Marshall Loeb, the former managing editor of Money and Fortune, conducts a regular series of conversations with today’s leading chief executives on the Stern campus.

Interviews with: Jeffrey Immelt • Hank McKinnell

ML: How is business?

JI: At GE, it feels like we're in the third year of the post-bubble economy. The consumer, because of lower interest rates, continues to spend money, to invest, and to refinance homes. But the 30 or 40 percent of the economy that’s driven by industrial investment is terrible. There’s too much capacity, too many airplanes, too many factories, too many computers in a number of industries around the world. I believe it’s going to take some time for that part of the economy to fire on all cylinders again. And until that happens, we’re not going to see the type of robust economic growth that we’d like to see in the U.S.

ML: When do you expect this business recovery and what specifically will lead the economy back up?

JI: If you saw what I got in college economics you wouldn’t be asking me to do an economic forecast! There are two businesses I look at within GE. One is the plastics business. Plastics are sold everywhere. It goes into cars, computers, it’s ubiquitous. In that business I see low, single digit volume growth versus last year. That’s a good sign. And I look at our industrial business – we sell industrial controls in the factories – and that will tell you when companies start investing.

ML: Tell us some of the broad thrusts of the changes you wish to make at GE.

JI: I’m trying to prepare GE to grow in a slow-growth, deflationary, tough price pressure world. Number one, only those businesses that have technology advantages are going to survive. So our R&D spending is going to be up 12 or 13 percent this year, even in a tough economy. You also have to find ways to have ongoing revenue streams. If you look at health care, we sell equipment into hospitals, and we service that equipment, so in good times and bad we have a revenue stream. Third, the last decade was the decade of the finance manager, the next decade is going to be about marketing and sales. Fourth, think globally. If the U.S. economy is going to grow only three percent, that’s not enough. So I’m trying to take the company to China. I want to go to Europe.

“If the U.S. economy is going to grow only three percent, that’s not enough. So I’m trying to take the company to China.”

ML: In light of the monumental scandals that have rocked corporate America, particularly in the last year, how has GE changed its corporate governance?

JI: Your job as a corporate leader is to make your company perform and do it with integrity each and every day. You’ve got to have a strong and independent board. Today, 11 of our 17 directors are independent. And the only directors we’re going to appoint in the future are going to be independent. We have also totally aligned our directors with shareholders, so they have to take their compensation in deferred stock units. We’ve also changed executive compensation. I’ve got to have six times my salary in GE stock, and I’ve got to hold it for as long as I’m chairman. The top senior leaders also have to have large holdings of GE stock. If we cash stock options we have to hold it as stock for a year before we can turn it into cash. Finally, we’re doing more disclosure: more investors meetings, longer annual reports. We have allowed investors to come inside the company and keep them there every day.

ML: Do you think General Electric stock is fairly valued?

JI: Well, Marshall, you’ve been doing this a long time, have you ever met a CEO that thought their stock was fairly valued? Last year, we had an incredible run up in the utility sector. Our power business went from making around $1 billion a year to a peak of almost $4 billion a year. And investors were skeptical in this environment as to what would replace those earnings. Second, for the first time we had to take a write-off because of our reinsurance business last year. When I look at those two things, I don’t blame investors for taking the value of the company down. I don’t like it. But if you were GE employees – 10 percent of the company is owned by GE employees – I’d say, you’re not victims. We’ve got to demonstrate industrial growth outside the power bubble and we’ve got to take some of the volatility out of financial services.

ML: What kinds of goods and services will offer us the greatest opportunity to sell to the Chinese? And what kinds of businesses are going to face the toughest competition from China?

JI: The way to play in China is infrastructure. There’s going to be a $300 billion investment in infrastructure in China between now and the Beijing Olympics in 2008. There are 50 airports being constructed right now. About 40 percent of all the new commercial jets sold in the next three years are going to China. On the sourcing side, my entire appliance business is uncompetitive today because of China. I can source an 18-cubic foot refrigerator in China with higher quality and lower costs than I can make it in Louisville, Kentucky. There’s no doubt that China is going to take manufacturing jobs from the U.S. But, if I want to sell aircraft engines today, I’ve got to go to China. American Airlines isn’t buying many planes these days. But China Southern is.

“The only rational basis to have a multi-business company is based on performance.”

ML: Huge conglomerates that have major stakes in many different kinds of businesses have fallen out of favor lately with investors. What has GE done to buck this trend?

