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GEs Two-Decade Transformation Case Analysis

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

Executive Summary
This reports objective is to provide analysis of the leadership challenge that General Electric (GE) is currently facing, and to recommend solutions. The primary problem is determining what kind of candidate is required to replace retiring CEO Jack Welch. This has left GE to question how much does the company want to change policy over the previous era, 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, flexible, and many times more profitable. If GE wishes to sustain and build upon the progress of the Welch era, it would do well to nominate a new CEO from within the organization who is familiar with his brand of leadership, and who can continue to provide it for many years to come.

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

Statement of Problem
Primary Issue John (Jack) Welch, the current CEO of General Electric (GE), will be retiring within the next eighteen months at the end of the year 2000. Welch has shepherded a corporate entity comprised of several diverse lines of businesses that became the Most respected company in the world. according to the Financial Times. 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, as no suitable candidate has yet been determined. This is becoming a concern for shareholders who want to realize the same returns they have been receiving under the Welch regime. The new CEO needs to be dynamic to lead this complex organization, and sustain the rate of growth realized during the Welch era.

Secondary Issues Upon selecting a successor, the first issue that GE will encounter will be how to transition from Welch as the CEO to the new individual. This has to be done very carefully in order to strike a balance. 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.

GE has to minimize the disturbance when this transition occurs not only at the top, but throughout the entire organization. The firm as a whole must be able to continue to operate as if nothing has changed.

GE has to examine what strategy the firm is going to follow. Will the firms strategy continue as is, or will it be changed to reflect the leadership traits of the new CEO? And if so, 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. The questions that GE as an organization has to ask itself are: who am I, and where do I want to be in the future (ten to twenty years)?

Root Causes Jack is a very hands-on CEO. He is not afraid to get involved in projects and initiatives that he implemented. He participated in the Session Cs every April and May to evaluate the 3,000 senior executives of the organization, the top 500 of which had to be personally approved by him. Welch also taught GE managerial training courses on a bi-monthly basis at its Crotonville facility, boasting I have not missed one session yet.

It does not appear that GE had anyone nominated to take over for Welch upon his retirement. This was a major concern of shareholders. Without the right successor, how will GE continue being as successful as it was in the past 20 years in terms of creating value for shareholders?

Even though Welch had prided himself on reducing bureaucracy and cutting corporate layers of management, it has created a situation where corporate governance seems to be lacking. The Business Unit CEO reports directly to Welch. This is likely going to become very unmanageable if GE continues to expand its business units, as the new CEO will be hard pressed to maintain the same level of direct involvement without being spread too thin. Plus, the controls do not appear to be in place to monitor management, as Welch maintained that documenting processes creates needless bureaucracy. As such, it will be very difficult for the business unit CEOs to understand all of the business lines in order to properly allocate resources.

GE has a very fundamental problem. By diversifying into many unrelated lines of businesses through acquisitions, it has lost its corporate identity to some degree. GE used to be known as a light bulb company; today it is hard to know what GEs core products are. GE likes to let the business units operate on a standalone basis, like a small business. It is unclear whether or not GE has a clear overall mission and vision for the organization.

Key Decision Being Faced GE has to determine who can become the next dynamic leader of this complex organization. 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.

Problem Analysis
GEs situation is similar to that of most organizations which need to find a successor for a departing CEO. The new CEO will have to prove to everyone that he or she is a credible leader. Titles are granted, but its your behaviour that wins you respect.1 Nothing exemplifies this more for Jack Welch than how he handled the companys employees. Early on in his tenure as CEO, Welch made big waves by deciding to downsize the number of corporate layers and sell off many of GEs traditional business units. 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.

Welch, however, always believed that people should come first. Those people that were let go were provided with help finding a new job, or given training in a new skill to make them more marketable to other employers. While in the downsizing process, 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. Welch used stories at GE to create a unique culture and make the values come alive throughout the organization. In the end, by putting people first, Jack earned the love and respect of GE staff and overcame the Neutron moniker.

