The Wall Street Journal carried an article this past week on the change in management philosophy at GE. GE under Jack Welch was the quintessential conglomerate. It had divisions in unrelated industries such as media (NBC), finance (GE capital), and aircraft engines. Welch prized general managers who had no special expertise in a particular industry. He force-ranked executives, and fired the bottom ten percent each year. He shed companies if they were not at the very top of their industrial sectors. He was a leader in cost-cutting, firing so many employees, that he was called “neutron Jack,” after a neutron bomb which presumably killed people without demolishing buildings. Under Welch’s leadership the conglomerate’s primary task was to grow shareholder value, not serve customers or satisfy the needs of diverse stakeholders.
Nonetheless, the conglomerate as a corporate form was and remains controversial. Born in 1960s and simulated by the conception of the corporation as a portfolio of businesses, it came under attack by corporate raiders in the 1980s who bet, it turned out correctly, that many conglomerates were worth more broken up into their separate divisions, than held together.
Was Welch’s GE therefore the exception? From 1981 to 2001, under his leadership, the stock split 5 times so that a share worth about $57, in 1981 was worth $2300 at the end of 2000. But as the following graph shows the value of this same share dropped precipitously during the Great recession
In retrospect it appears that GE capital, a financial services company and a core part of the firm, enabled GE to profit handsomely from the financial sector’s disproportionate share of the overall economy’s profits. But it became a millstone around GE's neck when this selfsame sector collapsed after the housing market crashed.
The conglomerate once promised to be the solution to the difficulty of growing companies organically based on their historical strengths. After all competition, anti-trust laws, and the size of the market were barriers. Instead the company would grow by acquisition. But in light of the raiders’ successes and the fall in value of one share of GE, it appears that organic growth, however, challenging may still be the best way to grow.
Indeed, Jeffery Immelt, Jack Welch’s successor has refocused the company on organic growth, and this brings in its wake a changed corporate culture. Under Welch, ambitious senior executives rose to the top by gaining experience leading companies in a wide range of sectors. Their tenures were short, they focused on profits rather than revenue, they did not know their top customers very well, they uprooted their families frequently, they developed no deep industry expertise, and with the forced ranking system, they competed with each other.
Under Immelt, by contrast, ambitious executives must develop industry expertise, stay in leadership positions for a longer time, know their top customers intimately, rely on market breakthroughs to grow revenue, and focus more attention on creativity, and less on re-engineering operations to reduce cost. Welch had turned GE’s storied R&D organization from a cost to a profit center, so that it could no longer undertake research on behalf of the whole company. Immelt has rebuilt the R&D organization. In addition, Immelt has softened the impact of the forced ranking system. The purpose of Welch’s most important meeting, “Session C” was to evaluate GE’s top several hundred managers. Immelt’s top meeting is the “Commercial Council” for developing breakthrough ideas.
As these contrasts suggest, organic growth relies on the connections that executives build and sustain with each other, their employees and their customers. In the pure conglomerate these ties count for much less. In this sense, the pure conglomerate mirrors the pure market. But even in companies that grow organically executives still compete with each other for scarce capital, for visibility and for the limited number of positions at the very top. Competition and cooperation are both spurs to progress. Perhaps one reason executives take up the challenge of organic growth with ambivalence and with difficulty is that they do not know to how sustain a culture based on both cooperation and competition. This requires, it would seem, a certain level of psychological sophistication and skill. Does Immelt have what it takes?