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74 CREATIVITY AND INNOVATION MANAGEMENT

Case Study: Jack Welch’s Creative


Revolutionary Transformation of
General Electric and the Thermidorean
Reaction (1981–2004)
Pier A. Abetti

This case study draws a parallel between the French Revolution and the GE ‘revolution’,
according to three waves of transformation. We discuss the ‘hard’ effects on GE employees
(strategy, structure, employment, rewards) and the ‘soft’ effects (culture, work climate, indoc-
trination). In parallel with the French Revolution, the retirement of CEO Jack Welch was
followed by a ‘Thermidorean reaction’ characterized by the relaxation of Welch’s professional
and ethical standards, lassitude and indecision in the GE organization, and the fall of GE stock
price by 45 percent. Welch’s role as revolutionary leader and driving force is highlighted.

Introduction Thermidorean reaction after Welch’s


retirement. (The French Thermidorean
GE and Jack Welch’s Legacy reaction refers to the period after the Reign
of Terror, in 1794, when the tyrant Robe-
alued at $380 billion, General Electric
V (GE) is the world’s most valuable and
admired company. This status is still attrib-
spierre was removed from power and an
economically and culturally liberal gov-
ernment came to power.) This reaction, in
uted to the 20-year leadership of CEO Jack turn, was due to Welch’s less creative,
Welch (1981–2000). During that period, GE’s more opportunistic and more intolerant
market value increased 3213 percent at a leadership during his last years of tenure
compounded annual growth rate (CAGR) of and the ensuing lassitude and indecision
20.4 percent, while the Standard and Poor 500 among employees (Abetti, 2001). The
(S&P) Index increased 915 percent (CAGR = question thus becomes: was the sharp
13.1 percent). Two years after Welch’s retire- decline of GE’s stock value due to the col-
ment, GE’s market value had fallen by 45 per- lapse of the Internet bubble or to the Ther-
cent, while the S&P index declined by 32 midorean reaction which, in turn, had its
percent. These figures lead to the conclusion root cause in Welch’s last years as CEO?
that GE’s success was essentially due to the
leadership of Welch and that his successor, Jeff
Immelt, was unable to maintain the momen- Objective, Methodology, Sources,
tum of his predecessor. However, two differ-
ing theories also need to be considered. and Plan
(1) GE was a company ‘built to last’ (Collins The objective of this historical study is to
and Porras, 1997). If GE had selected answer these questions by describing Welch’s
another CEO in 1981, he or she would career and his creative revolutionary transfor-
have obtained similar results. The ques- mation of GE according to three waves of ‘cre-
tion thus becomes: was Welch a product of ative destruction’ (Schumpeter, 1930) and their
GE, as claimed by Collins and Porras, or effects on GE’s employees, organization, and
was GE after 1981 a product of Welch? culture.
(2) The collapse of GE’s market value was We have deliberately elected not to draw on
primarily due to what can be called a the extensive and sometimes contradictory

Volume 15 Number 1 2006 © 2006 The Author


doi:10.1111/j.1467-8691.2006.00370.x Journal compilation © 2006 Blackwell Publishing
CASE STUDY 75

