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There were many arguments for and against it

For the exclusive use of K. LYNCHHarvard Business School9-899-162Rev. February 9, 2000GE … We bring good things to life. (A) *In June 1995, the Corporate Executive Council (CEC) of General Electric Company (GE),comprising 25 of the most senior executives in the company, had just heard a presentation from LarryBossidy, CEO of AlliedSignal, on the topic of six sigma quality. “GE is a great company,” Bossidysaid. “I know. I worked there for 34 years. But there is a lot you can do to become greater.” Thepresentation at the Council’s regular two-day quarterly meeting had been prompted, among otherthings, by the results of an April survey in which GE employees expressed concerns about the qualityof the company’s products and processes. One member of the CEC, CFO Dennis Dammerman,commented that the presentation “had a real ring of substance to it, not just posters, but realsubstance.”1The presentation added fuel to the debate about whether GE should launch a formal qualityimprovement effort and how. There were many arguments for and against it. CEC members knewthat this would not be the last meeting at which the issue of a formal quality improvement effort forGE would be raised. CEO Jack Welch, who convened CEC meetings, had a great deal of respect forBossidy even though he had been a skeptic along with many of his colleagues on the issue.History ➁Since its founding in 1878 as the Edison Electric Light Company by Thomas Alva Edison,with the early financial help of J.P. Morgan, General Electric had become one of the most successful,most valued (by the world’s stock markets), and most-watched companies in the world. By 1995, itwas the only remaining member of the original list of Dow Jones Index companies that had preservedits identity over the entire 100-year history of the list. It had been recognized for decades for itsperiodic development of important, influential management practices, as shown in the time-line inExhibit 1. A highly diversified company comprising at times everything from appliancemanufacturing to coal mining, like the bumble-bee it had defied those who maintained there was noreason for it to “fly.” Given its diversity, the most relevant benchmark of GE’s performance—in theminds of many of its senior managers—was how it performed in relation to the gross nationalproduct of the United States.* “We bring good things to life.” is a registered word mark of the General Electric Company.1 This case is based on published sources which are listed at the end of the case and referred to by numberthroughout the document. For example, this quote is from source number ➀.Professor James L. Heskett prepared this case as the basis for class discussion rather than to illustrate either effective orineffective handling of an administrative situation.Copyright © 1999 by the President and Fellows of Harvard College. To order copies or request permission toreproduce materials, call 1-800-545-7685, write Harvard Business School Publishing, Boston, MA 02163, or go tohttp://www.hbsp.harvard.edu. No part of this publication may be reproduced, stored in a retrieval system,used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying,recording, or otherwise—without the permission of Harvard Business School.1This document is authorized for use only by Kathy Lynch in RBUS 401 – 2012 – Term A taught by Rick Marolt fromAugust 2012 to October 2012.For the exclusive use of K. LYNCH899-162GE … We bring good things to life. (A)Throughout its history, each of GE’s eight CEOs had made major contributions to thedevelopment of the company and its culture. Each had had distinctively different backgrounds, afact that was considered by observers to be both remarkable and important to the company’scontinual revitalization over the years. Thomas Alva Edison, the great inventor, had given it a basisfor early growth through the invention and distribution of direct current (DC) electricity. Hisimmediate successor, Charles Coffin, had the foresight to conclude that GE’s major competitor,Westinghouse, had a better technology in the form of alternating current (AC) electricity, andchanged its strategy to adopt the superior technology.More recently, after a period of highly centralized management in the 1930s and 1940s, RalphCordiner led a move to a market- and product-focused decentralization and attendant growth of GE’sbusiness units in the 1950s, breaking the company down into profit-centered departments that, as hewould say, “were a size that a man could get his arms around.” In a little-recognized corollary moveas one means of bringing managers in the decentralized GE together, the company acquired a largeplot of land in Crotonville, New York, on which it constructed what was to become a model formanagement training facilities in the world. Cordiner’s approach not only grew the company, but