Wednesday, April 20, 2011

GE Goes With What It Knows: Making Stuff (Blog 5, EMiceli)

As I read the article GE Goes With What It Knows: Making Stuff, I did not know if I should be praising Jeffrey Immelt, GE’s chairman and chief executive, for his current decision to embrace the old GE strategy of “making physical products” or to ask him what the company’s strategy was during Welch’s tenure in the 80’s and the 90’s when the company added the financial segment. By the time Immelt took over in 2001, 50% of the company’s make up was the financial segment of GE Capital. Immelt was a part of this financial growth segment during his early years as CEO.

How does a company that started 132 years ago with the making of incandescent light bulbs and a history of manufacturing end up in the financial world? Simply, Immelt states that company decisions were made on the basis of “anticipated returns – not so much market expertise … If a deal looked like a money-spinner, he says, it got the nod. And you don’t have to build a factory.” This was quite an honest answer. What is going on here? Is this a good strategy?

To find out if Immelt shared this kind of information to his shareholders, I read Immelt’s 2010 letter to the shareholders. Immelt recounts the volatile events of the last 10 years including two recessions, and the 9/11 tragedy, and admits they were in businesses were they could not sustain a competitive advantage. He also states, “Being a CEO can be pretty humbling. I have made a few mistakes and learned a lot over the last decade. I am more resilient. To do this job well, you have to “burn” with a competitive flame that demands daily improvement. My desire has never been greater.“ Interestingly enough, there was no mention of how GE made their strategic financial segment decisions in the shareholder’s letter only rhetoric that they promise to do better.

GE has the backbone and infrastructure of manufacturing great products, but somehow was lured into the financial world and in effect changing their strategy. Financial services were not a competitive advantage skill that GE possessed in its history and due to the financial crisis they have gone back to their roots. I commend GE on the idea of wanting to enter a completely different field, but they should also be embarrassed that they did not research their strategic new move. I believe that they were embarrassed. To prevent another disaster, in February 2011, the Board of Directors created a risk committee. This committee oversees GE’s key risks including strategy, operational, market, liquidity, funding, credit and product risk and the guidelines, policies and processes for monitoring as well as mitigating such risks.

Is this what happens when your new strategy does not work – go back to what you know?

Resources: GE Goes With What It Knows: Making Stuff”, The New York Times

GE 2010 Annual Report – Letter to Investors and Managements Discussion and Analysis

1 comment:

  1. I would not be so harsh on GE for venturing into the financial world. Think about it. GE manufactures not just incandescent bulbs but also huge aircraft engines (GE Aviation), even larger products like Oil drilling platforms(GE Oil and Gas) and many many more products/services that are not easy to own for even the most financially sound firms. It was but natural for GE to start their financial institution with the main aim to provide financing options to their customers for these big products. I'm guessing it made business sense that when they did have a financial wing for businesses, they start one for consumer banking too. As for taking the hit during recession goes, I think every bank took a hit.
    So, personally, I would not blame GE strategically for starting financial services.


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