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Research Associate Meg Wozny prepared this case under the supervision of Professor Christopher A. Bartlett. HBS cases are developed solely as
the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective
management.
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C H R I S T O P H E R A . B A R T L E T T
M E G W O Z N Y
GE’s Two-Decade Transformation: Jack Welch’s
Leadership
On September 7, 2001, Jack Welch stepped down as CEO of General Electric. The sense of pride he
felt about the company’s performance during the previous two decades seemed justified judging by
the many accolades GE was receiving. For the third consecutive year, it had not only been named
Fortune’s “Most Admired Company in the United States,” but also Financial Times’ “Most Admired
Company in the World.” And, on the eve of his retirement, Fortune had named Welch “Manager of
the Century” in recognition of his personal contribution to GE’s outstanding 20 year record.
Yet while the mood at GE’s 2001 annual meeting had clearly been upbeat, some shareholders
wondered whether anyone could sustain the blistering pace of change and growth characteristic of
the Welch era. And specifically, many wo
ied if any successor could generate the 23% per annum
total shareholder return Welch had delivered in his two decades leading GE. It would be a tough act
to follow. (See Exhibit 1 for financial summary of Welch’s era at GE.)
The GE Heritage
Founded in 1878 by Thomas Edison, General Electric grew from its early focus on the generation,
distribution, and use of electric power to become, a hundred years later, one of the world’s leading
diversified industrial companies. A century later, in addition to its core businesses in power
generation, household appliances, and lighting, the company was also engaged in businesses as
diverse as aircraft engines, medical systems, and diesel locomotives.
Long regarded as a bellwether of American management practices, GE was constantly undergoing
change. In the 1930s, it was a model of the era’s highly centralized, tightly controlled corporate form.
By the 1950s, GE had delegated responsibility to hundreds of department managers, leading a trend
towards greater decentralization. But a subsequent period of “profitless growth” in the 1960s caused
the company to strengthen its corporate staffs and develop sophisticated strategic planning systems.
Again, GE found itself at the leading edge of management practice.
When Reg Jones, Welch’s predecessor, became CEO in 1973, he inherited the company that had
just completed a major reorganization. Overlaying its 10 groups, 46 divisions, and 190 departments
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This document is authorized for use only by ALYCIA MOHAM in Organizational Behavior MGMT5320 Summer 2, 2022, Karst taught by Rusty Karst, Texas A&M University Corpus Christi from
Jul 2022 to Aug 2022.
XXXXXXXXXXGE's Two-Decade Transformation: Jack Welch's Leadership
2
were 43 strategic business units designed to support the strategic planning that was so central to GE’s
management process. Jones raised strategic planning to an art form, and GE again became the
enchmark for hundreds of companies that imitated its SBU-based structure and its sophisticated
planning processes. Soon, however, Jones was unable to keep up with reviewing and approving the
massive volumes of information generated by 43 strategic plans. Explaining that “the review burden
had to be ca
ied on more shoulders,” in 1977 he capped GE’s departments, divisions, groups, and
SBUs with a new organizational layer of “sectors,” representing macrobusiness agglomerations such
as consumer products, power systems, or technical products.
In addition to his focus on strategic planning, Jones spent a great deal of time on government
elations, becoming the country’s leading business statesman. During the 1970s, he was voted CEO of
the Year three times by his peers, with one leading business journal du
ing him CEO of the Decade
in 1979. When he retired in 1981, The Wall Street Journal proclaimed Jones a “management legend,”
adding that by handing the reins to Welch, GE had “replaced a legend with a live wire.”
Welch’s Early Priorities: GE’s Restructuring
When the 45-year-old Welch became CEO in April 1981, the U.S. economy was in a recession.
High interest rates and a strong dollar exace
ated the problem, resulting in the country’s highest
unemployment rates since the Depression. To leverage performance in GE’s diverse portfolio of
usinesses, the new CEO challenged each to be “better than the best” and set in motion a series of
changes that were to radically restructure the company over the next five years.
