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Alfred Sloan, move over.

How does Jack Welch pursue the goal of transforming GE into "the world's most competitive enterprise"? Relentlessly. Passionately.

There is perhaps no other contemporary business figure more celebrated than John F. Welch Jr., 57, who became General Electric's eighth and youngest CEO in 1981. Welch's energy and ideas, which have served as the plutonium core of GE's management reactor, transformed an institution most thought was already successful. Just as Alfred Sloan reshaped GM in the 1920s into the prototype command-and-control corporation, Welch is pushing for what he calls, somewhat inelegantly, the "boundaryless" organization. This is where the barriers of hierarchy, function, and even geography dissolve, where cross-functional teams are empowered to act quickly and in partnership with customers and suppliers. Sloan sought to reorganize control. Convinced that control "slows you down," Welch seeks to redefine how work is managed, and indeed to transcend what management itself means. Companies can't afford to tell employees what to do, he says. It takes too long. Instead, values are meant to guide people and, in turn, to drive the organization continually toward profitability and other benchmarks.

Welch's emphasis on "soft" values may seem strange coming from a fellow who once had the reputation of being one of America's toughest bosses. But the 5-foot-8-inch CEO with ice-blue eyes explains that this is not coddling but a question of competitive necessity. Besides, he argues, soft values are useless in fat organizations. This is why Welch spent the first five years of his chairmanship paring down the company by employing twin principles: Fix, close, or sell poorly performing operations, and become No. 1 or No. 2 in those that remain.

Welch's view of the future was not widely shared in the early 1980s. "The layers of bureaucracy were mind-boggling," observes former Citicorp Chairman Walter Wriston, who retired from GE's board after 31 years. Nor did Welch's impatience and occasional abrasiveness endear him to shell-shocked executives and line employees. Yet the passion for change persevered. So much of GE has been transformed under Welch that some, in hindsight, call the process a revolution. He sold $12 billion and bought $26 billion worth of businesses. At about $80 billion, GE's market value ranks in the top three among all U.S. public companies, up from 11th in 1981. In 1981, the GE work force worldwide was 412,000. Today, it's 229,000. Twelve years ago, only three business groups--lighting, motors, and power systems--were leaders in their markets. Only aircraft engines and plastics were truly global. Today 11 of the 12 business groups are first or second in their markets. (The sole laggard, NBC, recently slipped behind CBS and ABC in ratings). When Welch took over, each business had between 9 and 11 organizational layers, depending on the sector/business between the CEO and the line worker. A decade later, there were 4 to 6. Annual corporate productivity languished at no better than 2 percent in 1981, whereas it is now up to 4.5 percent. (GE reckons it saves about $350 million for every 1 percent of productivity TABULAR DATA OMITTED it achieves.) GE is a different company today and not just because 45 percent of its current U.S. employees signed on since Welch became CEO.

The central nervous system of "the new GE" is the Corporate Executive Council (CEC). Created by Welch in 1985, it consists of CEOs of each of GE's 12 business groups plus staff officers. This is where "integrated diversity," another Welchism, is practiced; useful ideas are meant to be shared and driven through the various operating units. Virtually all GE businesses have their own CECs patterned after the corporate one.

Welch also capitalized on GE's Ossining, NY, Crotonville training facility by creating Work-Out, a mechanism to eliminate unnecessary work, empower employees, and push the new values to the very foundations of the company. At first, the process proved harrowing for managers. But workers were liberated to speak frankly about problems and solutions. Some of the payoffs of Work-Out: Teams of hourly employees at the steam turbine plant in Schenectady, NY, revamped procedures at the steam turbine bucket machinery center, where they now run--without supervision--$20 million of new milling machines that they specified, tested, and approved. The cycle time for the operation dropped 80 percent. A team at a diesel engine plant in Grove City, PA, devised its own way to improve plant inventory turnover, increasing annual turns from 1.8 in 1989 to 12 in 1992.

There were mistakes. The $500 million invested in factory automation didn't succeed in its objectives. The Kidder, Peabody mess and the refrigerator-compressor disaster at the appliances division were also dark moments. And some, such as University of Michigan's C.K. Prahalad, fault Welch's outlook as one fixated on cost reduction. "GE doesn't grow new businesses very well," says the business school professor of corporate strategy. While the company is globally focused--$16 billion of its $62 billion 1992 revenues comes from offshore--it remains a U.S. company: Ninety percent of its managers are American.

