Jack Welch and His Creative Revolution: Increasing of Psychological Pressure on the Employees - Case Study Example

 Jack Welch, the revolutionary entrepreneur, was Irish by descent and has a humble family background. His father was a conductor by profession and worked on the Boston and Maine commuter railroad. All his life he punched or sold the tickets and could not get a promotion. At the time of Jack’s birth, in the year 1935, most of the Boston ruling class was WASP (White Anglo Saxon Protestants). Jack, who was Catholic and Irish, looked up to the ruling class envyingly and admiringly. He was perhaps a little hostile too. In 1922, Ireland had gained independence from England’s repressive rule. (Pier A. Abetti, 2006) Welch was able to get Ph.D.in engineering in 3 years only. His strong technical background attracted leading companies of the time. General Electric, which was known to be the most progressive and technologically advanced company of the time, recruited him and hence started the making of a revolutionary. As is the case with the majority of potential entrepreneurs, Welch did not unleash his enterprises until he was provoked by a precipitating event. This event, typically, is a negative one; for instance, boredom, being dismissed unjustly, and lack of recognition. It has also been observed that most of the revolutionaries initially try to work within the existing system. They try to modify the existing system persuasively and in a friendly manner. They continue to do so until they are convinced that a revolution is needed. (Pier A. Abetti, 2006) Initially, Welch was hired in the GE’s Plastic Division. This was not a part of GE’s core electrical business. Welch was given charge of the power plant and was made responsible for the development of a new product. He worked very hard in the first year and his hard work paid off in form of extraordinary results. In return, Welch was anticipating a promotion and a financial compensation, as per the agreement at the time of recruitment. Welch was shocked when his supervisor, a bureaucrat, gave only a minimal raise. The supervisor was not appreciative of Welch’s enthusiasm. Welch was not satisfied for obvious reasons and hence decided to quit working for GE and search for more rewarding jobs. However, luckily for GE, Welch’s talent was considered by a vice president who did not let him quit. The Vice President promised Welch an outstanding career and also offered a substantial raise in order to convince Welch to stay at GE. (Pier A. Abetti, 2006) Welch was smart enough to see this as a chance to revolutionize the existing system at GE and make it the greatest company in the whole world. However, implementation of his plans required him to be in a position of power. He had to become the CEO of GE somehow. The first step towards achieving this goal was to get recognition while working in the system. He was recognized for his polished presentations, extreme hard work, and detailed analyses. But most importantly, Welch was noticed for producing extraordinary business results. (Pier A. Abetti, 2006) Despite of the fact that Welch was never comfortable in the highly sanitized and politicized environment at GE, he was able to rise through higher ranks. The apparently friendly atmosphere at the headquarters was actually very bureaucratic. Welch was able to exploit the bureaucratic procedures and policies to his own good. Although, Welch was not included in the 10 people who were listed as the possible CEO after the retirement of CEO Reginald Jones in 1975, Jones had confidence in Welch. The senior vice president of the human resource department thought that Welch was not very respectful of the GE’s traditions and rituals. He also thought that Welch worked way too hard to acquire the desired results. (Pier A. Abetti, 2006) Jones was annoyed by the slow progress of the company and bureaucratic ways. He wanted a CEO who had the potential to take charge and make things better for the good. On his insistence, Welch was listed as the 11th candidate in the list of potential CEO of GE to succeed Jones. Jones conducted the ‘airplane interview’ to select the final candidate. He asked each one of them the same question. The format of the interview was: ‘You and I are flying in a company plane. The plane crashes and we both die. Who should be the next CEO of GE?’ This format was set so that the candidate’s views about the other contenders could be assessed and also to determine if they would be able to work in collaboration after Jones’ retirement. Welch, however, followed his own agenda by conveniently dismissing that he was supposedly dead and proposed his own self as the next CEO! (Pier A. Abetti, 2006) Jones had short listed the candidates to three only, who were made the vice-chairmen. This was their final chance of proving themselves as the most suited candidate for the position of the CEO. Finally, on April 1 1981, Welch became the CEO of General Electric. He had succeeding in acquiring power, though limited, by working in the traditional system. In a short period of time, he was able to create a small group of young people who had the same vision as he did. This was a group of aggressive people who were not only loyal to GE, but also to Welch. (Pier A. Abetti, 2006) In order to take complete charge, Welch seized some of the neural centers that were the ‘brain’ of the company. He first planned and using power at these centers and then gradually spread to the entire constituency. Following this plan, he began from the headquarters by firing the self-satisfied bureaucrats who were resistant but inactive. Out of a total of 200,167 were eliminated by Welch, while 67 were hired from his own group of loyal people. (Pier A. Abetti, 2006) Welch’s farsightedness helped in realizing that a recession was soon to set in and he was acting accordingly. He aimed at cutting down the GE expenses in order to face the two big challenges of the recession and the increased competition on an international level. Focusing on his idea of ‘mean and lean’ GE, Welch fired 80,000 workers in the first year. In the next two years, 42,000 more workers were laid off. Welch targeted the employees who were expensive for the business. These were old employees who did not welcome change very easily. (Pier A. Abetti, 2006) This was a problematic step as the GE had a long-standing policy of not laying off the employees who had worked for over 25 years on the basis of lack of work. Welch understood very well that canceling this policy was going to have negative repercussions on the prices and among the stakeholders. The press was also anticipated to be critical of this step. Henceforth, Welch only added ‘when appropriate’ to the GE policy. The ‘appropriateness’ was never challenged! (Pier A. Abetti, 2006) Welch was not satisfied just by breaking down the bureaucratic infrastructure of GE. He simultaneously tried to modify the modus operandi at the field, as well as the headquarters. The plans for each of GE’s 65 strategic business units (SBUs) were being prepared and reviewed from January to May. These plans were inclusive of detailed forecasts for the coming five years. Staff headquarters were to grade and check these plans. Moreover, they prepared irrelevant and difficult queries to put forward to the top executives and the CEO at the formal review which was to take place in July. These reviews, however, were prepared and rehearsed in detail so that any unpleasant surprises were prevented. Welch decided to change this and instead asked questions himself. (Pier A. Abetti, 2006) The formal presentations were now conducted in a different way. An event that was formerly attended by more than 40 people, now only required 10 people who could discuss the business and its problems in an informal way. Putting an end to the dog and pony show, Welch preferred leading over approving and reviewing. He was not concerned with the books but instead focused on the minds of the business leaders. He not only focused on their heads, but also their heart. He tried to see how passionate people were about their work. Their passion was assessed on the basis of the heart and soul they poured into their discussions. After dismantling the bureaucratic system and dismissing a massive number of people, Welch was all set to start a revolution. (Pier A. Abetti, 2006) Welch’s creative revolution is often regarded as ‘the three waves’. A revolution, by definition, aims at destroying a regime that fails to satisfy the majority of population, incase of business it implies the majority of stakeholders. A new order is to replace the old regime which would come up to the expectations and satisfy the majority. Welch was able to revolutionize GE in 20 years. As the revolutionary fervor, like all other things, comes to an end eventually, Welch planned his revolution in separate waves. People get exhausted and want to feel relax by enjoying the rewards of their hard work. For a progressive system, a cycle must continue. People need to be pushed through periodic waves so that they can be energized time to time. (Pier A. Abetti, 2006) The first wave of the revolution started off in 1981 when Welch focused on creation of a strategy and a vision that would drive acquisitions, reorganization, divestments, and mass dismissals. This wave was ‘hard’. The second wave began in 1985 when GE was being revolutionized such that it was strong how a big company should be. However, agility and leanness like that of a small company was maintained. This was the ‘soft’ wave. The third wave, starting in 1996, was