The Three Steps GE Should Take Now – And The Lessons For Your Business

by | Oct 27, 2017 | Food and Drink, Growth Stall, Investing, Leadership, Retail

Monitor displays General Electric Co. (GE) at the New York Stock Exchange (NYSE) October, 2017. Photographer: Michael Nagle/Bloomberg

For years I have been negative on GE’s leadership.  CEO Immelt led the dismantling of the once-great GE, making it a smaller company and one worth quite a bit less.  The process has been devastating to many employees who lost their jobs, pensioners who have seen their benefits shrivel, communities with GE facilities that have suffered from investment atrophy, suppliers that have been squeezed out or displaced and investors that have seen the value of GE shares plummet.

But now there is a new CEO, a new leadership team and even some new faces on the Board of Directors.  Some readers have informed me that it is easier to attack a weak leader than recommend a solution, and they have inquired as to what I think GE should do now.  I do not see the GE situation as hopeless.  The company still has an enormous revenue base, and vast assets it can use to fund a directional shift.  And that’s what GE must do – make a serious shift in how it allocates resources.

Step 1 – Apply the First Rule of Holes

The first rule of holes is “when you find yourself in a hole, stop digging.”  (Will Rogers, 1911) This seems simple.  But far too many companies have their resourcing process on auto-pilot.  Businesses that have not been growing, and often are not producing good returns on investment, continue to receive funding.  Possibly because they are a legacy business that nobody wants to stop.  Or possibly because leadership remains ever hopeful that tomorrow will somehow look like yesterday and the next round of money, or hiring, will change things to the way they were.

In fact, these businesses are in a hole, and spending more on them is continuing to dig.  The investment hole just keeps getting bigger.  The smart thing to do is just stop.  Quit adding resources to a business that’s not adding value to the market capitalization.  Just stop investing.

Will rogers, american humorist

When Steve Jobs took over Apple he discontinued several Macintosh models, and cut funding for Macintosh development.  The Mac was not going to save Apple’s declining fortunes.  Apple needed new products for new markets, and the only way to make that happen was to stop putting so much money into the Mac business.

When streaming emerged CEO Reed Hastings of Netflix quit spending money on the traditional DVD/Video distribution business even though Netflix dominated it.  He even raised the price.   Only by stopping investments in traditional distribution could he turn the company toward streaming.

Step 2 – Identify the Trend that will Guide Your Strategy

All growth strategies build on trends.  After receiving funding from Microsoft to avoid bankruptcy in 2000, Apple spent a year deciding its future lied in building on the trend to mobile.  Once the trend was identified, all product development, and new product introductions, were targeted at being a leader in the mobile trend.

When the internet emerged GE CEO Jack Welch required all business units to create “DestroyYourBusiness.com” teams.  This forced every business to look at the impact the internet would have on their business, including business model changes and emergence of new competitors.  By focusing on the internet trend GE kept growing even in businesses not inherently thought of as “internet” businesses.

GE has to decide what trend it will leverage to guide all new growth projects.  Given its large positions in manufacturing and health care it would make sense to at least start with IoT opportunities, and new opportunities to restructure America’s health care system.  But even if not these trends, GE needs to identify the trend that it can build upon to guide its investments and grow.

Step 3 – Place Your Bets and Monetize

When Facebook CEO Mark Zuckerberg realized the trend in communications was toward pictures and video he took action to keep users on the company platform.  First he bought Instagram for $1 billion, even though it had no revenues.  Two years later he paid $19 billion for WhatsApp, gaining many new users as well as significant OTT technology.  Both seemed very expensive acquisitions, but Facebook rapidly moved to increase their growth

chess pieces and cash

and monetize their markets.  Leaders of the acquired companies were given important roles in Facebook to help guide growth in users, revenues and profits.

Netflix leads the streaming war, but it has tough competition.  So Netflix has committed spending over $6billion on new original content to keep customers from going to Amazon Prime, Hulu and others.  This large expenditure is intended to allow ongoing subscriber growth domestically and internationally, as well as raise subscription prices.

This week CVS announced it is planning to acquire Aetna Health for $66 billion.  On the surface it is easy to ask “why?” But quickly analysts offered support for the deal, ranging from fighting off Amazon in prescription sales to restructuring how health care costs are paid and how care is delivered.  The fact that analysts see this acquisition as building on industry trends gives support to the deal and expectations for better future returns for CVS.

During the Immelt era, there were attempts to grow, such as in the “water business.”  But the investments were not consistent, and there was insufficient effort placed on understanding how to monetize the business short- and long-term.  Leadership did not offer a compelling vision for how the trends would turn into revenues and profits.  Acquisitions were made, but lacking a strong vision of how to grow revenues, and an outsider’s perspective on how to lead the trend, very quickly short-term financial metrics built into GE’s review process led to bad decisions crippling these opportunities for growth.  And today the consensus is that GE will likely sell its healthcare businessrather than make the necessary investments to grow it as CVS is doing.

Successful leadership means moving beyond traditional financial management to invest for growth

In the Welch era, GE made dozens of acquisitions.  These were driven by a desire to build on trends.  Welch did not fear investing in growth businesses, and he held leaders’ feet to the fire to produce successful results.  If they didn’t achieve goals he let the people and/or the business go.  Hence his nickname “Neutron Jack.”

For example, although GE had no background in entertainment, GE bought NBC at a time when viewership was growing and ad prices were growing even faster.  This led to higher revenues and market cap for GE.  On the other hand, when leaders at CALMA did not anticipate the shift in CAD/CAM from dedicated workstations to PCs, Welch saw them overly tied to old technology and unable to recognize the trend, so he immediately sold the business.  He invested in businesses that added to valuation, and sold businesses that lacked a clear path to building on trends for higher value.

Being a caretaker, or steward, is no longer sufficient for business leadership.  Competitors, and markets, shift too quickly.  Leaders must anticipate trends, reduce investments in products, services and projects that are off the trend, and put resources to work where growth can create higher returns.

This is all possible at GE – if the new leadership has a vision for the future and starts allocating resources effectively.  For now, all we can do is wait and see……
will rogers quote: Even if you're on the right track you'll get run over if you just sit there.

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