GE’s Two-Decade Transformation Case Analysis

March 17, 2005 For: Anne Becker From: Scott Ashby 999004953 Phil Parkinson _ Judy Lee 04003094 Gianni Liburdi 049003649

and many times more profitable. This has left GE to question how much does the company want to change policy over the previous era. If GE wishes to sustain and build upon the progress of the Welch era. and who can continue to provide it for many years to come. flexible. and where does the company want to be in future? Detailed examination of the impact Jack Welch has had as CEO over the past twenty years reveals a leadership style that is the driving force behind a successful transition from a corporate model that was highly centralized and bureaucratic to one that is dynamic.Executive Summary This report’s objective is to provide analysis of the leadership challenge that General Electric (GE) is currently facing. it would do well to nominate a new CEO from within the organization who is familiar with his brand of leadership. and to recommend solutions. 2 . The primary problem is determining what kind of candidate is required to replace retiring CEO Jack Welch.

.............................................................................................. 7 Decision Criteria............................................................................ 11 Alternative 1: ........................................................................ 3 Statement of Problem ........................ 14 Key Tasks for Implementation: .......................................................................................................................... 16 Appendix ..... 2 Table of Contents ............................................................... 5 Key Decision Being Faced.................................................... 4 Primary Issue ................................................................................................ 4 Secondary Issues............................................................................... 15 Contingency Plan:.................... 12 Alternative 2: ...................................................................................................................................................................................................................................................................................... 4 Immediate Concern...... 4 Root Causes .......................................... 12 Recommended Solution................................................Table of Contents Executive Summary..................................................................................................................................................................................................................................... Implementation and Justification ...................... 6 Problem Analysis .......................................................................................................................... 17 3 ............................................................................................................................................................................................................................... 10 Alternatives ..............................................................................................................................................................................................................................................

Will GE be able to sustain the success that it has realized during the past twenty years under Welch as the acting CEO once he departs? Immediate Concern A successor has to be found to replace the retiring Jack Welch.Statement of Problem Primary Issue John (Jack) Welch. the first issue that GE will encounter will be how to transition from Welch as the CEO to the new individual. will be retiring within the next eighteen months at the end of the year 2000. and sustain the rate of growth realized during the Welch era. This is becoming a concern for shareholders who want to realize the same returns they have been receiving under the Welch regime. as no suitable candidate has yet been determined. the current CEO of General Electric (GE). The new CEO has to commence the job and have the ability to act and make decisions while being mentored by Welch so they are not “thrown to the wolves” while enabling Welch to tie up loose ends before departing. 4 . The new CEO needs to be dynamic to lead this complex organization. This has to be done very carefully in order to strike a balance. Secondary Issues Upon selecting a successor.” according to the Financial Times. Welch has shepherded a corporate entity comprised of several diverse lines of businesses that became the ”Most respected company in the world.

Without the right successor. to what degree will the new strategy diverge from the old? It is uncertain if GE will be able to sustain another transformational change similar to that which occurred under Jack Welch. He is not afraid to get involved in projects and initiatives that he implemented. how will GE continue being as successful as it was in the past 20 years in terms of creating value for shareholders? 5 . the top 500 of which had to be personally approved by him. The questions that GE as an organization has to ask itself are: who am I. boasting “I have not missed one session yet”. GE has to examine what strategy the firm is going to follow. but throughout the entire organization.GE has to minimize the disturbance when this transition occurs not only at the top. It does not appear that GE had anyone nominated to take over for Welch upon his retirement. The firm as a whole must be able to continue to operate as if nothing has changed. Will the firm’s strategy continue as is. and where do I want to be in the future (ten to twenty years)? Root Causes Jack is a very hands-on CEO. This was a major concern of shareholders. Welch also taught GE managerial training courses on a bi-monthly basis at its Crotonville facility. He participated in the Session C’s every April and May to evaluate the 3. or will it be changed to reflect the leadership traits of the new CEO? And if so.000 senior executives of the organization.

