GE’s Complete Leadership Failure

General Electric’s Chairman and CEO Jeffrey Immelt announced last week that his next big step as leader will be to sell off the company’s real estate assets and the balance of its financial services business.  This is a massive $300B asset sale.  It follows the very large spin-off of GE’s retail banking unit as Synchrony Financial in 2014, and the sale of NBC/Universal in 2013.  When it comes to shrinking a company, few CEOs have ever been as successful as Mr. Immelt!

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The money is not going into developing any new markets or new products.  It is not being used to finance growth of GE at all.  Rather, Mr. Immelt will immediately begin a massive $50B stock buyback program in order to prop up the stock price for investors.

Immelt GE WayWhen Mr. Immelt took the job of CEO GE sold for about $40/share.  Last week it was trading for about $25/share.  A decline of 37.5%.  During that same time period the Dow Jones Industrial Average, of which GE is the oldest component, rose from 9,600 to 17,900.  An increase of 86.5%.  This has been a very, very long period of quite unsatisfactory performance for Mr. Immelt.

Prior to Mr. Immelt GE was headed by Jack Welch.  During his tenure at the top of GE the company created more wealth for its investors than any company ever in the recorded history of U.S. publicly traded companies.  GE’s value increased 40-fold (4000%) from 1981 to 2001. He expanded GE into new businesses, often far removed from its industrial manufacturing roots, as market shifts created new opportunities for growing revenues and profits.  From what was mostly a diversified manufacturing company Mr. Welch lead GE into real estate as those assets increased in value, then media as advertising revenues skyrocketed and finally financial services as deregulation opened the market for the greatest returns in banking history.

Jack Welch was the Steve Jobs of his era.  Because he had the foresight to push GE into new markets, create new products and grow the company.  Growth that was so substantial it kept GE constantly in the news, and investors thrilled.

But Mr. Immelt – not so much.  During his tenure GE has not developed any new markets.  He has not led the company into any growth areas.  As the world of portable technology has exploded, making a fortune for Apple and Google investors, GE missed the entire movement into the Internet of Things.  Rather than develop new products building on new technologies in wifi, portability, mobility and social Mr. Immelt’s GE sold the appliance division to Electrolux and spent the $3.3B on stock buybacks.

Mr. Immelt’s tenure has been lacked by a complete lack of vision. Rather than looking ahead and preparing for market shifts, Immelt’s GE has reacted to market changes – usually for the poorer.  Unprepared for things going off-kilter in financial services, the company was rocked by the financial meltdown and was only saved by an infusion from Berkshire Hathaway.  Now it is exiting the business which generates nearly half its profits, claiming it doesn’t want to deal with regulations, rather than figuring out how to make it a more successful enterprise.  After accumulating massive real estate holdings, instead of selling them at the peak in the mid-2000s it is now exiting as fast as possible in a recovering economy – to let the fund managers capture gains from improving real estate.

GE is now repatriating some $36B in foreign profits, on which it will pay $6B in taxes.  Investors should realize this is happening at the strongest value of the dollar since Mr. Immelt took office.  If GE needed these funds, which have been in offshore currencies such as the Euro, it could have repatriated them anytime in the last 3 years and those funds would have been $50B instead of $36B!  To say the timing of this transaction could not have been poorer ….

The only thing into which Mr. Immelt has invested has been GE stock.  And even that has been a lousy spend, as the price has gone down rather than up!   Smart investors have realized that there is no growth in Immelt’s GE, and they have dumped the stock faster than he could buy it.  Mr. Immelt’s Harvard MBA gave him insight to financial engineering, but unfortunately not how to lead and grow a major corporation.  After 15 years Immelt will leave GE a much smaller, and as he said in the press release, “simpler” business.  Apparently it was too big and complicated for him to run.

In the GE statement Mr. Immelt states “This is a major step in our strategy to focus GE around its competitive advantage.”  Sorry Mr. Immelt, but that is not a strategy.  Identifying growing markets and technologies to create strong, high profit positions with long-term returns is a strategy.  Using vague MBA-esque language to hide what is an obvious effort at salvaging a collapsing stock price for another 2 years has nothing to do with strategy.  It is a financial tactic.

The Immelt era is the story of a GE which has reacted to events, rather than lead them.  Where Steve Jobs took a broken, floundering company and used vision to guide it to great wealth, and Jack Welch used vision to build one of the world’s most resilient and strong corporations, Jeffrey Immelt and his team were overtaken by events at almost every turn.  CEO Immelt took what was perhaps the leading corporation of the last century and will leave it in dire shape, lacking a plan for re-establishing its once great heritage.  It is a story of utterly failed leadership.

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Why Jeff Bezos is our greatest living CEO

The Harvard Business Review recently published its list of the 100 Best Performing CEOs.  This list is better than most because it looks at long-term performance of the CEO during his or her time in the job – with many on the list in service more than a decade.