Born in Peabody, MA, in 1935, Welch is the only child of John Francis and Grace Welch, who had a formidable influence on his life. A sharp student and hockey player, he earned degrees in chemical engineering from the University of Massachusetts and the University of Illinois. He joined GE in 1960 at its plastics unit in Pittsfield, MA, and moved up through chemicals, components, and consumer products, becoming SVP in 1977 and chairman in 1981. To say that he is quick-thinking is to say Michael Jordan can play basketball. "Jack has put GE into the Super Bowl of international companies," says PepsiCo Chief Wayne Calloway. "He's assembled one of the best teams around and raises the bar of excellence."

Dial Corp.'s John Teets reckons that by injecting a small company soul and speed into a big company, GE "stands as a model for American business," a model Andersen Consulting Managing Partner George Shaheen thinks many are trying to imitate.

"Some CEOs would like to try what he's doing but can't," says Don Frey, a former Bell & Howell CEO turned Northwestern professor. "Some don't even understand what he's doing."

EDS CEO Les Alberthal sums it up tersely: "We are entering the 21st century. He is a true leader." CE editor J.P. Donlon had his own "Work-Out" with Welch at GE's Fairfield, CT, headquarters.

AROUND THE WORLD

How do companies win in the 1990s?

Companies in the '90s will have global reach and global distribution where necessary--and will have a work force and organization centered around productivity goals. An organization's center of gravity will not necessarily be the U.S., but rather where the action is around the globe, regardless of traditional boundaries.

You've increased productivity dramatically. Is there a ceiling or at least a point of diminishing returns on investments geared to improve it?

Productivity improvement is infinite. It is a product of ideas. At GE, our productivity is increasing; our speed is increasing; and our involvement with our employees is increasing. People used to think of productivity as taking out things. I like to think of it as putting in ideas, getting more output for less input because you're able to get ideas faster.

What are some of these ideas?

We now have new quick-response programs to accelerate our order to remittance cycles. Where it used to take 14 weeks to get an order, make the product, and then sell it, in some businesses we've cut the process in half, and in others, we've cut it by a factor of four. Our objective in some of our businesses is to get the order one day, make it the next, and ship it the next. Shorter cycles and faster response times tie up less assets and allow us to be more responsive to the customer.

What new technologies do you see GE advancing in the next several years?

Generally speaking, we're trying to take existing technologies to new limits rather than developing new ones. For example, we are experimenting with new firing temperatures in turbines, higher-thrust jet engines, and faster cycling machines.

We just put together one of our newest aircraft engines, a GE-90, in record time, partly because of advanced computer-design techniques. Partners from Italy, France, and Japan and a customer from Britain gathered around a coffeepot in Cincinnati and put it all together. This is an example of boundaryless behavior.

RACE TO SUCCEED

Having refashioned GE over 10 years, what would you do differently?

I would have done it all faster, and I would not have worried so much about resisters to change. I would have taken the best of the resisters and given them operating jobs. I would have challenged them to run businesses rather than to be the ones doing the running.

How do you deal with managers who meet your financial objectives but do so without absorbing GE values?

Today, GE manages by certain values--not by numbers. Everyone knows these values--relish change, advocate boundaryless behavior, etc. You can quiz our people on them, and 80 percent of them will pass.

Everybody in each of GE's 12 businesses participates in the management and evaluation of people. We have a 360 |degrees~ Leadership Assessment form that rates what the manager says about the person, what the peers say about the person, and what the subordinates say about the person. The rating system is on a scale of 1 to 5, with 5 being outstanding. Every person is evaluated in this way.

So, when I go into what we call a Session C in each business, we'll target Mr. Y or Miss X. And we'll look at the values sheet. People are removed for having the wrong values. Integrity violations clearly are the worst ones. We don't talk about what the numbers are.

If such an assessment is the stick, what is the carrot--what makes people adhere to GE's management system?

