UPDATE: As Larry Culp tries to turn around GE, this is the next phase to watch
By James E. Schrager
One year after taking over at General Electric, Culp still needs to find new ways for the company to grow
Keep betting on Larry Culp to turn around General Electric.
One year into his tenure at the top, Culp faces steep challenges, and
the stock market isn't yet convinced he can pull it off. But unlike
those who followed Jack Welch's storied run at the top, this CEO
understands that GE(GE) needs to be treated as a turnaround, rather than
just as a course correction.
A corporate turnaround has three
phases. First, stop doing dumb things; second, improve management
practices; and third, find new ways to grow. The first two are
relatively straightforward; the third is much tougher. But this is where
Culp, who ran medical products manufacturer Danaher (DHR) for more than
13 years, is different than his predecessors.
To be fair, General Electric
never had a much of a chance once Jack Welch retired way back in 2001.
That wasn't because of bad luck or lackluster management as the
executives at GE were well-trained to run their businesses. Instead,
Welch's brilliant growth strategy had simply run its course. It was the
end of history for GE, but most at the time didn't notice.
Looking back at when Welch took over as CEO in 1981, GE was struggling
with an overgrown and constraining corporate headquarters staff. Welch
slashed the bureaucracy, pushing decision-making down into the field.
This had wondrous effects but required keeping a scrupulously close eye
on emerging trouble spots. Welch then instructed his division presidents
that their jobs depended on immediate assessments of potentially
damaging issues finding their way -- post haste -- to the CEO's desk.
John Flannery (http://www.marketwatch.com/story/ge-earnings-no-more-drama-please-2018-07-17),
the most recent GE CEO to be fired, was tossed out unceremoniously for
violating rule No. 1 at GE: don't surprise the board with adverse news.
That he blindsided his board with a $23 billion write-down (http://www.marketwatch.com/story/ge-replaces-ceo-and-investors-cheer-despite-a-profit-warning-and-huge-charge-2018-10-01) was exactly the sort of thing that Welch worked hard to avoid.
Beyond running the businesses well, Welch also understood that growth
is the magic potion Wall Street requires. To grow GE, he embraced the
idea of buying companies to increase earnings, but not just any deal.
Instead, the search was on for businesses ranking first or second in
industries with only three of four players. No turnarounds, no roll-ups,
no startups here. He set his sights on companies with dominant
positions in their markets.
Once a newly acquired firm became a
part of GE, Welch's management structure was often a welcome relief for
those working inside the companies he purchased. This afforded him a
preferred position when large and attractive businesses were on the
block. Admirers were justifiably amazed at Welch's successful growth
In fact, his approach was soon imitated. In many ways
the modern private-equity industry with billions of dollars on call is
testament to Welch's clever strategy. Other large public firms also
became engaged in buying companies. This left Welch's successor, Jeffrey
Immelt, looking at an entirely different chessboard.
was serious about acquisitions, having learned his lessons well. He
spent about $175 billion buying over 300 companies on his watch. His
GE-trained managers had management principles honed in the Welch era to
make the acquisitions work. Immelt was the handpicked successor, the
best of the best. Yet it wasn't enough.
Once the PE firms got
respectable, every juicy acquisition suddenly had too many bidders. This
pushed prices ever higher, forcing increasingly risky bets. When the
strategy of buying the right companies at fair prices no longer worked,
applying GE's superior management attributes couldn't fill the void. The
end of history for that strategy required a new one.
been deeply involved in the first phase of the turnaround by getting rid
of businesses that don't show "strong promise." This is always best
done by an outsider with few intellectual or emotional ties to the past.
Earlier this year, for example, Culp agreed to sell GE's biopharma business to Danaher for $21.4 billion (http://www.marketwatch.com/story/ge-stock-rockets-after-21-billion-deal-with-danaher-but-remains-below-key-chart-level-2019-02-25). Danaher had approached GE about such a deal a year earlier, but Culp's predecessor had rejected the idea.
Also read:GE to sell millions of Baker Hughes shares, no longer have majority control (http://www.marketwatch.com/story/ge-to-sell-millions-of-baker-hughes-shares-no-longer-have-majority-control-2019-09-10)
Phase two is to improve management practices, which means finding ways
to get adverse information flowing back to the top, as it did in the
days of Welch.
The hardest part of any turnaround -- phase
three -- is igniting new growth, and here Culp comes with a bit of a
He hails from a sort-of GE clone in Danaher.
This manufacturer followed many of GE's management tenants except for
one big difference plucked from the private-equity playbook: Danaher was
free to sell companies when that was the smart move. This open-minded
approach brought the PE firms' biggest profit weapon to a publicly
traded conglomerate, i.e., the ability to take advantage of frothy
markets when appropriate to cash out, rather than always forcing a
long-term hold position.
Jack Welch had a great run; don't take
anything away from him. But by the time he handed over the reins in
2001, the world was a much different place.
For those placing
odds on a GE recovery, be wary but optimistic. Culp understands GE needs
a complete turnaround, and if stock markets and the economy stay
strong, GE will have a chance to play the divestment game to its
advantage. But if a general slowdown begins to take hold, Culp will have
a much tougher time selling unwanted divisions.
ways to grow is where Culp will have to use all his training to remake
remaining core businesses with mergers able to leverage GE's distinct
advantages. The story is far from over, but keep your eye on his plans
for getting GE growing again and you'll be looking in the right places.
James E. Schrager is a Clinical Professor of Entrepreneurship and
Strategy at the University of Chicago Booth School of Business. An
earlier version (https://review.chicagobooth.edu/strategy/2019/article/three-strategy-lessons-ge-s-decline) of this article was published in the Chicago Booth Review