GE Case Study
General Electric (GE) occupied the eighth spot on Fortune 500’s list of companies at the close of 2013. While number eight was a slide from 2012’s number six GE maintains its position, as one of the world’s largest and most influential corporations. Today, GE’s operates in over 160 countries and is led by Jeffery Immelt. During 2013 GE reported, total revenues approached 147 billion USD and profits around 13. 6 billion USD. (CNNMoney, 2013). GE appears in textbooks from the third grade through the PhD. Level of the world’s best business and engineering universities.
No conversation about GE is complete without discussion two of its most prolific leaders, Thomas Edison and Jack Welch. Each of these leaders left their mark on GE, American Capitalism and the world. The Wizard of Menlo Park Thomas Edison was the most influential innovator and businessperson of America’s second generation. Born in 1847, just 71 years after the Declaration of Independence was signed Mr. Edison left his mark on history. While he is most famous for the electric light bulb, it could be argued that his ability to fuse science and business was what left his biggest mark on the world.
Similar to Bill Gates, Steve Jobs, Paul Allen and Steve Zuckerberg, Edison was a self-educated innovator who blended big ideas with uncompromising business skills. Edison formed a strategic partnership with J. P. Morgan to advance his alternating current (AC) technology and destroy competition from Nicholas Tesla’s alternating current (AC). “In 1892, a merger of Edison General Electric Company and Thomson-Houston Electric Company created General Electric Company. GE is the only company listed in the Dow Jones Industrial Index today that was also included in the original index in 1896.” (Gneral Electric, 2014). Thomas Edison was a genius innovator and shrewd businessperson who established set the tone for future generations of GE leaders to follow. Jack Welch Mr. Welch took the reins from Reg Jones in 1981 as GE’s Chairman and CEO and continued to serve GE in those positions until his retirement in 1981.
Following Reg Jones must have been an intimated task but Mr. Welch quickly proved himself more than capable for the by affecting drastic change in GE’s structure and product offerings. Similar to Edison, Welch was a scientist at heart earning a B.S. in chemical engineering from the University of Massachusetts in 1957 and his M. S. and Ph. D. degrees from the University of Illinois in 1960. (General Electric, 2014). Welch believed in giving GE’s managers the space to innovate but demanded they produce results by telling them that the products or services their divisions offered must be number one or two in the world or GE would sell the division. “In 1980, the year before Welch became CEO, GE recorded revenues of roughly $26. 8 billion; in 2000, the year before he left, they were nearly $130 billion.
The company went from a market value of $14 billion to one of more than $410 billion at the time of his retirement, making it the most valuable and largest company in the world, up from America’s tenth largest by market cap in 1981. ” (General Electric, 2014). Welch earned Fortune Magazine’s title of “Manager of the Century” in 1999. Today he continues shape business thought as a best-selling author, speaker and advisor. Statement of Core Problem General Electric had grown in size from the days of Edison, but its corporate structure and management style had remained largely unchanged.
In 1980, GE was a really big, really slow corporation unprepared for changes in the global business landscape. Jack Welch followed an enormously successful leader of GE, Reg Jones, so it would seem that simply maintaining Mr. Jones’ structure of GE would be enough to guarantee the success of the company and Mr. Welch. Welch took the reins at GE in 1981, the U. S. economy was in recession, and unemployment was 10. 8% and the prime lending rate just set a record high of 21. 5%. Corporate structures remained largely unchanged between the end of World War II and 1980 but that was all about to change.
Competition from Japan, the desktop PC and the dawn of the information age forced GE to rethink its operational model and search for a strategy that would enable them to remain competitive as the century ended. Welch quickly assessed that GE was too big and too slow to maintain its current market positions much less grow them. The strategic planning model Welch inherited held nine layers between idea and decision with over 200 personnel involved in the process, hardly “lean and agile”. John Boyd developed what he called the OODA Loop to describe winning in air combat maneuvers.
The OODA Loop consists of a cycle of four steps; Observe, Orientate, Decide, Act (OODA), Boyd argued that when two aircraft are engaged in a dogfight the pilot who has the fastest OODA Loop cycle will win. “The OODA Loop found advocates not only in the U. S. military, but also in the realms of business and sports – anywhere a competitor seeks and edge. ” (McIntosh, 2011). Welch recognized that if GE was to win against the completion he needed to cycle its strategic planning OODA Loop faster. He responded by eliminating 5 layers of bureaucracy and over 50% of the planning staff.
“We used to have department managers, sector managers, subsector managers, unit managers, and supervisors. We’re driving those titles out… We used to go from the CEO to sectors, to groups to businesses. Now we go from the CEO to businesses. There is nothing else. Zero. ” (Christopher A. Bartlett, GE’s Two-Decade Transformation: Jack Welch’s Leadership, 2005). Welch identified other areas of GE’s management structure, leadership development initiatives and compensation program that were the anti-thesis of quick and efficient.
