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Team Globalization Case Analysis GE’s Two Decade Transformation: Jack Welch’s Leadership
Yasmine Abdo Al-Kouraishi Muhammad Howard Steven D. Johns Kenneth V. Oliver Kimberly N. Lomax
AMBA 670 Managing Strategy in the Global Workplace July 25, 2012
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Executive Summary Team Globalization has conducted an in depth analysis on General Electric's (GE) two decade transformation achieved by the company’s former Chief Executive Officer (CEO) Jack Welch. This report consists of a reflective examination performed by the team, incorporating perspective gained through professional experience and key concepts gleaned from selected course reading selections. As CEO of GE, Jack Welch's management skills became legendary, with little tolerance for bureaucracy and archaic business processes. Acquiring new businesses and ensuring that each business unit under the GE umbrella was one of the best in its field was a primary concern for Mr. Welch. Under his guidance, the company expanded dramatically from 1981 to 2001 (GE, 2012). The culture of innovation and learning, which included incorporation of measures related to new product development, technological leadership, and rates of improvement, aided Welch and the company in defying the critics as the company continued to profit.
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Introduction Surviving in today’s challenging business environment necessitates innovative thinking in terms of crafting strategies to enable the establishment and sustainment of a competitive advantage. Through an established strategy, structured options and decision making processes, organizational leaders will be able to facilitate organizational development and growth. Overcoming the odds and competitive pressures sometimes requires defying critics and popular views to develop initiatives that not only streamline the organization, but create profitable business operations and human resources to add value to the organization. The analysis that follows identifies and defines the challenges which Welch of GE encountered during his tenure, and outlines his approach to strategic corporate leadership and taking charge. The report is followed by a breakdown of Welch’s objectives in regards to innovation and his strategy on creating value. The authors will also provide an evaluation of Welch’s approach to leading change with emphasis on the overall impact that Welch had on GE’s success. Finally, this paper will take a look at the implications of Welch’s replacement.
How difficult a challenge did Welch face in 1981? How effectively did he take charge?
Welch faced a very difficult challenge taking over the position as CEO of GE. His predecessor, Reg Jones, set the bar extremely high at the company leaving a legacy for Welch to compete with as the new CEO. Jones had been considered a “management legend” and had been voted CEO of the year three times for his brilliant accomplishments with GE. Jones was also labeled CEO of the Decade two years before he retired. Needless to say, Welch had some big shoes to fill once named as CEO. During this transition, the business world was highly
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competitive, with the economy, environment, and political climate in constant flux. If not handled properly, the transition could be detrimental to the company. Welch was up for the challenge and knew that a successful transition would mean developing a team that would make GE even more prosperous earning stakeholder trust. This required assessing the current environment to accurately determine a way to improve it. Welch convinced his team to buy into his new vision of where the company should go and challenged employees to be “better than the best”. In order to accomplish this enormous task, Welch placed executives and management in key places to could assist his efforts to redirect overall company culture. Managers that did not fit into or who failed to embrace his strategy were let go. Anything and anyone that didn’t bring value to GE was eliminated. Hierarchical organizational levels were dramatically reduced, enabling the company to operate as a “lean and agile” business. From the moment he took over the business, Welch went full force into implementing a “real time planning” strategy. At the time of his appointment, the United States economy was in a recession. To combat this situation, Jack Welch had to develop a plan of action aimed at keeping the company thriving in the business world. In order to accomplish this, GE sold many of their businesses, which represented 25% of their sales. However, during that time, Welch simultaneously and strategically invested in other businesses, increasing their revenue and operating profits. How effectively did he take charge? Welch was extremely effective in taking over the GE reins. Although his predecessor was quite successful during his reign and the business thrived, there was still the need for change. The business world was evolving and competitors attempted nonstop to stay ahead of GE. Fortunately, Jones had left the company in a “good place” during
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the transition, allowing Welch to come in with his new and innovative ideas to take the company even further in the business world. What was Welch’s objective in the series of initiative he launched in the late 1980’s and early 1990’s? Jack Welch repaired the structure of GE with his initial changes, but now had to manage the human resources aspect to “rebuild the company on a more solid foundation (Bartlett & Wonzy, 2005, p. 3).” GE’s employees had been sufficiently shaken by the preliminary changes made, and were subsequently worn-out due to upheaval within the company’s core. Welch hoped to create an environment which optimized “openness, candor, and … reality (Bartlett & Wonzy, 2005, p.4).” Additionally, “speed, simplicity and self-confidence (Bartlett & Wonzy, 2005, p.4)” were the characteristics he expected to dominate the culture. Welch had always been a teacher often leading sessions at the Management Development Institute. These sessions afforded managers with an open-forum, allowing them to vent concerns about change implementation and resulting complications. With the help of James Baughman, Director of Management Development, Welch decided to institutionalize these open forums, giving every employee the opportunity to become part of the discussions, honestly and openly. Employees gathered in groups to respond to their unit bosses’ challenges and agendas in general. Facilitators were empowered to walk these groups through a process wherein problems were laid out, discussed, potential solutions identified, and final presentations produced for presentation to unit bosses. This process was dubbed the “Work-Out”. When the bosses returned, they were required to listen to the proposals and make a decision in front of the group to at least 80% of the total proposals. As a result of these standardized processes, productivity increased two-fold.