theories of leadership in general and executive and Coutu, 2002). It should be noted that
or managerial leadership in particular. Rather, the last two sources must be treated with
since Welch was a revolutionary, always pro- caution. Welch’s autobiography was hast-
active, sometimes ruthless, we draw a parallel ily co-authored with a professional jour-
between his actions and the French Revolution nalistic writer. My analysis of the styles
(1789–1815) and other revolutions that had a in the text show that only around one-
major impact on their countries and the world, quarter of it was written by Welch. As will
namely the Russian Revolution (1917–1993), be described later, the final interview is a
the Chinese Revolution (1921–1972), the Mex- watered – down version of the original
ican Revolution (1911–1940), the Fascist Revo- interview that could not be published
lution in Italy (1919–1943) and the National- because of a conflict of interest.
Socialist Revolution in Germany (1923–1945)1. (6) Soon after his retirement, revelations about
In fact, GE’s value added in 1981 was of the Welch’s personal life stirred up many
same order of magnitude as the GNP of France scandalous stories in the popular press,
in 1789: $30 billion in 2004 prices2 (Hohenberg, (Beam, 2004), and in a book (Byron, 2004).
2005). Today GE’s value added is approxi-
The plan of this historical study follows the
mately $100 billion, similar to the GNP of Ire-
evolution of Welch from his family back-
land. We also draw a parallel between Welch’s
ground to his first job at GE; the event that
origins, motivation, leadership, personal and
caused him to become a revolutionary; his rise
managerial characteristics, and actions and
through the ranks by exploiting the GE sys-
those of the leaders of these other revolutions3.
tem; his selection as CEO; the coup d’état that
We hope this unorthodox approach will help
led to his assumption of full power; the three
answer the two controversial questions above.
creative revolutionary waves; their hard and
The sources for this study are the ample
soft effects on GE’s employees, organizations
business and popular literature on GE and
and culture; the hardening of his personality
Welch, and the author’s personal experience
and increasing intolerance of dissent; the
over 32 years (1948–1981) at GE, as well as his
attempt to keep power beyond the mandatory
conversations with other GE employees who
retirement age; the selection of three candi-
worked under Welch and his successor (1982–
dates for succession; the decision to appoint
2004).
one and fire the other two; the grooming,
The literature on GE and on Welch is
indeed attempted cloning, of his successor,
extensive but uneven. It can be divided into
Immelt. We then describe the Thermidorean
five categories.
reaction as it affected GE and its employees and
Welch personally, including business and mar-
(1) Serious business studies, such as the sem-
ital scandals that have left a permanent mark
inal study of GE by Collins and Porras
on Welch’s image.
(1997), and Harvard Business School and
We conclude by answering the two ques-
other cases, for instance, Aguilar et al.
tions above and by revealing the driving force
(1981, 1985, 1991); Malwight and Aguilar
underlying the rise and fall of American’s
(1996); Elderkin and Bartlett (1993); Jack
most successful and admired executive.
Welch, GE’s Revolutionary (1994); Heskett
(1999); Bartlett and Wozny (2000); Bartlett
and Glinka (2002); Bartlett and McLean
(2004).
Welch the Revolutionary
(2) Books and articles by Welch’s laudatory
semiofficial biographers (a better designa-
The Origins of the Revolutionary
tion would be hagiographers4) such as Slater Like many militant revolutionaries, Welch was
(1994, 1996, 1998, 2000); Tichy and Sher- born in a humble family of Irish descent at the
man (1994); Tichy and Cohen (1997); margins of the ruling class. His father was a
Heller (2001); Lowe (2001). conductor on a commuter railroad, the Boston
(3) A few critical studies, for instance, a well- and Maine, who sold and punched tickets and
researched book (O’Boyle, 1998) based never advanced in rank. More importantly,
mostly on interviews with disgruntled when Jack was born (1935), most members of
employees and Welch’s critics. the ruling class in the Boston area and execu-
(4) Countless interviews with Welch pub- tives in leading U.S. companies were WASPs
lished in a book (Lowe, 1998) and in busi- (White Anglo Saxon Protestants). Welch was
ness magazines, (Tichy and Charon, 1989), white, but Irish and Catholic, and regarded the
and in the popular press. ruling class with admiration, envy, and per-
(5) Welch’s autobiography (2001) with an haps some hostility. Ireland, which had been
afterword (2003) and a final interview in repressed for centuries by England, had just
the Harvard Business Review (Collingwood recently gained independence, in 1922.

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Journal compilation © 2006 Blackwell Publishing Volume 15 Number 1 2006
76 CREATIVITY AND INNOVATION MANAGEMENT

