Two Decade Transformation

1.How difficult a challenge did Welch face in 1981? How effectively did he take charge?
When Reg Jones retired and Jack Welch became GE’s CEO in 1981, the country was facing a major recession, with high inflation and unemployment rates, reminiscent of those 50 years earlier during the Great Depression. Thousands of businesses were failing, not only affected by the national economic conditions but also due to increased competition from other countries such as Japan. At the time, GE was highly structured, with numerous management layers and several macro businesses. The company followed very orthodox practices, with 43 different strategic plans across numerous sectors. That all changed under Welch’s leadership, who implemented a major overhaul and created a unified strategy and vision for the entire organization.

Welch’s revitalization initiatives encompassed significant strategic, structural and human resource management transformations that translated into sustainable growth and established the company as one of the most valuable companies globally. His strategy proved to be extremely effective, with GE’s market capitalization increasing from 12 billion in 1981 to approximately 200 billion in 2001 when he ended his 20-year tenure. Revenues went from 27 billion in 1981 to 130 billion. 2.What is Welch’s objective in the series of initiatives he launched in the late 1980’s and early 1990’s? 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? After taking over in 1980, Welch decided to launch a “revolution” (his actual words) and dedicated the first years to reinvent the company. During the first part of the decade, he sold more than 200 of GE’s businesses and acquired 70 new ones, transforming the company from an aging industrial manufacturer to a diverse global powerful institution.

His objective was to increase the level of GE’s competitiveness, making sure that those business areas that intended to compete in global markets had to be or become number-one or number-two in their corresponding market places. Welch’s rationale was to focus on leveraging, growing and investing on those businesses who were competitive and profitable, releasing the rest. Some claim that Welch had no mercy in this initial portfolio management” stage, closing down businesses that were unprofitable and had little potential of turnaround. However, he believed that this emphasis on effectively managing the company’s portfolio would make better use of the company’s capital for appropriate investments. During the mid-1980s, GE went global by making significant pushes into Europe and Japan. In the late 1980s, he turned hierarchy upside down, pioneering a program known as Work Out where employees would tell their bosses their suggestions to make the company better. This challenged employees and management to discover creative ways to streamline the organization, simplifying work and removing unnecessary processes.

Ultimately, in 1995, Welch initiated GE’s Six Sigma initiative to eliminate the common cause variation found in business and work processes. Still a part of GE’s strategy 20 years later, Six Sigma is a “highly disciplined process that helps focus on developing and delivering near-perfect products and services”. In other words, the idea behind it is to measure how many “defects” there are in a process in order to figure out how to eliminate them. Welch believed that growth should be measured in terms of bottom-line performance and value generated for shareholders. His rationale behind these strategies was to deliver both short-term profits and long-term organizational strength. Under his holistic leadership, he built a well-oil machine to deliver sustained competitive performance. 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? Jack Welch built a culture at General Electric that came to appreciate and promote change.

He once said: “We’ve long believed that when the rate of change inside an institution becomes slower than the rate of change outside, the end is in sight. The only question is when.” During his tenure, thousands of people were fired and several unprofitable businesses were eliminated; however, he transformed GE from a bureaucratic conglomerate into a lean and powerful company. Welch believed that every component of GE had to be profitable and contribute to the company’s overall productivity and success. Every single person, piece of equipment, division, and manager had to contribute to the bottom line. Productivity, efficiency, and profitability were expected in order to make the cut. Welch’s initiatives were designed to increase inventory turns, quality, productivity, and improve customer satisfaction.

They yielded excellent results, making the company grow at a double-digit rate, and building more shareholder equity than any corporation in history. 4.What is your evaluation of Welch’s approach to leading change? How important is he to GE’s success? What are the implications for his replacement? I believe Welch was an exceptional manager and leader. His non-sense simple approach to change led GE to levels never seen before. He demonstrated he had the qualities necessary to create massive change, multiplying revenue to $130 billion, increasing the value of the organization from $13 to $410 billion during his 20-year tenure. Welch transformed General Electric from a bureaucratic industrial conglomerate into a lean, high-growth company. Welch also decided the bureaucracy, which was supposed to provide order and control, was a liability.

He removed layers of management because it got in the way of quick, simple communication. Known as “Neutron Jack”, he made significant changes, eliminating both unprofitable businesses and underproductive people. At the time, all these strategies made GE the biggest and most valuable company in the world. It transformed the company from a basic manufacturing oriented business into the heavily service oriented business which it is today. This approach still inspires the way many companies around the world conduct their day-to-day businesses. Jeffrey Immelt, his successor, certainly had big shoes to fill. However, one of Welch’s best skills was his ability to develop subordinates so that there was always someone ready to take his place when he was offered a promotion. In 1991, almost a decade before his retirement, he was quoted saying that from the point on, choosing his successor was the most important decision he would ever make. He was determined to choose (and groom), someone who shared a similar vision and was guided by the same values of “speed, simplicity, self-confidence and limitless-mentality”. Fast forwarding 13 years, it’s interesting to see the mixed opinions about this decision.

President Obama announced in 2011 Immelt’s appointment as chairman of his outside panel of economic advisers, and chairman of the Council on Jobs and Competitiveness. Jeffrey Immelt has also been named by Barron’s one of the world’s best CEOs on three different occasions; however, many question his leadership abilities during the past decade. An article in Forbes goes as far as to question why has not been fired from his role. In his defense, four days after becoming CEO the September 11 terrorist attacks created chaos in the whole economy, impacting the company’s aviation and reinsurance businesses. The financial crisis also pushed the company to the edge, pushing down the stock below $7 a share, cutting in the dividend and causing the loss of the company’s triple-A credit rating. Regardless of these circumstances, many analysts criticize Immelt for not shining in the two areas Welch was outstanding at: allocating capital and evaluating people. Only history will say whether Immelt was as effective and significant as his predecessor.