Running Header: GE We Bring Good Things to Life

MGMT E-5005 Corporate Strategy

Harvard Extension School
GE…We Bring Good Things to Life (A)
Overview

Viewed as “one of the most successful, most valued, and most-watched companies in the world,” 1 the General
Electric Company (GE) has a long and rich history—dating back to its founding in 1878—of financial,
leadership, and cultural success.

1995 marked 100 years in business for GE and over that time it had only had a total of eight CEOs—a tenure
averaging over 14 years for each. Many well performing corporations will typically replace a retiring CEO with
one of similar style—a move which creates less uncertainty with shareholders and results in an easier transition
for employees. However, GE has a history of replacing its CEO’s with ones which have quite diverse
backgrounds and leadership styles; an important cultural tradition of GE continually revitalizing itself.

The 1981 transition followed that GE tradition when Jack Welch took over as CEO of GE from Reg Jones—US
World News and Report’s “most influential man in business” (in 1980) 2 and a “management legend” according
to The Wall Street Journal. Where Jones was “considered the model of the button-down, sharp-pencil corporate
executive,” 3 and regarded as “the leading statesman among American businessmen in the 1970s,” 4 Welch was
known to be “scrappy,” “confrontational,” and “abrasive;” so much so that a 1973 appraisal noted that he needed
“improvement in handling socio-political relationships.” 5 That said, Welch was also recognized as a bright,
decisive, and motivated “go getter,” with a well-articulated vision for GE’s future—not to mention that he was
hand-picked by Jones to succeed him.

After 14 years of leadership, Welch had over doubled GE’s revenues and multiplied net income by four-times.
Although his 1981 inheritance was already considered a highly successful company, he still managed to identify
a host of issues that plagued GE, and subsequently implemented both cultural and process based changes that
resulted in even better company performance. That said, one area that GE was struggling in was quality control;
while GE produced about 35,000 defects per million operations—a figure on par with most major U.S.
companies—competitors like Motorola had reduced defects to as little as 3.4 per million operations.

An April 1995 employee survey indicated that GE employees were concerned about the quality of the company’s
products and processes. In a timely presentation, 34 year GE veteran and CEO of AlliedSignal, Larry Bossidy,
delivered a presentation to the GE Corporate Executive Council (CEC) which echoed the concerns of quality
expressed in the employee survey and suggested the company adopt the six sigma quality program. While Welch
recognized that GE needed a formal quality improvement effort, and other companies that had successfully
implemented the six sigma program had “attributed as much as a 10% increase in after-tax profits to it,” GE’s
massive size and diversification of business types presented unique implementation challenges.6 No program’s
success could be guaranteed but something needed to be done.

Assessment

As described in the overview, Jack Welch was fortunate to inherit an already highly successful company in 1981,
putting him a unique position to strengthen an already great company as opposed to turning around a failing one.
That said, even though GE was successful, it still faced a host of challenges, and Welch, being a GE employee
of 21 years, had been exposed to them first-hand and was intent on fixing them through a series of new initiatives.

1
Heskett, “GE ... We Bring Good Things to Life. (A).”
2
Saxon, “Reginald Harold Jones, 86, Dies; Led General Electric.”
3
Saxon.
4
Heskett, “GE ... We Bring Good Things to Life. (A).”
5
Heskett.
6
Heskett.
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During the previous few decades GE had grown rapidly, and by 1968 contained 10 groups, 46 divisions, and
over 190 departments. As a victim of its own success, the rapid expansion created new scaling issues that GE
was ill equipped to fix. To help correct these, GE solicited outside help in 1969 by hiring McKinsey to do a
study of the company and make change recommendations. The major impact of the study was GE’s
implementation of McKinsey’s recommended 35 to 40 “Strategic Business Units.” While the SBU
implementation may have been the right structure at the time, Welch had viewed the SBU’s and the subsequent
five sector “macrobusinesses” as additional layers of management and bureaucracy that needed to be removed
or reduced. There were many things Welch disliked about the GE environment that he inherited but none more
so than “bureaucracy,” which was antithetical to his fast paced, deal-making, laissez-faire style of leadership.

Welch hated delays resulting from approvals, and decisions from employee superiors; as a result, he started right
away in eliminating most of the bureaucratic positions and employees he saw as a hindrance to his plan of
breaking GE fee of bureaucratic red tape. In all, between 1981 and 1985, Welch had laid off over 120,000
employees, reducing employment from 420,000 to 299,000. The majority of these were corporate staff in
strategic planning and finance roles (80% and 60% role reductions, respectively).

Other initiatives tied either directly or indirectly to Welch’s objective of removing bureaucracy included:

 Moving from 46 SBU’s and six sectors to 13 businesses that directly reported to the four-member
“Corporate Executive Office.”
 Reducing the number of management levels between him and field managers from nine to six.
 Ending the employee security program that “tenured” employee’s (25 years+) received.
 Changing manager’s directive from “controlling and revising” to “assisting and coaching.”
 Warning employees that non-adoption of the “work-out” program is a “career-threatening” move.

Outside of these more draconian implementations, were softer cultural changes that Welch rolled out. While the
indirect objective was still often to break down GE bureaucracy, these initiatives helped unify GE employees
with a handful of core values that they could focus on and be rewarded for embracing—both in recognition and
in compensation.

