Since August, GE has had a new CEO. In his announcements today, it is clear that he is making two fundamental errors in strategy. John Flannery is “focusing” on corporate strategy that is rejiggering GE’s portfolio of businesses and cost-cutting.
Instead, he should be enhancing the strategies of GE’s business units and investing in growth.
Before getting into that, let’s review the appallingly bad performance of GE stock in which I am an investor and what Flannery is doing about it. As of November 11, GE shares had lost nearly 40% of their value in 2017 — slashing over $100 billion from GE’s stock market value — compared to a 15% increase in the S&P 500. Flannery has famously put GE’s corporate aircraft and executive car fleet on hold along with the build-out of its Boston headquarters. GE has already cut $1 billion in industrial costs in 2017 and plans to cut $2 billion in 2018 and divest $20 billion of businesses in the next year or two, according to the New Haven Register
What’s more, GE is slashing its dividend by 50% to 12 cents a share and Flannery plans to “focus on three of its biggest business lines: GE’s aviation, power, and health-care divisions,” according to the Wall Street Journal. The Journal wrote that GE plans to “pull back from its transportation unit, one of the oldest and biggest makers of diesel locomotives, as well as GE Lighting, which traces its roots to Thomas Edison and makes LED bulbs and energy management sensors.”
To his credit, Flannery seems to be aware that cost-cutting is not a reason that investors want to own a stock — instead, they prefer market-beating growth. According to Bloomberg, in June Flannery “dismissed concerns about conglomerates, saying investors care more about outcomes.” Instead, he said, “They want growth, they want visibility, they want predictability, they want margin rate.”
Sadly for GE investors, what he has done so far is not helping GE grow — what’s more cutting costs and getting rid of business units will only make GE smaller — though it could improve its cash flow (for the last 12 months, GE’s free cash flow has been negative $2 billion).
So what should Flannery be doing instead? He should make decisions that accelerate GE’s revenue growth rate — after all, it’s expectations-beating growth that propels stocks upward these days, not cost cutting or banker-enriching corporate portfolio buying and selling. These are actions I would expect from someone who has a 30-year career at GE — beginning in GE Finance. What’s more — with the exception of the cost-cutting, portfolio restructuring is a continuation of what Flannery’s predecessor Jeff Immelt did. And GE’s stock sank some 40% over Immelt’s 16-year tenure during which time the S&P 500 was up 213%.
How can GE generate sustainable, market-beating growth? I don’t know, but I can say, based on the frameworks in Disciplined Growth Strategies, I would do two things.
1.Boost Growth Of Leading Businesses
First, I would change the strategies of its most successful lines of business — GE aviation, power, and health care — so that they can at least double their revenue growth rates. There are two keys to changing the strategies of these business units:
New growth vectors. GE should sell the products produced by these business units in new countries and/or to groups of customers where it does not already sell them; and
Quantum value leap. GE should invest in new products or modify existing ones supplied by these business units so customers perceive that GE delivers much more benefit for the money than do products offered by GE rivals.
These approaches could help GE increase its market share of its leading business lines.
2.Invest In Capabilities That Create New Sources of Growth
But GE must also invest in new growth opportunities. I do not know specifically what those are but I do know that Amazon has been doing that well (with some exceptions) since it was founded. For example, it used to sell books online it has expanded into many other lines since then most notably selling companies access to its computer systems in what is now its most profitable business AWS.