Organizations define both acceptable behavior and rewards. If the norm is to be open, to be caring, to reach for ideas from everywhere--as it is at GE--somebody who is turf-oriented and holds ideas close to the vest ends up looking silly and is repelled by his peers.

IDEAS FACTORY

A few years ago, GE's appliances division got itself into a problem, and other units came to its assistance. But how do you institutionalize that helping-out process?

Communication is key. We have a unit called the Corporate Executive Council. The heads of all the businesses and the key staff meet quarterly for two days. The principal thrust of the meeting is to exchange ideas. We'll discuss market intelligence, for example, or sales force effectiveness.

We also bring in outside people. We've had David Glass of Wal-Mart there. We've had Wayne Calloway of PepsiCo there. We've had Marvin Mann of Lexmark International there to tell us what's it like to be a spin-off from IBM. Nobody gets in there and drones on and on about his own business; if he does, he quickly gets the hook.

Meanwhile, rank-and-file employees are perhaps the most important source of innovation. Gary Reiner, vice president of GE's Corporate Business Development, told me that 90 percent of new ideas come from that group.

The CEC has surpassed expectations--far beyond what we hoped. We no longer have people reporting on what people are doing. Instead, we have people who are doing a job, reporting on what they are doing. It's made an enormous difference.

Our individual businesses now have their own CECs. Instead of having the manufacturing people and the engineering people and the marketing people show up at a meeting, they bring their staffs. So we don't have the filter of a functional leader in a $7 billion dollar business having a meeting with his staff, talking about what happened.

Years ago, if one division head called another for help, the guy receiving the call might have said to himself: "Those jerks. They always cause problems. Why are they taking my resources?" But now things are different. Managers see the big picture.

You had some difficulty getting employees to verbalize their ideas. What opened the floodgates?

We used a process called Work-Out, a town meeting of sorts, led by an outside facilitator. The business leader comes in, outlines his plans, then lets people have their say.

LOUSY BUSINESS

When you sold consumer electronics to Thomson CSF, GE did very well. But isn't that business at the heart of interactive technologies that likely will provide lucrative opportunities in the 21st century?

The major players in consumer electronics have encountered tough going of late. In contrast, GE offers investors consistency--strong, steady growth. That's why our market cap is so high. We're a safe haven. Besides, we can get any display devices we need. We can get any components we need to fit our medical equipment business, our aerospace business, our engine control business. We have five suppliers supplying us.

I don't think there's a lot of money to be made in consumer electronics. It's a highly competitive business with low margins. We were fourth or fifth in that game, and we didn't have the resources, so the business was never more than break-even, and in many cases it lost money. Consumer electronics is cyclical as hell. Why would I want to be in a massively cyclical business?

I used to wake up in the morning and see that the business was down $40 million. During the Christmas season, prices were terrible. It's a lousy business. Consumer electronics doesn't fit our investment profile. I like to be in businesses where financial strength, market reach, and muscle are necessary.

Any regrets about having acquired NBC, particularly in light of the fact that the networks continue to cough up market share to cable?

The network business acts as a counterbalance to more cyclical manufacturing businesses. Besides, my cash flow at NBC this year will be over $300 million. That cash flow allows us to pursue expansion and investment in other areas. It's interesting that people continue to write about "beleaguered NBC."

COMPETITIVE CEOs

Olivetti Chairman Carlo de Benedetti reportedly once said to you, "Jack, give me the best CEOs in the U.S., and I'll line up the best six CEOs in Europe, and globally, we'll have you for lunch." If that challenge were posed today, how would you respond?

I think American business today is more competitive than it's ever been. American CEOs are better than they've been, and I've watched them for 12 years.

Most of our competitors are European. I tell my businesses, "Here's what somebody's saying about us. We have to get better, faster because our competition is getting better, faster." It's a rallying cry.

GE claims to be a global company, but only about 21 percent of its employees are employed outside the U.S., while IBM has close to 40 percent, and Ford has 49 percent. Isn't that a handicap?

Our sales are growing outside the U.S. at 15 percent a year, and 1 percent to 2 percent a year in the U.S. over the last three years. So we have moved our resources and our people into the world. For example, 17 percent of our top 500 people are in Asia. Five years ago, that number was probably 2 percent or 3 percent. In addition, we've been investing heavily outside the U.S. and have taken some operating profit hits to expand our global position.

