Learning from GE’s Stumbles

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Welcome to the hbr ideacast from harvard business review. I'm sara greene carmichael. In June, General Electric fell out of the Dow Jones Industrial Average, a stock index of which it had been one of the founding members. It caught some people by surprise, including me, because GE has long been held up as an example of a well managed company. So what's responsible for this and what can we learn from? In an analysis for HBR.org, our guest today, Roger Martin, writes that GE was hurt by two problems. A lot of companies, clueless activist investors, and M and A folks masquerading as strategists.

When you're using M and A to acquire growth that you can't do yourself, you're in 100% get mode. I will get growth from that company. Oh, yay, that's great. As opposed to here's what I can do to make it more valuable.

Roger Martin is the former dean of the Rotman Business School at the University of Toronto, where he now directs the Martin Prosperity Institute. Roger, thank you for talking with us.

I'm always delighted to talk to you, Sarah.

In a way, it seems like GE dropping out of the Dow is kind of the exclamation point at the end of a sentence that began during the Great Recession. They just never seemed like they were able to fully recover from that. Why?

Yes, well, and it goes back further than the Great Recession. Actually, I think you can track it all the way back to, if you will, the end of the Jack Welch era, which was around another economic turndown. So I would say it's been since then, Sarah, and it's, you know, they've had more problems of late, more notable problems of late, but that's all been part of a whole cloth, I think. Mm.

Well, let's dig into then why that might be the case. One challenge you've pointed to in your article for HBR was activist investors. I feel like every CEO right now is worried about them. Let's start with ge. What happened in their case?

Well, they acquired an activist investor trion, who had the view that, oh, they were so clever they could kind of fix ge. And as I point out in the article, that hasn't exactly worked out so hot thus far for trian investors. I have to say, when I look at activist investors and try to assess whether what they say makes a lot of sense, a Little sense or no sense, I find myself rarely seeing what they say as very sensible or interested in the actual welfare, long term welfare of the company. That would be the case here. I mean, essentially the story on activist investors, even though they say they're coming in and they're going to kind of be a long term investor to help turn around the company, the median activist investor in the entire Universe is the a 423 day holding period. A little more than a year. You can't turn around any company in 423 days. Less than 10% of activist investors are into their target stock for even four years. So they're interested in making a quick killing.

Are they a trend that's increasing? I mean, are you seeing more activists intervening in their companies?

Yeah, I think the general trend would be to more of it because they've told a narrative that people are buying, right? People buy the narrative. This happens, a narrative gets created. And this is the narrative of, oh, you've got entrenched inefficient management and if you could only bring these clever, clever activists who've got all these great ideas in, they will be able to kind of root this out. We need a change of the narrative. People need to look at the real statistics and, and see that these people simply are not interested in better company performance. They're interested in generating an event. Because they know that that's what does it for you. If you can generate that event, you'll make a fortune and then you don't have to worry about the hard work of running a company to make it competitive. Service customers, well, have great employees, et cetera, et cetera. And so they just, you know, they're hyenas, right? They just go from one prey to the next prey. And that does not make the world a better place. It makes the world a worse place.

If you're a CEO living in the world we live in, with the rules and laws we have, how can you fight off an activist or outwit one?

It's like a gazelle with a pack of hyenas, right? It is very, very difficult. So that's why it is. It really takes a fantastic CEO with a fantastic effort to overcome the entirely negative impact of having an activist hedge fund get some measure of control over you. It's sad. It's sad. And again, it's not as though hyenas are, are very smart. You know, if there's a bunch of, you know, kind of gazelles there and there's one that's limping, they don't go after the fastest gazelle. Right. They go after the limping one and just eat it.

Interesting. So let's dig into that a little bit more. You know, I like the gazelle analogy. Why was this gazelle limping in the first place?

Yeah, well, I mean, I think a bunch of these things are kind of known facts that in retrospect, I would argue that GE got far over diversified. I do think that Jeff Imelt inherited a broad, messy portfolio that was turbocharged with an unsustainable GE capital. And so he had a real challenge. I haven't worked for ge. I'm not inside ge. So some of it is just observations, as anybody else would from the outside. But my bet is in being in all of these businesses, there wasn't enough of a focus on how are we winning? Customers, consumers, customers, how are we making sure our value equation is superior to competitors? Rather, there was deal making. We can fix whatever problems we have by M and A by bulking ourselves up. You know, because, gee, you got to be number one or two in your business. That's not a terrible rule. But if you have to pay an extraordinary sum to get to one of those, and perhaps, you know, being being two in a business where you've got a really, really, really, really good number one, you know, kind of ain't no fun. And you gotta. You've gotta understand what the competitive dynamics are that justifies M and A to bulk you up. I think he inherited something that was a bit of a mess and dramatically overvalued. And he had to live with that even before. And it was in them inherited in the middle of a not so great period. And then, whatever it was, six or seven years later, the global financial crisis hit, which demolished GE Capital and showed the weaknesses of GE Capital and the big downsides of it.

