Jack welch and the general electric management system case study

Introduction

The General Electric Company (GE) is widely regarded as one of the world’s most successful

corporations of the 20th century. This paper aims to critically analyse the corporate strategy of GE during the period from 1981 to present under the leadership of two very different but equally influential CEOs—Jack Welch and Jeff Immelt. The essay is organised in four sections. The first section describes GE’s corporate strategy from 1981 to 2001 with Jack Welch as CEO, followed immediately by a critical analysis of Welch’s strategic approach in the second section. The third section then describes GE’s corporate strategy from 2001 to present with Jeff Immelt as CEO, followed again by a critical analysis of Immelt’s strategic approach in section four.

The Jack Welch period (1981–2001)

When Jack Welch took up his post as GE’s CEO in 1981 he embarked on a radical transformation of GE’s strategy, ushering in a new era of performance management and internal efficiency. Welch’s profit guidance aimed for earnings growth of 1.5 times to double of the GDP growth rate and his management philosophy found its articulation in GE’s slogan—Speed, Simplicity, Self-Confidence (GE 1995). These values would reflect not only in the organisation’s systems and processes but also in GE’s products and services through their simple and highly functional designs.

Welch’s corporate strategy was all about performance and efficiency. Throughout his 20 years as CEO, he relentlessly drove his subordinates to the limits of their abilities, encouraging employees at all levels to embrace ambitious targets and continuously improve their performance. Welch was renowned for his use of constructive conflict as a means of eliciting commitments from line managers and making difficult decisions.

As part of his efforts, Welch led a sustained attack on bureaucratic processes and in its place he sought to instil a culture of openness, confidence, leadership and creative thinking at every level of the organisation. Through his organisational restructure Welch ruthlessly eliminated several layers of management and shed a large number of jobs, which earned him the nickname ‘Neutron Jack’ referring to the deadly neutron bomb which kills people but leaves buildings standing (Economist.com 2009). The biggest staff cuts were made in administrative functions and business decision making was delegated to line operation managers.

Welch implemented a major restructure of the GE business portfolio, focusing on a limited number of sectors with promising performance and growth potential, whilst retaining a fairly diversified portfolio of businesses. This was achieved through the sale of GE’s less profitable businesses and retention or acquisition of businesses identified as number one or number two in their industry (Grant 2008, p.304). The strategy led to several huge divestments and the shifting of emphasis towards GE’s technology-based businesses and service businesses (Bock 2001). A series of acquisitions that followed led to the phenomenal growth of GE Capital, which became one of the world’s leading diversified financial services companies (Grant 2008, p.304). Figure 1 shows GE’s organisational structure and business portfolio in 2001.

Cultural Change Processes

You can’t grow long-term, if you can’t eat short-term. Anybody can manage short. Anybody can manage long. Balancing those two things is what management is.”

The job of leadership is to deliver both short-term profits and long-term organizational strength. Compromise of one or the other of these two objectives results in less than a world-class organization because the success in one time period or the other is purchased at the sacrifice of the other. The way to achieve both of these objectives simultaneously is through pursuit of Jack Welch’s third cycle of learning: variation elimination through application of the collection of analytical methods associated with the Six Sigma business improvement process.

In 1995, the year that Welch initiated GE’s Six Sigma initiative, he had just confessed (to GE shareholders) that they had missed two major stretch improvement goals related to operating margins and inventory turns. After implementing Six Sigma this shortfall was erased. GE demonstrated performance in both areas based on its Six Sigma journey:

Operating margins improving from 13.6% to 18.9%. Inventory turns moving from 5.8 to 8.5. Asset efficiency (ratio of plant and equipment expenditures to depreciation) moving

down toward 1.0 (with future movement projected to 0.8—which indicates finding free production capacity concealed among current corporate assets by removing the “hidden factories” caused by waste and rework).

Earnings per share doubling over the five years of implementing Six Sigma.

