The Ultimate Manager In a time of hidebound, formulaic thinking, General Electric's Jack Welch gave power to the worker and the shareholder. He built one hell of a company in the process.
(FORTUNE Magazine) – I want a revolution," Jack Welch told another General Electric executive just after the company revealed Welch would be its next CEO. He got what he wanted soon enough. Looking back from our high-tech, information-driven era, it may seem surprising that the chief of one of America's biggest, oldest companies emerged as the leading management revolutionary of the century. But it shouldn't be.
To see why Welch wanted--needed--a revolution, you have to remember the sorry state of the world when this driven, intense 45-year-old got his job: On the December day in 1980 when GE announced his promotion, the prime rate rose to 21.5%; the economy was coming out of one recession and was about to drop into another; and the Dow was at 937, a level it had first reached 15 years earlier. Stocks had just come through their worst decade since the '30s.
As for GE, its stock had done terribly. Adjusted for the merciless inflation of the time, it had lost half its value over the previous ten years. And this was considered an outstanding performance! As Welch settled into his new office at headquarters in Fairfield, Conn., FORTUNE published the results of a survey of the FORTUNE 500 CEOs. Who was the best CEO among them? Reg Jones, Welch's predecessor, his peers agreed by a wide margin. What was the best-managed company in the 500? Another landslide: GE.
Yet Welch proposed to blow up this paragon--its portfolio of businesses, its bureaucracy, many of its practices and traditions, its very culture. And though he acted with what seemed at the time like blitzkrieg aggressiveness, he regretted in later years that he hadn't moved even faster. Having been handed one of the treasures of American enterprise, he said, he was "afraid of breaking it."
Not only did Welch not break it, but he transformed it as well and multiplied its value beyond anyone's expectations: from a market capitalization of $14 billion to more than $400 billion today. GE is the second-most-valuable company on earth, behind Microsoft, and at times during the past few years has been No. 1.
That record is stunning but in itself may not be enough to make someone manager of the century. Welch wins the title because in addition to his transformation of GE, he has made himself far and away the most influential manager of his generation. (Indeed, his only competition would be Alfred P. Sloan, General Motors' chief from 1923 to 1946, who's in the running for a still higher honor; see "The Businessman of the Century.") As the most widely admired, studied, and imitated CEO of his time, Welch has enriched not only GE's shareholders but also the shareholders of companies around the globe. His total economic impact is impossible to calculate but must be a staggering multiple of his GE performance.
What Welch did is so sweeping that it begs for some kind of unifying idea. Think of it this way: He got his job at the moment when the ideas that governed late-19th and early-20th century business had finally lost their purchase, when an old world was giving way to a new one. That old world was based on manufacturing--made efficient through scientific management--and workers were programmed accordingly, with detailed procedures, manuals, hierarchies. This approach had met the century's first great business challenge in successfully controlling the massive new organizations that were multiplying globally. And through the military it had done even more: It had won World War II. Who could say it nay?
But by 1980 the central premise of Taylorism--that most workers did physical work--was long since invalid, and evidence was overwhelming that the old world was falling apart. A decade of stock market stagnation was screaming to CEOs that management was failing, though hardly anyone wanted to admit it. (Instead, conventional wisdom held that the stock market was "broken.") Total employees of the FORTUNE 500 had just peaked and would never again reach the level of 1979 (about 16 million), but few recognized the symptoms of corporate bloat. The economies of Germany and Japan, finally rebuilt from near-total destruction in the war, were threatening American markets and signaling the onset of global competition, but U.S. corporations like Xerox and the carmakers dismissed the danger. A 1980 NBC documentary on quality guru W. Edwards Deming called If Japan Can Do It, Why Can't We? brutally demonstrated the poor quality of U.S. products and processes, yet Deming was then virtually unknown in the U.S. The personal computer had just appeared, but IBM still wasn't interested.
Welch was hardly the first person to see the new world coming. His great achievement is that having seen it, he faced up to the huge, painful changes it demanded, and made them faster and more emphatically than anyone else in business. He led managers into this new world, which we still inhabit, and just as important, he showed business people everywhere a method of attacking change of any kind.
He began at the beginning, by changing GE's goal. The company was so big--then as now, sales equaled about 1% of America's GDP--that most people considered it a proxy for the economy as a whole, rising and falling by forces beyond its control. GE's ambition had long been simply to grow faster than the economy, an objective with at least two problems. First, it was hardly inspiring: If the economy was growing 2%, you could grow GE 2.2% and claim success--but no one would care. And second, it was wrongheaded: Shareholders pay managers to make their company not bigger but more valuable; over the previous decade, GE had grown steadily but wasn't worth any more than it had been in 1972.
Welch gave GE a new mission: to be the world's most valuable company. This profound shift in focus not only reoriented the company but also was so audacious--GE was then No. 10--that it could actually stir people. As the centerpiece of his new plan, Welch declared that every GE business must be No. 1 or No. 2 in its industry, another radical change in self-assessment, and he reportedly wasn't crazy about any of them being No. 2.