GE likes to let the business units operate on a standalone basis. today it is hard to know what GE’s core products are.Even though Welch had prided himself on reducing bureaucracy and cutting corporate layers of management. as Welch maintained that documenting processes creates needless bureaucracy. 6 . This is likely going to become very unmanageable if GE continues to expand its business units. the controls do not appear to be in place to monitor management. it has created a situation where corporate governance seems to be lacking. Key Decision Being Faced GE has to determine who can become the next dynamic leader of this complex organization. GE used to be known as a “light bulb company”. it will be very difficult for the business unit CEOs to understand all of the business lines in order to properly allocate resources. The Business Unit CEO reports directly to Welch. GE has a very fundamental problem. like a small business. as the new CEO will be hard pressed to maintain the same level of direct involvement without being spread too thin. Plus. By diversifying into many unrelated lines of businesses through acquisitions. It is unclear whether or not GE has a clear overall mission and vision for the organization. As such. it has lost its corporate identity to some degree. People need to be guided and GE needs to ensure that they adhere to the guiding principles that Welch has established over the past 20 years in order to be successful when deciding who should be his successor in the role as the CEO.

Early on in his tenure as CEO. 2002. Pg. In the end. Welch used stories at GE to create a unique culture and make the values come alive throughout the organization. always believed that people should come first.”2 Welch’s vision of building people. however. John Wiley & Sons. or given training in a new skill to make them more marketable to other employers. These mass layoffs lead to some critics dubbing him “Neutron Jack” for his practice of getting rid of the people while leaving the building standing. In the early days. The new CEO will have to prove to everyone that he or she is a credible leader. Welch. by putting people first. “Shared values are the foundations for building productive and genuine working relationships. “The Leadership Challenge”. Welch made big waves by deciding to downsize the number of corporate layers and sell off many of GE’s traditional business units. Those people that were let go were provided with help finding a new job. While in the downsizing process. 78 7 . differed from GE’s vision of developing and perfecting skills. Welch did not work with everyone at GE to develop 1 2 Kouzes and Posner. not just employees. “Titles are granted. Such deeply held beliefs were reflective of his hatred for bureaucracy. John Wiley & Sons. he also invested in his people by revitalizing the Crotonville Management Development Facility better train future leaders and treat the process as a reward for the best employees. but it’s your behaviour that wins you respect.”1 Nothing exemplifies this more for Jack Welch than how he handled the company’s employees. which again differed from an employee’s vision of excelling individually so that they can move up the corporate ladder. Pg. 14 Kouzes and Posner. “The Leadership Challenge”.Problem Analysis GE’s situation is similar to that of most organizations which need to find a successor for a departing CEO. 2002. Jack earned the love and respect of GE staff and overcame the Neutron moniker.

They communicate their hopes and dreams so that others clearly understand and accept them as their own. not forced. Duane Ireland. Pg. “The Leadership Challenge”. they must participate in the process: unity is forged. John Wiley & Sons. #2 – Fix. He wanted to focus GE on businesses that were successful. 158 5 Michael A. Welch took a bold risk by implementing the #1. building consensus. but he had to make GE lean before he could focus on the softer elements. Leaders know what motivates their constituents. Sell or Close strategy.an acceptance of what his or her vision was and how to achieve it. appreciating. Oxford University Press. 2001. For people to understand the values and come to agree with them. 83 Kouzes and Posner. They show others how their values and interests will be served by a particular long-term vision of the future. “Leaders breathe life into visions. Jeffrey S.”4 Welch’s vision did eventually create a responsive organization. Welch challenged the process by disproving conventional theory that a conglomerate of unrelated and diversified businesses could succeed as a viable strategy. Mergers & Acquisitions: A Guide to Creating Value for shareholders. Pg. and remove the ones that were not. “The Leadership Challenge”. 2002. 126 4 3 8 . “Acquired businesses that are unrelated to the acquiring firm’s core business are less likely to produce positive results.”3 This was displayed during the de-staffing process. R. Hitt. “Shared values are the result of listening. and practicing conflict resolution.” 5 GE demonstrated strong financial performance over the past 10 years by allowing each business unit have their own strategy. John Wiley & Sons. so they could be more entrepreneurial. Pg. 2002. This was also exemplified through his Session C’s and the removal of the 10% of employees with the lowest Kouzes and Posner. rather than one strategy for the firm as a whole.

