Michael carla memo#3


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Michael carla memo#3

  1. 1. Summary<br />The question for this analysis is the “effectiveness of General Electric (GE) CEO Jeffrey Immelt strategy, organizational structure, and systems”. In my opinion, Immelt’s strategy has not been effective and he does not deserve to keep his CEO position. Mr. Immelt, like far too many CEOs, took a much less aggressive stance toward growth and was unwilling to challenge and disrupt existing leaders, or promotes aggressive market disruptions through the GE business units (Hartung, 2010) In contrast, Jeff Immelt does not deserve all the criticism that has recently been thrown at him. He inherited a massively overvalued company with a large and arguably out of control financial services segment that he did not create. Therefore, I would agree with Chuck Carnevale the President of a NASD firm that, “the true Jeff Immelt legacy has yet to be written”. (Carnevale, 2011)<br />Introduction<br />GE was founded in 1892 from the merger of Thomas Edison’s Electric Light Company with the Thomas Houston Company. GE is a diversified industrial corporation that manufactures a wide range of products from major appliances and lighting products to commercial and military aircraft jet engines; medical diagnostic imaging systems; bioscience assays and separation technology products to electrical distribution and control equipment. (Huraira, 2011) Throughout its history, GE has been associated with near-continuous growth and above average profitability. See Exhibit 1.1 for profitability under successive CEOs. (Grant, 2004)<br />Jeff Immelt (Immelt): Taking Charge<br />The GE that Jeff Immelt inherited in 2001 was the world’s most valuable company and was widely regarded as the worlds most successful. (Grant 2010) Four days later, two planes crashed into the World Trade Center towers, and the world was thrown into turmoil. After the chaos of the first few post-9/11, he authorized a $10 million donation to the families of rescue workers, and dispatched mobile generators and medical equipment to the World Trade Center. More specific criticisms were directed at the way in which GE was able to disguise the true risks of its businesses by consolidating the financial statements of its industrial businesses within its financial services business, GE Capital (Grant, 2004) On September 18, Immelt finally focused on reassuring the financial markets by purchasing 25,000 GE shares on his personal account. (Bartlett, 2006) Three days later, he appeared before a group of financial analysts and promised that 2001 profits would grow by 11% and by double digits again in 2002. The net result was that by the end of Immelt’s first week as CEO, GE’s shares had dropped 20%, taking almost $80 billion off the company’s market capitalization. (Bartlett, 2006)<br />Strategy, Organizational Structure, and Systems designed by CEO Jeffrey Immelt<br />He elaborated this into a vision of a global, technology-based, service-intensive company by defining a growth strategy based on five key elements (Grant 2004): Technical Leadership: Immelt identified technology as a major driver of GE’s future growth and emphasized the need to speed the diffusion of new technologies within GE and turn the corporate R&D center into an intellectual hothouse. Marketing and Customer Service: A key feature of Immelt’s career at GE was the extent of his customer orientation and the amount of time he spent with customers building relationships with them and working on their problems. Services Acceleration: By building service businesses on its massive installed base of aircraft engines, power turbines, locomotives, medical devices, and other hardware, Immelt believed GE could better serve customers while generating high margins and raising entry barriers. Commercial Excellence: Reflecting his own sales and marketing background, Immelt committed to creating a world-class commercial culture to overlay the engineering bias and financial orientation of GE’s dominant business approach under Welch. Globalization: Immelt committed to expanding GE’s sourcing strategy and market access worldwide, in particular focusing on its underexploited opportunities in developing world countries such as China and India. Growth Platforms: Finally, he recognized that significant resource reallocation would be necessary to build new business platforms capitalizing on “unstoppable trends” that would provide growth into the future. (Grant 2004)<br />Changing Organizational Structure<br />Between 2002 and 2008, Immelt reversed several major structural changes that Welch had introduced during the 1980’s. In 2005, GE was restructured into six businesses focused on broad markets: Infrastructure, Industrial, Commercial