Union Star Five

Group 1

General Electric: Managerial Practices under Jack Welch Case 31

Case Summary June 20, 2000

Jack Welch earned his Ph.D. in chemical engineering from the University of

Illinois and joined GE Plastics in 1960. During his first year Welch quit GE over a pay

raise or lack thereof but was talked into returning. By 1968, at age 33, Welch became the

youngest general manager ever at GE. This was due in part to his success within the

Plastics division of GE, which Welch had driven to pass Du Pont as the market leader.

Earnings at Plastics increased at “a compound rate" of 34% underWelch. At the age of

37 he was asked to head up the components and materials group.

When the current CEO of GE, Reginald Jones, was to retire, Welch was on the list

of candidates. Jones' management state was on touted for stability, sound management,

and predictable earnings, much the opposite of that of Welch, who had a reputation as

being a "maverick and renegade." Welch was just the type of personality that Jones was

looking for as his successor, someone to take the company to the next level of change.

In 1977 Jones reorganized General Electric into six sectors and gave each of his

possible replacements candidates authority over one the sectors. Welch was put in charge

of Consumer Products and Services. By 1979 the candidates were narrowed to three

possibilities, Welch being one of the three. They were each named vice chairman. By

1980, Welch was voted unanimously, by GE Board of Directors, as CEO elect. Many

business analysts evaluated his overwhelming win as a relatively scary thing, as now the

"maverick" would have complete control.

 Welch assumed a sprawling, complex organization with an organization of 150

SPU's, each dedicated to a single product or product line. Each of these SBU's had

approximately 9 organizational levels between Welch and the plant floor. These levels of

management did serve a purpose, they gave everyone a feeling of security and

opportunity to move into management. In order to take GE to the next level Welch knew

he had to determine which SBU’s were contributors to the bottom line, and those that

weren’t would be, as he said, "disengaged."

Each of the 150 business units also contained support staff, from all functional

areas. The functional areas were grouped into businesses, which were grouped into

sectors. His plan was simple, and was divided into 4 basic thoughts 1) be number 1 or 2

in the market they serve 2) maintain substantially above average real return on

investments 3) possess as competitive advantage 4) leverage existing strengths at GE

such as technology, capital intensity, and management expertise.

In 1981 Welch sketched, on the back of an envelope, his idea of the organization

he wanted. He divided the company's portfolio into three groups of businesses, in the

form of three concentric/connected circles that contained; core manufacturing units,

technology-driven businesses, and services.

SERVICES TECHNOLOGY
GECC Industrial Electronics
Information Medical Systems
Construction & Materials
Engineering Aerospace
Nuclear Services Aircraft Engines
SUPPORT OUTSIDE
Ladd Petroleum CORE Housewares
Semiconductor Lighting Central Air
Training Major Appliances Conditioning
Utah International Motor Transportation TV & Audio
Turbine Construction/ Cable
VENTURES Mobile
Calma Power Delivery
Radio Stations
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 Equipment

If any of these businesses were not number 1 or number 2 in their respective

markets, they were fixed, sold, or closed. During Welch’s first 4 years, he acquired the

name “Neutron Jack” by reducing the workforce by 18% and liquidating $21 billion of

GE's assets, and by 1986 100,000 jobs had been eliminated. Though doubted by many

past, and remaining employees, his vision constantly was on the welfare of the business,

and he referred to this activity as a "renewal process." Welch's efforts were an attempt to

move the company away from traditional electrical products and into more high-

technology and service-oriented areas.

Performance and market share shaped GE's portfolio in the 1980s, but the vision

of a boundaryless organization shaped the company's direction in the 1990s. This form

of organization forms "partnerships" with suppliers and employees of the company, as

well as within the entities of the GE organization, with a major focus on the needs of the

customer. He saw the cuts to manpower and bureaucracy necessary for this to happen.

He found it easier to change the GE portfolio than the culture.

In changing the culture he started by shaping GE’s attitude, using three basic

ideas for “attitudinal positioning" - reality, excellence, and ownership.

1. Reality – understanding both the marketplace and corporate social

responsibilities.