Shared values are the foundations for building productive and genuine working relationships.2 Welchs vision of building people, not just employees, differed from GEs vision of developing and perfecting skills, which again differed from an employees vision of excelling individually so that they can move up the corporate ladder. Such deeply held beliefs were reflective of his hatred for bureaucracy. In the early days, Welch did not work with everyone at GE to develop
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Kouzes and Posner, The Leadership Challenge, John Wiley & Sons, 2002. Pg. 14 Kouzes and Posner, The Leadership Challenge, John Wiley & Sons, 2002. Pg. 78

an acceptance of what his or her vision was and how to achieve it. Shared values are the result of listening, appreciating, building consensus, and practicing conflict resolution. For people to understand the values and come to agree with them, they must participate in the process: unity is forged, not forced.3 This was displayed during the de-staffing process. Leaders breathe life into visions. They communicate their hopes and dreams so that others clearly understand and accept them as their own. Leaders know what motivates their constituents. They show others how their values and interests will be served by a particular long-term vision of the future.4 Welchs vision did eventually create a responsive organization, but he had to make GE lean before he could focus on the softer elements.

Welch challenged the process by disproving conventional theory that a conglomerate of unrelated and diversified businesses could succeed as a viable strategy. Acquired businesses that are unrelated to the acquiring firms core business are less likely to produce positive results.
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GE demonstrated strong financial performance over the past 10 years by allowing each

business unit have their own strategy, rather than one strategy for the firm as a whole, so they could be more entrepreneurial.

Welch took a bold risk by implementing the #1, #2 Fix, Sell or Close strategy. He wanted to focus GE on businesses that were successful, and remove the ones that were not. This was also exemplified through his Session Cs and the removal of the 10% of employees with the lowest

Kouzes and Posner, The Leadership Challenge, John Wiley & Sons, 2002. Pg. 83 Kouzes and Posner, The Leadership Challenge, John Wiley & Sons, 2002. Pg. 158 5 Michael A. Hitt, Jeffrey S. R. Duane Ireland, Mergers & Acquisitions: A Guide to Creating Value for shareholders, Oxford University Press, 2001. Pg. 126
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performance in a group, dubbed C-players. He only wanted the best people to make GE the best it could be.

Part of gaining credibility involves building trust. Building trust includes demonstrating that you are working for others interests as well as your own, being a team player, practicing openness, being fair, speaking your feelings, showing consistency in the basic values that guide your decision making, maintaining confidence and demonstrating competence.6 When implementing Six Sigma, he tied the initiative to the annual bonus, which has become the granting of stock options. Thus, he is using rewards to coerce the managers to adopt Six Sigma. This shows that he was using fear as a motivator in order to gain respect and acceptance of his ideas. This is the classic case of expectancy theory where effort leads to performance, which leads to reward, that was achieved through the bottom line results.

Welch attempted to enable others to act. He did so by implementing the Work Out program where employees were expected to continuously improve the firm. On the other hand, Welch was not necessarily the best at fostering collaboration. Employees were faced with a choice of either following his initiatives or being eventually removed from the organization. This was most exemplified during the Six Sigma implementation, where managers had to be on board or they would be fired. In terms of Path/goal theory, Welch used this to some degree; he would sometimes provide a roadmap to reach a given destination, while other times he would leave the course taken open to the project staff. He would only do the latter when he felt he could not offer any expertise to the project.
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Stephen P. Robbins and Nancy Langton, Organizational Behaviour Concepts, Controversies, Applications, Prentice Hall, p253.

Welch encouraged the heart by stretching the goals in order to outperform the competition. He also wanted to hear employees by having them provide annual surveys asking questions that would determine if the employees needs were being met, and whether GE was a great place to work. Jack tried to promote the idea of celebrating small wins. Everyone felt that they did not do it enough, but Welch was poor at leading by example while CEO. He was more focused on ensuring the results were met.

Currently, GE is at a crossroads. With Welch retiring, change is opportunity as he would say. GE has a big challenge to overcome, as they must decide not only on a successor, but also how much change will occur under the new CEOs reign. 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 Welchs retirement in 2000. The following criteria will contribute to the Boards final decision: The solution must deliver products & services that consistently meet customers' expectations and achieve customer loyalty. The company is able to build a strategy around a clear value proposition for the customer. The solution must not sacrifice the ability to continuously change. In fact, the successor CEO needs to see change as opportunity for further improvement.

