Succeeding a Legend
In 2001, Prior to the selection of Jeff Immelt as GE CEO I published this article in the Chief Executive Magazine. This article and the latest Chief Executive Magazine article ...which is also on this page, shows that it was clear that Immelt had to make changes and ADAPT, as all of the GE leaders have done. Take a look at both.
On April 2, 2001, the oldest company on the Dow Jones, General Electric, will elect a new CEO. This new CEO will have no small challenge: succeeding a business legend.
There are several candidates that we are all publicly aware of. I won't speculate on who will replace Welch, but rather focus on what the new CEO should do to become a legend in his own right. Jack himself has made it clear that the new CEo should have a minimum of 15 years in office, which in today's business world is an eternity and why Jack's replacement will need to establish his own mark as a legend.
To become a legend, the new CEO should ask the following questions:
How and why did Jack Welch become a legend?
Is the current GE business portfolio sufficient to replicate the Welch track record? What are my strategic alternatives to make me a long-term winner?
HOW AND WHY DID JACK WELCH BECOME A LEGEND?
There are four characteristics of Jack Welch that, I believe have contributed to his remarkable success. Jack is 1) a skillful, intuitive portfolio strategist; 2) willing to change the rules if required; 3) highly competitive; and 4) a great communicator and motivator.
1) The skillful intuitive portfolio strategist.
Jack knows what he likes and dislikes. With focus and careful analysis, he is willing to bet on his instincts. He has focused on what he believes were the winners and eliminated the pieces that didn't fit his strategy, but did so with an excellent sense of timing and the recognition that business and product lines that didn't fit GE were potential fits with other companies.
He has exhibited the same sense of value and timing in making acquisitions. In the past few years he has made strategic acquisitions in Japan and Europe at very attractive prices. Welch acquired RCA at a bargain price, merged its market leading consumer electronics business with a losing GE brand and then traded it to Thompson for Medical Systems properties and cash. He also spun off Utah International at a profit and sold the Aerospace and Defense businesses and has made money on the Martin Lockheed stock.
2) Willing to change the rules as needed.
Jack Welch's predecessors were unwilling to sell a business unit with the GE brand for fear that the brand would be negatively impacted. Jack changed this thinking, carefully selling the GE brand with both the small appliance and consumer electronics businesses. He took advantage of the huge profits made from the GE pension programs to supplement company earnings, as well as to use the know-how to manage other company pension programs.
3) Jack the competitor. As with his golf game, Jack in business sought to the leader in every market. His vision was simply: Be #1 or #2 or don't play. He emphasized the need to be "different" and create sustainable long-term competitive strengths.
He used GE's financial strengths and skills to gain a dominant position in many of its capital goods markets. GE has become the largest owner and leaser of aircraft, thereby pulling through aircraft engines and services. It did the same in locomotive, turbine and medical system businesses.
Welch increased GE's emphasis on selling of services and solutions, rather than just products. Services have become the major contributor to earnings and even permitted the company to sustain positions in stagnant markets, such as Nuclear and Steam generation.
4) A great communicator and motivator. An effective communications strategy has been critical to energizing the GE troops. Numerous books and articles have been written about Jack's management style, and frequent and recognized speaking engagements at MBA schools have spread his success to the academic community and to their students.
IS THE CURRENT GE BUSINESS PORTFOLIO SUFFICIENT TO REPLICATE THE WELCH TRACK RECORD?
The new CEO must accept that GE is a strategically led portfolio company with a mix of businesses in different phases of the life cycle. which enables GE to deliver consistent earnings. This is the current macro portfolio of the company.
____________________________________________________________
The 1998 GE business portfolio
Business -------------------------% Revenues--------------% Earnings
GECS-------------------------------- 49-----------------------------28
Industrial----------------------------10-----------------------------13
Aircraft Engine--------------------9-------------------------------13
Power Systems------------------8-------------------------------- 9
Plastics----------------------------6------------------------------- 11
Technical--------------------------5--------------------------------8
Major Appliances------------- -5-------------------------------- 5
Broadcasting---------------------4---------------------------------9
______________________________________________________________
Jack Welch has had several favorite businesses during his reign. The first is financial services, which he has used as both a means (to pull through other GE products and services) and an end (becoming a major owner and leaser of capital goods equipment). Aircraft Engine and Medical Systems (included in the Technical) have been other favorites and he has made a significant number of acquisitions to enhance the position of these lines. The other businesses have been able to create strong positions and contribute to the company's earnings and cash flow.
There are other issues to be addressed, such as, what are the impact of changes financial service regulations and the creation of enormous financial service companies going to have on GECS? What are the risks inherent in the "own/ lease provide equipment and services synergy? Can the mature businesses continue to be the earnings and cash generators or have they reached a point where new technological and innovative strategies will be required?
