GE’s Two Decade GE’s Two Decade TransformationTransformation

Blake BermanBlake BermanEcon 465Econ 465

Economics of StrategyEconomics of StrategyProfessor SakaProfessor Saka

History of the FirmHistory of the Firm• Founded in 1878 by Thomas EdisonFounded in 1878 by Thomas Edison

– Originally focused on generation, distribution, Originally focused on generation, distribution,

and use of electric powerand use of electric power• Company continued to grow into other industriesCompany continued to grow into other industries

– Household appliancesHousehold appliances– LightingLighting– Aircraft enginesAircraft engines– Medical systemsMedical systems– Diesel locomotives, etc.Diesel locomotives, etc.

• Reputation as a market leader throughout early 1900’sReputation as a market leader throughout early 1900’s– Underwent constant changeUnderwent constant change– 1930’s it was highly centralized, tightly controlled1930’s it was highly centralized, tightly controlled– 1950’s GE lead a trend toward decentralization (100’s of department managers)1950’s GE lead a trend toward decentralization (100’s of department managers)– Underwent profitless growth in the 1960’s, forced firm to develop strategic Underwent profitless growth in the 1960’s, forced firm to develop strategic

planning systemsplanning systems

GE Product LinesGE Product Lines

•Energy•Infrastructure•Electronics•Media•Financial Services•Communication•Industrial Services •Appliances•Medical•Aerospace•Locomotives•Turbines

Firm that Jack Welch Firm that Jack Welch InheritedInherited• Prior CEO Reg Jones established 43 Strategic Prior CEO Reg Jones established 43 Strategic

Business Units (SBUs)Business Units (SBUs)– Each one developed a strategic plan to be reviewed by Each one developed a strategic plan to be reviewed by

CEOCEO

• Envy of most other conglomeratesEnvy of most other conglomerates– Massive interwoven network of 46 divisions, 190 Massive interwoven network of 46 divisions, 190

departments, 10 groups, 43 SBU’s, and sectorsdepartments, 10 groups, 43 SBU’s, and sectors

• Business was meticulously managed by highly Business was meticulously managed by highly complex, bureaucratic structurecomplex, bureaucratic structure

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Jack Welch: The Early DaysJack Welch: The Early Days• 1981 Economic Climate: Recession1981 Economic Climate: Recession

– High interest ratesHigh interest rates– Strong dollarStrong dollar– Highest unemployment rates since the Great DepressionHighest unemployment rates since the Great Depression

• First Task: RestructuringFirst Task: Restructuring– Welch wanted each business in the company to be Welch wanted each business in the company to be

“better than the best” in the industry“better than the best” in the industry– #1 or #2: Fix, Sell or Close#1 or #2: Fix, Sell or Close– Reorganized businesses into three circlesReorganized businesses into three circles

• Core business, technology business, service businessCore business, technology business, service business

• Welch sold over 200 businesses, which accounted for 25% of 1980 salesWelch sold over 200 businesses, which accounted for 25% of 1980 sales– Freed up over $11 Billion in capitalFreed up over $11 Billion in capital

• He also made over 370 acquisitionsHe also made over 370 acquisitions– He invested over $21 Billion on these additionsHe invested over $21 Billion on these additions

GE: Business RefocusedGE: Business Refocused• Leaner and more agileLeaner and more agile

– Focused on eliminating bureaucratsFocused on eliminating bureaucrats– Forced every employee to add value to the final productForced every employee to add value to the final product– Got rid of 200 person strategic planning staffGot rid of 200 person strategic planning staff

• Reduction in workforceReduction in workforce– From 1981-1989 workforce declined from 404,000 to From 1981-1989 workforce declined from 404,000 to

292,000292,000

• Replaced many existing business heads with his Replaced many existing business heads with his own hand picked “varsity team”own hand picked “varsity team”

• ResultsResults– Slow revenue growth $27.2 Billion to $29.2 Billion Slow revenue growth $27.2 Billion to $29.2 Billion

from 1981 to 1985from 1981 to 1985– Dramatic increase in operating profit $1.6 to $2.4 Dramatic increase in operating profit $1.6 to $2.4

Billion over same time periodBillion over same time period

Step Two: Software Step Two: Software (≈1987-1993)(≈1987-1993)• Cultural change at GECultural change at GE

– Speed, simplicity, opennessSpeed, simplicity, openness• Businesses report directly to CEOBusinesses report directly to CEO• Each boss has 10 to 15 direct reports, v. only 6-Each boss has 10 to 15 direct reports, v. only 6-

7 before7 before

– Work-OutWork-Out• Open forum for employee discussions across Open forum for employee discussions across

ranksranks

– Best PracticesBest Practices• Copy the most successful aspects of other firmsCopy the most successful aspects of other firms

• Small company feelSmall company feel– Focus on innovationFocus on innovation– Methods more important than resultsMethods more important than results

GE Goes GlobalGE Goes Global• 1987- GE sells its consumer electronics business in exchange for 1987- GE sells its consumer electronics business in exchange for

Thompson S.A.’s (French) medical imaging businessThompson S.A.’s (French) medical imaging business

• 1989- Welch appoints Paolo Fresco as Head of International 1989- Welch appoints Paolo Fresco as Head of International OperationsOperations– Fresco brokers numerous international deals in Germany, Japan, Fresco brokers numerous international deals in Germany, Japan,

