Cost Accounting Trumps Strategy and Leadership


Jeff Immelt is most likely an honest guy. He is probably sincerely stating his beliefs, his vision for GE and his perception of basic economics when he said just 8 months ago, “supply chain and materials” are the important cost elements driving a plan to bring GE manufacturing back to the United States. He is correct when he says that a 1% higher yield in materials offsets and labor differences between countries, and there is no questioning the fact that oil going from $20 a barrel in the old days to $100-120 a barrel has a big impact on the total cost of global manufacturing.

I do think there is a competitive structure today and it works for the United States; and it’s based on proximity to market, high skilled workforce, around materials and the ability to innovate quickly”.

So if Immelt is the boss and these are the big economic drivers, how can we reconcile this statement with …

Leveraging the available talent pool and lower manufacturing costs, American conglomerate General Electric Company (GE) is planning to make India a manufacturing hub, “but for the world,” said Banmali Agrawala, president and chief executive officer (GE South Asia) … GE is setting up a manufacturing facility at Chakan near Pune with an investment of $200 million. The plant will locally manufacture a host of different aviation and turbo machinery components and wind turbines. Agrawala said the company expected the facility to be up and ready by mid 2014.”

Is Agrawala just an insubordinate guy thumbing his nose at his boss? Is Immelt just a shameless liar? Have the basic tenets of Immelt’s economics undergone a radical change in the last year?

The answer is an obvious ‘no’ to all of the above.

The explanation is good, old-fashioned, old school cost accounting. Immelt is stating principles, theory and general truths, but actual decisions are made based on ‘the true, accurate, reality’ of accounting. And that reality only understands labor cost. Accounting doesn’t understand proximity to market, the relative skill levels of people and the value of quick innovation, so when push comes to shove, the plant is built where the labor is cheap.

You see that over and over and over and over again. The big boss learns about lean, gets fired up at the idea of a fully engaged, enthusiastic work force relentlessly driving waste from the organization; and then the air slowly, but inevitably, goes out as one decision after another shoves the business away from that vision. Inventories are not permitted to go down when it is at the expense of overhead absorption’s impact on near terms profits; people can’t engage in improvement efforts if it detracts from efficiency metrics.

Most of these decisions never even make the big boss’ radar. They just drive the business counter to his vision before it even gets out of the starting gate. Jeff Immelt probably meant every word he said when he talked to the guy from The Atlantic back in February. The fact is, however, that even as he spoke hundreds, probably thousands, of detailed decisions were being made at GE assuring GE would stay on the pursuit of cheap labor trajectory it has been on for almost forty years.

Twenty years ago, Immelt’s predecessor said that GE would focus on India as its hub. That clearly hasn’t changed for the simple reason that Jeff Immelt doesn’t call the shots at GE. Its cost accountants do.

And that’s true everywhere. The actual decisions made every day determine the course of the business, not the grand statements and visions of the leaders. If the boss wants to take the company down a different path, then people have to start making different decisions. The boss better clear his vision with the accountants. Unless they agree with his big idea, it isn’t going to happen.

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