1GE’s Two Decade Transformation

Team Globalization Case AnalysisGE’s Two Decade Transformation: Jack Welch’s Leadership

Yasmine Abdo Al-Kouraishi

Muhammad Howard

Steven D. Johns

Kenneth V. Oliver

Kimberly N. Lomax

AMBA 670 Managing Strategy in the Global Workplace

July 25, 2012

2GE’s Two Decade Transformation

Executive Summary

Team Globalization has conducted an in depth analysis on General Electric's (GE) two decade

transformation achieved by the company’s former Chief Executive Officer (CEO) Jack Welch.

This report consists of a reflective examination performed by the team, incorporating perspective

gained through professional experience and key concepts gleaned from selected course reading

selections.

As CEO of GE, Jack Welch's management skills became legendary, with little tolerance for

bureaucracy and archaic business processes. Acquiring new businesses and ensuring that each

business unit under the GE umbrella was one of the best in its field was a primary concern for

Mr. Welch. Under his guidance, the company expanded dramatically from 1981 to 2001 (GE,

2012). The culture of innovation and learning, which included incorporation of measures related

to new product development, technological leadership, and rates of improvement, aided Welch

and the company in defying the critics as the company continued to profit.

3GE’s Two Decade Transformation

Introduction

Surviving in today’s challenging business environment necessitates innovative thinking

in terms of crafting strategies to enable the establishment and sustainment of a competitive

advantage. Through an established strategy, structured options and decision making processes,

organizational leaders will be able to facilitate organizational development and growth.

Overcoming the odds and competitive pressures sometimes requires defying critics and popular

views to develop initiatives that not only streamline the organization, but create profitable

business operations and human resources to add value to the organization.

The analysis that follows identifies and defines the challenges which Welch of GE

encountered during his tenure, and outlines his approach to strategic corporate leadership and

taking charge. The report is followed by a breakdown of Welch’s objectives in regards to

innovation and his strategy on creating value. The authors will also provide an evaluation of

Welch’s approach to leading change with emphasis on the overall impact that Welch had on

GE’s success. Finally, this paper will take a look at the implications of Welch’s replacement.

How difficult a challenge did Welch face in 1981? How effectively did he take charge?

Welch faced a very difficult challenge taking over the position as CEO of GE. His

predecessor, Reg Jones, set the bar extremely high at the company leaving a legacy for Welch to

compete with as the new CEO. Jones had been considered a “management legend” and had been

voted CEO of the year three times for his brilliant accomplishments with GE. Jones was also

labeled CEO of the Decade two years before he retired. Needless to say, Welch had some big

shoes to fill once named as CEO. During this transition, the business world was highly

4GE’s Two Decade Transformation

competitive, with the economy, environment, and political climate in constant flux. If not

handled properly, the transition could be detrimental to the company.

Welch was up for the challenge and knew that a successful transition would mean

developing a team that would make GE even more prosperous earning stakeholder trust. This

required assessing the current environment to accurately determine a way to improve it. Welch

convinced his team to buy into his new vision of where the company should go and challenged

employees to be “better than the best”. In order to accomplish this enormous task, Welch placed

executives and management in key places to could assist his efforts to redirect overall company

culture. Managers that did not fit into or who failed to embrace his strategy were let go.

Anything and anyone that didn’t bring value to GE was eliminated. Hierarchical organizational

levels were dramatically reduced, enabling the company to operate as a “lean and agile”

business. From the moment he took over the business, Welch went full force into implementing a

“real time planning” strategy. At the time of his appointment, the United States economy was in

a recession. To combat this situation, Jack Welch had to develop a plan of action aimed at

keeping the company thriving in the business world. In order to accomplish this, GE sold many

of their businesses, which represented 25% of their sales. However, during that time, Welch

simultaneously and strategically invested in other businesses, increasing their revenue and

operating profits.

How effectively did he take charge? Welch was extremely effective in taking over the GE

reins. Although his predecessor was quite successful during his reign and the business thrived,

there was still the need for change. The business world was evolving and competitors attempted

nonstop to stay ahead of GE. Fortunately, Jones had left the company in a “good place” during

5GE’s Two Decade Transformation

the transition, allowing Welch to come in with his new and innovative ideas to take the company

even further in the business world.

What was Welch’s objective in the series of initiative he launched in the late 1980’s and

early 1990’s?

