Google’s search need look no further than GE

Google has announced plans to reorganize its businesses under a General Electric-like conglomerate called Alphabet. If the new company wants to maximize overall performance, it should take a close look at Jack Welch’s work as GE’s CEO.

Under the new structure, Alphabet will be the corporate parent of a portfolio of diversified businesses. Google Inc. will be part of the new entity and include YouTube, Android mobile software and other web-based products. Alphabet will also include expanding and emerging businesses such as Nest, the smart-thermostat maker, cloud storage, Calico, Google Ventures, Google Capital, etc., with self-driving cars thrown in at no extra charge.

Each business will operate autonomously with a chief executive officer (CEO) and report to Google co¬≠ founders Larry Page and Sergey Brin, who will serve as Alphabet’s CEO and Alphabet president, respectively.

The average consumer of Google products will see no meaningful change. The co-founders hope restructuring will enable them to have a strong CEO run each business, freeing them to focus on capital allocation and maximizing all the businesses’ long-term performance. Managing a portfolio of diverse units to maximize the overall value to various stakeholders is the key corporate strategy challenge.

For many talented people at Google, the change will provide an opportunity to be their own CEOs, thereby stoking entrepreneurialism and helping to retain great talent. For investors, the conglomerate structure should provide greater transparency into how Google invests in various businesses and how the businesses, including the core, are performing.

Alphabet should study how General Electric (GE) operated as a conglomerate during Jack Welch’s 20- year tenure as CEO, when it managed businesses as disparate as jet engines, dishwashers, and a TV network.

Among the reasons GE succeeded as a holding company was that the majority of businesses within its portfolio shared a set of resources that linked them and could be readily leveraged into new businesses. By transferring and sharing specialized expertise, technological know-how, and other valuable resources across its units, the firm was able to perform better and create value greater than the sum of its individual parts.

For example, value was created by training managers, notably at GE’s famed Crotonville Center, regularly moving its world-class managers among the various businesses and driving strategic initiatives such as best manufacturing practices across all units. It was no accident that Welch spent two months a year on personnel evaluation of his top 400 managers. The focus at GE was not just on managing capital allocation, but on developing human capital as a scarce strategic resource.

GE’s umbrella brand was applied to businesses as diverse as financial services (GE Capital), medical imaging (GE medical diagnostics) and lightning (GE light bulbs). Using an umbrella brand in a diversified firm not only has the potential to reduce costs by spreading the fixed cost of developing a brand across many businesses, but also to link its products to a name consumers trust. This, among other resources, could be exploited, transferred and leveraged across a range of businesses.

Simply put, GE was an astute enabling corporate parent that nurtured its individual businesses to become a whole that was far greater than the sum of its parts. The diversified businesses performed better under the auspices of a single corporate parent that they would have had they been stand-alone businesses. The best parent companies create more value for stakeholders than any of their rivals would if they owned the businesses

Jack Welch identified GE’s critical resources, especially human capital. He created a learning organization and transferred resources over a broad range of businesses and geographies. The challenge for Google under the new structure will be to turn all its businesses into an integrated whole that is truly more than the sum of its parts.

To paraphrase Stephen Sondheim’s song, “Having just a vision’s no solution. Everything depends on execution. Putting it together, that’s what counts!”

Originally Published: September 19, 2015

General Electric’s shift is a light bulb moment for economy

Last week General Electric announced plans to drastically downsize GE Capital, for years a key earnings driver, to focus on its core industrial businesses that range from jet engines to medical devices. The company will shift away from running the diversified financial services firm that wiped billions off its balance sheet during the financial crisis and escape the post-financial crisis regulatory burden that has weighed down GE’s stock price.

A company statement noted that “The business model for large, wholesale- funded financial companies has changed, making it increasingly difficult to generate acceptable returns going forward.” In other words, this business is the financial equivalent of a boxer who has taken way too many shots to the head.

Over the next two years they plan on selling off most of GE Capital, the country’s seventh largest bank holding company with about $500 billion in assets. Part of the strategy involves selling off $165 billion of loans and a $26.5 billion portfolio of commercial real estate investments and loans.

As GE CEO Jeff Immelt explained in a CNBC interview, “You really have a perfect market to be selling financial service assets … you’ve got slow growth, low interest rates, lots of liquidity, people searching for yield.” He added: “We think it’s good for the regulatory world, it’s good for investors and that’s been more or less recent. Now’s the time to do it.”

After the 2008 financial crisis, GE began surgically pruning GE Capital, which was founded in 1933 as a subsidiary of the General Electric Co. to provide consumers with credit to purchase GE appliances. The firm sold its domestic consumer finance business last year and earlier this year it sold its lending units in Australia and New Zealand.

Last fall, Immelt announced that the firm planned to reduce the size of GE capital to represent about 25 percent of the company’s earnings, down from nearly half at its peak. Under the new plan, GE Capital will account for less than 10 percent of profits by 2018.

But the company plans on retaining key units like GE Capital Aviation Services, Energy Financial Services, and Healthcare Equipment Finance. These financial operations provide GE with an advantage over its global competitors in these market segments by helping customers finance equipment purchases from the company.

For example, customers want GE CT scanners, MRI equipment and other medical devices because they are high-quality products that offer cutting-edge technologies. But they also want GE’s Healthcare Equipment financing arm to help fund a large capital outlay because it can give customers cheaper access to money. Each GE business benefits from the ability to provide customers with tailored financial solutions.

The firm is reshuffling GE Capital’s financing portfolio with an awareness that certain financial resources are integral to the success of its core businesses.

The firm also announced that it will pass some of the proceeds from scaling back GE Capital on to shareholders in the form of a share buyback program.

The company believes that buying back up to $50 billion of its own shares will help rejuvenate its moribund stock price and regain favor with investors, who have been complaining that GE’s stock has been stagnant for over a decade.

Investors loved the strategic move and sent shares up 11 percent. But even after the bump, GE’s stock price is down 22 percent over the past decade while the market as a whole is up 73 percent.

These returns are a far cry from those delivered so brilliantly during Jack Welch’s two-decade tenure as CEO, when he captured Wall Street’s fancy by delivering a 23 percent per annum total shareholder return and increased the firm’s market capitalization from $18 billion to over $500 billion. As the good times rolled, this performance made GE the most valuable company in the world-by 2000.

Only that great sculptor Time will tell if GE’s latest strategic shift will yield similar returns.

originally published: April 8, 2015