Jack welch ge case study

Harvard Business School 9-394-065 Rev. April 12, 1994

Professor Joseph L. Bower, assisted by Research Associate Jay Dial, prepared this case as the basis for class discussion rather than to illustrate either effective or ineffective handling of an administrative situation. It is based on earlier cases: “General Electric: Strategic Position 1981 (No. 381-174) and “General Electric 1984” (No. 385-315) prepared by Professors Francis J. Aguilar and Richard Hamermesh and Research Assistant Caroline Brainard as well as “General Electric: Jack Welch’s Second Wave (A)” (No. 391-248), prepared by Research Associate Kenton W. Elderkin and Professor Christopher A. Bartlett. It also draws on “Speed, Simplicity, Self-Confidence: An Interview with Jack Welch” by Noel Tichy and Ram Charan, Harvard Business Review, September-October 1989.

Copyright © 1993 by the President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685 or write Harvard Business School Publishing, Boston, MA 02163. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of Harvard Business School.

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Jack Welch: General Electric's Revolutionary In 1993, Jack Welch might be satisfied that the ultimate arbiter of value, the stock

market, seemed to appreciate GE’s achievements under his leadership. From a multiple of 7 in 1982, the price/earnings ratio had climbed to 16—a clear signal that the stock market was enamored with the changes Welch was making at GE. Over a period when the S&P 500 had risen 326%, GE market value had grown 498%. (See Exhibit 1.) If GE was not yet as “lean and agile” as Welch might want, it was surely a far more nimble giant than the company he had inherited from the “management legend” Reg Jones.

In fact, as GE entered its twelfth year with Welch at the helm, the company was once again being studied widely as a model of how a giant corporation ought to be managed. Fundamentally, Welch appeared to be pulling off the impossible. He was making one of the largest, most complex companies in the world perform like a growth company. At first, the accomplishment was merely discounted. By 1993, however, Welch was being credited with a world-class achievement in management. Having concluded that Jack Welch had done the impossible and transformed giant GE, everyone interested in management wanted to know whether it was fluke of personality or whether generalizable principles, useful for all, underlay Welch’s achievement. Had Jack Welch presided over the invention of a new approach to managing a complex organization?

GE as an Inventor

Founded to exploit Thomas Edison’s patents, the company that later became GE soon assembled a range of businesses, wide for the time, dedicated to the generation, distribution, and use of electric power. Later, businesses such as aircraft engines, engineering plastics, nuclear power and computers were added to the basic businesses of generators, transformers, wire and cable, lighting and home appliances.

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GE’s size and complexity had always proved a challenge for its leaders. In the 1930s to help control its diversity, GE had developed a powerful financial staff. Later, in the 1950s in order to develop a more entrepreneurial culture suited to diversification, profit centers and group staff were introduced by CEO Ralph Cordiner. As the post-war trendsetter of divisionalization, GE was broken up into more than 100 businesses. When these grew large, they were again broken up. Cordiner’s organizational arrangements for managing diversity became a role model and were widely copied. In the 1960s, to provide substantive analysis to deal with the stagnant profits that resulted from the consequent dispersion of resources, Fred Borch used his planning staff and leading consulting firms to develop PIMS and portfolio strategic planning. Once again GE’s innovations were widely imitated by companies around the world.

Borch’s consultants argued that allocating resources on the basis of projected ROI led to waste because incremental investments almost always looked attractive even when the business was poor. But there was no system for looking at businesses. The consultants recommended that GE should reorganize completely into what they called Strategic Business Units (SBUs). The special characteristics of an SBU were a unique set of integrated strategic plans and the ability for the unit manager to “call the shots” on all the factors crucial to the success of the business. Thus, where there had been profit centers for ranges, refrigerators, and dishwashers, there would now be only a home appliance SBU.

The Jones Legacy

When he was named GE’s new chairman and CEO in 1972, Reg Jones took over a company consisting of 10 groups, 46 divisions and 190 departments. These were organized into 43 SBUs that were intended to provide a basis for better planning and investment. Jones asked each to hire a strategic planner.

By the mid-1970s, some GE managers believed that SBU planning, while helping to strengthen GE’s competitive positions and to improve profits, was also leading to a balkanization of the company. GE appeared to be moving in the direction of becoming a holding company.