JI: What GE is today is really a function of being a 125 year-old company and being successful. We’re in nine industrial businesses, four financial service businesses, but we’ve been in each of those businesses almost from the birth of the industry. I mean, we’ve been in the aircraft engines business for 100 years. We’ve been in the medical business for 85 years. We’ve been financing equipment since 1933. We’ve kind of grown as a multi-business company. But, we have one human resource system, one culture, one financial system. The reasons why you invest in GE today is because you think you’re going to get superior growth through the cycles, you think you’re going to get better cash flow, you think you’re going to get more competitiveness. The only rational basis to have a multi-business company is based on performance.

ML: How does it feel to succeed an icon like Jack Welch and what are the advantages and disadvantages?

JI: The advantage is that he is a good friend and a good advisor. If I have a tough question about the company he’s the guy I ask. I’m sure there are many times he disagrees with the things I do, but never in public. Inside our company change has always been viewed as a good thing. I got the job on September 7th of 2001. The world changed dramatically four days later. And the world has continued to change. Different leadership is going to be required. My job is to lead GE.

ML: A lot of your businesses are lead by people in their 30’s and 40’s. Do you find that people at that relatively young age have got certain characteristics that older people don’t?

JI: I think what we’ve done over time is give people at a very early age a number of different experiences so that they’re prepared to run big businesses by the time they are in their 30’s and 40’s. The advantage that we have in our company is we’ve got great jobs. By the time you’re 35 you get a chance to run a $1 billion dollar profit and loss, you get a chance to have assignments in China or Europe or elsewhere around the world.

ML: What characteristics does GE look for when hiring people?

JI: We like people who have an absolute thirst for learning and the capability to perform. We like people that know how to work in teams and know how to energize diverse groups of people. And we want people who know how to teach, know how to give back, and know how to make contributions.

“Don’t believe that you’re going to spend 20 years at McKinsey and get my job. If you want to be a CEO of a company, go join a company.”

ML: Any other advice you would give to someone who is graduating with an MBA?

JI: The best advice I can give you is know in your heart what you want to do and go in as direct a line as possible to get that done. Don’t believe that you’re going to spend 20 years at McKinsey and get my job. If you want to be a CEO of a company, go join a company. If you want to be an investment banker, go be an investment banker. But don’t sit here and think that you can go spend three years here and three years there. Get deep in something. I’m not here to say one path is better than the other, but pick one and be totally dedicated to it.

STUDENT QUESTIONS

Q: What do you think are the major difficulties that women face in entering the business world?

JI: Companies that don’t have an environment that is friendly to everybody aren’t going to get the best people. If you look at our top 600 people, about 22 percent are women. That’s probably double what it was as recently as five years ago. We have tried to give women more personal flexibility inside the company, to make life choices that they want to make and still not have to give up the career path they’re on. I believe that women can do any job in this company.

Q: Do individual investors have any business owning GE?

JI: Our stock is held about 50 percent by institutions, 10 percent by employees, and 40 percent by individual investors. We are the most broadly held stock in the world. In some ways, our size and diversity help buffer individual investors from some of the volatility that exists in the world. If you want to make a core investment, a five or ten-year investment, this is the best company in the world. It gives you more consistent returns, and I think that’s what individual investors like.

Q: How do you communicate with all your employees?

JI: I’m an avid IT user. One thing that I do three or four times each year is an all-employee webcast. It gives me a chance to get the message out in a pretty consistent way and they can see a face. I do a lot of one-on-one. It’s absolutely critical. When you’re running a company with 300,000 people, every one of them needs to think that you can enter their life any day. They need to believe that you could be on e-mail to them, that you could walk through the door, that they could see you in a meeting. You have to use every information tool at your disposal to make that happen.

Q: Is there a particular business that you’re not in today that you’d like to be in over the next decade?

JI: There are some advanced technologies I like. I like molecular imaging, I like hydrogen fuel cells, I like nano-technology and advanced propulsion technology. But the bubble-less market of our lifetime is health care. There’s going to be a massive amount more spent on health care in the future than there is right now.

Q: What is it about business that you find intriguing?

JI: I am one of those people that absolutely hit the jackpot because I learn every minute of every day. My argument for business is that if you like to learn and you like people, this is the field that you want to be in. And the fact is, business is a great force for change. I’m an undying globalist. I really believe that as the economies come together you get more understanding.

ML: What do you see when you look out at the US economy and the global economy?

HM: At this point in the economic cycle, coming out of a recession, the economy has the capacity to grow at something like three to five percent without triggering inflation. It looks like we may be growing at one or two percent. So, I think there needs to be additional stimulus short term. Ending the double taxation of dividends is just the beginning. We need a larger agenda to really get into some of the complexity of the tax code and make it more growth friendly.

ML: Why are identical pharmaceuticals so much less expensive in Canada than they are in the United States?

