Leadership that Creates Innovation
When Jack Welch became CEO of General Electric in 1981, he was only the 11th CEO the
company had seen in its 120 years of existence. Although GE was a $13 billion a year company,
it began showing signs of necessary change as it had reached the stage between maturity and
decline. After 20 years at the helm, Jack Welch had turned General Electric (GE) into one of the
world’s most successful companies.
Welch increased GE’s market value from $13 billion to over $300 billion in 2001. He
guided the once struggling company to what was then the biggest corporation in the entire
world as well as the most profitable. Through the use of goal setting, empowerment, and
communication Welch transformed the gigantic and complacent company into an energized
multi-national organization ready to face world competition. Through an analysis of the
techniques employed by Welch, one can gain a better understanding of how to motivate
outstanding performance in any organization.
In 1981, the industry environment in which GE was involved was in a downward spiral. GE
was also suffering from low productivity growth (1%-2%) as well as a lack of innovations.
Another issue facing Welch as he took control was that the company was still organized as it
had been when GE was founded near the turn of the century. GE was suffering from a lack
of strong leadership and the existence of to much bureaucracy.
As Welch took over, he found that structure and struggle to change made it impossible to
perceive an effective environmental change when change was necessary to remain an industry
leader. In fact, if GE’s massive cost structure was not dramatically restructured, analysts
projected that GE would become unprofitable by the end of 1982. When Welch took over as
CEO, he quickly identified several major areas that were in need of his immediate attention.
The first problem he identified was that the organizational structure was represented by
an overwhelming nine layers of management between the shop floor and the CEO. This lead to
an unresponsive, inward focused company that’s employees found great difficulty in
communicating with one another. At the same time, the numerous layers of middle
management gave employees comfort. The company was divided into 150 units. Welch saw
this and believed that GE was overly diversified. They were simply involved in too many
different ventures. GE was a financially strong company, but its growth rate was close to the
companies GNP (Gross National Product).
From his previous years of experience with GE, Welch also knew that there were issues
involving the employees. Once he took control, he worked on establishing a number of change
management processes to combat the problems that the company faced with isolation, low
morale, and negative attitudes toward the workplace. Welch knew that the company was too
large to fail, yet GE was too unwieldy to adapt for further growth. Welch’s grand scheme in
reinventing General Electric involved two separate phases. These phases were referred to as
the “hardware” and “software” phases. Over the next five years, General Electric under the
command of Welch would go through some extensive changes. In September 1981, in an
internal GE publication, Welch articulated the corporate strategy that each division would be
number one or number two in their industry, and that GE would remain lean, agile and able to
respond to changes in its environment. Welch’s early priorities would be extensive
restructuring of General Electric’s infrastructure. Welch began selling those business in GE’s
portfolio that faced no potential return in the future and retained and added some with the
potential to be number one or number two in that industry.
This could bring GE’s operation into economies of scale and then lock out the potential
competitors. During the 80’s, GE had bought 338 businesses and product lines for $11.1 billion
and sold 232 for $5.9 billion during the 1980s. Among his most noble feats was restructuring
the company’s 350 businesses into twelve divisions of the company and reducing the
management structure from twenty-nine levels to only six. By 1989, 12 out of 14 GE units were
leading their markets both in the U.S. and abroad.
His first years were also marked by “destaffing”, or reduction of the workforce. He did this
by removing unnecessary layers of middle management and laying off thousands of employees.
By 1984, he had reduced the workforce by almost 100,000 in order to streamline the company
and to increase efficiency. Each year he would terminate the bottom 10% of his managers.
However, he would reward the top 20% with bonuses and stock options. At the end of 1980, GE
had 411,000 employees and by the end of 1985, GE had 299,000 employees By the late 80s,
Welch was confident that that hardware part of his restructuring was almost complete so he
wanted to begin focusing on the software phase.
Welch admitted his priorities were changing, “A company can boost productivity
by restructuring, removing bureaucracy and downsizing, but it cannot sustain high productivity
without cultural change.” Welch’s approach for this phase focused on three main areas. These
areas of focus would include goal setting and competition, empowering employees, and
increasing corporate communication. An underlying theme for Jack Welch’s tenure as CEO of
GE was his use of goal setting to motivate higher levels of achievement throughout the
company. Welch set company wide goals, as well as specific performance objectives for
individual companies and divisions. He often supplemented his goal setting by creating a sense
of competition within the organization, as well as against all competitors.
Welch preached a philosophy he called “planful opportunism,” whereby GE employees
were given an over-reaching stretch-goal and permitted to do whatever it took to reach the
target. Welch used this same technique in an effort to improve product quality. This led Welch
to introduce GE to Six Sigma, a defect reduction program. Six Sigma is a process, which consists
of the rigorous application of statistical tools to improve profits, reduce costs and improve
speed. It begins by asking hard questions regarding level of defects, time required to perform
operations, and customer expectations. It is a quality control process, which brings robust
changes unlike other process. This program relies on teamwork to propel quality to the highest
level. GE had been operating at 3.5 sigma, but that was not enough for Welch, he wanted six
sigma (nearly twice the national standard). Welch consistently set far-reaching goals in an
attempt to move the company in the direction he wanted. While not all goals may be reached,
Welch reinforced the notion that advancing towards those goals was still considered success
and rewarded managers accordingly. Welch realized that he could motivate higher levels of
performance by setting goals that were much higher than the managers would have set for
themselves. These “stretch-goals” often caused the managers to outperform their original
targets. Because Welch set such extreme stretch-goals, he needed to incent effort toward these
seemingly unattainable targets. He rewarded people by giving bonuses if they made great
progress towards the goals, even if they did not reach them. This succeeded in driving people to
work beyond their original goals and even if they did not reach the stretch goals Welch often
recognized them for superior performance.
