Case 8-2 :

GE’s Two-Decade Transformation :

Jack Welch’s Leadership
 Introduction
• GE Annual Meeting (March 1999) showed
outstanding performance and two decade’s
transformation :
– Revenue exceeded $100 billion
– Operating margin 16.7%
– Earning/share had increased 14% (1997)
– 2nd year of “the most admired company” (fortune poll)
– “Most respectable company in the world” (Financial
Times)
• Some shareholders worried about Welch’s intention to
retire at the end of 2000
 The GE Heritage (1)
• Founded 1978 by Thomas Edison
– Core business on the power generation, household appliances, and lighting
• 1978 : diversified on aircraft engine, medical system, and diesel
locomotives
• 1930s : the era’s highly centralized, tightly controlled corporate firm
• 1950s : GE had delegated responsibility to hundreds of department
managers, leading a trend towards greater decentralization.
• 1960s : a subsequent period of “profitless growth”
– GE strengthen its corporate staffs and develop sophisticated strategic planning systems.
– GE as the leading edge of management practice
• 1973 : GE’s CEO by Reg Jones
– GE completed a major reorganization.
– 10 groups, 46 division, 190 departments were 43 SBUs designed to support the strategic
planning and so central to GE’s management process
– GE raised strategic planning to an art form
– GE became the benchmark of SBU-based structure and sophisticated planning process
– Problem : burden of reviewing and approving the massive information generated by 43
strategic plans
 The GE Heritage (2)
• 1977 : Jones capped GE’s departments, divisions, groups, and SBUs with
the new organizational layer of “sectors” representing macrobusiness
agglomerations, such as consumer product, power system, and technical
product.
• 1970s : Jones was voted “CEO of the years” three times
• 1981 : Jones was retired
– as a “Management Legend” by The Wall Street Journal
 Welch’s Strategy Stages
Welch’s Early Priorities : GE
Restructuring (Hard ware
Restructuring)
• “better than the best” & radical
restructuring
• #1 or #2 : Fix, Sell, or Close
• Set standard SBU become the
#1 or #2 competitor or to
disengage
• 1983 : #1 or #2 into “three cycle
concept”
• “Fix, sell, or close”
uncompetitive business
frequently
• internal : Downsizing,
destaffing, delayering
• “lean and agile”
• removing bureaucracy
• real time planning with “5 page
strategy playbook”
• Redefined budgeting process
The late 1980s : 2nd
Stage of the Rocket
(Software
restructuring)
• reeling organization : culture
shock & management
exhaustion
• The Neutron-Jack stage
• The software Initiative :
• Work-out
• Best Practices
• Management style : Openness,
candor, & facing reality
• culture : speed, simplicity, and
self confidence
• Going Global
• Developing leader :
• review top manager
• overhauled
compensation package
• GE leadership capabilities
• 4 type of manager
Into the 1990s :
the Third Wave
• Boundaryless Behaviour :
• integrated diversity
• Bundaryless company
• Barrier free vision
• Strecth : achieving the
impossible
• Stretch target vs rigid plan
• People like problem
solving
• Service business
• Suplementing by added-
value service
The Three-Circle Vision of GE, 1982
Services
High-Technology
“Add outstanding
“Stay on the leading
people and make
edge” by investing in
contiguous
R&D
acquisition”
Industrial Electronic
Medical system
GECC information
Materials
Construction
Aerospace
& Engineering
Aircraft engines
Nuclear Services

Core
Support “reinventing in Outside
Ladd petroleum production & quality” Housewares
Semiconductor Central AC
GE trading co Lighting TV & audio
Utah Mining Major appliances Cable
Motor transportation Mobile
Venture Turbine construction Power delivery
Calma Equipment Radio stations
 Welch’s Early Priorities : GE’s Restructuring
• April 1981 : 45-year-old Welch became GE’s CEO
– US economy was in a recession : high interest rate, strong dollar , highest unemployment rate since
the depression
– To leverage performance in GE’s diverse portfolio of business, the new CEO challenged each to be
“better than the best” and set “radical restructuring”
• 1981 – 1990 : Fix –Sell-Close
– freed up over &11 bio of capital by selling off more than 200 businesses (25% of 180 sales)
– 370 acquisitions
– investing $21 bio to purchase Westinghouse’s lighting business, employers insurance, RCA, Kidder
Peabody, Thompson/CGR, the French Medical imaging company
• Internal restructuring : Hardware restructuring
– “Lean and agile” : highly discipline destaffing proces (50% reduction of 200 person strategic planning
staff)
– De-bureaucracy & downsizing
– Real time planning with “five-page strategy playbook” : current market dynamic, competitor’s key
recent activities, GE business response, the greatest competitive threat over next 3 years, GE
business’s planned response
– Redefined budgeting response  evaluating againt external competitively based
– Delayering in organization structure
– result of downsizing, destaffing, and delayering :
1981-1988 : eliminated 59,290 salaries & 64,160 hourly positions
Divestiture : eliminate 122,700
Declining number employee
 The Late 1980s : 2nd Stage of the Rocket
• Mid 1980s - Hardware Restructuring : to boost productivity by restructuring, de-
bureaucracy, and downsizing
• 1989 : Software Restructuring – Cultural Change
– Articulate the management style : openness, candor, & facing reality
– Culture : speed, simplicity, and self-confidence
– The software initiative : Work-out & best practices
• Late 1988 : Work-out
– A process designed to get unnecessary bureaucratic work out the system, while
providing a forum in which employees and their bosses could work out new ways of
dealing with each other
– Result :
• Mid 1992 : over 200.000 GE employees (2/3 total) had participated in Work-Out
• Increased productivity : 2% (1981-1987) to 4% (1988 – 1992)
• Summer 1988 : Best Practices
– Focused : effective processes, customer satisfaction, threated supplier as partner, emphasizing
the need for a constant stream of high quality new product
– New training program
 GE Performance in Three Eras (mio-$)
Borch Jones Welch
1961 1970 1971 1980 1981 1990 1998
Sales 4.666,6 8.726,7 9.557 24.950 27.240 52.619 100.469

