GE’s Growth Strategy: The Immelt Initiative
In February 2006, after four and a half years in the CEO role, Jeff Immelt felt General Electric (GE) was finally poised for the double-digit growth for which he had been positioning it. Having just announced an 11% increase in revenues for 2005 (including 8% organic growth), he was now forecasting a further 10% revenue increase in 2006. And following 12% growth in earnings from continuing operations in 2005 (with all six businesses delivering double-digit increases), he committed to leveraging the 2006 revenues into an even greater 12% to 17% earnings increase. It was a bold pledge for a $150 billion global company. (See Exhibit 1 for GE financial data, 2001–2005.) Yet, for the past year GE’s share price had been stuck at around $35, implying a multiple of around 20 times earnings, only half its price-to-earnings (P/E) ratio in the heady days of 2000. (See Exhibit 2 for GE’s 10-year share price history.) It frustrated Immelt that the market did not seem to share the belief that he and his management team had in his growth forecasts. “The stock is currently trading at one of the lowest earnings multiples in a decade,” he said. “Investors decide the stock price, but we love the way GE is positioned. We have good results and good governance. . . .What will it take to move the stock?” Taking Charge: Setting the Agenda On Friday, September 7, 2001, Immelt took over the reins of GE from Jack Welch, the near-legendary CEO who preceded him. Four days later, two planes crashed into the World Trade Center towers, and the world was thrown into turmoil. Not only did 9/11 destabilize an already fragile post-Internet-bubble stock market, but it also triggered a downturn in an overheated economy, leading to a fall in confidence that soon spread into other economies worldwide. After the chaos of the first few post-9/11 days during which he checked on GE casualties, authorized a $10 million donation to the families of rescue workers, and dispatched mobile generators and medical equipment to the World Trade Center, on September 18 Immelt finally focused on reassuring the financial markets by purchasing 25,000 GE shares on his personal account. Three days later, he appeared before a group of financial analysts and promised that 2001 profits would grow by 11% and by double digits again in 2002. As impressive as such a performance might have appeared, it was less than Welch’s expansive suggestion in the heady days of 2000 that GE’s profits could grow at 18% per annum in the future.2 The net result was that by the end of Immelt’s first week as CEO, GE’s shares had dropped 20%, taking almost $80 billion off the company’s market capitalization. To make matters worse, as the year wore on, a scandal that had been engulfing Enron finally led to that company’s bankruptcy. Soon, other companies were caught up in accusations of financial manipulation, including Tyco, a company that had billed itself as a “mini GE.”Again, the market punished GE stock, concerned that its large and complex operations were too difficult to understand.