The recently completed split of GE into three independent public companies marks the end of a 100-plus-year era that saw GE become a global “everything company” under the leadership of business icon Jack Welch. Protiviti’s Jim DeLoach explores the rise and fall of GE and what lessons GE’s story holds for the leaders of today and tomorrow.
Jack Welch was regarded as one of the most accomplished CEOs of the 20th century in terms of creating shareholder value. During his 20 years as CEO of General Electric, he grew GE’s market capitalization over 30 times. Given his undisputed success in making GE the most valuable company on the planet, people listened whenever he spoke. They wanted to know his “secret sauce.”
But a series of 21st century disruptions, including those both corporate and cultural, led to the eventual breakup of the American mega-conglomerate.
The Welch management philosophy
When Welch became GE’s chairman and CEO in 1981, he inherited a lumbering industrial conglomerate beset with a bureaucratic corporate structure, a cumbersome strategic planning process, a limited strategic focus and a perception that the company was slow to adapt to the market. At that time, GE also faced the challenge of translating financial results into attractive stock performance.
To address these issues, Welch applied a management style featuring a relentless pursuit of excellence and a steady focus on driving change. Its tenets were — and continue to be — encapsulated in the business lexicon and many MBA programs. They remain prominent in many businesses today. For example, consider the following 10 Welchisms, as covered in Noel M. Tichy and Stratford Sherman’s 1994 book “Control Your Own Destiny or Someone Else Will: How Jack Welch Has Made General Electric the World’s Most Competitive Company”:
- Apply the “rule of No. 1 or No. 2” when managing a business portfolio. Shortly after being named CEO, Welch required each business unit to present a compelling plan to position themselves as No. 1 or No. 2 in their respective markets. Bottom line, the message was they must either lead the market or get out of it. In this way, he ruthlessly pared GE’s portfolio of companies by selling off more than 200 underperforming businesses over his first decade as CEO, creating $11 billion in fresh capital. The point is clear: Lacking competitive advantage is a signal to get out of the game.
- Be the master of your own destiny, or someone else will. In other words, change proactively before the market forces you to do so. This philosophy captures the essence of managing disruptive change and its impact on strategies and business models and is particularly relevant to our day and age. Change presents an opportunity. Embrace it or be swept aside by it. This emphasis on agility led to the elimination of GE’s strategic planning system.
- Avoid excessive control. Guide and lead people rather than control them. Create and articulate a vision, own it and establish accountability to make it happen. Managing less is managing better.
- Face reality as it is. Pay attention to internal developments and external market forces and manage by fact. Candidness with others and an ability to face fresh business realities and act on them are keys to a performance-driven culture.
- Exercise curiosity that borders on skepticism. In the decision-making process, examine all angles of a decision. Be insatiably curious: Ask questions;d listen and learn.
- Think “boundaryless.” Eliminate silos, foster cross-functional collaboration and increase agility and resilience. This philosophy was a forerunner to creating tight coupling within the value chain to connect with upstream suppliers and downstream distribution channels. At GE, bonuses and options were used to reward innovative ideas that created process efficiencies within the boundaryless organization.
- Flatten the organization. Speed up decision-making and make the company more responsive by empowering frontline employees at the lowest possible level with the authority to make decisions that would traditionally be made by managers several layers above them. (This was Welch’s “Work Out” initiative.)
- Pursue Six Sigma quality. Toward the end of his tenure, Welch adopted a data-driven Six Sigma quality program to improve processes, products and services. He understood the importance of continuous improvement from simplifying and focusing product design and speeding up idea-to-market, procure-to-pay, order-to-cash, inventory conversion, time-to-deliver and other processes.
- Set stretch goals. Welch challenged managers to set ambitious targets to incent and motivate them to surpass their own expectations and achieve exceptional performance within the context of a clear organizational vision and strategy.
- Rank and yank. GE applied a performance management system known as “the vitality curve,” by which employees would be differentiated to identify the top and lowest performers based on the extent to which they share corporate values and achieve their objectives. The idea was to promote the top 20% to jobs that fit their strengths and give them the highest rewards as “A” players, assist the middle 70% in meeting their potential and terminate the bottom 10%.
The 10 “Welchisms” listed above are a few among many. Whether one agrees with them or not, some are highly relevant to today’s disruptive markets, while others present cause for debate. But in his time, Welch was viewed as an exceptional CEO who delivered results the market rewarded.
Rooted in Friedman economics, Welch’s management style often focused on near-term financial results. He streamlined GE with ruthless cost-cutting and layoffs, sold off underperforming businesses, dismantled hierarchical bureaucracy and fostered a decentralized structure, leading to his nickname, “Neutron Jack,” likely because his approach often clashed with workforce morale. The moniker stayed with him until his death in 2020.
Upon his retirement in 2001, Welch stated that his 20-year legacy as CEO would be defined by GE’s performance for a comparable period into the 21st century. But it didn’t work out that way. The company’s stock price declined nearly 90% from its peak in August 2000 to its low in September 2020.
And then in November 2021, the company announced it would split itself into three public companies. GE HealthCare (which focuses on the healthcare technology market) and GE Vernova (which consists of GE’s portfolio of energy businesses) were officially spun off in January 2023 and April 2024, respectively. The original GE then became an aviation-focused company, GE Aerospace.
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Read moreDetailsWhat happened: A 20/20 hindsight exercise
If everything was working so well during Welch’s 20-year tenure, why and how did GE lose its mojo over the next 20 years? Challenges and headwinds were encountered almost from the moment he stepped down. His handpicked successor, Jeffrey Immelt, served for 16 years, until October 2017. In succeeding a legendary CEO, Immelt inherited a company with a very high price/earnings multiple and a board that wanted more of the same.