Operating profit 431,8 548,9 737,0 2.243,0 2.447,0 6.616,0 13.477

Net earning 238.4 328,5 510,0 1.514,0 1.652,0 4.303,0 9.296,0

ROS 5.1% 3.8% 5.3% 6.1% 6.1% 8.2% 10.8%

ROE 14.8% 12.6% 17.2% 19.5% 18.1% 19.8% 25.1%

Stock market 6.283,7 7.026,7 10.870,5 12.173.4 13.073,4 50.344,9 334.236,9

capitalization
S&P 500 stock price index- 65.7 83.0 97.9 119,4 126,4 330,2 1.095,4
composite
Employees 279.547 396.583 402.000 366.000 404.000 298.000 293.000

US-GNP ($ bio) 523,0 982,0 1.063,0 2.626,0 2.708,0 5.524,5 8.508,9

Source : GE annual report, Survey of current business, Datastream

 Growth Through Globalization
105

84

63

42

21

0
1987 1991 1995 1996 1997 1998

Global 15% AAGR Domestic 6% AAGR

Source : GE Annual report, 1998

 GE Leadership Capabilities
• Create a clear, simple, reality based, customer focused vision and are able to
communicate it straightforwardly to all constituencies.
• Understand accountability and commitment and are decisive …set and meet aggressive
target…always with unyielding integrity.
• Have the self-confidence to empower others and behave in a boundary less
fashion…believe in and are committed to work-out as a means of empowerment ….be
open to ideas from any where.
• Have a passion for excellence…hate bureaucracy and all the nonsense that come with it.
• Have, or have the capacity to develop global brains and global sensitivity and are
comfortable building diverse global teams.
• Stimulate and relish change …are not frightened and paralyzed by it. See change as
opportunity not just a threat.
• Have enormous energy and the ability to energize and invigorate others. Understand
speed as a competitive advantage and see the total organizational benefit that can be
derived from a focus on speed.
 GE Product vs Services Revenues; 1980 - 2000

15
45 45 33 33

55 55
85 62 75

1980 1990 1995 1998 2000

(forecast)

Product

Service
 Six Sigma Result : 1996 - 1999
2500

2000

1500

1000

500

0
1996 1997 1998 1999

Cost benefit

Source : GE Annual report, 1998

 Closing Out the Decade : Welch’s Final Chapter

• Welch reached GE’s mandatory retirement age in 2001

• “Six Sigma Quality” initiative :
– 1995 survey : GE employees were dissatisfied with the quality of its product and
processes
– Analysis result : GE was operating at error rate 10.000 x the six sigma quality level of 3,4
defects per million operations
– Estimated : the gap was costing $8 bio and $12 bio/year in inefficiencies and lost
production
– 2000 announced Six sigma Initiative as well-developed program with a detailed plan for
its implementation
– SSQ’s Participation was not optional and tied 40% bonus
– Cadre/trainer : green belts, black belts, and master black belt
• “A Player” with “Four E’s”
– Preparing the quality of organization to his successor
– “A Player” : individuals with vision, leadership, energy and courage, with 4E’s
– 4Es : Energy, Energize, Edge, Execution
 Question
1. How difficult did Welch in 1981? How effectively did he take charge?
2. What’s Welch’s objective in the series of initiative in late 1980s and
1990s? What is he trying to achieve in the round of change he put in
motion in that period? Is there logic or rational supporting the change
process
3. How does such a large, complex diversified conglomerate defy the critics
and continue to grow so profitably? Have Welch’s various initiative added
value? If so, how?
4. What is your evaluation of Welch approach to leading change? How
important is he to GE’s success? What implication for his replacement?