itintroduced an important “go for it” attitude in management ranks, with the number of marketsegments in which GE competed increasing 20-fold under Cordiner’s leadership. However, itproduced a period of what came to be known as “profitless growth” with attendant lack of controland coordinated direction.Despite efforts by Fred Borch, who succeeded Cordiner as CEO in 1963, profitless growthcontinued. Borch’s GE Growth Council identified nine growth sectors in the U.S. economy anddecided to “beat the GNP” by solidifying GE’s position in all of them. By 1968 GE was widelydiversified, competing in 23 of the 26 two-digit SIC industry categories, and was decentralized into 10groups, 46 divisions, and over 190 departments. In an effort to try to understand and providesupport to such a wide array of businesses, large, functionally organized staff groups had beencreated at headquarters. As Reg Jones, Borch’s successor, put it, “Under the existing structure withfunctional staff units at the corporate level, business plans only received functional reviews. Theywere not given a business evaluation.”Realizing the problem, Borch commissioned a McKinsey study in 1969 which recommendedthat GE be organized into Strategic Business Units, a term first coined within GE in 1957, with each of35 or 40 SBUs reporting directly to the CEO. Instead of eliminating other organizational entities suchas groups, divisions, and departments, however, in an effort to avoid a total disruption of theorganization yet again, the SBU structure was superimposed over the existing structure. In addition,corporate staff units were split into those providing advice to the field and those responsible for longrange planning activities. At the same time, SBUs went about building their own staff supportgroups. Long-range planning received major emphasis under Borch, with the result that a “9-block”matrix built upon assessments of industry attractiveness and business unit position was developed tohelp management determine whether businesses should be built, held, or “harvested.” As a result ofthis, one of Borch’s major contributions, in the eyes of many, was his willingness to lead GE’s exitfrom the mainframe computer business in 1970, which played a pivotal role in legitimizingdivestitures. He had put in place strategic planning practices that had restored profitability to thegrowth that continue apace at GE under his successor. (See Exhibit 2 for trends in key financialmeasures.)By the time Reginald (Reg) Jones—a suave, English-born graduate in economics from theUniversity of Pennsylvania, who had begun his career at GE in 1939 as an auditor and controller andwho grew to become, in the eyes of many, the leading statesman among American businessmen inthe 1970s—assumed the reins from Fred Borch in 1973, 43 SBUs had been created. This created asevere burden on top management of having to review and intelligently respond to plans producedby SBUs. Worse, it was thought to contribute to a lack of integration and cohesiveness of plans beingundertaken by each. As a result, a new level of management, comprising five “sectors,” representing2This document is authorized for use only by Kathy Lynch in RBUS 401 – 2012 – Term A taught by Rick Marolt fromAugust 2012 to October 2012.For the exclusive use of K. LYNCHGE … We bring good things to life. (A)899-162“macrobusinesses” (consumer products and services, industrial products and components, powersystems, technical systems and materials, and international), was established. Over time, this led tothe company shifting the major sources of its earnings, for example, from power systems to technicalsystems and materials. Sensing a long-term need for sources of energy, Jones engineered a deal in1976 to acquire a large coking-coal producer, thereby moving GE into a sixth major endeavor. At thesame time, he spent a great deal of his time building and maintaining an effective dialogue betweenbusiness and government.Given his background and manner, Jones surprised many by recommending to the board ashis successor John F. (Jack) Welch, a bright (Ph.D.), scrappy, confrontational chemical engineer whohad made a mark as an operating manager in the Plastics Division, who was at the time senior vicepresident and sector executive for Consumer Products and Services, and who was thought by manyto be the antithesis of Reg Jones. (In a 1973 appraisal, it was agreed that Welch needed“improvement in handling socio-political relationships” and that he had a tendency to operate“outside the dots,” i.e., outside bureaucratic norms.)