GE’s Larry Culp Faces Ultimate CEO Test in Trying to Save a Once-Great Company

(Bloomberg Businessweek) -- One Sunday in March, Gary Wiesner, who runs General Electric Co.’s wind-turbine-blade factory in Pensacola, Fla., received something he’d never gotten before: a personal email from the CEO. H. Lawrence Culp Jr. wanted to know if it would be OK if he came for a visit..When Culp arrived two days later, alone, in jeans, it marked the first time a GE chief executive officer had visited the plant since the company bought it 18 years ago. He spent about two hours walking the floor and chatting with technicians, stopping only briefly for a call with the board of directors..A longtime devotee of Toyota-style lean manufacturing, Culp was in his element. While overhead screens flashed measurements of the production pace in eight-hour increments, Culp wondered aloud if the metrics were visual enough and whether they could be broken down into 20-minute or even 10-minute slices, so workers would know sooner when they might be falling behind on their goals. At the tour’s end, he urged them to face up to production issues as early in the process as possible—or, as he put it, “Let’s make it red, make it ugly, let’s go fix them,” Wiesner recalls. A half-hour after leaving, Culp sent another email promising to return..The wind turbine business is among the least of Culp’s worries. GE’s balance sheet is lopsided with debt, its GE Power division is shedding millions of dollars in cash daily, the stock price is barely in double digits, and the Securities and Exchange Commission is investigating the company’s accounting practices. Nonetheless, Culp’s Pensacola visit is a telling example of how the first outsider to run GE is trying to fix it, metric by metric..Since taking over as CEO on Oct. 1, he’s eschewed the company’s Boston headquarters for frequent travel, spending day-and-a-half sessions with GE units around the world and meeting with CEOs at Boeing, Duke Energy, and Safran, among other customers. In May, the night before his appointment to see FedEx Corp. CEO Fred Smith, he flew to Memphis to watch a million-odd packages handled in the “night sort” at the company’s main shipping hub. Culp ordered almost 50 GE business heads to take off June 10-14 for an on-the-factory-floor, “true-lean” manufacturing boot camp that he’s helping to teach..None of this would surprise people who worked with Culp in his 14 years as CEO at Danaher Corp., the low-profile industrial conglomerate. On his watch, Danaher grew fivefold in revenue while Culp, in the mold of GE legend Jack Welch, oversaw scores of acquisitions. And like Welch, Culp isn’t the sort to buy a company and forget it. It wasn’t unusual to see Culp moving equipment around in factories or strolling trade shows seeking time with customers. While studying an orthodontics company Danaher had bought, Culp decided he could best understand its customers by testing the product himself. “Probably he didn’t need braces, but he got braces,” says Vicente Reynal, who ran that business for Culp..Culp retired from Danaher four years ago at the age of 51. The behemoth he’s charged with rescuing is, with $120 billion in annual revenue, six times the size of that company, with quadruple the number of employees. GE Power, which produces electricity-generating equipment, is by itself larger than Danaher. Whereas Culp expanded his former company with acquisitions, his first job at GE will be to shrink it. At Danaher he could mostly ignore an outside world that mostly ignored him—a luxury he no longer enjoys..Culp is an “inspired choice,” but the skills he honed at Danaher—buying companies and making them more efficient—don’t prepare him for the mess at GE, concluded research firm Paragon Intel in a recent report. JPMorgan Chase & Co. analyst Stephen Tusa, who predicted GE’s collapse before his peers, has argued that there still hasn’t been a true accounting of the extent of the company’s problems..Culp’s many acolytes aren’t fazed. Jim Lico, who worked for him at Danaher and now runs Fortive Corp., a Danaher spinoff, says that when he heard of his old boss’s new job, he bought a “meaningful” chunk of GE stock. “And I think most of the people that have worked for him did, too,” Lico says. “When you look at how Danaher changed over the course of his CEO tenure, there might not have been as many zeros behind the numbers, but the work he did to build Danaher was every bit as risky” as what he confronts at GE..Culp himself doesn’t seem terribly worried, either. “Is it more challenging? I can’t say that it is,” he said in a brief phone interview in January, sounding supremely confident, or deeply delusional, or possibly both. “I wish I had more hours in the day, I wish we had started sooner, but I can’t deal with any of that. We’re just trying to make progress a little bit every day.”.The magnitude of GE’s fall probably helps Culp by giving him a longer leash with investors than his predecessors. Wall Street was always skeptical of Welch’s successor, Jeffrey Immelt, who overpaid for some early acquisitions and later committed the cardinal sin of cutting the dividend. Then John Flannery was too busy dousing fires during his short reign to build rapport with shareholders. Culp brought his gleaming Danaher résumé and zero GE baggage. Although it’s not at all clear that he can return GE to its past glory, he probably can’t make things much worse. Read more: Was Jack Welch Really That Good? .GE shares got a nice little bump when the company announced on April 30 that it had burned only $1.2 billion in cash in the first quarter, a third of what most analysts expected. “No news is good news, I guess, in the eyes of some investors,” Culp said in another brief phone chat. In fact, no news has been almost the only good news the past two years, as the rat-a-tat of negative revelations prompted investors to knock $150 billion off GE’s value, or more than the entire market cap of