Everyone wants to tell their own version of the story. That’s the trouble with autobiographies. And especially troubling is a CEO’s memoir. How much truth is in there?
That’s my feeling after I read Hot Seat by Jeff Immelt, the former head of the once-mighty General Electric. The company is a shell of its former self. Under Immelt’s watch, GE lost $500 billion in value. It laid off half its workforce. Its stock price plunged. It sold off businesses at a discount. Immelt, after leading GE for 16 years, stepped down in 2017.
But it’s easy to play Monday morning quarterback. Without hindsight, any critic will make the same mistakes. And I don’t doubt Immelt’s honesty in retelling the facts. I am only curious about his interpretation of those events. The only way to get closer to the truth is to cross examine data. Lots of it. Big data style. And this is what my research team did.
The CEO’s Dilemma
Here’s the gist of Immelt’s version of the story. “I’d become CEO of a company where perception didn’t equal reality,” he writes. Before he took over, for at least a decade, GE had relied on GE Capital—its financial operations—to make up the overall earnings.
“Few observers grasped how little we’d been investing in those industrial businesses. We were a sprawling conglomerate that encompassed everything from jet engines to TV networks to insurance policies for cats and dogs. Yet we were valued like a tech company, trading substantially above the value of the businesses we had.”
In Immelt’s view, GE’s actual businesses had been pretty average. It was the halo of GE, powered by commercial lending, leasing and insurance, that had inflated the corporate valuation. All were riding the wave of a decade-long economic expansion.
So the task for the CEO is to defuse the bomb without setting it off.
Not The Only Game In Town
GE has peers. Honeywell comes to mind, as they both compete in a similar space. My research team made a pair comparison. It’s noteworthy because the two would have merged in 2001, had the deal not been blocked by the European Union.
Here are four major contrasts.
1. Share price performance between GE and Honeywell between 2001 and 2021.
Of course, share price can be affected by many things. But one of the most reliable measures is the operating cash flows per share.
Amazon’s CEO Jeff Bezos prefers cash flow over earnings. “Why focus on cash flows?” he asks. “Because a share of stock is a share of a company’s future cash flows, and as a result, cash flows more than any other single variable seem to do the best job of explaining a company’s stock price over the long term.”
Our team decided to follow Bezos’s thinking and calculate the cash flow per share ratio between GE and Honeywell.
2. Operating cash flows per share.
You might notice right away that Honeywell overtook GE in 2006 by this measure. GE’s ability to generate cash has been declining ever since. What happened?
Immelt took over GE in 2001. He promised an “industrial internet” that GE would build. Data could be captured from GE’s wind turbines, jet engines, MRI machines and diesel-electric locomotives. The future of industrial companies was in software and computing, and GE pronounced it would become the world’s first “digital-industrial” company.
That sounded like a great strategy for profitable growth. We want to evaluate the result of this effort.
Our team downloaded every report published in the last 10 years by the standard-bearers of business news—The Wall Street Journal, CNBC, and Financial Times—along with corporate press releases from this period. Ten years of data were all fed into an algorithm. We want to look at how digitally obsessed Honeywell and GE were. To what extent the business community had come to understand how digitally savvy each of these players was. This “textual analysis” may not be the perfect measure of their digital efforts, but it should give us a gauge.
3. The intensity of “digital” mentioning between GE and Honeywell.
Of course, just because a company talks a lot about digital technology doesn’t mean it’s meaningfully bringing digital innovations into the marketplace. If a company spreads its investments everywhere and doesn’t focus on a few targeted areas, its money and resources get wasted. Without making tough choices, a team ends up making a millimeter of progress in a million directions.
This is certainly a reflection of GE’s complexity. The company was busy divesting its financial operations, expanding its geographic footprint outside of the U.S., fending off active investors, and then dealing with investigations by the Securities and Exchange Commission. All these added distractions. They certainly drowned out GE’s digital plan.
To validate this claim, we added a second dimension. We wanted to see how focused and committed Honeywell and GE are. Who is exploring everything without focus? Who is committed to exploiting a few chosen areas to their full potential? Along this Explore-Exploit spectrum, how do GE and Honeywell compare?
4. The Exploration–Exploitation comparison.
It turned that out as time went on, GE had become less committed. It tried to keep all options open, as if it couldn’t make up its mind.
Ironically, it was GE that had been especially bullish about its own future. GE is willing to take risks in order to realize future opportunities. Honeywell, in contrast, is the one trying to avoid an unnecessary downside. We’ve made one last analysis to understand these corporate attitudes.
5. Attitude towards risk.
Despite all the mishaps, GE is still more risk-seeking until the very last moment.
One thing is for sure. Immelt grew up inside GE when it was the paragon of corporate success. GE had been a company that enjoyed a large advantage against its competition. Its core market was growing. It enjoyed a long period of peace.
But what GE needed after Jack Welch was a wartime CEO. The company was repeatedly trapped by imminent existential threats, one after the other, for sixteen years. Immelt essentially had a single bullet in the chamber and needed, at all costs, to hit the target. Unfortunately, he was groomed as a peacetime leader.