both, soft and hard. In the third wave, the focus was on becoming a total quality company that does not compromise on anything below A-players. Development of a stretched, well integrated, and boundary less company was the main objective. (Pier A. Abetti, 2006) These waves are characterized as soft or hard, depending on the means that were used by Welch. Hard waves mean that employees’ lives have been physically disrupted by major changes in the organization, dismissals, acquisitions, and divestments. Soft waves concern the habits and the minds of the employees. This is when employees are to adjust to the new working practices and ways of operation. The physical disruption is minimized but those are not able to adjust in the new environment are made to leave the company. (Pier A. Abetti, 2006) The period between 1981 and 1984 is that of the first wave. After conquering the headquarters, Welch was all set to acquire the field as well. This also meant conquering the minds of workers, managers, and the staff. To achieve this target, first time in the history of GE, a unified strategy and vision was developed for the whole company. This was based on the acclaimed three-circle concept. According to this concept, all of the GE’s businesses had to fit any of the three classifications of businesses. (Pier A. Abetti, 2006) The three classifications were: 1. Core business; for instance the Power Generation Appliances. The business had balanced returns and was regulated as cash cows with selective investments. 2. High-tech businesses; for instance Aircraft Engines, Medical Systems, and Plastics. These had high investment ration, whereas the cash flow was negative and the growth rate was high. 3. Services; for instance GE Capital, Information Services, and NBC. These businesses have low investments and cash generation. The growth rate and returns are high. (Pier A. Abetti, 2006) Each of the GE businesses was evaluated and if it held the first or second place in the industry, it was placed in one of the three circles. The businesses that did not have the first or second place were allowed two years to get there. If they failed to achieve the first or second position in the industry, the business was either sold or shut down. Welch was very clear about his message to the employees. A lot of Jack Welch quotes also exhibit his standards. One of them goes like, “If you don’t have a competitive advantage, don’t compete.” (Pier A. Abetti, 2006 and Brainy Quote, not dated) GE’s 65 SBUs were grouped together to form 13 businesses that were under his direct supervision. Welch never hesitated to convey his message to the field through both, formal and informal meetings, with workers of all ranks. Welch could relate to the blue-collar workers because of his origins. He used to consider their ideas and advices about enhancing the efficiency level of the business. Welch also made sure that he visited the GE executive training center, which was located in Crotonville, N.Y., at regular intervals. He did so to have informal meetings with the employees who were to be the future general managers of the GE. He also gave lectures to guide and train them. Most of the complaints that were received from the employees were regarding delays in getting the decisions or approvals from the superiors and about the prevalent bureaucracy. (Pier A. Abetti, 2006) The second wave ranged from 1985 to 1995. After succeeding in achieving outstanding financial results, Welch was concerned about maintenance of the growth rate. Henceforth, he came up with a reorganization plan, whereby the capability and motivation would continue to increase. The first thing he did was the flattening the corporate pyramid to four levels from eight. The staff was reduced and its role was also modified. It was now responsible for coaching and assisting instead of revising and controlling. A new rewarding system had been instituted. This system was largely based on the performance bonuses instead of increased stock options or salaries. Welch also put an end to the employment security. This meant that GE could fire anyone whenever it wanted to, irrespective of merit or the duration of service. Moreover, if the employees could find a better job elsewhere, they could also leave anytime, without being considered disloyal. (Pier A. Abetti, 2006) After the first wave, GE generated cash in abundance. A proportion of this cash was paid to the stakeholders. However, most of it was reinvested in form of capital investments, R&D, and acquisitions. This generated even more cash for the company. This concept, called the ‘GE growth engine’ was hence conceived by Welch. The second wave took the efficiency to new levels with modern organizational structure, increased motivation of the employees and decreased bureaucracy. Employee