“By the end of the 1980’s Welch had reduced GE’s size from 404,000 employees in 1981 to 292,000 in 1989. ” (Christopher A. Bartlett, GE’s Two-Decade Transformation: Jack Welch’s Leadership, 2005). These cuts transformed GE from its big and slow bureaucratic structure to a decentralized, nimble organization poised for growth. Secondary Problem Addiction counselors claim “the first step is admitting the problem”, Welch took the first step when he identified GE’s core problem as being “Big and Slow”. Welch’s second step was arguably more difficult, transforming the organization to overcome the GE’s addiction to bureaucracy. Welch demanded “out-of-the-box” leaders to implement his new light and nimble business strategy to tackle the challenges of the century on the horizon. He inherited managers who found safety in bureaucracy and stovepipe structures; a compensation structure that failed to encourage “ground-up” solutions, an employee performance review system that ensured mediocrity. Leadership Development Welch grew up in GE’s leadership and was no stranger to GE’s Crotonville Management Development Facility.
He rightfully recognized that Crotonville was primarily used as a reward or consolation prize for those who missed on promotion. Welch viewed Crotonville as a powerful engine of change in his transformation effort. While cutting budgets everywhere else in the company Welch spent $45 million to make Crotonville a top-tier leadership development center and tool to advance his vision of GE’s future. Compensation As Welch evaluated GE’s corporate “software”, he determined its compensation structure did not line up with his corporate strategy.
The system Welch started with was a system of narrow-range increases in base salary supplemented by bonuses based on one’s business performance that inherently rewarded a “rice-bowl” mentality. Welch re-engineered the bonus system by replacing cash bonuses with stock options to incentivize managers to contribute towards GE’s overall bottom line as opposed to focusing solely on their respective divisions. Additionally, he expanded the bonus eligible list of employees from approximately 300 to 30,000 to enlist more personnel in GE’s stock performance. Personal Review System
Welch held a strong personal belief that good people were GE’s key assets and had to be managed as a company resource. (Gneral Electric, 2014) The performance review system Welch started with laid a solid foundation but in his mind did not go far enough. While the existed approach did evaluate each manager’s performance and potential, it did it in a stovepipe. Welch dedicated much time each April and May to personally visit, his top 3,000 managers and focused heavily on the top 500. Eventually he leveraged these visits to develop his 4E’s appraisal system, energy, ability to energize, edge, and execution.
By making performance appraisal, a personal priority Welch motivated his subordinate executives to do the same. Solutions Jack Welch assumed command of GE and immediately went to work transforming GE from big and slow to lean and agile. Change is rarely fun and never easy and the scale of Welch’s change rocked GE’s long established structure to its foundations. GE employees were no longer guaranteed 30 years and a gold watch for showing up and working hard, they now had to compete and win. Welch challenged GE to become #1 or #2 in each market they competed in or else.
“Soon after taking charge, Welch set the standard for each business to become the #1 or #2 competitors in its industry – or disengage. ” (Christopher A. Bartlett, GE’s Two-Decade Transformation: Jack Welch’s Leadership, 2005). This strategy came with a very high cost when measured in the impact to GE’s workforce and was met with harsh criticism. Almost 100,000 people lost their jobs because of Welch’s new strategy for GE. Another view may be that over 300,000 employees kept their jobs and GE grew year-over-year under Welch and was positioned to compete in the new Global economy. Portfolio Change
During his first eight years at the helm of GE Welch determined that over 200 GE business subsidiaries were not part of his vision for GE’s future. These divestitures provided GE with $11 billion to reinvest in lighter, faster companies that would help GE grow. Welch sold off overhead heavy businesses in manufacturing, mining and oil and gas. Welch essentially took the $11 billion in capital gains and doubled it with another $10 billion to acquire over 370 lighter businesses in the service, credit and leasing industries. Like any portfolio manager, Welch was looking to maximize return on investment (ROI) in the short-run.
Welch and GE have long been criticized for killing American jobs by closing U. S. factories only to open new ones in foreign lands. This is a fair criticism; Welch’s actions did cost American jobs. He also re-engineered GE to become the first truly global companies and the fruits of his efforts have benefitted U. S. investors. Most of the companies GE sold during Welch’s early years as CEO have continued to operate under different names and those in the mining and oil and gas industries have in fact thrived. Some would point to the natural resources sectors as an opportunity lost by Welch and they may be correct.
