Sell GE Capital: Selling GE Capital now has many advantages.Immelt knows that the influence of GE Capital could end up de-naturalizing GE. Once interest rates start picking up GE Capital will become even more attractive inside GE. And this problem could escalate quickly because the GE Capital unit already accounts for two-thirds of GE’s profits at a time when interest rates have been at a historical low. Do nothing: I suspect Immelt also knows that if he doesn’t do anything GE Capital will take over the entire focus of the company anyway, because of its ROI superiority.If he focuses on GE Capital over the next 15 years, given the difference in ROI, more than 60 to 70% of revenues and well over 90% of the profits will probably come from that unit alone, creating a strong incentive to whoever comes next to shed everything but GE Capital because doing otherwise wouldn’t make economic sense. Focus on GE Capital: I expect Immelt knows that if he gives free rein to GE Capital he will in all probability reach record performance, but of course he eventually will have to pass the baton to a new CEO sometime in the future, and he knows that GE is not only about performance but about leaving a sustainable enterprise that is well balanced to create progress for the next generation.I believe that none of this has escaped the astute Jeff Immelt, who as he contemplates GE Capital must know that he has three options. At this rate, in 10 years GE Capital will account for 55% of GE’s profits, and over time it can account for the lion’s share of GE’s profitability, which would put into question what GE is really about. So what is different here? The answer is the balance. Now, naturally, GE’s situation is far more sophisticated than this, involving many more variables, such things as strategic importance and competitors’ moves, and, of course, for each of its business units, the offerings all have different ROIs.Ĭompanies deal with different levels of profitability in different divisions all the time. What you are imagining is a very, very simplified account of the strategic choices that have been facing the top management of General Electric for decades in relation to GE Capital. Where do you think most of the money will go to? Obviously, to unit A, because it’s very hard to justify both internally and externally why you’re investing the next year in a suboptimal unit when you have another option that is far more profitable.Īnd then imagine that this kind of decision happens year after year. Then, suppose we are in the month of December, and like every month of December, management meets to decide where to invest the budget for next year. But in only five years, because of the accumulated 80% ROI rolling in year after year, unit A is already two-thirds as big as unit B in terms of profits. It turns out that unit A is only five years old and unit B is 100 years old. And for the sake of simplicity let’s say that business unit A is in financial services and all its offerings have an 80% ROI, and business unit B is in manufacturing and all its offerings earn a 20% ROI. Imagine that you have a business with two business units.
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