GE: Failure To Transform
As GE turned into a shipwreck in what seemed like a matter of months, pointing fingers at the captain became a parlor game. That was how the media missed the real problem.
As GE transformed into a shipwreck, pointing fingers at the captain became a parlor game. Even someone as astute as New York Times writer James Stewart found it irresistible to condemn CEO Jeff Immelt for the failure. Only he never sought confirmation from chief executives who understand GE. Instead, he chose a law professor. The media, as Warren Buffett says, likes to shop for confirmatory quotes. Sources provide them in return for seeing their name in print. Perhaps a better approach would begin by admitting the GE story is more complicated.
Immelt was the steward of GE during the period its stock lost $540 billion, a value higher than the GDP of the Kingdom of Belgium. That’s a lot of waffles. The chief executive of General Electric is usually someone business schools are named after and case histories extoll. That was Immelt’s likely future when he took the reins in 2001. He had been a star football player at Dartmouth, majoring in math, and an outstanding Harvard MBA. His climb up the GE ladder was steady by hard, and he was tested every step of the way. He is a rock star in person and on paper. So why did GE fail?
It is why the media jumps to quickly to assess blame when the point is that the company suffered a systemic collapse. While the CEO should always bear some responsibility, when a company with the most brilliant management and strategy skills in the world falls apart, there must be more to the story. As George Santayana said, “those who fail to remember history are doomed to repeat it.” Let’s remember what really happened to GE.
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In 1994, Jack Welch was at his peak. so he doubled down on the “be #1 or 2 in your business” strategy and instructed each division to achieve it or get sold. To the GE culture, being sold was a death sentence. The task ahead became simple: cut costs, fire employees, shed product lines, and make the company into a lean and mean machine — emphasis on the mean.
Welch once told Immelt, “I love you, but if you don’t get your numbers this quarter, I’m going to fire you.” The truth was Welch loved productivity more than people, and if telling someone he loved them would help, he wasn’t shy. GE became built for the moment. You either made your numbers or your career was over. It made investors happy, but in the process turned good managers into automatons. The GE culture was about today, not yesterday. And, not about tomorrow.
When Jack Welch took over in 1981, it was a well-run conglomerate. He cared about things CEOs cared about in those days, like Wall Street. Whatever multiple it assigned, GE responded. Classic GE managers were appointed to head up investment banks like Kidder Peabody and glitzy media companies like NBC. GE leaders could run any business, or so the myth believed. But they didn’t really run anything. They just cut costs until earnings flowed. And that drove the company headlong into a sector that no one thought much about, the old GE Leasing business, now dubbed GE Capital.
Welch discovered the hen that lays golden eggs when he realized that GE Leasing could become a powerhouse called GE Capital, a nonbank bank — financial jargon for an unregulated, shadow banking entity, the kind that would help bring the world into meltdown in ’08. GE got into the leasing business initially because everything it made was leased or rented. The company had a Standard and Poor’s AAA rating and was able to compete against banks that did not enjoy such a rating. Welch jumped on the easy money, and it became his recipe for success, but ultimately Immelt’s disaster.
By 1995, Welch appeared on magazine covers and talk shows regularly, and was as close to a celebrity as it got. Then, four days before 9/11 in 2001, he passed the reins, lock, stock, and triple-A credit, to his successor.
When Immelt took over, he could not have foreseen the times would decimate his aviation business after the terror attacks on the World Trade Center and then crush his financial services business in the ’08 global crisis.
As the Treasury Department put the breaks on financial services, capital intensive projects became unaffordable. Then the board never got Immelt’s rhythm, nor did it understand the pressures. It led to things like board director Sandy Warner (former JP Morgan CEO) doing an end-run to appoint a successor.
Immelt’s makeover into digital, healthcare and industrial automation was still driven by being number one or two, which meant doubling down on winners and shedding losers. Only losers became the winners in a less capital intensive world. If Google were run the GE way, Larry Page would be a professor at Stanford.
The result was that Immelt was able to drive the company to higher lows, not higher highs.
Transformations go wrong because of the timing, the team, and in some cases, the strategy. When a company is under duress, plans drift into remedies. It reminds me of that expression about how you forgot to drain the swamp because it was filled with alligators. Immelt knew this. Although he tried to reshape the company by finding growth businesses, none could fill the hole.
If there is a lesson, it is that if you want to transform, you should shake up the game, not evolve slowly. To hell with Wall Street because it’s going to judge you on final results, not the last quarter. Immelt was a brilliant executive with great ideas but was outgunned by a rigid corporate culture and Wall Street custom that refused to let the company transform.
Timing is everything, as sports coaches say. If Immelt had taken the reins ten years earlier, I suspect his retirement would be a victory lap. When I wrote him a while back, I had just published an article claiming the GE way might have been the problem. Whoever ran the company had to do things the “Jack Welch” way, and couldn’t escape the stranglehold it had on the management team and Wall Street. Immelt didn’t confirm (or deny) but simply wrote back, “It’s a long story, I hope to tell it someday.”
Three reasons the GE transformation flopped:
- Transformations take more time than you think and may already be too late.
- Transformations need the right team, and it may not be the team that runs things now.
- Transformations need a new strategy, and the market may reject it.
The three things we learn from GE:
- The company evolved but never transformed.
- The team that created the plan wasn’t capable of implementing it.
- The new strategy was miscommunicated.
- The market never gained confidence.