France, and Eastern EuropeFrance, and Eastern Europe

• Welch sees economic downturns as buying opportunitiesWelch sees economic downturns as buying opportunities– 1989-1995: GE invests $17.5 Billion In Europe during a recession1989-1995: GE invests $17.5 Billion In Europe during a recession– 1995: GE acquires 16 companies in Mexico as the Peso collapses1995: GE acquires 16 companies in Mexico as the Peso collapses– 1997-1998: GE invests $15 Billion in Japan during major economic 1997-1998: GE invests $15 Billion in Japan during major economic

crisiscrisis

• ResultsResults– 1998: International revenues of $42.8 Billion (double the level of 1998: International revenues of $42.8 Billion (double the level of

1993)1993)– 2000: International revenue accounted for 50% of total revenue (20% 2000: International revenue accounted for 50% of total revenue (20%

in 1985)in 1985)– Global Revenues growing at 3x the rate of domestic salesGlobal Revenues growing at 3x the rate of domestic sales

GE 2007 Annual Report

Changing Employee RelationsChanging Employee Relations

• Change compensation structureChange compensation structure– reward best employees with company stock and optionsreward best employees with company stock and options

• Expanded the number of employees receiving options from 300 to 30,000Expanded the number of employees receiving options from 300 to 30,000• Much more aggressive bonus system linked to individuals’ performanceMuch more aggressive bonus system linked to individuals’ performance

• Provide workers with honest performance feedbackProvide workers with honest performance feedback

• Meet with executives to identify future leaders, high potential Meet with executives to identify future leaders, high potential employeesemployees

• Invested heavily in improving Crotonville management Invested heavily in improving Crotonville management development facilitydevelopment facility– Used facility as an open forum to create a new generation of leadersUsed facility as an open forum to create a new generation of leaders

• 360° feedback process360° feedback process– Every employee gave feedback on their direct reports as well Every employee gave feedback on their direct reports as well

as their bossas their boss

Step Three: Tearing Down BoundariesStep Three: Tearing Down Boundaries• Welch encouraged each employee Welch encouraged each employee

to become “boundary less”to become “boundary less”

• Stretch GoalsStretch Goals– Goals beyond the minimumGoals beyond the minimum– Forced each aspect of the company to Forced each aspect of the company to

dream bigdream big– Though most of the company’s stretch Though most of the company’s stretch

goals were not met, the mind set they goals were not met, the mind set they fostered led to unprecedented growthfostered led to unprecedented growth

• Service BusinessService Business– 1996: GE has built an $8 Billion equipment service business1996: GE has built an $8 Billion equipment service business– 1997: GE made 20 service related acquisitions1997: GE made 20 service related acquisitions

• Strength in NumbersStrength in Numbers– Welch felt the conglomerate business model, when run Welch felt the conglomerate business model, when run

effectively, could be more efficient then the free marketeffectively, could be more efficient then the free market

Creating a Reputation for Creating a Reputation for ExcellenceExcellence

• Six Sigma Quality InitiativeSix Sigma Quality Initiative– Goal: Become highest quality producer Goal: Become highest quality producer

in the industry, eliminate inefficiencies in the industry, eliminate inefficiencies throughout the company through throughout the company through sharing informationsharing information

– 1996-1999: Investment of <$2 Billion 1996-1999: Investment of <$2 Billion returned over $2.5 Billion in profitsreturned over $2.5 Billion in profits

• Bring in the bestBring in the best– Use high wages, benefits, and career Use high wages, benefits, and career

growth opportunities to attract only the growth opportunities to attract only the best talent availablebest talent available

• Rank Employees based on 4 E’sRank Employees based on 4 E’s– Edge, energy, execution, ability to Edge, energy, execution, ability to

energizeenergize– Sorted employees at all levels into Sorted employees at all levels into

groups 1-5 based on talent, potentialgroups 1-5 based on talent, potential– Actively identified future leadersActively identified future leaders

lsspmp.com/Six-sigma-b.jpg

GE at the turn of the century: E-GE at the turn of the century: E-BusinessBusiness

• Welch leaves firm in 2001Welch leaves firm in 2001– Jeff Immelt appointed new CEOJeff Immelt appointed new CEO

• Leaves business with focus on online Leaves business with focus on online presencepresence

• GE is most admired company in the worldGE is most admired company in the world

ResultsResults

• 23% annualized increase in shareholder 23% annualized increase in shareholder value during Welch’s tenurevalue during Welch’s tenure

• Crushed the returns of the S&P 500 Crushed the returns of the S&P 500 over the same time periodover the same time period

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Key QuestionsKey Questions1.1. Where did Welch leave GE?Where did Welch leave GE?

2.2. Stretch Targets?Stretch Targets?

3.3. Was going into service businesses the right move?Was going into service businesses the right move?

4.4. How effective were Welch’s first stages (fix, sell, How effective were Welch’s first stages (fix, sell, close, consolidation, #1 or #2, 3 circles, etc.)?close, consolidation, #1 or #2, 3 circles, etc.)?

5.5. Did Welch change over time, or did the demands of Did Welch change over time, or did the demands of his business change (consolidation to global his business change (consolidation to global expansion, “Neutron Jack” to emphasis on employee expansion, “Neutron Jack” to emphasis on employee growth and feedback)?growth and feedback)?

6.6. What was the purpose of the Work-Out and Six Sigma What was the purpose of the Work-Out and Six Sigma initiatives?initiatives?

7.7. How did GE manage to avoid being broken up like How did GE manage to avoid being broken up like most other big conglomerates?most other big conglomerates?

8.8. What made GE’s internal organization more efficient What made GE’s internal organization more efficient than the free market?than the free market?