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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.

The solution must minimize the turnover of A-Players, as these people are the driving force behind the company' success. s

The solution must convey security and strength to the shareholders, thus ensuring their confidence and support. 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. This can be measured through a financial ratio analysis such as ROA per employee, percentage of revenues/profits from new business, improved returns, broader revenue mix.

Alternatives
With the above criteria in mind and the assumption that hiring a new leader is the basis for any solution, the Board of Directors has two potential courses of action to choose between: 1. Hire a new leader from within the organization, hand picked by Jack. Use this new leader to maintain current momentum of change and growth during Welchs era. 2. Hire a new leader either from within or outside of GE, with a mandate to begin a tear down and rebuild of the organization once again. Effectively make the successor more aggressively initiate growth and change.

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Alternative 1: The first solution does meet the prescribed criteria. Most importantly, allowing Welch to hand pick a worthy leader form the top 500 executives will have minimal impact on the established culture at GE. 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. In addition, the familiarity of the incoming CEO with existing processes and organizational structure helps mitigate the learning curve.

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, who will likely continue to receive the same kind of preferential incentives that they have over the past twenty years.

Jack Welch is unlikely to pick anyone who does not share his passion for customer service, so it can be expected that any successor will continue to rate highly in this regard. A focus on customer needs, rather than abstract product development, is a key lesson that the new CEO must take close to heart.

Finally, the premise that the future leader was selected by Jack Welch will undoubtedly have a positive effect on shareholder confidence. The sense of continuity will minimize the chances of any negative impact on GEs stock price, due to expectations that financial performance will remain as strong as that under Welchs reign.

Alternative 2: The second solution has the potential to cause significant upheaval during the transition period. Selecting a new leader from outside will likely have a major effect on the organizations culture 12

and people immediately upon inception. After the new leader has had a chance to study the organization, widespread changes may occur in the organizations processes and organizational structure. 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 greatest challenge with this approach is that such a major reworking of GE business practices poses a significant risk factor. Jack Welch himself is famous for maintaining that whatever changes he made during his tenure, he could have always done things faster. It may prove, however, that an even more rapid rate of change becomes too much for both consumers and employees to accept.

Also, while shareholders may have confidence in the Board and Welch to elect a suitable successor and support their decision, this may be tested if the financial performance deteriorates in the short term as the re-organization is taking place. This will cause the shareholders to become less supportive of the new leader and the decision to replace Welch with an outsider. 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. Repercussions from the Board may happen when some of them are concerned that there may not be a smooth transition for handover.

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Recommended Solution, 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' era s 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, the recommended course of action for the GE Board of Directors is alternative one: Maintain the current momentum of change and growth of Welchs era.

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. As illustrated in Exhibits I and II, Welchs style exhibited a number of attributes that are key for a successful leader, and represented a marked departure from the traditional highly centralized and bureaucratic GE that he inherited from Reg Jones.

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In some ways, Welch was able to implement his sweeping agenda of change in GE because he created a sense of crisis within the organization. Instilling the notion that massive change was a necessary as it was unavoidable helped to reduce employee resistance to the plan, in addition to generating buy-in at both senior levels and the grassroots.

In todays GE, however, the success brought by the Welch years means no such sense of impending crisis exists. While staff can certainly motivated to get behind a new initiative every few years such as Boundaryless and Six Sigma, there is little recognition within the organization of the need for massive restructuring along the lines of that which occurred twenty years prior. Not only is it difficult to motivate people to fix what isnt broken, but there is also the risk that rapidly accelerating the rate of change will create problems where none previously existed.

GE requires a leader who can readily institute changes within the organization to make it more competitive, 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, and GE would be well served to have a CEO which can provide his kind of leadership for years to come.

