Keep betting on Larry Culp to turn around General Electric.
One year into his tenure at the top, Culp faces steep challenges, and the stock market isn’t yet convinced he can pull it off. But unlike those who followed Jack Welch’s storied run at the top, this CEO understands that GE GE, +1.26% needs to be treated as a turnaround, rather than just as a course correction.
A corporate turnaround has three phases. First, stop doing dumb things; second, improve management practices; and third, find new ways to grow. The first two are relatively straightforward; the third is much tougher. But this is where Culp, who ran medical products manufacturer Danaher DHR, +1.83% for more than 13 years, is different than his predecessors.
To be fair, General Electric never had a much of a chance once Jack Welch retired way back in 2001. That wasn’t because of bad luck or lackluster management as the executives at GE were well-trained to run their businesses. Instead, Welch’s brilliant growth strategy had simply run its course. It was the end of history for GE, but most at the time didn’t notice.
Looking back at when Welch took over as CEO in 1981, GE was struggling with an overgrown and constraining corporate headquarters staff. Welch slashed the bureaucracy, pushing decision-making down into the field. This had wondrous effects but required keeping a scrupulously close eye on emerging trouble spots. Welch then instructed his division presidents that their jobs depended on immediate assessments of potentially damaging issues finding their way — post haste — to the CEO’s desk.
John Flannery, the most recent GE CEO to be fired, was tossed out unceremoniously for violating rule No. 1 at GE: don’t surprise the board with adverse news. That he blindsided his board with a $23 billion write-down was exactly the sort of thing that Welch worked hard to avoid.
Beyond running the businesses well, Welch also understood that growth is the magic potion Wall Street requires. To grow GE, he embraced the idea of buying companies to increase earnings, but not just any deal. Instead, the search was on for businesses ranking first or second in industries with only three of four players. No turnarounds, no roll-ups, no startups here. He set his sights on companies with dominant positions in their markets.
Once a newly acquired firm became a part of GE, Welch’s management structure was often a welcome relief for those working inside the companies he purchased. This afforded him a preferred position when large and attractive businesses were on the block. Admirers were justifiably amazed at Welch’s successful growth strategy.
In fact, his approach was soon imitated. In many ways the modern private-equity industry with billions of dollars on call is testament to Welch’s clever strategy. Other large public firms also became engaged in buying companies. This left Welch’s successor, Jeffrey Immelt, looking at an entirely different chessboard.
Immelt was serious about acquisitions, having learned his lessons well. He spent about $175 billion buying over 300 companies on his watch. His GE-trained managers had management principles honed in the Welch era to make the acquisitions work. Immelt was the handpicked successor, the best of the best. Yet it wasn’t enough.
Once the PE firms got respectable, every juicy acquisition suddenly had too many bidders. This pushed prices ever higher, forcing increasingly risky bets. When the strategy of buying the right companies at fair prices no longer worked, applying GE’s superior management attributes couldn’t fill the void. The end of history for that strategy required a new one.
Culp has been deeply involved in the first phase of the turnaround by getting rid of businesses that don’t show “strong promise.” This is always best done by an outsider with few intellectual or emotional ties to the past.
Earlier this year, for example, Culp agreed to sell GE’s biopharma business to Danaher for $21.4 billion. Danaher had approached GE about such a deal a year earlier, but Culp’s predecessor had rejected the idea.
Phase two is to improve management practices, which means finding ways to get adverse information flowing back to the top, as it did in the days of Welch.
The hardest part of any turnaround — phase three — is igniting new growth, and here Culp comes with a bit of a secret weapon.
He hails from a sort-of GE clone in Danaher. This manufacturer followed many of GE’s management tenants except for one big difference plucked from the private-equity playbook: Danaher was free to sell companies when that was the smart move. This open-minded approach brought the PE firms’ biggest profit weapon to a publicly traded conglomerate, i.e., the ability to take advantage of frothy markets when appropriate to cash out, rather than always forcing a long-term hold position.
Jack Welch had a great run; don’t take anything away from him. But by the time he handed over the reins in 2001, the world was a much different place.
For those placing odds on a GE recovery, be wary but optimistic. Culp understands GE needs a complete turnaround, and if stock markets SPX, +0.43% and the economy stay strong, GE will have a chance to play the divestment game to its advantage. But if a general slowdown begins to take hold, Culp will have a much tougher time selling unwanted divisions.
Finding new ways to grow is where Culp will have to use all his training to remake remaining core businesses with mergers able to leverage GE’s distinct advantages. The story is far from over, but keep your eye on his plans for getting GE growing again and you’ll be looking in the right places.
James E. Schrager is a Clinical Professor of Entrepreneurship and Strategy at the University of Chicago Booth School of Business. An earlier version of this article was published in the Chicago Booth Review.
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