GE's Business Model Is Broken, and Jeff Immelt Hasn't Fixed It

GE CEO Jeff ImmeltGeneral Electric (GE), which reported its first-quarter earnings today, has been struggling to regain its swagger. Over the last decade, the stock has lost half its value. In 2006, I wrote that GE CEO Jeff Immelt had earned a gentleman's C. He has yet to raise his grade.

Thanks to two decades of roaring success under Immelt's predecessor, Jack Welch, GE was a highly respected company whose reputation has probably outlived its performance. Why? Welch consistently boosted GE's stock, while it has tumbled under Immelt, who has presided over what seems to be an endless cycle of disappointing results despite promises of a brighter future. Immelt is either the wrong leader, or GE's corporate strategy is broken -- or both.

GE's first-quarter results are a case in point. GE announced a drop in sales and profits. Its sales declined 5%, missing analysts' expectations of $37.1 by half a billion bucks. Profits fell even more. Its net income tumbled 31% to $1.9 billion, and its earnings from continuing operations stumbled 18% to $2.3 billion.

And the stock fell in Friday trading, despite GE's earnings from continuing operations of 21 cents a share which were 5 cents above analysts' expectations.

Wrong Focus for Today's World

GE's only source of profitable growth was its energy infrastructure business. Despite a 5% drop in sales to $8.7 billion, this unit's profit rose 12% to $1.5 billion. Its biggest sources of sales growth, NBC Universal, enjoyed a 23% rise to $4.3 billion. But after taking a huge loss from its Winter Olympics in February and a $45 million charge to nuke Conan O'Brien, the unit's profit plunged 49% to $199 million.

GE's two biggest problems are that it's a conglomerate in a time when focus is the key to winning. And GE is so internally oriented that it doesn't appear to realize what's going on outside its cushy walls.

The idea behind a conglomerate is that when one of its businesses is suffering, another one will be doing well, and the overall result will smooth earnings fluctuations. That idea was popular in the 1960s as deals enriched mergers and acquisitions bankers. But it collapsed when the earnings increases of conglomerates like ITT turned into losses.

Jack Welch was able to extend the conglomerate concept well beyond its sell-by date. And as I wrote in 2003, that may have been because he used some creative accounting so that GE always beat its double-digit earnings forecasts by a penny. This regular outcome enabled GE stock to beat the S&P 500.

Speaking the Wrong Language

What is Immelt doing about all this? His most important accomplishment has been maintaining the support of GE's board. But I think that if a company's stock loses a predetermined amount of value, its CEO should be canned. That would have saved GM shareholders from the wipeout they suffered under former CEO Rick Wagoner.

But as BusinessWeek reports, Immelt is bragging about how great it is that he has started talking to the people who report to him. What struck me is the language he uses to describe that: "five growth traits: external focus, clear thinking, imagination, inclusiveness, and expertise." Those are very different words than the hard-nosed ones Welch used: "cost-cutting, efficiency, and dealmaking."

GE is just too internally focused. People there spend too much time caring about how to move up within the hierarchy and not enough about how to take customers from the competition. One measure of this internal focus is that GE executives regularly spend two months of the year on an internal process of business performance review. One person told BusinessWeek, "It felt like your entire team was spending all of December and all of January on this, instead of focusing on the business and on customers."

The Wrong Leaders

So what's to be done about GE? When its chief financial officer asked me about this in July 2007, I said that GE ought to focus on industries with high profit potential in which GE enjoys a market-share lead. Its energy infrastructure business fits the bill. The rest does not. Immelt has been moving in the direction of focus, trying to sell GE Appliances and NBC Universal, but his efforts to sell them have yet to bear fruit.

I don't know whether another person could do a better job than Immelt, but with all the attention GE pays to developing leaders, not to mention the $1 billion it spends each year on training, according to BusinessWeek, it should have someone in its leadership development pipeline who can restore GE to its former luster. If not, it needs to scrap its leadership development methods along with its passive board and ineffective business model.
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