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How Jack Welch Runs Ge (Part 1)


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HOW JACK WELCH RUNS GE (Part 1)

A Close-up Look at How America's #1 Manager Runs GE

Whisked by chopper from New York City, Jack Welch arrives early at the General Electric Co. training center at Croton-on-Hudson. He scoots down to The Pit--the well of a bright, multitiered lecture hall--peels off his blue suit jacket, and drapes it over one of the swivel seats.

This is face-to-face with Jack, not so much as the celebrated chairman and chief executive of GE, the company he has made the most valuable in the world, but rather as Professor Welch, coach and teacher to 71 high-potential managers attending a three-week development course.

The class sits transfixed as Welch's laser-blue eyes scan the auditorium. He hardly appears professorial. With his squat, muscular, five-foot, eight-inch frame, pasty complexion, and Boston accent, the 62-year-old balding man looks and sounds more like the guy behind the wheel of a bus on Beacon Hill. And he isn't there to deliver a monologue to a polite group.

For nearly four hours, he listens, lectures, cajoles, and questions. The managers push right back, too. They grouse that despite the rhetoric about managing for the long term at GE, they are under too much pressure to produce short-term results. They say that for all the Welch talk about "sharing best practices" and "boundaryless behavior," they are missing many opportunities to learn and sell services across the vast network of GE companies. Some worry that the company's gargantuan Six Sigma program, the largest quality initiative ever mounted in Corporate America, is allowing bureaucracy to creep back into GE.

Pacing the floor with a bottle of water in hand, Welch passionately attacks each question.

"You can't grow long-term if you can't eat short-term," he states flatly. "Anybody can manage short. Anybody can manage long. Balancing those two things is what management is."

"I think someone is smoking pot here," he quips about the complaint over the lack of synergy among GE units. "We've got enormous sharing going on."

As for the concern over Six Sigma, Welch retorts: "I don't give a damn if we get a little bureaucracy as long as we get the results. If it bothers you, yell at it. Kick it. Scream at it. Break it!"

In this classroom, where Welch has appeared more than 250 times in the past 17 years to engage some 15,000 GE managers and executives, something extraordinary happens. The legendary chairman of GE, the take-no-prisoners tough guy who gets results at any cost, becomes human. His slight stutter, a handicap that has bedeviled him since childhood, makes him oddly vulnerable. The students see all of Jack here: the management theorist, strategic thinker, business teacher, and corporate icon who made it to the top despite his working-class background. No one leaves the room untouched.

If leadership is an art, then surely Welch has proved himself a master painter. Few have personified corporate leadership more dramatically. Fewer still have so consistently delivered on the results of that leadership. For 17 years, while big companies and their chieftains tumbled like dominoes in an unforgiving global economy, Welch has led GE to one revenue and earnings record after another.

"The two greatest corporate leaders of this century are Alfred Sloan of General Motors and Jack Welch of GE," says Noel Tichy, a longtime GE observer and University of Michigan management professor. "And Welch would be the greater of the two because he set a new, contemporary paradigm for the corporation that is the model for the 21st century."

It is a model that has delivered extraordinary growth, increasing the market value of GE from just $12 billion in 1981 to about $280 billion today. No one, not Microsoft's William H. Gates III or Intel's Andrew S. Grove, not Walt Disney's Michael D. Eisner or Berkshire Hathaway's Warren E. Buffett, not even the late Coca-Cola chieftain Roberto C. Goizueta or the late Wal-Mart founder Sam Walton has created more shareholder value than Jack Welch. So giddy are some Wall Street analysts at GE's prospects that they believe that when Welch leaves at the end of the year 2000, GE's stock could trade at $150 to $200 a share, up from $82 now, and the company could be worth $490 billion to $650 billion. "This guy's legacy will be to create more shareholder value on the face of the planet than ever--forever," says Nicholas P. Heymann, a onetime GE auditor who follows the company for Prudential Securities.