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The “Best Practices” program was assigned to the Business Development department. As head of the Business Development department, Michael Frazier and his team studied nine companies who had higher productivity rates than GE. The end result was a toolkit of key techniques and identification of core characteristics that made these companies successful. For example, process efficiency, customer satisfaction as their Key Performance Indicator (KPI), well-developed supplier relationships, and consistent innovation of high quality products and manufacturing efficiencies with little to none unused capacities were all discovered as “ingredients to success”. A new training program emerged which helped managers see the error of existing measurement practices. Managers were further trained to look at larger-scale opportunities for improvement, and broaden their vision of what success actually looked like. Welch continued to subtly injecting his ideas about globalizing business units within GE. He looked for opportunities within each business unit to not only increase success levels within United States markets, but to benchmark GE against competitors on the world stage. To prove his steadfastness, Welch hired Paolo Fresco, a proven negotiator, to head the International Operations position. GE took advantage of global economic downturns in countries like Mexico and Japan to increase their acquisitions, doubling revenue from international operations within the first five years. Welch dug even deeper into the fabric of GE with an initiative focused on locating and developing leadership at all levels of the company. GE employees were being developed, evaluated and compensated based on a demanding evaluation process called “Session C”. Welch had employed this process with his top team members and was now drilling down to other business layers in search of the next wave of GE leadership. Now, everyone in the GE professional corps could expect detailed feedback on their performance, a clear plan for
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developing their skills, and with successful completion of their training and development plan, knowledge about what future positions they might hold within the company. To incentivize stronger work ethics, GE revamped its compensation package by offering more stock options tied directly to individual performance for program initiatives. Welch wanted employees to feel valued for their contributions, and highly-compensated for their efforts. Welch used Crotonville, the management development facility, as his incubator. Crotonville was re-designed and outfitted with new buildings for example. Teams of managers focused on real-time issues facing GE’s business to produce action plans for achieving results. Welch was so committed to this concept that he taught and talked with managers at Crotonville two times per month. He practiced what he preached, leadership development through active mentorship and teachable moments. Once Welch’s commitment to developing internal leadership was fully in play, he made it clear that everyone would need to commit to GE’s values, or risk being let go. He knew that some managers made the cut based on numbers, but failed to inspire and motivate their employees. To further demonstrate his seriousness about having thoughtful leaders, he implemented the “360o review”. Everyone was evaluated by their peers and subordinates in addition to their leadership. This process “… [identified] training needs, coaching opportunities, and eventually career planning-whether that be up, sideways, or out (Bartlett & Wonzy, 2005, p. 8).”
Is there a logic or rationale supporting the change process? When analyzing Welch’s rationale for the changes made, it is important to identify the benefits of incorporating Porter’s five forces model to analyze competition within an industry. Welch based his proposed and implemented changes on proven tactics used by other successful
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companies to achieve his strategic organizational goals. Realizing that bureaucratic models of organizational structure were prone to promoting sluggishness, Welch opted to depart from this model and implement a more flat organizational structure to assist in meeting his defined objectives. Although unpopular at the time, Welch’s decisions and actions have through time become renowned as revolutionary exposing sheer genius in executing changes within an organization.