In Jones’ mind, another problem was that corporate review of SBU plans also suffered from overload. He explained:

Right from the start of SBU planning in 1972, the vice chairmen and I tried to review each plan in great detail. This effort took untold hours and placed a tremendous burden on the corporate executive office. After awhile, I began to realize that no matter how hard we would work, we could not achieve the necessary in-depth understanding of the forty-odd SBU plans. Somehow, the review burden had to be carried on more shoulders.1

In 1977, Jones announced a “sector” organization structure as a new level of management that represented a macrobusiness or industry area. Jones’ objective was to spread the review load, and also to add more value at the corporate level. After allowing time for the six sector structure to take root, Jones concluded, “The sector approach . . . exceeded my expectations. Now I can look at six planning books and understand them well enough to ask the right questions.”2 Fortune anointed Jones a “Management Legend” for his accomplishments.

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Jones also had a private reason for this organizational change. He thought it time to consider succession and the sector executive position would provide visibility for the candidates in a horse race for CEO. The position also enabled him to broaden the managers by assigning them responsibilities for businesses new to them. Jack Welch, for example, was reassigned from engineering plastics where he had succeeded in building up a magnificent high-tech business to sector executive for home appliances. From that position he was elected CEO.

A Harvard Business School professor who had invited Welch to his class on a number of occasions during the 1970s later wrote:

“Welch’s youth, extremely high energy level, candor in responding to tough questions, and obvious leadership qualities combined to captivate my students. Welch was engaged in a horse race, and I told my students that. In the class following each of Welch’s appearances, I asked the students whether they thought he would be the next chairman of GE, winning out over six other candidates. Knowing nothing about the other six candidates, my students, each time, concluded that Welch did not fit their stereotype of GE’s CEO, and the job would probably go to someone more conventional. Welch was a maverick, he let the students know it, and they loved him for it, but that’s what happens to mavericks. I didn’t know the other candidates either, but I shared my students’ view, and was astonished at the announcement in December 1980 that Welch had won the race. The outcome that I admire is that somehow the officers and directors of GE were able to select a new CEO who was more likely to make difficult changes than some of the other contenders for the job. The core issue in CEO selection is the tension between continuity and change. In this case, GE was able to select an `outsider’ from inside.”3

Welch’s Background4

According to Welch, most of his values and beliefs had been shaped during his childhood years:

I was an only child. My parents were about 40 when they had me, and they had been trying for years 16 years. My father was a railroad conductor, a good man, hard working, passive. . . . [My mother] always felt I could do anything. It was my mother who trained me, taught me the facts of life. She wanted me to be independent. Control your own destiny⎯she always had that idea. Saw reality. No mincing words. Whenever I got out of line, she would whack me one, but always positive, always constructive, always uplifting. And I was just nuts about her.5

One of Welch’s high school classmates described him as “a nice, regular guy, but always very competitive, relentless, and argumentative.” A college classmate said, “The desire to win was in his eyes. He was always looking one step ahead.” Another classmate said, “He hated losing⎯even in touch football,” and another said, “Jack wasn’t blessed with a lot of grace or athletic ability. He trounced people by trying harder.” One of Welch’s most remembered comments was, “We’re still friends?”6

Years later, a colleague would claim that Welch’s management style was built on his hockey-playing years. “Hockey is the kind of game where people bang you up against the boards and then go out and have a drink with you after,” he said. Using “constructive conflict”

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Welch often forced managers to defend their views, even if that meant getting into shouting- match arguments. “Jack will chase you around the room, throwing arguments and objections at you,” said one executive. “Then you fight back until he lets you do what you want, and it’s clear you’ll do everything you can to make it work.” According to another manager, “If you win, you never know if you’ve convinced him or if he agreed with you all along and was just making you strut your stuff.”

Welch was the first engineer to earn a Ph.D. from the University of Illinois in only three years. Graduating in 1960, he joined GE’s plastics division in Pittsfield, Massachusetts. In 1968, at age 32, he became the youngest division manager in GE. Because people neither really knew what the unit was doing nor had high expectations for it, Welch got a considerable degree of freedom and responsibility. Starting with the Detroit automakers, he rapidly expanded his sales to OEMs worldwide. Overseas operations reinforced his autonomy, allowing him to transform the small plastics operation into a $400 million business. Always open, he distrusted anyone who hoarded information or surrounded themselves with staffs.

