SUCCEEDING A LEGEND-2000 GE prior to IMMELTS selection

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:

• 
  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...

Why is the PRESS trying to DESTROY GE?

Why is there a current desire to DESTROY GE?

Before the 'WALL STREET MELTDOWN and the uprising against those who required and begged for Federal Government bailouts and survival packages, General Electric was a global ICON...

GE's GREAT ICON image was a combination of a strong, well managed company with predicable earnings, the largest capitalization, the WELCH deification and a diversified portfolio. I described in one ONE WORD...LATIN.

LATIN summarized the reason that the company not only prospered, but excelled, while its other peer DOW JONES companies disappeared or suffered. LATIN stands for Leadership (no cookie cutters) Adaptability (nothing is sacred) Talent (grow your own) Influencing (Being politically unacceptable) and Networks (meeting realistic expectations).

However since the Wall Street meltdown...GE has been placed in the "Financial services... you can't believe them" category and its stock has dropped to all time lows...

BUT the good news is that the GE management has Adapted...(consistent with the GE tradition) and admitted it made mistakes and is moving in the right direction...

• Jeff Immelt had vowed to reduce its dependence on GE Capital and return it to what is supposed to me...A means to grow the Industrial businesses and not be an END.
• Recognition that GE is a US company with a global presence... he said in the most recent annual report to invest globally, but keep the US operations a center of the global growth.
• A return to the disciplines of sound strategic thinking and decision making and include all of the input, both positive and negative and avoid being SURPRISED.

Jeff Immelt also made a personal commitment. He gave up over $12 million of personal wealth, because it was RIGHT and, even though his personal commitment deserved the incentives, the company stock did not...this is truly unique.

OVERALL.. I personally have a vested interest in GE, since I own GE stock and am a loyal GE alumnus...but I am and have been a strong opponent to the Immelt strategic vision of GO BIG and GO GLOBAL... My book: THE SECRET TO GE's SUCCESS and my continuing blog" GEWATCHER.. have continually challenged the IMMELT strategy and have described, in depth, GE's failures...

BUT.. GE is still the most successful US company and has demonstrated, over 127 years, that it is a winner and able to adapt and conquer change. One of the key elements is STRONG, DEDICATED, COMMITTED LEADERS...and based on what Jeff IMMELT has done and continues to do..I PERSONALLY am committed to continue my personal WEALTH to his leadership...however if I see evidence this is not correct, I will be the first to let you know.

Bill Rothschild, CEO Rothschild Strategies Unlimited LLC.. a personal, boutique that will let you know what is real and what you need to do to win...

GE wants "naysayers"!!!

In his "letter to shareholders" in the 2008 Annual Report: Jeff Immelt states:

"For 2009, we have sharpened our strategic processes and scenario planning. We have increased the frequency and changed the agendas of our operating meetings. Each of our businesses has set up a process to identify the "naysayers" in each of our industries to make sure their voices are heard inside GE. From the top to the bottom and across GE, we must and will listen more critically and respectfully to each other".

I would not use the word "naysayer" to describe what it takes to be a strong, skilled strategy reviewer, but it is clear that GE now recognizes that it is impossible to develop sound, realistic strategies and expectations, without having many points of view.

This is not a new GE situation. In the mid 1970s, Fred Borch, GE's CEO, recognized that his ambitious "go big/ venture" program was failing to provide "profitable earnings" and so he instituted the disciplined strategic thinking and decision making process that helped turn the company around.

Borch conducted a study and found: "In many cases, the operating businesses didn’t do an adequate job of evaluating their markets, customers, and competitors, and they often failed to identify technological and sociopolitical trends and forces that could negatively impact their businesses. The result was that there were too many omissions, miscalculations, and surprises." (excerpt from my book:" The Secret to GE's Success")

GE Instituted Annual Review Systems that included multi-functional professionals, from inside GE, consulting firms and academics. The propose was to challenge the underpinning assumptions and be sure that the best insights and intelligence sources were used in constructing the strategic priorities and execution strategies.

There was a continuing review and monitoring of the key underpinning assumptions to assure that they were wrong, actions could be taken to minimize any negative impacts. The key was to avoid "surprising yourself" and minimize the impact of surprises, if and when they occurred.

Another key element of this system was Admitting Mistakes. "The overriding objective was to ensure that the business units had realistic expectations and weren’t kidding themselves or senior manage­ment. Management had been surprised by all of the ventures, in one way or another, and this had negatively impacted its credibility on Wall Street. The new process was designed to ensure that these surprises were minimized and that promises were met. Once this process was in place, the worst thing that business unit managers could do was surprise senior management. If they did, they were often demoted or even fired" (excerpt from my book: The Secret to GE's Success")

I was fortunate to head up this strategy review and integration process for several years and it is one of my consulting firms most successful services.

I am pleased that GE plans to reinstate this type of review process, so that it will not suffer the consequences of "surprising itself".