Jack Welch repaired the structure of GE with his initial changes, but now had to manage

the human resources aspect to “rebuild the company on a more solid foundation (Bartlett &

Wonzy, 2005, p. 3).” GE’s employees had been sufficiently shaken by the preliminary changes

made, and were subsequently worn-out due to upheaval within the company’s core. Welch hoped

to create an environment which optimized “openness, candor, and … reality (Bartlett & Wonzy,

2005, p.4).” Additionally, “speed, simplicity and self-confidence (Bartlett & Wonzy, 2005, p.4)”

were the characteristics he expected to dominate the culture. Welch had always been a teacher

often leading sessions at the Management Development Institute. These sessions afforded

managers with an open-forum, allowing them to vent concerns about change implementation and

resulting complications. With the help of James Baughman, Director of Management

Development, Welch decided to institutionalize these open forums, giving every employee the

opportunity to become part of the discussions, honestly and openly. Employees gathered in

groups to respond to their unit bosses’ challenges and agendas in general. Facilitators were

empowered to walk these groups through a process wherein problems were laid out, discussed,

potential solutions identified, and final presentations produced for presentation to unit bosses.

This process was dubbed the “Work-Out”. When the bosses returned, they were required to listen

to the proposals and make a decision in front of the group to at least 80% of the total proposals.

As a result of these standardized processes, productivity increased two-fold.

6GE’s Two Decade Transformation

The “Best Practices” program was assigned to the Business Development department. As

head of the Business Development department, Michael Frazier and his team studied nine

companies who had higher productivity rates than GE. The end result was a toolkit of key

techniques and identification of core characteristics that made these companies successful. For

example, process efficiency, customer satisfaction as their Key Performance Indicator (KPI),

well-developed supplier relationships, and consistent innovation of high quality products and

manufacturing efficiencies with little to none unused capacities were all discovered as

“ingredients to success”. A new training program emerged which helped managers see the error

of existing measurement practices. Managers were further trained to look at larger-scale

opportunities for improvement, and broaden their vision of what success actually looked like.

Welch continued to subtly injecting his ideas about globalizing business units within GE.

He looked for opportunities within each business unit to not only increase success levels within

United States markets, but to benchmark GE against competitors on the world stage. To prove

his steadfastness, Welch hired Paolo Fresco, a proven negotiator, to head the International

Operations position. GE took advantage of global economic downturns in countries like Mexico

and Japan to increase their acquisitions, doubling revenue from international operations within

the first five years.

Welch dug even deeper into the fabric of GE with an initiative focused on locating and

developing leadership at all levels of the company. GE employees were being developed,

evaluated and compensated based on a demanding evaluation process called “Session C”. Welch

had employed this process with his top team members and was now drilling down to other

business layers in search of the next wave of GE leadership. Now, everyone in the GE

professional corps could expect detailed feedback on their performance, a clear plan for

7GE’s Two Decade Transformation

developing their skills, and with successful completion of their training and development plan,

knowledge about what future positions they might hold within the company. To incentivize

stronger work ethics, GE revamped its compensation package by offering more stock options

tied directly to individual performance for program initiatives. Welch wanted employees to feel

valued for their contributions, and highly-compensated for their efforts.

Welch used Crotonville, the management development facility, as his incubator.

Crotonville was re-designed and outfitted with new buildings for example. Teams of managers

focused on real-time issues facing GE’s business to produce action plans for achieving results.

Welch was so committed to this concept that he taught and talked with managers at Crotonville

two times per month. He practiced what he preached, leadership development through active

mentorship and teachable moments. Once Welch’s commitment to developing internal

leadership was fully in play, he made it clear that everyone would need to commit to GE’s

values, or risk being let go. He knew that some managers made the cut based on numbers, but

failed to inspire and motivate their employees. To further demonstrate his seriousness about

having thoughtful leaders, he implemented the “360o review”. Everyone was evaluated by their

peers and subordinates in addition to their leadership. This process “… [identified] training

needs, coaching opportunities, and eventually career planning-whether that be up, sideways, or

out (Bartlett & Wonzy, 2005, p. 8).”

Is there a logic or rationale supporting the change process?

When analyzing Welch’s rationale for the changes made, it is important to identify the

benefits of incorporating Porter’s five forces model to analyze competition within an industry.

Welch based his proposed and implemented changes on proven tactics used by other successful

8GE’s Two Decade Transformation

companies to achieve his strategic organizational goals. Realizing that bureaucratic models of

organizational structure were prone to promoting sluggishness, Welch opted to depart from this

model and implement a more flat organizational structure to assist in meeting his defined

objectives. Although unpopular at the time, Welch’s decisions and actions have through time

become renowned as revolutionary exposing sheer genius in executing changes within an

organization.

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?