➂ One analysis of Welch’s management stylecompared to elements of Alfred Sloan’s classic concept of scientific management is presented inExhibit 3.Welch’s InheritanceOne of three finalists for the job of CEO, Jack Welch inherited in 1981 what was generallyregarded both externally and internally as a highly successful company. One of his first tasks was toreplace several of his competitors for the job who had left the company upon finding out that theywould not be selected. But more important, his first priority was to deal with the increasingbureaucracy, evidenced by the number of signatures required for approval of any substantialproposal, that he had experienced as an operating manager. The General Electric he saw wasovergrown, laden with too many layers of management and too many people duplicating work, withtoo little effective internal communication and coordination, with too many “losers” among itsmanagement ranks, and a company facing an uncertain future with competitors that could becomestronger than GE. Further, he felt that it was in too many businesses in which it was a relativelyminor player. In keeping with his nature, he felt that he and his team would have to act fast,decisively, and consistently in ways that would send a clear and simple message to an organizationof 412,000 employees. Thus began an era at GE in which its CEO would speak in short, endlesslyrepeated, and often memorable “sound bites” (albeit “sound bites” with a “bite”) in order to get hismessage across to the huge organization. (See Exhibit 4 for a selection of favorite Welch “messages.”)To many associates, this method of communication was sometimes regarded as the “message of themonth.” Over time, the cumulative effect of the messages, however, began to be felt.New InitiativesIn response to questions from security analysts about GE’s future strategy, Welchdownplayed the idea of an elaborately crafted strategy, saying, “What will enhance the manydecentralized plans and initiatives of this company isn’t a central strategy, but a central idea—asimple core concept that will guide General Electric in the eighties and govern our diverse plans andstrategies.”➂One element of this central idea would involve drawing three circles, based on analysessupplied by his staff, to describe the GE of the future. (In fact, by 1982 the corporate strategicplanning function would be disbanded in favor of planning groups in the respective businessesworking closely with managers responsible for profits.) They comprised groupings of businesses3This document is authorized for use only by Kathy Lynch in RBUS 401 – 2012 – Term A taught by Rick Marolt fromAugust 2012 to October 2012.For the exclusive use of K. LYNCH899-162GE … We bring good things to life. (A)that were #1 or #2 in their respective industries and were labeled core manufacturing, technologyintensive, and service businesses. (Exhibit 5 is a reproduction of the drawing.) The message wasclear to managers of the other businesses outside the circles: become #1 or #2 or get ready to leaveGE.#1 or #2; Fix, Close, or SellAmong the first important businesses sold under this policy were Utah International (cokingcoal production), consumer electronics, housewares, central air conditioning, and Family FinancialServices (a second mortgage issuer). At the same time, businesses that would reinforce existingpositions or create companies that were #1 or #2 in their industries were acquired. These includedthe purchase of Thorn-EMI’s medical equipment sales and service business, AMIC Corporation(mortgage insurance), Employers Reinsurance Corp., Borg-Warner Chemicals, and Roper(appliances); the trade of GE’s consumer electronics business to France’s Thomson-CGR in return forits medical-imaging unit; and the creation of several joint ventures designed to extend GE’s reach inexisting businesses beyond the United States. It also included the acquisition of RCA, by far thelargest in the company’s history, and one which was thought to provide the basis for establishing anew business in broadcasting (through RCA’s NBC subsidiary). Yet another acquisition thought tofit with the company’s strategy for financial services was the investment banking firm, KidderPeabody. (Clearly not #1 or #2 in its industry, this would prove to be what was generallyacknowledged as a mistake. After failing to turn it around, GE would sell it in 1994.)The concept of being #1 or #2 was not without its problems for GE’s management. Businessmanagers were beginning to define their markets narrowly so that their companies, by definition,dominated them. This had the potential effect of constraining new business opportunities rather thanbroadening them. One of the important tasks of the members of the Office of the CEO in reviewingplans became that of insuring that markets were being defined sufficiently broadly—a factor that wastaken into account in performance appraisal for the businesses.DownsizingConcurrent with “fixing, closing, or selling,” GE embarked on what was regarded internallyas an attack on bureaucracy but what later would be termed “downsizing.” As Reuben Gutoff,former head of the Chemicals Group, put it, “The enemies were not just outside competitors but theGE bureaucracy as well. We talked a lot about that—the bureaucracy-speak, the bureaucracy-babble.We had met the enemy, and it was us.”