6 Stephen P. He would only do the latter when he felt he could not offer any expertise to the project. He only wanted the best people to make GE the best it could be.”6 When implementing Six Sigma.performance in a group. being fair. Welch attempted to enable others to act. This shows that he was using fear as a motivator in order to gain respect and acceptance of his ideas. speaking your feelings. This is the classic case of expectancy theory where effort leads to performance. “Organizational Behaviour Concepts. 9 . practicing openness. Controversies. he would sometimes provide a roadmap to reach a given destination. dubbed C-players. Applications. This was most exemplified during the Six Sigma implementation. Thus. he tied the initiative to the annual bonus. In terms of Path/goal theory. He did so by implementing the “Work Out” program where employees were expected to continuously improve the firm. maintaining confidence and demonstrating competence. that was achieved through the bottom line results. being a team player. which has become the granting of stock options. p253. Welch was not necessarily the best at fostering collaboration. Building trust includes demonstrating that you are working for others’ interests as well as your own. On the other hand. Welch used this to some degree. which leads to reward. where managers had to be on board or they would be fired. while other times he would leave the course taken open to the project staff. Robbins and Nancy Langton. he is using rewards to coerce the managers to adopt Six Sigma. Employees were faced with a choice of either following his initiatives or being eventually removed from the organization. “Part of gaining credibility involves building trust. Prentice Hall. showing consistency in the basic values that guide your decision making.

the successor CEO needs to see change as opportunity for further improvement. Everyone felt that they did not do it enough. but Welch was poor at leading by example while CEO. GE is at a crossroads. In fact. The company is able to build a strategy around a clear value proposition for the customer. “change is opportunity” as he would say. With Welch retiring. but also how much change will occur under the new CEO’s reign. as they must decide not only on a successor. He also wanted to hear employees by having them provide annual surveys asking questions that would determine if the employee’s needs were being met. Currently. Jack tried to promote the idea of celebrating small wins. • The solution must not sacrifice the ability to continuously change. and whether GE was a great place to work. 10 . The following criteria will contribute to the Board’s final decision: • The solution must deliver products & services that consistently meet customers' expectations and achieve customer loyalty. He was more focused on ensuring the results were met.Welch encouraged the heart by stretching the goals in order to outperform the competition. GE has a big challenge to overcome. Can GE survive another “transformational change” that occurred under the Welch regime? Decision Criteria The Board of Directors at GE must make several important considerations when choosing a course of action to address Jack Welch’s retirement in 2000.

2. Therefore it is critical the solution enables the organization to achieve the same or better financial performance and growth in market share relative to competitors. Use this new leader to maintain current momentum of change and growth during Welch’s era. Hire a new leader from within the organization. Effectively make the successor more aggressively initiate growth and change. thus ensuring their confidence and support. Alternatives With the above criteria in mind and the assumption that hiring a new leader is the basis for any solution. broader revenue mix. 11 . the Board of Directors has two potential courses of action to choose between: 1. This can be measured through a financial ratio analysis such as ROA per employee. as these people are the driving force behind the company' s success. • The solution must minimize the turnover of A-Players.• The solution must have minimal disruption on GE in terms of its people (employee satisfaction and customer turnover) and a corporate culture which strives for excellence. hand picked by Jack. improved returns. percentage of revenues/profits from new business. Hire a new leader either from within or outside of GE. • The solution must convey security and strength to the shareholders. with a mandate to begin a tear down and rebuild of the organization once again.

Most importantly. A focus on customer needs. due to expectations that financial performance will remain as strong as that under Welch’s reign. rather than abstract product development. Finally. the familiarity of the incoming CEO with existing processes and organizational structure helps mitigate the learning curve. the premise that the future leader was selected by Jack Welch will undoubtedly have a positive effect on shareholder confidence. Employees will be comfortable working with a new leader that reflects the same values and beliefs that Jack Welch has bestowed upon them over the years. This is particularly important for the retention of the top A-Player employees. Potential candidates will only have reached senior levels of management by furthering the agenda laid out by Welch during his tenure. and such success has in turn helped them to “buy-in” to his way of doing business. allowing Welch to hand pick a worthy leader form the top 500 executives will have minimal impact on the established culture at GE.Alternative 1: The first solution does meet the prescribed criteria. Jack Welch is unlikely to pick anyone who does not share his passion for customer service. Selecting a new leader from outside will likely have a major effect on the organization’s culture 12 . Alternative 2: The second solution has the potential to cause significant upheaval during the transition period. who will likely continue to receive the same kind of preferential incentives that they have over the past twenty years. The sense of continuity will minimize the chances of any negative impact on GE’s stock price. is a key lesson that the new CEO must take close to heart. so it can be expected that any successor will continue to rate highly in this regard. In addition.

