In his last earnings call as CEO, Jeff Immelt announced yet another disappointing quarter for General Electric. The pressure now mounts on Immelt's successor, John Flannery, to put the company back on track. GE's market capitalization tumbled $170 billion during Immelt's tenure. This year alone, GE stock is down some 18 percent, while the S&P index is up almost 10 percent.
When GE surprised its investors in May by announcing its CEO transition, Flannery promised an immediate review of GE's portfolio by November, noting, "Focus on the cost, and margin and cash, and then where do you focus the company." Such a financially-oriented approach may please GE's investors in the near-term, but it begs the vastly more important question: What business is GE in? Does GE have a unifying purpose other than making money?
GE did not become the most iconic American company through financial engineering or margin analysis. While Flannery can create near-term value by focusing GE's business, he must look beyond immediate financial returns to build an enduring enterprise. Otherwise, GE risks becoming a holding company that buys and sells businesses opportunistically with no dominant strengths. If Flannery's mission for GE is simply a set of financial metrics, he will put the company on the opposite side of great, enduring companies like PepsiCo, ExxonMobil, Goldman Sachs, Mayo Clinic, and Merck.
For GE to lead American industry for the next century, Flannery needs to determine an over-arching corporate strategy that leverages GE's global strengths to create sustainable competitive advantage. Then he needs to determine how to translate those strengths into leading market positions for each of its businesses through innovation and operational excellence. That's the only way GE can achieve superior long-term financial results.
For decades GE has set the standard for the business community through the direction of the company. When Jack Welch took over leadership in 1981, he immediately undid the work of his predecessor, Reginald Jones, declaring that all GE businesses had to be No. 1 or No. 2 in their respective industries or risk being sold off. Welch quickly disposed of Utah International, Jones's largest acquisition. Then he streamlined the organization, taking out multiple layers of line and staff managers. Welch proceeded to build the most successful conglomerate of the 20th Century, with high-performing industrial businesses ranging from appliances to jet engines, balanced by high growth, high return financial businesses in GE Capital.