As employees puzzled over what this might mean for them--many, used to decades of bureaucracy, figured it wouldn't mean much--Welch cleared the decks for transformation. He blenderized GE's portfolio of businesses, in his first two years getting into 118 new businesses, joint ventures, or acquisitions while selling 71 businesses. The theme was to make GE more of a service company and to get out of businesses in which the company had no competitive advantage. The biggest divestiture symbolically was Utah International, an Australian coal outfit that had been Reg Jones' largest acquisition. Under Welch, GE was not going to sell commodities.
He simultaneously dealt with other irritants and distractions. Corporate strategic planners were one of the most misguided fads of the 1970s, and Welch saw that effective planning had to come from the individual businesses--so he decimated the planning staff. Big-deal CEOs like him were also expected to spend lots of time in Washington as virtual statesmen of business; Welch refused. And startlingly for a man in his position, he declined all invitations to sit on other corporate boards, reasoning that he had a full-time job already.
Now Welch could concentrate on reforming the innards of GE, the practices and culture that determine day by day how the company performs. Too numerous to count, these changes were virtually all expressions of one big notion: that GE's competitive edge would come from individuals and ideas. That sounds soft and mushy and commonplace, but in fact it can legitimately be called epochal.
In the business world that Welch saw ending, a company's competitive advantage came from headquarters. GE had elevated this belief higher than any other company with its famous blue books, the five thick volumes of guidance for every GE manager. They were indeed an awesome achievement, written by America's best business thinkers, including Peter Drucker. But to a GE manager their message was clear and dispiriting: You don't have to think; the thinking has been done for you, by people who are probably smarter than you.
Welch burned the blue books. His message to GE's managers, preached since day one with remarkable consistency, is, You own these businesses. Take charge of them. Get headquarters out of your hair. Fight the bureaucracy. Hate it. Kick it. Break it.
If employees were surprised by the vehemence of the words, they were more surprised by the actions that followed. Welch wiped out entire layers of management, including one high-level layer Jones had installed. Eventually he launched the famous workout process, in which employees at all levels of an operation gather for "town meetings" with their bosses and ask questions or make proposals about how the place could run better--80% of which must get some kind of response then and there. This was a true cultural revolution. As an electrician at a GE aircraft engine plant said to FORTUNE, "When you've been told to shut up for 20 years, and someone tells you to speak up--you're going to let them have it." The multiday workout sessions took huge chunks of wasted money and time out of GE's processes, but their more important effect was to teach people that they had a right to speak up and be taken seriously; those who advanced good ideas were rewarded, as were those who implemented them.
The next natural step was to spread those good ideas across the company. Logical, obvious--but it hadn't been done before. Then a more radical move: borrowing good ideas from other companies. Welch loudly advocated this one to show it was actually okay, and today he'll tell you what GE learned about asset management from Toyota or about quick market intelligence from Wal-Mart. Again, it was an obvious idea but a profound cultural change for GE. You've heard of not-invented-here? GE invented it. Welch killed it.
At least as important as these high-profile changes are his behind-the-scenes people practices, which he says take more of his time than anything else. When a manager meets with Welch, the exchange is candid, not scripted. There will be arguments. There may be shouting. The manager will almost certainly have to stretch his mind and do new thinking on the spot. Afterward Welch will dispatch a highly specific written summary of commitments the manager made, and when Welch follows up later--also in writing--he will refer to the previous summary. He does this with relentless consistency with scores of managers.
Of course managers then see how it's done and replicate the system down through the organization. One result is that all employees at GE are graded annually on a five-level scale and told where they stand. That's more honest than what most companies do, but then comes the really hard part: continually making sure the lowest level, the bottom 10%, move up or get moved out. Cruel? Far from it, says Welch. Falsely telling a manager he's doing fine for 20 years, then firing him at age 53 when he's got two kids in college--"that's the definition of cruelty." GE is just facing reality, says Welch, and of the many precepts he has made famous ("Control your destiny, or someone else will," "Change before you have to," "Be candid with everyone"), the most fundamental and important may be, "Face reality."
Some people are having trouble facing the reality of Welch's retirement, scheduled for Dec. 31, 2000, the date sticklers say is the century's true end. An audience member at the recent Fortune Global Forum in Shanghai challenged Welch: "You are 60-some years young. How can you make as great an impact on this world after you retire?" Then, with mock sternness: "What's wrong with you?"
The question drew laughter and an ovation, but Welch had a ready answer: "I'm not retiring because I'm old and tired. I'm retiring because an organization has had 20 years of me. My success will be determined by how well my successor grows it in the next 20 years. I've got a great management team, and they're ready to get the old goat out of there so they can do their thing.
"To be vital, an organization has to repot itself, start again, get new ideas, renew itself. And I shouldn't stay on the board. I should disappear from the company so my successor feels totally free to do whatever he wants to do. Now if I go to another company, I can do that to another company. But there I've done it enough."
Wait. "Go to another company"? What's that about? Welch may be the manager of the century, but apparently that doesn't mean he has to quit when the century does.