Friday, June 24, 2011

Immelt's Strategy for GE - bold and thoughtful

It was refreshing to hear a CEO say that “We are going back to basics.” This is especially profound if the CEO wasn’t someone who had just been appointed. We have heard many NEW CEO’s talk about change and how they would like to take the company in a different direction. But, there aren’t many precedents of CEO’s acknowledging their mistake midway into the role and charting a different course.

On the face of it, the decision by Jeffrey R.Immelt to focus on “building stuff” as opposed to pursuing lucrative financial deals seems to be easy post recession. But, one must consider this in a broader perspective. In 2007, GE Capital contributed to half of GE’s overall profits. Studies show that the financial industry is one of the few industries to make money quickly with less investment. Thus, I believe it was a bold move to pull back on investments in GE capital and get back to building factories again.

Another example that showed Immelt was clear on GE’s priorities was when he pushed to sell a part of GE’s stake in NBC to Comcast. This sale freed up much needed capital that is being invested by GE in its core business.

CEO’s often find it hard to take this kind of bold moves unless they have their backs to the wall. One of the few exceptions was Samuel J.Palmisano, chairman and CEO of IBM. IBM caught everyone by surprise when they announced the sale of the PC division to Lenova. It was a bold move considering that IBM was at the forefront of making PC a global phenomenon. Judging by the current results the plan seems to have worked. IBM reported revenue of $23.7 billion in second quarter of 2011. Its stock is traded around $165 and it has a market cap of $199 billion.

Contrast this with HP, another technology behemoth that has based its strategy around becoming bigger and bigger and becoming the one stop shop. In the second quarter of 2011, 29% of HP’s revenue was driven by the personal system group (PSG), which primarily sells laptops and PC’s. But the operating profit of PSG is just 5.7% of revenue. This is primarily because of the intense competition on price between the different players. Thus, though HP reported revenue of $31.6 billion (higher than IBM) in second quarter of 2011, its stock price is languishing around $34 and it has a market cap of $72 billion.

If you follow the contrasting paths taken by these two technological companies its clear that IBM’s strategy has played out better. Thus, based on past examples its clear that Immelt’s decision to focus on heavyweight engineering would take the company in the right path. Though Immelt’s strategy looks riskier in the short term, it would pay rich dividends in the longer term. I wish there were many such CEO’s who take calculated risks based on sound logic.

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