Nike Inc. or General Motors Co..The descent began decades ago. GE preserved its public bearing as one of the world’s greatest companies partly because of its name: Everyone wanted to believe in General Electric, maker of lightbulbs and jet engines, corporate child of Thomas Edison, keystone of 20th century industrial America. Welch could do no wrong in the eyes of most investors and business media..The reckoning also was deferred because GE’s questionable accounting and selective disclosures made it almost impossible for shareholders to see which businesses were truly thriving and which weren’t. The company pioneered the euphemistically named practice of earnings management; it could sell a handful of assets at the end of the quarter to give earnings a boost. GE routinely met or beat Wall Street expectations, which of course juiced shares. Further obscuring the picture, its in-house bank, GE Capital, was so vast that troubled businesses such as long-term-care insurance or subprime mortgages could fester without drawing much attention..Cracks finally became visible under Immelt, who ran GE much like Welch, constantly buying and selling companies. When the 2008 financial crisis hit, GE almost collapsed. Immelt cut the dividend for the first time since the Great Depression. The SEC charged the company with misleading investors, saying it “bent the accounting rules beyond the breaking point.” GE paid $50 million to settle the case without admitting fault, but it would no longer get a free pass when fiddling with earnings..By the time Nelson Peltz’s activist Trian Fund Management disclosed it had bought a $2.5 billion stake in 2015—usually not a good sign for top managers—Immelt had made two fateful decisions that would help pave the way for Culp’s ascension. The first was GE’s $10.6 billion acquisition of the energy business of France’s Alstom SA. A maker of natural gas power turbines, Alstom had poor profitability as fossil fuels faced growing competition from renewables, but the purchase bolstered GE’s position as the world’s largest maker of gas turbines. The global market for those products was crashing when GE closed the Alstom deal in late 2015..Then, in selling the bulk of GE Capital, Immelt cashed in on strong assets while hanging on to weak ones, such as the long-term-care insurance business that last year forced GE to set aside $15 billion to cover potential future losses. On the day in June 2017 that GE announced Immelt would retire, the stock rose 3.6%, its biggest one-day jump in almost two years..GE veteran Flannery, one of four finalists inside the company to succeed Immelt, took over in August 2017. Two of the other candidates resigned before the year was over. “Things will not stay the same,” Flannery vowed. He was right; things worsened as the power business continued to deteriorate and investors inured themselves to hearing one bad-news bombshell after another. Investor Trian, with its sizable GE stake and a board seat, grew concerned about both Flannery and the shallow bench behind him, says a source who isn’t authorized to speak publicly..Early last year, GE took the extraordinary step of overhauling its board, shrinking it to a dozen directors from 18. Flannery sought advice on new members from, among others, Kevin Sharer, a GE alumnus and former Amgen Inc. CEO, who was teaching at Harvard Business School. Sharer raved about his fellow HBS lecturer and golf-fishing-and-skiing buddy Culp. After Culp joined the board, he threw himself into learning everything about the giant company, even visiting factories. Analysts began to speculate that he’d soon become CEO. Sharer says there was no such plan, though Flannery “knew very well Larry’s background and his capability.” In one of Culp’s first conversations with the then-CEO, Flannery said he admired what Culp had done at Danaher. Culp replied, “We were simply doing what we thought you were doing.” .Unless you’re a Danaher shareholder or a fan of Harvard case studies, you probably don’t know much about the company. It’s an oddly frequent focus of academic inquiry, perhaps because its executives seem more willing to speak with professors than the media, which Danaher tends to ignore. The company didn’t respond to requests for interviews for this story..Its headquarters are on the eighth floor of a glass building wedged between a federal credit union and an upscale restaurant in the Washington, D.C., neighborhood of Foggy Bottom. The name “Danaher” doesn’t appear on the building’s exterior. The company evolved from a real estate firm that brothers Mitchell and Steven Rales founded in 1969. (It’s named for a tributary of a Montana river they liked.) By the mid-1980s, it had acquired hundreds of small and midsize industrial companies..Danaher was one of the first U.S. companies to adopt Toyota Motor Corp.’s kaizen process of increasing productivity with tiny, continuous improvements. Its own version is called the Danaher Business System, or DBS, which in some ways resembles the Six Sigma quality-assurance regimen Welch embraced in the 1990s. DBS relies heavily on measurable facts, including not only profits and sales but also nonfinancial metrics such as on-time delivery. These are measured on monthly, weekly, daily, and even hourly bases, depending on a project’s urgency. From the moment Culp joined Danaher in 1990, he embraced it like a religion..Danaher was Culp’s first job out of HBS. Classmates sought out big-name companies, but Culp thought Danaher’s relative obscurity would give him the chance to have a bigger impact quickly, he told students in a talk last year at Montgomery College in Maryland. One of his first assignments was helping assemble air conditioners at a plant in Japan—his introduction to lean thinking. In 2001, at age 38, he became CEO. Immelt succeeded Welch at GE the same year..Over the next 14 years, Culp oversaw $25 billion in acquisitions. They included makers of digital microscopes, dental