Jeff Immelt’s stepping down as head of GE after 16 years was the odds-on favorite to be the big business story of the week until of course the Amazon/Whole Foods acquisition sucked all the oxygen out of the building.

Any lessons in here for Law Land? Bear with me, because I think there are a few.

GE and Jack Welch’s Poisonous Seed

The redoubtable James Stewart of The New York Times (Pulitzer Prize winner, author of 11 books including a couple of classics on BigLaw, Harvard Law grad and former Cravath associate), wrote in his weekly “Common Sense” column about, ahem, the re-examination of the Jack Welch legacy, lauded by Fortune in 1999 as nothing short of the best manager of the 20th Century.

Actually it turns out that Welch was the quintessential micro-manager of quarterly earnings during his GE tenure, miraculously beating the Street’s “whisper number” by one or two pennies quarter after quarter, year in and year out. How did he do this? Largely by expanding and contracting the flexible earnings accordion provided by GE Capital, always good for throwing off or taking in the odd few pennies or nickel per share. He could do this because GE in the Welch years was one of the largest and certainly the highest-profile conglomerate in the US economy. That model is now officially interred.

But hardly anyone considers Mr. Welch, now 81, a management role model anymore, and the conglomerate model he championed at G.E. — that with strict discipline, you could successfully manage any business as long as your market share was first or second — has been thoroughly discredited.

Immelt gets credit for dismantling much of the GE empire, shedding NBC Universal and GE Capital itself, but blame for not doing it fast enough. Indeed, when the 2008 financial crisis hit, it turned out that GE Capital had no comparative advantage in financial services; if anything, their risk controls were even worse than the lamentable industry standards.

Still, no one seems to dispute that streamlining to more of a core suite of businesses (jet engines, power turbines, locomotives, medical/healthcare) was the right thing to do. “Specialization is something that provides real value,” according to Bruce Greenwald, professor of finance at Columbia. Indeed, the conglomerate model is so thoroughly discredited that there’s a well-recognized “conglomerate discount” applied by the market.

Lessons for Law Land?

  • Without straining the analogy too hard about the unfavorable view of conglomerates, firms who do a little bit of a number of unrelated things, we can certainly stress the positive perspective on specialization, which lets firms be more “nimble and adaptable.”
  • Second, did you note there can be hell to pay down the road if earnings are manipulated year to year? You may be able to run from the discipline of cash-basis accounting, but you can’t ultimately hide. Or, as my high school physics teacher used to intone about behaviors that had certain inherent limits, “You cahn’t play dat game fuh-evah.”

Amazon and Whole Foods

Far more ink has been spilled and pixels illuminated on this deal than on almost any business story I can recently remember, and Adam Smith, Esq. has never been and never will be about covering news qua news, so don’t expect a first draft of the historic importance of this deal here. I will note only one extraordinary anomaly from a former Wall Streeter’s perspective: Immediately upon the announcement, the stock of both companies rose. This isn’t supposed to happen, and never does; the rule is that the acquiree’s spikes up and the acquirer’s slides down. Instead, Amazon’s stock rose 2.5%, almost enough to cover the entire purchase price.

More important, but permit me two observations, one from the perspective of each company, that seem particularly germane to Law Land:

  • Whole Foods had reached the point in its corporate and strategic business trajectory where its growth phase was over and thanks to both its own approximate saturation of the tony zip codes where its customers lived and its shining a spotlight on the willingness of consumers to pay a premium for organic, and fresh, and locally sourced, for the benefit of the rest of the grocery world (organic produce at Walmart! At Walmart??), it had to shift from growth mode to operational excellence mode.”Operational excellence” simply means focusing on efficiency, faster inventory churn, (in groceries) lower rates of shrinkage and spoilage, just-in-time deliveries, and so forth. As an analyst from Oliver Wyman, the most respected consultancy in the retail and grocery sector noted, “retail is a fabulous industry as long as you’re growing; once that stops and you have to turn to operational excellence, it’s a different world.”


  • From Amazon’s perspective, all reports are that the deal came together quickly and perhaps to some extent unexpectedly or surprisingly. This raises the obvious question of what Bezos and Amazon actually plan to do with Whole Foods. To be sure, some of the (real, honest-to-God) “synergies” of the combination are self-evident, perhaps the most obvious being that at a stroke Amazon acquires 460+ parcels of real estate with buildings purpose-built to receive, store, stock, and distribute fresh food, all in some of the most attractive neighborhoods in the country for Amazon Prime members’ demographics.Is it conceivable that three years from now the typical Whole Foods location would be 50% or 20% or 10% its current size in terms of shopper-facing square footage and the rest would be converted into a hyper-local Amazon “distribution center?” It wouldn’t surprise me.

    But let’s spend more time on the speed with which the deal came together. What if Amazon and Bezos don’t really know what they’re going to do with Whole Foods?

This seems to me the leading hypothesis, because it’s entirely consonant with Bezos’ approach to everything so far in the 20+ year history of Amazon. Bezos may have spent more, and lost more, on business experiments than any CEO dead or alive. A few quotes:

  • Key to [his] strategy is his approach to failure. While other companies dread making colossal mistakes, Mr. Bezos seems just not to care. Losing millions of dollars for some reason doesn’t sting. Only success counts. That breeds a fiercely experimental culture that is disrupting entertainment, technology and, especially, retail.

    Mr. Bezos is one of the few chief executives who joke about how much money they’ve lost.

    “I’ve made billions of dollars of failures,” Mr. Bezos said at a 2014 conference, adding that it would be like “a root canal with no anesthesia” if he listed them. […] It is an approach baked into the company since the beginning — and one that is difficult, if not impossible, for competitors to emulate.—Whole Foods deal shows Amazon’s prodigious appetite for risk, The New York Times

  • Mr. Bezos and his team will most likely spend years meticulously analyzing and tinkering with how Whole Foods works. They will begin lots of experiments. When something works, they will do more of that, then more, and then even more. […]“I think they look at this as an opportunity to learn,” said Venky Harinarayan, an early Amazon executive who later worked at Walmart, and who also ran a venture capital firm in which Mr. Bezos was a big investor. “It’s an experiment for everyone — I don’t know if anyone has figured out yet how to use a store to service online customers at massive scale. That’s the experimental piece.”

    In this light, I suspect that the Whole Foods deal starts less with a strategic end-goal and more with this insight: Shopping for food is broken.

    In Whole Foods, Bezos Gets a Sustainable Sourced Guinea Pig, The New York Times

Do I need to underscore the twin points?

  1. Shifting from a growth environment to an operational excellence approach to business requires navigating rocky and windswept channels; most firms who try it don’t succeed the first time and many never do.
  2. Trying lots of different things, seeing what works, killing what doesn’t and doing much much more of what does, is the most powerful way to ensure your firm stays truly responsive to what the market is telling you, and not what you hope/wish/prefer/are deluding yourself that the market “should”or “must” or “ought to be” telling you.

Whole Foods is not a trivially endowed company, nor one without a tremendous track record of having disrupted an industry. It needed a next chapter.

Meanwhile, Amazon is the greatest single business-model petri dish the world has ever seen. And a fearsome competitor. It’s no accident that not only did its stock go up substantially upon the announcement of the deal, but the stocks of Kroger, Costco, and Walmart all dropped substantially. Wall Street wasn’t betting against Amazon, and maybe you shouldn’t bet against a little R&D at your firm.


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