We can draw a parallel with Napoleon opportunity to revolutionize the system and
Buonaparte, who came from an impoverished make GE the world’s greatest company. To
Corsican family, despised by the French achieve this end, however, he had to gain
nobility. Welch’s roots in a comparable poor, power by becoming CEO.
despised minority could have given rise to a
comparable ambition to become the powerful
ruler of the majority.
The Rise of the Revolutionary
Welch was smart enough to obtain a Ph.D. According to Machiavelli (1515) there were
in engineering in three years. With his strong three ways to become the ruler of an Italian
technical background, he was hired by a lead- Renaissance state: (1) being chosen by the
ing, technologically advanced, growing and incumbent prince; (2) a palace revolution (coup
progressive company, GE, which was the ideal d’état); (3) violence. Welch advanced by being
vehicle for acquiring power. chosen by the incumbent president and then
implementing the coup d’état that allowed him
to revolutionize GE.
The Making of the Revolutionary After the Reign of Terror, Napoleon, a pen-
Most potential entrepreneurs do not launch niless general, was asked to subdue with a
their enterprises until they are either stimu- ‘whiff of grapeshot’ the mob that wanted to
lated or forced by a precipitating event, usu- restore the repressive regime of Robespierre.
ally a negative one such as dismissal for unjust Napoleon rose politically, was elected consul,
reasons, lack of recognition, or boredom (Tim- then first consul, then consul for life after a
mons, 1999). Similarly, many potential revolu- coup d’état in 1798. Finally he crowned him-
tionaries initially attempt to work within the self emperor.
system, hoping they can modify it through In a similar progression, Welch had first
persuasive or pacific means, until a major gained recognition by working within the sys-
shock convinces them that revolution is the tem before being selected as a candidate for
only possible solution. At the beginning of the succession and then, as CEO, revolutionizing
French Revolution the oppressed Third Estate GE. Although he hated GE’s highly politi-
(the 98 percent of the population who were cized, sanitized, ‘superficially congenial’
neither nobles nor clergy) addressed petitions (Welch, 2001) headquarters, with its bureau-
to the French king that went unanswered. cratic policies and procedures, he exploited
Only when the Third Estate was denied equal the system as he rose through the ranks. He
representation did they rebel against the king gained recognition through hard work,
and storm the Bastille. In Mexico, Francisco detailed analyses, polished presentations, and
Madero sought power through a democratic most of all outstanding business results.
election and started a revolution only after the Nonetheless, in 1975, he was not on the list of
vote was rigged by the incumbent dictator ten possible successors to CEO Reginald Jones,
Porfirio Diaz. In Russia, Lenin began by trying who was to retire in five years. The senior vice
to gain control of the democratically elected president of human resources believed Welch
Constituent Assembly. After he was forced drove too hard for results and had too little
into hiding, he decided to overthrow the gov- respect for the company’s rituals and tradition
ernment by violent means. (Welch, 2001).
Welch’s first job at GE was with the Plastics But Jones was also frustrated with GE’s
Division, an innovative venture outside GE’s slow-moving bureaucracy and wanted a
conservative electrical core business. He was successor who would shake things up. He
given responsibility for developing a new insisted that Welch be the eleventh candidate.
product and for the pilot plant. By working In 1979, Jones interviewed all of them accord-
extremely hard, he achieved outstanding ing to the ‘airplane interview,’ whose format
results his first year. He expected to be com- was: ‘You and I are flying in a company plane.
pensated financially and with a promotion, as The plane crashes and we both die. Who
he had been promised before he was hired. should be the next CEO of GE?’ The purpose
Instead his supervisor, apparently a bureau- was to determine each candidate’s opinion of
crat who did not appreciate Welch’s zeal, gave the other contenders and whether they would
him a minimal raise. This was the precipitat- be able to work together after Jones’ retire-
ing event that pushed him over the line. He ment. But Welch had his own agenda: to prove
decided to quit GE and look for more reward- he was the best choice for CEO. He conve-
ing employment. Fortunately for GE, his niently forgot he was supposed to be dead and
potential had been noticed by a vice president proposed himself as Jones’ successor!
who was able to convince Welch to stay thanks As a final test, Jones named three of the
to a substantial raise and promises of a bril- candidates, including Welch, vice-chairmen.
liant career. Welch realized he had a unique Welch proved his ability and was named CEO

© 2006 The Author


Volume 15 Number 1 2006 Journal compilation © 2006 Blackwell Publishing
CASE STUDY 77

on April 1, 1981. He had gained limited power ended the dog-and-pony show. He wanted to
by climbing the traditional ladder. Over time lead rather than ‘review and approve.’ He did
he built a small, dedicated group of young, not want to see the books, but rather look into
aggressive followers who shared his vision the heads and hearts of the business leaders
of the new GE and were loyal to him. As and the passion they poured into their argu-
with Napoleon, these ‘dashing generals’ were ments. With two powerful actions – the mas-
rewarded with promotions, recognition as sive dismissal of people and the dismantling
members of the elite team, and generous of the bureaucracy – Welch showed that he
financial packages, as long as they kept winning. was fully in charge. Now he was ready to start
the revolution5.
Welch’s Coup d’Etat
To assert himself and prove he was in charge, Welch’s Creative Revolution
Welch consolidated his power through a coup (1981–2000)
d’état. His goal was to seize the few neural
centers where power was exercised and from The Three Waves
there to conquer the entire constituency
By definition, the goal of a revolution is to
(Malaparte, 1931). Accordingly, he started at
destroy a regime that is unsatisfactory to the
headquarters and eliminated the complacent
majority of the people (‘stakeholders’ in busi-
bureaucrats who might offer passive resis-
ness parlance) and replace it with a new order6
tance, firing 167 out of 200 and adding 67
that, it is hoped, will meet their needs and
members of his own loyal team.
aspirations. Welch achieved this goal over 20
He also realized that the world was entering
years by bringing about a revolution in waves.
a recession and that GE should reduce
The advantage of acting in separate waves
expenses, becoming ‘mean and lean’ to face
rather than one continuous revolution is that
the double challenge of a recession and
revolutionary fervor cannot last forever. Peo-
increased international competition. He laid
ple become tired and want to relax and enjoy
off 80,000 employees the first year and 42,000
the rewards of their work. To make progress,
over the next two years, targeting older, more
they must be reenergized and pushed ahead in
expensive employees who might be more
periodic waves.
resistant to change. There was one problem:
Welch’s 20-year revolution can be conceptu-
GE’s long-standing policy that employees
alized as three waves with the following start-
with 25 or more years of service could not be
ing dates and major objectives:
dismissed for lack of work. Welch realized that
canceling this policy would have negative 1981, first wave (hard)
repercussions among stakeholders and the
Create a new vision and strategy to drive
press and therefore decided to add the words
reorganization, mass dismissals, divest-
‘when appropriate’ to the policy. As far as I
ments and acquisitions.
know, not one single case of ‘appropriateness’
was ever registered! 1985, second wave (soft)
In parallel with dismantling the infrastruc-
Revolutionize GE to gain the strengths of a
ture of the GE bureaucracy, Welch wanted to
big company with the leanness and agility
change the modus operandi at headquarters and
of a small company.
in the field. This was exemplified by the prep-
aration and review of the plans of GE’s 65 stra- 1996, third wave (soft and hard)
tegic business units (SBUs). From January to
Develop an integrated, boundaryless,
May, every SBU prepared strategic plans of
stretched, total quality company with
100 or more pages with detailed forecasts for
A-players.
the next five years. Staff headquarters checked
and even graded them. They then prepared The characterization of the waves as hard or
tough or irrelevant questions for the CEO and soft refers to the means Welch employed. In
top executives to ask during the formal review the hard waves, the lives of the employees
in July. These reviews were elaborately pre- are physically disrupted by mass dismissals,
pared and rehearsed to avoid unpleasant sur- divestments, acquisitions and major organiza-
prises. Welch put an end to all this. He refused tional changes. In the soft waves, the minds
to see the books before the presentation and and habits of the employees are disturbed,
insisted on asking his own questions. The because they must absorb new ways of oper-
formal presentations with over 40 people ation and new working practices. Physical dis-
in attendance became shirt-sleeve, informal, ruption is minimal, except for those who
open discussions of the business and its cannot cope with the new company environ-
challenges with fewer than 10 persons. Welch ment and are forced to leave.

