Jeffrey Immelt was left with a nearly impossible job when he took over from Jack Welch in 2001 (Daily Gazette, June 16) for two reasons: Immelt could no longer purchase low-price-to-earnings (PE) ratio financial companies to raise the stock price as Welch did. And Welch’s strategy to not invest in manufacturing businesses, but to milk and sell them, made it difficult for Immelt to change to the correct strategy of restoring GE to its manufacturing and innovation roots.
Welch saw financial services as an easy money generator. When Welch started purchasing low PE ratio financial services companies, the stock price kept rising because the combined earnings from manufacturing and the acquired financial companies were given the much higher PE given to manufacturing. By the time Immelt took over, the stock price began dropping because Wall Street was questioning the quality of the earnings; GE became more of a financial company. The high PE given to GE stock was no longer justified. The financial crisis showed the failure of Welch’s strategy that nearly bankrupt GE.
The second part of Welch’s strategy was to stop investing in manufacturing as he was transforming the company to financial services. His strategy was to milk and then sell manufacturing businesses. He even tried to sell the Turbine Generator business to Siemens. He closed the labs associated with the manufacturing businesses, including the highly respected Turbine Technology Lab in Schenectady. These were the labs that were developing new materials and products for the factories. No manufacturing R&D investments were made for 20 years. The only investments made were the useless bureaucratic Six Sigma, “boundaryless,” and other silly initiatives promoted by Welch. Immelt was confronted with weakened manufacturing businesses when he started to restore GE manufacturing.
In summary, Welch’s strategy during his 20 years as CEO made it nearly impossible for Immelt to become a successful CEO. Welch refused to be interviewed for the June 16 story because he wants only praise. Welch will be remembered as the chief financial engineering officer of the century whose misguided strategy nearly destroyed GE.