The portfolio has don a remarkable job, but it will require new ideas and innovations to remain strong. The following, among others, is the list of what GE owns and leases either by itself or with partners:
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A fleet of 850 owned and managed aircraft
950,000 cars and trucks under lease and service management
Fleet of over 1,100,000 TEU
13 communications satellites
186,000 rail cars
Over 100 modular buildings and facilities
WHAT ARE MY STRATEGIC ALTERNATIVES TO MAKE ME A LONG-TERM WINNER?
Continue to do what Jack did...
This is going to prove difficult. It would require that he be the intuitive portfolio leader, flexible, highly competitive and a good motivator and communicator. Obviously, these are positive characteristics, but rarely has a successor been able to replicate the legend. Plus, the current GE portfolio is vulnerable and doesn't appear to have the ability to produce the same results for next decade and beyond.
Re-institute the TECHNOLOGICAL and MARKET INNOVATION OF GE'S past.
Welch did not become a legend because of any notable technological breakthroughs made my GE under his command. But there have been innovations in financing, services and applications, which stimulated growth.
The New CEO may wish to review the strategic history of GR and determine if past innovations could help. In 1963, GE was faced with the need to find new growth areas.
It commissioned the Growth Council and challenged it to find opportunities that were growing faster than the GNP and built on GE strengths. The council came up with 10 areas:
Products--------------------------------------Services
Aircraft Engines __________ Financial and Personal Services
Computers_________________Entertainment
Polymer Chemicals_______Community Development
Nuclear_____________________Education
Medical_Systems_____________________
Many of these recommendations were foundations for significant GE businesses. Financial Services, polymer chemicals, aircraft engines and medical systems were all great successes.
For GE other opportunities, such as computers, community development and education failed, but did prove to be major growth industries. One of the major problems GE had was that it tried all of them. It was not selective and it assumed that managers could manage anything.
The new CEO might wish to commission a similar council comprised of the best and brightest inside and outside the company. The council could identify areas that build on GE's significant financial, services and applications strengths and identify acquisitions and partnerships to enhance its technological and marketing skills.
The major issue is how much risk does the new CEO want to take? GE has not truly succeed in more than 60 percent of their new ventures, but their batting average is better than their competitors.
RECOGNIZE THAT GE MIGHT FARE BETTER AS MORE THAN ONE FIRM.
In the past decade many companies have decided to split themselves up. AT&T has done it twice: once to comply with the court ruling and once to create shareholder value and focus. ITT (one of the first conglomerates) split because its business portfolio was not strong enough.
Jack Welch has studied options and strongly rejects splitting GE up.When asked by Forbes what he thought if his successor split up GE, Jack was quoted as saying:" It meant I've picked the wrong guy--I haven't done my job well." The company position is that GE is now "boundary less" and that it gains from exchanging ideas across businesses.
This may all be true, but it's still an option the new CEO must consider. He should step back and be objective about what is best for the company in the next two decades and not what has worked in the past. The process should be evolutionary, not revolutionary. Jack Welch took three years before he started his evolutionary process. Making timely decisions is what makes the legend during the evolutionary process.
The first step in the evolution is to create at least three companies and establish tracking stocks:
1- TRADITIONAL GE. This would include the electrical, electro-mechanical and chemical based components of the company. Lighting, power systems, aircraft engine, and plastics would be part of this company. Its mission would be to continue to grow profitable sales and maintain strong positions, using the skills and resources of GE Capital as required. In essence, this is the continuation of the current strategies. There may be, however, some pruning required with Major Appliances as a disposition candidate.
2- GE FINANCIAL SERVICES. In essence, it is now a separate company and behaves like one. This company should aggressively but selectively continue to gain position and be the financial arm of the other components, which would enable GE to adapt to the dynamic changes in the industry. It may require the acquisition of or merger with a major financial services company.
3 GE TECHNOLOGY. This is the major change in the portfolio and Welch strategy. Jack elected not to be a major player in the information and communications, biotechnology and new IT-based markets. GE has made many acquisitions in the medical systems and communications area, but nothing real dramatic; most have been either line or market extensions. It has not really decided how to use NBC as a platform for the revolutions taking place in the information, communications and entertainment arenas. The new CEO must take decisive and major steps in these markets before it's too late. New ventures, creating new products and services and so on, all of which GE did before the Welch era.
By creating these three companies the new CEO would be able to focus each one and be positioned to participate in new markets. The tracking stocks are likely to increase overall stockholder value and reduce the need for debt. But most importantly, it would enable the company to clarify what it really is and develop the most appropriate management and teams to meet the unique needs of the three companies. Integration and communication need not suffer if they are managed
.
AS WELCH MIGHT SAY: SO WHAT?
The old adage, "If it ain' t broke, don' fix it," seems to be the major reason that the multi-GE approach is rejected. Jack Welch, however, didn't live by these rules. He was proactive in taking actions before they became problems. The new CEO must do the same. He must be creative and not just try to emulate Jack. He will need Welch's intuitively strategic, competitive communications and motivational skill, but he must use these skills to create a truly new GE.
Bill Rothschild, author of the THE SECRET TO GE's SUCCESS...NOW IN SIX LANGUAGE, KINDLE, AUDIO...
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