Firms and Markets Mini-Case

Jack Welch and General Electric Revised: August 31, 2001

Jack Welch and General Electric have garnered almost cult-like followings on Wall Street, illustrated by Welch’s $7.1 million book deal. But what has made GE so successful under Welch? Why has its performance been so consistently good over more than a century?

A Short History of Leadership at GE

General Electric was incorporated in 1892 as a combination of three existing companies. It was an original member of the Dow – in fact, the only one still in existence. Its stock has consistently outperformed the market for a century and its leaders have been routinely praised for their insight and ability. See Exhibits 1 and 2. James Surowiecki in The New Yorker (December 18, 2000) notes:

In the twentieth century, GE was the industrial equivalent of the New York Yankees. Regardless of who ran the team, it just kept on winning. … Charles Coffin kept GE afloat during one of the worst depressions in American history. … [H]e essentially created the country’s electricity infrastructure and outmaneuvered a competitor, Westinghouse, whose technology was superior early on. Gerald Swope and Owen Young reinvented GE as a consumer-goods powerhouse, then had to find a way to make money during the Great Depression. Ralph Cordiner made GE a space-age giant and masterminded its widely imitated decentralization.

GE is also well known as a source of successful leaders at other companies.

GE Under Welch

In December 1980, Jack Welch was announced as the successor to Reginald Jones, himself a highly regarded executive, after an extensive internal search. Although GE was a widely respected company when he took over, he immediately made changes to the company’s structure and management practices. Early newspaper reports cite his aggressive and demanding management style and a willingness to shift GE out of its traditional lines of business. During his tenure, the company enjoyed enormous financial success. It also shifted from a highly-bureacratic organization to one with fewer layers of management focused on responsiveness.

Perhaps best known among Welch’s rules of thumb is his emphasis on market share over short-term profits: that each of GE’s businesses should be number 1 or number 2 in its

industry. Furthermore, they should be in attractive industries, with good prospects for growth and profitability. If a business was not number 1 or number 2, it should be fixed, sold, or shut down.

GE remains a combination of largely unrelated businesses, and thus a challenge to those management experts who see focus as a key to success. The 2000 Annual Report includes these business units: Power Systems, Aircraft Engines, Plastics, NBC, Medical Systems, Global Consumer Finance, GE Equity, Financial Assurance, Employers Reinsurance, Commercial Equipment Financing, Aviation Services, Industrial Systems, Card Services, Lighting, Real Estate, Structured Finance, Mortgage Insurance, Transportation Systems, Commercial Finance, and Appliances. This portfolio is subject to constant change, with numerous acquisitions and divestitures every year. The 2000 Annual Report notes: “the company made over 100 acquisitions for the fourth consecutive year.”

The apparent glue holding this diverse array of businesses together is the management culture. Particularly in sessions at GE’s Crotonville management center, managers learn the GE way of doing things. Welch himself spends a substantial part of his time at Crotonville.

The Critics

GE also has it critics, who cite legal difficulties with defense contracts, accusations of price-fixing of industrial diamonds, the Jett scandal at Kidder, pollution of the upper Hudson River, and a ruthless culture that casts aside those whose performance is judged inadequate. Welch says, in essence, that a company the size of GE is bound to have a few problems.

Questions for Analysis

(a) What is the logic for “number 1 or number 2”? (b) How does NBC fit in? (c) What are the challenges of managing such a diverse set of businesses? (d) What features of GE would you imitate if you ran a competing company? (e) Why has GE been successful over so long a period of time?

Notes

Charles Miller and Kenneth Goldman prepared this case under the supervision of David Backus and Luís Cabral for the purpose of class discussion rather than to illustrate either effective or ineffective handling of an administrative situation. © 2001 David Backus and Luís Cabral.

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Exhibit 1. GE Leadership History

Chief Executive Position Tenure Notable

Coffin, Charles President 1892-1912 “A man born to command, yet Chairman 1913-1922 who never issued orders”

Rice, E.W. President 1913-1922 Founded GE Research Lab

Swope, Gerard President 1922-1940 Made $1/day when starting at GE President 1942-1945

Young, Owen Chairman 1922-1940 Active outside GE; created RCA Chairman 1942-1945 and NY state university system

Wilson, Charles President 1940-1942 Used GE resources to better President 1945-1950 lives of unemployed, downtrodden

Reed, Philip Chairman 1940-1942 Spent 32 years with company Chairman 1945-1958

Cordiner, Ralph President 1950-1958 Introduced decentralization & Chair/CEO 1958-1963 managerial training to GE

Phillippe, Gerald President 1961-1963 Founder: Urban Coalition Chairman 1963-1967

Borch, Fred President/CEO 1963-1967 Doubled GE Earnings Chairman/CEO 1967-1972

Jones, Reginald Chairman/CEO 1972-1981 Doubled GE Sales

Welch Jr., John Chairman/CEO 1981-present Quote: “If it bothers you, yell at it, kick it, scream at it, break it!”

Source: http://www.ge.com/

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Exhibit 2. GE’s Stock Performance Under Different Leaders

Chief Executive GE Stock Return Market Return

Swope/Young, 1922-39 8.3% 4.0%

Wilson, 1940-49 5.1% 9.1%

Cordiner, 1950-63 16.8% 14.4%

Borch, 1964-72 8.4% 8.5%

Jones, 1973-80 -1.1% 3.4%

Welch, 1981-90 19.2% 15.3%

Source: Collins and Poras, Built to Last, Table A.9, p 298.

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