When Welch took over GE, he had a vision of creating an organization where people at all
levels could be held responsible for their own work, and in the end make decisions for the
betterment of their job. The goal was not to control workers, but instead to liberate them.
Welch characterized this as creating a boundary-less organization in which empowered
employees were self-directed and motivated to reach their goals. Welch addressed this issue by
eliminating whole layers of management, consolidating overlapping jobs and business units,
and forcing employees at every level to take more responsibility for their own work. In the
plant, equipment operators became responsible for the quality of their own work, reducing the
need for inspectors. In effect, employees were given the ability to eliminate those aspects of
their job that were unproductive and thus unnecessary.
An important aspect of this has been the Work-Out. Work-Out had been an
empowerment concept greatly favored by Welch. Thousands of GE employees get an
opportunity to get together and share their ideas, thoughts and expertise, while building and
fostering a more creative and team oriented atmosphere. The Work-Out encourages
communication and accountability with the ultimate goal being to drive above average team
performance. By providing each team member with the opportunity to contribute his ideas
to the decision making process, Welch hoped to stimulate individuals to constructively
challenge their bosses and promote a more motivated workplace. All Work-Outs included
follow-up meetings where previous commitments were discussed and accountability was
enforced. Employees received the satisfaction of being able to air their concerns, while the
company has greatly benefited from insights shared.
Under Welch, GE began to realize that human beings are not machines and that each
person has the potential to enhance productivity. Knowing how to use this resource cannot
only give the company a competitive edge, it can make each employee feel more important in
the production process and thus more motivated. It helped to eliminate vertical and horizontal
barriers and forever changed the way people behaved at the company. This process assisted
Welch to achieve workable unity within the organization, creating an environment of trust and
openness that had not existed before. By empowering people, an organization gives employees
the ultimate responsibility for their own work. If they share the company’s goals, they do not
need much supervision. Costs will be reduced and layers of management will become
unnecessary. This can also lead to employees becoming more motivated to perform their jobs
optimally, which in turn leads to large productivity improvements and allowing the organization
to be able to implement new ideas faster and be more responsive to market changes.
“Boundary-less behavior” and the elimination of unnecessary communication filters are the key
phrases to describe Jack Welch’s attitude towards communication.
To facilitate goal setting and empowerment within GE, Welch needed to establish clear
lines of communication in the organization. He realized that employees come to GE with many
different experiences and backgrounds. He did not want to take away from the benefit of those
various backgrounds, as much as reshape them with GE philosophies. One of his objectives was
to motivate people to think outside the box and challenge the status quo. Open communication
channels between Welch and his employees have been an important tool in this regard. These
channels work in both directions, giving employees the ability to air their concerns and work
towards a consensus for action. He encourages direct communication with employees,
including he, himself having face-to-face meetings with subordinates as often as possible and
participating in the Work-Out.
Welch himself was characterized as inpatient, blunt and ill tempered towards his
dependent and would strive to build self-confidence in his managers, but his communication
style would often cause people to lose self-confidence instead. Open communication channels
work well when they are used to motivate performance and increase employee morale, but
when they are used to intimidate they will have the opposite effect, causing low self-esteem.
This “brashness” has also contributed to the criticism over the years for an apparent lack of
compassion for the middle class and working class. Some industry analysts claim that Welch is
given too much credit for GE’s success.
They contend that individual managers are largely responsible for the company’s success.
Jack Welch changed his management style based on the needs of GE during a particular time.
He was Neutron Jack when he needed to be. GE was sluggish and slow, layered with
cumbersome management, and needed to “trim the fat” and make middle management less of
a burden. We may have taken less of a hardnosed approach by providing benefits and
education opportunities to employees that were let go to ease the burden on the families,
especially those employees with a number of years at GE. The rationale that Jack used to make
decisions was based solely on where the company was, and where it needed to be. He was able
to change his management style based on the condition of the company. He needed to be
Neutron in the early 80’s because the company was fat and sluggish. Middle management
needed to be trimmed to save time and money. There was no other choice but to adopt a very
directive style and portray a hard attitude.
As GE slimmed, it became apparent that GE needed to be coached and inspired for better
productivity and simpler process. Jack was able to adapt his leadership style into that of a coach
with a “you can do it” communication style. As GE evolved into the late 90’s Jack understood
that it was now time for the GE employees to be empowered to share ideas for best practices,
and teach back to management tricks of the trade that would take the company to the next
level. By implementing the “boundary-less” philosophy, Jack was sending a message to the
entire company that employees are valued, have great ideas that they need to share, and they
would be rewarded rather than punished for speaking up. This was the last empowering style of
leadership that Jack employed before his retirement.