Transferred to corporate headquarters in Fairfield, Connecticut in 1977, Welch was astonished at the Byzantine nature of GE’s bureaucracy. In his view, corporate staff was interfering too much in line activities⎯requiring presentations, demanding reports⎯but doing little to create or sell more products. He felt that this led line people to waste their time playing political games with corporate staff in the hope that they would receive some benefit. He cringed as he recalled the $30,000 the light bulb business had spent to produce a film in order to make its case with corporate for a new piece of production equipment.

Jack Welch Takes Charge

Jack Welch took office in April 1981 shortly after his forty-fifth birthday. As the new chairman and chief executive officer of General Electric, he described his vision for GE:

A decade from now I would like General Electric to be perceived as a unique, high-spirited, entrepreneurial enterprise . . . a company known around the world for its unmatched level of excellence. I want General Electric to be the most profitable, highly diversified company on earth, with world-quality leadership in every one of its product lines.7

Welch, in his 1989 Harvard Business Review interview noted: “In 1981, when we first defined our business strategy, the real focus was Japan. The entire organization had to understand that GE was in a tougher, more competitive world, with Japan as the cutting edge of the new competition. Nine years later, that competitive toughness has increased by a factor of five or ten.”8 Also, when Welch took office, the U.S. economy was in serious decline aggravated by soaring interest rates and a strong dollar.

In terms of GE’s strategic response, Welch told an HBS audience that “you can’t set an overall theme or a single strategy for a corporation so diverse as GE.” Instead, Welch determined that the goal was to be number one or number two in every business the company was in. Achieving this required a common concern for quality and excellence. “To me, quality and excellence mean being better than the best. . . . If we aren’t, we should ask ourselves `What

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will it take?’ then quantify the energy and resources to get there. If the economics, the environment, or our abilities determine that we can’t get there, we must take the same spirited action to disengage ourselves from that which we can’t make better than the best.”

As GE built and exited businesses, Welch found that he needed a concise way to give strategic meaning to his actions. In 1983, he developed the “three circle concept” as it came to be called (after a drawing he made for a reporter). All businesses were divided into (1) core, (2) high technology, or (3) service areas. Only the fifteen businesses that dominated their markets would be placed in a circle. (See Exhibits 2 and 3.) The others either had to come up with a strategy for achieving dominance or be divested. Welch decreed that core businesses were to focus on “reinvestment in productivity and quality,” and the high-tech businesses were to “stay on the leading edge” through acquisitions and large R&D investments, the services were to grow by “adding outstanding people who create new ventures and by making contiguous acquisitions.” Welch noted that “we have our hands on a simple, understandable strategy for where we are, where we are not, where we can’t find a solution, and where we have to disengage. We have to get used to the idea that disengaging does not mean bad people or bad management; it’s a bad situation, and we can’t tie up good dollars chasing it.” The major moves Welch made into and out of businesses in order to be number one or number two are shown in Exhibit 4. Profits from divestitures were used to fund acquisitions and growth of remaining businesses.

To deal with a corporate bureaucracy that seemed out of place in the new GE, he emphasized what became known as “destaffing.” From 1980 to 1984, the total workforce was reduced from 402,000 to 330,000. While the press nicknamed him “Neutron Jack,” after the neutron bomb which wipes out people but leaves buildings intact, Welch believed the label to be exaggerated. He was convinced that a company the size of GE needed to stay “lean and agile” to be competitive. He acknowledged that becoming lean required destaffing, but he stated that the company had no intention of becoming “mean” in the process.

Welch also believed that the planning system had evolved from being fresh, idea- oriented and effective to becoming bureaucratic and inhibiting. To increase candor and constructive discussions, planning reviews were restructured so Welch and the two vice chairmen talked with individual SBU managers privately and informally. Rather than focusing on comprehensive strategic documentation or planning concepts, Welch directed the review around the key issues for each business. Welch cut the 200-person corporate planning staff in half by 1984. His objective was to get “general managers talking to general managers about strategy, rather than planners talking to planners.”9

GE’s Cultural Change

Going for the Leap

By 1984, in spite of substantial accomplishments, Welch claimed that he was only at the 15% mark of what he intended to do. Said Welch: “A company can boost productivity by restructuring, removing bureaucracy and downsizing, but it cannot sustain high productivity without cultural change.” Addressing GE employees in 1985, he suggested.

