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GE’s Two-Decade Transformation

Case Analysis

March 17, 2005


For: Anne Becker
From:
Scott Ashby 999004953
Phil Parkinson _
Judy Lee 04003094
Gianni Liburdi 049003649
Executive Summary

This report’s objective is to provide analysis of the leadership challenge that General Electric

(GE) is currently facing, and to recommend solutions. The primary problem is determining what

kind of candidate is required to replace retiring CEO Jack Welch. This has left GE to question

how much does the company want to change policy over the previous era, and where does the

company want to be in future?

Detailed examination of the impact Jack Welch has had as CEO over the past twenty years

reveals a leadership style that is the driving force behind a successful transition from a corporate

model that was highly centralized and bureaucratic to one that is dynamic, flexible, and many

times more profitable. If GE wishes to sustain and build upon the progress of the Welch era, it

would do well to nominate a new CEO from within the organization who is familiar with his

brand of leadership, and who can continue to provide it for many years to come.

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Table of Contents

Executive Summary................................................................................................................... 2
Table of Contents ....................................................................................................................... 3
Statement of Problem ................................................................................................................ 4
Primary Issue .......................................................................................................................... 4
Immediate Concern................................................................................................................. 4
Secondary Issues..................................................................................................................... 4
Root Causes ............................................................................................................................ 5
Key Decision Being Faced...................................................................................................... 6
Problem Analysis ....................................................................................................................... 7
Decision Criteria....................................................................................................................... 10
Alternatives ................................................................................................................................ 11
Alternative 1: ........................................................................................................................ 12
Alternative 2: ........................................................................................................................ 12
Recommended Solution, Implementation and Justification .......................................... 14
Key Tasks for Implementation: ............................................................................................ 15
Contingency Plan:................................................................................................................. 16
Appendix .................................................................................................................................... 17

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Statement of Problem

Primary Issue

John (Jack) Welch, the current CEO of General Electric (GE), will be retiring within the next

eighteen months at the end of the year 2000. Welch has shepherded a corporate entity comprised

of several diverse lines of businesses that became the ”Most respected company in the world.”

according to the Financial Times. Will GE be able to sustain the success that it has realized

during the past twenty years under Welch as the acting CEO once he departs?

Immediate Concern

A successor has to be found to replace the retiring Jack Welch, as no suitable candidate has yet

been determined. This is becoming a concern for shareholders who want to realize the same

returns they have been receiving under the Welch regime. The new CEO needs to be dynamic to

lead this complex organization, and sustain the rate of growth realized during the Welch era.

Secondary Issues

Upon selecting a successor, the first issue that GE will encounter will be how to transition from

Welch as the CEO to the new individual. This has to be done very carefully in order to strike a

balance. The new CEO has to commence the job and have the ability to act and make decisions

while being mentored by Welch so they are not “thrown to the wolves” while enabling Welch to

tie up loose ends before departing.

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GE has to minimize the disturbance when this transition occurs not only at the top, but

throughout the entire organization. The firm as a whole must be able to continue to operate as if

nothing has changed.

GE has to examine what strategy the firm is going to follow. Will the firm’s strategy continue as

is, or will it be changed to reflect the leadership traits of the new CEO? And if so, to what

degree will the new strategy diverge from the old?

It is uncertain if GE will be able to sustain another transformational change similar to that which

occurred under Jack Welch. The questions that GE as an organization has to ask itself are: who

am I, and where do I want to be in the future (ten to twenty years)?

Root Causes

Jack is a very hands-on CEO. He is not afraid to get involved in projects and initiatives that he

implemented. He participated in the Session C’s every April and May to evaluate the 3,000

senior executives of the organization, the top 500 of which had to be personally approved by

him. Welch also taught GE managerial training courses on a bi-monthly basis at its Crotonville

facility, boasting “I have not missed one session yet”.

It does not appear that GE had anyone nominated to take over for Welch upon his retirement.

This was a major concern of shareholders. Without the right successor, how will GE continue

being as successful as it was in the past 20 years in terms of creating value for shareholders?

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Even though Welch had prided himself on reducing bureaucracy and cutting corporate layers of

management, it has created a situation where corporate governance seems to be lacking. The

Business Unit CEO reports directly to Welch. This is likely going to become very unmanageable

if GE continues to expand its business units, as the new CEO will be hard pressed to maintain the

same level of direct involvement without being spread too thin. Plus, the controls do not appear

to be in place to monitor management, as Welch maintained that documenting processes creates

needless bureaucracy. As such, it will be very difficult for the business unit CEOs to understand

all of the business lines in order to properly allocate resources.

