We are all still in a bit of shock over the rapid decline in the market valuation of GE. As of this writing, the stock is hovering at 50 percent of its previous valuations, and a plan has begun to break the company into several pieces. Stock options are underwater and talented people are taking phone calls that they never would have considered before. No doubt there are endless meetings about who is going to own which shared investments after it’s broken up.
Yes, the senior leaders will take a hit to their career arc, but countless employees and their downstream partners will also be affected. The thing I think about is the people who had this stock as a cornerstone of their financial plans. These folks have mortgages, kids to send to college and retirement plans. Real human costs.
If this were an isolated event it would be one thing, but it’s been played over and over again.
Are you in the next GE?
How do you know if your firm is approaching this tipping point?
Well, it’s more subtle than you think. First, I need to share a little about how a large firm is structured.
Modern firms have been built on the Strategic Business Unit (SBU) model. These SBU’s are like the pillars in a suspension bridge: intending to make the firm manageable, each one is charged with developing and executing its own market-aligned strategy.
To make things more efficient, certain functions are grouped together to support multiple business units – you can think of these as the road deck of the bridge being supported by the SBU’s. It is not uncommon for these units to share IT, HR and legal resources. Additionally, many firms have also chosen to centrally manage their marketing, sales and R&D teams. If there is a global component, then there are regional organizations, as well.
Each large SBU needs to hold up its share, (typically product or services oriented) and work strategically with multiple shared services groups and regional distribution organizations, the employees of which have the same badge, but report to different leaders. A regional leader is measured on their region’s performance, which doesn’t align directly with any one SBU. These matrix relationships set up a close coupling of interdependence.
This all works well when the SBU’s stay fresh, vital, and in sync with their markets and have multiple successful product lines. The necessary ingredient to keep this all balanced and in sync is a powerful combination of senior leadership, depth of visionary middle leaders and cross-functional cooperation. In a large firm like GE, it takes a very active and effective board to make sure that leadership ego does not transcend mission.
The puzzle piece that holds it all together is a ruthless focus on delivering to the voice of the customer with amazing efficiency. It’s alway a significant act of leadership to keep this complex dance in sync.
What Happens in Firms That Get Close to the Cliff
The issues usually begin quietly and subtly – and the foundations of those bridge pillars start getting spongy.
Surprisingly, my experience is that a very successful product or service begins to deliver profits that provide a substantial amount of cash to the balance sheet. These cash engines provide a false sense of security, and increasingly, a large number of “innovation” projects are kicked off. These innovation projects are typically built using the same tools that are there to optimize the core, which leads to large investments early, based largely on internal intuition.
In operations reviews, there is a shift from having an insatiable curiosity to better understand the customer, to being primarily focused on the internal controllables and managing costs. Support teams become more insular and align themselves politically with the most contributive P&L owners. You start to hear dialogue about that direction not being “good for engineering” or compatible with our ERP system instead of what the client needs. Visionary up and coming leaders have deep frustration and start being poached by recruiters.
Instead of refreshing products and services, financial performance is shifted to those “work horse” platforms that reliably bring the earnings to the P&L. This “narrowing” of the P&L base at first is almost imperceptible, and doesn’t set off panic, as everyone rationalizes it as a rough patch. Many times corporate is kicking off new, glitzy “initiatives” that are quite small relative to the SBU base, but serve as fodder for earnings conference calls.
Then it happens – one of the bridge supports gets hit – either an economic or market shock to one of the stalwarts. In GE’s case, it was said to have been the energy business, but it’s hard to tell exactly how vulnerable each SBU became. The truth is that once the market gets wind of an approaching cliff in one of the big SBU’s, it sells the stock off harshly – it’s just too difficult to predict what comes next because the financial interconnections are so opaque.
The interconnectedness of this system keeps it supported long after the middle has started to decay and become more vulnerable. When the issues finally come to to light, to the outside world, it looks like a catastrophic collapse. The truth is the seeds of the reversal have been growing for a long time.
What Actions do You Need to See to Enable a Return to Vitality?
One path is what you are seeing now – separate the firm into pieces to compartmentalize the SBU’s and their associated support costs into more manageable pieces. By putting in these dividers, economic vitality becomes more transparent. There will be winners and losers in the process, and in the case of GE, we won’t know for a while how things will come out.
Another path was pursued by Gerstner when he worked with IBM. When he looked at the assets, the verdict was that it was worth more together than broken up. This drove a deep and wide transformation project that rattled the culture of the firm to the far reaches of each region. The cultural changes he set off became a best-selling book.
What Can you do to Pre-Empt This?
The simplest explanation is to embed creative tension and ruthless execution around the voice of the customer deep in the firm’s culture.
As an individual:
- Anchor your contributions in the market, every time. Volunteer to be the one on the front line.
- Support and encourage cross-team collaboration. When you are given a task, pencil out the full 360-degree circle of who and how everyone is affected.
- Listen to the earnings calls and keep an eye on the analyst reports. Be an informed team member and subscribe to sites like Seeking Alpha.
As a mid-level leader:
- Establish a culture that values short listing and decision making (hypothesis-based thinking). Avoid wandering initiatives at all costs.
- Be a lateral leader. Model the truth that value for your client is developed across the org chart – not up and down it.
- Be on the lookout for inefficient resource application, and be bold enough to call it out. If the processes are not serving the need, stand up and be counted.
As a mid-senior leader:
- Get control of hiring to move the needle towards SME’s and leaders that bring truth telling and reasonable risk taking into the firm. Get the new hires the mentoring they need.
- Set benchmarks, metrics and incentive compensation systems that have a short, medium and long-term component.
- Do the very hard work of aligning support groups costs and allegiance to their client set or region – not corporate.
The truth is that once the tipping point is passed, it almost impossible to right the ship without significant restructuring – and that means lots of lives are going to be disrupted.
If you are sensing the early stages of this in your firm, don’t wait. Find time to get to work on the restoration process before an economic or market shock pushes it from a voluntary activity to a compelled action.
I’ve spent years learning how to diagnose these situations and shape focused teams to quickly develop new products and services. If you’d like to explore how to engage, feel free to call me at (847) 651-1014 or use this link to set up a 20-minute, (no-strings-attached) consult.
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