Hailed as modern day management hero or a soulless corporate
number (and personnel) cruncher depending on who you consult, Jack Welch made a
big impact in management in his time as CEO at General Electric. Now that he’s
moved on, will ‘Neutron’ Jack’s philosophy continue to be widely copied? If
sales of his memoirs are any guide, the bottom 10 per cent had better watch
out. Jon Ashworth reports
Jack Welch, former chairman and chief executive officer of US conglomerate
General Electric, means different things to different people. To the factory
workers who were ejected from GE during the 1980s he will never be anything but
a monster – during a five-year period, one in four people, 118,000 employees in
all, were removed from the GE payroll. In 1982, Newsweek magazine came up with
the moniker Neutron Jack – the man who removed the people but left the
buildings standing. In 1984, Fortune magazine put Welch at the top of its list
of the 10 Toughest Bosses in America. "Working for him is like a
war," claimed one unnamed source. "A lot of people get shot up. The
survivors go on to the next battle."
Yet to his business peers, Welch will always be a hero. Fortune magazine was
later to name him Manager of the Century and his deceptively simple approach
has been emulated with varying degrees of success by CEOs around the world. The
most accomplished of these generally share Welch’s ability to charm as well as
Welch’s high profile is entirely down to his success with General Electric.
Already a key US company when Welch took over in the early 1980s, GE developed
into an increasingly global player under his leadership, growing into a
business worth more than $550bn. GE today has interests in aircraft leasing,
credit cards, jet engines, generators, and even NBC Television. The ‘Jack Welch
Way’ has been a source of inspiration to businessmen the world over.
His approach to human resources, with his ‘vitality curve’ and
differentiation – a combination of gut instinct overlaid with a meticulous
reference structure – undoubtedly contains lessons for other companies. In
essence, it is simply a matter of singling out the best – and worst –
performers and encouraging the talent to continually ‘stretch’ and surpass
itself. With so many thousands of executives fizzing away at critical mass, it
is hardly surprising that, under Welch, GEachieved so much.
In the first decade of his leadership, GE underwent a massive reshaping that
gave the edge to technology and services over manufacturing and trimmed the
number of major product lines from 350 to 13. But GE would never have changed
to the extent that it did without a sea-change in attitudes within the company.
As a young manager in GE’s plastics division in the 1960s, Welch encountered
stultifying layers of bureaucracy. The status of a manager was said to be
reflected in the number of tiles in the ceiling of their office. He could see
that this was not the way to get the best out of people and believed that if
you cut through all the rules and paperwork you would free whatever talent was
there for the real task of driving the business. He believed that managers who
measured their career in ceiling tiles would have to go, leaving the rest to
flourish. It was this philosophy that was to drive the Welch revolution at GE.
Welch reflected on these and other lessons in his memoirs Jack: What I’ve
Learned Leading A Great Company And Great People, published last autumn.
Coming from a relatively humble background – Welch’s father, an Irishman,
was a ticket inspector on the railways north of Boston – his rise to the top
was undoubtedly an impressive feat. He was appointed chairman and chief
executive officer of GE in 1981 after a leadership selection process lasting
several years, and once in the chair, he wasted little time in attacking all
the things that he loathed within GE – much of it down to putting the right
people in place.
Personnel files were drawn up including photographs and biographies of GE
executives. Welch recalls: "When a photo might reveal slumping shoulders,
drooping eyelids or a hanging head, I wouldn’t hesitate to point him out and
say: ‘This guy looks half-dead! He can’t be any good. He’s in the job for six
or seven years and he hasn’t gone anywhere. What the hell is going on? Why
haven’t you moved on him?’"
