GE - The Flannery Way

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About: General Electric (GE)
by: Out of Ignorance
Summary

This morning GE announced the long expected retirement of CEO Immelt.

On August 1, 2017, John Flannery, GE Healthcare's CEO will take the hot seat, likely with a short to nonexistent honeymoon.

CEO-to-be Flannery recently set out his approach to reform setting out a possible template for his new role.

Introduction

GE (NYSE:GE) has taken an incremental shot at righting the ship that has been listing in the eyes of many of its shareholders. The question that always comes to the fore in such instances is whether the change goes far enough.

In keeping with the sentiment in my most recent article, GE: Let It Be, I believe that a light touch is appropriate. Now, I urge all to follow the refrain from John Lennon's masterpiece:

"All we are saying is give peace a chance
All we are saying is give peace a chance"

This morning GE announced the long expected retirement of CEO Immelt.

To no one's great surprise, GE has finally made the decision that everyone has been expecting. Mr. Jeffrey Immelt, whose legion of non-fans love to taunt him with epithets such as Jeffy Boy, is retiring as CEO effective August 1, 2017.

The first SA article following the announcement was Alessandro Pasetti's "General Electric: Nothing Changes". The comments to this short article were relatively sanguine but there was a definite undercurrent of dissatisfaction with the selection of a long-time GE veteran.

On August 1, 2017, John Flannery, GE Healthcare's CEO will take the hot seat, likely with a short to nonexistent honeymoon.

Many have been hoping for dramatic changes in the executive suite at GE. The following jstratt comment to the Pasetti article cited above makes the point with clarity:

Immelt was a disaster and no GE spin can change that!

What about the GE Board of Directors and current execs who have participated in two decades of GE decline makes GE desirable?

John Flannery is a GE veteran with long tenure. In his own words at the recent Sanford Bernstein Strategic Decisions Conference he described GE Healthcare as:

...a classic GE franchise business. So, it's a heavy technology, heavy installed base, services, digital at scale. So, it's a business model and business type that you would see across other parts of the GE portfolio.

This introduction most emphatically suggests that Mr. Flannery will serve as a polisher, not as a fixer. Now that disaffected shareholders have tasted the red meat of an announced Immelt retirement, which so many see as too long delayed, they are unlikely to be in a patient mood. Tension is clearly at hand.

CEO-to-be Flannery recently set out his approach to reform setting out a possible template for his new role.

At the Bernstein Conference, Flannery reported how he had been drafted to take over GE Healthcare at a time when it was successful but was facing arrested growth. His description of GE Healthcare at the time when he took it over could apply as well to GE as a whole at the current time.

Accordingly, I expect that he will work to apply the lessons he learned in upgrading GE Healthcare to the whole of GE. In this regard, the following description likely sets out his initial approach to his new larger mandate.

First and foremost was we really ... needed a strategic and cultural reorientation of the business around, ... getting better clinical and economic outcomes for our customers. So everything we do, every person we hire, every investment we make, every new product we look at, we always go through that lens of how can I quantify better clinical and economic outcomes. So there is a cultural reset that was the key part of our story. The other two things really are how can we get the cost down and get the margin rate to expand and how can we grow top line?

The Flannery way will focus on these three ingredients.

  1. cultural focus on achieving better customer outcomes
  2. cost reduction and
  3. growing the top line.

His prescription for achieving these are in the classic polishing mold. He describes his approaches from careful product redesign to supply chain refinement to implementation of digital strategies in great detail.

Conclusion

GE has finally made a move. It should be a winner. Mr. Flannery has long experience in wrestling the devils at GE towards the end that it achieve its potential.

He is an executive who understands GE. He knows that performance counts but he also knows that significant improvements can be realized from incremental changes properly applied.

GE is about to chart a new chapter in its storied history. I am looking forward to better times a coming.

Disclosure: I am/we are long GE. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.