Harvard Business Publishing

Ken Favaro is cochairman of consultancy Marakon Associates, a Trinsum Group company, and the coauthor of the Harvard Business Review article "Managing and the Right Tension" as well as the book The Three Tensions: Winning the Struggle to Perform Without Compromise.

There are rumblings from shareholders to break up General Electric. Does such a move make any strategic sense?

The question that’s really being asked here is whether GE’s businesses are better off together or under alternative ownership. To address this question, Chairman and CEO Jeffrey Immelt needs to determine how GE adds value to the performance of its individual businesses. Is it from the corporate center’s oversight, leadership, and direction? Is it from revenue or productivity enhancements from the other businesses across GE? To justify GE’s unified state, the answer has to be yes to both of these questions.

But it’s very difficult for a business unit (be it within GE or another larger company) to reap value from corporate headquarters as well as from its sister businesses. This is because the things companies do to achieve success in one of these relationships interferes with their ability to achieve the other. For example, many companies will centralize common activities (HR, logistics, legal) in order to gain scale economy; but this can often have the unintended side effect of constraining the business units’ ability to perform such activities in the most competitive way for their particular markets, thus eroding their performance over time.

In the other direction, companies often tend to grant autonomy to their businesses when they want to sharpen their accountability, thus unwittingly encouraging the “silo” behavior than can undermine the sharing and openness that is so necessary to achieving benefits from being part of a bigger whole.

This difficulty of adding value in both directions -- from the corporate HQ and across the businesses -- at the same time is why most companies (55%) are worth less than the sum of their parts.

Until Immelt cracks this challenge, his stock price will continue to lag and there will continue to be challenges to whether GE belongs together. I would not give up hope that GE can prove itself once again to investors that the company can add enough value to the performance of its businesses to justify keeping it together. However, I would guess that some businesses no longer belong in the GE portfolio and I would at least consider the alternative of creating two or three GEs rather than staying with the one GE.

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