Of course, GE's success is hardly Welch's alone. The company boasts what most headhunters believe to be the most talent-rich management bench in the world. Gary C. Wendt has led GE Capital Corp. to extraordinary heights, where it contributes nearly 40% of the company's total earnings. Robert C. Wright has managed an astonishing turnaround at NBC, leading it to a fifth straight year of double-digit earnings gains in 1997 and a No.1 position in prime-time ratings. Nor does Welch's magic work everywhere in GE. The huge appliance operation, for instance, saw operating earnings fall 39% last year, to $458 million, largely due to restructuring charges. Nonetheless, Welch has led and managed GE to nearly unprecedented prosperity.

Much has been said and written about how Welch has transformed what was an old-line American industrial giant into a keenly competitive global growth engine, how he has astutely moved the once-Establishment maker of things into services. Welch has reshaped the company through more than 600 acquisitions and a forceful push abroad into newly emerging markets.

Less well understood, however, is how Jack Welch is able to wield so much influence and power over the most far-flung, complex organization in all of American business. Many managers struggle daily to lead and motivate mere handfuls of people. Many CEOs wrestle to squeeze just average performance from companies a fraction of GE's size. How does Welch, who sits atop a business empire with $304 billion in assets, $89.3 billion in sales, and 276,000 employees scattered in more than 100 countries around the globe, do it?

He does it through sheer force of personality, coupled with an unbridled passion for winning the game of business and a keen attention to details many chieftains would simply overlook. He does it because he encourages near-brutal candor in the meetings he holds to guide the company through each work year. And he does it because, above all else, he's a fierce believer in the power of his people.

Welch's profound grasp on General Electric stems from knowing the company and those who work for it like no other. First off, there are the thousands of "students" he has encountered in his classes at the Croton-on-Hudson campus, which everyone at GE just calls Crotonville. Then there's the way he spends his time: More than half is devoted to "people" issues. But most important, he has created something unique at a big company: informality.

Welch likes to call General Electric the "grocery store." The metaphor, however quirky for such a colossus, allows Welch to mentally roll up his sleeves, slip into an apron, and get behind the counter. There, he can get to know every employee and serve every customer. "What's important at the grocery store is just as important in engines or medical systems," says Welch. "If the customer isn't satisfied, if the stuff is getting stale, if the shelf isn't right, or if the offerings aren't right, it's the same thing. You manage it like a small organization. You don't get hung up on zeros."

You don't get hung up on formalities, either. If the hierarchy that Welch inherited, with its nine layers of management, hasn't been completely nuked, it has been severely damaged. Everyone, from secretaries to chauffeurs to factory workers, calls him Jack. Everyone can expect--at one time or another--to see him scurry down an aisle to pick through the merchandise on a bottom shelf or to reach into his pocket and surprise with an unexpected bonus. "The story about GE that hasn't been told is the value of an informal place," says Welch. "I think it's a big thought. I don't think people have ever figured out that being informal is a big deal."

Making the company "informal" means violating the chain of command, communicating across layers, paying people as if they worked not for a big company but for a demanding entrepreneur where nearly everyone knows the boss. It has as much to do with Welch's charisma as it has to do with the less visible rhythms of the company--its meetings and review sessions--and how he uses them to great advantage.

When he became CEO, he inherited a series of obligatory corporate events that he has since transformed into meaningful levers of leadership. These get-togethers--from the meeting in early January with GE's top 500 executives in Boca Raton, Fla., to the monthly sessions in Croton-on-Hudson--allow him to set and abruptly change the corporation's agenda, to challenge and test the strategies and the people that populate each of GE's dozen divisions, and to make his formidable presence and opinions known to all.

Welch also understands better than most the value of surprise. Every week, there are unexpected visits to plants and offices, hurriedly scheduled luncheons with managers several layers below him, and countless handwritten notes to GE people that suddenly churn off their fax machines, revealing his bold yet neat handwriting. All of it is meant to lead, guide, and influence the behavior of a complex organization.