QUESTION OF ETHICS

You've said corporations must be held to a strict ethical code. Merck CEO Roy Vagelos and Columbia Graduate Business School Executive-in-Residence Bob Lear told me a story related to this topic, the outcome of which left you rather stunned.

Yes. A professor gave a hypothetical case to his business school students. He said, "If you were running a business for a larger company and were about to book a $50 million order, but to do so, you had to deposit $1 million in a Swiss bank account to an agent, would you do it?"

Approximately 40 percent to 50 percent said they would. I was shocked! Shocked! I told the students someone was teaching them the wrong things. This was not one of those cases where you had to interpret the law; this was a simple bribery case.

Yet, GE, too, periodically confronts scandals. How do you work to maintain high standards?

We hold sessions in which management talks about any problems it's had and what it's doing about them in terms of education and other initiatives.

By way of background, most of GE's problems arose in the aerospace business, in the days when government regulations went wild. That was when the timecard scandal broke. Another bad apple turned up in a situation in which a GE employee was in cahoots with a customer. There always will be exceptions to the rule. All the policies in the world aren't going to solve these types of situations.

CRACKING THE WHIP

Your management persona seems to have changed from confrontative to warm and fuzzy. Why?

The business press makes too much of this supposed change. The fact is we continue to have constructive conflict around this table every day. We are, however, engaging more people.

My reputation for harshness is also overblown. From the beginning, it was stamped into my forehead. Though to a certain extent, it's understandable. I made changes that upset people's lives. They'd like somebody to blame.

At one point, early in the first year of your career at GE, you almost left. What turned you against your employer?

Structure. I had done a good job, and GE gave me a raise, but the company made it clear to me that everybody--performers and non-performers alike--got the same amount.

Now GE has more merit-based programs and incentives. We used to have 300 employees with stock options. Today, that number is 13,000.

BAR NONE

What do chief executives have to get right if they want to revise and restructure their businesses?

The question should be, "What ingredient do you think people need to win?" My answer would be they need to clearly articulate a vision and the rationale for that vision and to find the mechanisms to engage everybody in achieving it. That may sound overly simple, but it's not easy.

In our company, we have tried to emphasize and measure certain values. Most important, we want people to recognize that reaching for an idea allows them to put the achievement bar higher. With the bar set high, you stretch. You have a headset that says the ultimate attainment is 10. When we get to 10, it will be 15.

But isn't there a danger of setting the bar too high, too early?

Not as long as you don't punish people for not attaining the goal right away. If the road to the 10 involves excess punishment, you have killed the motivation. The big trick is to reward progress and not punish for missing the mark.

DOCUMENTS TO LIVE BY

GE Management Values

GE Leaders--Always With Unyielding Integrity:

* Create a Clear, Simple, Reality-Based, Customer-Focused Vision and Are Able to Communicate It Straightforwardly to All Constituencies.

* Reach--Set Aggressive Targets ... Understand Accountability and Commitment and Are Decisive.

* Have a passion for Excellence ... Hate Bureaucracy and All the Nonsense That Comes With It.

* Have the Self-Confidence to Empower Others and Behave in a Boundaryless Fashion ... Believe in and Are Committed to Work-Out as a Means of Empowerment ... Are Open to Ideas From Anywhere.

* Have, or Have the Capacity to Develop, Global Brains and Global Sensitivity, and Are Comfortable Building Diverse Global Teams.

* Stimulate and Relish Change ... Are Not Frightened or Paralyzed by It ... See Change as Opportunity, Not a Threat.

* Have Enormous Energy and the Ability to Energize and Invigorate Others ... Understand Speed as a Competitive Advantage and See the Total Organizational Benefits That Can Be Derived From a Focus on Speed.
COPYRIGHT 1993 Chief Executive Publishing
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Copyright 1993, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

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Title Annotation:Chief Executive of the Year; CEO John F. Welch Jr. reorganizes General Electric Co.
Author:Donlon, J.P.
Publication:Chief Executive (U.S.)
Article Type:Cover Story
Date:Jul 1, 1993
Words:3317
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