Others would simply point out that a company cannot be everything to everyone and GE’s concentration in the service and tech industries have served them and their investors extremely well. People Change Among the 100,000 employees who lost their jobs during Welch’s first eight years were many senior leaders. Welch did exactly what every young leader dreams of; got rid of the old establishment and replaced them with his own team. In August of 1986, Welch replaced 12 of 16 business heads earning him the nickname “Neutron Jack”. (Christopher A. Bartlett, GE’s Two-Decade Transformation: Jack Welch’s Leadership, 2005).
His new team was committed to breaking the old GE rules and to align GE with Welch’s vision. Welch believe in stress and pressure, he pioneered GE’s workout sessions that engaged middle managers to find solutions to big challenges and then put their boss to the test. During these sessions, the business head was compelled to make decisions on the middle managers idea’s within a few minutes and in front of a live audience that included their own boss. Additionally, Welch challenged his executives to add direct reports and “stretch” themselves towards their personal limits.
The strategy of added direct reports seems to be in conflict with Welch’s attempt to make individual business units smaller and faster. Regardless, Welch marched forward by rewarding those who were willing and able to assume more authority with generous stock options and cash bonuses while trimming GE’s salaried payroll by 59,000 jobs. Constraints Welch’s re-alignment of GE’s portfolio meant that many small towns that were dependent on GE for employment and their local economy would see their GE plants either close and move off shore or downsize significantly.
Welch often used the “sacrifice the few for the good of the many” rationalization to justify his vision that did require the divestiture of over 200 GE subsidiary companies and the loss of almost 200,000 solid blue collar jobs in the United States. Obviously, these decisions were met with harsh criticism and resistance from labor and political representatives. Limiting Factors Welch was limited to some degree by the old guard of GE. “GE executives scoffed at Welch and insisted that no change was needed. GE employees greeted Welch with disdain, disbelief, often with outright fear.” (Slator, 1999). Transforming GE’s century-old business model was a daunted task in and of itself but getting the existing team at GE onboard was an even bigger challenge. Welch was limited in what he could accomplish by the speed he could gain acceptance to his vision. Justification for Corporate Structure Change Welch took the helm of GE at a critical point in history, the last decade of the Cold War. Call it luck or intuition, Welch’s crystal ball accurately predicted and aligned GE for the changes and opportunities that would come when the walls between countries began to crumble.
Globalizing markets, instantaneous communications, travel at the speed of sound, political realignments, changing demographics, technological transformations in both products and production, corporate alliances, flattening organizations—all these and more are changing the structure of the corporation. The once very rigid and unbreachable boundaries of business are fading in the face of change. ” (Kanter, 1991). The Fortune 25 in 1980, just before Welch became CEO, looked very different by 2000, just before his retirement.
A common thread of this list through the years of General Electric, one of only seven companies to remain in the top 25 during his tenure and one of two that moved up on the list. Welch drastically transformed GE through several major initiatives. His most important transformation was changing GE’s archaic management and decision-making structure this provided the foundation and blueprint for his subsequent changes. “A decade from now, I would like General Electric to be perceived as a unique, high-spirited, entrepreneurial enterprise … : (Christopher A. Bartlett, GE’s Two-Decade Transformation: Jack Welch’s Leadership, 1999). Changing the operational mindset of GE from a rigid and formal corporation to that of an entrepreneurial enterprise allowed Welch to make subsequent changes in portfolio and leadership. Looking back and analyzing several of the companies who fell off the Fortune 25 and in many cases off the Fortune 500, present clear evidence that Welch was right. For example, DuPont occupied the #16 spot on the list in 1980 but by 2000-it slide to #42 and today rest at #72.
DuPont was global company by 1980’s standards but did not recognize the competition on the horizon and failed to realign its structure to meet new challenges. GE may have suffered a similar fate had Welch failed to see the warning signs of the new world order. “Few American business leaders noticed when others, especially the Japanese, began to steal customers by seducing them with higher-quality products bearing cheaper price tags. ” (Slator, 1999). The global economy rewards organizations who perform like “startups” regardless of their size or age and punish organizations who fail to adapt.
Under Welch’s guidance, GE returned to its roots by removing its legacy management structure and innovating like the Wizard of Menlo Park. Justification for Leadership Training and Development Realigning GE’s management structure was the precursor for Welch’s investment in leadership training and development. After transforming GE’s management, structure and decision-making process to resemble that of an entrepreneurial organization, Welch needed his leadership team to think like entrepreneurs. “Managers talk to one another, write memos to one another.
Leaders talk to their employees, talk with their employees, filling them with vision, getting them to perform at levels the employees themselves didn’t think possible. ” (Slator, 1999). Welch knew that his new corporate structure needed leaders and he knew that leaders are not born; they are made. Therefore, when GE was cutting back just about everywhere else and the U. S. economy was in the middle of a recession he invested in GE’s Leadership Training Facility. By re-defining the role of the manager and then cultivating those who shared GE’s values Welch set GE on a course to not only compete in the economy but also eventually lead it.