HM: First, in Canada, pharmaceutical companies don’t set prices, the government does. Second, while there are no research-based pharmaceutical companies in Canada there are generic companies. So, it’s no coincidence that Canada sets very low prices for patented products while setting extraordinarily high prices for generics once the patent expires. Generic prices in Canada are 60 to 70 percent higher than those in the United States.

ML: Just about every national political leader has come out with a program to provide pharmaceuticals inexpensively to older Americans. What’s your program?

HM: I don’t have a program. I can only urge that Americans work to give all citizens greater access to better healthcare. The greatest step we can take right now is to include a good quality prescription drug benefit as part of Medicare. As we, as a society, debate the scope and shape of such a plan, we should remember that America’s pharmaceutical industry is the most innovative in the world, and take steps to make certain that level of innovation can be sustained. Clearly, though, we as a society can do more to make certain that people in need can get the medicine they need.

ML: In the last 50 years, life expectancy in the U.S. has gone up about 20 years. That’s a dramatic leap forward.

HM: Everybody in this audience has a really good chance of living into their eighties. That’s the good news. The bad news is, 50 percent of those in their eighties are suffering from Alzheimer’s disease. As a society, we have a choice. Either we spend tens of billions of dollars to construct long-term care facilities, and find the people to take the low-wage jobs to work in these facilities, or we continue to provide the incentives, through free market pricing, and good intellectual property protection, so that my industry has at least a chance of discovering drugs that will improve the quality of life of people suffering from Alzheimer’s. And then you have to survive the approximately $800 million and ten to twelve years it takes a drug to go from discovery through to the patient.

ML: Pfizer spends more on research and development than any other pharmaceutical company in the world. What are your primary targets now, and what breakthroughs are you hoping for?

HM: We’re spending one hundred million dollars a week on research and development. That is the investment in the future. Whenever we introduce a new product, ten years later the patent is gone, and the income from that product goes to zero. If we don’t re-invent ourselves every 10 years or so, we go out of business. There is a lot of research going on, both within the industry and within Pfizer, in areas like oncology, central nervous system disorders and cardiovascular diseases. The area that concerns me the most is the area of anti-infectives. We thought we had cured infectious disease back in the 1940s with penicillin. Turns out these little bacteria are a lot smarter than any of us. As we see with the SARS outbreak in Asia, these organisms are able to mutate away from the currently available products. And, in the last decade, four or five major pharmaceutical companies have dropped out of anti-infective research, in part because they were concerned that there weren’t going to be the incentives for that research.

“As a nation, we spend almost as much on prescription medicines as we do on automobile accident repair. But, of course, we’re all insured for automobile accident repair.”

ML: Tell us about Pfizer’s contributions to Makerere University in Uganda that will focus on AIDS and HIV care and training.

HM: About five years ago, the accepted thinking was that the reason those with HIV infection in Africa weren’t getting access to the drugs they needed was the pharmaceutical companies and their patents and their high prices. It was nonsense, because there are no patents in sub-Saharan Africa. The problem was lack of representative government, corruption, lack of medical infrastructure. People were dying because they didn’t have the knowledge to protect themselves. This is the medical crisis of our generation. I’ve learned through my career, that where local government and UN and private companies can’t solve problems alone, together they usually can. So, we started with trachoma, the world’s leading cause of preventable blindness. We happen to have a drug, a very convenient once a day treatment, which can eliminate this infection. We’re partnering with the World Health Organization (WHO) and governments in Africa. In some regions we’ve taken infection rates down by 50, even 75 percent. In a year or so, we can actually eliminate blinding trachoma.

My thought was the same approach would work with HIV/AIDS. We started with Diflucan, an anti-fungal for serious systemic fungal infections in AIDS patients. We made it available free of charge, provided training to health care professionals, and provided secure distribution. So far, we have distributed over three million doses, and trained over 11,000 health care professionals, and we’re now rolling this program out from South Africa to more than 20 countries in sub-Saharan Africa, and 50 low income countries around the world. The major issue we’re trying to address at Makerere University, the medical school in Uganda, is medical infrastructure. We’re building a clinic. Our vision is that we will train 100 specialists each year, who in turn will return to their districts in Uganda, and countries elsewhere in sub-Saharan Africa, and train thousands, and they in turn will care for and treat millions every year.

ML: You acquired Warner Lambert in 2000, and now you’ve acquired Pharmacia. Do you see other large mergers ahead for Pfizer?

HM: I don’t see any mergers ahead for Pfizer. If you track our strategy over the past 15 years or so, in the early 1990s we were very busy launching a number of very important products that came out of our own research. The Warner Lambert partnership was based on Lipitor, now the world’s largest selling drug. The discussions with Pharmacia were sparked by a very important drug, Celebrex, for the treatment of rheumatoid arthritis and osteoarthritis. We knew that we could do things together that we couldn’t do separately.