Bill Rothschild, CEO Rothschild Strategies Unlimited, LLC

Immelt asserts: "GE will always invest to win globally, but this should include a preeminent position in a STRONG U.S."

Jeff Immelt made a strong statement in his 2009 "shareholder letter" which clearly demonstrates that he is in the GE leadership tradition. In my book: THE SECRET TO GE'S SUCCESS and my GEWATCHER blog, I have continually asserted that one of the key reasons that GE is still a strong and vibrant 127 year old company, is that its leaders were willing to admit mistakes and adapt. Jeff continues to adapt, admit mistakes and move on...he calls it "resetting". This is another example of adapting.

This is what Jeff wrote in his shareholder letter:

I have also learned something about my country. I run a global company, but I am a citizen of the U.S. I believe that a popular, thirty-year notion that the U.S. can evolve from being a technology and manufacturing leader to a service leader is just wrong. In the end, this philosophy transformed the financial services industry from one that supported commerce to a complex trading market that operated outside the economy. Real engineering was traded for financial engineering. In the end, our businesses, our government, and many local leaders lost sight of what makes a nation great: a passion for innovation.

To this end, we need an educational system that inspires hard work, discipline, and creative thinking. The ability to innovate must be valued again. We must discover new technologies and develop a productive manufacturing base. Our trade deficit is a sign of real weakness and we must reduce our debt to the world. GE will always invest to win globally, but this should include a preeminent position in a strong U.S.

There is no question that some of most talented smartest people became enamored with the "get rich/quickly" opportunities in financial services and haven't used their talents to create new products and services. Hopefully the "Wall Street meltdown" will change this and more students will go to engineering and scientific universities and not business schools. I agree with Jeff that we need to reward real innovation and creativity and not just "creative book keeping".

Bill Rothschild, author of THE SECRET TO GE's SUCCESS and other global best selling books and articles..visit http://www.strategyleader.com/ to learn more.

WINNERS...Set Realistic (even low) Expectations and EXCEED THEM

GE has the ability to do what I tell my clients "create realistic/ even lower" expectations and exceed them.

For the past few years, I believe that GE has created unusually high expectations and has not achieved them. This has contributed to the stock decline and loss of credibility. Now, the company can do the opposite. The "street" doesn't believe that GE can achieve the earnings it promises, but GE asserts it can,

SO...GE can do what it promised and be a perceived as an OVERACHIEVER...if it does, I believe the stock will surge and the GE management will regain the confidence it learns... and the investors will be happy.

A WIN/ WIN/ WIN opportunity...so I hope that Immelt and his team will use this unusual opportunity and be heroes.

Bill Rothschild, author of the only comprehensive, objective and insightful assessment of GE's successes and failures from Edison to Immelt... THE SECRET TO GE's SUCCESS and GE Watcher blog...

Economist's Magazines GE assessment is fair and balanced..but their conclusion is wrong!

My favorite magazine is the ECONOMIST, which calls itself a newspaper. It is my favorite because, unlike other magazines who think that brevity is the key to success, the Economist provides in-depth, comprehensive and in most cases, fair and balanced news, columns and special reports. Its GE analysis in March 21, 2009 edition, entitled: Losing its magic touch demonstrates what I am asserting. The Economist, unlike other publications, gave a good analysis of GE and its problems. Lets review some of the key points the article made about GE:

