GE and Jack Welch

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The Welch Era at GE: 1981-2001

During the first five years as CEO, Jack Welch emphasized that GE should be No.1 or No.2 in all businesses or get out of them. He disposed off the businesses with low-growth prospects, like TVs and toaster ovens. He expanded the financial-service provider GE Capital into a powerhouse. He also entered the broadcasting industry with the acquisition of RCA Corp., the owner of NBC TV network. At the same time, he shed more than 100,000 jobs - a fourth of GE's work force - through mass layoffs. Tens of thousands of other high paying manufacturing jobs were moved to cheaper, union-free locations overseas. Following this, Jack Welch was nick named 'Neutron Jack' after the nuclear weapon that killed people but left buildings largely intact. The number of employees at GE dropped from 402,000 at the end of 1980 to as low as 220,000 in mid-1990s. Jack Welch felt that making GE a leaner company was necessary to ensure healthy profits in the wake of high inflation and stiff Japanese competition. By 2000, the number of employees went up to 314,000, mostly as a result of acquisitions.

Analysts felt that GE under Jack Welch had performed very well (Refer Exhibits III and IV). The company's 2000 earnings of US$12.7 billion were 8 times more than the profit it reported in 1980 (US$1.5 billion). By 2000, its shares had risen about 5,096% (inclusive of dividends) or about 21.3% p.a. from the day Jack Welch took over.

Analysts felt that where most top executives lost their effectiveness in 10 years or less, Jack Welch was an exception, staying on the job and driving GE to elevated levels of accomplishment for 20 years. Like the seasons in the year, there were rhythms and rituals to how Jack Welch managed GE. Besides his monthly teaching sessions at the Crotonville² academy, Jack Welch clearly laid out his monthly programs (Refer Exhibit V).

However, analysts felt that the Welch Era was not without flaws. GE had suffered major setbacks, in the form of criminal indictments relating to military contracts and battles with environmental groups. GE was blamed for the Poly-Chlorinated Biphenyls (PCB)³ contamination in the Hudson River. In early 2001, the U.S. Environmental Protection Agency endorsed a $460 million dredging plan to clean the river.

Analysts also observed that Jack Welch relied too much on GE Capital, the financial services division for GE's growth. However, by 2000, the division had accounted for half of the company's profits. Others pointed out that GE did not encourage women and minorities to take up top managerial positions. According to a few, Jack Welch's biggest shortcoming was his handling of growing political and social pressures, as evidenced by the European Union's veto of the proposed GE-Honeywell⁴ merger and the Bush Administration's order GE to clean up the Hudson River at a cost of US$460 million.

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2] GE's Management Development Centre.
3] In mid-1970s, GE contaminated the Hudson river by dumping PCBs and other pollutants. PCBs and the pollutants caused Cancer. In 1977, PCBs were banned worldwide.
4] The proposed US$45 billion acquisition of Honeywell, Inc. announced in October 2000, fell through in July 2001 because of resistance from the European Commission. Honeywell, Inc. is mainly into the manufacture of aircraft engines. Other businesses of Honeywell include Electronic Control, Home & Building Control, Industrial Control, Performance Polymers and Chemicals, and Transportation and Power Systems.