GE's new strategy: Less is more

A smaller, simpler and more efficient General Electric. That is the plan for the company's future under its new leader, John Flannery.

Since taking over the company in August, Flannery has promised big changes, shaken up his leadership team and grounded corporate planes. On Friday, he offered new details about his broader strategy, including selling off nearly $20 billion of businesses in the next year or two, so that the company can focus on more promising businesses.

The new moves were announced with the company's third-quarter results. And given the depth of its struggles highlighted in that report, GE is certainly in need of an overhaul.

GE's profit fell sharply, and the company scaled back its earnings outlook for the year. In a conference call, Flannery told analysts not only that this year would be difficult but also that 2018 would be "a reset year."

Flannery said he was "deeply disappointed" by the performance. And he promised investors, "Things will not stay the same at GE."

In his first few months as chief executive, Flannery - a 30-year GE veteran, who is a finance expert and most recently ran the health care business - has made some moves that analysts regard as telling if largely symbolic. He has grounded the corporate jets, slashed the company car program and slowed the pace of spending on GE's new corporate headquarters in Boston.

In addition, three top executives close to his predecessor, Jeffrey R. Immelt, have announced their departures. And Trian Fund Management, an activist investor, which had pressured Immelt's team to improve financial performance, has been given a seat on the GE board.

"He's sending a clear signal to everyone in the company: There's a new sheriff in town," said Deane Dray, an analyst at RBC Capital Markets.

The details released Friday included news that the company's cost-cutting target for next year would be doubled, to reduce expenses by $2 billion, including at the top. GE, the nation's largest industrial company, with a market value above $200 billion, will have a "much smaller and focused" corporate staff, Flannery said.

GE also announced it would sell off $20 billion worth of businesses over the next year or two. Flannery did not say what those operations will be, but further information may come next month when Flannery addresses analysts and investors at an event billed as an in-depth presentation of his strategy.

The winnowing, he said, is intended to focus GE's capital investment and management time on the most promising businesses. While he said there were "no sacred cows," Flannery, in an interview, singled out the company's jet engines and health care - imaging equipment and biosciences - as businesses with "real opportunity for organic investment."

In the conference call, Flannery described GE as a company with strong industrial businesses that mainly needed to be managed more efficiently.

"This is largely a self-help exercise," he said.

But two of its businesses - power generation and oil and gas - are dragging down the financial performance of the overall corporation.

In oil and gas, the challenge has been evident for years. GE decided to build up its oil and gas business, for both onshore and offshore exploration and production, just as oil prices plummeted. Immelt and his team stayed with that strategy, reasoning that it was a sound long-term move by creating a more valuable business when energy markets turned.

In July, GE completed the merger of its oil and gas business with Baker Hughes into a separate company, in which GE holds a 62.5 percent stake. The revenue from that merged business is why GE's revenue grew 14 percent, to $33.5 billion, in the third quarter.

But GE reported profit fell 9 percent to $1.84 billion, or 21 cents per share.