John Flannery, the head of GE’s healthcare unit, will now succeed Jeff Immelt, its current CEO. GE is a unique company. It's the only company to be part of the Dow Jones Industrial Average index since inception of the index in 1896. It has successfully steered itself through the past 122 years.
Today, in an era of technology and domination of companies such as Google, Apple and Amazon, GE still is one of the top 10 most valuable companies in the world, with a market capitalisation of close to $250 billion. Commendable!
GE has always been defined by the quality of its leaders, a key attribute that has helped it consistently reinvent itself over the last century. Jack Welch, its eleventh CEO, was at the helm from 1981 to 2001 and ensured GE achieved enormous growth, rising share price and superior shareholder returns over the glorious two decades. The media, which often considers Jack Welch as the ‘benchmark’ in global leadership, portrays Jeff Immelt as someone who has not lived up to Welch’s standing and calibre, more so on the grounds of GE’s stock performance.
The share price of GE increased multi-fold under Welch: by 30 times when the market index barely scaled-up 10 times; a true achievement of high performance and superior shareholder returns. Contrarily, under Immelt, the share price has more or less remained flat over the 16-year period, while the index has almost doubled. A large section of the investors are not happy with Immelt and, in fact, his exit has come as a relief to many sections of the investor community. Has Jeff Immelt under-performed? Is the tanking of the GE stock price a direct reflection of his leadership and poor strategy? These are some of the questions we will ponder.
Jack Welch: an era of growth and diversification
During his 20-year tenure Welch focused primarily on growth. Expansion and acquisitions was the name of the game. Welch made close to 600 acquisitions. GE, a company traditionally known as a strong industrial company, completely moved away and was positioned as a conglomerate. Diversification into remote areas far away from its core, such as financial services and media businesses, became the norm. In fact, GE was beginning to be classified as a ‘financial services conglomerate’, given the large proportion of its revenues that were coming from its financial services business.
Jeff Immelt: an era of focus and mega restructuring
It is important to note that Immelt steered the company through two major crises during his 16-year tenure. The 9/11 Twin Tower attacks and the economic crisis that followed, and the 2008 financial crisis, which had a deep impact on GE, its profitability, and its stock price. The poor performance of its financial services business almost wiped out anything left from the industrial side, and the company seemed to be poorly-managed, with shareholders growing impatient. Immelt was quick to act.
Credit where due
If Jack Welch can be credited for the astronomical expansion, Immelt should be credited for making bold move after bold move. Not only did it take enormous guts to reshape the company and anchor it back as an ‘industrial’ company, Immelt was also instrumental in exiting various non-core businesses such as banking and financial services, consumer finance, media businesses, home appliances, and strongly pulling the company back to its industrial roots. Today, GE is at a place that would make the late Thomas Alva Edison — one of the greatest inventors of our times and also the founder of GE — happy. It now has a strong portfolio that includes aviation, power, healthcare and energy. To that extent, Immelt’s tenure can be described as an era of mega restructuring.
The exit from financial services and other non-core businesses not only allowed the management to focus on the key industrial businesses, the divestures also provided adequate funds for the company to reinvest and strengthen its core business. Notable large acquisitions were Baker Hughes. GE’s merger with Baker Hughes created a global oil and gas giant that positions itself well to compete with oil and gas companies like Schlumberger — the world's leader in energy services. GE’s acquisition of Alstom also positioned it strongly in the power sector, making it a formidable industrial company to look forward to, in the short to near term.
Going digital
Steering the company back to being an industrial company is one thing, but again, deepening its skill sets and weaving digital capabilities to position it as a ‘digital industrial’ company is, in a sense, a master-stroke. Immelt has intelligently invested large sums in integrating digital services with the industrial capabilities, weaving data and analytics through the company’s entire product line — be it MRI machines, aircraft engines, locomotives, or wind turbines. This is done through the integration of mechanical and cyber systems through millions of sensors and platforms that capture ‘second’ level data generated out of these sensors. Sophisticated analytics software work on these data to provide deep insights into the functioning of the products sold by GE to its customers. The beauty of these is that GE, which merely used to sell products, will now be capable of selling higher ‘value-added’ services to the same customers, substantially enhancing its value creation.
In terms of poor stock performance, when such a large-scale restructuring is being undertaken, investors don’t understand the true strategic intent. All they see and sensationalise is the businesses that are being divested, the jobs that are lost and the shrinkage in the size of the company. These have a negative impact on the stock prices. That said, Immelt did not have the good luck of Welch in terms of timing; in fact Welch’s period was mostly a ‘boom era’ in the phase of the US stock markets, while Immelt’s era was marred by global uncertainties, recession and a solid bear phase. That said, I personally tend to believe that the decisions that Immelt took in challenging circumstances, were more difficult than the expansionary route followed by Welch that happened during good times!
Although comparison of the two individuals is not the objective, this observation cannot be missed.
All said, GE is definitely well poised for a good growth in the coming years. What Immelt is leaving behind is an outcome of a well-crafted strategy and an organisation that Thomas Alva Edison would be proud of!