Engineering vs. Financial Engineering

In 1981, Peter Drucker famously asked Jack Welch, who had just been named General Electric’s CEO, a couple of simple questions: “If you weren’t already in this business, would you enter it today? And, if the answer is no, what are you going to do about it?” This led Welch to a key strategy: If any GE business wasn’t No. 1 or No. 2 in its given market, Welch set out to fix it, sell it or close it.

But in some ways, Drucker probably would have given even higher marks to the strategy being pursued by Welch’s successor, Jeffrey Immelt. As detailed in Sunday’s New York Times, Immelt is bent on relying “more on making physical products and less on financial engineering—a path that, he insists, is also necessary for the American economy as a whole.”

[EXPAND More]Under Welch, the industrial giant built up its GE Capital division, which became the nation’s largest nonbank financial company. Immelt himself, the article notes, also came to overly depend on GE Capital, which eventually ran into big trouble during the mortgage meltdown, dragging its parent company down in the process. Immelt now “admits that GE was seduced by GE Capital’s financial promise—the lure of rapid-fire money-making unencumbered by the long-range planning, costs and headaches that go into producing heavy-duty material goods,” the article says.

“Rapid-fire money-making” is, of course, about as un-Drucker-like as you can get. As he once put it: “Securities analysts believe that companies make money. Companies make shoes.”

Drucker was also wary of financial products that move money around but don’t create any real value. Drucker called the worldwide flow of capital and credit the “symbol economy,” as distinct from “the real economy.” “Americans,” he warned, “cannot live in a symbol economy where businessmen play only with numbers.”

The question is: Do you think that in the wake of the financial crisis more and more executives are, like Immelt, starting to understand that we need to rely less on financial engineering? Or is it business as usual out there for most?[/EXPAND]


A GE engine