When it was announced Jack Welch would be taking over as head of General Electric, skeptics wondered how much of a difference the new CEO could make in a company that was huge, profitable and more than 100 years old. To the surprise of many experts who repeatedly said GE was too large to be a growth stock and only worth investing in for the dividend, Welch pushed the company to double-digit growth during his two decades at the helm.
The story of Jack Welch has become the stuff of management legend, from his harsh treatment by the media for downsizing to his emphasis on people and corporate culture. Under Welch, GE exited many of the traditional markets it had competed in for years, like consumer appliances and air conditioning, and entered completely new areas, including medical technology, finance, television, and services. Welch believed that with the right people, GE could make each new venture a success.
To attract the right personnel, Welch instituted a strategy that earned him the moniker "Neutron Jack." He had GE cut all businesses in which the company could not dominate the market in first or second positions. Next, he had managers fire the bottom 10% of GE employees, and he fired the bottom 10% of management. Welch's housecleaning cleared away layers of bureaucracy and made way for a quicker flow of ideas. The new commitment to competition came with large rewards, especially as stock option grants increased in value and GE continued to grow rapidly. GE soon became one of the most coveted places to work and attracted the best in the world.
The soft economic moat created by GE's corporate culture led to it becoming more dominant in its bread-and-butter operations. As a result, the company added new businesses through leveraged buyouts and acquisitions in the 1980s. One of the company's biggest moves was the billion-dollar acquisition of RCA, which gave GE control of NBC. Welch and GE were criticized for straying too far from the company's traditional core business areas, like manufacturing, and venturing into markets such as insurance, jewelry, and television. With GE managers in control and GE capital in the pipeline, NBC underwent a renaissance. (To learn more, see: Economic Moats Keep Competitors At Bay.)
Just when it seemed the company could do no wrong, GE's acquisition of Kidder, Peabody & Co. blew up in Welch's face—twice. First, the firm was part of the Ivan Boesky scandal before the acquisition, which left GE with legal fines, although the company had not been charged at the time. Second, Welch was burned when rogue trader Joseph Jett did $250 million in fake trades. Despite these hiccups, however, GE remained profitable, and any real problems stemmed from the company being so dominant it didn't have much room for growth. Having unloaded any business that did not dominate, the company's growth became dependent on the growth of the market.
Redefining Goals to Continue Growing
When GE hit this new barrier, Welch and his management team redefined their goals. GE had been focused so tightly on specific markets, like airline engine maintenance in the U.S., for example, that the company easily came to dominate that space. Thus, Welch and his team reworked their narrow definitions in each business's market, so no division controlled more than 10% of it. For example, GE may have been first in CT scanners, but parallel products dominated other areas of the larger medical technology market where GE did not have a presence.
Having cut its dead weight during the days of "Neutron Jack," GE now had the people and the capital required for future expansion. As a result, Welch's final years as CEO were some of the most successful for GE, even considering his already amazing. When Welch turned over the reins of the company to Jeff Immelt in 2001, he went out as the CEO of a company everyone either wanted to work for or own, proving one man at the right post can make a huge difference—no matter the size of the company beneath him. (For related reading, see Is Your CEO Street Savvy?)