Finance, Healthcare, Consumer Finance and NBC Universal. (Grant, 2010) Immelt changed the reward system by tying the salary and bonuses of the executives to their performance, putting a reward on growth they put in compared to new deals they have struck. (No Author 2)<br />Effects of Immelt’s approach in leveraging resources and capabilities to meet revenue and profit growth goals<br />Despite all his efforts, 2002 had been a terrible year for GE. Revenues were up only 5% after a 3% decline the prior year. And rather than the double-digit growth he had promised, 2002 earnings increased by only 7%. By year’s end the stock was at $24, down 39% from the year before and 60% from its all-time high of $60 in August 2000. Having just announced an 11% increase in revenues for 2005 (including 8% organic growth), he was now forecasting a further 10% revenue increase in 2006. And following 12% growth in earnings from continuing operations in 2005 (with all six businesses delivering double-digit increases), he committed to leveraging the 2006 revenues into an even greater 12% to 17% earnings increase. It was a bold pledge for a $150 billion global company. Yet, for the past year GE’s share price had been stuck at around $35, implying a multiple of around 20 times earnings, only half its price-to-earnings (P/E) ratio in the heady days of 2000. See Exhibit 1.2 for GE’s 10-year share price history. (Bartlett, 2010) And most importantly, GE Capital is once again contributing to the firm's profitability as the financial services business <br />is steadily improving. (Carnevale, 2011)<br />Does Immelt deserve to keep his CEO Position?<br />Considering all the mitigating factors, GE shareholder returns under Jeff Immelt have been less-than-satisfactory and below average. (Carnevale, 2011) Since Immelt took the helm at GE, the company’s value has actually declined. Amidst the financial crisis, he had to make a very sweet deal with Berkshire Hathaway to grab some cash (in exchange for preferred shares) in order to keep GE out of bankruptcy court. That deal has enriched Mr. Buffett’s company at the expense of GE investors. GE has exited several businesses, such as its current effort to unload NBC via a deal with Comcast, but it has not created (or bought) a single exciting, noteworthy growth business! Under Mr. Immelt, GE has become a smaller, lower growth company that narrowly diverted bankruptcy. (Hartung, 2010) As a result, the company has retrenched and actually become less interesting, less valuable and clearly less able to produce high returns or create new jobs! (Hartung) To Immelt’s credit, GE today is a more balanced conglomerate than it was just prior to entering the great recession of 2008. And overall, in 2011, GE has begun growing earnings again, which have led to three modest dividend increases in the last 12 months. (Carnevale, 2011) <br />Appendices<br />Exhibit 1.1: GE’s profitability under different chief executives<br />Source: GE financial statements.September 2001 to December 2002.GENERAL ELECTRIC: LIFE AFTER JACKCEO Av. Annual pre-tax ROECharles A. Coffin, 1913–22 14.52%Gerald Swope/Owen Young, 1922–39 12.63%Charles E. Wilson, 1940–50 46.72%Ralph J. Cordiner, 1950–63 40.49%Fred J. Borch, 1964–72 27.52%Reginald H. Jones, 1973–81 29.70%John F. Welch, 1981–2001 25.81%Jeffrey R. Immelt 2001–02 31.60% <br />The dates given for each CEO are for the financial years that correspond most closely to each CEO’s tenure<br />Exhibit 1. 2: GE Stock Price and P/E Multiple vs. S&P 500 Performance, 1995–2005<br /> <br />Reference:<br />No Author 1. HBR Interview with Jeffery R. Immelt, “Growth as a Process,” Harvard <br />Business Review, June 2006,<br />http://www.ge.com/files/usa/stories/en/Growth_The_HBR_Interview.pdf<br />No Author 2. GE’s CEO Jeffrey Immelt case analysis http://essaytree.com/company-<br />analysis/ges-ceo-jeffrey-immelt-case-analysis/<br />Bartlett Christopher A. GE’s Growth Strategy: The Immelt Initiative, Harvard Business<br /> Review, 2006, www.hbr.org<br />Carnevale Chuck, 2011. Should Dividend Growth Investors Forgive General Electric?<br />Part 1: The Jack Welch Era. http://seekingalpha.com/article/280085-should-dividend-growth-investors-forgive-general-electric-part-2-the-jeffrey-immelt-era<br />Grant Robert. Case 16. 2004. General Electric: Life After Jack. www.blackwell<br /> publishing.com/grant/docs/16GE.pdf<br />Grant, Robert, M. (2010). Contemporary Strategy Analysis. Seventh Edition. John Wiley<br /> & Sons, LTD Publication. (Pg 875)<br />Hartung Adam. 2010. http://blogs.forbes.com/adamhartung/2010/12/15/why-jeff-<br />immelt-is-no-mark-zuckerberg-and-why-ge-investors-suffer-as-a-result/<br />Huraira Abu (2011) Growing GE under Jeff Immelt. GE Final Report.<br /> www.scribd.com/doc/52167500/GE-Final-Report<br />