Was GE correct in replacing its CEO?

A nagging thought kept running through my mind when I read General Electric had replaced Mr. John Flannery as Chief Executive Officer after just 14 months on the job: Was he given enough time to fix this huge severely distressed $120 billion company?

My answer is no...

It would take at least 3 years to fix a company with the complexity and size of General Electric. It is extremely difficult to even save a smaller company with sales under $300 million in only one year, based on my own experience completing a number of turnarounds as CEO. This type of challenge takes time.

In my experience, although the chief executive officer I replaced had failed, the Board of Directors were at times also at fault and contributed to the failure. In more than one turnaround, the Board was more at fault than the chief executive officer.

It is not difficult to determine that a company is failing but surprisingly, in my experience, some Boards did not recognize that management failed and that the company was in trouble until the decline was at a desperate crisis level.

One has to wonder....

Why wasn’t General Electric’s decline identified some years earlier when it would have been easier to fix the problems? Siemens, one of General Electric’s competitors, realized it was headed for trouble in 2003 and began a restructuring. Now Siemens is reportedly successful.

News reports suggest GE's entire Board of Directors will be replaced by 2019. There are currently six new Board members.  But 5 of the 11 current Board members recently involved with removing Flannery were also on the Board during the company's decline. Did these five Board members participate in the decision to replace Flannery? If yes, how can anyone be certain the latest move was sound? Or did this Board make another poorly considered decision that got General Electric in trouble in the first place?

Personally I find General Electric’s demise particularly sad, since I started my career at GE. I would have thought this decline would have been virtually impossible after the excellent job Mr. Jack Welch completed in building GE from its troubled condition when he took over.

Bloomberg: GE Ousts Flannery After Slump, Names Lawrence Culp CEO 

Washington Post: Why GE is making a dramaticoverhaul to its board of directors

CNBC: GE was once America's most valuable company. Today it is fighting junk-bond status.

Wall Street Journal: GE Powered the American Century—Then It Burned Out
 

Broken Business Models: Sears & Kmart

The NY Post’s article and others seem surprised that Sears Holdings may not be able to continue as a going concern. Clearly sale of its Craftsman brand was a signal that Sears was in serious financial straits.

The acquisition of Sears and Kmart was completed ten years ago. But twenty years ago, before e-commerce became a major competitor, it was painfully obvious that Sears and Kmart were in serious trouble. Vendors selling to both companies at that time were questioning whether they could survive against Wal-Mart.

Could it be accurate that Wal-Mart’s physical distribution and information technology systems are so efficient that Wal-Mart receives cash for its products prior to having to pay its vendors for the purchases? All? Some? If true, tough to compete against.

Sears’ and Kmart’s business models were unmistakably broken starting in the 1990s. It is virtually impossible to repair a business model once it is broken. At minimum it would have required major capital investments in information technology and restructuring of their physical distribution operation with its high overhead and slow inventory replenishment. Would there have been a positive return on investment?

Mr. Edward Lampert was certainly considered a successful investor when he acquired Sears and Kmart. Possibly he was optimistic that he could repair both companies. Perhaps taking over as chief executive officer was a mistake as he apparently had never worked as CEO of a large retail company.

To be qualified to be CEO of a retail, manufacturing or service company – particularly one as large as Sears and Kmart - one needs to have started their career in the bowels of a company – at the bottom. Mr. JackWelch is an example of a successful CEO who started at the bottom.

Working ones way up from the bowels gives experience with all the functions (departments) of a business. How do these functions work together. Why is cross-functional communication so critically important - while simple in concept it is difficult to practice. How to submerge oneself into the lower organization levels to find out the priority problems and solutions without being a distraction. CEOs who started at the bottom are more calmly self-confident and make better decisions when they get to the top position.

Regardless of any mistakes that have been made Sears and Kmart seem to fit the axiom: “not every business can be turned around” – particularly if their business model is broken.