There’s Just One Word for Jack Welch…Published: September 13, 2001 in Knowledge@Wharton
Praise for Jack Welch was widespread and consumed large quantities of newsprint in the weeks leading up to Sept. 7, his last day as chairman and CEO of General Electric. But Wharton faculty members say if you had to use just one word to sum up his contribution to GE in the 20-plus years he served as its leader it would be: results.
From 1981 through 2000, a period that includes nearly all of Welch’s tenure, GE’s annual revenue soared from $28 billion to $130 billion, its earnings rose from $1.65 billion to $12.74 billion, and its stock price saw a 40-fold increase.
"The ultimate reason he is admired is because his record is outstanding," says Michael Useem, management professor and director of Wharton’s Center for Leadership and Change Management. "The measure for me is that he took GE from being a $13 billion company back in 1981 to almost a $500 billion company now [in market capitalization]. And the growth of GE’s stock has consistently outpaced the S&P 500. The results are really what ultimately brings all the attention to him."
"What singles him out are his results," agrees Monica McGrath, director of leadership development at Wharton. "He’s had an outstanding record of delivering profits to shareholders."
The numbers GE racked up during Welch’s tenure were astonishing in and of themselves. But what makes them even more noteworthy is that the company achieved those gains by employing a business structure - the conglomerate - that was supposed to have gone the way of console TV sets, the three-martini lunch and leisure suits.
"Conglomerates have disappeared almost everywhere," Useem says. "Over a 10-year period from the mid-1980’s to the mid-90s, American companies became half as diversified as they had been before. Executives realized they were not very good at running conglomerates, and conglomerates underperformed pure-play companies. With that as background, Welch has defied gravity and thus is all the more remarkable for having successfully run an extremely diversified company that makes everything from jet engines to toaster ovens to TV programming."
But Robert E. Mittelstaedt Jr., vice dean and director of Wharton’s Aresty Institute of Executive Education, says Welch will be remembered for more than just the numbers he put on the board at GE.
"His legacy is about developing people and the importance of bench strength in organizations of any size but especially in big ones," Mittelstaedt says. "You can look at GE’s, or any other company’s, stock price, its revenues and its position in markets, but all of that flows back to developing people efficiently. GE is the ultimate management story. If you develop people properly, you can make money in almost any business."
Useem says Welch achieved success by focusing on several tenets:
Building leadership through the ranks. The management-training center Welch established at Crotonville, N.Y., has educated thousands of GE executives, many of whom went on to head other companies. "His main and enduring contribution has been to build an extraordinary leadership team deep in the organization," Useem notes. McGrath calls Welch "an excellent teacher and motivator with the ability to give managers autonomy and let them win or lose."
Communicating with clarity. Welch was exceptionally talented at communicating GE’s strategy and operating principles in a clear, straightforward fashion. One of his most famous management principles deals with the "boundary-less organization," meaning that managers are expected to look everywhere for ideas, wherever they happened to be invented, and to share them across the internal boundaries at GE. "GE has grabbed from anywhere and everywhere whatever seems to work," Useem explains. "They long ago got beyond the NIH syndrome - not invented here."
Another favorite Welch tenet was his call for speed and simplicity throughout GE. His intention in stressing speed was to emphasize an overwhelming bias for action on the part of GE managers. In calling for simplicity, Welch told his managers that ideas and operating procedures should be made as simple as possible, without being overly simplistic, so that employees could understand them.
Another guideline: Be No. 1 or No. 2 in whatever business you are in, or get out of that industry altogether. "GE actually abandoned this practice a couple of years ago," Useem says, "but for many years this mantra focused managerial attention on becoming the dominant or near-dominant players in their markets."
Reinventing the company before it becomes essential. "Welch was able to anticipate the need for change and was able to move GE in new directions before it became necessary," Useem says. "Years ago, he moved GE deeper into financial services. More recently, he pushed GE managers to embrace e-commerce and identify opportunities offered by the Internet."
Management professor Nancy P. Rothbard agrees that Welch’s ability to reinvent himself and the company was pivotal to his success. "He pursued not just one major initiative while he headed the company, but a whole host of initiatives, and he focused attention on each of them," Rothbard says. One of them was called Work-Out, a program that began in 1988 to improve productivity and efficiency as part of GE’s process of cultural change. Work-Out, which evolved in a series of employee meetings, was designed to eliminate unnecessary procedures and tasks that were left over from the time when GE had many layers of management.
Another initiative was the adoption in 1996 of a quality program called Six Sigma, which also has been used by Motorola, Allied Signal and other companies. The idea behind Six Sigma is that if a company can measure how many defects exist in any of its processes related to products or services, it can figure out how to eliminate the defects and move as close to perfection as possible. Sigma is a statistical term that measures how far a given process deviates from perfection. Welch once called Six Sigma "part of the genetic code of our future leadership."
"Welch was also able to tie the reward systems to these initiatives," Rothbard adds. "He didn’t just say the initiatives were important; he tied them to incentive systems to back them up. That seems like an obvious thing to do, but not all CEOs do that."
Moving aggressively, GE made nearly 1,000 acquisitions under Welch. But Welch was also known as a leader who was keen on divesting unwanted businesses - more than 400 of them during his tenure. In the 1980s alone, Welch eliminated more than 100,000 jobs, through divestitures, layoffs and forced retirements, earning him the moniker "Neutron Jack." Like a neutron bomb, Welch killed off jobs - many of them in middle management - but left GE’s buildings intact.
It was a name he did not like, and he was more than a little justified in feeling that way. Unlike "Chainsaw Al" Dunlap, a CEO who took over companies only to decimate them for short-term gains and then move on, Welch’s cuts were strategic and designed to strengthen GE’s chances for long-term growth.
"It takes courage to be that kind of leader," McGrath says of Welch. "As a shareholder that’s what I want. Dunlap was self-serving, egotistical and demeaning. Of course, many people who make money can demonstrate those behaviors, but Dunlap wasn’t interested in leaving a legacy. Jack Welch has left his company in good hands. He took a very thoughtful, systematic and nurturing approach to building GE’s senior leadership."
It was not all smooth sailing for Welch. The Neutron Jack label rankled him, as did a 1984 Fortune magazine piece that labeled him America’s "toughest boss." Welch was even the brunt of jokes by comedian David Letterman when Letterman had a show at NBC, which was acquired by GE in 1985.
There were more serious issues, too. In 1985, GE pleaded guilty to submitting improper time cards on a defense contract. In 1994, the company was beset by two more scandals. GE pleaded guilty and paid $69 million in fines to the federal government after GE Aircraft Engines was accused of working with an Israeli military officer to divert $30 million of U.S. government funds into personal accounts. That same year, the investment bank of Kidder Peabody, 80% of which GE owned, was racked by a bond-trading scandal.
Most recently, Welch saw GE’s attempted acquisition of Honeywell go down in flames at the hands of a European antitrust official named Mario Monti. Welch, who did his best to eliminate the bureaucracy within GE, saw what could have been the crowning moment of a great career doomed by a civil servant most Americans never heard of.
Despite the Honeywell disappointment, Welch’s legacy as a bold and demanding CEO with sweeping vision and relentless determination remains intact. "The Honeywell acquisition was a failure, but I’m not sure it’s going to have a lasting effect on GE," Rothbard says. "When you sum up everything Welch has done, the accomplishments far outweigh the failures."