• "How did GE get itself into a mess that has seen $269 billion wiped off its stock market value since the beginning of 2008? The main reason is that the strategy which helped GE gain its reputation for consistently producing bumper profits, year in and year out, has backfired. At its core was GE Capital. Founded in 1932 as General Electric Contracts Corporation to provide financing that supported the group’s industrial businesses, the operation gradually expanded into other areas of lending unrelated to GE. Under Jack Welch, GE’s chief executive from 1981 to 2001, GE Capital grew rapidly." This is true GE Capital was established as GE Credit Corporation during the great depression to finance dealers inventories and consumer purchases (note this is different than the Economist "facts", but mine are correct).
• "If GE Capital were a bank, it would rank as one of the biggest in America (see chart 1). Its growth has made the division more and more important to its parent’s overall revenues and performance (see chart 2). In 2007 GE Capital’s profit made up 55% of the company’s total. "This is true and even though Jeff Immelt promised to reduce the dependence on GE Capital it didn't happen and the company became addicted to the ability to use GECC earnings to fill the gap and make the numbers.
• "Given the unit’s difficulties, it would be understandable if Mr Immelt wanted to jettison GE Capital as soon as it has been nursed back to health—which may take a while. But he insists he is committed to the business, which he says has strong franchises in areas such as aviation and energy finance, thanks to its close association with GE’s industrial activities." This is also insightful GE's success in aircraft engines was partially a result of GE's financing of the engines and providing operating leases to airlines. This was a successful strategy and should continue, but it doesn't require all of the consumer and commodity type of financing GECC does. These could be separated out and spun off. Possibly using a " tracking stock approach".
• "Mr Immelt, recognising that the world has changed, has placed more emphasis on organic growth since taking office. He has built up the company’s marketing expertise, whereas in Mr Welch’s GE engineers and spreadsheet jockeys were the masters. And he has focused on innovation. Since 2001 GE has invested $330m to expand its research facilities around the world. It spent $4.3 billion on R&D in 2008, up from $2.3 billion in 2002." This is a significant point. Welch focused on short term and not the long term and the company's ability to innovate declined during his tenure. Immelt needed to change the strategy and focus on innovation. In my book: The Secret to GE's SUCCESS" In my book, I entitled this "back to the future" since Immelt has tried to restore what GE once was, namely: innovative. However Jeff combined it with GO BIG (also discussed in the book") and this has become a major problem.
• "So does this mean that GE should be broken up? Assuming the company can revive GE Capital, there might be a case for hanging on to that business even if its margins are squeezed. By refocusing on its original mission, a stripped-down finance unit could help drive sales at GE’s industrial operations by providing finance for large infrastructure projects and other activities." This is key to GE's future success, namely to become more focused, more selective, use the financial arm as a MEANS to grow the other businesses and not an END in itself.
• "Some critics claim that GE’s boss has dented his credibility by making several optimistic predictions that have been quickly proved wrong. For instance, barely a couple of weeks before the company revealed that it had missed its earnings in the first quarter of 2008, Mr Immelt declared that he expected GE to hit its target. In September he denied that the company needed a fresh capital injection. But soon afterwards it announced that it had raised $15 billion from Mr Buffett and others." I totally agree that GE has created unrealistic expectations and has not been able to meet them. In my book, I challenged the company's assertion that it could grow at a 8% organic compounded growth rate, especially if the assumption that it could also grow earnings at the same rate, which had been the case under Welch.
• "Nevertheless the suspicion lingers that GE’s boss has a habit of promising too much. The best way for him to rebuild confidence in his leadership will be to demonstrate that GE can bounce back quickly from its woes. It will require a prodigious feat of managerial wizardry to pull that off." I agree that there has been a tendency to over promise and not deliver...however, it Immelt follows his predecessors he will lead through adversity, admit mistakes and adapt thus making the company even stronger. A review of GE's past (in my book) shows that GE leaders, of which there have only been 10) all faced adversities.
• -Edison picked the wrong technologies but adapted.
• -Swope and Young saw GE revenues drop 75% during the Great Depression,
• -Borch got the company growing again after the Great Electrical Conspiracy
• -Jones managed to overcome hyper inflation and
• -Immelt grew the company successfully and profitably after 9/11.

GE's success has been because of its LEADERSHIP, ADAPTABILITY, TALENT, INFLUENCING PUBLIC ISSUES and CREATING STRONG MANAGEMENT SYSTEMS and NETWORKS...I call this LATIN in my book.

In closing, I believe that the ECONOMIST has done a great job in summarizing what GE is and the key challenges it faces, however I DON'T THINK IT WILL REQUIRE A WIZARD, BUT A RETURN TO SOUND STRATEGIC THINKING AND DECISION MAKING that made the company stronger even in adversity.

Bill Rothschild, author of THE SECRET TO GE's SUCCESS and GE WATCH blog (www.strategyleader.com)

Shareholder versus Stakeholder Value

In a recent FINANCIAL TIMES front page article the issue was raised about who created the Shareholder value concept and its negative impact on US businesses. The author asserted that the concept can be traced to Jack Welch's speech in 1981. Welch asserts that maximizing SHORT TERM profits to enhance Shareholder value, which really means increasing the share price is not a strategy and is not a good thing to do.
I totally agree with JACK that maximizing short term profits to increase the STOCK price is poor management. But in fact, this is what he did and it enhanced the share price.
But this concept of CREATING and MEETING Wall STREET EXPECTATIONS didn't start with JACK, it really started with Fred Borch and enhanced by Reg Jones... Jack two previous predecessors.
It started when GE was involved in PRICE FIXING. Borch took over because GE stock had stopped and Fred recognized it need a jump start. He and Reg, his CFO, decided to create and meet realistic expectations on Wall Street and it was GE that established the now accepted approach of guiding the Street.
GE under Jones mastered this approach and GE stock started to move upward, however Jones also recognized the need to balance all STAKEHOLDER (investors, stockholders, governments, employees, management, unions, communities and others) results, but clearly recognized that it was impossible to satisfy all stakeholders.
Welch elected to focus on shareholders, employees and management and he was successful..but times have changed and these stakeholders are under attack.
The issue facing Immelt and other current CEO's is how to balance the conflicting needs and expectations of all stakeholders and determine which is the right mix and emphasis.

Bill Rothschild, author to the most comprehensive, objective and insightful evaluation of GE's 127 years of successes and failures...THE SECRET TO GE's SUCCESS..