Wednesday, December 12, 2018

What Went Wrong at GE?



What went wrong at GE ?
by Harrison Snow


GE is an industrial conglomerate with a
storied history that was long considered the model for how a business can thrive through skilled leadership and a strong culture. GE’s different divisions make a wide range of products to include: jet engines, medical devices, drilling equipment, power generation, Insurance, and healthcare. The traditional benefit of a conglomerate is its ability to weather cyclic downturns because different sectors may be in different stages of a cycle. Losses in one sector can be offset with profits in another sector 


Yet, somehow during an historic business expansion after the 2008 financial panic, GE managed to underperform its competitors and the stock market overall.  Some of the bad news for GE includes a stock price that lost 61% of its value while the stock market increased its value a 185%. This translated into a loss of 175 billion dollars in market evaluation over two years. The GE dividend is now at four cents per share and its stock is no longer listed on S&P 500. Cash flow from profitable divisions goes into servicing the debt accumulated by the underperforming divisions.

John Clupp, the current CEO, was brought in to turn around GE. An outsider, he must win over employees to his vision for the company. He replaced John Flannery who was fired by the board after a one-year tenure. Flannery tried to reduce the complexity in the areas of organization, finance and staffing that made running GE a management challenge. His predecessor, Jeffery Immelt, was forced out after a sixteen-year tenure, in part, because of a series of mergers and acquisitions that proved to have more costs than benefits.  Criticized for being fad driven, the top dollar prices he paid resulted in what is known as poor capital allocation; which included buying back GE stock at high prices. His predecessor, Jack Welch, was considered by many to be an iconic business leader who guided GE through a long period of profitable growth. However, Welch was nicknamed, Neutron Jack, for his HR policies that supposedly eliminated staff while keeping infrastructure intact. He was also an advocate of the “rank and yank” policy that automatically fired staff ranked at the bottom ten percent of all performance evaluations.

Focus Question

The two questions the Washington DC Organizational Constellation group sought to answer after reviewing the data presented above were: What key factors were responsible for GE’s decline? If those factors were identified what measures could be taken to truly turn GE around? While issues such as poor capital allocation certainly affected GE’s bottom line they were seen to be symptoms of the problemand not the actual problem. 

 GE employees lots of smart, educated and capable people. The GE culture supports, at least in principle, “speaking truth to power.”  How did they, at least at the headquarters level, manage to keep making the same mistakes; chasing fads that resulted in poor capital allocation? Was there insular thinking that meant they were somehow out of touch with the dramatic changes taking place in the business world? 

GE has taken steps to shake up C-suite management and the board, institute a leaner workforce and reduce financial complexity. Would this bring about the necessary change whatever that might be to revitalize the company?

The group of participants conducting this analysis included two shareholders, a potential shareholder and a former employee. One of the shareholders had been impacted by the decline in the stock price. Was there hope for a turnaround or should he cut his losses? 

Systemic Factors

The group brainstormed a list of systemic factors that might be impacting GE. The factors that seemed most relevant included: former CEO Jack Welch, the new CEO, staff affected by the “rank and yank” policy, previous nuclear power programs and the associated toxic waste, the GE conglomerate business model, something not apparent that was the root cause of the downward spiral, and the GE management ethos. The nuclear power issue was unexpectedly raised by the former GE employee who participated in the exercise. Although it was something no one else had heard about the issue seemed relevant so the participants decided to include a representative for it in the constellation. 

The members of the group each agreed to represent one of the identified factors and found a spot in the meeting room that seem to be their place. Two groups formed and stood about 15 feet apart. The smaller group was Jack Welch and the toxic waste from the nuclear program. Another person joined them to represent the people affected by the radiation. 

Interactions by the Representatives 

Welch reported he felt distant from GE but concerned about what was happening there.  Near the GE group but not in it was the new CEO. He observed their interactions with a degree of objectivity and detachment.  In the GE group the representative for those affected by the HR policy was bent over and turned away from the others. The business model moved slowly towards the management ethos. She eventually she stood in front of the ethos wanting to know what the company stood for now. Ethos and the affected staff did not look at her and the new leader. Nuclear waste left her small group and moved slowly over to the side of management ethos as if looking for something. 

 Nothing happened until Welch moved closer to the GE group and claimed responsibility (for his part) for the HR policies and management ethos and how that had affected people. When that occurred the staff, who were bent over, stood up and turned to face the rest of the company. The shadow root cause realized he was hubris. He was “the best” and always knew better than anyone else. He represented a long history of excessive pride and arrogance that led to bad decisions and a lack of self-accountability. 

When management ethos saw how hubris was a part of his persona it was able to become humbler and more connected to the others in group. Ethos acknowledged what happened to the “ranked and yanked” staff and the victims of the toxic waste. Both ethos and business model looked at John Clupp to answer the question, who are we now?The new CEO seemed relieved this question had been asked. And he appeared ready to work in partnership with the rest of company to forge the answer.  

Exercise Debrief and Take-Aways

After the participants de-roled from the exercise they discussed what they took from the experience. The answers to the two questions had a lot to do with the corporate culture that Welch was instrumental in creating and the policies and structure that supported it. 

Hubris not only fosters poor decision making; it prevents people from learning from their mistakes. “Being the best” can easily warp into “looking the best” and not admitting or addressing mistakes. Clearly over the last few years, this emperor had no clothes. But there was no way to confront the issue and how it was impacting decision making as long as hubris was an unacknowledged part of the management ethos. 

Restoring the GE brand according the results of this exercise starts with changing the culture. This change requires a collective and honest look at the ethos of “being the best” and how that shaped workplace behavior. Pride can be source of strength. Hubris never is. But it’s difficult to know the difference once hubris takes root. The new CEO has the opportunity to inspire the shift towards humility. During the exercise the dysfunctional ethos became more open to the change effort the new CEO needs to lead. This openness grew as parts of the company’s dysfunctional past were brought to light and acknowledged. Obviously, some corporate soul searching is called for. This soul searching would likely be more accepted if the champion of that effort was an insider, like Walsh, who helped shaped the past dynamic that is affecting GE’s present performance.

The unexpected issue of nuclear waste was intriguing. Any waste that was a public health hazard likely occurred decades ago. The fact that it showed up in the constellation asking to be seen and acknowledged does not mean some kind of malfeasance actually took place. But it does indicate a potential issue that needs to be researched. That research would answer the question if there is a past that should be uncovered and remediated. 

 The possible victims of the toxic waste, along with the “ranked and yanked” staff could be two groups who might be still be energetically part of the current system.  Given GE’s poor performance one has to ask if there was an unconscious compensation at work to atone for those who were disadvantaged or hurt by abusive or shortsighted corporate policies and culture? 

Conclusion 

About two weeks after the above exercise the writer of this article came across a blog, Contrarian Edge, written by investment analyst, Vitaliy Katsenelson.  According to Katsenelson, GE’s management thought they could dramatically improve any company they acquired through a process known as Six Sigma. Their confidence in their abilities was such that they did not worry much about the initial acquisition costs. Katsenelson also faulted Jack Welch for his near obsessive focus on quarterly results. Welch left GE years nearly two decades ago but his values apparently still predominate as part of the management ethos. The focus on beating Wall Street earnings estimate each quarter likely made short-term thinking and short-sighted behaviors part of the institutional norm. Revising the GE culture and establishing acorporate modus operandibased on greater humility and longer-term thinking should be one of John Clupp’s priorities as he seeks to rebuild the GE brand and its performance.