GE under Jack Welch vs. Jeffrey Immelt
- Do you agree with the claim that “GE experienced a sustained competitive advantage under Jack Welch, while it experienced a sustained competitive disadvantage under Jeffrey Immelt”? Why or why not?
While the historic shareholder’s rate of return may lead to the conclusion that GE only experienced a sustained competitive advantage during Jack Welch’s tenure, and not during that of Jeffrey Immelt, in this particular case it is uncertain at best. A sustained competitive advantage does not rely on a single person. However, this is exactly what this analysis of shareholder value creation is indicating. The sudden drop in shareholders’ returns that coincides with the time of the change in leadership suggests that GE’s competitive advantage left with Jack.
Still, it cannot be assumed that the only explanation for this sudden change in shareholders’ returns is a loss in competitive advantage for the firm resulting in the change of CEO. Investor sentiments influence their decisions, and sometimes these sentiments lead them to act irrationally. This could partially explain this situation, where investors, faced with the departure of a Chief Executive as successful as Jack Welch fear that the firm will not be able to sustain the previously achieved level of growth downgrading the value of its stocks. Additionally, the terrorist attacks on 9/11 and a global economic downturn occurred in 2001, just when Immelt took over as CEO. Therefore, in this case we cannot obtain an accurate conclusion just by looking at this metric.
2. How much of the performance difference in the Welch versus Immelt time periods do you believe can be directly attributed to the respective CEO? What other factors might have played an important role in determining firm performance? (Hint: Consider especially the time period since 2001.)
This is a much debated topic, and students may have a variety of views on it. Some will argue that the presence of exogenous factors that influence the metrics or even the firm’s actual performance—such as the 9/11 attacks and the economic downturn in 2001 and economic crisis of 2008—have unfairly impacted Immelt’s tenure as CEO relative to more favorable conditions under Welch. Other arguments may be based on the performance that each division has and how much of it could really be attributed to CEO actions (e.g., GE’s financials showed exceptional growth during Welch’s tenure). It is the CEO’s job to identify and act upon exogenous factors and promote outstanding performance in not one but all of the divisions of a firm. Therefore, when we observe a 10-year period and all the metrics point at good or bad performance, the CEO cannot be freed from such responsibility, in spite of the bad or good luck involved.
3. Shareholder value creation is one of the metrics to assess firm performance. Do you consider this metric to be the most important one? Why or why not?
· Yes, it is an impartial and comprehensive measure. Impartial because it is not calculated within the firm. Instead, it varies freely with the evaluation that investors constantly make of the firm. It is also comprehensive, because if the firm has been creating economic value and generating accounting profits. It is also investors’ preferred metric and can arguably be considered the ultimate goal of the firm.
· No, shareholder value is only one perspective of performance. For example, customers would view the economic perspective as more important, because GE must provide products and services with sufficient value for customers to want to buy them.
4- If you were to use a balanced-scorecard or triple-bottom-line approach to assessing firm performance and competitive advantage, how might those approaches change your assessment of the Welch and Immelt eras? If Jack Welch had been more focused on broader measures of firm performance, might GE have been better able to weather the post-2001 changes?
Under Immelt GE has placed an increased emphasis on people, planet, and profit that recognizes that the more than 100-year-old company depends on a sustainable business strategy. This has shifted the focus from efficiency and 6-sigma under Welch to a broader perspective of performance. Part of this is helping to ensure customers succeed, investing in employees, lowering energy consumption and water usage, and creating corporate positions on human rights and conflict minerals. Combined with the external changes that have hindered the performance of any company during Immelt’s time as CEO, addressing broader measures of performance should provide a more positive view of Immelt’s tenure.
It is difficult to answer whether GE would have been better prepared to weather post-2001 changes if it had used broader measures of performance. The impact of the terrorist attacks and economic challenges were rare and hard to predict based on past information. If GE under Welch had looked at broader criteria, it is difficult to anticipate that prior to these events GE would have made appropriate decisions in adapting to them.