Executive Summary
After taking the reigns of General Electrics in 1980, until his final succession in 2000, Jack Welch, CEO, has led GE into dramatic and revolutionary changes whose impact is far reaching and whose success is unparalleled. However such initiatives with milestones in late 1980, 81 and early 1990’s apart from its success, created for Jack Welch challenges due to internal resistances; Such resistance ranged from technical, cultural and personal or internal politics.
Under Welch’s leadership GE was able to rise above all obstacles and achieve unparallel success based on unprecedented restructuring process. This success was inclusive and not just financial: The value of GE ranged from increase, in Profits, market value, Assets and more importantly, intellectual capital.
It is our understanding that Jack Welch has successfully led GE through a period of prosperity. GE’s growth during Jack Welch’s tenure has a double-edged sword implication: in one hand it put GE in a good position to compete successfully in the short and long term, at the same time it put pressure on Welch’s replacement, since he will be expected to achieve the same level of success Welch has achieved. It is our recommendation that the new CEO should follow the same business approach Welch has put in place; but at the same time he should create a new identity that is dedicated by the current economic trends, specifically disruptive technologies and the Internet.
SWOT Analysis
Strengths:
•Welch inherited the company which already had strong leadership ( Reg Jones0
•Welch turned the company focus to leanness and agility
•Benchmarked results externally rather than internally
•Removed numerous hierarchies whether vertically or horizontally
•Restructured the company through phases starting with: #1 or #2, sell or close, to workout and best practices, focus on the global market, Bounderyless behavior and stretch, focus in the services industry and finally focusing on E-business.
•Focus on building a strong intellectual capital by educating and rewarding performance
•Focus on the services sector
•Focus on value added services and differentiation
•Involvement of everyone in the workforce
•Firing even top management ( before they become the rotten potato in the bag)
•Never being content with achieved success
Weakness
•Job insecurity as results of layoffs.
•A massive cultural shock
•Management exhaustion from pressure
•Distrust of motives and the overall direction of the company
•Firing competent people who did not adhere to the new culture
•The shift to the services sector creates a reliance on other manufacturers to assure quality and efficiency
•Motivation through fear
Opportunities
•Quick diagnosis and problem solving mechanism
•Quick response to changes in the market
•Always searching for innovation and remaining above the curve
•Becoming the industry’s trend setter
•Motivated workforce
Threats
•Leadership change
•Diminishing Investor’s confidence
•Overlooking short-term objectives
•Disturbance of synergies due to cultural changes
•Globalization
•Playing a catch up game on the online marketplace
Changes in the Value Chain
Welch in his restructuring process was met with unparalleled success, as well as numerous obstacles. In order to put them into perspective we must understand how the company was like before Welch started his structural revolution. When Welch become the CEO, GE’s performance was mediocre: they had an average earnings growth, low cash flows due to diverse capital expenditures, a core business that had reached a slow growth, productivity growth was a mere 1%-2% a year. Furthermore managers were content with a 7%-9% growth in margins, the company was too bureaucratic with decision process taking a long response time, the company was inwardly focused and there were no technical innovations being implemented.
Welch on the onset decided that he needed radical changes in the all value chain of the company by setting high standards and redesigning the business culture. The first step was to make each of their business Number 1 or 2 competitor in the industry; if such goal could not be reached then he got rid of the business. He used most of the capital to reinvest in productivity and quality and R&D. During this process he sold roughly 200 businesses however he spent $21 billion to acquire 370 businesses which strengthened their core competencies and turned the remaining business more agile, with higher quality and unparalleled performers. The new process therefore shift gears and focused on being lean and agile. The weaknesses and threats to such process were: job insecurity due to massive lay offs i.e. in 1981 GE had 404000 workers, in 1994 they had close to half of that number ( 221000), by 2000 GE, mainly because of acquisitions had 313000 workers ( Exhibit 2 shows is a diagram of how Welch weeded out undesirable employees) ; a culture shock and management exhaustion as result of constant pressure to become the top performer in the respective industries. The statues quo of measuring performance based on internal results was no longer adequate, managers and line workers had to focus on adding value and look at the overall marketplace to evaluate their performance.
