General Electric's (chart here) future earnings and valuation were recently lowered by an analyst at J.P. Morgan (read article here). Reviewing the difficulties facing GE he commented, "Former [Chief Executive Jack] Welch built a culture of earnings management that was unsustainable." One of the few times I've ever heard an analyst make excuses for management. Unfortunately, he could not be more wrong. Investors have every reason to expect GE's earnings growth to continue.
There is no doubt that the real estate bust has led to lower consumer spending, as well as big troubles for banks struggling with reserve requirements as they mark down loans. There is a "wall of worry" among consumer and business spenders alike. Yet, GE's task is to find ways to grow – even in the face of market challenges. When companies fall into a growth stall they have only a 7% chance of ever again growing at a mere 2%.
At GE we're seeing first stages of a growth stall. Why? Despite the very aggressive culture at GE, when Mr. Immelt replaced Mr. Welch he did not maintain the level of Disruption and White Space that his predecessor maintained. For whatever good reasons he had, Mr. Immelt steered GE on a course that was more predictable – and far less likely to make hard turns and hold leaders accountable. GE was very strong, and the company could continue to build on past strengths. And doing so, Mr. Immelt sustained GE largely by Defending & Extending historical practices. Along the way, acquisitions and divestitures were very predictable actions – not openings into new markets that could develop a new Success Formula.
Then the markets shifted. Very hard. And a long-term GE business called GE Capital was suddenly in a lot of trouble. This was not entirely unpredictable – but GE Capital had fallen into Defending & Extending its old business rather than really assessing what might happen. They had real estate investments, and complex hedging products that made real estate losses worse. GE Capital's reserves began disappearing overnight. Simultaneously, NBC was seeing declining revenue as ad demand fell through the floor. Again, not unpredictable given the inroads Google was making in the ad market since 2002. But NBC had fallen into believeing it could Defend & Extend its traditional business, rather than use scenarios to point out the potential shift of advertisers to the web. Even though Mr. Buffet at Berkshire Hathaway jumped in with financing, the reality was that GE had not prepared for the scenario unfolding. By slowing its Disruptions and White Space, GE fell into the same problems many of its other big company brethren fell into. Something the company had avoided under "Neutron Jack" who kept the company eyes firmly on the future while avoiding complacency in existing businesses.
Part of what made GE the incredible earnings machine it was under Mr. Welch was its extensive scenario planning which led the company to get out of businesses, and get into new ones. Under Mr. Welch GE implemented Disruptive techniques like focusing on market share (#1 or #2 was one Disruptive technique) or implementing Destroy-Your-Business.com teams to prepare for internet-based competition. But under Mr. Immelt GE did far less changing of its businesses. GE remained largely in industrial businesses, it's financial business and traditional media. Although it had extensive business interests in India, GE itself was not deeply involved in new internet-based or information-based businesses. It spun out its biggest IT business (GENPAC), reaping a huge reward which the company mostly invested in additional industrial businesses - like water production.
GE is a great company. It's the only company to be on the Dow Jones Industrial Average since the index was created. But not even GE can escape market shifts. GE was one of the first to pick up on the shift to globalization and was an early investor in offshore operations. But the last few years GE's fortunes have stymied as the company spent more energy Defending & Extending its old businesses instead of doing more in new markets. No company, of any size or age, can afford to depend on its old businesses. All businesses must prepare to compete in the future, on the requirements of future customers and against future competitors willing to maximally leverage current and developing opportunities for improvement via technology, business model or any other factor.
GE has a lot of resources, and a long-term culture of Disruption and using White Space. GE has the built-in skills to attack its old Lock-ins, find competitive opportunities and rapidly gear itself in the direction of growth. And that's what GE needs to do. Some analysts are worried that GE may have to reduce its dividend – and well GE should!!! When markets shift as rapidly as has happened this last year, its more important to develop new market opportunities than Defend a dividend payout. GE needs to move quickly to re-establish itself in growth markets for products and services that can push GE into the Rapids and pull the company out of this growth stall. Right now, investors should be demanding that Mr. Immelt act more like Mr. Welch, and push hard for Disruptions that open new White Space projects. That Mr. Immelt is on Mr. Obama's new business economic team (read article here) is not important to investors, employees and suppliers. Right now, all hands and minds need to be focused on finding new markets to regain growth for GE.