© 2006 The Author


Journal compilation © 2006 Blackwell Publishing Volume 15 Number 1 2006
78 CREATIVITY AND INNOVATION MANAGEMENT

The First Wave (1981–1984) 2. Reducing staff and changing its role from
controlling and revising to assisting and
Now that Welch had conquered headquarters, coaching.
he had to conquer the field, including the 3. Instituting a new reward system based
minds of managers, staff, and workers of all more on performance bonuses rather than
ranks. To achieve this, Welch, for the first time salaries, with more stock options.
in GE’s history7, created a unified vision and 4. Ending employment security. The company
strategy for the entire company, the famous could dismiss anybody, any time, regard-
three-circle concept. All GE businesses had to less of length of service or merit. At the
fit within three categories: same time, employees who found better
1. Core business (such as Power Generation, jobs outside the company were free to leave
Appliances) with moderate returns, managed and would not be considered disloyal.
as cash cows with selective investments. The first wave had created a smoothly func-
2. High-tech businesses (such as Medical Sys- tioning company that generated plenty of
tems, Plastics and Aircraft Engines) with cash. A portion of this cash was paid to the
high growth, negative cash flow and high stockholders, but the majority was reinvested
investments. in R&D, capital investments, and acquisitions,
3. Services (such as GE Capital, NBC and which, in turn, generated more cash, a concept
Information Services) with high returns, developed by Welch that was called the ‘GE
high growth, cash generation and low growth engine’ (Elderkin and Bartlett, 1993).
investments. The second wave created a more efficient,
Welch then evaluated each business. Those streamlined organization that reduced bure-
that were first or second in their industry were aucracy and motivated employees, through
placed inside one of the three circles. The oth- tangible incentives, to achieve improved
ers were given two years to become first or financial results.
second. If they could not, they were closed or
sold. Welch’s message to all employees was
crystal clear: Be first or second! If not, you’re out! The Third Wave
At the same time, Welch regrouped the 65 Because GE’s success was identified with
SBUs into 13 businesses, which he managed Welch personally rather than the new GE sys-
directly. Welch carried his message to the tem, the challenge was to prevent a slackening
field and met formally and informally with of efforts and a slowdown in growth and prof-
employees of all ranks. Because of his its after his retirement. In the third wave, he
working-class origins, Welch could relate eas- had to create new GE values, a new GE cul-
ily to blue-collar workers and listen to their ture, and an emotional climate that would
suggestions for improving efficiency. He regu- transcend his personality as well as his strate-
larly visited the GE executive training center gic and organizational reforms.
in Crotonville, N.Y., to give lectures and meet The third wave was both soft and hard. On
informally with future general managers. He the soft side, it included watchwords like
listened to their complaints about the linger- ‘speed, simplicity and self-confidence,’ ‘can-
ing bureaucracy and delays in obtaining dor, openness, ownership,’ ‘integrated diver-
approvals and decisions from superiors. sity,’ and even ‘evangelizing.’ On the hard side
Welch’s ‘workout’ meetings (Ulrich et al., was the total quality (six sigma) initiative,
2000) may be compared to Chairman Mao’s which produced significant results. To enforce
frequent meetings with Chinese workers and the six sigma culture, Welch made it clear that
soldiers, and his management meetings to nobody would be promoted unless he or
Mao’s open discussions with the younger she was a certified ‘black-belt’ team leader
party leaders. (Heckett, 1999). Welch then started a similar
campaign for digitization and e-commerce. All
The Second Wave (1985–1995) managers had to find a mentor who would
teach them how to access the Internet (Bartlett
Having achieved, almost by force, impressive
and Glinka, 2002).
financial results, Welch was concerned that
Probably the most important aspect of the
GE’s organization would not be able to main-
third wave was the selection of a top team of
tain its growth rate. Therefore, he embarked
A-players, the future leaders of GE (Bartlett
on a major reorganization that would ensure
and McLean, 2004). We know that Welch stud-
the motivation and the capability to grow suc-
ied the German strategies of World War I and
cessfully. He took the following actions:
admired the German general staff. He may
1. Flattening of the corporate pyramid from also have read Karl von Clausewitz’s famous
eight to four levels. treatise Vom Kriege (On War) (1830). Welch’s

