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GE’s successes have taught the business world (myself included) a lot about strategic management and achieving greatness in business. Thanks to their recent performance shortfalls, the company now affords us the opportunity to learn important lessons about avoiding bad decisions.
Having followed GE’s recent and precipitous performance drop, I couldn’t help but notice that when you look past the size and nature of the problems, the root causes of their issues are two remarkably universal challenges that all management teams face. Given that, I thought it worth sharing my observations and learning from their mistakes.
First, I’ll set the stage on what is happening with GE:
The demand for machines to make energy has shifted from gas turbines to renewable energy because renewable now costs less (thanks to subsidies, not technological advancement). With gas turbines as GE’s largest source of revenue, the company acted to survive (better still, to continue thriving) during this demand shift by buying Alstom’s renewable energy business (amongst other smaller acquisitions).
While there are many perspectives on what GE should and should not have done, what is fact is that data showing the decline of energy prices has been available for years and calculating the economic tipping point for demand shifting to alternative energy sources is a math problem that can be solved. What is also known is GE fell far short of their projections to capitalize on the Alstom acquisition. While there is no exhaustive accounting of where the misses occurred, GE cited project failures and difficulty cross-selling Alstom’s renewal energy solutions as primary reasons. I.e. things normally subject to transaction due diligence.
So, what are the universal management lessons we can learn from this?
#1: It is crucial for a management team to maintain a critical dialogue based on facts.
I know firsthand that forecasting demand is imprecise, but optimism or relying on historical trends are not a viable solution to uncertainty. Data and facts are the solution. In this case, facts on clean energy subsidies, energy price changes, and resulting demand changes should have been jointly considered.
It’s quite possible no one knows exactly where things went wrong at GE Power, but what is certain is the company failed to acknowledge risks that would be costly and lengthy to recover from. Most of the companies I work with have more humble resources than GE, however what remains universally applicable is the importance of making decisions based on what is certain, or can be treated as fact, and what is not.
In order for any company’s management team to deliver high-probability outcomes, a critical dialogue that seeks out and demands explanation of contrarian facts is an absolute must.
While most executives readily agree to this concept, in practice it can feel like trying to stand in front of a train, moving quickly towards a broken track. But remember this: when the stakes are high, the outcome of standing aside is likely disaster for the train and your colleagues on board.
#2: Identify and mitigate the risks.
Based on the facts, GE’s approach to managing the risk of demand shifts and their acquisition of Alstom were woefully insufficient.
When risks are complex or risk mitigations seem beyond the control of the business, leaders have a tendency to describe risks too generally (e.g. energy market prices will fluctuate) or automatically believe they are beyond mitigation. From experience, I have learned that even the largest risks can be reduced into the specific possible outcomes that are cause for concern. This provides leaders a concrete scenario whose likelihood, impact, recovery, and overall importance can then be evaluated (If you need a good template for risk assessment, feel free to email me and I’ll share my favorite).
In GE’s case, the company could have worked more closely with customers to gain advance visibility to their changing needs, explored a more diversified acquisition approach, exercised greater caution during due diligence, or considered rep & warranty insurance for their Alstom acquisition. Admittedly, these are theoretical mitigations for a situation where I have the benefit of hindsight. That said, I have repeatedly found that clarifying risks often leads to remarkably straightforward mitigations like these. (If you need a good methodology for risk assessment, feel free to email me and I’ll share my favorite).
There are certainly other lessons that will emerge as GE’s manages through this period of operating difficulty, but these two lessons are indisputable and worthy of learning from.
P.S. My expertise is root cause analysis and strategic decision making, not energy. If there is context I missed or you have thoughts to share, please comment.