Posted on 04/09/2007 5:36:58 AM PDT by grey_whiskers
One of the most influential CEOs of recent memory has been Jack Welch. He first gained fame as the hard-driving CEO of General Electric, and his fame at that time was due to several rules which he implemented. First, GE was to be either first or second in every industry in which it had an interest. Second, GE insisted that the bottom 10% of all performers every year be culled from the company. While this had the immediate effect of increasing the performance, and a longer-term effect of forcing everyone to scamper like frightened rabbits, lest they be perceived or chosen as underperforming. Alas, it was to no avail. “Neutron” Jack earned his sobriquet by mercilessly cutting headcount by the entire division. His own take on it was instructive: “I didn’t give them lifetime employment, I gave them lifetime employability.” Well, on paper he did. Just like he gave his first wife “lifetime marriageability” (one might say). Because those were only the first of the changes instituted. Jack Welch was also a pioneer in two or three other long-running management fads. One of which has run its course, and is being supplanted even at GE; one is still in its flower, and the other one of which has lost its bloom. Let us look at each of these individually.
The first management fad was “six sigma” named after the statistical term sigma, the measure of one standard deviation. The idea that six sigma is the measure of a very rare event, one that happens (assuming a normal distribution) approximately 3.4 times per million events. This is management speak for getting processes down to a T, to eliminate defects and rework. Granted, the fad did not start at GE, but at Motorola. But Jack Welch is credited with evangelizing for it. Six sigma is very good when you have a well-defined process, but the problem is that it tends to lend itself to things which are readily quantified, and that it tends (by its nature) to discourage risk-taking. It is instructive that the new CEO of GE has turned away from six sigma to focus on innovation and “out of the box” thinking. I believe there are business and historically related reasons for this, which I shall touch on later.
The second management fad, which is still in its glory, is outsourcing; and more specifically offshoring. Jack Welch continues to be an evangelist for this practice, on the theory that one can get workers of equal quality to those in the United States or Western Europe, from Second- or Third-world countries, at much lower cost. This turns out to be true to a limited extent: there is a shortage of well-trained, English-speaking, adaptable people in the Third World. And this is no surprise: one of the reasons the Third World is and remains the Third World is not just that they have no money, it is that they do not create much new wealth. Which is tantamount to saying they don’t have many successful businesses. And successful businesses are necessary to train and to groom employees who are attractive to other successful businesses. GE in fact had “the pick of the lot” when it began outsourcing; and now the field is getting rather crowded, with other US-based giants such as IBM, Cisco, Accenture, Hewlett-Packard and Dell (to name a few) coming in. GE had a novel response, which again, I shall touch on later, as I believe it also indicates GE’s ongoing strategy.
The last management fad, which is now mercifully dying a long overdue death, is the concept of the CEO as cult-leader. Think first of the ‘walk on water’ reputation of Jack Welch among other business leaders, and the enormous compensation packages which CEOs commanded upon a time; coupled with the even more staggering severance packages. (Dick Grasso was awarded $140 million in a single year; the excesses at Enron, MCI/WorldCom and Tyco became legendary; Carly Fiorina ran two major corporations into the ground and was awarded tens of millions in severance pay; Michael Ovitz was awarded close to $140 million after being a CEO for merely fourteen months.) Things are beginning to change, however. Even though Robert Nardelli (a Jack Welch protégé, interestingly enough) delivered increased profitability to Home Depot, the stock price languished, and he was removed—though at a cost to shareholders of $240 million. The CEO of Dell has been replaced by its founder, Michael Dell, after that company hit a rough patch; the CEO of Delta airlines has agreed to forego his bonus in favor of bonuses for employees; and the co-founders of Google have agreed to accept $1 / year in salary. (Although, to be fair, given the stock appreciation, the stockholders probably could afford a little more). Another Jack Welch protégé, W. James McNerney, was such an outstanding success as CEO of 3M that he left that company to head up Boeing. (He timed the cycle of the aviation giant very well, and managed to arrive just in time for Airbus to shoot itself in the foot, reload, and empty another clip into its other foot.) And as for Jack Welch himself? He had been all set to receive $2 million annually, for life, in addition to numerous other perks; but having the details disclosed to the public during his divorce put the kibosh on that. (One does question what the ongoing business value to GE was to pay him $2 million a year—when so many companies are cutting back or even reneging on defined-benefit pensions to ordinary workers “to save money”…)
So what do all of these items have to do with GE's ongoing strategy? I think the answer is the idea of “disruptive change” coupled with the idea of “maturing markets.” That is, when an industry is mature, everything is going along smoothly, people, products, and processes become commoditized, and it is hard to increase profits by increasing market share. However, when there is a new market, it is much easier get the high profits which accrue when there is little competition, and then to establish oneself as a dominant player as the industry matures. Once the industry is mature, companies which can streamline their processes have a short-term boost, but once again, growth will slow down, requiring a new “disruptive change” in order to create new markets or new competitive advantages. The six sigma was a change in efficiency in order to squeeze more money out of existing processes, though with loss of flexibility; outsourcing was a disruptive change to lower costs and to open new markets for GE; the divine CEO was a disruptive change in order to increase the pay of C-level executives generally.
