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GE's earnings under Jack Welch increased so much that he became the very model of a a modern corporate Major-General. But over time, as an insightful BusinessWeek article discusses, " less and less of that income came from technological innovations or manufacturing prowess or even the productivity gains Welch had wrung out early in his tenure. Instead it came from GE’s financial-services arm." The historic bull market of Welch's era didn't care that the earnings were "low quality", rewarding the company with a high stock price. It wasn't until after Welch retired in 2001 that GE experienced the long-term consequences of transitioning to "low quality" financial products and the deep cuts Welch had made to research and development. The value of an organization is based on two elements, elements that compete for resources: - Operational Excellence: The ability to generate competitive earnings from selling existing products to existing customers and markets.
- Strategic Excellence: The ability to make investments that will sustain future growth and profitability - future products, customers, and markets.
As an extreme example, one can always maximize current profitability by cutting all expenses that don't contribute to earnings this year. Fire all the sales reps developing new customers and all engineers developing new and improved processes and products. The future may be bleak but you will have a hell of a year. Alternately, you can put all your resources into developing new, strategic customers, products, and processes and go bankrupt. You create the greatest value - short, medium, and long-term when your strategic plan balances your focus and investments on sustaining both operational and strategic excellence
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