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
Executive Summary
This report’s 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.
2
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
3
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.
4
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 firm’s 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 C’s 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?
5
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 GE’s 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.
6
Problem Analysis
GE’s 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 it’s your behaviour that wins you respect.”1 Nothing exemplifies this
more for Jack Welch than how he handled the company’s 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 GE’s 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
Welch’s vision of building people, not just employees, differed from GE’s vision of developing
and perfecting skills, which again differed from an employee’s 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
1
2
Kouzes and Posner, “The Leadership Challenge”, John Wiley & Sons, 2002. Pg. 14
Kouzes and Posner, “The Leadership Challenge”, John Wiley & Sons, 2002. Pg. 78
7
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
Welch’s 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 firm’s core business are less likely to produce positive results.”
5
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 C’s and the removal of the 10% of employees with the lowest
3
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
4
8
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.
6
Stephen P. Robbins and Nancy Langton, “Organizational Behaviour Concepts, Controversies, Applications,
Prentice Hall, p253.
9
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 employee’s 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 CEO’s 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 Welch’s retirement in 2000. 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. 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.
10
•
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'
s success.
•
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 Welch’s 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.
11
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 GE’s stock price, due to expectations that financial performance will
remain as strong as that under Welch’s 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 organization’s 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 organization’s 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.
13
Recommended Solution, Implementation and Justification
Table 1: Alternatives for GE Succession Plans
Criteria
Customer
Satisfaction
Ability to Rapidly
Evolve
Minimal Cultural
Disruption
Low A-player
Turnover
Financial
Performance
Total
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
4
3
3
2
4
3
18
16
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 Welch’s 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,
Welch’s 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.
14
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 today’s 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 isn’t 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,
15
iii. Special introduction to shareholders and carefully developed press releases
to announce to public.
3. New leader must understand and encompass Jack Welch’s 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.
16
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
Jack Welch used his alliances with key direct reports to establish credibility for corporate
acceptance of the delayering process.
Create a Vision
Welch’s vision was simple as "Being No. 1 or 2 in any industrial sector in which they
compete".
Communicate the Vision
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.
Empower Others to Act on
Vision
Jack Welch empowered others to act on their vision by making them the idea champion, and
telling the story throughout the organization.
Plan for and Create Short
Term Wins
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.
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
17
Exhibit III: Implementation Plan
Recommendations
Targets
1.To continue dyb.com
project and launch as
full fledged (Strategy)
Business
levels
managers to
collaborate
with IT
department
Quality people
and business
leaders
2.Institute companywide training and retain
A-Players (leadership)
Short term (within three months)
Justifications
Key Tasks
To continue the
momentum
initiated by Welch.
Communications
company wide to let
people know
management'
s
commitment.
Training is key
Communicate clearly
and get message
across. Encourage
upward and
downward
communications.
They are
individuals who
integrate all
essential elements
of company to
achieve impeccable
results.
Im Implementations (resource
allocations/management processes,
cultural values, sequencing and
contingency arrangements)
3. Focus on integration
(process)
Company wide
Integration is a
deliberate process
which is often
ignored. One of
the highest
priorities during
the transition and
in a dynamic
industry.
Develop a task force
to facilitate and
orchestrate best
practices and bring in
representatives from
different functional
units.
4. Consultation and
seek input from the
bottom (culture)
Few tiers
down below
successor and
critical
business level
managers
5. Plan for exit
Jack Welch
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.
Create a task force and pilot test.
Launch in phases.
Set clearly defined priorities and
schedules. Establish effective
controlling measures in relation to
expected standards of performance.
Reward according to performance
- 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.
18
Long Term (within twelve months)
6. To inject morale
(people)
All employees
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
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
Periodic review of
progress to ensure
process is on the
track and on-going
feedback gathered
from employees to
enhance
communication
process.
Develop job descriptions in
parallel of workout process
8. To remain competitive
in market and sustain
competitive advantage
(Strategy)
Senior
management
To develop
strategy to leverage
on company'
s
reputation to sell
products in niche
categories
-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
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.
-omit irrelevancies
and get to the core
of every issue
-To implement by tying all
processes, units together and
doing it in such a way as to get
bottom-line results.
19