#1 was Steve Jobs.  #2 is Jeff Bezos – making him the greatest living CEO.  It is startling just how well these two CEOs performed.  During Jobs' tenure Apple investors achieved a return of 66.8 times their money.  During Mr. Bezos' tenure shareholders achieved a remarkable 124.3 times return on their money.  In an era when most of us are happy to earn 5-10%/year – which equates to doubling your money about once a decade – these CEOs exceeded expectations 30-60 fold!

Both of these CEOs achieved greatness by transforming an industry.  We all know the Apple story.  From near bankruptcy as the Mac company Mr. Jobs led Apple into the mobile devices business, and created a transformation from Walkmen, Razrs and PCs to iPods, iPhones and iPads – to the detriment of Sony, Motorola, Nokia, Microsoft, HP and Dell. 

The Amazon story is all the more remarkable because it has been written in the far more mundane world of retail – not known for being nearly as fast-changing at tech.

Lest we forget, Amazon started as an on-line seller of books frequently unavailable at your local bookstore.  "What's a local bookstore?" you may now ask, because through continuous upgrading of its capability to build on the advances in internet usage – across machines, browsers, wi-fi and mobile – Amazon drove into bankruptcy such large booksellers as B.Dalton and Borders – leaving Barnes & Noble a mere shell of its former self and on tenous footing.  And the number of small bookshops has dropped dramatically.

But Amazon's industry transformation has gone far beyond bookselling.  Amazon was one of the first, and by most users considered the best, at offering a complete on-line storefront for any retailer who wants to sell goods through Amazon's site.  You can set up your inventory, display products, provide user information, manage a shopping cart and handle check out all through Amazon – with minimal technical skill.  This allowed Amazon to bring vastly more products to customers; and without adding all the inventory or warehousing cost.

As digital uses grew, Amazon moved beyond the slow-paced publishers to launch the Kindle and give us eReaders displacing paper books and periodicals.  But this was just the first salvo in the effort to promote additional on-line buying, as Amazon next launched Kindle Fire which at remarkably low cost gave people a tablet already set up for doing retail shopping at Amazon.

As Amazon launched its book downloads and on-line services, it built its own cloud services business to aid businesses and people in using tablets, and doing more things on-line; which further reinforced the digital retail world in which Amazon dominates.

And make no doubt about it, Kindle Fire – and the use of all other tablets – is the WalMart and other traditional brick-and-mortar retail killer.  Amazon is now a player in all pieces of the transition which is happening in retail, from traditional shopping to on-line. 

Demand for retail space in the USA began declining in 2009 and has not stopped.  Most analysts blamed it on the great recession.  But in retrospect we can now see it was the watershed year for customers to begin looking more, and buying more, on-line.  Now each year growth in on-line retail continues, while demand at traditional stores wanes.

Just look at this last holiday season.  To (hopefully) drive revenue stores were opening on Thanksgiving, and doing 24 and 48 hours of non-stop staffing and promotions to drive sales.  But it was mostly in vain, as traditional retail saw almost no gains.  Despite doing more and more of what they've always done – trying to be better, faster and cheaper – they simply could not change the trend away from shopping on-line and back into the stores.

For the last year the #1 trend in retailing has been "showrooming" where customers stand in a store with a smartphone comparison pricing on-line (most frequently Amazon) to the product on the shelf.  Retailers were forced to match on-line prices, despite their higher overhead, or lose the business.  And now Target has implemented a policy of price-matching Amazon for all of 2013 in hopes of slowing the trend to on-line purchasing.

Circuit City went bankrupt, which saved Best Buy as it picked up their lost business.  But now Best Buy is close to failure.  Same store sales at WalMart have been flat.  JCPenney recruited Apple's retail store wizard as CEO – but he's learned when you have to compete with Amazon life simply sucks.  Nobody in traditional retail has found a way to reverse the on-line shopping trend, which is still dominated by Amazon.

We all can learn from these two CEOs and the companies they built.  First, and foremost, is understand trends and align with them.  If you help people move in the direction they want to go life is easy, and growth can be phenomenal.  Trying to slow, stop or reverse a trend doesn't work, and is expensive. 

Second, don't ask customers what they want, instead give them what they need.  Customers may be on a trend, but they will frame their requests in the old paradigm.  By creating new trend-promoting products and solutions you can capture the customer and avoid head-to-head competition with the "old guard" titans selling the increasingly outdated solutions.  Don't build better brick-and-mortar, make brick-and-mortar obsolete.

So, what's stopping you from growing your business like Apple or Amazon?  What keeps you from being the next Steve Jobs, or Jeff Bezos?  Can you spot trends and provide trend-supporting solutions for customers?  Or are you stymied because you're spending too much time trying to defend and extend your old business in the face of game changing trends.