Faculty & Research
Faculty & Research
The strategic leadership of GE CEO Jack Welch
By Terence Tsai
The late former chairman and CEO of General Electric Jack Welch was heralded by many as the greatest leader of his era. During his two decades at GE's helm, he transformed the organisation from a $13 billion (USD) maker of appliances and lightbulbs into one of the most valuable companies in the world, while building a reputation for himself as a management guru.
What made Jack Welch so successful? And, what were the secrets and principles behind his approach to work and life?
Be #1 or #2: Fix, sell, and close
Jack Welch became GE’s CEO in 1981 at the age of 45. Upon taking office, he initiated a series of changes to improve the performance of GE’s diversified business portfolio, with the hope of fundamentally reshaping the company over the next five years.
Despite resistance to change within the company, Welch was aware that past performance could not define future success, and an organisation would not go anywhere without a sense of crisis. Transformation and innovation are keys for survival.
Three months after taking over as CEO, Welch set a vision for each business unit that they had to be #1 or #2 in their markets; if not, they had to fix, sell, or close the unit. This later became his one of the most famous strategies.
As a result, over 20 business units were cut off, including central air-conditioning, housewares, coal mining, and consumer electronics. From 1981 to 1990, GE freed up over $11 billion by selling off more than 200 underperforming businesses.
Within the company, Welch sought to streamline GE with layoffs, eliminating the laborious strategic planning system, dismantling the bureaucracy, and abolishing the nine-layer management hierarchy. As a result, GE’s revenue expanded and operating profits soared to $2.4 billion by 1985, setting the tone for robust earnings growth over the next decade.
‘Work-Out’ and ‘Best Practices’
In the late 1980s, following GE’s massive restructuring effort, Welch proposed to develop an approach to management characterized by speed, simplicity, and self-confidence. To this end, he launched Work-Out and Best Practices, two closely linked initiatives that aimed at promoting aspired culture and management approaches.
At Welch’s request, GE promoted the Work-Out programme throughout the company. It consisted of a group of 20 to 100 employees who were selected and invited to a discussion to share views about their own departments and how they could be improved. Lasting for three days, the session also required managers to make decisions on site about the issues and suggestions raised by the staff. By mid-1992, over 200,000 GE employees – more than two-thirds of the workforce – had participated in the programme.
After Work-Out was implemented, Welch sought out ideas that could raise GE’s productivity, and that led him to create Best Practices. This programme was designed to develop effective processes by studying and analysing the best practices of other high-performance companies.
To align GE’s established human resources system with the company’s strategic targets, Welch also radically overhauled GE’s compensation package by extending stock options to management compensation, and reengineering its bonus and option allocation system in a more aggressive manner to ensure it was closely linked to the key strategies of the day.
In the 1990s, Welch created a new strategic concept called ‘integrated diversity’ and worked to make GE ‘a boundary-less company,’ which he described as “a company where we knock down the walls that separate us from each other on the inside and from our key constituencies on the outside.”
The idea was aimed at encouraging employees to seek out and share new ideas. To make this happen, he changed the way bonuses and options awards were delivered to honour innovative and resource-sharing efforts. Moreover, Welch also introduced the notion of ‘stretch’ to set performance targets to motivate higher levels of performance of managers, which he described as “using dreams to set business targets, with no real idea of how to get there.”
In late 1990s, before his retirement, Welch adopted Motorola’s Six Sigma quality programme to improve the company’s products and production procedures. In 1996, he announced that GE aimed to attain its Six Sigma goals within five years.
Although Welch had previously built up a top-notched management team, the closer he got to his planned retirement date, the more he wanted to enhance the GE’s quality for his successor. Therefore, he modified his four types of managers to describe GE as a company that needed only ‘A players’ – managers who had vision, leadership, energy and courage.
“We’re an A+ company. We only need good A players. We can get the talent we need. If you can’t be honest and resolute in identifying those who are not good enough and finding top talent, then shame on you. Cherish your best people, reward them, promote them, pay them well, grant them a lot of [stock] options, and don’t waste your time on how to promote Cs to Bs. Move them out early. It’s a contribution to the company,” he said.
Far-sightedness: Going global, manufacturing services, and digitisation
Within only 20 years, Jack Welch grew GE’s market cap by over 30-fold to $450 billion, making it the most valuable company in the world.
However, during his tenure, he not only developed GE’s business with strategic vision, but also championed the company’s international operations amidst increasing global trade and cultural exchange.
His strategy in integrating products and services was self-described as “one of the greatest growth opportunities in GE’s history.” By 1996, GE had built an $8 billion equipment services business, which grew much faster than the underlying product businesses. Within two decades, GE’s business structure had changed radically.
Not long before his retirement, Welch led GE to become a pioneer in e-commerce business and digital transformation amongst large US companies. “Change means opportunity, and this is our greatest opportunity yet,” he said.
Jack Welch was an outstanding, legendary leader and strategist who took a fresh look at his work every day and made all necessary and aggressive changes. In his two decades leading GE, he recorded an average of 23% annual total shareholder return.
“Treat every day as your first day on the job,” was one of Welch’s favourite sayings to GE management.
Though he believed there was no “one size fits all” solution for businesses in such a competitive world, some of his leadership remains relevant today.
Be the master of your own destiny, or someone else will
Welch believed that an effective way to bring about forceful changes was to empower employees and allow them to unleash their energy, intelligence, confidence, and productivity. Evidence has proved that employees had become more creative and open-minded with more possibilities through GE’s Boundary-less Company initiative.
Face reality as it is, not as it was or as you wish it to be
Real life has risks, failures, and vulnerabilities… things that people try to escape. However, as perceived by Welch, one who cannot see the world with simplicity and rationality cannot make right and reasonable decisions. If a company fails to face reality, whether it be soaring costs or growing market competition, it will result in shrinking market share, reduced profits, high employee turnovers, and investment withdrawal.
‘Bad’ news is ‘good’ news. Be candid with everyone
Welch called for developing a candid culture at GE where he encouraged employees to reach out directly to leaders to seek advice. He believed that it was those who never reported ‘bad news’ to their superiors that were the most dangerous to their business.
Lead over control
For Welch, the role of leaders was not to control people but rather to guide and lead. Good business leaders create a vision, articulate the vision, passionately own the vision, and relentlessly drive it to completion.
“Controlling slows you down. You have to strike a balance between autonomy and controlling and make sure the former outweighs the latter,” Welch said. “Managing less is managing better.”
Change before you have to
Proactive transformation improves competitiveness. It protects you from losing ground in fierce market competitions and struggling in a difficult economic or political environment. In the current VUCA era, we need leaders who know exactly what they want, communicate it explicitly, and empower employees with autonomy. Such leaders know how to follow through and when to make changes. As Welch put it, “Those who carry historical baggage are the ones who get us into trouble.”
This article is based on a case study entitled, “Strategic Leadership: Jack Welch, Howard Schultz and Elon Musk.” co-authored by Terence Tsai and Jasmine Liu. Terence Tsai is an Associate Professor of Strategy and International Business at CEIBS. For more on his teaching and research interests, please visit his faculty profile here. Jasmine Liu is a Research Assistant at CEIBS.