"We're pebbles in an ocean, but he knows about us," says Brian Nailor, a fortysomething marketing manager of industrial products who was at the Croton-on-Hudson session. "He's able to get people to give more of themselves because of who he is. He lives the American dream. He wasn't born with a silver spoon in his mouth. He got himself out of the pile. He didn't just show up."

THE PROMISE

John Francis Welch Jr. had worked for General Electric not much more than a year when in 1961 he abruptly quit his $10,500 job as a junior engineer in Pittsfield, Mass. He felt stifled by the company's bureaucracy, underappreciated by his boss, and offended by the civil service-style $1,000 raise he was given. Welch wanted out, and to get out he had accepted a job offer from International Minerals & Chemicals in Skokie, Ill.

But Reuben Gutoff, then a young executive a layer up from Welch, had other ideas. He had been mightily impressed by the young upstart and was shocked to hear of his impending departure and farewell party just two days away. Desperate to keep him, Gutoff coaxed Welch and his wife, Carolyn, out to dinner that night. For four straight hours at the Yellow Aster in Pittsfield, he made his pitch: Gutoff swore he would prevent Welch from being entangled in GE red tape and vowed to create for him a small-company environment with big-company resources. These were themes that would later dominate Welch's own thinking as CEO.

"Trust me," Gutoff remembers pleading. "As long as I am here, you are going to get a shot to operate with the best of the big company and the worst part of it pushed aside."

"Well, you are on trial," retorted Welch.

"I'm glad to be on trial," Gutoff said. "To try to keep you here is important."

At daybreak, Welch gave him his answer. "It was one of my better marketing jobs in life," recalls Gutoff. "But then he said to me--and this is vintage Jack--`I'm still going to have the party because I like parties, and besides, I think they have some little presents for me."' Some 12 years later, Welch would audaciously write in his annual performance review that his long-term goal was to become CEO (page 104).

Gutoff's story is cute, but it contains within it hints of Welch's future management style. Indeed, the decades have failed to diminish for Welch the potency of combining big-company might with small-company nimbleness. If Gutoff, who remained Welch's boss until 1973, could do that for Welch--and he did--then Welch could do that for others, many others. And so for much of his professional life, as he climbed the corporate totem, Welch has been preoccupied with harnessing the brute strength of bigness while ridding GE of big-company paralysis.

Just look at the Corporate Executive Council (CEC) sessions, where GE's top 30 officers gather before the close of each financial quarter. The antithesis of the staid, staged off-site meeting, these sessions earn descriptions from executives like "food fights" and "free-for-alls." They are where Welch collects unfiltered information, challenges and tests his top players, and makes sure that the organization's triumphs and failures are openly shared. "I may be kidding myself," says Welch, "but going to a CEC meeting for me is like going to a fraternity party and hanging around friends. When I tell my wife I can hardly wait to go, she says, `Well, why wouldn't you? You hired them all!' If you like business, sitting in that room with all these different businesses, all coming up with new ideas, is just a knockout."

If Welch's intellect and fervor made a strong impression on Gutoff, it is his near spiritual belief in the promise of the individual that made his early mentor really sit up and take notice. Welch believes that efficiencies in business are infinite, a faith grounded in the belief that there are no bounds to human creativity. "The idea flow from the human spirit is absolutely unlimited," Welch declares. "All you have to do is tap into that well. I don't like to use the word efficiency. It's creativity. It's a belief that every person counts."

It is not surprising, then, that Welch chose to embrace--as the ultimate expression of those beliefs--the largest corporate quality initiative ever undertaken. GE's Six Sigma program, Welch is convinced, can add up to $5 billion to GE's net earnings through the year 2000.

For years, Welch had been skeptical of the quality programs that were the rage in the 1980s. He felt that they were too heavy on slogans and too light on results. That was before he heard former GE Vice-Chairman Lawrence A. Bossidy, a longtime friend, wax on about the benefits he was reaping from a quality initiative he had launched at AlliedSignal Inc., where he has been CEO since 1991. Bossidy had borrowed the Six Sigma program from Motorola Inc. and reported that the company was lowering costs, increasing productivity, and realizing more profits out of operations.

