Ooooh a penny for the thoughts of the late Jack Welch on events over the last few days. Welch steered the General Electric(GE) conglomerate to being the most valuable company on the planet as recently as 2004 and cemented his position as a global thought leader on management. His 2005 book “Winning” was a best-seller and has been a staple of many MBA reading lists but the history books might have a different executive summary of GE today. In time, we might see business texts change too. The debate is not really about winning management or execution but something more fundamental which I come across in lots of business plans and investment documents – losing. More specifically, losing sight of what is the core business, service or product in a company.
GE didn’t just lose sight of its core business. It lost almost $500 billion of value from its $600 billion peak in 2000. The core industrial business, co-founded by Thomas Edison in 1892, had become a global manuafacturing giant of appliances, jet engines and medical equipment by 1981. Then “Neutron Jack” took over the CEO role and made 600 acquisitions but crucially not all were in its core manufacturing activities. The acquisition of media(RCA/NBCUniversal) and financial(Kidder, Peabody) assets brought GE into sectors where business models were less robust. Another famous US business leader, Warren Buffett, put it rather well:
“When a manager with a reputation for brilliance tackles a business with a reputation for bad economics, the reputation of the business remains intact.”
Sure enough, it was Buffett who provided emergency funds to save GE in 2008 when its financial services division, GE Capital, almost brought down the entire company. The company has been in retreat ever since. This week’s announcement of a break-up of GE’s last remaining businesses in health, energy and aviation marks the end of a decade of balance-sheet firefighting. Previous exits from media and finance did little to help the share price and the last of America’s original “blue chips” was dumped from the Dow Jones Index in 2018. Lots of losses, lots of lessons.
Perhaps the most staggering fact for future business books will be GE’s market value at final break-up was just over $120 billion. For context, that’s less than the amount Tesla dropped in value in just one trading day this week. And, if one were looking for another business text book head-scratcher then check out the IPO this week of electric vehicle(EV) maker, Rivian.
The Rivian IPO will generate a valuation close to $75 billion but currently the company has zero revenues just like its $72 billion EV competitor, Lucid Motors, which is already listed and delivered its first car only last week. In fact, the combined value of these two EV players (with ZERO revenues) at almost $150 billion beats GE’s current market value, 130 year history of actual revenues and its 2021 revenue run rate of $75 billion. Who needs core business revenues these days! Well, actually all businesses need to communicate the prospect of future revenues and I believe there are some GE lessons to be learned for start ups in pre-revenue mode. The following thoughts should help the drafting of business plans, financial projections and valuation guides:
- The core business must clearly describe a problem, a solution to the problem, how that product/service solution clearly helps a prospective customer and how much that customer will pay for it. Then clearly tell the story of how there will be more customers every year and that in X years all these customers and their payments will be valued at Y. I recently saw a Pixar guide to storytelling and this tried-and-trusted formula struck a chord:
Once upon a time there was________ . Every day ________ . One day _______ . Because of that _____ . Because of that ______. Until finally _______ .
Arguably, GE would have saved its shareholders years of pain in financial services if the strategic storyline had required it to describe massive leverage, cheap pricing of risk and the inevitable capital destruction.
- In an investment pitch there is nothing wrong per se with describing a variety of solutions, products or services but if they have different business models and customers then make sure not to “crowd out” the core business projections and confuse the reader. Be very clear in your narrative that these lines of business are not core but have “option value”. This also communicates where the ‘focus” of resources and management time will be. The troubles at GE’s media and financial divisions demanded massive amounts of management time and attracted a steady stream of negative headlines. At what cost? Who knows but a focused GE might have blazed a trail in electric vehicles (EV) which would have been far closer to its proud manufacturing legacy.
- It has been said that almost every company is now a “technology” company. That seems reasonably accurate from the perspective of how a company delivers its products or services. However, in an investment pitch a company must be crystal clear about who is going to pay them. If we look at GE’s history it started out in life as a traditional business-to-business (B2B) manufacturing operation(appliances, engines, x-rays) and then added business-to-consumer (B2C) services(media, finance) in the Welch era. It would be easy to conclude that GE was much better at B2B than B2C and then recommend start-ups to choose one or the other. However, in a digital economy there are many ‘platform’ business models which do both B2B and B2C eg subscriptions paid by users and aggregate usage data analytics paid for by businesses. It is striking in many ‘platform’ investment pitches that one of the two types of end-payers(B or C) is described in more detail and that storyline is better developed. There is nothing wrong with one revenue channel requiring more development but make sure there is a clear strategy outlined to redress the imbalance.
Of course, even the most detailed business and financial plans will be scuppered by future events. Yes, current orthodoxy trumpets laser-like focus, revenues, fly-wheels and more revenues but here’s a few reminders of how non-core initiatives can eventually be winning ones:
- Amazon: The core Amazon business is e-commerce and delivered almost $50 billion of revenues in Q3. But …..the “option” of launching cloud services (AWS) in 2006 has turned into a trillion dollar franchise with annual revenue run-rates of $70 billion growing at 40% with 30% margins. Wow.
- Google: The best performing “FAANG” company (FaceB, Apple, Amazon, Netflix and Google) of 2021 delivered $53 billion of core search/ad revenues in Q3 but is still growing at 44%. There’s lots to like in the wider group from Cloud Services to Android but the standout “option” channel must surely be YouTube which Google bought for $1.65 billion in 2006, an amount which now equates to about 20 days of YouTube revenues. YouTube’s revenues alone are likely to pass those of fellow “FAANG” Netflix in Q4.
Note both of these companies remain dominant and focused in their original core activities which have financed other opportunities. Bluntly, they had the cash to lose if the “option” didn’t work out and they avoided large and time-consuming M&A activity. Sadly, GE and its long-suffering shareholders embarked on far more costly options which took years to exit. Lesson learned, know what is core.