Welch has grown GE over this time through a combined approach that uses this capital effectively for acquisition, supported by both Six Sigma cost reduction and natural business growth through market and product innovation that fuels the ability for further reinvestment.

Why did Welch become convinced that Six Sigma was the final stage in the sequence of improvement initiatives that he championed as CEO? What value did he perceive from the integration of Six Sigma with his ideas of portfolio management, the boundaryless organization and institutional learning?

“We have been working on moving the mean. The problem is the mean never happens. The customer only feels the variance that we have not yet removed. Variation is evil in any customer-touching process. Improvement to our internal processes is of no interest to the customer.”

Welch’s previous initiatives had focused GE on the businesses that should deliver the future strength of the company (portfolio management) and had challenged his people to apply their creative abilities to simplify and streamline their work by eliminating bureaucracy and nonvalue-added activities. He saw clearly that the remaining frontier for business improvement was to take these lean processes and wring out the variation that caused the performance to fluctuate over time.

The effort Welch orchestrated by implementing Six Sigma focused his management team on eliminating the common cause variation found in business and work processes. For many

years, GE had worked to control special cause variation (changes in work process performance due to specifically attributable causes), but when the call came to implement Six Sigma, Welch was moving them to the next level of business improvement—what W. Edwards Deming long ago recognized as the job of management: removal of common cause variation, the variation inherent in design and implementation of business processes.

Welch had discovered the next level of business efficiency: Workers cannot eliminate the common cause variation found in a business system by focusing on the daily activities of work process management. It must be the work of the management team to eliminate common cause variation. The GE Six Sigma initiative is the management approach to satisfy this improvement objective. It prepares the business to be a reliable organization that produces the right product through value-added processes that consistently perform as designed to deliver the value that has been demanded by customers and markets.

How enduring will this emphasis on Six Sigma be? According to Welch, “Six Sigma is quickly becoming part of the genetic code of our future leadership. Six Sigma training is now an ironclad prerequisite for promotion to any professional or managerial position in the company—and a requirement for award of stock options.” By embedding Six Sigma into the performance evaluation process and linking Six Sigma to the reward system of GE, Welch ensured that he would gain and hold the attention of his entire management team. Welch has built a business system one step at a time and integrated the pieces with his holistic leadership style to deliver sustained competitive performance.

Corporate initiatives

In addition to continuously stretching performance targets through strategic planning, financial control, and human resource management, Welch introduced periodic corporate initiatives which became known as GE’s Operating System. Roughly every two years Welch would implement a new initiative focused on improving a particular aspect of company-wide performance. The major initiatives include: Work-Out, Boundaryless Organisation, Globalisation, and Six Sigma.

Work-Out was a forum where a cross section of employees from each business was asked to talk openly about the management practices in their part of the business without fear of retribution. At the end of each session the group’s manager returned to hear the results and recommendations and make a decision as to what further action may be needed.

Boundaryless Organisation. Welch believed that the key to translating diversity into a competitive advantage was the ‘frictionless transfer of best practices and learning within the organisation, and the close partnership relations with its suppliers’ (Grant 2008, p.310). The Boundaryless Organisation initiative aimed to blur GE’s internal and external boundaries through information sharing, cross-business learning and the integration of key suppliers into GE’s end-to-end processes.

Globalisation was aimed at exploiting international economies of scale across GE’s business portfolio and taking advantage of global opportunities as they arise. During the 1997 Asian financial crisis GE invested acquired distressed assets in the region in order to leverage off an eventual upturn. This approach had paid off for GE in the past during the US and European recessions in the 1980’s and the Mexican crisis in the mid 1990’s, allowing the company to accumulate quality assets at discount prices.