“For me, the idea is: shun the incremental and go for the leap. Most bureaucracies⎯and ours is no exception⎯unfortunately still think in incremental terms rather than in terms of

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fundamental change. They think incrementally primarily because they think internally. Changing the culture⎯opening it up to the quantum change⎯means constantly asking not how fast am I going, how well am I doing versus how well I did a year or two before, but rather, how fast and how well am I doing versus the world outside. Are we moving faster, are we doing better against that external standard?”

“Changing the culture starts with an attitude. And I would suggest it starts at the top⎯with the CEOs and the boards of directors that are charged with leading our institutions. More boards have to be thinking: how much can this organization take, how much can it absorb, is it being stressed too little or too much⎯constantly challenging the pace. How does an institution know when the pace is about right? I hope you won’t think I’m being melodramatic if I say that the institution ought to stretch itself, ought to reach, to the point where it almost comes unglued.”10

Welch’s People

In his Harvard Business Review interview, Welch stated:

“Good business leaders create a vision, articulate the vision, passionately own the vision, and relentlessly drive it to completion. Above all else, though, good leaders are open. They go up, down, and around their organization to reach people. They don’t stick to the established channels. They’re informal. They’re straight with people. They make a religion out of being accessible. They never get bored telling their story.”

“Real communication takes countless hours of eyeball to eyeball, back and forth. It means more listening than talking. It’s not pronouncements on a videotape; it’s not announcements in a newspaper. It is human beings coming to see and accept things through a constant interactive process aimed at consensus. And it must be absolutely relentless. That’s a real challenge for us. There’s still not enough candor in this company.”11

“I mean facing reality, seeing the world as it is rather than as you wish it were. We’ve seen over and over again that businesses facing market downturns, tougher competition, and more demanding customers inevitably make forecasts that are much too optimistic. This means they don’t take advantage of the opportunities change usually offers. Change in the marketplace isn’t something to fear; it’s an enormous opportunity to shuffle the deck, to replay the game. Candid managers⎯leaders⎯don’t get paralyzed about the “fragility” of the organization. They tell people the truth. That doesn’t scare them because they realize their people know the truth anyway.”

“We’ve had managers at GE who couldn’t change, who kept telling us to leave them alone. They wanted to sit back, to keep things the way they were. And that’s just what they did⎯until they and most of their staffs had to go. That’s the lousy part of this job. . . . The point is, what determines your destiny is not the hand you’re dealt; it’s how you play the hand. And the best way to play your hand is to face reality⎯see the world the way it is⎯and act accordingly.”

“For a large organization to be effective, it must be simple. For a large organization to be simple, its people must have self-confidence and intellectual self-assurance. Insecure managers create complexity. Frightened, nervous managers use thick, convoluted planning books and busy slides filled with everything they’ve known since childhood. Real leaders don’t need clutter. People must have the self-confidence to be clear, precise, to be sure that every

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person in their organization⎯highest to lowest⎯understands what the business is trying to achieve. But it’s not easy. You can’t believe how hard it is for people to be simple, how much they fear being simple. They worry that if they’re simple, people will think they’re simple- minded. In reality, of course, it’s just the reverse. Clear, tough-minded people are the most simple.”12

“Simple doesn’t mean easy, especially as you try to move this approach down through the organization. When you take out layers, you change the exposure of the managers who remain. They sit right in the sun. Some of them blotch immediately; they can’t stand the exposure of leadership.”13

Welch made similar statements at the 1989 GE shareholders meeting:

“We found in the 1980s that becoming faster is tied to becoming simpler. Our businesses, with tens of thouousands of employees, will not respond to visions that have sub-paragraphs and footnotes. If we’re not simple, we can’t be fast . . . and if we’re not fast, we can’t win.”

