Are Great CEOs Born or Made?
A panel of experts discuss the business world’s preeminent position.
Are Great CEOs Born or Made?Recent years have seen a decline in GE’s market capitalization and an uptick in uncertainty over its future. How did the once-mighty company find its way into trouble? Chicago Booth’s James E. Schrager says that among other things, it failed to anticipate a time when its successful strategies would stop working. From imitation by competitors to a changing market for corporate acquisitions, the landscape around GE changed, Schrager says, and GE’s flagging fortunes reflect its inability to adapt to those changes.
James E. Schrager: GE is a fascinating study. We study GE for the same reason that we read The Rise and Fall of the Roman Empire—because we’re fascinated with what happens and very worried if it applies to our society or, in the case of GE, our own company. So studying GE and other great, large, successful companies that later failed gives us all kinds of ideas on how we can make our own companies better.
Right now, it looks like GE is going to kind of stagger through, but they’ve come a long, long way from where they’ve been. In 1981, when Jack Welch took over GE, it was an OK company, but he proceeded, over the next 20 years, to make it a fantastic company. But he did two very major changes, both of which kind of broke the rules at the time, and both of which were tremendously successful.
On the inside of GE, he knocked out the large corporate bureaucracy that really ruled the day inside GE for a couple decades, and replaced it with very powerful CEOs at each division, who were tasked to run their own businesses. And that was a very different thing to do in large corporations in the early ’80s, and he was dead set on doing that, regardless of what happened. It turned out to work out very well, and presidents of GE divisions went on to have a reputation as people who could run a business anywhere.
So that’s change No. 1: smaller bureaucracy at headquarters, less control, more power to the divisions to make decisions in the hope that that decision-making push down would make for much more profitable companies, and it absolutely worked.
The second big thing he did was he realized that his current group of divisions didn’t have a lot of growth built into them, that organically they weren’t going to bring the type of numbers that Wall Street and shareholders want to see. So he went on an acquisition spree of sorts, slowly at first, looking to buy very special companies at very good prices that could add the growth that Wall Street wanted to his existing company.
In 2001, Jack Welch was ready to retire, and he asked the board for one more acquisition, believing that acquisition would be great as a transition to his handpicked successor, Jeffrey Immelt. And Jeffrey Immelt had won a horse race; he was the best of the best. That acquisition didn’t happen, but Immelt took over right on time. And now we have a very interesting test, and that is all the trained executives, all the trained division managers, Jeffrey Immelt at the top, having learned all the lessons of GE, would it translate to the next leader, Jeff, or not?
As it turns out, all the management, all the managers knew their lessons, did their best, but under Immelt, GE did not do well. And that causes us to think, what piece of the puzzle fell out? What didn’t work when all this great management was there and running well, but GE still faltered? And the answer was back to Jack Welch’s strategy. It turns out that, over his 20-year run, everything he set out to do with strategy was still there, could be done, worked well, but little by little, competitors listened to the GE success story and picked up the pieces they could to take it home for themselves.
So two large groups of competitors came on the scene to take away from GE some of the things that made it a success. And those two competitors were, No. 1: other big companies came in to find a seat at the table for acquisitions, and No. 2: the growth of the private-equity world. Private equity was around a long time but by around the mid-’90s had picked up a lot of steam, a lot of lessons, done a lot of good deals, and had the ability to raise huge amounts of capital and attract very good management teams. And that gave them a seat at the table.
When GE was the only one there in the past, now there were GE, other big companies, and private equity as well, all bidding up the prices of the very best acquisitions. So there are three great strategy lessons to take away from the GE story.
Strategy lesson No. 1 is: your situation will change. There will be an end of history for your great strategy. When we look at GE, General Motors, and Sears, they all fiddled away past the end of history for their respective strategies and paid the big price.
Lesson No. 2: others will learn from what you did well. What may have been inside your company, as people watch you, will now be known by others. Realize they will use it if they can.
And lesson No. 3 is: your strategy must be flexible enough and adaptable enough to when things change. It can’t be a straitjacket or “the way we do things.” What it really has to be is a decision process to look at the world, to look at yourself, to look at your competitors and figure out what you’re going to do next, not just what has worked in the past. Because probably what has worked in the past is going to go away.
So one of the great lessons from these three ideas of strategy in GE is to begin to think about them outside of GE. Think about them with big, giant companies, like Google or like Apple or like Amazon, today. What are they counting on? What do they need in their pipeline? Where is your growth coming from? I’ll guarantee you; they’re not immune to the end of history, as these three legacy companies, GE, GM, and Sears were, all three of which were wildly successful in their day, and all three of which we have watched crumble.
What GE has to realize today, going forward, is the basic lesson that you got to think about what you have now—what pieces you have on the chess table now that are powerful—versus your competitor. What happened in the past is in the past. Yesterday’s strategy is gone. Think about what you have now versus what is available for you to make a good play.
When Welch retired in 2001, he believed there were many more things they could do along the path they were setting. That’s always a mistake. A strategist, if he gets that, or she gets that, it’s always fine to play that card, but the best strategists think, what if what happened yesterday doesn’t repeat tomorrow? What are we going to do if . . .? And they’re always thinking about tomorrow with a new set of options, not the same options.
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