When he was selected as the new CEO of General Electric, Jack Welch was certainly not everyone's top pick. Many folks thought he was too young. At 45 he was youngest GE CEO ever. Others thought he was a bit of a playboy, not right for the GE culture. Some said he was too aggressive.
In April, 1981, Welch succeeded Reg Jones as CEO of General Electric. He had big shoes to fill. Jones had been CEO of the Year and the Most Admired Business Leader in America. He'd gotten results, leading GE to 26 consecutive quarters of improved earnings through two recessions. He inaugurated several management innovations.
Welch knew things looked good, but he also thought that big changes were needed. He started out by ripping apart the company he inherited. He took layers out of management. He laid off over 100,000 people. That earned him the nickname, "Neutron Jack," after the neutron bomb that kills the people but leaves the buildings intact.
In fact, a lot of buildings disappeared too. Welch divested GE of billions of dollars in businesses. He told the company that every GE business unit should be number one or number two in its market, or else. Or else what? "Fix it, sell it or close it"
Corporate icons got no respect either. Under Fred Borch and Reg Jones, GE had been one of the inventers of many practices of corporate strategic planning. They'd been developers of concepts like the business unit and the Attractiveness/Position Matrix. In the early seventies businesses that wanted to do better strategic planning sent folks on a pilgrimage to Fairfield, Connecticut to learn from General Electric's full time strategic planners.
Welch zapped the planners, but kept the concepts. He moved strategic planning into the business units and made it a line function. That wasn't uncommon behavior for him. Lots of corporate, bureaucratic functions wound up in business units, or being eliminated all together.
Then there was the Great Research Department icon. After all this company was originally founded by Thomas Edison, the inventor of the modern concept of research and development. GE's Research and Development Center, supplemented by over 100 product-oriented labs was one of the most respected operations in the world. It boasted two Nobel Laureates.
For the entire twentieth century, until 1986, the General Electric Company boasted more patents than any other corporation. But by the time Welch retired last week, GE was no longer even in the top twenty.
After the slashing, severing and selling, Welch started making his own, more positive mark. He started a program called Work-Out whose purpose was to get all GE employees involved in problem solving and innovation.
He said that, "We want to make our quality so special, so valuable to our customers, so important to their success, that our products become their only real value choice." One way to do that was Welch's Six Sigma Quality program to reduce defects to 3.4 per million operations.
There were acquisitions, too. They've averaged about one hundred a year. In that mix are success like RCA and failures, like Kidder Peabody.
And what was the biggest change from Welch's perspective? Here's the answer from an interview in Business Week. "The biggest change we made, without question, was the move to a boundaryless company. We got rid of the corner offices, the bureaucracy, the `not-invented-here' syndrome. Instead, we got every mind in the game, got the best out of all our people."
Well, now Jack Welch himself is retiring. How can we assess his performance after twenty years as head of the largest corporation in the world?
We could just listen to the business press. That evaluation would be loud, laudatory and include multiple mentions of the word legendary. There would be lots of references to "The House that Jack Built." But the business press has fed itself on the Cult of the Celebrity CEO for so long now, that we're more likely to get gushing admiration rather than good analysis.
And Welch is a major celebrity. He gets as much press coverage as many movie stars. And, recently he got a $7.1 million book advance. That was the largest advance ever for a nonfiction book, until Bill Clinton came along.
We could compare the performance of Welch's GE with other large corporations over the same period of time. In this company, Welch looks pretty good. During his tenure, GE outperformed 93% of the Fortune 500 in total return on investment.
There are several problems with this method, though. First, most of those companies haven't had the same CEO for the whole period. American companies have gotten into the habit of firing CEOs if the quarterly numbers don't soar and soar quickly. Beyond that, this method also compares companies with very different challenges and starting points.
We could always compare Welch to his predecessors among GE CEOS. That's really tough competition, because GE has had a succession of great ones. In fact, based on average annual return on equity, Welch comes out number five among the seven CEOs that GE has had since 1892.
The best way to measure Welch or any other CEO is based on how they do CEO work. CEO work is strategic.
Strategy is what you do consistently to increase long term profitability and long term competitive advantage. It's not about increasing stock price or even shareholder value, though those may be by products of good strategy.
Let's drill down further. You build profitability by delivering value. For a CEO, that means that you put programs and processes and portfolios in place that are designed to deliver value over the long term. Welch's Work Out and Six Sigma programs certainly meet this criterion.
You increase long term competitive advantage by building on your strengths. The best strengths to build on are those that involve culture and people. That's because those are the strengths that it's hardest for the competition to duplicate.
Welch spent a lot of time on people stuff. He taught each month at GE's management training center. He personally reviewed the yearly appraisals of GE's top 3,000 managers. He wrote lots of personal notes to lots of people.
So, how does Welch do when we grade him on the basis of CEO work? Right now he looks like a good bet for the CEO hall of fame. But it's still early. You can't really judge a CEO's effectiveness on the day the CEO steps down. You have to wait five or ten years and see if there's a real impact on competitive advantage and profitability.
But I think Jack Welch's work will look very good ten years from now. That will almost certainly be true if all the work he's put into choosing his successor has been well done. That would make Jeffrey Immelt the next great CEO of GE and the man we may be writing about when he retires twenty years from now.
That may be the real, the final test. If you're a CEO, can you pick a successor, who's good enough to keep the good things you've left behind, and jettison the rest. That's what Welch did to Jones, and it's what Immelt will have to do to Welch. Stay tuned for the final review, a decade or so from now.
This feature appeared on 10 September 2001
