Don’t Fall in Love With Last Decade’s Business Model

The Pygmalion Trap

The Greek myth of Pygmalion, the sculptor who falls in love with the statue he creates, is one of the most enduring stories of all time.  The tale shows up in the works of Ovid, the Roman poet who lived in the time of Caesar Augustus. In the 18th and 19th century, the story was dramatically retold by Goethe, Rameau, Donizetti and Gilbert, among others. In the early 20th century, George Bernard Shaw adapted the story for his play, Pygmalion which famously inspired Lerner and Lowe’s musical, “My Fair Lady.”

Ovid’s version of the myth is a story of piety, Pygmalion honors the goddess Aphrodite with prayers and sacrifices, and is rewarded by his beautiful statue being brought to life. By the Renaissance the story was mainly interpreted as a cautionary tale of vanity and hubris, only the gods could create perfection and it was hubris for Pygmalion to believe he could do so himself.  George Bernard Shaw uses Pygmalion as a vehicle for social commentary; Professor Higgins gets caught up in his own creation but ignores the real societal issues going on around him and so loses the object of his obsession. While we are not entirely certain of the message of “My Fair Lady,” there are some great songs (“I Could Have Danced All Night”, “Wouldn’t It be Loverly”, etc.) and Audrey Hepburn is unforgettable as Eliza Doolittle! 

So how is the Pygmalion story relevant to today’s business leaders? We have found that often here-to-fore successful organizations fall into what we might call the “Pygmalion Trap”. Having had a run of success with a particular market approach or business model, they become convinced that the same approach will continue to be successful into the future. Enamored of their own creation, these business teams often continue to pursue the same historic strategies and practices while ignoring the competitive issues and market changes going on around them, usually to their own detriment.

The story of General Electric over the last 40 years provides a great example of the dangers for a management team overconfident in their company’s historic strategies and practices and who falsely attributes the reasons for their success. For a long time, General Electric was an admired and iconic company whose history parallels the industrialization of America.  The company was formed in 1892 when Thomas Edison merged his Edison General Electric with Thomson-Houston Electric Company. In 1896, GE was one of twelve companies selected for the original Dow Jones Industrial Average, and stayed a component of that index longer than any of the others (finally being dropped in 2018). For the next 75-plus years, GE either invented or commercialized everything from refrigerators and televisions to jet engines,  literally transforming the way Americans live.

By the time Jack Welch took over GE in 1981, it was a conglomerate with dozens of small, niche businesses. Welch began a massive overhaul of GE’s portfolio, famously selling or spinning off a total of 71 businesses that couldn’t meet his “be number one or number two” standard. He also acquired companies, some of which, like radio company RCA which owned NBC, took GE farther from its manufacturing roots. By the 1990’s, this iconic manufacturing company had become what Welch called a ‘boundary-less company,”.

In addition to overhauling the portfolio, Welch reinforced a distinct corporate culture that valued training, business and financial management as a discipline and identifying and promoting talent from within. Many at GE believed that their ability to train managers, roll out lean principles and aggressively manage people through force ranking would work in any business.  And the results supported this view, with GE going from around $25 billion in revenue to nearly $130 billion during Welch’s tenure.  Even more impressively, the stock was up over 40-fold from its 1981 level when it peaked in late 2000. Jack Welch had molded GE into a company and a business system whose leadership, as well as many on Wall Street, thought could do no wrong.

However, while GE’s performance-based culture had created a generation of leaders who knew how to make their numbers, it was also becoming increasingly internally-focused.  GE’s middle management quickly figured out that the stars got promoted every 18 – 24 months, so they needed to show results in 12 months or less.  This led to increasingly aggressive cost-cutting and not nearly enough long-term planning.

Trying to drive long-term initiatives almost exclusively from headquarters, GE made a series of big bets, many of which turned out to be ill-timed or ill-conceived and nearly all of which were poorly executed. Yet they continued to make their numbers.  However, if one had bothered to look, the cracks in this great edifice were already showing.  A disproportionate share of that growth, and nearly all the excess shareholder returns, were coming from GE Capital, as a series of increasingly aggressive leaders turned the sleepy credit arm that financed appliances and jet engines into the world’s largest ‘non-bank bank.’ 