© 2006 The Author


Volume 15 Number 1 2006 Journal compilation © 2006 Blackwell Publishing
CASE STUDY 79

Imperial Germany The New GE

Smart Stupid Achievers Non-


Achievers

General Teach Motivate


Eager Out! Believers and and
Staff
Stretch Train

Force Non- Do Not


Lazy Troops Believers Out!
Them Hire

Karl von Clausewitz, 1830 Jack Welch, 2000

Figure 1. Welch’s third wave: selecting leaders.


Source: Abetti (2001)

criteria for selecting leaders are very similar to their wallets a card listing the GE values, just
the criteria for selecting the elite members of as Chinese party members, soldiers, and stu-
the German general staff. As shown in the left dents had to carry Chairman Mao’s Little Red
matrix of Figure 1, Clausewitz classified all Book. Welch applied these same values as cri-
potential candidates as smart or stupid and as teria for selecting GE’s future leaders.
eager or lazy. There are four possible combina- Welch characterized potential leaders in the
tions: new GE as achievers and non-achievers,
believers and non-believers, as shown on the
1. The ‘smart and eager’ (top left quadrant)
right side of Figure 1. There are four possible
are the obvious choice, but there are not
combinations:
enough of them.
2. Therefore, the ‘smart and lazy’ will be 1. ‘Achievers and believers’ are the obvious
forced to move from the lower left to the choice, but there are not enough of them.
upper left quadrant. 2. Therefore, the ‘believers and non-achievers’
3. If they do not respond, they will have to are motivated and trained to move from the
join the ‘stupid and lazy’ troops in the top right to the top left quadrant.
lower right quadrant. 3. ‘Non-achievers and non-believers’ should
4. ‘Stupid and eager’ is the worst combination not be hired.
because these people cause all kinds of 4. The ‘achievers and non-believers’ repre-
trouble with their overzealousness. They sented a problem for Welch. His attitude
should be thrown out! toward them changed over time. Initially he
recognized grudgingly their contributions
but also saw them as a management prob-
Welch’s Succession and Retirement lem. Later, in his last letter to stockholders,
Welch launched a crusade to eliminate
The Hardening of Welch
type-IV managers:
At the end of the third wave, faced with the
‘. . . we have to remove these type IV’s
prospect of mandatory retirement, Welch’s
because they have the power, by them-
attitude hardened. He became more and more
selves, to destroy the open, informed, trust-
demanding, setting unattainable stretch goals,
based culture we need to win today and
and more intolerant of dissent. For instance,
tomorrow . . . There are undoubtedly a few
while most companies would be content with
type IV’s remaining, and they must be
a 10 percent annual increase in operating
found. They must leave the company
margins, say from 10 to 11 percent, Welch
because their behavior weakens the trust
demanded a 50 percent increase, from 10 to 15
that more than 300,000 people have in its
percent, and a doubling of inventory turns.
leadership.’ (GE Annual Report, 2000)
Attempting to achieve such goals can cause
exhaustion or ‘fixing the books;’ missing the Here again, a parallel with major revolutions
goals can cause fear of sanctions and loss of is instructive. The French Revolution did away
morale. Welch also demanded more and more with the moderates, the Russian Revolution
conformity with his tenets. For several years, cast out the non-party specialists who had
GE managers were encouraged to carry in contributed to the post-war reconstruction,

