Jack Welch and General Electric developed cult-like followings on Wall Street, culminating in a $7

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Jack Welch and General Electric developed cult-like followings on Wall Street, culminating in a $7.1 million book deal (Jack: Straight from the Gut, published in 2001). During his 20-plus-year tenure, GE enjoyed enormous financial success and its methods were imitated worldwide. But what made GE so successful under Welch? How has it managed to excel in such a wide range of businesses?

History:

General Electric is a large diversified industrial and financial company, whose major product lines include appliances, lighting products, aircraft engines, plastics, power systems, medical imaging, broadcasting, and a wide range of financial services (consumer finance, leasing, private equity, credit cards, and so on). See Exhibit 1. In 2000, GE employed 223,000 people in over one hundred countries and reported net earnings of $13b on revenue of $130b.

General Electric was incorporated in 1892 as a combination of three existing companies, one of them founded and run by the inventor Thomas Edison. It was an original member of the Dow – in fact, the only one still in existence. Over the years, it has been wildly successful, reinventing itself as time and markets changed. James Surowiecki (New Yorker, December 18, 2000) notes:

In the twentieth century, GE was the industrial equivalent of the New York Yankees. Regardless of who ran the team, it just kept on winning. ... Charles Coffin kept GE afloat during one of the worst depressions in American history. ... [H]e essentially created the country’s electricity infrastructure and outmaneuvered a competitor, Westinghouse, whose technology was superior early on. Gerald Swope and Owen Young reinvented GE as a consumer-goods powerhouse, then had to find a way to make money during the Great Depression. Ralph Cordiner made GE a space-age giant and masterminded its widely imitated decentralization.

Welch:

In December 1980, Jack Welch was announced as the successor to Reginald Jones, himself a highly regarded executive, after an extensive internal search. Although GE was a profitable and respected company when he took over, its financial results during the 1970s were troubling to both its investors and senior management. Welch immediately made changes to the company’s structure and management practices. Early newspaper reports cite his aggressive and demanding management style and a willingness to shift GE out of its traditional lines of business. GE also changed from a highly-bureacratic organization to one with fewer layers of management focused on speed and responsiveness.

Welch stressed from the start the importance of being one of the top players in any industries in which it was involved. Welch told his colleagues that GE should be number 1 or number 2 in all of its businesses. If they were not, the options were to fix, sell, or shut them down. The “number 1 or number 2” mantra was intended to give a clear goal to managers of individual businesses. He soon found that he needed additional criteria about the businesses themselves. In his words, “being number 1 or 2 in hula hoops would not do very much good.” (From Janet Lowe, Jack Welch Speaks.) Later on, some of his junior colleagues complained that the goal had turned into a game of market definition: managers could often define themselves to number 1 or 2 by defining the market narrowly. Appliances are a good example. Although GE was estimated to be number 3 in North America (see Exhibit 2), it was first in refrigerators and ranges/stoves. Welch’s colleagues suggested he add the requirement that the market definition give GE no more than a 10% market share. They argued that this would give them 90% of the market to shoot for and focus them on growth.

Welch also stressed size. But Welch emphasized that it allowed GE to diversify its risks. The way to capitalize on its size was to use this ability to diversify internally to take a lot of risks. The 2001 annual report put it this way:

We understand [the] inherent limitations [of size] -- on speed and on clarity of communications, among other things -- and we fight every day to create the quickness and spirit of a small company. But we appreciate the one huge advantage size offers: the ability to take big swings, big risks, and to live outside the technology envelope, to live in the future. Size allows us to invest hundreds of millions of dollars in an enormously ambitious program like the GE90, the world’s highest-thrust jet engine, and the “H” turbine, the world ’s highest- efficiency turbine generator. Size allows us to introduce at least one new product in every segment, every year, in medical diagnostics, or to spend hundreds of millions on new plastics capacity, or to continue to invest in a business during a down cycle, or to make over 100 acquisitions a year, year after year. Our size allows us to do this knowing that we don’t have to be perfect, that we can take more risks, knowing that not all will succeed. That’s because our size -- far from inhibiting innovation, the conventional stereotype -- actually allows us to take more and bigger swings. We don’t connect with every one, but the point is, our size allows us to miss a few -- without missing a beat.

A final feature of GE is the wide range of businesses in which it operates. Although many other companies have had difficulty expanding outside their core businesses, GE had been successful for decades doing precisely that. Some observers find it difficult to believe that a single firm can understand and operate such different businesses as aircraft engines, television broadcasting, and venture capital. Others, however, suggest that the quality of GE’s management and management practices are valuable regardless of the industry to which they are applied. Apparently even this has it limits, however, as GE stumbled badly when it bought Kidder Peabody. As Welch puts it: “[I] didn’t know diddly about it. I was on a roll. ... I thought I was 6-foot-4 with hair. ... I had two very smart board members, Walter Wriston and Lew Preston, who both said: ‘Jack, this is awful.’ But I bullied over them. ... It wasn’t worth it ... to go through the headaches we made [for ourselves] for being such jerks.” (Comments at NYU Stern, May 2002.)

Questions for Analysis

1. (a) In what ways is “number 1 or number 2” a useful goal? In what ways not?

2. (b) What are the advantages of GE’s enormous size? Disadvantages?

3. (c) What are the advantages to GE of managing such a diverse set of businesses? Disadvantages? Can you think of other examples of “unrelated diversification” that have been less successful?