➀Acting on Welch’s belief, fostered under Gutoff, that “every layer is a bad layer. The worldis moving at such a pace that control has become a limitation. It slows you down,”➀ actions weretaken to eliminate organization layers and jobs contributing to the GE bureaucracy. Jobs involvingprimarily supervision, approvals, and controls were cut. Jobs producing information that was notabsolutely necessary were cut. The entire notion of “sectors,” representing a layer of management,was eliminated along with SBUs (strategic business units). Thirteen businesses replaced not only sixsectors but also the 27 businesses that existed in 1981, with each business head reporting to onemember of a four-member “Corporate Executive Office.” (Exhibit 6 contains comparativeorganization charts for GE in 1981 and 1992.) In all, between 1981 and 1985, GE’s employmentdropped from 412,000 to 299,000 while revenues increased by 19.7% and net income increased by37.8%. Corporate staff, regarded as the “police”—made up of professional nit-pickers and secondguessers on the strategic planning and finance staffs—took the biggest hit of all, with its ranksreduced by nearly 60%, including 80% of strategic planners.➂ The number of management levelsbetween the chairman and managers in the field was reduced from nine to from four to six.4This document is authorized for use only by Kathy Lynch in RBUS 401 – 2012 – Term A taught by Rick Marolt fromAugust 2012 to October 2012.For the exclusive use of K. LYNCHGE … We bring good things to life. (A)899-162Despite the care with which the company treated terminated employees, the combination ofdownsizing and fix, close, or sell by 1984 had damaged the morale of those remaining in the companyand earned Jack Welch the nickname “Neutron Jack” (leaving in his wake buildings but no people) inthe business press that he would regret and dispute for years to come. Pockets of antagonism towardhim began to form among some managers in the organization which were alleviated only partly byevidence that the idea seemed to be producing a leaner, stronger GE that was ready to step up itspace of growth, both internally and through acquisition. Nevertheless, the spirit of openness andcandor that was encouraged among executives in the “new GE” helped to diffuse some of the fearand bitterness among them. Noel Tichy, then head of GE’s training center at Crotonville, relates astory from this era: “Late one night in 1985, I happened upon one of the many breakout rooms there.In it was a group of young engineers and businesspeople, new hires to the company. Around thetable with sleeves rolled up and food wrappers and dirty plates littering the room, they werefeverishly debating two flip charts. One said, ‘Jack Welch is the greatest CEO GE has ever had.’ Theother said, ‘Jack Welch is an asshole.’“➃ Tichy didn’t say which flipchart was fullest.“The GE Engine”… Self-Confidence, Simplicity, and SpeedDuring the period from 1981 to 1985, several management concepts were articulated andconstantly emphasized by members of the Corporate Executive Office. They were all intended tobreak down the GE bureaucracy. Among them were the concepts of “ownership/entrepreneurship/stewardship/excellence” (greater delegation and greater ability to act at lower levels in theorganization); a greater emphasis on benchmarking performance against competitors as opposed tolast year’s performance; “reality, candor, and open communications” (seeing the world as it is ratherthan as one might wish it to be); and “integrated diversity” (in which ideas and resources would bemoved across and among businesses, best practices would be shared, and the success of the entirecompany would be the responsibility of its parts). Incentives and recognition were given tomanagers practicing each of these concepts.A combination of values and administrative processes came to make up The GE Engine, inwhich the office of the CEO allocated GE’s human, capital, and technical resources among thebusinesses for productivity, volume growth, or other opportunities. Each GE business, in turn, wasrewarded for earnings growth and/or cash flow. The businesses, in turn, were highly differentiatednot only in activities but also in policies by which activities were carried out. For example, each hadits own reward and compensation system.At the individual level, The Human Engine, the goal was to release creativity and feelings ofownership at every level. For example, an effort was undertaken to increase “ownership” among GEmanagers by enriching stock option programs and extending them from only the very top managersto eventually 27,000 employees. The key characteristics of The Human Engine were self-confidence,simplicity, and speed. The theory behind it was that self-confident people are able to be simple, notclutter the organization with bureaucracy, and hence create speed.