Spectacular returns can be detrimental
Well, it seems GE stock is getting back up there, and people think it’s time for a celebration. Really?
Founded in 1892 by Thomas Edison, the legendary inventor of light bulbs and so many other things we enjoy today, General Electric eventually became the most valuable company in the world. It was hard to find a household that wasn’t using at least something that GE produced.
Jack Welch, a chemical engineer, became CEO in 1981 and began his 20-year reign transforming the company. A conglomerate with many divisions, Welch decided he didn’t want to be in any business where he wasn’t No. 1 or No. 2. He became known as “Neutron Jack,” getting rid of the people but leaving the buildings intact.
He expected his managers to rank the people in their organizations and fire the bottom 10% each year. Let’s say we worked in one of his engineering groups. The secret to great engineering is collaboration. As I learned from Boeing years ago, “All of us together are much smarter than any one of us alone.” Even brilliant engineers can’t think of everything, so gaining ideas from our colleagues to enhance our own is quite valuable.
With the 10% rule, much of that collaboration disappeared. Instead of working together, the engineers became competitors with each other. If I helped you, you might be here next year while I got fired because I wasn’t seen as good enough.
Welch became famous for delivering spectacular returns year after year. He became the model CEO and perhaps the most admired business leader in America, if not the world. He did it by cutting expenses he deemed unnecessary.
I have a friend who, as a young engineer, developed an invention that was quite valuable. He and other engineers who had developed such things were invited to present at conferences in exotic locations (e.g., Hawaii, etc.) and encouraged to bring their wives. Many GE engineers tried hard to develop something that would invite them into that auspicious club. My friend even went to Japan with his wife, and it was a big deal. He eventually became a division general manager.
Welch decided that practice was a waste of money and stopped it, much to my friend’s disappointment. “We weren’t getting many new ideas after he did that.” In fact, Welch cut much of GE’s research and development to deliver those spectacular returns. He cut many expenses, the damage from which wouldn’t be seen until years later. Welch retired in 2001. Jeff Immelt, his successor, was largely left with old technology and had to start R&D operations in India because he couldn’t afford to do it here.
In any case, GE has largely floundered since Welch. Even so, courses in his management techniques abound. You can even get a Jack Welch MBA. Now, he had some good ideas, but be careful using some of them. The resulting damage is not necessarily immediate.
Even so, GE, the former “gold standard” embarrassingly lost their AAA credit rating in 2009 and was further humiliated by being dropped from the Dow Jones Industrial Average in 2018. But now, the stock is bouncing back under Larry Culp, CEO since 2018, and everybody wants to celebrate.
Unfortunately, it’s not all good news. GE sold its appliance business in 2016. They even sold the light bulb business in 2020. (I wonder if Thomas Edison is spinning in his grave?) When you sell a division, you make a lot of money, but you don’t make any more from that division going forward. It’s like selling the goose that lays the golden eggs instead of fixing the problems.
Additionally, they probably became too diversified under Welch. They bought NBC, and managing a network is not like managing a manufacturer. They even played in the financial industry. GE Capital delivered great returns at first but dragged the company down in the 2007 recession. It’s really hard, if not impossible, to be good at everything.
What’s left of the former great General Electric is now three companies: GE Healthcare makes medical equipment (e.g. MRIs, ultrasounds, etc.), GE Aerospace makes jet engines and GE Vernova makes power-generation equipment.
Hopefully, they’ll all do well. There are many things people can do to prop up returns for a while. Welch probably did that better and longer than anyone, but was it worth it? I can’t help but wonder what GE could be today without his efforts. The returns back then would probably have been less, but the aggregate over time might be so much more.
Ronald J. Bourque, a consultant and speaker from Salem, has had engagements throughout the United States, Europe and Asia. He can be reached at 603-898-1871 or RonBourque3@gmail.com.