GE has a very fundamental problem. By diversifying into many unrelated lines of businesses

through acquisitions, it has lost its corporate identity to some degree. GE used to be known as a

“light bulb company”; today it is hard to know what GE’s core products are. GE likes to let the

business units operate on a standalone basis, like a small business. It is unclear whether or not

GE has a clear overall mission and vision for the organization.

Key Decision Being Faced

GE has to determine who can become the next dynamic leader of this complex organization.

People need to be guided and GE needs to ensure that they adhere to the guiding principles that

Welch has established over the past 20 years in order to be successful when deciding who should

be his successor in the role as the CEO.

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Problem Analysis

GE’s situation is similar to that of most organizations which need to find a successor for a

departing CEO. The new CEO will have to prove to everyone that he or she is a credible leader.

“Titles are granted, but it’s your behaviour that wins you respect.”1 Nothing exemplifies this

more for Jack Welch than how he handled the company’s employees. Early on in his tenure as

CEO, Welch made big waves by deciding to downsize the number of corporate layers and sell

off many of GE’s traditional business units. These mass layoffs lead to some critics dubbing him

“Neutron Jack” for his practice of getting rid of the people while leaving the building standing.

Welch, however, always believed that people should come first. Those people that were let go

were provided with help finding a new job, or given training in a new skill to make them more

marketable to other employers. While in the downsizing process, he also invested in his people

by revitalizing the Crotonville Management Development Facility better train future leaders and

treat the process as a reward for the best employees. Welch used stories at GE to create a unique

culture and make the values come alive throughout the organization. In the end, by putting

people first, Jack earned the love and respect of GE staff and overcame the Neutron moniker.

“Shared values are the foundations for building productive and genuine working relationships.”2

Welch’s vision of building people, not just employees, differed from GE’s vision of developing

and perfecting skills, which again differed from an employee’s vision of excelling individually

so that they can move up the corporate ladder. Such deeply held beliefs were reflective of his

hatred for bureaucracy. In the early days, Welch did not work with everyone at GE to develop
1
Kouzes and Posner, “The Leadership Challenge”, John Wiley & Sons, 2002. Pg. 14
2
Kouzes and Posner, “The Leadership Challenge”, John Wiley & Sons, 2002. Pg. 78

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an acceptance of what his or her vision was and how to achieve it. “Shared values are the result

of listening, appreciating, building consensus, and practicing conflict resolution. For people to

understand the values and come to agree with them, they must participate in the process: unity is

forged, not forced.”3 This was displayed during the de-staffing process. “Leaders breathe life

into visions. They communicate their hopes and dreams so that others clearly understand and

accept them as their own. Leaders know what motivates their constituents. They show others

how their values and interests will be served by a particular long-term vision of the future.”4

Welch’s vision did eventually create a responsive organization, but he had to make GE lean

before he could focus on the softer elements.

Welch challenged the process by disproving conventional theory that a conglomerate of

unrelated and diversified businesses could succeed as a viable strategy. “Acquired businesses

that are unrelated to the acquiring firm’s core business are less likely to produce positive results.”
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GE demonstrated strong financial performance over the past 10 years by allowing each

business unit have their own strategy, rather than one strategy for the firm as a whole, so they

could be more entrepreneurial.

Welch took a bold risk by implementing the #1, #2 – Fix, Sell or Close strategy. He wanted to

focus GE on businesses that were successful, and remove the ones that were not. This was also

exemplified through his Session C’s and the removal of the 10% of employees with the lowest

3
Kouzes and Posner, “The Leadership Challenge”, John Wiley & Sons, 2002. Pg. 83
4
Kouzes and Posner, “The Leadership Challenge”, John Wiley & Sons, 2002. Pg. 158
5
Michael A. Hitt, Jeffrey S. R. Duane Ireland, Mergers & Acquisitions: A Guide to Creating Value for shareholders,
Oxford University Press, 2001. Pg. 126

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performance in a group, dubbed C-players. He only wanted the best people to make GE the best

it could be.

“Part of gaining credibility involves building trust. Building trust includes demonstrating that

you are working for others’ interests as well as your own, being a team player, practicing

openness, being fair, speaking your feelings, showing consistency in the basic values that guide

your decision making, maintaining confidence and demonstrating competence.”6 When

implementing Six Sigma, he tied the initiative to the annual bonus, which has become the

granting of stock options. Thus, he is using rewards to coerce the managers to adopt Six Sigma.

This shows that he was using fear as a motivator in order to gain respect and acceptance of his

ideas. This is the classic case of expectancy theory where effort leads to performance, which

leads to reward, that was achieved through the bottom line results.

