Summary:
- Many people think it is OK for large companies to grow slowly
- Many people admire caretaker CEOs
- In dynamic markets, low-growth companies fail
- It is harder to generate $1B of new revenue, than grow a $100B company by $10B
- Large companies have vastly more resources, but they squander them badly
- We allow large company CEOs too much room for mediocrity and failure
- Good CEOs never lose a growth agenda, and everyone wins!
“I may just be your little rent collector Mr. Potter, but that George Bailey is making quite a bit happen in that new development of his. If he keeps going it may just be time for this smart young man to go asking George Bailey for a job.” From “It’s a Wonderful Life“ an employee of the biggest employer in mythical Beford Falls talks about the growth of a smaller competitor.
My last post gathered a lot of reads, and a lot of feedback. Most of it centered on how GE should not be compared to Facebook, largely because of size differences, and therefore how it was ridiculous to compare Jeff Immelt with Mark Zuckerberg. Many readers felt that I overstated the good qualities of Mr. Zuckerberg, while not giving Mr. Immelt enough credit for his skills managing “lower growth businesses” in a “tough economy.” Many viewed Mr. Immelt’s task as incomparably more difficult than that of managing a high growth, smaller tech company from nothing to several billion revenue in a few years. One frequent claim was that it is enough to maintain revenue in a giant company, growth was less important.
Why do so many people give the CEOs of big companies a break? Given that they make huge salaries and bonuses, have fantastic perquesites (private jets, etc.), phenominal benefits and pensions, and receive remarkable payouts whether they succeed or fail I would think we’d have very high standards for these leaders – and be incensed when their performance is sub-par.
Facebook started with almost no resources (as did Twitter and Groupon). Most leaders of start-ups fail. It is remarkably difficult to marshal resources – both enough of them and productively – to grow a company at double digit rates, produce higher revenue, generate cash flow (or loans) and keep employees happy. Growing to a billion dollars revenue from nothing is inexplicably harder than adding $10B to a $100B company. Compared to Facebook, GE has massive resources. Mr. Immelt entered the millenium with huge cash flow, huge revenues, and an army of very smart employees. Mr. Zuckerberg had to come out of the blocks from a standing start and create ALL his company’s momentum, while comparatively Mr. Immelt took on his job riding a bullet out of a gun! GE had huge momentum, a low cost of capital, and enough resources to do anything it wanted.
Yet somehow we should think that we don’t have as high expectations from Mr. Immelt as we do Mr. Zuckerberg? That would seem, at the least, distorted.
In business school I read the story of how American steel manufacturers were eclipsed by the Japanese. Ending WWII America had almost all the steel capacity. Manufacturers raked in the profits. Japanese and German companies that were destroyed had to rebuild, which they progressively did with more efficient assets. By the 1960s American companies were no longer competitive. Were we to believe that having their industrial capacity destroyed somehow was a good thing for the foreign competitors? That if you want to improve your competitiveness (say in autos) you should drop a nuclear bomb on the facilities (some may like that idea – but not many who live in Detroit I dare say.) In reality the American leaders simply refused to invest in new technologies and growth markets, allowing competitors to end-run them. The American leaders were busy acting as caretakers, and bragging about their success, instead of paying attention to market shifts and keeping their companies successful!
Big companies, like GE, are highly advantaged. They not only have brand, and market position, but cash, assets, employees and vendors in position to help them be even more successful! A smart CEO uses those resources to take the company into growth markets where it can grow revenues, and profits, faster than the marketplace. For example Steve Jobs at Apple, and Eric Schmidt at Google have found new markets, revenues and cash flow beyond their original “core” markets. That’s what Mr. Welch did as predecessor to Mr. Immelt. He didn’t so much take advantage of a growth economy as help create it! Unfortunately, far too many large company CEOs squander their resources on low rate of return projects, trying to defend their existing business rather than push forward.
