GUEST POST from Greg Satell

When Jack Welch took the helm at General Electric in 1981, it marked the beginning of a new era. Corporations would no longer coddle workers, but would slash costs, close factories and focus on increasing shareholder value. By 1999 he had increased revenues from $26.8 billion to nearly $130 billion and in 2000 he was named “Manager of the Century” by Fortune magazine.

Yet all the success belied serious problems rumbling underneath the surface. As David Gelles explains in, The Man Who Broke Capitalism, Welch increased profits largely by “financializing” the firm and operations suffered. Under his successor, Jeffrey Immelt, GE collapsed and was removed from the Dow index.

Yet while Welch’s rise marked a new era of shareholder capitalism, the new CEO at GE, Larry Culp has taken a different turn. He invests in workers, distributes authority and has refocused the firm on improving manufacturing productivity. The result has been one of the most dramatic turnarounds in industrial history, perhaps signaling a larger shift.

The Welch Myth

To understand why the Welch era was not what it seemed, let’s look at one common practice that took hold in the 1980s and 90s: Offshoring. From a shareholder value perspective, it has an intuitive logic. You move your factory from high wage countries such as the US to low wage countries such as China and pocket the savings. You lower costs and increase profits, at least in the short-term.

Yet that analysis omits some important factors. First of all, it undermines trust among employees, suppliers and other partners when relationships are treated as purely transactions. Also, a Harvard study found that moving the factory floor thousands of miles away from R&D reduces knowledge transfer and has a negative effect on innovation.

Looking back, it’s easy to see how this played out at GE. The company became more profitable, but less productive. For decades, it failed to innovate. Its last major invention was the CT scanner, which came out in the 1970s, before Jack Welch took the helm. For all of the hype about his management genius, in truth Welch was, in large part, living off the accomplishments of his predecessors.

One helpful way to look at managing an enterprise is to group it into two major activities: capacity building and optimization. Building capacity is a drag on profits in the short term, but builds a foundation for the future. Optimization focuses on efficiency, which drives short-term profits, but doesn’t build anything for the long term.

Welch’s layoffs created profits, but undermined GE’s ability to build capacity. The firm’s increasing reliance on its finance arm to smooth earnings masked real problems and increased risk. The stage was set for a downfall.

The Road To Ruin

In 2001, after a lengthy succession process, Jeffrey Immelt was named Jack Welch’s successor and he began his star-crossed tenure. The 9-11 attacks hit the firm’s aerospace business hard and, while he used many of the same accounting tricks involving GE finance that Welch employed, the share price continued to lag. That’s when Jeffrey Immelt set out on a journey to transform GE into a 124 year old startup.

No longer would GE be a boring old manufacturing company, but would make a “pivot” to the digital age. Although it was one of the largest private organizations in the world, with 300,000 employees, he sought to become agile and nimble enough to compete with high-flying Silicon Valley firms. A key ambition was the development of Predix, an industrial software platform.

He also brought in Lean Startup guru Eric Ries to help instill a more entrepreneurial culture and speed time to market. The initiative caught on and eventually became the FastWorks program, One of the most touted projects was the development of a gas turbine , which reduced development time by a full year while significantly increasing performance. Immelt also acquired the power division of Alstom, essentially doubling down on the same bet.

It didn’t end well. As renewable energy began to take off, demand for gas turbines declined markedly. In 2017, problems in the firm’s power division led to massive layoffs and GE’s removal from the Dow after 110 years.. Immelt was forced to step down as CEO. The company, once famous for its sound management, was now an iconic failure.

The Rebirth

In the aftermath of GE’s collapse, Larry Culp was named as the first outsider CEO in its history and he came with a very different approach. Unlike Jack Welch, he didn’t take pride in layoffs or try to be a management guru. Nor did he fall in love with Silicon Valley and fashion himself as some sort of new age hero, like Jeffrey Immelt.

Instead, he focused on improving operations through lean manufacturing, a methodology focused on continuous improvement that’s been around for over four decades, and shed debt to improve the resiliency of its balance sheet. He also broke the company up into three separate firms, reversing GE’s history of growth through acquisition.

Most of all, he shifted management’s focus from seeing its employees as cost centers to profit centers. Rather than offshoring to cut costs, lean manufacturing puts an emphasis on getting the factory floor involved, using frontline hands-on knowledge to improve productivity and efficiency. GE’s famous culture of stack-ranking and shooting the messenger has been replaced by one in which workers are encouraged to report problems so they can be solved.

The results are hard to argue with. In 2023, GE’s share price leaped by 95.8%, outperforming darlings such as Apple, Google and Microsoft and sending its market cap back over $150 billion. Perhaps most importantly, he’s shown that you can best serve shareholders by serving employees, much as MIT’s Zenep Ton argues in her book, The Case for Good Jobs.

Rethinking American Industry

General Electric has long been symbolic of the US economy. Formed in the 1890s when J.P. Morgan merged Thomas Edison’s electric company with other firms, it was one of the original components of the Dow Jones index and signaled America’s industrial rise. It also became the first major conglomerate, forming the Radio Corporation of America (RCA) in 1919, which became a leading broadcaster.

That all began to change when Jack Welch took over in 1981. He led a new era of “Welchism,” in which CEO’s laid off employees, offshored factories and engaged in “financial engineering,” to goose profits. American industry followed suit, cutting investment in R&D, lobbying hard for cuts in government spending and corporate taxes, hollowing out the US industrial base.

Yet it appears that GE’s new CEO, Larry Culp, might be as emblematic for the new era as Jack Welch was for the old one. Instead of layoffs, he’s investing in lean manufacturing methods that put front-line workers at the center and instead of using acquisitions to fuel growth, he’s broken the company up to help focus on operational excellence.

This reflects a greater shift that began during the Obama Administration with the creation of the Advanced Manufacturing Office and the Manufacturing USA Institutes. It has continued under the Biden Administration with legislation such as the CHIPS Act and the IRA. The results are clear. Manufacturing employment has increased by roughly 1.5 million jobs since 2010, productivity is up and unemployment is at record lows.

The truth is that we’re moving from an era of bits to an era of atoms and that means we can’t just move fast and break things anymore. We can expect the basis of competition to shift away from design sprints, iterating, and pivoting to building meaningful, collaborative relationships in order to solve grand challenges.

Once again, what’s going on at GE might be a sign of the times.

— Article courtesy of the Digital Tonto blog
— Image credit: 1 of 1,550+ FREE quotes for you at http://misterinnovation.com

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