Welch emphasized the concepts of “ownership, entrepreneurship, stewardship, and excellence,” which translated
to encouraging managers to delegate more and employees at lower levels in the organization to be more
empowered to make decisions without approval. His “Human Engine” concept encouraged creativity and
ownership at every level through “self-confidence, simplicity, and speed.” To better tie “ownership” to the rank
and file GE managers, he extended the stock option program from just the very top managers to over 27,000
employees. Welch, along with his top leadership, created a short list of shared values that was to be
communicated throughout the company. In an effort to make sure values were lived and not just paid lip service,
Welch and the CEC began “giving more emphasis to the values than to performance numbers.”7

Lastly, Welch redefined and implemented the concept of “stretch goals:” aggressive goals in which significant
progress had to be made to achieve but in doing so, employees would be rewarded in both recognition among
peers, and financially. While the stretch goals arguably helped GE improve both operating margins and inventory
turns, they also were recognized as pushing managers to make decisions they may not otherwise make in order
to achieve these goals. Some leadership felt that they were walking a fine line between doing what was right,
and what would help them achieve their goals. As evidence that employees may have been pushed too far in
trying to reach their aggressive targets, GE had to pay millions of dollars in fines over several lawsuits imposed
by the U.S. government and other wronged parties, all of which stemmed from employee misconduct in trying
to sell more product and close more deals.

7
Heskett.
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While many of the initiatives Welch implemented increased company focus on its core businesses, speed to
market, and ultimately annual revenues and net profit, some of his implementations almost certainly resulted in
pushing employees too hard (creating work-life balance issues), corporate misconduct (stemming from
employees trying to meet aggressive goals), quality control issues (as a result of removing “approval” processes),
a loss of morale (after “downsizing 120,000 + employees), and a culture of consequence management (due to
Welch’s aggressive style and directives such as "Be first or second! If not, you're out!").

Recommendations

It’s hard to argue with Welch’s leadership purely on the numbers—by all accounts, he had over doubled revenues
and increased net income by a factor of four. But one could make an argument that some of his implementations
could have been handled differently or better.

For better or worse, by 1995, Welch had changed GE’s mix of business whereby over half was in financial,
aftermarket, and broadcasting services—leaving just 44% represented by manufacturing. While this
diversification gives GE the benefit of resilience if any one or several market verticals are struggling, it also
potentially damages a long standing culture of a company inspired by innovation and actually developing and
making products. Expansions into less respected, more risky, and “unsavory” markets such as investment finance
may serve to hurt GE’s reputation if caught up shady dealings during the next financial crisis, and may further
sour attitudes of employees which are already not pleased with GE’s need to be involved in businesses don’t
“make things.”

One area it would be easy to argue that Welch could have handled better is his “downsizing” in the first four
years. Welch was known for soundbites (or “bites) and one of them was: "my whole job is people. I can't design
an engine. I have to bet on people.” That statement seems to be contradicted by his elimination of those 120,000
jobs in the first four years. Were those 120,000 employees people that Welch couldn't “bet on” or could he have
done a better job leveraging them in different roles? GE was so large and diversified across so many sectors that
if any company could find a new home for an otherwise good employee—in the unfortunate position of a role
designated for elimination—it would be GE. The company wasn’t in a negative position when Welch took over
in 1981, whereby he needed to cut employees or GE would sink. Certainly, cutting those positions made the
company leaner but did so hastily and added a great deal of uncertainty among remaining employees wondering
“will I be next?”

Welch was openly adverse to “spinning off” business units and claimed in his 1995 shareholder letter that
“breaking up is the right answer for some big companies. For us it is the wrong answer.” Instead of making the
drastic personnel cuts that he made, could some of these business units have been spun off and those employee’s
jobs and culture been preserved in a GE spin-off?

There’s also a larger, more ethical question regarding if it’s right for a company to be so large and in so many
businesses, both domestic and globally. Antitrust laws help restrict companies from dominating any one market
vertical—a situation which breeds price fixing, stifles innovation and removes marketplace competitiveness—
but what about companies that are so intertwined into every market segment that they become “too big to fail?”
What about American companies that are so globally diversified that they lessen allegiance to their home country
and exploit labor and tax laws of less regulated countries in order to secure (and potentially exploit) cheaper
labor and pay less taxes?

Lastly, while the quality control at GE was typical of most major U.S. companies, it still left plenty of opportunity
for improvement. And due to GEs scale, implementation of a successful program could have significant benefits
to the tune of billions of dollars. Even though hiring the 3,000 new employees required to implement the six
sigma quality concept was antithetical to Welch’s style of minimizing additional layers and would require a top-
down style implementation, we would recommend it as a valuable add to the company’s culture and processes.
GE We Bring Good Things to Life 4

While the case positions implementation of the six sigma program as an either “do it” or “don’t do it,” it doesn’t
give the recommended approach expressed in Collins’ and Hansen’s Great by Choice of “fire bullets, then
cannonballs.” 8 That is to say, GE would be best served by deploying the six sigma program in just one of its
business lines first and then following the six sigma process to determine the effects: measure, analyze, improve,
and control. An additional recommendation would be to fire other “bullets” by implementing other quality
programs in parallel and seeing which one produced the best results. It could be that different programs could
have worked better or worse across the various business lines at GE and perhaps six sigma (while later deemed
as a success) wasn’t the best choice available.

The last recommendation would be for Welch to simply “slow down” and take a more measured approach before
making drastic changes. Companies like GE will always be vulnerable to smaller, more nimble and innovative
competitors, but at no time under Welch’s leadership was GE in danger of folding. Along the same thread is a
lesson learned from Great by Choice (and backed up by empirical data) regarding the “20 mile march” concept.
In short, rapid expansion and growth—while often beneficial for short term gains that are likely to please Wall
Street— isn’t usually the best long term decision. During Welch’s 20 year tenure he moved very quickly on
initiatives and may have done so while sacrificing some of the long standing “mission, values, and pride” style
culture of GE and damaged its integrity and reputation. Employing more of a “20 mile march” style growth
program could have better positioned GE for Welch’s successor and made it an even larger and more profitable
company than it is today.

8
Collins and Hansen, Great by Choice.