Six Sigma. The methodology, developed by Motorola, was implemented by GE on an unprecedented scale throughout the whole organisation. It is a comprehensive quantitative system for defining, measuring, analysing, improving and controlling every aspect of corporate processes. Among the claimed benefits of the system is its focus on achieving measurable financial results from any project to which it is applied. GE’s target was reducing defects to 3.4 per million (Bock 2001)

Digitization. This initiative was introduced in 1999 with the launch of Welch’s destroy-your-business.com program where line managers were encouraged to visualise how their business might be ‘crushed by the dotcom juggernaut’ (Grant 2008, p.310). Digitization allowed further improvements in internal process and the discovery of profitable new market opportunities.

During GE’s twenty years with Welch at the helm, GE shareholders consistently benefited

from the legendary leadership of one of 20th century’s most successful CEOs. Figure 2 shows that in the last three years alone of his appointment as CEO, at the height of Welch’s success, GE share price more than doubled despite the dotcom crash of 2000.

Observations and Conclusions

This learning goes hand in hand with the evolving concept of leadership required to sustain a winning competitive position. As Welch observed: “This company cannot be ‘managed’ to perpetual double-digit growth. Management implies stewardship of an asset, order, structured, tightly controlled. With leadership the question at the beginning and end of each day is, ‘how far can we take this … how big can we grow it … and how fast can we get there?’”

Management focus on stewardship, strict accounting-based business controls, and highly ordered and rigorous decision-making processes can immobilize an organization causing it to reduce agility in managing change. On the other hand, the learning culture Welch focused on building developed an insatiable thirst for new ideas in operating businesses and stimulated the ability to grow faster and perform better as a continuing challenge.

The sequence of learning is important when it comes to business process improvement. It makes no sense to waste an organization’s resources on eliminating non-value-added work from businesses that are not long-term winners. It also makes no sense to drive out variation from business processes that add no value to customers. The sequence of the learning observed in Welch’s activities as CEO is just as important as the lessons that may be taken away. Winning companies use all of their resources more effectively than do their competitors.

All three levels of learning have prepared GE to face its next challenge: digitization or the adoption of e-business as a means to automate the work that has been optimized with respect to their customers and markets. Welch used the GE learning process to prove a final lesson compared to an organization such as General Motors (GM): While GM had invested over $80 billion in automation during the decade of the 1980s—with little to no apparent financial benefit—Welch observed that there is a different way to improve business than by purchasing assets.

Welch built into the business asset efficiency through his three cycles of learning, thereby earning the right to automate work processes that have been simplified and optimized. GM did not learn this lesson for the 21st century and failed to create the much-touted “factory of the future” because its investment in “e-business” was biased toward the acquisition of equipment that enabled automation. GM had failed to focus its business and fix its work processes as prerequisites to automation. Welch’s process for continuous learning led to the discovery that business must simplify first, then automate best practice that has been designed for robust performance in the face of variation in business conditions.

In Welch’s own words:

“It is what makes GE work. It’s the fabric of the learning culture. Such an operating mechanism is difficult to bring alive on paper or in a chart, but is vividly clear when one observes the ferment and sharing of ideas. … It is this passion for learning and sharing that forms the basis for the unrelenting optimism with which we view the future, and for the conviction that our greatest days lie ahead.

“We believed then and we are convinced today … that there is an ‘infinite capacity to improve everything’—but there was no methodology or discipline attached to that belief.

There is now. It’s Six Sigma quality, along with a culture of learning, sharing and unending excitement.

“Work-Out in the 1980s defined how we behave. Today, Six Sigma is defining how we work.”

Learning quickly and rapidly translating learning into action is the ultimate competitive advantage. What is the real lesson for CEOs as architects of change? First, eliminate the nonperforming businesses. Next, focus on eliminating nonvalue-added activities by simplifying the business and unlocking the creativity of your people. Lastly, eliminate variation in business and work processes using Six Sigma quality methods. Then, and only then, has a business earned the right to automate its operations. Over his tenure as CEO, Jack Welch created this formula for sustainable success. Perhaps this is why so many CEOs are paying attention to his comments and observations regarding Six Sigma.