Welch attempted to enable others to act. He did so by implementing the “Work Out” program

where employees were expected to continuously improve the firm. On the other hand, Welch

was not necessarily the best at fostering collaboration. Employees were faced with a choice of

either following his initiatives or being eventually removed from the organization. This was most

exemplified during the Six Sigma implementation, where managers had to be on board or they

would be fired. In terms of Path/goal theory, Welch used this to some degree; he would

sometimes provide a roadmap to reach a given destination, while other times he would leave the

course taken open to the project staff. He would only do the latter when he felt he could not

offer any expertise to the project.

6
Stephen P. Robbins and Nancy Langton, “Organizational Behaviour Concepts, Controversies, Applications,
Prentice Hall, p253.

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Welch encouraged the heart by stretching the goals in order to outperform the competition. He

also wanted to hear employees by having them provide annual surveys asking questions that

would determine if the employee’s needs were being met, and whether GE was a great place to

work. Jack tried to promote the idea of celebrating small wins. Everyone felt that they did not

do it enough, but Welch was poor at leading by example while CEO. He was more focused on

ensuring the results were met.

Currently, GE is at a crossroads. With Welch retiring, “change is opportunity” as he would say.

GE has a big challenge to overcome, as they must decide not only on a successor, but also how

much change will occur under the new CEO’s reign. Can GE survive another “transformational

change” that occurred under the Welch regime?

Decision Criteria

The Board of Directors at GE must make several important considerations when choosing a

course of action to address Jack Welch’s retirement in 2000. The following criteria will

contribute to the Board’s final decision:

• The solution must deliver products & services that consistently meet customers'

expectations and achieve customer loyalty. The company is able to build a strategy

around a clear value proposition for the customer.

• The solution must not sacrifice the ability to continuously change. In fact, the successor

CEO needs to see change as opportunity for further improvement.

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• The solution must have minimal disruption on GE in terms of its people (employee

satisfaction and customer turnover) and a corporate culture which strives for excellence.

• The solution must minimize the turnover of A-Players, as these people are the driving

force behind the company'


s success.

• The solution must convey security and strength to the shareholders, thus ensuring their

confidence and support. Therefore it is critical the solution enables the organization to

achieve the same or better financial performance and growth in market share relative to

competitors. This can be measured through a financial ratio analysis such as ROA per

employee, percentage of revenues/profits from new business, improved returns, broader

revenue mix.

Alternatives

With the above criteria in mind and the assumption that hiring a new leader is the basis for any

solution, the Board of Directors has two potential courses of action to choose between:

1. Hire a new leader from within the organization, hand picked by Jack. Use this new

leader to maintain current momentum of change and growth during Welch’s era.

2. Hire a new leader either from within or outside of GE, with a mandate to begin a tear

down and rebuild of the organization once again. Effectively make the successor

more aggressively initiate growth and change.

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Alternative 1:

The first solution does meet the prescribed criteria. Most importantly, allowing Welch to hand

pick a worthy leader form the top 500 executives will have minimal impact on the established

culture at GE. Potential candidates will only have reached senior levels of management by

furthering the agenda laid out by Welch during his tenure, and such success has in turn helped

them to “buy-in” to his way of doing business. In addition, the familiarity of the incoming CEO

with existing processes and organizational structure helps mitigate the learning curve.

Employees will be comfortable working with a new leader that reflects the same values and

beliefs that Jack Welch has bestowed upon them over the years. This is particularly important

for the retention of the top A-Player employees, who will likely continue to receive the same

kind of preferential incentives that they have over the past twenty years.

Jack Welch is unlikely to pick anyone who does not share his passion for customer service, so it

can be expected that any successor will continue to rate highly in this regard. A focus on

customer needs, rather than abstract product development, is a key lesson that the new CEO must

take close to heart.

Finally, the premise that the future leader was selected by Jack Welch will undoubtedly have a

positive effect on shareholder confidence. The sense of continuity will minimize the chances of

any negative impact on GE’s stock price, due to expectations that financial performance will

remain as strong as that under Welch’s reign.

Alternative 2:

The second solution has the potential to cause significant upheaval during the transition period.

Selecting a new leader from outside will likely have a major effect on the organization’s culture

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and people immediately upon inception. After the new leader has had a chance to study the

organization, widespread changes may occur in the organization’s processes and organizational

structure. New ideas and perspectives injected by an outside leader not indoctrinated in the

“Jack Welch GE” can introduce different team dynamics and new ways of doing business.

