CEO John Flannery has vowed to make the conglomerate leaner and more focused by slashing costs, trimming operations, and changing the culture.
It is clear that within this vast organisation, spanning sectors from healthcare and aviation to lighting and energy, something has got to give. During the tenure of legendary CEO Jack Welch, from 1981 to 2001, GE’s market value rose from about $15 billion to over $400 billion. By now it has slid back to around $150 billion. This year has been particularly rough, with GE’s stock falling by more than two-fifths, making it the poorest-performing stock in the Dow Jones Industrial Average.
When he succeeded Welch, CEO Jeffrey Immelt steered away from the former’s ambitious “buy or bury the competition” credo. He was successful in getting the company through two calamities, namely the September 11 terrorist attacks and the global financial crisis; but GE’s core power business has suffered greatly. Big energy acquisitions, such as France’s Alstom and US oilfield services firm Baker Hughes, have mostly flopped.
Thus when GE veteran John Flannery took over as Chief Executive in August 2017, he took on some major challenges. About two months in, the company announced feeble third-quarter results. In particular, profits in its power division declined by half from the previous year. In November Flannery told an audience at the Wharton Forum in New York that “we need to make some major changes with urgency”, and laid out his plan. As The Economist reports, his strategy has three main components: slash costs, sharpen the culture, and shrink to the core. Flannery already intended to cut $1 billion in annual spending on top of the $2 billion annual cut already proposed by Immelt.
Transforming GE’s corporate culture will be a big undertaking, in proportion to the vastly different leadership styles of Flannery and Immelt. “Jeff was a visionary but he did not dig into the numbers the way John does”, one of the company’s senior executives remarked. Flannery seeks to be disciplined, data-driven, and more transparent in financial reporting. Where cultural change is needed most, Flannery believes, is within GE’s senior management. For one, he plans to bring pay for top executives into alignment with the company’s free cash flow. He is also cutting the board of directors down from 18 to 12, and replacing three directors.
Trimming the company itself will likely be the most difficult of all. Having promised in October to sell assets worth $20 billion over the next two years, Flannery has put GE’s transportation and industrial lighting operations up for sale, and is willing to sell its stake in Baker Hughes. Investors would like to see more. Analysts agree, many suggesting far deeper cuts. While criticism has been harsh, The Economist notes, “Flannery has, after all, only just begun to wrestle with the problems he has inherited. His instincts appear to be sound, and his principles of curbing costs, cultural clarity and cutting to the core are surely the right ones. He is being punished for his reluctance to wield the knife more aggressively.”