It was a tough act to follow. Immelt’s second day on the job was Sept. 11, 2001, and the terrorist attacks affected several major GE businesses. In 2002, the Sarbanes-Oxley legislation (SOX) was enacted, increasing the scrutiny of financial results and the underlying internal financial reporting controls. The 2007-08 financial crisis significantly affected GE Capital, forcing GE to take immediate action to raise $15 billion in equity capital through a $3 billion capital infusion from Warren Buffett (in exchange for preferred stock and common stock warrants) and a $12 billion common stock offering.
GE’s stock fell 40% during Immelt’s tenure. The rest of the decline in market cap occurred after he was forced out. That decline largely occurred because the company agreed to pay a $200 million settlement to the SEC over charges related to alleged disclosure failures in its gas turbine power and insurance businesses. According to the SEC, GE misled investors by failing to fully disclose significant issues within these two business segments. In 2017 and 2018, GE’s stock price fell almost 75% as the two segments’ challenges were disclosed to the public. Ultimately, GE was excluded from the Dow Jones industrial average in 2018, ending the company’s 110-year presence in the index — a decision that reflected both the changes at GE and its reduced influence in the market.
GE Capital offers a starting point for understanding the divergence in performance. It owned a number of financial institutions that proved to be more complicated and expensive to manage during Immelt’s tenure than during Welch’s. The ability to leverage industrial free cash flow in the late 1980s and through most of the 1990s was enticing, as it enabled Welch to use GE Capital as a creative financial engineering tool to stabilize quarterly performances and drive short-term profits.
However, when Immelt took the helm, he faced the dot-com bubble burst, the 2002 recession and the 2007-08 financial crisis. Accordingly, Immelt had to deploy GE Capital in a different way, he wrote in his 2021 memoir. When the financial crisis hit, GE Capital’s exposure to commercial real estate and consumer finance forced him to pare down the emphasis on financial services to focus primarily on the leasing businesses connected with GE’s manufacturing businesses.
To Immelt’s credit, he acknowledges his mistakes, tactical errors and lapses in judgment. He also asserts that the power business was not managed effectively over a two- to three-year period and that energy markets were facing disruption. Then the Covid-19 pandemic hit after his tenure, completing the downward spiral in GE’s stock price.
Critics also have weighed in. Some assert that Immelt paid too much for some acquisitions and didn’t get enough for some divestitures — a claim he disputes.
Others claim that rather than rein in GE Capital, he let it spin out of control. However, Immelt counters that early in his tenure he did not view GE Capital to be an immediate issue. Rather, he believed he had the luxury of time to address its place in the business as he focused on a broader strategy of using GE’s scale to drive organic growth and efficiency by streamlining the company with less administration and more decentralization to position decision-making authority with those leaders who were closest to their markets. In this way, he sought to transform the company’s core industrial businesses and divest slower-growth, low-tech and nonindustrial businesses, except for that portion of GE Capital that supported GE’s industrial businesses.
Still others argue he simply missed on his big bets and was unable to adapt to changing market conditions. Immelt’s successors didn’t fare any better. For a company facing the glaring quarter-to-quarter earnings spotlight of short-termism, these perceptions made it difficult to gain the market’s trust.
Immelt’s learnings and other takeaways
GE’s decision to split suggests a strategic shift away from a conglomerate management style to a streamlined corporate structure that emphasizes strategic focus, specialization and agility. Having transparency into the dedicated, focused management teams in charge, investors can assess each company’s prospects according to their respective industry preferences.
Immelt published an article in the Harvard Business Review at the time he stepped down in 2017. In it, he discusses his lessons learned as a CEO seeking to transform GE into a technology-driven industrial company. Following is a crisp summary:
- Be disciplined and focused, armed with a clear point of view and interconnected initiatives.
- Understand how the world is changing, and position the company to anticipate change or be in the vanguard of those reacting to it.
- Obtain buy-in from the organization that the need for change is existential.
- Be all-in — make a bold, sustained commitment to the transformation.
- Be resilient so that transformation efforts can be sustained during tough times.
- Obtain feedback during the transformation process, and be prepared to pivot when something new is learned.
- Embrace new kinds of talent, a new culture and new ways of doing things.
These are powerful lessons from a man who learned them the hard way. According to Immelt: “We were a classic conglomerate. Now people are calling us a 125-year-old startup.”
GE’s steady, low-velocity downward spiral was indeed painful to observe over the years. A once-proud company and brand with diverse operations across multiple sectors had seemingly reached a point of no return where very little, apparently, could be done to abate its decline despite Immelt’s aforementioned transformation initiatives. Clearly, something was askew. And the headwinds that GE faced in the new millennium would have been challenging to any leader, including Welch had he not retired.
In fact, those armed with the lens of 20/20 hindsight who are critical of Welch’s methods and philosophy during his tenure are asking the wrong questions. Instead, they should ask, “What would he have done differently in the face of changing markets? How would he have deployed the tools of the digital age? How would he have coped with the changing geopolitical realities companies now face? How would he have addressed the disruptive change confronting 21st century leaders? And how would he have addressed the pressures of meeting earnings expectations given the demanding bar he set?”
As the 21st century unfolds, disruption has proven to be the norm. Long-term success in today’s times necessitates: strategic focus to guide the company’s overall direction; specialization to create distinctive, differentiating capabilities and market offerings; and agility so that the company can pivot when market circumstances change
These realities raise yet another question: Would Jack Welch’s business model have been sustainable in the 21st century? I will leave the answer to that question to the reader. In my view, Jeffrey Immelt’s lessons are fit for purpose in the digital age. But sadly — whether due to unrealistic investor expectations, strategic error, poor timing or execution, insufficient information, unexpected market disruption or just bad luck — Immelt’s transformation initiatives could not save the house that Jack built.