Charles McElroy - Blog 4 - The Coherence Premium, GE's Execution of the Coherence Philosophy and Cognitive Bias

Charles McElroy Blog #4 GE’s Performance and Cognitive Bias

Week 4’s readings emphasize the importance of having a strong focus in a company’s business sectors in order to provide the most value for the shareholder.  For example, the Coherence Premium article discusses the importance of having a logical connection between business divisions in order to build a synergy so that a corporation can thrive and build value in its business execution.  Similarly, the week’s articles include several about how GE’s coherence philosophy, articulated by the CEO J. Immelt, is focusing (successfully as is it purported in several sections of the readings) on areas in which it can thrive, e.g., areas of manufacturing which require a great deal of technological expertise, long term planning, with a renewed emphasis on robust research and development capabilities.  Unfortunately, while this philosophy on the surface appears to be sound, its apparent execution in the case of GE has been deeply flawed.

In the last two months punctuated with the delisting of GE’s place in the Dow Jones Industrial Average today, it appears that GE’s efforts at renewing its manufacturing offerings – even taking into account its coherence philosophy - have not been as successful as it has been conveyed by the CEO.   Indeed, in a recent article in the Wall Street Journal, GE’s board has been shell shocked by its recent plunge in its financial performance (Wursthorn & Gryta, 2018).  In a similar article from the Wall Street Journal, Board members are questioning the veracity of Immelt’s assurances about the strength of the core businesses, and an internal review is being conducted to determine how the financial predictions could be so far off the mark (Gryta, Lublin & Benoit, 2018).  The dynamic at GE would appear to resemble some elements of this week’s readings from Christensen about how difficult it is for an established company like GE to maintain its market dominance against new trends and startups which embrace new technologies.  At the heart of the issue is that the incumbent does not take notice of disruptive technologies or trends before it is too late.  Part of this inability to perceive the new developments in the marketplace is an unwillingness to accept that one’s current efforts are misplaced or inadequate relative to the market dynamics.  Put simply, it appears that cognitive bias is having a disproportionate influence on the tactical and strategic decisions of the leadership in a company.  Daniel Kahneman (Kahneman 2011) and others have articulated how easy it is for cognitive biases to effect corporate decision making. Thus, even though Immelt had adopted a winning strategy – according to the coherence premium perspective – the tactical execution of the effort may be flawed because of cognitive biases.  In the case of GE, apparent over confidence in the efforts they embraced, led to a downward spiral – predictable through the lens of the innovator’s dilemma - which results in its being delisted from the Dow Jones Industrial Average.

Christensen, Clayton M., and Clayton M. Christensen. The innovator's dilemma: The revolutionary book that will change the way you do business. New York, NY: HarperBusiness Essentials, 2003.

Kahneman, Daniel, and Patrick Egan. Thinking, fast and slow. Vol. 1. New York: Farrar, Straus and Giroux, 2011.

Giroux, 2011.Gryta, T., Lublin, J., Benoit, D., How Jeffrey Immelt’s “Success Theater” Masked the Rot Within: a culture that disdained bad news contributed to over optimistic forecasts and botched strategies, Wall Street Journal, February 21, 2018.

 

Wursthorn, M., Gryta, T., GE Drops Out of the Dow After More Than a Century, Wall Street Journal, June 19, 2018.