Welch once hired a garage mechanic who had helped fix his car, impressed by
his gutsy determination. The man went on to work for GE for 35 years. Yet while
he believed in following his instincts, Welch could see the need for some sort
of structure in a company with more than 300,000 employees and 4,000 senior
managers – there was a need for something more than ‘touchy-feely’ good
Welch came up with something called the ‘vitality curve’ in which GE’s
businesses had to prepare an annual review of their top executives. At school,
everyone is "differentiated", whether through exams or on the sports
field. To Welch, it seemed nonsensical that this differentiation ceased upon
leaving school or university. GE’s business leaders were forced to
differentiate their leadership. They had to identify the people in their
organisation that they considered to be in the top 20 per cent, the middle 70
per cent, and the bottom 10 per cent. If there were 20 people on the management
staff, Welch wanted to know the names, positions and pay of the top four and
bottom two. The losers generally had to go.
This dictum of the ‘bottom 10 per cent’ has become part of Jack Welch
folklore. Harsh as it sounds, it undeniably achieved results. As Welch explains
in his book: "Making these judgements is not easy and they are not always
precise. Yes, you’ll miss a few stars and a few late bloomers – but your
chances of building an all-star team are improved dramatically. This is how
great organisations are built. Year after year, differentiation raises the bar
higher and higher and increases the overall calibre of the organisation. This
is a dynamic process and no-one is assured of staying in the top group forever.
They have to constantly demonstrate that they deserve to be there."
Around the time that the book came out, Welch recalls going into a tie store
on Fifth Avenue in New York. The manager nervously asked whether he could have
a word, and ushered the tycoon, whom he had recognised from TV, to a dark
corner of the room. Huddled under the stairs, out of earshot of the rest of the
staff, the man said: "Mr Welch: I’ve got 20 salesmen in there. Do I really
have to fire two of them?". Welch replied that, yes, he did – if he wanted
to have the best shop on Fifth Avenue.
Differentiation comes down to sorting out the A, B and C players. The
A-types are filled with passion, committed to making things happen, and open to
ideas from anywhere. They have very high energy levels and an ability to
energise others around common goals. Crucially, they also need to be able to
deliver the numbers. The B players are the heart of the company and the Cs are
those who can’t get the job done – they procrastinate and are a negative drain
on those around them. This categorisation roughly fits with the 20-70-10 grid
found in Welch’s vitality curve.
Unsurprisingly, GE managers had a tough time singling out those colleagues
who were not pulling their weight. For the first couple of years, it was easy
enough, but by year three, when all the obvious weaklings had been purged, it
became much tougher. Some managers put in the names of people who were
intending to retire anyway. One submitted the name of a man who had died two
months before his review.
Welch is adamant that differentiation is the only way. "Some think it’s
brutal or cruel to remove the bottom 10 per cent of our people. It isn’t. It’s
just the opposite. What I think is brutal and ‘false kindness’ is keeping
people around who aren’t going to grow and prosper. There’s no cruelty like
waiting and telling people late in their careers that they don’t belong – just
when their job options are limited and they’re putting their children through
college or paying off big mortgages."
Welch admits to making mistakes along the way. One of his biggest blunders,
he thinks, came when he went against the advice of the GE board and bought the
Wall Street stockbroking firm Kidder, Peabody. Kidder’s chief government bond
trader, Joseph Jett, was later found to have run up $350m in phantom trades.
Welch blames himself for not meeting Jett face-to-face to fathom why he was
apparently so successful. "We had approved a $9m bonus for Jett – a huge
award even for Kidder. Normally, I would have been all over this. I would have
dug into how one person could be so successful and I would have insisted on
meeting him. I didn’t."
Welch’s memoirs earned him a $10m advance and, gratifyingly for both author
and publisher, passed with some speed into the best-seller lists. Perhaps
surprisingly for a corporate number cruncher, Welch is donating all the takings
to charity. But having grown up in a modest yet happy home in working-class
Salem, Massachusetts, in New England, US, he likes giving money to
underprivileged children in similar communities in the area.
The unanswered question is whether GE, under its new CEO, Jeff Immelt, can
maintain the momentum of the Jack Welch era. It was Welch’s good fortune to
retire almost on the day that the airliners crashed into the World Trade Center
towers, ushering corporate America – and the world – into dark and uncertain
times. His years at the top may yet come to be seen as a fleeting golden age in
General Electric’s long history.