After a highly publicized CEO succession contest featuring Dave Cote, Jim McNerney and others, Jeff Immelt, a consummate GE insider, took the helm in September of 2001, just four days before the 9/11.  The financial turmoil and the downturn in aviation that followed September 11 were particularly damaging to GE.  Despite the impact on short term results, Immelt was resolute in his belief in the GE system. He maintained the key elements of the business model and culture and continued to diversify away from manufacturing, acquiring 80 percent of Universal Pictures and buying a subprime lender in California. Immelt, GE’s management and many on Wall Street remained enamored of Jack Welch’s creation but the magic has never returned.

In the financial crisis of 2008/2009 GE Capital was hit with the same liquidity problems that affected all lenders. But since they sometimes operated outside the regulatory frameworks of the banking industry, they were hurt worse. For the most part, the rest of the GE portfolio proved to be anemic, GE management’s short-term focus had starved these companies of their long-term growth potential and GE had not put in place a business culture focused on the fundamentals of business strategy and growth. Jeff Immelt left the company earlier than planned in 2017. Jack Welch’s creation had lost its luster.

GE is now on its second CEO post-Immelt and have yet to recapture even a hint of the old glory.  The tale of its stock price is dramatic: If you put $1,000 into GE stock in January of 2004 (by then the market had recovered most of its 9/11 losses) you would have about $420 today.  If you had blindly put that money in the S&P 500, you would have $3,778 today – nearly ten times as much.  Oh, and we mentioned Dave Cote , he took over Honeywell in 2002 (after European regulators nixed a planned merger with GE), and by January of 2004 had assembled his team and established his leadership cadence and expectations.  $1,000 invested in Honeywell in January 2004 would be worth over $7,500 today!

So, what can we learn from General Electric’s fall from grace?  Like Pygmalion, it is a story that will be retold and reinterpreted over time, but we believe some lessons are clear:

  • Don’t assume the business model you have built to succeed in the past will succeed in the future. Make sure to have an objective view of the “Momentum of the business” – how much of your success is being in the right markets vs. gaining share from competitors.  Internal focus (we are running ahead of plan!) tends to downplay root causes and underplays the role of luck.  We have said it elsewhere, but asking why you are doing well while you are still doing well, is one of the most difficult, and most important challenges in business.
  • Related to the first point, Strive to be brutally honest about your differentiation – You need to separate the long list of things you are good at to the short list of capabilities that are truly differentiating and for these, to be crystal clear about the source of the differentiation, the evidence that it is real and the way that it provides value for the customer. “We are better managers than the competition” may be true, but it is almost certainly an incomplete (if not misleading) description of your differentiation. And remember, your competition is always evolving.
  • Teach the basics – rising business leaders need to understand how to think strategically about their markets and organic growth; teaching process improvement and financial principles is not enough.  At Honeywell, Dave Cote created a version of GE’s famed Crotonville leadership academy, one of the flagship courses was the Strategic Marketing Program, which was eventually delivered to more than 3,000 Honeywell associates attending as part of growth project teams.
  • Encourage bottom-up innovation – This is the basic idea behind our book’s title, “Grassroots Strategy”: more people closer to the customer and the technology thinking of growth and innovation ideas will produce better strategies than relying on big ideas delivered from on high in the ivory tower. 
  • Establish leadership processes that encourage longer-term, outside-in thinking about the business, trying to avoid the almost inevitable tendency to focus only on ‘are you on track to make this quarter?’  For example, Dave Cote at Honeywell established ‘growth days’ where he would do a deep dive with a business unit, but structure the meeting around future opportunities explicitly not letting it devolve into an operating review of current year’s performance.
  • Keep your market understanding current – it sounds obvious, but markets and competitors change.  Updating your perspective periodically and objectively assessing the implications is critical.  While GE was loaded with smart people, most seemed to believe that as long as they delivered their numbers everything must be ok, causing them to miss lots of warning signs that their market positions were not as secure as they thought.

These are not the only lessons that can be drawn, or even the only way to interpret the story.  Books and full length articles have already been written and more will likely follow.  Many of those focus on the personalities and individual foibles of the CEOs, but we believe this gives an incomplete picture.  The failings of GE were systemic and symptoms of the same disorders that affect many other companies, internal focus and overconfidence in established management systems. Companies would do well to remember that you can’t cost reduce yourself to success and no matter how many quarters in a row you hit your earnings targets, that is no substitute for an informed strategic perspective of your markets and your positions within them.

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