Learning Strategy Through GE’s Eyes

I’ve often mentioned GE as a company to watch as it goes through its transition. I could not resist writing about them in this week’s blog since just about a year ago, in August 2017, General Electric brought in John Flannery to help revive the company. In November, the new CEO said the company was streamlining its business. By July, GE was reporting progress on cutting costs, and at least one division, aviation, was taking off (to use a pun). A 30-year veteran of GE, Flannery began a multiyear transformation for this iconic company known for its excellent management.

After 14 months in the top job, Flannery was ousted this month and replaced by H. Lawrence Culp, Jr., the former longtime chief executive of Danaher who joined GE’s board in April.

GE has been reinventing itself and shedding businesses, but according to reports, change has not come quickly enough for the board. The board agreed with the decisions Flannery made, just not the pace of change.

The tenure of GE CEOs had been measured in decades rather than months, and Culp’s appointment marks the first time the company has brought in an outsider to be its leader.

What could anyone have done in 14 months? GE overpaid for oil-field services company Baker Hughes and Alstom’s power business, overpaid for buybacks of GE shares, and exited financial services but kept long-term care liabilities. GE’s stock price is currently trading at half of where it was a year ago, and the company has lost $175 billion in market value over the past 20 months. In June, GE was dropped from the Dow Jones Industrial Average after more than a century.

Recent events at GE echo a similar episode at Ford when that company brought up Mark Fields from the ranks as CEO, and less than three years later replaced him for the same stated reason: not being able to change the company quickly enough. 

GE’s stock price gained about 7 percent immediately after the announcement of Culp’s appointment as CEO and chairman. Share prices gained 3 percent after the June 2017 announcement of Flannery to the post. This recent change represents about $7 billion market cap on the fact that a new CEO is coming in.

Difficulties at GE were already established when Flannery took over: the $13.5 billion agreement to take over the power business of French company Alstom and the decision to abandon consumer finance company Synchrony Financial, among them, attributable to former CEO Jeff Immelt.

GE experienced a combination of bad luck and bad decisions. Bad luck in their choice of industries.  Health care took a bit of a pause, transportation/locomotive took a dive, oil at the time when they bought Baker Hughes turned out to be a bad investment. Alstom turned out to be a poor decision that GE could not rectify.  

You’d have to be an insider to know if Flannery was a bad CEO choice. If one spends 30 years in an organization, he or she is probably deeply steeped in the culture.

Research on succession is clear: when companies are doing fine, go within. When companies are in trouble, redirect and look outside.

Culp will feel the pressure to boost the operational effectiveness of the businesses GE keeps. They will likely accelerate the spinoffs. As that happens, the board’s role is going to be critical. They forced out a CEO and chose a new one right away. This strong board has several CEOs who can provide guidance and advice from their own personal experience, and they are going to help Culp speed up the changes and decide what ought to be spun off, to reposition, to define the company’s core strategy.

GE also named Thomas W. Horton as lead director, the former American Airlines chairman, and chief executive oversaw the airline’s restructuring and eventual merger with US Airways. Changes on the board, in fact, have been one under-appreciated aspect of GE’s transition. There are five holdovers from the old board and six new members. Eleven of the members there in 2016 are gone. That change provides opportunities to think differently at the top of the company and to take actions which might have been difficult to take for board members that are longer tenured.

The latest changes will also impact employees.  Long-term service people are likely to leave, and some of that will probably be healthy because it may be that the longer-tenured folks are part of the problem, and Culp will be needing the next generation of managers with a different mindset and maybe different skill set.

In announcing Culp’s appointment on October 1, GE cited the way he transformed Danaher from an industrial manufacturer into a leading science and technology company. Danaher executed a disciplined capital allocation approach, including a series of strategic acquisitions and dispositions, a focus on investing for high-impact organic growth and margin expansion, and delivering strong free cash flow to drive long-term shareholder value.

Culp gets his job with some advantages, such as the write-downs are all behind the company, and all the bad news is known and being dealt with.

The company will probably its dividend to strengthen its balance sheet. That prospect has already taken the equity price down.

Larry Culp is a great fan of the Toyota system in which there is continuous improvement, exacting focus on what you’re delivering, no fooling around at the top and in the ranks and insisting that everything is produced on time with quality. We’re going to see a focus on quality, meaning process oversight, so everything you make goes out the door and it works, which is not a trivial problem.  

There are knowledge and competencies to be found GE. Culp needs to dig into the company to figure out what he has that competition doesn’t and how to use the embedded competencies and knowledge.

Can GE remain a conglomerate? Should it? GE will likely remain somewhat of a diversified firm.  They want to keep aviation, power, and energy. Those are not identical, although they have some commonalities. What Larry Culp is going to be asked to do is to find commonality across the businesses. For example, what he finds in aviation research and development can somehow be used in the power business.

So, keep your eyes on GE– you will learn lots about corporate strategy!


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