It turns out that erasing $100 billion in market value takes less time and energy than bolting together parts to achieve it initially. It doesn’t take the brightest bulb in the chandelier to see that keeping the trains on the tracks, the coal-fired turbines spinning or the airplanes flying all at the same time is a gargantuan feat. 

General Electric (GE) leaves the Dow Jones Industrial Average not because its stock performed poorly (though it did) but because it became more irrelevant to the digital economy than it was in the industrial economy. But perhaps the “irrelevance” is the root cause for both.

GE’s past success depended on three concepts that don’t hold up well: (1) M&A builds value, (2) central control is a good thing, and (3) rock star CEOs are more important than business models and successful strategy. 

M&A can sometimes work very well, but more often it destroys value. Different research, different results, but if you read enough studies you’ll likely conclude that value is destroyed slightly over half the time. When acquisitions happen to goose current earnings rather than for strategic reasons (i.e. to fill in a required competency), you no longer have an operating company, you have a hedge fund.

Central control institutionalizes the “one big brain” theory. It hasn’t worked for Venezuela, and it’s hard to pull off in business. GE hypothetically allowed its individual business units to develop their own business strategy (e.g., How do we win in our chosen market?), while corporate stuck to the two key conglomerate questions: (1) What businesses should we be in? and (2) Where will we deploy capital? The conglomerate model suggests that the one big brain (or the office of the big brain) should be able to answer those last two questions well enough to cover the cost of overhead and provide a return. (Still sounds like a hedge fund, doesn’t it?) Doesn’t seem to work so well.

Now that GE has stumbled, Jack Welch’s image has been tarnished, but for years he was hailed as “the” CEO.  Let’s be honest, studying history is much easier than creating it. For instance, is the 2018 Elon Musk a superhero or a carnival barker? Time will tell. Most everyone admired GE under Welch, and in many ways rightly so. From my perspective, he understood two things deeply: performance management and leadership development. The guy knew how to demand performance and build tough-minded leaders and should be remembered for that. He himself said, however, that people would judge his success based on his successor’s ability to grow the company. Didn’t work so well.

In the light of history, GE’s success may have been more about demanding performance than grand strategy. Much of the company’s success was due to GE Finance, which failed miserably. Growth covers up many mistakes.

It’s sad to see a former giant stumbling, but it offers many lessons!