motivation was driven with tangible incentives and enabled GE to achieve enhanced financial outcomes. (Pier A. Abetti, 2006) As the GE’s success was attributed more to Welch as a person, rather than the new system at GE, it was important to prevent the growth rate and profits from slowing down after Welch’s retirement. Therefore, in the third wave, he worked on creating an emotional climate at GE, a new set of values, and a new GE culture that would not only transcend him as a person but also his organizational reforms and strategies. (Pier A. Abetti, 2006) This third wave is characterized as both, soft and hard. On the soft side it includes different slogans such as, ‘candor, openness, ownership’, ‘evangelizing’, ‘speed, simplicity, and self-confidence’, and ‘integrated diversity’. On the hard side is the six sigma or total quality initiative, which brought about substantial results. The six sigma culture promoted the concept that no one would be promoted unless he/she was a team leader. Welch took the same steps for e-commerce and digitization. All of the GE managers were to find a mentor who could educate them about accessing the Internet and using it. (Pier A. Abetti, 2006) Selection of the A-players was by far the most significant part of third wave. Welch was much concerned as it was about the selection of future GE leaders. Welch was greatly influenced by the German strategies in the World War I in this respect. His attitude hardened as the time of retirement started approaching. He had started setting targets that were practically unattainable. He had also become very impatient about any disagreements and was being over-demanding. When other companies were satisfied with a 10% to 11% increase in the annual operating margins, Welch pushed for a 50% increase. He also insisted that inventory turns be doubled. Trying to attain the set goals resulted in ‘fixing the books’ or exhaustion. The fear of not being able to achieve the goals came with the loss of morale and the fear of penalties. Welch wanted the GE employees to conform. (Pier A. Abetti, 2006) Welch came up with four categories of potential leaders. They are listed and described below: 1. Achievers and believers; who are the obvious pick but they are scarce. 2. Believers and Non-achievers; are the ones that are trained and motivated so that they can achieve as well.. 3. Non-achievers and non-believers; who are good for nothing and should not be recruited. 4. Achievers and non-believers; who are problematic because it is hard to manage them. They should be get rid of. (Pier A. Abetti, 2006) To sum it up, Welch’s first revolutionary wave was about what people did and the modification of the GE’s physical infrastructure. The second wave focused on how people operated and reorganization. While in the third and final wave, he altered the culture at GE and also influenced what and how people think. It is important to note that employees became potentially more prone to resentment and resistance as one wave came after the other. The psychological pressure on the employees was also increasing. (Pier A. Abetti, 2006) GE, which is known today for its boundary less organization and peculiar learning culture, is counted as one of the most admired companies all over the globe. In Jack Welch, we see a very dramatic personification of corporate leadership as he led GE from one earning and revenue record to the other. Welch has set a new modern paradigm for the corporate world. (Business Week, 1998) References Jack:straight from the gut, 2001 Jack Welch and the 4E's of leadership. Get better or get beaten. Jack Welch and the GE way. Pier A. Abetti, Case Study: Jack Welch’s Creative Revolutionary Transformation of General Electric and the Thermidorean Reaction (1981-2004), 2006 Vadim Kotelnikov, 25 Lessons from Jack Welch, not dated, < http://www.1000ventures.com/business_guide/mgmt_new-model_25lessons-welch.html>, Accessed on October 6, 2009 Brainy Quote, Jack Welch Quotes, not dated, < http://www.brainyquote.com/quotes/authors/j/jack_welch.html>, Accessed on October 6, 2009 David Cummings, Jack Welch on the Four Types of Employees, not dated, < http://davidcummings.org/2008/11/08/jack-welch-on-the-four-types-of-employees/>, Accessed on October 6, 2009 Business Week, How Jack Welch runs GE, 1998, < http://www.businessweek.com/1998/23/b3581001.htm>, Accessed on October 6, 2009 ICMR, Case Study: GE and Jack Welch, 2002, < http://www.icmrindia.org/casestudies/catalogue/Leadership%20and%20Entrepreneurship/LDEN002.htm>, Accessed on October 6, 2009 Business and Management Case Studies Blog, GE and Jack Welch Leadership Case Study, October 28, 2005, < http://management-case-studies.blogspot.com/2005/10/ge-and-jack-welch-leadersh_113049808449837598.html>, Accessed on October 6, 2009 Read More