What Real Estate Investors Can Learn From the 9th Largest Corporation in the World — General Electric
General Electric is one of the largest, oldest, and most identifiable companies in American history. It was founded all the way back in 1892 and is today the ninth largest corporation in the world. All combined, it had over $117 billion in revenue in 2015 and today has a market cap of $266.7 billion and employs over 300,000 people.
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But not too long ago, GE could best be described as a lumbering amalgamation of a bunch of mediocre companies. At least, that’s how Jack Welch found it when he first became CEO.
How GE Learned to Reach Its Potential
No, GE wasn’t a bad company, but it was falling far short of its potential. Here’s what Welch and company did to right the ship according to John Maxwell:
“When Welch assumed leadership of GE in 1981, it was a good company. It had a ninety-year history, the company stock traded at $4 per share, and the company was worth about $12 billion, eleventh best on the stock market. It was a huge, diverse company that included 350 strategic businesses. But Welch believed the company could become better…
“Within a few months of taking over the company, he began what he called the hardware revolution. It changed the entire profile and focus of the company. Welch said,
“‘To the hundreds of businesses and product lines that made up the company we applied a single criterion: can they be number 1 or number 2 at whatever they do in the world marketplace? Of the 348 businesses or product lines that could not, we closed some and divested others. Their sale brought in almost $10 billion. We invested $18 billion in the ones that remained and further strengthened them with $17 billion worth of acquisitions.
“‘What remained [in 1989]aside from a few relatively small supporting operations, are 14 world-class businesses… each one either first or second in the world market in which it participates.'” (The 21 Irrefutable Laws of Leadership, pg. 181-182)
And what were the results?
“Welch’s strong leadership and ability to focus have paid incredible dividends. Since he took over, GE’s stock has experienced a 2 to 1 split four times. And it trades at $80 per share as I write this . The company is currently ranked as the nation’s most admired company according to Fortune, and it recently became the most valuable company in the world [as of that time].” (182)
In the late 1960’s, a new way of looking at large businesses emerged. Before then, according to George Stalk, Jr. and Thomas M. Hout, “…companies were generally organized into profit centers that could be managed for the most part as independent businesses.” (Competing Against Time, pg. 9) But this lead to poor capital and time allocation. For example:
“…in a profit-center corporate structure, a high-growth operation will generally receive capital commensurate with the returns it is generating. This can often mean that such a company does not get all the capital it could use because a high-growth operation must invest resources before demand, which increases its expenses and reduces profitability.” (10-11)
What GE had was a bunch of loosely connected profit centers, but many of them were suboptimal and merely distracted from the best, high growth, high profit companies under GE’s umbrella. So Jack Welch decided to focus on those and discard the less profitable companies.
What Real Estate Investors Can Learn from Jack Welch and GE
I have written about the “shiny object syndrome” before, and it is worth talking about again. There is a great temptation to do something different, especially after you have started having some success in real estate (or whatever field we’re talking about). If nothing else, mere boredom can lead us to this.
But you don’t want to be a jack of all trades and a master of none.
My father once stepped out of real estate into trucking and another time into stock market investing. But these yielded little or nothing. It was focusing more on real estate investment, his primary job, that made him the most money.
Some good friends of mine buy large apartments in Kansas City and only large apartments. Their company has grown from being just a few houses in 2010 to over 3,000 apartment units now.
On the other hand, I have seen investors get lost in weird side businesses from car washes to affiliate marketing that take up a lot of time but bring almost nothing in return.
If those things are your core business, go for them. But if real estate investment is your core business, then that needs to be your core or even better yet, your only area of focus.
Jack Welch cut out all the fat and focused GE’s operations on the most profitable companies in its portfolio. He sold other companies so he could invest more in the winners. Everything in life you do has an opportunity cost. If you are doing A you can not be doing B at the same time. So everything you do in a way has a cost to it.
The Difference Between “Good” & “Great” is Massive
Furthermore, there is a steep learning curve with most ventures. The more you do and study real estate, the better you will become. Early on, you will probably make a lot of mistakes. For example, Josh and Brandon like to say that it is very uncommon for a new investor not to lose money on their first deal.
Well, the same is true for just about everything else. So how many things are you going to try to climb that steep learning curve to become good at? How many losses are you going to take?
And it’s worse than that. The difference between good and great is massive. According to Pareto’s Principle, the top 20 percent of any given field make 80 percent of the returns. You don’t get into the top 20 percent of anything by being a jack of all trades.
So focus on real estate investment and not all the shiny objects that float around. And focus on a particular type of real estate investment, too. You are not being focused if you buy A and D apartments, commercial buildings, industrial buildings, houses (both big and small) in multiple different states through tax liens, foreclosure auctions, note investing, the MLS, mailings, and the like.
Sure, maybe you can do some of that if you have a large operation and different people who specialize and focus on different things. But overall, you need to stay focused on your core real estate investing strategy and ignore all the rest of the noise.
What companies have given you ideas for your real estate business? What can you take from GE’s story of success?
Leave your comments below!