act (NRA) and Social Security. Both foundation programs of the Roosevelt NEW DEAL.


• STOPPING GOVERNMENT AND UNIONS FROM CONTROLLING THE COMPANY. During the 1950's it was Cordiner who took the opposite stand and fought BIG Government and Big Labor and used the services of a future President, not revered, Ronald Reagan to fight the increasing power of the socialists and the potential nationalization of American industry.

CREATING THE BUSINESS ROUND TABLE. After Cordiner, the GE CEO's took another approach to influencing policies. They instituted and led the Business Round table to serve as their surrogate and to allow them to protect their company interests and enable the company to be master of its own destiny.

MSNBC - THE LIBERAL NETWORK. Today, it appears that Jeff Immelt is using another approach to influence public policy. He is using the spokesman of NBC and MSNBC to take public stands. MSNBC has become the LIBERAL network to counter the Fox Conservative network. The most recent hostility between O'Reilly (Fox) and Olbermann (MSNBC) has become so bitter that it is now degenerated into name calling. Matthews is clearly an Obama supporter and very negative about the Republicans.

WHAT DOES GE GAIN? It is not clear what GE gains by taking political stands. It is not just a media company like Fox, who is using this to differentiate itself. GE has many diverse businesses and their political stand can hurt them, both in this country and globally. If the stands were focused on issues that can help GE, like greening or energy conservation, it would make sense but they are not.

Influencing public opinion and government policies is one of the GE Success factors, but it needs to be focused. In my book I discuss the reasons that GE leaders were willing to take "politically incorrect" stands on major issues. In each case, they had a recognition that they had to control their own destiny and it required being unpopular, if needed.

I am not sure that Immelt's reason is and so I will continue to evaluate GE's actions and determine if it is helpful to GE and is consistent with one of the reasons that GE has been so successful in the past.

Bill Rothschild- author of The Secret to GE's Success- that balances GE's successes and failures.

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).

GE Appliance Spin Off Makes Strategic Sense

Both the Wall Street Journal and the Financial Times reported May 14th, that Immelt had hired Goldman to divest the "storied" GE appliance business. Diane Brady, senior Business Week reporter, had a blog which also highlighted that the spin off was a good idea.

I have been out of GE for 24 years but still completely understand their strategies and portfolio, and in 2000, before the appointment of Jeff Immelt, I wrote an article for Chief Executive Magazine recommending that Jack Welch's successor, then unknown, sell Major Appliances. In my book The Secret to GE's Success and in another Chief Executive article in 2007, I repeated this recommendation. (These articles can be found on my site: http://www.strategyleader.com/.

So, I believe, that this spin off is long overdue and I agree with Immelt's belated decision. However the timing may be poor since the value of the appliance business is lower than it was several years ago and maybe Immelt should wait to get more money of this asset.

But let's go beyond the obvious reasons, that are being reported, namely that the GE Appliance business doesn't produced the desired earnings and is cyclical.

The real reason that I recommended this sale is that Immelt has created a new GE and the Appliance and the Lighting businesses, don't fit.

Immelt has moved GE "back to the future" that is he has moved GE back to long cycle, technology, systems businesses, which he had christened "infrastructure". This includes some of the traditional GE businesses, like nuclear, gas turbines, jet engines, locomotives..plus some new ones like water purification, wind, solar energy. It also should include health care...a very old GE business, starting with x-ray (pages 140-141in The Secret to GE's Success)

The appliance and small appliance businesses were created as part of the "benign cycle" strategy ( pages 57- 58 in The Secret to GE's Success) whose theory was simple: "provide consumer and industrial electricity using products that would require the electric utilities to acquire more generation, transmission and distribution products and systems." Thus as the consumer demand increased so did the demand of the longer cycle more expensive systems. Since GE provided them all it was a win/win game plan.

Jack Welch discontinued this strategy when he sold the housewares, transformer and switchgear businesses. Further GE has not been the innovative leader in the appliance business for many decades.

In short... GE has moved beyond the "benign cycle" and appliances, lighting no longer fit..so Immelt is right in divesting them.

But this decision has several major strategic/ financial implications that will be discussed in my next blog. To gain a complete understanding of the real, objective, unbiased GE STORY... read my book" The Secret to GE's Success" and view my GEWatcher blogs on my site" http://www.strategyleader.com/

Bill Rothschild... author of five strategic books, tutors, software...

Test time for GE and Jeff Immelt.

The past few weeks have been very trying times for GE and Jeff Immelt.

• The most shocking time was when Jeff, after having said that 10% earnings growth was "in the bag" and then missing his promises was one of the worse times since Jeff has taken over.
  
• This embarrassment was compounded when his friend, mentor and predecessor went on global video to say he was shocked and that it happened again he would get a gun and shoot him ( this was shocking because it showed that Jack Welch was out of toon with the times and out of the company network)
  
• Then there were stockholder suits, the investigation of the SEC and finally admission that one of his acquistions,when he was the CEO of Healthcare had just resummed production after 20 months.
  
• Even worse was the Forbes article on the CEOs who failed to earn their money for stockholders.
  

In short, it appears that Jeff's "seven year honeymoon" has come to an adbrubt end and that his creditability and ability to lead and increase SHAREHOLDER VALUE are much in jeapody.

 

Unfortunately I think that Jeff is now witnessing the downside of his GO BIG, GO GLOBAL and Dreaming Approach to leading one of the most remarkable and successful company for over 127 years.

I personally continue to maintain my investment in GE and believe that the company will address its mistakes and ADAPT to external changes and its past mistakes.

 

Stay tuned…Bill Rothschild, author of The Secret to GE's Success which anticipated the problems of Immelt's GO BIG strategies, visit www.strategyleader.com for a continuing assessment of GE and other major companies…