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Why GE’s Incredible Turnaround Could Be A Sign Of The Times
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.