So I'm curious to hear more about that. The problem with the M and A masquerading as strategy, as you put it in your HBR article. Because we are seeing a ton of mergers all over the business newspapers these days. And I'm curious to know why you think that's happening. And is GE the only company that is making this mistake of thinking that a merger is kind of a strategy?

Oh, hell no. You're seeing a lot of it because it is the dominant form of strategy out there now, I think. And part of it is just a talent thing. Most CEOs sadly don't know much about strategy. It's sad, but it's true. And we can go into why that might Be. And many of them hire as their head of strategy a business development, corporate development MA person. That's very, very common. And so if you don't have a. If you have a CEO doesn't really understand strategy and they have as their head of strategy their chief strategy officer, a non strategist, they're going to do something. And so they know M and A, and they know M and A Coal, they can do deals because they've had experience doing that. So they go and do a bunch of deals. And so thanks to the pressure for growth without risk, M and A seems like a good idea. And we've got people who are good at that and bad at strategy. And so you get M and A. M and A. M and A. M and A and more M and A.

Yes. So but contrast what GE did and that kind of M and A that you're talking about with the right way to do M and A, because it's not that all M and A is bad. You've written extensively on kind of how to get M and A right? So what is the vision for a successful M and A?

M and A tends to work when you give the company you've acquired more than you try to get from it. And so you say because we're good at these things, we can help that company be more competitive. When you're using M and A to acquire growth that you can't do yourself because you can't come up with kind of good new business ideas, you're in 100% get mode. I will get growth from that company. Oh yay, that's great. As opposed to here's what I can do to make it more valuable. And what that get over give is a recipe for paying a huge premium for it. And in due course that coming home to roost as people saying, hey, you're not a very profitable company, we need to get a hedge fund in there to break you up. That's the story.

One of the things that does make me sad about GE's struggles as someone who cares about management is that they were a company that really talked a lot about how they prioritized management. And they were known as a company that would try to actively develop and share good managerial practices. How come that focus on managerial excellence didn't protect them?

Yeah, my observations of whenever I interacted with GE people, I was quite struck by how little kind of knowledge or understanding of strategy, what it is, how to do it in ge. I just think they don't have strategists. There may be evidence there that people can come to see and say, no, Roger, here's A, B, C, D, E, F. You know, this is not a statistically significant study. I'm doing its observations which just says there isn't a strategy gene, there's an MNA gene and a lean cost reduction get rid of waste gene. And those are incredibly strong with all sorts of talented people who know how to do that in the most talented way. You can do that sort of thing, but not the strategy gene.

So in one of your books you describe strategy as a set of choices and primarily where to play and how to win. Do you see a way for GE to come back and do that and figure that out now?

Absolutely. I mean it's always doable. I think virtually every strategy situation, strategically bad situation can be improved. Sometimes there's bigger headwinds than not clearly. But yeah, it's always a way to fix your value equation to meet customer needs. Kind of better at a, better at a better cost structure by being strategically nimble and clever.

So a company like GE who is facing a lot of internal and external challenges, is there something, some North Star that they can focus on to guide them out of trouble?

Sure, sure. I think it's customers. Customers first, employees second. But customers, they've got to swear off M and E. So they've done plenty. Ge, if we're referring to ge, they've just got to say I'm not going to do any deal for the next three years. So I'm not going to distract my employees by having them in the midst of merging with another company and doing post merger integration rather than serving customers and have our finance people tied up with carve out audits so that we can sell this. I would just swear off any M and A activity. We're done now. We aren't doing any more acquisitions, we're not doing any more divestitures and we're not doing any more mergers. We are going to focus entirely on how we improve the customer value equation with the great talent, the great technologies, the great customer relationships we currently have. And I'm taking off the table these things so people will not be thinking about that and will be turned directly back to the customer and making their lives better. Because when we make the life, when GE makes the life of a customer better, they make the life of our employees better, they make the life of our treasury better, they make the life of our stockholders better. And we are going to be focused relentlessly on that and nothing in the MA world is going to distract us from doing that. That is what I would do. And I think you could get GE back on the beam. Focus on making that customer the absolute apple of your eye, the focus of your attention. And GE, I think, will be just fine.

Well, Roger, I always find your insights so helpful. Thank you for spending some time with us today.

Anytime, Sarah. It's always enjoyable to chat with you.

That's Roger Martin. He's a professor at the University of Toronto's Rotman School of Management, where he runs the Martin Prosperity Institute. His most recent book is Creating Great Choices, co authored with Jennifer Riel, who we interviewed on this show. That's episode 595, transcending either or decision making. Our show's produced by Kurt Nickish and Amanda Kersey. We get technical and production help from Rob Eckhart and editing help from Ramsey Kabaz. Thanks for listening to the HBR IdeaCast. I'm Sarah Greene Carmichael.