© 2006 The Author


Journal compilation © 2006 Blackwell Publishing Volume 15 Number 1 2006
80 CREATIVITY AND INNOVATION MANAGEMENT

and Mao’s Cultural Revolution purged intel- trust authority of the European Economic
lectuals. History shows that all these purges Community. The deal fell through and
caused economic disruptions. Welch finally retired, having lost glory and
To summarize, during the first wave, Welch credibility.
changed the physical infrastructure of GE and
what people did. During the second wave he
changed the organization and how people
Welch’s Succession
operated. During the third wave, he changed Although he was in no hurry to retire, Welch
the culture and both what and how people selected potential successors following GE’s
should think. personnel policies and the example set by
It should be noted that the psychological Reginald Jones (Bartlett and McLean, 2004).
pressure on employees and their resentment However, the way Welch treated his potential
and potential resistance increased as one wave successors, especially the two losing candi-
was followed by the next. During the first dates, was quite different.
wave, employees were told what to do. They Like Jones, Welch narrowed his search to
recognized that it was part of management’s three candidates, but they were all working in
prerogatives, indeed of management’s duties, the field, not at headquarters. Welch chal-
to direct their effort where it would be most lenged each one to outperform the others and
valuable for the company. During the second to develop a successor who would be able to
wave, employees were told how to do their take over if that candidate was appointed
assignments. Thus, there was some concern CEO. After heated competition, Welch
that experimentation and creativity may have selected Jeff Immelt, whom he had mentored
been curtailed during the second wave. Dur- for many years, and who was loyal to him.
ing the third wave, employees were asked to Immelt had been in charge since 1997 of GE
endorse without reservations the new GE values, Medical Systems, Welch’s most successful
culture, and emotional climate. This new business before he was named CEO (Khanna
approach is potentially dangerous, because: and Weber, 2002).
The day before he announced his successor,
1. Some employees may be rewarded for
Welch took the company plane to Milwaukee
being politically correct rather than for their
to give the good news to Immelt. Then he flew
results;
to Cincinnati and Schenectady and fired the
2. Some high-performing employees may be
two losing candidates. GE was known as the
considered politically unreliable and forced
company that trained future CEOs and, in fact,
to leave;
some of the unsuccessful front runners for
3. Some employees may be afraid to speak
Welch’s job had already left GE to head For-
their minds for fear of retaliation.
tune 500 companies. Welch told the two losers
Here again, a parallel with revolutions is ‘You are going to be offered a CEO position
instructive. The situation above corresponds sooner or later, so you should leave right now!’
to the beginning of the Terror during the As a ruthless politician he knew the losers
French Revolution (1793)8. could do nothing more for him and thus fol-
A fourth wave from Welch would not have lowed the maxim: ‘In politics there is no grat-
been viable because it would have demanded itude because nothing is ever given’ (Guzman,
more conformity than was good for the com- 1951).
pany and more submission than the employ- On November 27, 2000, Welch and Immelt
ees were willing to accept. But in line with GE appeared on television in identical blue shirts
policy, it was time for Welch to retire. open at the collar, navy sports coats, even
matching tasseled loafers–the non plus ultra of
conformity! No wonder Fortune called Immelt
Welch’s Last Stand ‘The Man who would be Welch’ (Moore, 2000).
Welch, however, was not ready to give up From then on, Immelt’s problem was being
power. He wanted to leave with a bang, some considered Welch’s clone, and clones are never
major business coup that would satisfy his ego as good as the original. Welch kept Immelt on
and consolidate his fame as the world’s most a leash for nine months as he gradually turned
admired executive (Murray et al., 2000). Hav- over power. According to Sonnenfeld’s typol-
ing heard that Honeywell was being sold, ogy of succession patterns (1988), Welch was a
Welch made a last-minute offer at an inflated general who was leaving reluctantly and try-
price. Then he stated that he would not retire ing to stay in charge. Welch retired in Septem-
until this acquisition was consummated and ber 2001, and it was only after three years that
Honeywell was successfully integrated within Immelt began to shake his image as Welch’s
GE. Fortunately for GE stakeholders, Welch follower. In 2004 Fortune changed its tune and
was unable to obtain approval from the anti- the headlines were ‘Another boss, another

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Volume 15 Number 1 2006 Journal compilation © 2006 Blackwell Publishing
CASE STUDY 81

