Chet Richards

GE has long been a textbook example of operating inside competitors’ and customers’ OODA loops:

GE is known for seeing changes ahead of time - recognizing early, for example, that it had to go “green” - and responding to them faster and more creatively than the competition. (Geoffrey Colvin, “GE Under Siege,” Fortune, 10/10/2008.

But somewhere along the line, their orientation began to incorporate, if not focus on, financial engineering. It didn’t push out other forms of engineering excellence, which GE still does quite well, but:

GE Capital also performs another critical function: It helps GE manage earnings. Though earnings management is a no-no among good-governance types, the company has never denied doing it, and GE Capital is the perfect mechanism. Since financial assets are, under normal conditions, far more liquid than tangible assets, the company can buy or sell them in the final days of a quarter so that reported earnings rise with comforting smoothness, right in line with Wall Street expectations. (Colvin)

It appears that, to some extent at least, keeping the string of steadily rising profits became as important as shaping the marketplace for the company’s products and services. This seems to have caused their orientation to lock and some of their responses to be inappropriate or late:

Home prices peaked in June 2006, yet it wasn’t until a year later, with the subprime crisis on the front page of every newspaper, that GE Capital finally decided to bail out. [Subprime lender] WMC [which GE had bought in 2004] lost almost $1 billion in 2007 before GE dumped it in December. A Japanese consumer-lending company called Lake was another lousy business, but GE Capital again didn’t face the music until it was too late. GE took a $1.2 billion loss on it last year after deciding in September to sell it — but by then consumer credit was deteriorating so fast that unloading it (to Shinsei Bank) took another year.

Then when credit markets began to freeze in March of this year, GE was unable to do some of its financial sorcery and missed its quarterly estimates by $700 million (prompting Jack Welch to threaten to shoot CEO Immelt if he did it again).

As Colvin notes, the signs of impending trouble were there to be seen, but an “emerging pattern of confronting problems only after they could no longer be fixed” had developed. As I’ve noted before, one of the symptoms of a locked orientation is failure to see (not just interpret) mismatches between your orientation and the unfolding situation. If you think, for example, that you have a sure-fire cure to the world’s problems — call-up GE Capital to tweak the financials at the end of each quarter — then perhaps you are a little less rigorous in seeking out problems.

The point is, though, that if orientation lock can happen to a company as well run as GE, it can happen to anybody. To paraphrase Andy Grove, only those who remain paranoid survive. Perhaps a maxim for senior leaders should be that the more the world seems to be confirming your strategy and your abilities, the more frightened you should become.