This will cause the shareholders to become less supportive of the new leader and the decision to replace Welch with an outsider. that an even more rapid rate of change becomes too much for both consumers and employees to accept. It may prove. This alternative may not be practical in terms of managing expectations of external stakeholders and employees if communications are not well established during the initial stage. Also. After the new leader has had a chance to study the organization.and people immediately upon inception. 13 . however. Repercussions from the Board may happen when some of them are concerned that there may not be a smooth transition for handover. Jack Welch himself is famous for maintaining that whatever changes he made during his tenure. this may be tested if the financial performance deteriorates in the short term as the re-organization is taking place. while shareholders may have confidence in the Board and Welch to elect a suitable successor and support their decision. widespread changes may occur in the organization’s processes and organizational structure. The greatest challenge with this approach is that such a major reworking of GE business practices poses a significant risk factor. he could have always done things faster. New ideas and perspectives injected by an outside leader not indoctrinated in the “Jack Welch GE” can introduce different team dynamics and new ways of doing business.

The primary justification from a leadership standpoint is based on a recognition of the excellent work that Jack Welch has done over the past twenty years.Recommended Solution. As illustrated in Exhibits I and II. the recommended course of action for the GE Board of Directors is alternative one: Maintain the current momentum of change and growth of Welch’s era. Welch’s style exhibited a number of attributes that are key for a successful leader. Implementation and Justification Table 1: Alternatives for GE Succession Plans Criteria Alternatives Maintain and Successor to more continue current aggressively initiate momentum of growth and change change and over that of growth of previous regime Welch' s era 4 4 3 4 3 4 18 4 3 2 3 16 Customer Satisfaction Ability to Rapidly Evolve Minimal Cultural Disruption Low A-player Turnover Financial Performance Total Note: Rating is weighted importance of criteria on business strength and capacity The alternatives are measured against the criteria on a 1-5 scale Rating is on a 1-5 scale with 1 being the worst fit and 5 being the best fit Scores against criteria are used to develop strategy Table 1 (above) represents a numerical weighting of each alternative in the key areas discussed therein. Based on the results. 14 . and represented a marked departure from the traditional highly centralized and bureaucratic GE that he inherited from Reg Jones.

Not only is it difficult to motivate people to fix what isn’t broken. i. 2. the success brought by the Welch years means no such sense of impending crisis exists. but there is also the risk that rapidly accelerating the rate of change will create problems where none previously existed. Key Tasks for Implementation: 1. New leader attends all meetings with Jack Welch. GE requires a leader who can readily institute changes within the organization to make it more competitive. ii. but this does not imply that such a changes need to occur at a scope that is potentially foolhardy. Jack Welch demonstrated an great skill in balancing the needs of stability and evolution against one another. While staff can certainly motivated to get behind a new initiative every few years such as Boundaryless and Six Sigma. however. Surveys operations and meets lower level managers. Welch was able to implement his sweeping agenda of change in GE because he created a sense of crisis within the organization. and GE would be well served to have a CEO which can provide his kind of leadership for years to come. In today’s GE. Select most promising manager from top 500 executives and ensure acceptance.In some ways. Instilling the notion that massive change was a necessary as it was unavoidable helped to reduce employee resistance to the plan. Begin integration efforts immediately. 15 . in addition to generating buy-in at both senior levels and the grassroots. there is little recognition within the organization of the need for massive restructuring along the lines of that which occurred twenty years prior.

Special introduction to shareholders and carefully developed press releases to announce to public. This would help to give the company adequate breathing room to successfully complete the transition from old to new CEO without creating a dangerous power vacuum during the interim. For a detailed outline of the process. Convey consistency to employees yet push them forward towards continued change. a legal loophole could be exploited though employing his services as an unofficial consultant. The complete implementation of the transfer of power will take upwards of one year to complete.iii. please consult Exhibit III. Contingency Plan: In the event a suitable CEO candidate cannot be located and/or fully trained by the handover deadline. destroyyourbusiness. Given that he will have reached the government mandated retirement age by 2001. 3. a contingency plan can be established whereby Jack Welch can extend his tenure at GE. 4. New leader must understand and encompass Jack Welch’s philosophy of leadership.com initiative must be completed and embraced while existing procedures must be followed and enforced. 16 .