revolution. Jeff Immelt is following a time- The Thermidorean Reaction at GE


honored GE tradition: abandoning the most (2002–2004)
treasured ideas of his predecessor’ (Useem,
2004). In the case of GE, the Thermidorean reaction,
which came after 20 years of Welch’s revolu-
tion, had three main aspects:
The Thermidorean Reaction 1. Lassitude among GE employees who
hoped to relax under Immelt, who was
Welch’s ‘Terror’ reputed to be less ‘mean’ than Welch. Their
attitude was ‘let’s wait and see which way
As the French Revolution evolved and France Jeff will go.’
fought to prevent European powers from 2. A reexamination by business analysts and
invading and reinstating the king, Robespierre the press of GE’s financial results, account-
became dictator and instituted the Reign of ing practices, and forecasts. For instance,
Terror. Two hundred years have passed, and The Economist published an article critical of
GE is not France, nor are its competitors GE with the headline ‘The Jack and Jeff
striving to conquer GE. Nonetheless, Welch show loses its luster’ (Economist, 2002).
instituted his own polices of conformity, as 3. A long period of transition (2002–2004)
described above, as well as a reign of terror while Immelt was reenergizing GE and dif-
(Byron, 2004) to consolidate and assert his ferentiating himself from Welch.
power. GE managers and employees were
scared by Welch’s increasing outbursts of rage,
even over small issues, that were punctuated Welch’s ‘Thermidor’
by foul language. The worst, however, was his For Welch the Thermidorean reaction led to
policy that every year ten percent of employ- changes in his personal and professional
ees in each department must be replaced. behavior that tarnished his image. Suffice it
Across the board the lowest performers were to say that The Economist, which had often
removed, regardless of their actual perfor- praised Welch to the sky, became disillusioned
mance. This policy is not effective (Lawler, and excoriated him as an ‘aging philanderer’
2002), and in the case of GE was clearly unfair, (Allio, 2003). This radical change in Welch’s
because some departments had excellent image was due to two episodes that were
results, others poor results. No matter, ten per- treated as scandals in the press and in a book:
cent had to go (Welch, 2001)! Also, as dis- his severance package and his affair with a
cussed above, some higher performers who prominent editor.
were suspected of disloyalty to Welch’s values The policy and practice at GE has always
or who lacked political support were fired. In been no employment contracts. Employees
this way Welch kept everybody on edge and can be terminated by the company at will, and
paved the way for the Thermidorean reaction. they can also leave at anytime. In 1996, five
years before his retirement, Welch negotiated a
The Thermidorean Reaction in France contract that included an extremely generous,
even lavish, package of life-long, post-
(1793–98) retirement benefits. This contract came to light
During the Reign of Terror, Roberpierre when Welch’s second wife sued for divorce
demanded complete loyalty to the principles and claimed a payment of almost half a billion
of the Revolution, and he executed anyone dollars. Welch, who had been praising ‘open-
suspected of dissent or disloyalty. This lasted ness, simplicity and unyielding integrity,’ was
until July 27, 1794 (9 Thermidor, year II accord- condemned by the press. He had no choice but
ing to the new Revolutionary calendar), when to give up the entire package and repay GE for
Robespierre and his associates were over- $2 to $2.5 million annually in services (Welch,
thrown and executed in a coup d’état. The 2002). The second scandal was caused by an
people of France, tired after years of turmoil, interview with the editor of Harvard Business
gave a sigh of relief and supported the new, Review that promoted Welch’s autobiography.
more moderate leaders, who were called The resultant headline in Business Week was
Thermidoreans. ‘Too Close for Comfort. GE’s legendary former
This was the beginning of the Thermidorean CEO Jack Welch kicks up a controversy over
reaction, which lasted until Napoleon took his affair with a journalist.’ The journalist
power. It was characterized by relaxed moral boasted openly of her relationship with Welch
standards, conspicuous consumption, drunk- and ‘quit after having lost the confidence of
enness, orgies and sexual license, all fueled her staff’ (Orecklen, 2002). Due to the conflict
by war profiteering, political payoffs and of interest, a watered-down version of the
corruption. interview was edited by others (Collinwood

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Journal compilation © 2006 Blackwell Publishing Volume 15 Number 1 2006
82 CREATIVITY AND INNOVATION MANAGEMENT

