GE’s Two Decade

Transformation
Blake Berman
Econ 465
Economics of Strategy
Professor Saka
 History of the Firm
• Founded in 1878 by Thomas Edison
– Originally focused on generation, distribution,
and use of electric power
• Company continued to grow into other industries
– Household appliances
– Lighting
– Aircraft engines
– Medical systems
– Diesel locomotives, etc.

• Reputation as a market leader throughout early 1900’s

– Underwent constant change
– 1930’s it was highly centralized, tightly controlled
– 1950’s GE lead a trend toward decentralization (100’s of department managers)
– Underwent profitless growth in the 1960’s, forced firm to develop strategic planning systems
 GE Product Lines

•Energy
•Infrastructure
•Electronics
•Media
•Financial
Services
•Communication
•Industrial
Services
•Appliances
•Medical
•Aerospace
•Locomotives
•Turbines
 Firm that Jack Welch Inherited
• Prior CEO Reg Jones established 43 Strategic Business Units
(SBUs)
– Each one developed a strategic plan to be reviewed by CEO
• Envy of most other conglomerates
– Massive interwoven network of 46 divisions, 190 departments, 10
groups, 43 SBU’s, and sectors
• Business was meticulously managed by highly complex,
bureaucratic structure

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 Jack Welch: The Early Days
• 1981 Economic Climate: Recession
– High interest rates
– Strong dollar
– Highest unemployment rates since the Great Depression

• First Task: Restructuring

– Welch wanted each business in the company to be “better than the
best” in the industry
– #1 or #2: Fix, Sell or Close
– Reorganized businesses into three circles
• Core business, technology business, service business
• Welch sold over 200 businesses, which accounted for 25% of 1980 sales
– Freed up over $11 Billion in capital

• He also made over 370 acquisitions

– He invested over $21 Billion on these additions
 GE: Business Refocused
• Leaner and more agile
– Focused on eliminating bureaucrats
– Forced every employee to add value to the final product
– Got rid of 200 person strategic planning staff
• Reduction in workforce
– From 1981-1989 workforce declined from 404,000 to 292,000
• Replaced many existing business heads with his own hand
picked “varsity team”
• Results
– Slow revenue growth $27.2 Billion to $29.2 Billion from 1981 to
1985
– Dramatic increase in operating profit $1.6 to $2.4 Billion over
same time period
Step Two: Software (≈1987-1993)
• Cultural change at GE
– Speed, simplicity, openness
• Businesses report directly to CEO
• Each boss has 10 to 15 direct reports, v. only 6-7 before
– Work-Out
• Open forum for employee discussions across ranks
– Best Practices
• Copy the most successful aspects of other firms
• Small company feel
– Focus on innovation
– Methods more important than results
•
GE Goes Global
1987- GE sells its consumer electronics business in exchange for
Thompson S.A.’s (French) medical imaging business
• 1989- Welch appoints Paolo Fresco as Head of International Operations
– Fresco brokers numerous international deals in Germany, Japan, France, and
Eastern Europe

• Welch sees economic downturns as buying opportunities

– 1989-1995: GE invests $17.5 Billion In Europe during a recession
– 1995: GE acquires 16 companies in Mexico as the Peso collapses
– 1997-1998: GE invests $15 Billion in Japan during major economic crisis

• Results
– 1998: International revenues of $42.8 Billion (double the level of 1993)
– 2000: International revenue accounted for 50% of total revenue (20% in 1985)
– Global Revenues growing at 3x the rate of domestic sales

GE 2007 Annual Report

Changing Employee Relations
• Change compensation structure
– reward best employees with company stock and options
• Expanded the number of employees receiving options from 300 to 30,000
• Much more aggressive bonus system linked to individuals’ performance

• Provide workers with honest performance feedback

• Meet with executives to identify future leaders, high potential employees

• Invested heavily in improving Crotonville management development

facility
– Used facility as an open forum to create a new generation of leaders

• 360° feedback process

– Every employee gave feedback on their direct reports as well as their
boss
Step Three: Tearing Down Boundaries
• Welch encouraged each employee to
become “boundary less”
• Stretch Goals
– Goals beyond the minimum
– Forced each aspect of the company to dream big
– Though most of the company’s stretch goals were
not met, the mind set they fostered led to
unprecedented growth

• Service Business
– 1996: GE has built an $8 Billion equipment service business
– 1997: GE made 20 service related acquisitions

• Strength in Numbers
– Welch felt the conglomerate business model, when run effectively, could be more
efficient then the free market
 Creating a Reputation for Excellence
• Six Sigma Quality Initiative
– Goal: Become highest quality producer in the
industry, eliminate inefficiencies throughout
the company through sharing information
– 1996-1999: Investment of <$2 Billion returned
over $2.5 Billion in profits

• Bring in the best

– Use high wages, benefits, and career growth
opportunities to attract only the best talent
available

• Rank Employees based on 4 E’s

– Edge, energy, execution, ability to energize
– Sorted employees at all levels into groups 1-5
based on talent, potential
– Actively identified future leaders

lsspmp.com/Six-sigma-b.jpg
 GE at the turn of the century: E-Business
• Welch leaves firm in 2001
– Jeff Immelt appointed new CEO
• Leaves business with focus on online presence
• GE is most admired company in the world
 Results
• 23% annualized increase in shareholder
value during Welch’s tenure
• Crushed the returns of the S&P 500 over the
same time period

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 Key Questions
1. Where did Welch leave GE?
2. Stretch Targets?
3. Was going into service businesses the right move?
4. How effective were Welch’s first stages (fix, sell, close,
consolidation, #1 or #2, 3 circles, etc.)?
5. Did Welch change over time, or did the demands of his business
change (consolidation to global expansion, “Neutron Jack” to
emphasis on employee growth and feedback)?
6. What was the purpose of the Work-Out and Six Sigma initiatives?
7. How did GE manage to avoid being broken up like most other big
conglomerates?
8. What made GE’s internal organization more efficient than the free
market?