How does such a large, complex diversified conglomerate defy the critics and continue to grow so profitably? Have Welch's various initiatives added value? If so, how? Although GE had gone through a major reorganization that contributed to its successes, the changing business climate when Welch took over as CEO required more to be done. The complex diversified conglomerate consisting of overlaying groups of 46 divisions and 190 departments all supporting 43 business units were faced with a recession, an economy of high unemployment, high interest rates, and an overvalued U.S Dollar. These uncertainties and climate of continuous change and increased competitions led Welch to the realization that overcoming the magnitude of challenges would require unconventional leadership and bold strategies. He understood that in turbulent times, strategy was not just about building a position of sustained competitive advantage but rather formation and implementation of a strategy centered on the development of timely responses and flexibility to create successive temporary advantages (Grant, 2011, p. 16). To successfully achieve such objectives required the reconfiguration of organization’s resources and competences (Grant, 2011, p. 16). In times of uncertainties and recession, the normal course of action for many businesses is to engage in cost cutting strategies, but studies demonstrate that such strategies are not always sufficient.
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Investment in the right places during hard economic times enables a company to perform better during and after a recession (Anonymous, 2009, p. 9). GE defied critics and the prevailing convention of multi business break up by adapting various strategies which included but was not limited to restructuring through what Welch called “Fix, Sell or Close”. Through this strategy, the company was able to analyze the 43 businesses under its umbrella and only those businesses that were number one and two in their industries were maintained. Those that were not maintained were either sold or closed down. Businesses that were maintained became the center of strategic focus in terms of developing those units through additional investment and developing efficiency and effectiveness procedures and operations. This strategy is an indication that Welch did not adapt cost cutting strategies like many of the companies during that time but his goal was as he said: “I would like General Electric to be perceived as unique,…with world quality leadership in every one of its products line” (Bartlett, 2005). Selling and closing of some businesses was about doing away with those businesses that were under performing, and did not add value to the company. By doing so, the company became more efficient and a value building culture permeated the GE workforce. Evidence of this is shown when considering the fact that that Welch divided the remaining businesses into three categories known at The Three-Circle Vision (See Exhibit 2). The businesses were not the only component of the company to go through restructuring, but Welch’s goal of making GE lean and agile resulted in de-staffing and reduction of bureaucracy, eliminating layers of hierarchical that were bottlenecks to growth and operational, personal and production efficiency. The underlining principle in the transformation is that in order to operate an effective and efficient world class business, and sustain number one or two positions in an industry, GE had to invest in the right businesses and develop staffs that are the best at what they
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do. Individual employees were empowered to lead in their own capacity by finding ways to contribute to the value system of the company. Leaders were challenged to find ways to make their people more effective and competitive. Open forums were created to find avenues of improvement at all levels of the firm’s business, operations, human resources and employee morale. Critics saw the company’s strategy of developing leadership and employee capabilities enhancement as being risky especially in times of uncertainties. They also viewed the removal of boundaries through what was known as Work-Out best practice and the creation of the boundary less as being radical and risky. However, through the determination of Welch and his team, and the desire for change; the risk paid off contributing to the value of the company. Welch understood that strategy is not about doing things better, but it is about doing things differently through effective decision making and knowing where to compete and how to compete; as emphasized by Porter (Gant, 2011, p. 18) regardless of how radical and risky it may seem to critics. GE had acquired firms that enabled it to expand globally and developed global operations that resulted in the company almost doubling its international revenue to $42.8 billion. The company became lean and agile, with increased efficiency and organizational culture transformation. Through the stretch target initiatives, all employees were asked to prove how good they can be by setting and reaching higher goals that were once deemed to be impossible to achieve. Another important value added to the company was the service business, which contributed to two-thirds of the company’s revenues (See Exhibit 9). These and other initiatives are examples of how Welch endeavors, initiatives and ideas contributed to the value of GE. With Welch’s leadership GE ventured into new sectors, and did away with ineffective ones, developed a massive global market that out performed its
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domestic markets, created a service industry and an E-business; thus increasing it revenue and increasing its value by 60%, and most importantly surviving the recession and creating a large complex diversified conglomerate that continues to defy the critics and grow in performance and profitability. Values added include but not limited to the reduction of bureaucracy which resulted to more expedient processes, and effective operation. Welch extended his Fix, sell or close from the national level to the international level. He also saw the challenges in other countries and economic difficulties as opportunities for new investments and expansions. Values added also included the transforming of GE culture to a more learning, knowledge sharing and demanding of excellence, commitment and service to the goal of the organization. Welch introduction of business service contributed to two-third of the company’s value. Last but not the least, his introduction of the Six Sigma quality initiatives led to 62% in turnaround time, return of $750 million over the investment exceeding expectations along with a forecast of additional returns of $1.5 billion in 1999. In addition to this the program also contributed 300 million pounds of new capacity.
