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Learning from GE’s Stumbles
Roger Martin, a professor at the University of Toronto’s Rotman School of Management, offers two main reasons General Electric has lost its competitiveness. GE’s stock...
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Roger Martin, a professor at the University of Toronto’s Rotman School of Management, offers two main reasons General Electric has lost its competitiveness. GE’s stock has been removed from the Dow Jones Industrial Average. Martin blames pressures from activist investors as well as a short-sighted mergers and acquisitions strategy. He’s the author of “GE’s Fall Has Been Accelerated by Two Problems. Most Other Big Companies Face Them, Too.”
SARAH GREEN CARMICHAEL: Welcome to the HBR IdeaCast from Harvard Business Review. I’m Sarah Green 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 it? In an analysis for HBR.org our gest today, Roger Martin, writes that GE was hurt by two problems a lot of companies face, clueless activist’s investors and M&A folks masquerading as strategists.
ROGER MARTIN: When you’re using M&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.
SARAH GREEN CARMICHAEL: Roger Martin is the former dean of the University of Toronto’s Rotman School of Management, where he now directs the Martin Prosperity Institute. Roger, thank you for talking with us.
ROGER MARTIN: I’m always delighted to talk to you, Sarah.
SARAH GREEN CARMICHAEL: 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?
ROGER MARTIN: Yes, and well 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 at around another economic turndown. So, I would say it’s been since then Sarah. And it’s, they’ve had more problems of late, more notable problems of late, but that’s all been part of a whole cloth, I think.
SARAH GREEN CARMICHAEL: Well, let’s dig into then why that might be the case. One challenge you pointed to in your article for HBR was activist’s investors. I feel like every CEO right now is worried about them. Let’s start with GE. What happened in their case?
ROGER MARTIN: Well, they acquired an activist investor, Trian, who had the view that oh, they were so clever. They could kind of fix GE and that one article, that hasn’t exactly worked out so hot thus far for Trian investors. I have to say when I look at activists 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 activists investors, even though they say they’re coming in, 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 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’s investors into their target stock for even four years. So, they’re interested in making a quick killing.
SARAH GREEN CARMICHAEL: Are they a trend that’s increasing? I mean are you seeing more activists intervening in their companies?
ROGER MARTIN: Yeah, I think the general trend would be to more of it because they’ve told the narrative that people are buying. People buy the narrative. This happened to the narrative, it 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 see that these people simply are not interested in a 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 and make it competitive, serve its 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.
SARAH GREEN CARMICHAEL: 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?
ROGER MARTIN: It’s like a gazelle with a pack of hyenas. It is very, very difficult. So, that’s why it really takes a fantastic CEO with a fantastic effort to overcome the kind of 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 very smart. If there’s a bunch of kind of gazelles there and there’s one that’s limping, they don’t go after the fastest gazelle. They go after the limping one and just eat it.
SARAH GREEN CARMICHAEL: Interesting. So, let’s dig into that a little bit more. I like the gazelle analogy. Why was this gazelle limping in the first place?
ROGER MARTIN: 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 and so, I do think that Jeff Immelt inherited a broad, messy portfolio that was turbocharged with an unsustainable GE Capital, and so he had a real challenge and I haven’t worked for GE. I’m not inside GE, so some of it is just observations as anybody else from the outside, but my bet is and being in all 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&A, by bulking ourselves up because GE, you’ve 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, being two in a business where you got to really, really, really, really good number one, kind of ain’t no fun. And you got to understand what the competitive dynamics are that justifies M&A to bulk you up. So, that’s, 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 within, and he inherited it 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.
SARAH GREEN CARMICHAEL: So, I’m curious to hear more about that problem with the M&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 do you think that’s happening and is GE the only company that is making this mistake of thinking that a merger is that kind of a strategy?
ROGER MARTIN: Oh hell no. I mean 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. So, most CEO’s, 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 M&A person. That’s very, very common. And so, if you don’t have, if you have a CEO who 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&A and they know M&A cold. They can do deals because they have experience doing that, so they go and do a bunch of deals. And so, thanks to the pressure for growth without risk, M&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&A, M&A, M&A, M&A and more M&A.
SARAH GREEN CARMICHAEL: Yes. So, but contrast what GE did and that kind of M&A that you’re talking about with the right way of to do M&A. Because it’s not that all M&A’s bad. You’ve written extensively on kind of how to get M&A right. So, what is the vision for a successful M&A?
ROGER MARTIN: M&A tends to work when you give a 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&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 a 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, is a recipe for paying a huge premium for it and in due course that coming home to roost as people say, 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.
SARAH GREEN CARMICHAEL: So, one of the things that does make me sad about GE’s troubles 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 sort of known as the company that would try to actively develop and share good managerial practices. How come that focus on managerial excellence didn’t protect them?
ROGER MARTIN: 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 probably people can come to see and say, no Roger. Here’s A, B, C, D, E, F, this is not a statistically significant study we’re doing. It’s observations which just says there isn’t a strategy gene. There’s an M&A 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.
SARAH GREEN CARMICHAEL: So, in one of your books you described 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?
ROGER MARTIN: Absolutely. I mean it’s always doable. I mean I think virtually every strategy situation, a strategic bad situation can be improved. Sometimes there’s bigger headwinds than not, clearly. But yeah, there’s always a way to fix your evaluation to meet customer needs kind of better, at a better cost structure, by being strategically nimble and clever.
SARAH GREEN CARMICHAEL: So, a company like GE who is facing a lot of internal and external challenges, is there something, some North start that they can focus on to guide them out of trouble?
ROGER MARTIN: Sure. I think its customers. Customers first, employees second, but customers. They’ve got to swear off M&A. Just 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 cavort audits so that we can sell this. I would just swear off any M&A activity. We’re done now. We aren’t doing any more acquisitions. We’re not doing anymore 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 we’ll 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 M&A 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, focused on making that customer the absolute apple of your eye, the focus of your intention and GE, I think, will be just fine.
SARAH GREEN CARMICHAEL: Well, Roger, I always find your insights so helpful. Thank you for spending some time with us today.
ROGER MARTIN: Anytime Sarah. It’s always enjoyable to chat with you.
SARAH GREEN CARMICHAEL: 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 Curt Nickisch and Amanda Kersey. We get technical and production help from Rob Eckhardt and editing help from Ramsey Khabbaz. Thanks for listening to the HBR IdeaCast. I’m Sarah Green Carmichael.