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…