General Electric (GE) was founded by Thomas Edison, one of the world’s greatest innovators, and was one of the world’s most successful corporations, but now some would say its value only lies in chopping the business up and selling it off in bits to make some quick dollars.
So, what went wrong and what lessons can be learnt from it?
Welsh vs. Immelt
Columnist Adam Hartung in a recent article, titled ‘GE needs a new strategy and a new CEO’, for Forbes magazine, outlined what he believed are some of the reasons for GE’s demise.
Let’s take a look at Adam’s outline:
Under former GE CEO Jack Welsh (who oversaw it from 1981 to 2001):
- In 1981, Jack Welsh became CEO of GE and over the subsequent 20 years went about building a diversified corporation insisting upon growth and market positions of one or two for each business – or those business units would be sold off.
- During Welch’s tenure, GE stock rose from US$1.30 to US$46.75 per share outperforming the stock market by 350%.
- Welsh focused on growth, as he did not believe immediate profits were enough to create and sustain value.
- GE under Welsh invested in activities that would grow, even if they were not part of GE’s historical business.
Under current GE CEO Jeffrey Immelt (who has been in the role since 2001):
- Immelt ‘refocused’ the company and sold off many of its businesses.
- He focused on profits, cost cutting and moving out of non-core businesses.
- Under Immelt, strategy looked inward to optimise the company through business and asset sales, and the accompanying workforce and cost reductions.
- The focus shifted to quarterly results and optimisation against a view of historical core business.
- The company has now been weakened to the point that it is open to attack by outsiders who are ready to chop it up.
Indeed, the market under which Welsh held the reins of GE and those under which Immelt did, were different times. And whether Hartung’s analysis of what has happened to GE is fair is the not the issue, but rather his narrative provides an opportunity to explore the role of growth and profit in growing great businesses.
Growth vs. Profit
In my own recent article ‘Is business doing the ‘right thing’ by society today?’, I explored a range of the fundamental management principles that the founder of the modern corporation, Peter Drucker, espoused.
Drucker considered a focus on profit maximisation is to:
- Fail to identify and implement new opportunities, develop human assets and recognise external threats.
- To risk the foundation of a company’s economic assets.
Drucker also noted that:
- Businesses exist to meet the needs of its customers and not to make a profit.
- And whilst profit is a necessary condition of sustenance, that profit should be applied as a future investment in the creation of tomorrow’s jobs.
It would seem that Drucker’s view is clear and that businesses must always be looking to tomorrow and where new opportunities may exist to grow.
Profit is a condition for growth but profit without growth will not be sustainable. The opportunities that allow that profit to be earned have a limited economic life, and if the business fails to invest in new opportunities, profit will expire.
And where do those new opportunities lie? Well, in the creation of a customer and the meeting of their needs. This is an outward-looking view for the business and although cost efficiency is important in delivering a profit, it is in no way a replacement for external growth.
An inward-looking view must only ever support the outward expansion of a business.
A Growth Model For Value Creation
The role of growth is:
- The renewal of the business’s offering to maintain its relevance to its customers.
- To meet the changing and evolving needs of those customers.
- To continually improve the value offered so you can out-compete others in the marketplace.
The goal should always be real sustainable growth that builds on what has gone before and, therefore, compounds all the efforts of the business so that nothing is wasted.
There are three broad categories of growth, each of which steps ahead of the other and creates a greater market share and a greater capital value. The three stages are:
Stage 1 – Expansion
This is the simplest form of growth as it represents growing more of the same and is the most competitive area of growth. Expansion usually includes expanding existing markets, product range, geographical boundaries, acquisitions and mergers of like businesses and growing the brand equity.
Stage 2 – Monitoring
This phase represents a business that is seeking to be alert to the needs of its customers and how they may be evolving in a changing world. In this phase of growth, the business is trying to have a greater customer focus, is looking for change in the market, and trying to understand how it impacts their market. It is also conscious of technology and how that may impact customer value.
Stage 3 – Creation
Reflecting the highest level of the growth phases, creation is where opportunities for growth are being seized in the expansion and monitoring phases and the business is completely aligned with the needs of their customers. They are redefining what value looks like for their marketplace ahead of their competitors and the market, and they are leading their customers to experience, and then expect, new levels of value.
They are achieving this through an intimate understanding of their customers’ needs, creating new services and products, and developing new business models for effective delivery. Further through alliances, innovation and a blending of technology and value chains, they are stepping out where others have not yet even thought.
Are You Globally Competitive?
Across all these stages of focus the underlying principle is that ‘an increasing focus on customer need leads to the creation of a greater customer value’, which will allow the business to out-compete everyone else in their chosen markets.
Each business must understand the purpose for which it exists as expressed by the needs of its customers. The question that ‘purpose’ answers is – what are we building?
Unsure whether you are wasting your business’s money and efforts on the wrong growth strategies? Take my global benchmark test to assess your growth performance.
Active Knowledge Questions:
- Is your business’s growth focus inward or outward looking?
- How many opportunities are you actively pursuing at present?
- How do you think of growth and profit?
Act Now:
How undefeatable is your business strategy? Consider Strategy Play – Crafting Undefeatable Business Strategies.
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All the best in the success of your business,
Richard Shrapnel