➂ These qualities—along withothers such as the ability to face reality, honesty of communication, candor, and integrity, and theability to create and add value vs. controlling or focusing on personal power—which would later bearticulated in a values statement, were then used as a basis, along with business results, forevaluations of individual performance.Shared ValuesBy 1986, the top management of the company was ready to articulate the values that they hadshared in recent years. The Corporate Executive Council (CEC), comprising the 13 business headsand the senior corporate staff, assumed as one of its first tasks the articulation of shared values thatcould be communicated throughout the company. The eventual result of this effort, which wasrevisited from time to time and discussed by lower levels of management, was a set of statements5This document is authorized for use only by Kathy Lynch in RBUS 401 – 2012 – Term A taught by Rick Marolt fromAugust 2012 to October 2012.For the exclusive use of K. LYNCH899-162GE … We bring good things to life. (A)which later would be printed on a small card, shown in Exhibit 7, to be carried by GE executives. Inorder to emphasize the importance of these values, Jack Welch and other members of the corporateexecutive office began giving more emphasis to the values than to performance numbers in theirmeetings throughout the company. It was reflected too in the relatively short shrift given to thenumbers as opposed to what Welch termed the “soft stuff” in the letter to shareholders that hepersonally crafted early each year (showing it to colleagues only when he had completed severaldrafts) to appear in the company’s annual report, a letter that eventually would be circulated in morethan 1.3 million copies annually throughout the world. (Excerpts from the letter appearing in the1995 annual report are shown in Exhibit 8.)In order to drive home the importance of values, by 1987 managers were being evaluatedboth on their ability to meet goals and produce numbers and on their adherence to the values, asmeasured, among other things, by a 360-degree appraisal system. This was a first step toward aneventual categorization of managers into four types comprising those who did or did not meetnumbers and those who did or did not live the values. Those who met numbers and lived the valueswere rewarded handsomely. Those who did neither were dismissed. Those who couldn’t makenumbers but lived the values were given a second (or third or fourth) chance. Those who made thenumbers but didn’t live the values, however, presented the greatest challenge. Over time, themessage became clearer: They too would have to go.By the early 1990s, the evaluation of managers was simplified into a categorization of A, B,and C players. Again the message communicated to the organization became clear: “Don’t wastetime trying to develop C players into B players. Get rid of them (they will be happier somewhereelse) and concentrate on the development of A players.”BoundarylessnessBarriers to action were thought to be the enemy of many of the things GE’s leadership wastrying to achieve. These took many forms, including “not invented here” attitudes, the unwillingnessto coordinate plans and actions between functions, the need to “sign off” on a decision proposed bysomeone else, the need to supervise and control rather than allow employees latitude to makedecisions on their own, and even the lack of interest in becoming involved in community affairs. Theantidote to these barriers was something that came to be referred to by the somewhat awkward term“boundarylessness.” It was added to the list of shared values although it was closely related to otherdesired behaviors contained in the values statement.For example, in order to become“boundaryless,” a manager had to be candid, open, and self-confident. If it were achieved, simplicityand speed were results. The end result would be a significant improvement in productivity.The concept became a measure of individual performance. The biggest challenge for manyexecutives was the transition from commander and controller to coach and consultant that theconcept implied. Classes on boundarylessness were added to the curriculum at the CrotonvilleLeadership Development Center to facilitate the process. Steve Kerr, head of Crotonville, describedan example class “lesson”: “We teach that … you should ask, ‘What is keeping me from letting anysubordinate make that decision? … How often have I reversed a decision or approval?’ If the answeris seldom or never, why feel the need to sign off on it?”➀Other examples of the application of boundarylessness were the increasing levels ofcoordination between functions, businesses, and country organizations within GE; the involvementof suppliers and customers as participants in GE’s design and manufacturing processes; and the

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