Jack Welch empowered others to act on their vision by making them the idea champion. and training sessions. Welch targeted cost savings mostly from headcount reductions. Welch’s vision was simple as "Being No. and telling the story throughout the organization. Welch also rewarded his "A-players" with training at Crotonville. Within Work-Out. and was tied into individual compensation in the form of stock option bonuses. Institutionalize the new approaches Best practices and resources are shared between business units. Welch used management training at Crotonville and Best Practices and Workout programs to foster collaboration. it had to be done his way or the highway. weekly or monthly meetings. Empower Others to Act on Vision Plan for and Create Short Term Wins Consolidate Improvements. This became an end result of improving change moving customer satisfaction and productivity using the Workout and Six Sigma programs. Form a Powerful Guiding Coalition Create a Vision Communicate the Vision Jack Welch used his alliances with key direct reports to establish credibility for corporate acceptance of the delayering process. thus showing employees that their ideas were being considered. Welch determined that a Urgency radical change was required for GE to remain competitive in the future. When Six Sigma was introduced. Welch communicated his vision through employee suggestion programs.Appendix Exhibit I: Application of Kotter's Model of Transformational Change To General Electric Kotter's Model of Transformational Change Alan's Way Establish a Sense of Fueled by his business experience and hatred of bureaucracy. Initially. there was a great risk that its highly centralized and inflexible organizational processes and structure would leave it vulnerable to more dynamic firms. 1 or 2 in any industrial sector in which they compete". He challenged the Keep the momentum for entire organization to look for more savings. Exhibit II: Fiedler's Leadership Model Leaders Reg Jones Jack Welch Leader-Member Relations High High Task Orientation High Low Position Power High High 17 . He would use storytelling at these sessions to promote successes and illustrate failures. employee suggestions had to be accepted or rejected on the spot by managers. If it did not.

sequencing and contingency arrangements) Create a task force and pilot test.To continue dyb. Plan for exit Change and growth need ongoing revitalized ideas and plans. Training is key Communicate clearly and get message across. Recommendations Targets 1. .communicate clear vision (change if necessary to better fit with business environment) -Establish and reinforce core value (integrity. They are individuals who integrate all essential elements of company to achieve impeccable results. One of the highest priorities during the transition and in a dynamic industry. Communications company wide to let people know management' s commitment. Focus on integration (process) Company wide 4. .Pay attention to behavioral reactions of stakeholders and employees turnover rate. cultural values. Launch in phases. Set clearly defined priorities and schedules.com project and launch as full fledged (Strategy) 2. Integration is a deliberate process which is often ignored.Exhibit III: Implementation Plan Short term (within three months) Justifications Key Tasks Im Implementations (resource allocations/management processes.Institute companywide training and retain A-Players (leadership) Business levels managers to collaborate with IT department Quality people and business leaders To continue the momentum initiated by Welch. Involve target people to take ownerships of ideas and gain commitment. -develop contingency plan if retirement age cannot be changed. Reward according to performance 3. Develop a task force to facilitate and orchestrate best practices and bring in representatives from different functional units. Establish effective controlling measures in relation to expected standards of performance. quality and innovation) -These values to be stressed in hiring and training in performance appraisals -provide incentives and reward for actionable ideas/plans -reinforce this process is part of company culture for innovation -Business levels managers to be motivated and rewarded by able to train and select right quality people -contact related governmental units to understand if flexibility is allowed and to what extent. 18 . To continue personal aspirations Spearhead initiatives by formalizing processes and ask target people to suggest improvements or help plan a proposed change Retired but serve on board until successor is on track. Consultation and seek input from the bottom (culture) Few tiers down below successor and critical business level managers Jack Welch 5. Encourage upward and downward communications. customer service.

Continue to push for initiatives. lower performance) for diversified company like GE if they are not proactive in change. exposure) -To establish a reliable and fair reward system . future needs and competitive situation -not to get people cognitive overloaded and confusion. challenging assignments. To inject morale (people) All employees Long Term (within twelve months) To make policy manifested in consistent and clear way to employees and solicit ideas of how to retain and attract talent staff inside & outside. To develop strategy to leverage on company' s reputation to sell products in niche categories -omit irrelevancies and get to the core of every issue 8. 19 . units together and doing it in such a way as to get bottom-line results.6. Periodic review of progress to ensure process is on the track and on-going feedback gathered from employees to enhance communication process. -Every change to be done within the context of GE' s history. one at a time (Strategy) Company wide -To implement by tying all processes. -Vocational support (sponsorship.role modeling and mentor program to develop employee self-efficacy and greater appreciation of organizational culture Develop job descriptions in parallel of workout process 7. To remain competitive in market and sustain competitive advantage (Strategy) Senior management -Focus on core competence by offering services which are currently not available by other competitors 9.Continue to foster communications (people and operations structure) All employees Establish process to bring every senior executive from different functions to jointly pursue urgent business goals and reach conclusions of how to achieve them Risk (outperformed by competitors.

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