What is your evaluation of Welch's approach to leading change? How important was he to GE's success? What are the implications for his replacement? Jack Welch’s mission was to restructure the company in order to become the number one or number 2 competitor in the industry. He embraced change, expected his team to do the same, and challenged his team be “better than the best” (HBS, p.2). He employed different management reporting structures at different points of the transformation. For example, he felt as though there were too many layers at all large headquarters groups, as a result he spearheaded a de-staffing process which resulted in a vertical reporting structure with major department heads
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reporting directly to him. In addition, his team of managers shared the same commitment to management values. Furthermore team members had to have the willingness to take charge, to think outside of the box, to push the envelope and most of all to be team players. In return Welch compensated those employees with generous bonuses and incentives. Welch fostered open communication and created a culture characterized by “speed, simplicity, and self-confidence.” (HBR, p.4). In order to show his commitment he launched the “Work Out” program which created a forum where employees and managers could work out new ways of interacting with each other. Welch never rested on his last success; he continued to innovate and to look for ways to grow the business both internally and externally. For example as “Work Out” began he began to think of additional ways to increase productivity. As a result the “best practices” program was created in an effort to learn from other companies and to identify the reason for their success. Welch believed in developing leaders and provided the tools for them to do so. He adapted a human resource department that would be in line with his goals. He challenged his managers to identify future leaders, and then developed a training program and a developmental plan for all key jobs. He understood that GE’s assets were in fact their people and in turn had to be managed as a company resource. Welch’s unwavering involvement in every facet of the business was essential to all of these incentives, and directives. His philosophy was not a “do as I say not as I do” mentality. In addition he never rested on his last success. He created the “Stretch” program in an effort to push people to be the best they can be, to test boundaries, and to get “people to think of fundamentally better ways of performing their work.”(HBS, p.10). Ultimately Welch’s strategy was to look at the external factors that affected GE’s success, while implementing a bottom to top approach.
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Ultimately he realized that the success of GE relied on the strength of his team. To that end he was relentless in ensuring that his team was set up for success. Everything Welch did reflected his belief in his people and as he once stated. “I own the people, you just rent them.” (HBS, p.7). Welch’s replacement will need to establish him/herself and make a name for themselves. This person will need to clearly communicate their vision and how they will go about accomplishing those goals. He/she will need to continue to foster open communication in an effort to continue to foster teamwork. Innovation will be crucial if the company is to thrive under the new leadership. Welch’s replacement will need to make a name for himself by creating new programs that continue to foster employee/employer relations, and by understanding the importance of looking at the external factors that affect the overall business Conclusion As stated throughout this analysis, Jack Welch stepped out into uncharted territory with lofty aspirations of making dramatic change within the GE organization for positive growth. These efforts were achieved through several unprecedented means and reorganization of the existing organizational structure to facilitate discussion, communication, and constructive criticism unilaterally throughout the company. Although some of his chosen methodologies were deemed by critics as “radical” and “risky”, the results of Welch’s actions speak for themselves as a testament to his strategic leadership at the GE helm. The agility, responsiveness, productivity and ultimately profitability realized as direct results of Jack Welch’s actions while operating in the office of GE CEO are key indicators of the lasting impact that his legacy leaves for future officers tapped to fill the position. Programs and processes established under his watch leave an impressive standard for successors. Without a doubt, Jack Welch’s leadership has left a lasting impact on GE and the business world.
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References Anonymous. (2009, p. 9). Beware: Cost cutting can be deadly. Principal's Report, 9(6), 8-9 Bartlett, C.A., & Wozny, M. (May 3, 2005). GE's two-decade transformation: Jack Welch's Leadership. Harvard Business School. GE, 2012. Past Leaders. Retrieved from http://www.ge.com/company/history/bios/john_welch.html Grant, R.M. (2010). Contemporary strategy analysis (7th Ed.). Malden, MA: Blackwell.