#1 or #2: Fix, Sell, or Close
Soon after taking charge, Welch set the standard for each business to become the #1 or #2
competitor in its industry—or to disengage. Asked whether this simple notion represented GE’s
strategy, Welch responded, “You can’t set an overall theme or a single strategy for a corporation as
oad as GE.” By 1983, however, Welch had elaborated this general “#1 or #2” objective into a “three
circle concept” of his vision for GE. (See Exhibit 2.) Businesses were categorized as core (with the
priority of “reinvesting in productivity and quality”), high-technology (challenged to “stay on the
leading edge” by investing in R&D), and services (required to “add outstanding people and make
contiguous acquisitions”). To a question about what he hoped to build at GE, Welch replied:
A decade from now, I would like General Electric to be perceived as a unique, high-
spirited, entrepreneurial enterprise . . . the most profitable, highly diversified company on
earth, with world quality leadership in every one of its product lines.1
But as GE managers struggled to build #1 or #2 positions in a recessionary environment and
under attack from global—often Japanese—competitors, Welch’s admonition to “fix, sell, or close”
uncompetitive businesses frequently led to the latter options. Scores of businesses were sold,
including central air-conditioning, housewares, coal mining, and, eventually, even GE’s well-known
consumer electronics business. Between 1981 and 1990, GE freed up over $11 billion of capital by
selling off more than 200 businesses, which had accounted for 25% of 1980 sales. In that same time
frame, the company made over 370 acquisitions, investing more than $21 billion in such major
purchases as Westinghouse’s lighting business, Employers Reinsurance, RCA, Kidder Peabody, and
Thomson/CGR, the French medical imaging company. (See Exhibit 3.)
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This document is authorized for use only by ALYCIA MOHAM in Organizational Behavior MGMT5320 Summer 2, 2022, Karst taught by Rusty Karst, Texas A&M University Corpus Christi from
Jul 2022 to Aug 2022.
GE's Two-Decade Transformation: Jack Welch's Leadership XXXXXXXXXX
3
Internally, Welch’s insistence that GE become more “lean and agile” resulted in a highly
disciplined destaffing process aimed at all large headquarters groups, including a highly symbolic
50% reduction in the 200-person strategic planning staff. Welch described his motivation:
We don’t need the questioners and checkers, the nitpickers who bog down the process. . . .
Today, each staff person has to ask, “How do I add value? How do I make people on the line
more effective and competitive?”2
As he continued to chip away at bureaucracy, Welch next scrapped GE’s laborious strategic
planning system—and with it, the remaining corporate planning staff. He replaced it with “real time
planning” built around a five-page strategy playbook, which Welch and his 14 key business heads
discussed in shirtsleeves sessions “unencumbered by staff.” Each business’s playbook provided
simple one-page answers to five questions concerning cu
ent market dynamics, the competitors’ key
ecent activities, the GE business response, the greatest competitive threat over the next three years,
and the GE business’s planned response.
The budgeting process was equally radically redefined. Rather than documenting internally
focused comparisons with past performance, results were now evaluated against external
competitively based criteria: Do sales show increases in market share, for example? Do margins
indicate a cost advantage compared with competition?
In 1985, Welch eliminated the sector level, previously the powerful center of strategic control. (See
Exhibits 4a and 4b.) By reducing the number of hierarchical levels from nine to as few as four, Welch
ensured that all businesses reported directly to him. He said:
We used to have department managers, sector managers, subsector managers, unit
managers, supervisors. We’re driving those titles out… We used to go from the CEO to sectors
to groups to businesses. Now we go from the CEO to businesses. There is nothing else. Zero.3
Through downsizing, destaffing, and delayering, GE eliminated 59,290 salaried and 64,160 hourly
positions between 1981 and 1988; divestiture eliminated an additional 122,700. Even when offset by
the acquisitions, the number of employees at GE declined from 404,000 in 1980 to 330,000 by 1984 and
292,000 by 1989. Between 1981 and 1985, revenues increased modestly from $27.2 billion to $29.2
illion, but operating profits rose dramatically from $1.6 billion to $2.4 billion. This set the base for
strong increases in both sales and earnings in the second half of the decade (see Exhibit 5).
This drastic restructuring in the early- and mid-1980s earned Welch the nickname “Neutron Jack,”
a term that gained cu
ency even among GE managers when the CEO replaced 12 of his 14 business
heads in August 1986. Welch’s new “varsity team” consisted of managers with a strong commitment
to the new management values, a willingness to
eak with the old GE culture, and