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RIP Jack Welch

Fri, 6th Mar 2020

Rarely can a passing have marked the end of a business era more aptly than that of Jack Welch. When the legendary CEO of GE, who died this week, retired in 2001, the giant company that he had shaped over 20 years was at the height of its fame and financial success. GE’s fabled management academy at Crotonville, where Welch often lectured, was a big part of it, a conveyor belt as efficient as any of its plants at turning out successful executives modeled on Welch’s hard-nosed, hard-driving style. Had not Welch’s unforgiving approach and uncanny ability to meet Wall Street’s quarterly earnings targets, earned him in 1999 the grandiose title of Fortune’s ‘manager of the century’?
Yet it it is now evident that 2000 was GE’s high point. Never has its reputation, or earning, touched those levels since. Its share price has dropped 80 per cent as Welch’s successors struggled to cope with the legacy of his push into financial services, which nearly sank the group in 2008. Net profits of $15bn as late as 2014 have vanished in three of the last four years, and in 2018 GE suffered the indignity of being dropped from the Dow Jones Industrial Average. It was the last surviving member of the original class of 1896. 
Just as butal has been the collapse of GE’s management aura. Consider the careers of the post-Welch generation of leaders from GE's proud leadership finishing school. Jim McNerney, one of the unsuccessful suitors in the contest for Welch’s old job in 2000, decamped to another famous company, 3M, which he left on its knees five years later. His next berth was at Boeing, where as its first CEO with a non-aviation background (he was also president and chairman), he took the decision to build the 737 Max-8, currently in the news for all the wrong reasons, rather than design a new airliner from scratch.The second spurned internal candidate, Bob Nardelli, left Home Depot, his new company, similarly weakened, alienating customers and long-serving workers with sweeping cost cuts and provoking shareholder ire with his outsize compensation package. As for GE itself, when insider Jeff Immelt’s ultimately unsatisfactory reign ended in 2016, the board turned to another internal candidate, John Flannery – before abruptly ousting him two years later and – oh ignominy – replacing him with GE’s first CEO from outside the company. The rout of GE management is complete.
In retrospect, for the period of his CEO-ship, GE and Welch were perfectly matched. Russ Ackoff once noted that one of capitalism’s dirtiest secrets is that ‘we are committed to a market economy at the national (macro) level and to a nonmarket, centrally planned, hierarchically managed (micro) economy within most corporations’. A centrally planned, shareholder-value-driven company – of which GE was the epiome – can only operate as a top-down hierarchy, because without line of sight to the actions needed to meet indirect corporate targets, employees have to be told what to do.
Only an imperial CEO like Welch could make the model work, up to a point, by relentlessly holding underlings to account for punishing plans and performance targets, and having no compunction about sacking people who fell foul of GE’s infamous forced ranking assessment system. He was equally ruthless in pursuit of efficiencies through job cuts (hence ‘Neutron Jack’), offshoring and selling off units that couldn’t make number one or two in their industry. 
In truth, GE under Welch may have been about as well run as a large top-down corporate economy could be, as he pushed managers to break down silos and exhorted them to beat back competition from the far east. But he couldn’t escape the limitations of command and control. He railed for example at the bureaucracy of budgeting, which he castigated as ‘the bane of corporate America – it should never have existed’, but couldn’t get rid of; and complained that 'the talents of our people are greatly underestimated and their skills are underutilised'. In neither case did he understand why. Unchecked, he overreached imperially in financial services (a poisoned legacy that helped to cripple his successors), in his botched attempt to take over Honeywell in 2000, and in his exorbitant material demands – a scandal that tarnished his reputation when it came to light in a subsequent messy divorce.
Looking back, you might say that Welch perfected the dinosaur just in time for evolution to sweep it into the dustbin of history. Shareholder primacy, as even Welch came to admit – although not before he had retired on its imperial proceeds – was ‘the dumbest thing in the world’, shareholder value being a result, not a cause. Immoderate personal gains are no longer viewed with indulgence. Most decisively, business has evolved: today’s emerging business ecosystems, fluid and constantly shifting, simply aren’t amenable to the detailed planning and control that were GE’s, and Welch’s, forte. Management has to evolve too.
Poigantly, one part of the old conglomerate that is conspicuouly thriving is GE Appliances, albeit under different parentage. In 2016 it was sold to the Chinese Haier group. Under its inventive chairman, Zhang Ruimin, Haier is in the process of transforming itself from a white goods manufacturer into a ‘major appliances ecosystem’ in which all its related products are linked into, for example, an ‘internet of food’ or an ‘internet of clothes’. Standalone products don’t cut it any more. ‘We all need to transform into ecosystem companies, or we won’t survive,’ Zhang says.
In 2018, GE Appliances announced plans to invest $465m in new US manufacturing and distribution facilities.
RIP, then, Jack Welch. RIP too – and not before time – an entire industrial management paradigm. 

 

 


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User comments

Douglas Board :: 9th Mar 20
A superb appraisal. "Looking back, you might say that Welch perfected the dinosaur just in time for evolution to sweep it into the dustbin of history" - wonderful!
Henning Sieverts :: 10th Mar 20
I wholly agree. This is a superb obit!
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