“Simplicity, to an engineer, means clean, functional winning designs, no bells or whistles. In marketing, it might manifest itself as clear, unencumbered proposals. For manufacturing people, it would produce a logical process that makes sense to every individual on the line. And on an individual, interpersonal level, it would take the form of plain-speaking, directness, honesty.”

“But just as surely as speed flows from simplicity, simplicity is grounded in self-confidence. Self-confidence does not grow in someone who is just another appendage on the bureaucracy; whose authority rests on little more than a title. People who are freed from the confines of their box on the organization chart, whose status rests on real-world achievement⎯those are the people who develop the self-confidence to be simple, to share every bit of information available to them, to listen to those above, below and around them and then move boldly.”

“But a company can’t distribute self-confidence. What it can do⎯what we must do⎯is to give each of our people an opportunity to win, to contribute, and hence earn self-confidence themselves. They don’t get that opportunity, they can’t taste winning if they spend their days wandering in the muck of a self-absorbed bureaucracy.”

“Speed . . . simplicity . . . self-confidence. We have it in increasing measure. We know where it comes from . . . and we have plans to increase it in the 1990s.”

Welch wanted to keep directly in touch with the rich resource that he believed existed in GE’s employees. For this reason, he retained the sophisticated management development process (known as CI and CII reviews) that had long been part of the company’s tradition. For three hours each Spring and again in the Fall he met with each business to review their human resource potential and how it was being developed. He was a big supporter of Crotonville, GE’s education center, but focused it more on specific company-related development activities.

Welch’s Organization

In addressing the 1989 GE shareholders meeting, Welch also commented:

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“We had constructed over the years a management apparatus that was right for its time, the toast of the business schools. Divisions, strategic business units, groups, sectors, all were designed to make meticulous, calculated decisions and move them smoothly forward and upward. This system produced highly polished work. It was right for the 1970s, a growing handicap in the 1980s, and it would have been a ticket to the boneyard in the 1990s.”

“So we got rid of it, along with a lot of reports, meetings, and the endless paper that flowed like lava from the upper levels of the company. When we did this, we began to see people⎯who for years had spent half their time serving the system and the other half fighting it⎯suddenly come to life, making decisions in minutes, face to face, on matters that would have once produced months of staff gyrations and forests of paper. But this transformation, this rebirth, was largely confined to upper management. In the 1990s we want to see it engulf and galvanize the entire company.”

One year later the 1990 Annual Report stated:

“The walls within a big century-old company don’t come down like Jericho’s when management makes some organizational changes⎯or gives a speech. There are too many persistent habits propping them up. Parochialism, turf battles, status, “functionalitis,” and, most important, the biggest sin of a bureaucracy, the focus on itself and its inner workings, are always in the background.”

Surveying organizational changes, Welch commented, “We’re now down in some businesses [from nine] to four [layers] from the top to the bottom. That’s the ultimate objective. We used to have things like department managers, section managers, subsection managers, unit managers, supervisors. We’re driving those titles out. . . .We used to go from the CEO . . . to sectors, to groups to businesses. We now go from the CEO . . . to businesses. Nothing else. There is nothing else there. Zero.”14

In the Harvard Business Review, Welch elaborated:

“Layers hide weaknesses. Layers mask mediocrity. I firmly believe that an overburdened, overstretched executive is the best executive because he or she doesn’t have the time to meddle, to deal in trivia, to bother people. Remember the theory that a manager should have no more than 6 or 7 direct reports? I say the right number is closer to 10 or 15. This way you have no choice but to let people flex their muscles, let them grow and mature. With 10 or 15 reports, a leader can focus only on the big important issues, not on minutiae.”

“We also reduced the corporate staff. Headquarters can be the bane of corporate America. It can strangle, choke, delay, and create insecurity If you’re going to have simplicity in the field, you can’t have a big staff at home. We don’t need the questioners and the checkers, the nitpickers who bog down the process, people whose only role is to second-guess people who clog communication inside the company. Today people at headquarters are experts in taxes, finance, or some other key area that can help people in the field. Our corporate staff no longer just challenges and questions; it assists. This is a mind-set change: staff essentially reports to the field rather than the other way around. . . . Each staff person has to ask, `How do I add value? How do I help make people on the line more effective and more competitive?’ In