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MarketScreener Homepage  >  Equities  >  Nyse  >  General Electric Company    GE


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General Electric : Can Larry Culp Fix GE?

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10/05/2018 | 10:15pm EST

By Thomas Gryta and Russell Adams

Last Monday morning, Larry Culp did what he's done dozens of times during his career: talk to a nervous group of employees as their newly minted boss. This time was different because it wasn't a corporate takeover. It just felt like one.

Hours earlier, General Electric Co. had shocked millions of investors and 300,000 employees when it abruptly fired CEO John Flannery and brought in Mr. Culp, who had joined the GE board in April, to save the struggling conglomerate.

The new boss didn't have an ID badge or a work computer, but he wasted little time in addressing GE's top 150 executives from the Boston headquarters. A few days later, he jumped on a flight to visit the Atlanta offices of GE's power business, whose troubles forced the company to slash its dividend and financial targets, erasing more than $100 billion in market value.

The arrival of Mr. Culp didn't just install the first outsider in GE's 126-year history -- it also ushered in a new management philosophy that has guided his every move since he became CEO of Danaher Corp. at age 37. The strategy has developed a cult-like following, largely because Danaher used it to buy a string of companies, boost profits and richly reward shareholders.

Danaher, based in Washington, D.C., and established in 1984, is a much smaller company than GE. It owns disparate units that make everything from dental instruments to centrifuges to water-purification systems. It had about $4 billion in annual revenue when Mr. Culp took over as CEO on 2001 and $20 billion when he retired about 14 years later. GE had $121 billion in revenue last year and employs nearly five times as many people as Danaher.

Still, an investor who put $10,000 into Danaher 20 years ago would have more than $200,000 today. Over that same period, $10,000 invested in GE would be worth about $8,700.

The Danaher playbook, modeled after similar systems used at Toyota Corp., is defined by a maniacal commitment to efficiency and constant assessment of business units against eight performance metrics. Those include financial targets like core revenue growth as well as measures of customer satisfaction (on-time delivery) and employee morale (retention rates).

Each business is assessed monthly in face-to-face meetings. New executives are pulled away from their jobs and schooled in the Danaher way, which centers around a philosophy known as kaizen. Derived from the Japanese words kai, meaning change, and zen, meaning good, kaizen focuses on continuous improvement through in-depth sessions to assess employees' progress.

Instituted in the 1980s, the Danaher Business System, or DBS, is the underlying process that everything else in the company runs on. "DBS is our culture and the foundation of everything we do," reads a slide from a 2013 presentation by Mr. Culp to investors.

Harvey Bond, a Danaher executive in Europe until early 2011, recalls spending a late night eating pizza with Mr. Culp on a visit to a factory in Europe for a kaizen event. "He has safety shoes on with steel toe caps and he is completely immersed. He has his phone switched off," Mr. Bond said. "He knows that in the morning that people are going to be talking about what he was doing."

Mr. Culp, 55, grew up near Washington, D.C., where his father ran a welding and machine shop. He studied economics at Washington College and earned an MBA from Harvard Business School, where he cold-called the CEO of Danaher to get a job in 1990. He wanted an operating role at a company that could compete with the foreign manufacturers he admired, he told a Harvard student newspaper. He ran smaller industrial units until he was tapped to run the company in 2001. He expanded mostly through acquisitions, including a $6 billion purchase of Beckman Coulter, a maker of medical tests.

Danaher tends to garner little attention and the same goes for Mr. Culp. In his 14 years running the company, he didn't spend much time talking to media. In contrast to his GE predecessors, Mr. Culp didn't have a public account on Twitter until this week. He declined to be interviewed for this article.

Rather than bring executives into Danaher headquarters to conduct business reviews, Mr. Culp would go to the units, camping out in the office and walking the factory floor to get a hands-on view, former colleagues say. Since joining the GE board, he has visited several GE operations, including overseas.

The structure of Danaher is almost an upside-down version of GE. While it is a conglomerate, it doesn't use the GE-style corporate umbrella to derive value from those businesses. Danaher has about 200 of its 67,000 workers in corporate functions.

One of the core principles of GE under former CEO Jeff Immelt was that different business units like power, aviation and healthcare benefited from access to the "GE Store" for shared research and technology. There was management training at the Crotonville, N.Y., leadership academy, research centers employing thousands of scientists and engineers in Germany and China, and global finance and sales teams.

Danaher's top executives are skeptical that conducting research across different divisions has any real value, according to people familiar with their thinking. Increased efficiency -- by cutting inventory and improving manufacturing process -- reduces the amount of working capital tied up in the company, allowing that cash to be used for growing the business.