He wanted to create a place where everyone’s voice was heard and thus through a Work Out initiatives and Best practices he invited all workers to share their experiences and initiatives. Furthermore he adopted the 360 degree process which took single employees and they were graded by managers and subordinates to assure quality, focus and vision.
The most impressive change Welch made in the GE corporate culture, was his focus on intellectual capital. Welch created an environment that propelled people to do their best by giving wings to creativity. He saw people has being his best assets and created infrastructures and made available resources to nurture bright minds. Welch created a revolutionary idea; by focusing on intellectual capital, he created a talent value chain.
During Welch’s tenure, GE turned from focusing in manufacturing, to become a service oriented enterprise. This transition allowed GE to become less dependent on industrial products and focus on services. Exhibit 6 shows the transformation from manufacturing to services from 1980 until 2000. This change created a reversal in GE’s value chain: Services became the starting point and moved backwards to suppliers who were considered partners by GE. Exhibit 3 Show the value chain and GE innovative approach to the value chain. Welch realized that the biggest growth opportunity came from servicing customers by adding value to customers.
The results of Welch’s structural changes speak for themselves; Exhibit 1 shows some of the major changes in GE during Jack Welch’s tenure: It is a model that has delivered extraordinary growth, increasing the revenue of GE from just $27 billion in 1981 to $130 billion in 2000. The company established itself in the global market, i.e. in 1998 international revenues were 42.8 Billion. Welch through innovative initiatives was able to cut production cycle time by half, reduction in inventory costs by 20%. G.E during Welch’s tenure became acquired a very diversified portfolio which culminated in unparallel success. However in the coming years the new leadership will have to face problems in managing such a diverse portfolio in a global market and prevent GE from playing catch up game with top performers in the respective industries. GE's success is hardly Welch's alone. The company, though Welch’s leadership boasts most talent-rich management. These managers have been an integral part of GE’s success.
New Leadership Challenges
The new CEO has to be conscious that there will be a storm to face and the new CEO will have to be prepared for it; research has shown that after a change of leadership, specially a strong leadership such as Jack Welch’s companies often endure a period of declines results until the new leadership proves its effectiveness.
Stock prices is bound to decrease due to investors uneasiness with the eminent change of leadership. However has the new CEO proves success by delivering tangible results such skepticism will dissipate and we anticipate the decline in stock prices to normalize.
Furthermore Welch is leaving the legacy of cut throat business culture, which we believe will build strong individual performers but it will hurt team work, since even with the apparent cooperation between sectors, workers and managers will often look at each other as competitors rather than partners. Along the same lines, Welch’s approach to intellectual capital that is overly competitive and individualistic may have undesirable effects for the new CEO since GE will build good managers but many of them may end up leaving and become managers and CEO’s for other companies. This flight of Intellectual capital will be detrimental to a new CEO trying to establish a foothold in the company.
It’s therefore recommended that the new CEO uses the same structure that Jack Welch will leave behind. Any changes to the value chain should be done in small increments at first and not radically as to create disruptions in the corporate culture. Furthermore in order to achieve greater acceptance and incite confidence from all the stakeholders, the new CEO should consider keeping Welch as a consultant for a period of time as to assure a smooth transition in leadership.
Even though the structure left by Jack Welch is successful, the new CEO has to be entrepreneurial in his approach, and be dynamic in order to create strategic approaches that adapt to changes in the market. Exhibit 4 and 5 show a roadmap to create a good strategy.
The new CEO will have to use the strong management that is already in place in GE, after all Jack Welch’s success is not simply attributed to him, but also to the strong and competent management that will stay in place even after Welch’s tenure is over.
The above essay was written by a college student and merely states opinions of a college student. However, if you feel strong about responding to the opinions stated, please write to info@snap9.com and express your concerns.