Welch invited Bossidy to share his story with GE's top management at the June, 1995, CEC meeting. As it turned out, that was the only one Welch ever missed--he was home recovering from open-heart surgery. However, Bossidy's presentation won such rave reviews that when Welch returned to work in August, he agreed to pursue it.

A Six Sigma quality level generates fewer than 3.4 defects per million operations in a manufacturing or service process. GE is running at a Sigma level of three to four. The gap between that and the Six Sigma level is costing the company between $8 billion and $12 billion a year in inefficiencies and lost productivity.

Still, it was no small decision to launch a quality initiative because it called for massive investment in training tens of thousands of employees in a disciplined methodology heavily laden with statistics. To make the ideas take hold throughout General Electric would require the training of so-called master black belts, black belts, and green belts to impose the quality techniques on the organization.

Welch launched the effort in late 1995 with 200 projects and intensive training programs, moved to 3,000 projects and more training in 1996, and undertook 6,000 projects and still more training in 1997. So far, the initiative has been a stunning success, delivering far more benefits than first envisioned by Welch. Last year, Six Sigma delivered $320 million in productivity gains and profits, more than double Welch's original goal of $150 million. This year, he expects GE to get about $750 million in net benefits. "Six Sigma has spread like wildfire across the company, and it is transforming everything we do," boasts Welch.

SHOW AND TELL

The success of the program was evident this January at Boca Raton, where Welch kicks off each year with a confab for the top 500 executives. Amid the ocean breezes and palms, it is Welch's opportunity to set the year's agenda and toast the company's newest heroes. An invitation by Welch to pitch in front of GE's most accomplished executives is like winning an Olympic medal in GE's intense locker-room culture. This past January, 29 managers gained the privilege, most of whom spoke glowingly about their Six Sigma projects.

With Welch in the front row of the auditorium furiously scribbling notes on a yellow pad, the managers recounted how they used new ideas to squeeze still more profit out of the lean machine that is GE. One after another explained how quality efforts cut costs and mistakes, enhanced productivity, led to greater market share, and eliminated the need for investment in new plant and equipment.

It's more than a bragging fest. The show-and-tell routine allows managers in plastics to exchange lessons with their counterparts in GE Capital. It's a place, like Croton-on-Hudson, where "best practices" get transferred among GE's differing businesses. In between sessions, managers who make bulbs or locomotives swap ideas with those who finance cars and service credit-card accounts.

Welch seldom disappears early. One night, for example, he was up until 3, shooting the breeze with 20 executives--half of them fast-rising women. But the main event is Welch's wrap-up comments when he steps out onto the stage under a spotlight and a pair of video cameras. Even though GE had just ended a record year, with earnings up 13%, to more than $8.2 billion, Welch wants more. Most CEOs would give a feel-good, congratulatory chat. But Welch dispenses with the kudos and warns the group that it will face one of the toughest years in a decade. It's no time to be complacent, he says, not with the Asian economic crisis, not with deflation in the air.

"The one unacceptable comment from a GE leader in '98 will be `Prices are lower than we thought, and we couldn't get costs out fast enough to make our commitments.' Unacceptable," he shouts, like a preacher. "Unacceptable behavior, because prices will be lower than you're planning, so you better start taking action this week."

Then, after asking every GE business to resubmit annual budgets by the end of the month to account for deflation, the ideas tumble out of him for how they can combat it. "Don't add costs," he advises. "Increase inventory turns. Consolidate acquisitions. Use intellectual capital to replace plant and equipment investment. Raise approvals for price decisions. Make it harder to give away prices."

Welch then throws out yet another challenge. "The market is rewarding you like Super Bowl winners or Olympic gold medalists," he says. "I know I have such athletes reporting to me. Can you put your team against my team? Are you proud of everyone who reports to you? If you aren't, you can't win. You can't win the game."