Although GE had gone through a major reorganization that contributed to its successes,

the changing business climate when Welch took over as CEO required more to be done. The

complex diversified conglomerate consisting of overlaying groups of 46 divisions and 190

departments all supporting 43 business units were faced with a recession, an economy of high

unemployment, high interest rates, and an overvalued U.S Dollar. These uncertainties and

climate of continuous change and increased competitions led Welch to the realization that

overcoming the magnitude of challenges would require unconventional leadership and bold

strategies. He understood that in turbulent times, strategy was not just about building a position

of sustained competitive advantage but rather formation and implementation of a strategy

centered on the development of timely responses and flexibility to create successive temporary

advantages (Grant, 2011, p. 16). To successfully achieve such objectives required the

reconfiguration of organization’s resources and competences (Grant, 2011, p. 16). In times of

uncertainties and recession, the normal course of action for many businesses is to engage in cost

cutting strategies, but studies demonstrate that such strategies are not always sufficient.

9GE’s Two Decade Transformation

Investment in the right places during hard economic times enables a company to perform better

during and after a recession (Anonymous, 2009, p. 9).

GE defied critics and the prevailing convention of multi business break up by adapting

various strategies which included but was not limited to restructuring through what Welch called

“Fix, Sell or Close”. Through this strategy, the company was able to analyze the 43 businesses

under its umbrella and only those businesses that were number one and two in their industries

were maintained. Those that were not maintained were either sold or closed down. Businesses

that were maintained became the center of strategic focus in terms of developing those units

through additional investment and developing efficiency and effectiveness procedures and

operations. This strategy is an indication that Welch did not adapt cost cutting strategies like

many of the companies during that time but his goal was as he said: “I would like General

Electric to be perceived as unique,…with world quality leadership in every one of its products

line” (Bartlett, 2005). Selling and closing of some businesses was about doing away with those

businesses that were under performing, and did not add value to the company. By doing so, the

company became more efficient and a value building culture permeated the GE workforce.

Evidence of this is shown when considering the fact that that Welch divided the remaining

businesses into three categories known at The Three-Circle Vision (See Exhibit 2). The

businesses were not the only component of the company to go through restructuring, but Welch’s

goal of making GE lean and agile resulted in de-staffing and reduction of bureaucracy,

eliminating layers of hierarchical that were bottlenecks to growth and operational, personal and

production efficiency. The underlining principle in the transformation is that in order to operate

an effective and efficient world class business, and sustain number one or two positions in an

industry, GE had to invest in the right businesses and develop staffs that are the best at what they

10GE’s Two Decade Transformation

do. Individual employees were empowered to lead in their own capacity by finding ways to

contribute to the value system of the company. Leaders were challenged to find ways to make

their people more effective and competitive. Open forums were created to find avenues of

improvement at all levels of the firm’s business, operations, human resources and employee

morale.

Critics saw the company’s strategy of developing leadership and employee capabilities

enhancement as being risky especially in times of uncertainties. They also viewed the removal

of boundaries through what was known as Work-Out best practice and the creation of the

boundary less as being radical and risky. However, through the determination of Welch and his

team, and the desire for change; the risk paid off contributing to the value of the company.

Welch understood that strategy is not about doing things better, but it is about doing things

differently through effective decision making and knowing where to compete and how to

compete; as emphasized by Porter (Gant, 2011, p. 18) regardless of how radical and risky it may

seem to critics. GE had acquired firms that enabled it to expand globally and developed global

operations that resulted in the company almost doubling its international revenue to $42.8

billion. The company became lean and agile, with increased efficiency and organizational culture

transformation. Through the stretch target initiatives, all employees were asked to prove how

good they can be by setting and reaching higher goals that were once deemed to be impossible to

achieve. Another important value added to the company was the service business, which

contributed to two-thirds of the company’s revenues

(See Exhibit 9). These and other initiatives are examples of how Welch endeavors, initiatives and

ideas contributed to the value of GE. With Welch’s leadership GE ventured into new sectors, and

did away with ineffective ones, developed a massive global market that out performed its

11GE’s Two Decade Transformation

domestic markets, created a service industry and an E-business; thus increasing it revenue and

increasing its value by 60%, and most importantly surviving the recession and creating a large

complex diversified conglomerate that continues to defy the critics and grow in performance and

profitability. Values added include but not limited to the reduction of bureaucracy which resulted

to more expedient processes, and effective operation. Welch extended his Fix, sell or close from

the national level to the international level. He also saw the challenges in other countries and

economic difficulties as opportunities for new investments and expansions. Values added also

included the transforming of GE culture to a more learning, knowledge sharing and demanding

of excellence, commitment and service to the goal of the organization. Welch introduction of

business service contributed to two-third of the company’s value. Last but not the least, his

introduction of the Six Sigma quality initiatives led to 62% in turnaround time, return of $750

million over the investment exceeding expectations along with a forecast of additional returns of

$1.5 billion in 1999. In addition to this the program also contributed 300 million pounds of new

capacity.

