1.) How difficult a challenge did Welch face in 1981? How effectively did he take charge?
When Jack Welch accepted the position of CEO of GE in 1981 he faced a number of looming challenges which firstly included taking the reins of the company following a complete reorganization by a strong, successful predecessor. The second major challenge he faced was the new globalized marketplace in which GE had to compete. Welch had to act fast before GE's territory was taken over by global growth from foreign companies. The third challenge was the beginning symptoms of a contracting economy which, by 1982, would become a deep recession.
Jack Welch approached the first challenge of taking over from a successful predecessor by deciding that keeping the status quo would not guarantee GE future success. He felt that GE was to be a standard; they needed to be “better than the best”. This fierce drive to restructure the company during the next 5 years, immediately after the organization had barely finished their prior restructuring, also helped solve his other immediate challenge: the economy. He effectively implemented a new strategy, “Fix, Sell, Close.” If a business could be fixed so it could be #1 or #2 in its competing category then it was kept, otherwise the business was sold or closed. In order to prepare for the incoming global competition, Welch decided to part ways with 12 of his 14 previously hired business heads. The new business heads had to fit a certain billing: “strong commitment to the new management values, a willingness to break with the old GE culture, and most of all, an ability to take charge and bring about change."
The difference may not have shown in GE’s revenues, with only a 2 billion dollar increase between 1981 and 1985. However, his effectiveness was demonstrated by their growth in operating profits. This represented an increase from 1.6 billion dollars to 2.4 billion dollars in that same period, 67% growth. His ability to take charge and break away from the old culture would allow them to tackle the new challenges of the global marketplace. 2.) What is Welch’s objective in the series of initiatives he launched in the late 1980s and 1990s? What is he trying to achieve in the round of changes he put in motion in that period? Is there a logic or rationale supporting the change process?
“Neutron Jack” Welch had aspirations of transforming GE to be the most diverse, profitable, and innovative company in the world. He identified several essential objectives that he considered crucial to success. The primary objective was to change the fundamental culture of GE to one of openness, candor, and facing reality, where everyone had a voice and their ideas and proposals got an immediate response. His new corporate vision was characterized by speed, simplicity, and self-confidence. He also knew that he would have to cultivate leaders that were aligned with his new vision of GE and create an environment where people could be their best. He understood that people were his greatest resource and competitive advantage. To execute this transformation he launched several initiatives to free the organization from its burdensome bureaucracy and restructured the organization completely. By creating this “boundaryless” environment, he encouraged idea creation and sharing across business units, management levels, and geographic locations to further leverage his human capital. “You measure your people and you take action on those that don't measure up”. There was a strong logic and rationale supporting Welch’s change process. His objectives were not always clear, but once they were in focus he pursued them with a relentless passion. All new initiatives had well developed programs with detailed plans for their implementation, and comprehensive metrics to measure success. For example, leaders were evaluated on a 360 degree feedback process by their managers, peers, and subordinates to identify those managers that “smiled up and kicked down”. Leaders that did not share the new company values regardless of whether they delivered on commitments or not, were moved out. As long as you shared the company values, you would receive additional training and were given a second chance to make your numbers. This program eventually evolved into what Welch expressed as “A-Players with 4 Es”. An “A-Player” was characterized as having Energy, Edge, and Execution. Welch urged top management to take care of their best by rewarding them, promoting them, and paying them well. Time was not wasted developing “C-Players” into “B-Players”. They were moved out early (“vitality curve”). Welch made it clear when he exclaimed, “You got to be rigorous in your appraisal system. The biggest cowards are managers who don't let people know where they stand”. 3.) How does such a large, complex diversified conglomerate defy the critics and continue to grow so profitably? Have Welch’s various initiatives added value? If so, how?
Welch addressed this question from critics head-on in GE’s 1995 Annual Report by emphasizing the company strategy to continue getting bigger with the only spin off being “Cash – and lots of it.” A main key to GE’s sustained success was to “nurture and continuously upgrade” their employees, specifically management. Second, he expanded the globalization strategy to the employees and asked them to “globalize the intellect of the company.” This strategy reinforced his prior initiative of “boundaryless” behavior.
