My favorite magazine is the ECONOMIST, which calls itself a newspaper. It is my favorite because, unlike other magazines who think that brevity is the key to success, the Economist provides in-depth, comprehensive and in most cases, fair and balanced news, columns and special reports.
Its GE analysis in March 21, 2009 edition, entitled: Losing its magic touch demonstrates what I am asserting. The Economist, unlike other publications, gave a good analysis of GE and its problems.
- Lets review some of the key points the article made about GE:
"How did GE get itself into a mess that has seen $269 billion wiped off its stock market value since the beginning of 2008? The main reason is that the strategy which helped GE gain its reputation for consistently producing bumper profits, year in and year out, has backfired. At its core was GE Capital. Founded in 1932 as General Electric Contracts Corporation to provide financing that supported the group’s industrial businesses, the operation gradually expanded into other areas of lending unrelated to GE. Under Jack Welch, GE’s chief executive from 1981 to 2001, GE Capital grew rapidly."
This is true GE Capital was established as GE Credit Corporation during the great depression to finance dealers inventories and consumer purchases (note this is different than the Economist "facts", but mine are correct).
- "If GE Capital were a bank, it would rank as one of the biggest in America (see chart 1). Its growth has made the division more and more important to its parent’s overall revenues and performance (see chart 2). In 2007 GE Capital’s profit made up 55% of the company’s total."
This is true and even though Jeff Immelt promised to reduce the dependence on GE Capital it didn't happen and the company became addicted to the ability to use GECC earnings to fill the gap and make the numbers.
- "Given the unit’s difficulties, it would be understandable if Mr Immelt wanted to jettison GE Capital as soon as it has been nursed back to health—which may take a while. But he insists he is committed to the business, which he says has strong franchises in areas such as aviation and energy finance, thanks to its close association with GE’s industrial activities."
This is also insightful GE's success in aircraft engines was partially a result of GE's financing of the engines and providing operating leases to airlines. This was a successful strategy and should continue, but it doesn't require all of the consumer and commodity type of financing GECC does. These could be separated out and spun off. Possibly using a " tracking stock approach".
- "Mr Immelt, recognising that the world has changed, has placed more emphasis on organic growth since taking office. He has built up the company’s marketing expertise, whereas in Mr Welch’s GE engineers and spreadsheet jockeys were the masters. And he has focused on innovation. Since 2001 GE has invested $330m to expand its research facilities around the world. It spent $4.3 billion on R&D in 2008, up from $2.3 billion in 2002."
This is a significant point. Welch focused on short term and not the long term and the company's ability to innovate declined during his tenure. Immelt needed to change the strategy and focus on innovation. In my book: The Secret to GE's SUCCESS" In my book, I entitled this "back to the future" since Immelt has tried to restore what GE once was, namely: innovative. However Jeff combined it with GO BIG (also discussed in the book") and this has become a major problem.
- "So does this mean that GE should be broken up? Assuming the company can revive GE Capital, there might be a case for hanging on to that business even if its margins are squeezed. By refocusing on its original mission, a stripped-down finance unit could help drive sales at GE’s industrial operations by providing finance for large infrastructure projects and other activities."
This is key to GE's future success, namely to become more focused, more selective, use the financial arm as a MEANS to grow the other businesses and not an END in itself.
- "Some critics claim that GE’s boss has dented his credibility by making several optimistic predictions that have been quickly proved wrong. For instance, barely a couple of weeks before the company revealed that it had missed its earnings in the first quarter of 2008, Mr Immelt declared that he expected GE to hit its target. In September he denied that the company needed a fresh capital injection. But soon afterwards it announced that it had raised $15 billion from Mr Buffett and others."
I totally agree that GE has created unrealistic expectations and has not been able to meet them. In my book, I challenged the company's assertion that it could grow at a 8% organic compounded growth rate, especially if the assumption that it could also grow earnings at the same rate, which had been the case under Welch.
- "Nevertheless the suspicion lingers that GE’s boss has a habit of promising too much. The best way for him to rebuild confidence in his leadership will be to demonstrate that GE can bounce back quickly from its woes. It will require a prodigious feat of managerial wizardry to pull that off."
I agree that there has been a tendency to over promise and not deliver...however, it Immelt follows his predecessors he will lead through adversity, admit mistakes and adapt thus making the company even stronger.
A review of GE's past (in my book) shows that GE leaders, of which there have only been 10) all faced adversities.:
-Edison picked the wrong technologies but adapted.
-Swope and Young saw GE revenues drop 75% during the Great Depression,
-Borch got the company growing again after the Great Electrical Conspiracy
-Jones managed to overcome hyper inflation and
-Immelt grew the company successfully and profitably after 9/11.
GE's success has been because of its LEADERSHIP, ADAPTABILITY, TALENT, INFLUENCING PUBLIC ISSUES and CREATING STRONG MANAGEMENT SYSTEMS and NETWORKS...I call this LATIN in my book.
In closing, I believe that the ECONOMIST has done a great job in summarizing what GE is and the key challenges it faces, however I DON'T THINK IT WILL REQUIRE A WIZARD, BUT A RETURN TO SOUND STRATEGIC THINKING AND DECISION MAKING that made the company stronger even in adversity.
Bill Rothschild, author of THE SECRET TO GE's SUCCESS and GE WATCHER blog (www.strategyleader.com)