ML: How does the Pharmacia merger strengthen Pfizer?

HM: The combination of Pharmacia and Pfizer creates a stronger company in a couple of ways. Pfizer has always been a very strong general practitioner, or family doctor company. Pharmacia, historically, has been much more targeted. They brought to us businesses and relationships in oncology, endocrinology, and ophthalmology. So, in a very real sense, the combination makes Pharmacia a better general practitioner company, and they do have a potentially significant cardiovascular drug in the late stage regulatory process. That clearly will have more value in Pfizer’s hands than it would have in Pharmacia’s. And, similarly, the work that we’re doing in ophthalmology, and the major oncology research that we have under way, has more value in the Pharmacia oncology business than it would if we had to create one of those businesses.

ML: Could you go down the list of some of the major medical problems and tell us in what areas we’re making progress and in what areas we’re frustrated?

HM: Well, the two big killers, the things that all of us should be worried about are cancer and heart disease. There have been remarkable improvements in recovery rates from cancer and from heart disease. My view is that progress will continue. It will be sporadic. There will be big new products, and there will be smaller products. Also, the whole area of CNS, central nervous system disorders, from depression to schizophrenia to anxiety, is promising.

ML: What is your advice to students graduating this year with an MBA?

“We’ve got 20 products that we think will be in registration over the next five years. That’s a record in this industry and nobody else can even come close to it.”

HM: I think of careers in terms of three levels of leadership. When you graduate, you will join an organization, and probably be evaluated based on your own activity. I call this the first phase of leadership, and that’s individual responsibility and individual contribution. Very quickly you will be promoted to a first-line supervisory position. Those of you who will succeed recognize that you’re going to be evaluated based on achieving results through others. Now you get into, not a management issue, but a leadership issue. The one thing you need to start thinking about, maybe five years into your career, is leadership style. In the mid-1990’s, I was given responsibility for both our U.S. and international business. We’d always run them as separate, competing organizations. I decided to distract people from their internal warfare and set them a goal that they had to work on together. The goal was to be the number one pharmaceutical company in 2001. We did it in 1999, and again in 2000. The hardest thing, as a manager, was to convince people that it was achievable. I trusted the organization to get us there. And, we got there two years early.

Student questions

Q: What’s your strategy for developing your brand?

HM: Well, I don’t think of direct to consumer advertising in terms of branding. I think of direct to consumer advertising in terms of consumer health information. There’s a more informed discussion between the doctor and patient when the patient comes in reasonably educated about what an allergy is, and what drugs might be available to treat it. What it really does is grows the market and brings people into the doctor’s office.

Q: After the merger with Pharmacia, your projected annual revenues will be around $50 billion, making you 50 percent larger than your nearest competitor. What impact do you think will this have on the competitive landscape?

HM: I don’t really believe that bigger is better. You grow by investing in research and innovating, and selling the hell out of your inline products, and licensing where you can. So, that problem is really not any different at $50 billion company than it is at a $5 billion. There are some places where scale does matter. Purchasing is a good example. We’ll be the biggest purchaser of pharmaceutical, medical research services and products, and manufacturing raw materials of any other company in the industry. So, these suppliers will return our phone calls, and we probably will get the best prices. That’s probably worth about a billion dollars a year to us. Where you worry about scale is in research. We’re working really hard to make sure our researchers have scientific flexibility, that they don’t feel constrained by the bureaucracy. So far, the results are good. We’ve got 20 products that we think will be in registration over the next five years. That’s a record in this industry and nobody else can even come close to it.

Q: To what extent do you think that a Medicare prescription drug benefit is a slippery slope to the government setting prescription prices in this country?

“There have been remarkable improvements in recovery rates from cancer and from heart disease. My view is that progress will continue.”

HM: If the government administers the benefit, it is very much a risk. We’re working hard to achieve a government benefit administered through the private sector, so there is competition and patients have choice.

Q: Many mergers do not work because of a failure to integrate the corporate cultures. How are you going to integrate the management of Pharmacia?

HM: Pfizer is, at its core, an exceptional operationally effective company. And, we approached the integration of Warner Lambert the same way we approach everything else, with a very detailed planning, rapid implementation approach. It was very successful, and we found that the cultures weren’t that different. One of the lessons we learned from that merger was that, even though we did the integration in record time, if we ever do it again, we should do it even faster. We’ve taken the play book from the very successful Warner Lambert integration, applied it with some modification to the Pharmacia organization. Everybody will know their status, position, and boss on the first day.