This case study was part of a strategy assignment taken at the SDA Bocconi School of Management. I’d like to thank my fellows Gouri Wagle, Felipe dell’Oro, Andrea Masina, Paolo Cerchiario, Ashna Suri-Sasmal and myself for the insights that contributed to put through this work. The issue: In September 2009, Ge’s Board of Directors reappointed Jeff Immelt as CEO. My team was asked to prepare a memo providing guidance on the following four qustions: 1. The key features of Immelt’s strategy for GE, in compariso to that of his predecessor, Jack Welch.
While Jack Welch was mainly focused on short-term objectives, his successor, Jeff Immelt was more concerned about the long-term strategy. Welch’s leadership was characterized by risky projects that led to technological revolutions, aggressive cost cutting schemes and accurate performance measurements. On the other hand, Immelt emphasized organic growth, technological innovations and exploiting emerging opportunities. 2. To what extent has Immelt’s strategy been aligned (a) with developments in the external business environment since 2001 and (b) GE’s resources and capabilities?
Jack Immelt’s strategy was very much aligned with the external business development and its key resources and capabilities. External business events that occurred during the period 2001-9 included: the destruction of the Twin Towers, Enron’s collapse, the Tyco International Scandal and the 2008-9 financial crisis which brought to light an increased awareness in corporate governance issues. The investment community believed GE hasn’t been transparent with the sources of their profits and subsequently short GE’s shares. GE was then downgraded from AAA to AA+.
GE’s response was two fold with the aim of restoring investor confidence and maximizing their value. Firstly, GE improved communication with investors through more detailed financial reporting. Secondly, GE leveraged on its diversified portfolio in order to exploit strategic synergies that would lead to growth in emerging economies. Some of the initiatives included using brand reputation to gain floor in emerging economies such as India and China. In addition, its massive investments in R&Dresulted in new products such as “Smart Grid” and sodium battery.
GE also exploited itsmanagerial capability to increase efficiency and reduce costs. Consequently, customer satisfaction and coherency within the organization ensued. 3. How well is the strategy performing? Complexity remains a significant challenge for many mega-institutions. The larger and more complex the company, the harder it is to perform extremely well. When Immelt took over from Jack Welch almost 8 years ago (as of April 2009), GE stock was trading at $53 a share. 8 years later, it’s at around $12.
The company’s rating was AAA, the best, awarded to only a handful of enterprises, now it’s AA+. Looking at GE’s share price may give the impression the company destroyed value, but a close look at the company’s ROE shows that over the period, GE registered an average 19% ROE, which is quite impressive taking into consideration the company’s exposure to external business environments. Figure 1: GE’s stock against the S&P 500 and Siemens AG (2001-2009) Immelt may have made some mistakes during his tenure as GE’s CEO.
GE’s financial arm invested into too risky businesses, including consumer credit cards and real estate. But one should note that before the financial crisis, GE made considerable profits coming primarily from the now-questioned investments in its financial division and no one could have predicted that the financial crisis could have been so pervasive. GE has been investing heavily in R&D and focusing in what it believed would be the business of tomorrow.
Since his appointment, Immelt has been busy reshaping GE into one of the world’s biggest problem solvers through its infrastructure, energy, transportation and health care divisions in a broad, high-payoff scope. Immelt made some smart divestitures. GE got out of subprime mortgages in 2007 and exited insurance before the sector depressed. Though GE Capital unit suffered huge reversals during the financial crisis, it never registered a loss and the company was able to limit its exposure.
Overall, if we take into account the dividends GE paid to investors and all the meltdowns that occurred between 2001 and 2008, Immelt’s performance looks respectable and the company external and forward focus strategy may pay-off. 4. Is there a case for a radical change in strategy—specifically, should GE be broken up into a number of more specialized businesses (some of which would be floated as independent quoted companies, others might be sold to existing competitors)? A radical change wouldn’t be a solution for GE’s fate.
GE is surely suffering a conglomerate discount because there’s a lack of tangible and intangible interrelationships among some of its business units. The emergence of GE Capital has created another significant business for GE. GE should therefore try to focus on its two core businesses and get rid of what is not related either to the industrial or to the financial businesses. GE Capital should be horizontally integrated to GE’s industrial business. In addition, GE should keep divesting underperforming and non-core businesses unless they create synergies within the conglomerate.
GE should divest NBC Universal, the commercial lending and leasing, and the consumer and industrial businesses, which have registered negative growth since 2004. This could provide required capital to invest in high growth businesses. GE’s future as a successful conglomerate depends on its ability to harness cross-selling and cross-promotion between divisions, exploit scale advantages, differentiate itself from its direct competitors, maintain its role as a national champion, and be coherent with its culture and brand.