and Coute, 2002). Other dismal aspects of accomplishments are unique in the history of
Welch’s Thermidor were publicized as a result business. He transformed a mature electrical
of the divorce proceedings but will not be dis- company with a slow-moving, overstaffed
cussed here. bureaucracy, poor cash flow, and lethargic
stock into a global powerhouse, where electri-
cal products represent only 15 percent of sales,
Conclusion other innovative high-tech products (aircraft
engines, engineering plastics, man-made dia-
Answers to the Two Questions monds, medical diagnostic systems, etc.) 10
percent, and services 75 percent.
After having described the rise and fall of the While there have been many revolutionary
revolutionary Jack Welch, his creative trans- leaders in politics and business with clear
formation of GE, and the Thermidorean reac- vision and unbreakable motivation to imple-
tion, we turn to the two questions at the ment their vision, not many have succeeded in
beginning of this paper: maintaining the momentum for 20 years.
1. Was Welch a product of GE, as claimed by Welch is unique in his successful implementa-
Collins and Porras, or was GE (after 1981) tion of revolutionary change in a company that
a product of Welch? was already among the most admired when he
became CEO. How did Welch achieve this?
Our conclusion is that, while GE would The progress of nations is marked by revo-
have selected another capable executive in lutions that lead to a higher level of wellbeing
his stead, GE’s revolutionary transforma- for the citizens. As Thomas Jefferson wrote in
tion was due primarily, if not exclusively, to 1787 ‘A little rebellion now and then is a good
Welch’s creative leadership. In fact, it is thing’ (Jefferson, 1853–54).9 In a similar man-
clear that Welch, as a true revolutionary, ner, according to Greiner (1972), companies do
intended to overthrow the GE system after not grow continuously and smoothly but
his disillusionment with his first year of rather go through periods of evolution and
employment, and that he worked within revolution, separated by crises. According to
the system in order to become CEO, seize Collins and Porras (1997):
power through a coup d’état, and destroy
the old system. Visionary companies install powerful
mechanisms to create discomfort to obliter-
2. Was the major decline of GE’s stock value ate complacency and thereby stimulate
due to the collapse of the Internet bubble or change and improvement before the exter-
to the Thermidorean reaction, which in turn nal world demands it.
had its root cause in Welch’s last years as
CEO? Visionary companies are created by vision-
ary leaders who take advantage of impending
GE’s stock fell 45 percent from 2000 to external crises (as an economic recession) or
2003, while the S&P Index fell by 32 percent. even create their own crises in order to revo-
Other large, well-managed companies were lutionize the company and raise it to a higher
less affected. Microsoft fell 19 percent, Wal- level of performance. Markides (1998) states:
Mart 10 percent and IBM 22 percent. As dis-
cussed above, Welch’s hardening and his The successful innovators were not afraid
determination to stay in power would have to destabilize a smooth running machine
made a fourth wave of change ineffective, and to do so periodically but contin-
indeed dangerous, for GE. We have also uously. . . . The development of positive
shown that Welch’s insistence that his suc- crises. . . . is a powerful mechanism to des-
cessor should be his clone reinforced the tabilize the system and start the thinking
effects of the Thermidorean reaction and process again. . . .
delayed for three years Immelt’s establish- However, one revolution is not enough. The
ment as the new CEO and his differentiation revolutionary spirit fades over time, and a
from the Welch legacy. Our conclusion is that Thermidorean reaction follows10. At the same
Welch was the major cause of both GE’s suc- time, few visionary company leaders are will-
cess and GE’s decline. ing and able to maintain the revolutionary
drive over their entire tenure.
Welch’s Accomplishments and It takes a great leader to fundamentally
Driving Force question his or her mental models continu-
ously and escape the trappings of success
In spite of the managerial and personal short- more than once (emphasis added) (Markides,
comings at the end of his tenure, Welch’s 1998).

© 2006 The Author


Volume 15 Number 1 2006 Journal compilation © 2006 Blackwell Publishing
CASE STUDY 83

In conclusion, the driving force of Welch’s revolution’ (Deutseher, 1954) which was
undeniable accomplishments was his will and anathema to Stalin, who wanted to consol-
ability to create a new vision of GE, to imple- idate his power by stabilizing the Soviet
ment it through a continuous revolution, to Union.
question the status quo, to dynamically mod-
ify his vision and strategy, and to propel the
company to ever higher levels of performance Acknowledgement
and success.
The author wishes to thank Lindsay Evans for
reviewing and editing the manuscript.
Notes
1 The literature on revolution is enormous. A
basic reference is the Encyclopedia of References
World History (Langer, 1968). The French
Abetti, P.A. (2001) General Electric after Jack
and Russian revolutions are analyzed by
Welch: Succession and Success? International
Crane (1957), the Mexican revolution by Journal of Technology Management, 22(7/8), 656–
Johnson (1968), the Chinese revolution by 69.
Guillermaz (1972), the Fascist revolution Aguilar, F.J., Hamermesh, R. and Brainard, C. (1981)
by De Felice (1981), and the National General Electric: Strategic Position 1981, Harvard
Socialist revolution by Bullock (1952). Business School, case 381-179.
2 The sales of large multinational corpora- Aguilar, F.J., Hamermesh, R. and Brainard, C. (1985)
tions are often compared to the GNPs of General Electric 1984, Harvard Business School,
developing countries. A better measure is case 385-315.
the value added by a company (Bartlett, Aguilar, F.J., Hamermesh, R. and Brainard, C. (1991)
General Electric: Reg Jones and Jack Welch, Harvard
Goshal, Birkinshaw, 2004).
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4 From the Greek α′γιος = saint and γρα′ϕος = Boston.
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Saints’ of early Christianity. olution: Redefining the E in GE, Harvard Business
5 According to Welch, Reg Jones did not School, case 9-302-001.
expect drastic changes. In fact, Jones was Bartlett, C.A. and McLean, A.N. (2004) GE’s Talent
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Wild, Wiley, New York.
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Journal compilation © 2006 Blackwell Publishing Volume 15 Number 1 2006
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lished Companies, Sloan Management Review, as Professor in the Lally School of Manage-
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Illinois. neurship Professor of the Year.
Slater, R. (1996) Get Better or Get Beaten, McGraw
Hill, New York.

© 2006 The Author


Volume 15 Number 1 2006 Journal compilation © 2006 Blackwell Publishing