What is your evaluation of Welch's approach to leading change? How important was he to

GE's success? What are the implications for his replacement?

Jack Welch’s mission was to restructure the company in order to become the number one

or number 2 competitor in the industry. He embraced change, expected his team to do the same,

and challenged his team be “better than the best” (HBS, p.2). He employed different

management reporting structures at different points of the transformation. For example, he felt as

though there were too many layers at all large headquarters groups, as a result he spearheaded a

de-staffing process which resulted in a vertical reporting structure with major department heads

12GE’s Two Decade Transformation

reporting directly to him. In addition, his team of managers shared the same commitment to

management values. Furthermore team members had to have the willingness to take charge, to

think outside of the box, to push the envelope and most of all to be team players. In return Welch

compensated those employees with generous bonuses and incentives. Welch fostered open

communication and created a culture characterized by “speed, simplicity, and self-confidence.”

(HBR, p.4). In order to show his commitment he launched the “Work Out” program which

created a forum where employees and managers could work out new ways of interacting with

each other.

Welch never rested on his last success; he continued to innovate and to look for ways to

grow the business both internally and externally. For example as “Work Out” began he began to

think of additional ways to increase productivity. As a result the “best practices” program was

created in an effort to learn from other companies and to identify the reason for their success.

Welch believed in developing leaders and provided the tools for them to do so. He adapted a

human resource department that would be in line with his goals. He challenged his managers to

identify future leaders, and then developed a training program and a developmental plan for all

key jobs. He understood that GE’s assets were in fact their people and in turn had to be managed

as a company resource.

Welch’s unwavering involvement in every facet of the business was essential to all of

these incentives, and directives. His philosophy was not a “do as I say not as I do” mentality. In

addition he never rested on his last success. He created the “Stretch” program in an effort to push

people to be the best they can be, to test boundaries, and to get “people to think of fundamentally

better ways of performing their work.”(HBS, p.10). Ultimately Welch’s strategy was to look at

the external factors that affected GE’s success, while implementing a bottom to top approach.

13GE’s Two Decade Transformation

Ultimately he realized that the success of GE relied on the strength of his team. To that

end he was relentless in ensuring that his team was set up for success. Everything Welch did

reflected his belief in his people and as he once stated. “I own the people, you just rent them.”

(HBS, p.7). Welch’s replacement will need to establish him/herself and make a name for

themselves. This person will need to clearly communicate their vision and how they will go

about accomplishing those goals. He/she will need to continue to foster open communication in

an effort to continue to foster teamwork. Innovation will be crucial if the company is to thrive

under the new leadership. Welch’s replacement will need to make a name for himself by creating

new programs that continue to foster employee/employer relations, and by understanding the

importance of looking at the external factors that affect the overall business

Conclusion

As stated throughout this analysis, Jack Welch stepped out into uncharted territory with

lofty aspirations of making dramatic change within the GE organization for positive growth.

These efforts were achieved through several unprecedented means and reorganization of the

existing organizational structure to facilitate discussion, communication, and constructive

criticism unilaterally throughout the company. Although some of his chosen methodologies

were deemed by critics as “radical” and “risky”, the results of Welch’s actions speak for

themselves as a testament to his strategic leadership at the GE helm. The agility, responsiveness,

productivity and ultimately profitability realized as direct results of Jack Welch’s actions while

operating in the office of GE CEO are key indicators of the lasting impact that his legacy leaves

for future officers tapped to fill the position. Programs and processes established under his

watch leave an impressive standard for successors. Without a doubt, Jack Welch’s leadership

has left a lasting impact on GE and the business world.

14GE’s Two Decade Transformation

References

Anonymous. (2009, p. 9). Beware: Cost cutting can be deadly. Principal's Report, 9(6), 8-9

Bartlett, C.A., & Wozny, M. (May 3, 2005). GE's two-decade transformation: Jack Welch's

Leadership. Harvard Business School.

GE, 2012. Past Leaders. Retrieved from

http://www.ge.com/company/history/bios/john_welch.html

Grant, R.M. (2010). Contemporary strategy analysis (7th Ed.). Malden, MA: Blackwell.