Key Tasks for Implementation: 1. Select most promising manager from top 500 executives and ensure acceptance. 2. Begin integration efforts immediately, i. New leader attends all meetings with Jack Welch, ii. Surveys operations and meets lower level managers,

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iii. Special introduction to shareholders and carefully developed press releases to announce to public. 3. New leader must understand and encompass Jack Welchs philosophy of leadership. 4. Convey consistency to employees yet push them forward towards continued change, destroyyourbusiness.com initiative must be completed and embraced while existing procedures must be followed and enforced.

The complete implementation of the transfer of power will take upwards of one year to complete. For a detailed outline of the process, please consult Exhibit III.

Contingency Plan: In the event a suitable CEO candidate cannot be located and/or fully trained by the handover deadline, a contingency plan can be established whereby Jack Welch can extend his tenure at GE. Given that he will have reached the government mandated retirement age by 2001, a legal loophole could be exploited though employing his services as an unofficial consultant. 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.

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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, Welch determined that a Urgency radical change was required for GE to remain competitive in the future. If it did not, there was a great risk that its highly centralized and inflexible organizational processes and structure would leave it vulnerable to more dynamic firms. 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. Welchs vision was simple as "Being No. 1 or 2 in any industrial sector in which they compete". Welch communicated his vision through employee suggestion programs, weekly or monthly meetings, and training sessions. He would use storytelling at these sessions to promote successes and illustrate failures. Jack Welch empowered others to act on their vision by making them the idea champion, and telling the story throughout the organization. Within Work-Out, employee suggestions had to be accepted or rejected on the spot by managers, thus showing employees that their ideas were being considered. Welch also rewarded his "A-players" with training at Crotonville.

Empower Others to Act on Vision Plan for and Create Short Term Wins

Consolidate Improvements. Initially, Welch targeted cost savings mostly from headcount reductions. He challenged the Keep the momentum for entire organization to look for more savings. This became an end result of improving change moving customer satisfaction and productivity using the Workout and Six Sigma programs. 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. When Six Sigma was introduced, it had to be done his way or the highway, and was tied into individual compensation in the form of stock option bonuses.

Exhibit II: Fiedler's Leadership Model


Leaders Reg Jones Jack Welch Leader-Member Relations High High Task Orientation High Low Position Power High High

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Exhibit III: Implementation Plan Short term (within three months)


Justifications Key Tasks Im Implementations (resource allocations/management processes, cultural values, sequencing and contingency arrangements) Create a task force and pilot test. Launch in phases.

Recommendations

Targets

1.To continue dyb.com project and launch as full fledged (Strategy)

2.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.

They are individuals who integrate all essential elements of company to achieve impeccable results. Integration is a deliberate process which is often ignored. One of the highest priorities during the transition and in a dynamic industry.

Communications company wide to let people know management' s commitment. Training is key Communicate clearly and get message across. Encourage upward and downward communications. Develop a task force to facilitate and orchestrate best practices and bring in representatives from different functional units.

Set clearly defined priorities and schedules. Establish effective controlling measures in relation to expected standards of performance. Reward according to performance

3. Focus on integration (process)

Company wide

4. Consultation and seek input from the bottom (culture)

Few tiers down below successor and critical business level managers Jack Welch

5. Plan for exit

Change and growth need ongoing revitalized ideas and plans. Involve target people to take ownerships of ideas and gain commitment. 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.

- Pay attention to behavioral reactions of stakeholders and employees turnover rate. - communicate clear vision (change if necessary to better fit with business environment) -Establish and reinforce core value (integrity, customer service, 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. -develop contingency plan if retirement age cannot be changed.

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6. 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.

-Vocational support (sponsorship, challenging assignments, exposure)

-To establish a reliable and fair reward system - 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.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, lower performance) for diversified company like GE if they are not proactive in change. -Every change to be done within the context of GE' s history, future needs and competitive situation -not to get people cognitive overloaded and confusion.

Periodic review of progress to ensure process is on the track and on-going feedback gathered from employees to enhance communication process. 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. 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 push for initiatives; one at a time (Strategy)

Company wide

-To implement by tying all processes, units together and doing it in such a way as to get bottom-line results.

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