GE & Jack Welch

JACK WELCH AND GENERAL ELECTRIC
Jack Welch and General Electric developed cult-like followings on Wall Street, culminating in a
$7.1 million book deal (Jack: Straight from the Gut, published in 2001). During his 20-plus-year
tenure, GE enjoyed enormous financial success and its methods were imitated worldwide. But
what made GE so successful under Welch? How has it managed to excel in such a wide range of
businesses?
History
General Electric is a large diversified industrial and financial company, whose major product
lines include appliances, lighting products, aircraft engines, plastics, power systems, medical
imaging, broadcasting, and a wide range of financial services (consumer finance, leasing, private
equity, credit cards, and so on). In 2000, GE employed 223,000 people in over one hundred
countries and reported net earnings of $13b on revenue of $130b.
General Electric was incorporated in 1892 as a combination of three existing companies, one of
them founded and run by the inventor Thomas Edison. It was an original member of the Dow –
in fact, the only one still in existence. Over the years, it has been wildly successful, reinventing
itself as time and markets changed. James Surowiecki (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, and 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’’.
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 profitable and
respected company when he took over, its financial results during the 1970s were troubling to
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both its investors and senior management. Welch 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. GE also
changed from a highly-bureaucratic organization to one with fewer layers of management
focused on speed and responsiveness.
Welch stressed from the start the importance of being one of the top players in any industries in
which it was involved. Welch told his colleagues that GE should be number 1 or number 2 in all
of its businesses. If they were not, the options were to fix, sell, or shut them down. The
“number 1 or number 2” mantra was intended to give a clear goal to managers of individual
businesses. He soon found that he needed additional criteria about the businesses themselves. In
his words, “being number 1 or 2 in hula hoops would not do very much good.” (From Janet
Lowe, Jack Welch Speaks.) Later on, some of his junior colleagues complained that the goal had
turned into a game of market definition: managers could often define themselves to number 1 or
2 by defining the market narrowly. Appliances are a good example. Although GE was estimated
to be number 3 in North America, it was first in refrigerators and ranges/stoves. Welch’s
colleagues suggested he add the requirement that the market definition give GE no more than a
10% market share. They argued that this would give them 90% of the market to shoot for and
focus them on growth.
Welch also stressed size. But Welch emphasized that it allowed GE to diversify its risks. The
way to capitalize on its size was to use this ability to diversify internally to take a lot of risks.
The 2001 annual report put it this way:
“We understand [the] inherent limitations [of size] -- on speed and on clarity of
communications, among other things -- and we fight every day to create the quickness and spirit
of a small company. But we appreciate the one huge advantage size offers: the ability to take
big swings, big risks, and to live outside the technology envelope, to live in the future. Size
allows us to invest hundreds of millions of dollars in an enormously ambitious program like the
GE90, the world’s highest-thrust jet engine, and the “H” turbine, the world’s highest efficiency
turbine generator. Size allows us to introduce at least one new product in every segment, every
year, in medical diagnostics, or to spend hundreds of millions on new plastics capacity, or to
continue to invest in a business during a down cycle, or to make over 100 acquisitions a year,
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year after year. Our size allows us to do this knowing that we don’t have to be perfect, that we
can take more risks, knowing that not all will succeed. That’s because our size -- far from
inhibiting innovation, the conventional stereotype -- actually allows us to take more and bigger
swings. We don’t connect with everyone, but the point is, our size allows us to miss a few --
without missing a beat’’.
A final feature of GE is the wide range of businesses in which it operates. Although many other
companies have had difficulty expanding outside their core businesses, GE had been successful
for decades doing precisely that. Some observers find it difficult to believe that a single firm can
understand and operate such different businesses as aircraft engines, television broadcasting, and
venture capital. Others, however, suggest that the quality of GE’s management and management
practices are valuable regardless of the industry to which they are applied. Apparently even this
has it limits, however, as GE stumbled badly when it bought Kidder Peabody. As Welch puts it:
“I didn’t know deadly about it’’ I was on a roll. … I thought I was 6-foot-4 with hair. … I had
two very smart board members, Walter Wriston and Lew Preston, who both said: ‘Jack, this is
awful.’ But I bullied over them. … It wasn’t worth it … to go through the headaches we made
[for ourselves] for being such jerks.” (Comments at NYU Stern May 2002.)
Questions for Analysis
(a) In what ways is “number 1 or number 2” a useful goal? In what ways not?
(b) What are the advantages of GE’s enormous size? Disadvantages?
(c) What are the advantages to GE of managing such a diverse set of businesses?
Disadvantages? Can you think of other examples of “unrelated diversification” that have been
less successful?

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JACK WELCH AND GENERAL ELECTRIC

Questions for Analysis

(b) What are the advantages of GE’s enormous size? Disadvantages?

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