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Here's the dilemma for GE's new CEO

  • General Electric just logged another disappointing quarter.
  • The pressure is on new CEO John Flannery to put the company back on track.
  • Flannery needs to answer two key questions: 1) What business is GE in? 2) Does GE have a unifying purpose other than making money?
John Flannery, GE
Christopher Goodney | Bloomberg | Getty Images
John Flannery, GE

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.

"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?"

Perhaps only a remarkable leader like Welch, with his incredible mastery of the details of every GE business, could run such a complex enterprise. Welch drove the businesses not only with a clear eye on near-term performance but through focused corporate initiatives like Six Sigma and Session C that built management and leadership capabilities deep into the GE organization. Part of Welch's legacy is seen in the successful careers of GE alumni such as Dave Cote (Honeywell), Kevin Sharer (Amgen), Jim McNerny (Boeing), and Omar Ishrak (Medtronic).

By the end of Welch's 20-year tenure, GE Capital accounted for 52 percent of GE's earnings. Security analysts loved GE's consistently strong results and earnings flexibility, but also began referring derisively to GE as "a bank." As Welch's successor, Jeff Immelt knew he needed to lessen GE's dependence on its financial arm and return it to its manufacturing roots, but he was reluctant to undo Welch's legacy.

Immelt's hesitancy led to the liquidity crisis GE faced in 2008, triggered by the banking collapse. Immelt had to ask President George Bush to bail out what was once the world's most valuable company. Bush stepped up with a $139 billion lifeline, putting GE into the same category as AIG, Merrill Lynch, and Citigroup – not a club in which GE intended to be.

Immelt may have moved too slowly, but he largely dismantled "the house that Jack built," selling off most of GE Capital, divesting NBC, and spinning off legacy businesses like appliances, plastics and lighting. In recent years Immelt has remade GE as a high-tech, large systems company, building GE's expertise in energy systems, jet engines, and health systems. Yet it has been anything but a smooth ride, as volatility in oil prices has dragged down GE's energy business.

Meanwhile, GE is running well behind industrial competitors like Honeywell, United Technologies, and Danaher. Their revenue growth, earnings, and stock prices have easily outpaced GE because they are committed to their core markets, never vacillating about their high-tech, market-leading businesses.

While Immelt's strategy was directionally correct, impatient investors, frustrated after 16 years of lagging results, thought it was too little, too late. The GE board decided it was time for a change and chose Flannery to refocus GE on near-term results and immediate cash flow.

Now Flannery must decide what GE's core business is. Is Flannery willing to invest heavily in the high-tech future Immelt envisioned? Or will he continue to dismantle the company, turning GE into a typical industrial company that grows at the rate of the economy and delivers a high proportion of its free cash flow to short-term investors? The answer will determine whether GE can sustain itself through economic crises and still lead American industry for the next 100 years.

Flannery may be tempted to take this near-term view advocated by many GE investors, looking at each business purely through a financial lens. But too much surgery could kill the patient. Without a compelling purpose that inspires customers, employees, and shareholders, GE will lose its leadership position in American industry – an enormous loss for America's most iconic global business.

Commentary by Bill George, a senior fellow at Harvard Business, former Chairman & CEO of Medtronic, and the author of "Discover Your True North." Follow him on Twitter @Bill_George.

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