implants, water purifiers, and advanced packaging tools. Each year, Danaher performed due diligence on 150 companies or more while cultivating other targets that weren’t for sale, at least not yet. It deliberately avoided cyclical businesses and those in the financial sector, Culp said in an HBS study..Soon after a purchase, the acquired company would often be plunged into a DBS kaizen “event” that could last a few days. “Even the smallest operation was scrutinized, be it the act of picking up a tool, the organization of parts, or the distance a worker moved to get the product to the next stage of production,” according to a study by the University of Virginia’s Darden business school..A month after Danaher bought Radiometer, a maker of blood analysis technology, in 2004, the top 40 managers of the acquired company split into six study groups to seek efficiencies. Radiometer’s CEO told Harvard that he and his team were “skeptical that anybody … could make us any better.” One Radiometer study group quickly learned that a part that took less than a half-hour to produce took as long as 18 days to ship. The group slashed that to less than two days by cutting two departments out of the production flow..Radiometer executives then presented the new owners with their updated strategy, boasting of their 40% market share in key product segments. Danaher asked why 60% of the market preferred rival offerings. Radiometer’s CEO told the Harvard researchers, “We probably knew our own existing customers very well, but we did not know our competitors’ customers.”.What other companies might see as success could be viewed with suspicion at Danaher. In 2007, Culp, a rabid Boston Red Sox fan, told this magazine, “There are a lot of companies where if you win 10-9, nobody wants to talk about the nine runs [they] just gave up.” At Danaher, he said, “We’ll talk about ‘How did we give up nine runs? Why didn’t we score 12?’ ”.Culp retired from Danaher in March 2015. “I was very happy with my post-CEO life,” he recently told the Harbus, an HBS publication. In addition to teaching and advising Bain & Co., he did a lot of fishing and skiing. Money wasn’t a problem; he’d made about $300 million at Danaher, according to a Bloomberg News analysis. “Some friends said, ‘Why put your legacy at risk?’ And I thought that is exactly why I should do it,” Culp said. “I strongly believe GE as a company matters to the world.” .In Culp’s first day on the job, GE’s stock shot up 7%. It soon reversed direction as the extent of the company’s problems became clearer. By yearend, GE had cut its quarterly dividend to a penny—30¢ lower than its all-time high in early 2009—and the stock had fallen almost 40%. In February, Culp’s first letter to shareholders was a crisp five pages (vs. the 26 pages of Immelt’s last such missive) that committed GE to a simple two-step strategy: reduce debt and fix the power business..Culp moved as he might have at Danaher. He finalized an agreement to pay $1.5 billion to settle a Department of Justice investigation into GE’s defunct subprime mortgage business. He scaled back Immelt’s grandiose plan for the new headquarters in Boston. The smaller board now meets in a smaller room around a smaller table. He ditched a plan to spin off the thriving health-care unit in favor of selling its biopharmaceutical business for $21.4 billion to Danaher. He restructured a Flannery deal to sell GE’s locomotive business in a way that will raise additional cash of as much as $3.4 billion..GE also is getting a taste of Culp’s zeal for that Danaher regimen. Inside the company, he has preached the importance of hewing to measurable results. On a conference call with analysts in January, he said, “When we talk about execution, we talk about daily management.” He used the phrase “daily management” six times and the word “lean” 11 times in a recent presentation at an industry conference..David Joyce, who heads GE’s healthy aviation division, says this way of running things requires understanding not only what a business has accomplished but how. “I can sit down with Larry and show him 30 metrics and tell him relative to plan, the variance was positive in every one.” But that’s not enough. “Did you do it because there was a one-time event that allowed you to get across the finish line? Did you have a lot of variation and just happened to be on an upswing at the end of the quarter? How do you control it to make sure this performance repeats itself?”.A mountain of work remains. GE Power, in particular, shows how hard it will be for Culp to untangle the knots his predecessors tied. Angry shareholders have dragged it into court. Unfavorable contracts that past managers negotiated have helped Power become GE’s biggest cash drain. The unit’s marquee gas turbine suffered an embarrassing malfunction last year that necessitated widespread repairs. These would all be problems even if the gas-power market wasn’t suffering as it is. GE Power lost more than $800 million last year. At $27 billion in revenue, it’s one of GE’s biggest businesses, yet investors value it at zero—or worse. Culp has acknowledged that a turnaround will take years..If he can restore GE to its old self, he could go down as one of the greatest CEOs ever, surpassing even Welch at his cult-status peak. Culp also could collect a windfall of more than $200 million if GE’s stock goes way up and stays there. He says he’s eager to get back to what he did so well at his old job: buying good companies and making them great. For now, though, he’s stuck trying to make GE merely good again. —With Anders Melin.To contact the editor responsible for this story: Jim Aley at jaley@bloomberg.net, Bret Begun.©2019 Bloomberg L.P.

GE’s Larry Culp Faces Ultimate CEO Test in Trying to Save a Once-Great Company

When Culp arrived two days later, alone, it marked the first time a GE chief executive officer had visited the plant in 18 years.

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