Now that all the advantages which can be wrung from present conditions in general have been exploited, it is time to cast aside the old paradigms, while other companies are still adopting them, in order to create disruptive change; and to open new changes which have not been seen before. And that is what GE is engaged in. Here’s the game: enter an unknown space, and talk it up to make money, leveraging the prestige of GE to the maximum extent possible in order to lend credibility to the proceedings. Then, when the field is crowded, and the value of GE’s holdings in an area are maximized, sell the holdings and change the paradigm. This will make a lot of money, and open a new space—which GE will then be the dominant player in, thereby reinforcing their reputation as thought leaders. It is a sophisticated business-space analogy to the pink sheet stocks’ “pump and dump.” The paradigms which are in the process of being dumped include the “six sigma” in favor of “outside the box” thinking : recall the slogan “imagination at work”. And of course, outsourcing is to be reduced: GE has sold large interests in some of its offshoring subsidiaries. (The role of CEO as god is still being retained, for some reason.) So the question is, what are the new areas that GE is proposing to get into now?
What are the new changes? I see two of them. One of them is the whole idea of “green engineering” and “environmentally responsible industry”. “Ecomagination at work” or some such nonsense. If this were really true of GE, the first thing they would do would be to pull back as much manufacturing as possible from China, which has an environmental record bad enough to make Eastern Europe blush; and which also takes approximately five times as much oil for a single unit of GDP output as does the United States. It would be interesting, by the way, to see (since NBC is a unit of GE), how much of the programming oriented towards environmental topics came from NBC, or was decided upon in GE boardrooms. It is interesting, by the way, how there is so much sudden emphasis on “global warming”, just at the time GE is showcasing wind turbine energy, nuclear power (in China), and fuel efficient jet engines. How…convenient! The second one is an area not too widely considered in the United States, but which is getting much more important in China and India. Water. China is facing major water pollution; even Coca-Cola is in trouble in India on charges of polluting the drinking water; and the World Health Organization laments the shortages of potable water. Time for GE to use its ecomagination at work and save the world again—for a price, of course!
I’ve never been a big fan of Jack Welch, nor GE. Not to say they aren’t really smart and good at what they do, but suffice to say they are not people orientated at all, and seem to be somewhat anti-family. All one needs to do is look at the various heads of their differing divisions to see what kind of folks are running that company.
As someone who markets LTC insurance I’m always amazed when someone has bought GE (now called Genworth).
Today GE/Genworth is almost always in the top 7 but seldom in the top 3.
Apparently, some people don’t mind paying more for a ‘brand name’.
The first management fad was "six sigma" named after the statistical term sigma, the measure of one standard deviation. The idea that six sigma is the measure of a very rare event, one that happens (assuming a normal distribution) approximately 3.4 times per million events. This is management speak for getting processes down to a T, to eliminate defects and rework.A repair guy I know told me he wouldn't recommend a GE appliance to his ex-mother-in-law.
No cheers, unfortunately! A great column though.
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