The greatest challenge with this approach is that such a major reworking of GE business

practices poses a significant risk factor. Jack Welch himself is famous for maintaining that

whatever changes he made during his tenure, he could have always done things faster. It may

prove, however, that an even more rapid rate of change becomes too much for both consumers

and employees to accept.

Also, while shareholders may have confidence in the Board and Welch to elect a suitable

successor and support their decision, this may be tested if the financial performance deteriorates

in the short term as the re-organization is taking place. This will cause the shareholders to

become less supportive of the new leader and the decision to replace Welch with an outsider.

This alternative may not be practical in terms of managing expectations of external stakeholders

and employees if communications are not well established during the initial stage.

Repercussions from the Board may happen when some of them are concerned that there may not

be a smooth transition for handover.

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Recommended Solution, Implementation and Justification

Table 1: Alternatives for GE Succession Plans


Alternatives
Criteria Maintain and Successor to more
continue current aggressively initiate
momentum of growth and change
change and over that of
growth of previous regime
Welch' s era
Customer 4 4
Satisfaction
Ability to Rapidly 3 4
Evolve
Minimal Cultural 4 3
Disruption
Low A-player 3 2
Turnover
Financial 4 3
Performance
Total 18 16
Note: Rating is weighted importance of criteria on business strength and capacity
The alternatives are measured against the criteria on a 1-5 scale
Rating is on a 1-5 scale with 1 being the worst fit and 5 being the best fit
Scores against criteria are used to develop strategy

Table 1 (above) represents a numerical weighting of each alternative in the key areas discussed

therein. Based on the results, the recommended course of action for the GE Board of Directors is

alternative one: Maintain the current momentum of change and growth of Welch’s era.

The primary justification from a leadership standpoint is based on a recognition of the excellent

work that Jack Welch has done over the past twenty years. As illustrated in Exhibits I and II,

Welch’s style exhibited a number of attributes that are key for a successful leader, and

represented a marked departure from the traditional highly centralized and bureaucratic GE that

he inherited from Reg Jones.

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In some ways, Welch was able to implement his sweeping agenda of change in GE because he

created a sense of crisis within the organization. Instilling the notion that massive change was a

necessary as it was unavoidable helped to reduce employee resistance to the plan, in addition to

generating buy-in at both senior levels and the grassroots.

In today’s GE, however, the success brought by the Welch years means no such sense of

impending crisis exists. While staff can certainly motivated to get behind a new initiative every

few years such as Boundaryless and Six Sigma, there is little recognition within the organization

of the need for massive restructuring along the lines of that which occurred twenty years prior.

Not only is it difficult to motivate people to fix what isn’t broken, but there is also the risk that

rapidly accelerating the rate of change will create problems where none previously existed.

GE requires a leader who can readily institute changes within the organization to make it more

competitive, but this does not imply that such a changes need to occur at a scope that is

potentially foolhardy. Jack Welch demonstrated an great skill in balancing the needs of stability

and evolution against one another, and GE would be well served to have a CEO which can

provide his kind of leadership for years to come.

Key Tasks for Implementation:

1. Select most promising manager from top 500 executives and ensure acceptance.

2. Begin integration efforts immediately,

i. New leader attends all meetings with Jack Welch,

ii. Surveys operations and meets lower level managers,

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iii. Special introduction to shareholders and carefully developed press releases

to announce to public.

3. New leader must understand and encompass Jack Welch’s philosophy of leadership.

4. Convey consistency to employees yet push them forward towards continued change,

destroyyourbusiness.com initiative must be completed and embraced while existing

procedures must be followed and enforced.

The complete implementation of the transfer of power will take upwards of one year to complete.

For a detailed outline of the process, please consult Exhibit III.

Contingency Plan:

In the event a suitable CEO candidate cannot be located and/or fully trained by the handover

deadline, a contingency plan can be established whereby Jack Welch can extend his tenure at

GE. Given that he will have reached the government mandated retirement age by 2001, a legal

loophole could be exploited though employing his services as an unofficial consultant. This

would help to give the company adequate breathing room to successfully complete the transition

from old to new CEO without creating a dangerous power vacuum during the interim.

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Appendix

Exhibit I: Application of Kotter's Model of Transformational Change To General Electric

Kotter's Model of
Transformational Change Alan's Way
Establish a Sense of Fueled by his business experience and hatred of bureaucracy, Welch determined that a
Urgency radical change was required for GE to remain competitive in the future. If it did not, there
was a great risk that its highly centralized and inflexible organizational processes and
structure would leave it vulnerable to more dynamic firms.

Form a Powerful Guiding Jack Welch used his alliances with key direct reports to establish credibility for corporate
Coalition acceptance of the delayering process.