Stay healthy,
P.S. Can a CEO build the skill sets to lead in both peacetime and wartime? Have you come across such an example? Share your thoughts with us. Join the discussion.
This article has been co-authored with Angelo Boutalikakis and Iulia Calota, researchers at the Center Of Future Readiness.
22 comments
Brilliant analysis, Howard!
And with some adjustments and additions a great compass for New Normal strategies.
Thank you!
Very interesting analysis and great context support.
As this is a data driven analysis, it would be interesting to expand to:
1) Other players in the area
2) Other verticals (although, as you mentioned, GE was a lot more than a one trick pony)
One of the pivot you take, which is the “digital” element is very close to my heart and I would love to see if we can expand this across industries or if that was specific to GE considering the area they are in and their strategy back in the early 2000s.
We always hear about the same examples which are the archetypes of “successes” and “failures” of digital, but your evaluation approach could really expand to the companies that are still around and doing well but which could have missed a great potential/opportunities….
Thank you so much Jorge. That’s a great observation. In the future, our team will also try to unpack what makes Tim Cook so successful despite the shadow of Steve Jobs. Thanks a lot!
Thank you Stephen for your kind words. Also, it is very helpful that you remind us here that there are leading and lagging indicators. Our research team will keep this in mind because it might be useful to specifically examine which areas companies are paying more attention to. Thanks for the inspiration!
Superb article Howard (and team)!
Already some great comments from other readers, but one of my biggest personal takeaways is the importance of viewing business activity and performance through many different lenses.
Your analyses cover some interesting leading and lagging indicators, and I believe that all leaders need to continually challenge how we measure our businesses … otherwise confirmation bias and institutional mental models will continue to prevail.
While there is no single metric that provides perfect insight I believe that taking a holistic view (combined with an open mind and a quiet ego from all the stakeholders) should have helped to raise the alarm bells before it was too late for GE.
Keep up the great work, and stay safe!
Thank you Howard and team for such good analysis. As you said “may not be the perfect measure of their digital efforts, but it should give us a gauge.” I wonder how difficult is to take a company after a successful and charismatic leader (Welch, Gates, Jobs, etc) and deal with their ego ghosts that goes around. In the case of Immelt, besides that, I believe he was not the right fit for the moment and the company took too long to understand it. It came with a price.
Thanks again Howard.
Thanks Camilla!
Thank you Devon!
oh wow, thanks a lot Patricia! This is such a smart observation. I love it. Thank you for pointing this out.
Thank you so much Willy! This is wonderful additional examples. Excited to learn that you liked the piece.
Hi Jose,
Thanks for your question. Iulia, one of the co-authors, has placed some additional explanation in a new comment. Hope this would help.
Howard
Dear Jose,
Thank you for your comment. I would like to clarify a bit more the question you raised. The Explore – Exploit focus is based primarily on the use of related vocabulary that expresses one’s ability to explore/ exploit. In more details, exploration focus is the “identification of new opportunities” whereas exploit is defined by “seizing the existing opportunities”. The chart is constructed on the use of associated language that is found in the articles these companies are mentioned, (LexisNexis database). The same reasoning applies to promotion-prevention focus.
If you would like to get a better understanding of these parameters/ focuses, I would recommend reading some other interesting articles found on the blog!
1. Why Your Company Emphasizes Experimentation When Shared Priorities Should Come First : This piece talks about GE and Microsoft in terms of exploration/exploitation.
2. What Does It Mean if Your Company Expects Failures, Positively? : This piece covers innovation by adding a twist of digitalization.
If you have further questions, do not hesitate to share and comment on your thoughts! #WeeklyMusing
Allow me to add a couple of thoughts. The WEF has proposed in 2020 “Common Metrics for Sustainable Value Creation”. These 22 points take care of governance, ecology, social issues. As concerns corporate sustainable prosperity, maybe we need a systemic framework for reviews not only of past performances, but also of prospects for the future potential of the enterprise. It should inspire executives, directors, and savvy investors.
Many thanks for the article on Immelt.
Immelt a corporate disaster. He has done much worse than Ginni Rometty at IBM, and Steve Ballmer at Microsoft. The only question that comes to mind, how come they managed to keep their throne for such long? what has the board of directors been doing … besides cashing their checks?
Howard, Angelo and Julia, thanks for publishing your analysis´ results.
Due to the fact that enterprises´ S-curves are shortening and industries´ boundaries are blurring, I see wartime CEOs gaining momentum over peacetime ones.
Kind regards,
Patricia Araripe
I’d like to understand better how you created the explore-exploit focus and the promote wins-prevent losses.
Many thanks
Excellent article! I particularly found very powerful the metrics adopted to compare the strategic attitudes of the two companies.
Very inspiring!
Always interesting to read your thoughts. Some neat work on the comparison, which of course begs the question of why only Honeywell? That he did not execute well is crystal clear. I am looking forward to reading the book.
Very specific article. It gave us a chance to broaden our perspective.
Another great article. I’m always waiting for your new updates. Keep us posted.