Stunning news from General Electric headquarters this morning; Jeffrey Immelt will step down as CEO, and John Flannery will succeed him. Many people wonder what's next for GE given the leadership change. Immelt has transformed GE in many ways, but some big strategic questions remain. While he divested a number of businesses during his tenure, the company remains a conglomerate with some seemingly unrelated businesses. As the stock has languished in recent years, many analysts and observers have asked: Should GE break up? Is the whole not worth the sum of the parts? After all, one has to wonder how powerful the scope economies (synergies) are when combining a healthcare company and a jet engine manufacturer under one corporate parent. Flannery's background and initial comments suggest that a broad strategic review will take place, and nothing is off the table.
Conglomerate strategies may have made sense many decades ago, but focused firms and related diversifiers have outperformed unrelated diversification strategies in recent years. In GE's case, it often has been viewed as an exception to the rule when it comes to unrelated diversification. While many such conglomerates have faltered and broken up in recent decades, GE prospered. Recent performance has not been as good though. GE does not seem to have powerful economies of scope (typical synergies), but in the past, it has exhibited strong governance economies. In other words, it used common management systems and methods (the GE way) across the range of businesses, adding value as a result. Moreover, it had a strong talent management system that moved people across the business and enabled highly effective management of a diverse array of businesses. Are those governance economies still as strong as they used to be? Is that enough to justify keeping some unrelated business units together. John Flannery will have to answer those questions.
One final note: John Flannery is a fair bit older than Jack Welch and Jeff Immelt were when they became CEO. He is 55 years old. Welch and Immelt were each ten years younger when they became CEO in 1981 and 2001 respectively. One might conclude, therefore, that the Board does not expect Flannery to serve for as long as his predecessors. Could that mean Flannery will have more urgency to conduct a strategic review and make substantial changes in the near future? I think so.