Most big companies over-invest in known markets, or technologies, that have low growth rates, rather than invest in growth markets, or technologies they don’t know as well. Think about how Motorola invented the smart phone technology, but kept investing in traditional cellular phones. Or Sears, the inventor of “at home shopping” with catalogues closed that division to chase real-estate based retail, allowing Amazon to take industry leadership and market growth. Circuit City ended up investing in its approach to retail until it went bankrupt in 2010 – even though it was a darling of “Good to Great.” Or Microsoft, which launched a tablet and a smart phone, under leader Ballmer re-focused on its “core” operating system and office automation markets letting Apple grab the growth markets with R&D investments 1/8th of Microsoft’s. These management decisions are not something we should accept as “natural.” Leaders of big companies have the ability to maintain, even accelerate, growth. Or not.
Why give leaders in big companies a break just because their historical markets have slower growth? Singer’s leadership realized women weren’t going to sew at home much longer, and converted the company into a defense contractor to maintain growth. Netflix converted from a physical product company (DVDs) into a streaming download company in order to remain vital and grow while Blockbuster filed bankruptcy. Apple transformed from a PC company into a multi-media company to create explosive growth generating enough cash to buy Dell outright – although who wants a distributor of yesterday’s technology (remember Circuit City.) Any company can move forward to be anything it wants to be. Excusing low growth due to industry, or economic, weakness merely gives the incumbent a pass. Good CEOs don’t sit in a foxhole waiting to see if they survive, blaming a tough battleground, they develop strategies to change the battle and win, taking on new ground while the competition is making excuses.
GM was the world’s largest auto company when it went broke. So how did size benefit GM? In the 1980s Roger Smith moved GM into aerospace by acquiring Hughes electronics, and IT services by purchasing EDS – two remarkable growth businesses. He “greenfielded” a new approach to auto manufucturing by opening the wildly successful Saturn division. For his foresight, he was widely chastised. But “caretaker” leadership sold off Hughes and EDS, then forced Saturn to “conform” to GM practices gutting the upstart division of its value. Where one leader recognized the need to advance the company, followers drove GM to bankruptcy by selling out of growth businesses to re-invest in “core” but highly unprofitable traditional auto manufacturing and sales. Meanwhile, as the giant failed, much smaller Kia, Tesla and Tata are reshaping the auto industry in ways most likely to make sure GM’s comeback is short-lived.
CEOs of big companies are paid a lot of money. A LOT of money. Much more than Mr. Zuckerberg at Facebook, or the leaders of Groupon and Netflix (for example). So shouldn’t we expect more from them? (Marketwatch.com “Top CEO Bonuses of 2010“) They control vast piles of cash and other resources, shouldn’t we expect them to be aggressively investing those resources in order to keep their companies growing, rather than blaming tax strategies for their unwillingness to invest? (Wall Street Journal “Obama Pushes CEOs on Job Creation“) It’s precisely because they are so large that we should have high expectations of big companies investing in growth – because they can afford to, and need to!
At the end of the day, everyone wins when CEOs push for growth. Investors obtain higher valuation (Apple is worth more than Microsoft, and almost more than 10x larger Exxon!,) employees receive more pay (see Google’s recent 10% across the board pay raise,) employees have more advancement opportunities as well as personal growth, suppliers have the opportunity to earn profits and bring forward new innovation – creating more jobs and their own growth – rather than constantly cutting price. Answering the Economist in “Why Do Firms Exist?” it is to deliver to people what they want. When companies do that, they grow. When they start looking inward, and try being caretakers of historical assets, products and markets then their value declines.
Can Mr. Zuckerberg run GE? Probably. I’d sure rather have him at the helm of GM, Chrysler, Kraft, Sara Lee, Motorola, AT&T or any of a host of other large companies that are going nowhere the caretaker CEOs currently making excuses for their lousy performance. Think what the world would be like if the aggressive leaders in those smaller companies were in such positions? Why, it might just be like having all of American business run the way Steve Jobs, Jeff Bezos and John Chambers have led their big companies. I struggle to see how that would be a bad thing.
