GE: Changing the Vaunted Leadership Development Model

GE appears to be making a significant shift in its leadership development philosophy.  According to the Wall Street Journal,

The conglomerate that once groomed jack-of-all-trades generalists is now betting on deep industry experts instead. The shift is a change in philosophy at a corporation that for decades had made a rigorously applied but generic management tool kit central to its identity. Like all companies, GE wants some of both traits in its leaders, but the balance has tipped toward expertise. For years, GE wanted its top managers to be experts in managing. Now, it's increasingly looking for them to be deep experts in their fields. Rather than purposely relocate its senior leaders every few years to expose them to more of the company, GE now is leaving them in their business units longer than it used to, in hopes their deeper understanding of products and customers will help them win sales.

Susan Peters, head of leadership development at GE, explains the need for the change: "The world is so complex. We need people who are pretty deep." Interestingly, this shift in philosophy has occurred as the firm continues to face critiques of its corporate strategy. As this article on Forbes.com suggests, GE may be trading at a conglomerate discount because of its complex unrelated diversification strategy.   For years, GE remained an exception to the rule when it came to unrelated diversification.  Its whole was worth more than the sum of the parts, in contrast to many conglomerates that have since broken up.

When a firm pursues a conglomerate strategy, it strives to achieve governance economies.  Governance economies emerge when a firm shares management systems, processes, and talent across a variety of businesses.  Most related diversified firms, such as Disney, strive for scope economies - i.e. synergies through the sharing of intellectual property, manufacturing plants, distribution channels, and the like.   A conglomerate often does not have these types of synergies, so governance economies become critical to justifying the fact that so many seemingly unrelated businesses are being kept together.   However, if GE isn't sharing management talent across the businesses as much any longer, then it seems as though governance economies will shrink.  Of course, the units will still share many excellent systems and processes.  Those processes can be a key source of governance economies.  Will that be enough to convince investors that the parts are worth more together than apart?  That will be the key question moving forward.