GE’s top line growth over Welch’s two decades of leadership was $102.6 billion or 377% (Exhibit 5). More importantly, he was able to grow the business effectively by increasing operating profits $171.8 billion or 702%. Unsurprisingly, the growth between 1990 and 2000 was more than three times greater than the amount seen between 1981 and 1990. His change in direction to focus on people initiatives (i.e. Best Practices, Work Out, Leadership Development, & Stretch Goals) during his second decade is implicitly seen in these results. Another way to look at this is the sales generated by each employee which rose from $67,000 in 1981 to $415,000 in 2000, a 515% increase.
There were three other business initiatives that drove significant results for the organization. The first was globalization. In reference to Exhibit 6, the international business experienced a 15% average annual growth rate between 1987 and 1998. This accounted for $42.8 billion in revenues during 1998, “almost double the level just five years earlier.” The second was the focus on driving the service business. In 1980, services were only 15% of revenues. The forecast for 2000 saw the service business making up 75% of total revenues (Exhibit 9). This positively affected the company’s profitability, making up almost 60% of profits in 1995. The third was the implementation of six sigma processes. While there was an initial investment of $500 million to train all employees, GE forecasted incremental returns of $1.5 billion in 1999 (Exhibit 11). 4.) What is your evaluation of Welch’s approach to leading change? How important is he to GE’s success? What implications are here for his replacement?
Jack Welch’s style toward leading organizational change was highly influential and motivating to his team and to those familiar with this case. His relentless passion, adaptability, and unquestioned commitment toward making GE better than the best was the center of his drive toward leading positive change. Succeeding the great business leader, Reg Jones, despite a looming economic downturn, in 1981 Welch took charge of a prosperous and somewhat blithe General Electric. However, this did not prevent him from recognizing the need for and commanding immediate radical change in order to not only sustain, but to pave the way for GE’s boundless success. Coupling these circumstances with the fact that Welch’s methods ignored fair process, he initially faced a great amount of resistance. Nonetheless, Welch’s contagious attitude and unflinching confidence to build a better GE overcame this and his influence stretched beyond the gigantic and vastly diversified conglomerate.
Throughout the first phase and during the first decade of his leadership, Welch focused his energy on breaking the system and streamlining GE. From 1981 to 1988 he not only cut more than 100,000 jobs, he also challenged the company’s business models and future focuses all while initially failing to involve others, provide explanations, or clarify expectations. This first phase of the change he brought was instrumental to GE’s success and prevented it from wasting valuable resources on employees that were not stars, did not have the desire to compete, or had values differing from that of GE’s. Once he felt he had the A-Players in place, it was around 1989 he began reshaping the culture and developing many of the programs that are still in practice today. Although Jack always seemed to recognize the value in human capital by retaining good people and by eliminating the deadwood within the company, contradictory to his leadership style exercised in the first phase, he embraced open communication and advanced techniques to achieve commitment by aligning employee goals with company targets through use of a human resource system. He emphasized the importance of creativity and innovation versus objectives being results driven. This was accomplished by fostering an atmosphere in that failure was not a catastrophic event. Although his focus may have shifted, Jack remained a powerhouse never letting up and never becoming comfortable in all of the great successes he and his team shared. Because he was a steward leader, he continually made efforts to improve and wholeheartedly believed that his work, as well as the evolution of GE was continually changing and could never be entirely fulfilled.
Similar to Jack himself, and arguably to a higher degree, his replacement confronts colossal barriers in building upon and extending the direction of General Electric. Upon Welch’s retirement, stakeholders naturally shared a deep concern about the financial well-being and long-term security of GE. It is important to acknowledge the principle that Jack Welch was not successful by merely following the models of Reg Jones or by conducting business as usual. He invented his own vision and in by doing so he renewed GE to become more. Mr. Welch passionately challenged every person at GE to add value each day. Leading a company into ultimate and perpetual success using someone else’s model and vision is possibly even more difficult. For GE’s new CEO to be a transformative leader he must place his own fingerprint on the organization and continuing to harness and advance human capital.