The company is so committed to eliminating waste that it wouldn't be surprising for hour-long meetings to be stopped halfway through to discuss whether the next 30 minutes were necessary, said Paul Leinwand, a principal at PwC's global strategy business and co-author of "Strategy That Works: How Winning Companies Close the Strategy-to-Execution Gap," which focused in part on Danaher.

Danaher's headquarters itself speaks to the contrast with GE, which is building a new corporate base on the Boston waterfront. Danaher is located on the eighth floor of a nondescript glass office building in Washington, D.C. There are no signs for the company in the lobby or on the building.

The company that became Danaher started as a real-estate investment trust in 1969 by brothers Mitchell and Steven Rales. In 1984, it was renamed after a Montana creek where the brothers fished. It evolved beyond its roots as its founders discovered they had a gift for buying and turning around manufacturing companies.

The Rales brothers, now billionaires, both remain on the board of Danaher and own a combined 11% of the company, according to FactSet Research. Steven has served as chairman since 1984 and was CEO for six years ending in 1990. Mitchell and his wife, Emily Wei Rales, are prominent art collectors who opened a modern art museum with items from their portfolio in Potomac, Md.

When Mr. Culp took over as CEO in 2001, he reinforced the DBS approach. He posted notes for the staff on the company's intranet every day, often praising incremental improvements made by workers or teams, recalled former Danaher executive Steve Simms at a 2012 roundtable hosted by the publication strategy+business. Senior managers are rated every year on how well they apply the principles.

While GE has its own reputation for recruiting and training, Danaher has a rigorous system as well. It is crucial to have employees be a strong fit with the Danaher culture, a factor that is more important than performance. In the hiring process, the company uses a corporate psychologist to help profile candidates to make sure they will fit in with the DBS. The new hire is then put through an immersion process to assimilate into the practices of their new employer.

The company often moves executives around and makes sure it has a deep bench for key positions so it can switch executives into new companies it acquires, allowing someone else to immediately fill the empty role. The approach is similar to GE's, which rotates executives through units and geographies. Top executives at both companies also spend time each year teaching leadership or management techniques.

Central to Danaher's success is its meticulous process for evaluating acquisitions, according to people familiar with its process. The company looks for businesses with branded products used by professionals, which tend to be more profitable and have pricing power. It also seeks businesses that are poorly managed on cost, meaning they can become more profitable with greater attention to areas like manufacturing, supply chain and back-office operations.

Several analysts contrast GE's strategy for entering the water-processing business with Danaher's. In several deals costing at least $3 billion, GE acquired water-filtration businesses that used different, competing technologies, and then put the groups together under a single sales force. The bet didn't pay off: GE sold the water business last year for $3.4 billion.

In contrast, Danaher focused on water testing, an area with growth potential, RBC analyst Deane Dray notes. It bought in and has grown into other parts of the market, making it a major part of a division with $4 billion in annual sales.

Moves like these have bolstered Danaher's reputation. Trian Fund Management, the activist investor that holds a GE board seat and owns a large GE stake, pointed to Danaher's superior performance in various presentations that called for changes at much older and bigger industrial companies, including DuPont and GE itself.

Danaher has a constantly changing list of more than 100 potential acquisition targets and does about a dozen deals a year. When the company acquired Pall Corp. for $14 billion in 2015, it had been cultivating the maker of purification and filtration equipment for more a decade, according to people familiar with the deal. Danaher executives often do their own financial analysis, making them less reliant on traditional investment banks.

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10-06-18 0015ET

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ChangeLast1st jan.
GENERAL ELECTRIC COMPANY -3.63% 11.3637 Delayed Quote.6.27%
ONE STOP SYSTEMS, INC. -6.90% 2.3927 Delayed Quote.27.23%
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Financials (USD)
Sales 2020 91 333 M
EBIT 2020 9 718 M
Net income 2020 3 396 M
Debt 2020 16 503 M
Yield 2020 0,34%
P/E ratio 2020 28,2x
P/E ratio 2021 19,4x
EV / Sales2020 1,32x
EV / Sales2021 1,28x
Capitalization 104 B
Duration : Period :
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Technical analysis trends GENERAL ELECTRIC COMPANY
Short TermMid-TermLong Term
Income Statement Evolution
Mean consensus OUTPERFORM
Number of Analysts 20
Average target price 13,62  $
Last Close Price 11,86  $
Spread / Highest target 43,3%
Spread / Average Target 14,8%
Spread / Lowest Target -57,8%
EPS Revisions
H. Lawrence Culp Chairman & Chief Executive Officer
Jamie S. Miller Chief Financial Officer & Senior Vice President
Victor Abate Chief Technology Officer & Senior Vice President
James S. Tisch Independent Director
Francisco D'Souza Independent Director
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