Wednesday, April 12, 2017

Betting on The Black Swan - Immelt's vision for GE

In his bestselling, revisionist book The Black Swan, Nassim Nicholas Taleb introduces the concept of the Mediocristan vs. the Extremistan. The Mediocristan refers to the norm, the everyday, where the probabilities of regular things occurring are high, and where people are expectant of small, low-impact mundane occurrences and changes. The Extremistan refers to the unlikely, high-impact Black Swan events that occur more often than expected. They entail a lot of unpredictability and promise lasting impact. The basic difference - mediocristan promises known outcomes in short periods, whereas extremistan ventures out into the unknown and is mostly long-term.

Jeffrey Immelt joined GE at the turn of the century following one of the greatest CEOs the world had known, in Jack Welch. With all the odds against him, in GE’s Strategy Growth: The Immelt initiative, Christopher A. Bartlett tells us that Immelt managed to push the company into double digit revenue growth, carving a name for himself as a top-notch leader.  How did he do it?

I believe he did this by embracing the Extremistan way in his strategy and decision making.

GE at its very core was a company that worked in the Extremistan way. Its basis was industrial innovation and that made it a flag-bearer of the manufacturing boom of the 50s and 60s. But during Welch’s tenure GE had been lured by the quick-buck that financial services promised, and this led to the expansion of GE Capital. This was a typical Mediocristan mindset- short term work with multiple low-impact returns- as opposed to Extremistan way - long-term investment with high impact returns - that GE had built itself on.

Immelt set out to change this, and he did it by committing himself to a new vision with the promise of going back to basics, viz. Extremistan. As Bartlett mentions, he built a strategy based on Technical leadership, Services acceleration, Commercial excellence, Globalization and building new Growth platforms. All these are tenets of long-term investment with an interest in the high- impact. Immelt says, “It doesn’t happen every quarter or every year, but over a 10- or 20- year time period, the businesses that are hard to do had the best returns. The arithmetic works over time” defining GE’s attitude.

There is a key observation in GE’s stock price being low in spite of record growth. This is because the investors- and the world- in general identify with the Mediocristan perspective. Taleb talks about Normal distribution being an emblem of Mediocristan. People believe in the normal, most probable, short term, smooth changes that are incremental. But Immelt has his bets placed on being disruptive, long term and high impact activity. It is easy to follow why the stock prices aren’t reflecting performances of the company once we understand this divide.

Once the Extremistan strategy perspective enters public consciousness, the financial markets will reflect what actually has been transpiring at GE, and quite possibly capture and capitalize on the Black Swan events that this corporate behemoth has to offer.

Taleb, N. (2011). The black swan: the impact of the highly improbable. London: Allen Lane. 

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