When the executives return to work on Friday morning, a videotape of Welch's talk is already on their desks along with a guide for how to use it with their own teams. Within one week, more than 750 videos in eight different languages, including Mandarin and Hungarian, are dispatched to GE locations around the world. Welch's words will be absorbed and reinforced by as many as 150,000 employees by month's end.

ROSES AND CHAMPAGNE

What happens in Boca, in the management development courses at Crotonville, or in the quarterly CEC sessions promptly spills down into the organization's guts, where people at every layer digest it. William Woodburn, a 47-year-old former McKinsey & Co. consultant who heads GE's industrial diamonds business in Worthington, Ohio, was one of this year's heroes at Boca. Since taking over the business four years ago, Woodburn had increased the operation's return on investment fourfold and halved the cost structure.

Employing Six Sigma ideas, he and his team have squeezed so much efficiency out of their existing facilities that they believe they have eliminated the need for all investment in plant and equipment for a decade. Some 300 other managers from GE have visited the plant to learn directly how Woodburn has done it so they, too, can transfer the ideas to their own operations.

Like so many GE managers raised in Welch's intense hothouse, Woodburn's tough talk is pure Welch. To get the improvements, he has had to "take out" over a third of the workforce, including more than half the salaried staff. "We've been open and fair," he insists. "That doesn't mean being easy. You perform, or you're gone. There's tension in the rubber band."

On Monday, after returning from Boca, Woodburn gathers his 15 direct reports and uses Welch's video as the centerpiece for a discussion of what he learned in Florida. They then do the same with their staffs. On Wednesday, Woodburn uses the video again with 100 staffers in the plant. A week later, he goes through the process yet again with the region's "orphans"--GE staffers in the area who aren't in a major facility. "They see the tape. They hear the message. It gets people pumped up," he says.

Most great leaders, of course, are masters at communicating their desires. In his early years as chief executive, Welch discovered that you can't will things to happen, nor can you simply communicate with a few hundred people at the top and expect change to occur. So he doggedly repeats the key messages over and over again, reinforcing them at every opportunity.

Welch is uncommonly conscious of the signals and symbolism of leadership. Rarely does he miss a chance to make his presence felt. His handwritten notes sent to everyone from direct reports to hourly workers possess enormous impact, too, because they are intimate and spontaneous. Moments after Welch lifts his black felt-tip pen from the chairman's stationery, they are sent via fax direct to the employee. Two days later, the original arrives in the mail.

They are written to inspire and motivate as often as to stir and demand action. Two years ago, for example, Woodburn turned down a promotion from Welch that would have required a transfer because he didn't want to move his teenage daughter out of school. Woodburn does not report directly to Welch but to Gary L. Rogers, CEO of GE Plastics. Yet Welch spoke to Woodburn about the decision on the telephone and within a day dashed off a personal note to him.

"Bill," wrote Welch, "we like you for a lot of reasons--one of them is that you are a very special person. You proved it again this morning. Good for you and your lucky family. Make Diamonds a great business and keep your priorities straight." To Woodburn, the note was an important gesture. "It showed me he cared about me not as a manager but as a person," he says. "That means a lot."

Not everyone sees that side of Welch. Some rank-and-file employees, for example, grumble about the unrelenting pressure on them to perform, and they summon up the moniker Neutron Jack. "No matter how many records are broken in productivity or profits, it's always `What have you done for me lately?"' says Stephen Tormey, who negotiates the United Electrical Workers contract for some 6,000 GE employees. "The workers are considered lemons, and they are squeezed really dry."

Other critics have questioned whether the pressure Welch imposes leads some employees to cut corners, possibly contributing to some of the defense-contracting scandals that have plagued GE or the humiliating Kidder, Peabody & Co. bond-trading scheme of the early 1990s that generated bogus profits.

Few would dispute that Welch is seen as a demanding, no-nonsense executive who arouses a mixture of awe and fear. Aware of the daunting effect he can have on people, Welch works hard to counter that image. Not long ago, recalls human-relations chief William J. Conaty, one manager who had to make a presentation before Welch was so jittery he was shaking. It was the first time he had met Welch, who was swinging through St. Louis to meet with 10 different managers. "I'm so nervous," the manager confessed to Welch. "And my wife has told me she'll throw me out of the house if I can't get through this presentation."