2. Excellence - spurs the company to build upon its reputation for quality

through the best efforts of employees.

3. Ownership - drives decisions down to the operating levels within the company

while requiring employees to take full responsibility for these decisions.

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 These three basic concepts lead to three years of developing the first draft of a

statement of company values, and three more years until the revised statement was

completed in 1987. In 1989, GE values were first used to evaluate the performance of

top managers. Shortly after this the value criterion was used to evaluate all yearly

employees and entry-level professionals were rated every 6 months or following each

work assignment, on their display of GE values.

Since it’s founding in 1978, GE has been known for well-established “standards,”

including strategic planning, decentralization, and market research. These topics formed

the core curriculum at GE’s Management Development Institute in Croton-on-Hudson,

New York. Formed in the 1950s, it was charged with the mission “to enhance GE’s

competitiveness." To change the mindset of some 300,000 GE employees there had to be

a mechanism that would involve employees at all levels. The “Work-Out” was

developed to fulfill this requirement.

To begin the process of totally refining the relationship between boss and

subordinate, four main goals of the Work-Out were developed:

1. Build trust

2. Empower employees

3. Eliminate unnecessary work

4. Create a new paradigm

The basic concept on the Work-Out involved seven steps:

1. Choose a Work-Out process to discuss.

2. Select an appropriate cross-functional team.

3. Assign a “champion” to see through any recommendations.

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 4. Meet for three days (or as needed) and come up with recommendations to

improve processes, eliminate work.

5. Meet with managers, who must respond to recommendations.

6. Hold additional meetings as needed to pursue recommendations.

7. Start over.

These seven steps are accomplished in a meeting format, at a neutral location, without

supervisory personnel present. The topics are presented, discussed, possible solutions

decided upon, and presented to the leader with only three possible responses: yes, no, or

need more information. These sessions for the most part, have continued unchanged over

the years, but have become broader and less structured, occurring on site, including

customers and suppliers as well as employees.

Success stories from GE businesses that took the “Work-Out challenge” include

an Aircraft Engine’s plant in Lynn, MA; GE Plastics’ plant in Burkville, AL; GE

Appliances (GEA); a locomotive paint shop in Erie, PA; and GE Monogram Retailer

Credit Services.

The Best Practices program was developed almost simultaneously to the Work-

Out program. This program is one that opportunities for improvement are gleaned from

other companies. Welch placed Michael Frazier in charge of discovering the secrets of

those companies that were more productive than GE, in order to implement them into

operations at GE. Six common characteristics were found of these companies:

1. Instead of managing people, they managed processes.

2. They relied on practices such as benchmarking and process mapping to improve

their operations.

3. They emphasized kaizen, or continuous improvement.

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 4. These companies were all customer focused and used customer satisfaction as

their primary performance measurement.

5. Their products were designed with attention to manufacturing constraints.

6. The approached their relationship with suppliers as partners.

Best Practices came as a rude awakening for GE. This process would require a

shift of focus. Their entire education program was adjusted to include this new

methodology, by adding three central themes:

• GE has much to learn from other companies.

• There is tremendous value in continuous improvement.

• Processes need owners.

This final theme was the link between Best Practices and Work-Out, as an

ongoing process. For example, disciplines and techniques used by American Standard

and Caterpillar were used to improve production efficiency and inventory turnover rates.

The latest step by GE to improve operations is called the stretch. The stretch

strategy pushes for seemingly unobtainable goals, but Welch wants his people to believe

that nothing is impossible and to "stretch" their imaginations. This "thinking out of the

box" is meant to improve production and efficiency many times more than thought

possible. In a sense this method is meant to remove all of the limitations of thinking.

This visualization of ideas might spring forth the next generation of change and

productivity.

While there are still pockets of resistance, these new initiatives have changed the

culture at GE. They have proved invaluable for improving processes and productivity.

Quoting from the 1994 Letter to the Share Owners, Welch and Fresco wrote, "Using

100% of the minds and passion of 100% of our people in implementing the best ideas

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from everywhere in the world is a formula, we believe, for endless excitement, endless

growth and endless renewal."

What's next?