Create a Vision Welch’s vision was simple as "Being No. 1 or 2 in any industrial sector in which they
compete".
Communicate the Vision Welch communicated his vision through employee suggestion programs, weekly or monthly
meetings, and training sessions. He would use storytelling at these sessions to promote
successes and illustrate failures.

Empower Others to Act on Jack Welch empowered others to act on their vision by making them the idea champion, and
Vision telling the story throughout the organization.

Plan for and Create Short Within Work-Out, employee suggestions had to be accepted or rejected on the spot by
Term Wins managers, thus showing employees that their ideas were being considered. Welch also
rewarded his "A-players" with training at Crotonville.

Consolidate Improvements. Initially, Welch targeted cost savings mostly from headcount reductions. He challenged the
Keep the momentum for entire organization to look for more savings. This became an end result of improving
change moving customer satisfaction and productivity using the Workout and Six Sigma programs.

Institutionalize the new Best practices and resources are shared between business units. Welch used management
approaches training at Crotonville and Best Practices and Workout programs to foster collaboration.
When Six Sigma was introduced, it had to be done his way or the highway, and was tied
into individual compensation in the form of stock option bonuses.

Exhibit II: Fiedler's Leadership Model

Leaders Leader-Member Relations Task Orientation Position Power


Reg Jones High High High
Jack Welch High Low High

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Exhibit III: Implementation Plan

Short term (within three months)


Recommendations Targets Justifications Key Tasks Im Implementations (resource
allocations/management processes,
cultural values, sequencing and
contingency arrangements)

1.To continue dyb.com Business To continue the Communications Create a task force and pilot test.
project and launch as levels momentum company wide to let Launch in phases.
full fledged (Strategy) managers to initiated by Welch. people know
collaborate management' s
with IT commitment.
department Training is key
2.Institute company- Quality people They are Communicate clearly Set clearly defined priorities and
wide training and retain and business individuals who and get message schedules. Establish effective
A-Players (leadership) leaders integrate all across. Encourage controlling measures in relation to
essential elements upward and expected standards of performance.
of company to downward Reward according to performance
achieve impeccable communications.
results.

3. Focus on integration Company wide Integration is a Develop a task force - Pay attention to behavioral
(process) deliberate process to facilitate and reactions of stakeholders and
which is often orchestrate best employees turnover rate.
ignored. One of practices and bring in - communicate clear vision (change
the highest representatives from if necessary to better fit with business
priorities during different functional environment)
the transition and units. -Establish and reinforce core value
in a dynamic (integrity, customer service, quality
industry. and innovation)
-These values to be stressed in hiring
and training in performance
appraisals
4. Consultation and Few tiers Change and growth Spearhead initiatives -provide incentives and reward for
seek input from the down below need ongoing by formalizing actionable ideas/plans
bottom (culture) successor and revitalized ideas processes and ask -reinforce this process is part of
critical and plans. Involve target people to company culture for innovation
business level target people to suggest -Business levels managers to be
managers take ownerships of improvements or help motivated and rewarded by able to
ideas and gain plan a proposed train and select right quality people
commitment. change
5. Plan for exit Jack Welch To continue Retired but serve on -contact related governmental units
personal board until successor to understand if flexibility is allowed
aspirations is on track. and to what extent.
-develop contingency plan if
retirement age cannot be changed.

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Long Term (within twelve months)
6. To inject morale All employees To make policy -Vocational -To establish a reliable and fair
(people) manifested in support reward system
consistent and clear (sponsorship, - role modeling and mentor
way to employees challenging program to develop employee
and solicit ideas of assignments, self-efficacy and greater
how to retain and exposure) appreciation of organizational
attract talent staff culture
inside & outside.

7.Continue to foster All employees Establish process to Periodic review of Develop job descriptions in
communications (people bring every senior progress to ensure parallel of workout process
and operations structure) executive from process is on the
different functions to track and on-going
jointly pursue urgent feedback gathered
business goals and from employees to
reach conclusions of enhance
how to achieve them communication
process.

8. To remain competitive Senior Risk (outperformed To develop -Focus on core competence by


in market and sustain management by competitors, strategy to leverage offering services which are
competitive advantage lower performance) on company' s currently not available by other
(Strategy) for diversified reputation to sell competitors
company like GE if products in niche
they are not categories
proactive in change.
9. Continue to push for Company wide -Every change to be -omit irrelevancies -To implement by tying all
initiatives; one at a time done within the and get to the core processes, units together and
(Strategy) context of GE' s of every issue doing it in such a way as to get
history, future needs bottom-line results.
and competitive
situation
-not to get people
cognitive overloaded
and confusion.

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