At day's end, when Welch was back on the corporate plane, he immediately arranged for a dozen roses and a bottle of Dom Perignon to be delivered to the man's home. He then penned a note to the wife: "Your husband did a fantastic job today. We're sorry we put him and you through this for a couple of weeks."

There are no form letters from Welch, not to employees, managers, executives, or even directors in the GE boardroom. Every salary increase or decrease, every bonus, and every stock-option grant to Welch's 20 or so direct reports comes with a candid talk about expectations and performance. "There are carrots and sticks here, and he is extraordinarily good at applying both," says Gary M. Reiner, senior vice-president. "When he hands you a bonus or a stock option, he lets you know exactly what he wants in the coming year."

Rarely do surprises occur. Welch sets precise performance targets and monitors them throughout the year. And every one of Welch's direct reports--from his three vice-chairmen to each of the operating heads of GE's 12 businesses--also receives a handwritten, two-page evaluation of his performance at the end of every year. "I do the evaluations on Sunday nights in my library at home," says Welch. "It gives me a chance to reflect on each business." Attached to the detailed notes are his jottings from a year earlier, with new comments written in red pencil in the margins: "Nice job." "Still needs work."

As if in lockstep, each business chieftain then emulates the behavior of his boss, and their reports, in turn, do the same. After Welch's Boca meeting in January, for instance, Lloyd G. Trotter, CEO of GE's electrical-distribution and -control business, had his own 2 1/2 day leadership conference in Orlando with his top 250 people. And in February, after Welch gave him his bonus and reiterated the targets for the remainder of the year, Trotter then followed through in similar fashion with the 97 people in his organization who received cash bonuses. Other GE businesses follow the same format. As Thomas E. Dunham, who runs services in GE Medical Systems, puts it, "Welch preaches it from the top, and people see it at the bottom." The result: Welch's leadership style is continually reinforced up and down the organization.

Above all, however, Welch skillfully uses rewards to drive behavior. Those rewards are not inconsequential at GE, in part because of Welch's determination not to hand out the kind of standard $1,000 raise that he got back in 1961. To this day, Welch demands that the rewards a leader disburses to people be highly differentiated--especially because GE is in so many different businesses. "I can't stand nondifferential stuff," he says. "We live in differentiation. You can't run these 12 businesses as if they were one institution."

Although GE set an overall 4% salary increase as a target last year, base salaries can rise by as much as 25% in a year without a promotion. Cash bonuses can increase as much as 150% in a year, to between 20% and 70% of base pay. Stock options, once reserved for the most senior officers at GE, have been broadly expanded under Welch. Now, some 27,000 employees get them, nearly a third of GE's professional employees. More than 1,200 employees, including over 800 below the level of senior management, have received options that are now worth over $1 million.

Unlike many companies that hand out options as automatic annual grants, Welch doesn't want GE's program to be perceived as a "dental plan." So everyone who receives option grants doesn't necessarily get them every year. In fact, Welch insists that at least 25% of the employees receiving options should be getting them for the first time, and no more than 50% of the executives should get more than three grants in a row.

Welch, of course, along with every CEO of every major company in America, has been a major beneficiary of stock options. Last year alone, he exercised options that brought him $31.8 million. Yet few things energize Welch as much as reviewing a list of GE employees who cash in their rewards. Combing through the names, Welch can hardly contain his enthusiasm--not for how well his company's stock has performed but for the wealth he has put into the hands of people whose names are unfamiliar to him. In the first quarter of this year alone, some 3,900 employees exercised 8.7 million options with a net value of $520 million. "It means that everyone is getting the rewards, not just a few of us," he says. "That's a big deal. We're changing their game and their lives. They've got their kids' tuition or they've got a second house. That's a real kick. We've all got plenty. We're fat cats."

End of part 1


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