Jack Welch’s Creative Revolutionary Transformation of General Electric and the Thermidorean Reaction

Case Study: Jack Welch’s Creative Revolutionary Transformation of General Electric and the Thermidorean Reaction (1981–2004) Pier A. Abetti This case study draws a parallel between the French Revolution and the GE ‘revolution’, according to three waves of transformation. We discuss the ‘hard’ effects on GE employees (strategy, structure, employment, rewards) and the ‘soft’ effects (culture, work climate, indoctrination). In parallel with the French Revolution, the retirement of CEO Jack Welch was followed by a ‘Thermidorean reaction’ characterized by the relaxation of Welch’s professional and ethical standards, lassitude and indecision in the GE organization, and the fall of GE stock price by 45 percent. Welch’s role as revolutionary leader and driving force is highlighted. Introduction GE and Jack Welch’s Legacy alued at $380 billion, General Electric (GE) is the world’s most valuable and admired company. This status is still attributed to the 20-year leadership of CEO Jack Welch (1981–2000). During that period, GE’s market value increased 3213 percent at a compounded annual growth rate (CAGR) of 20.4 percent, while the Standard and Poor 500 (S&P) Index increased 915 percent (CAGR = 13.1 percent). Two years after Welch’s retirement, GE’s market value had fallen by 45 percent, while the S&P index declined by 32 percent. These figures lead to the conclusion that GE’s success was essentially due to the leadership of Welch and that his successor, Jeff Immelt, was unable to maintain the momentum of his predecessor. However, two differing theories also need to be considered. (1) GE was a company ‘built to last’ (Collins and Porras, 1997). If GE had selected another CEO in 1981, he or she would have obtained similar results. The question thus becomes: was Welch a product of GE, as claimed by Collins and Porras, or was GE after 1981 a product of Welch? (2) The collapse of GE’s market value was primarily due to what can be called a V Thermidorean reaction after Welch’s retirement. (The French Thermidorean reaction refers to the period after the Reign of Terror, in 1794, when the tyrant Robespierre was removed from power and an economically and culturally liberal government came to power.) This reaction, in turn, was due to Welch’s less creative, more opportunistic and more intolerant leadership during his last years of tenure and the ensuing lassitude and indecision among employees (Abetti, 2001). The question thus becomes: was the sharp decline of GE’s stock value due to the collapse of the Internet bubble or to the Thermidorean reaction which, in turn, had its root cause in Welch’s last years as CEO? Objective, Methodology, Sources, and Plan The objective of this historical study is to answer these questions by describing Welch’s career and his creative revolutionary transformation of GE according to three waves of ‘creative destruction’ (Schumpeter, 1930) and their effects on GE’s employees, organization, and culture. We have deliberately elected not to draw on the extensive and sometimes contradictory CASE STUDY 75 © 2006 The Author Journal compilation © 2006 Blackwell Publishing Volume 15 Number 1 2006 theories of leadership in general and executive or managerial leadership in particular. Rather, since Welch was a revolutionary, always proactive, sometimes ruthless, we draw a parallel between his actions and the French Revolution (1789–1815) and other revolutions that had a major impact on their countries and the world, namely the Russian Revolution (1917–1993), the Chinese Revolution (1921–1972), the Mexican Revolution (1911–1940), the Fascist Revolution in Italy (1919–1943) and the NationalSocialist Revolution in Germany (1923–1945)1 . In fact, GE’s value added in 1981 was of the same order of magnitude as the GNP of France in 1789: $30 billion in 2004 prices2 (Hohenberg, 2005). Today GE’s value added is approximately $100 billion, similar to the GNP of Ireland. We also draw a parallel between Welch’s origins, motivation, leadership, personal and managerial characteristics, and actions and those of the leaders of these other revolutions3 . We hope this unorthodox approach will help answer the two controversial questions above. The sources for this study are the ample business and popular literature on GE and Welch, and the author’s personal experience over 32 years (1948–1981) at GE, as well as his conversations with other GE employees who worked under Welch and his successor (1982– 2004). The literature on GE and on Welch is extensive but uneven. It can be divided into five categories. (1) Serious business studies, such as the seminal study of GE by Collins and Porras (1997), and Harvard Business School and other cases, for instance, Aguilar et al. (1981, 1985, 1991); Malwight and Aguilar (1996); Elderkin and Bartlett (1993); Jack Welch, GE’s Revolutionary (1994); Heskett (1999); Bartlett and Wozny (2000); Bartlett and Glinka (2002); Bartlett and McLean (2004). (2) Books and articles by Welch’s laudatory semiofficial biographers (a better designation would be hagiographers4 ) such as Slater (1994, 1996, 1998, 2000); Tichy and Sherman (1994); Tichy and Cohen (1997); Heller (2001); Lowe (2001). (3) A few critical studies, for instance, a wellresearched book (O’Boyle, 1998) based mostly on interviews with disgruntled employees and Welch’s critics. (4) Countless interviews with Welch published in a book (Lowe, 1998) and in business magazines, (Tichy and Charon, 1989), and in the popular press. (5) Welch’s autobiography (2001) with an afterword (2003) and a final interview in the Harvard Business Review (Collingwood and Coutu, 2002). It should be noted that the last two sources must be treated with caution. Welch’s autobiography was hastily co-authored with a professional journalistic writer. My analysis of the styles in the text show that only around onequarter of it was written by Welch. As will be described later, the final interview is a watered – down version of the original interview that could not be published because of a conflict of interest. (6) Soon after his retirement, revelations about Welch’s personal life stirred up many scandalous stories in the popular press, (Beam, 2004), and in a book (Byron, 2004). The plan of this historical study follows the evolution of Welch from his family background to his first job at GE; the event that caused him to become a revolutionary; his rise through the ranks by exploiting the GE system; his selection as CEO; the coup d’état that led to his assumption of full power; the three creative revolutionary waves; their hard and soft effects on GE’s employees, organizations and culture; the hardening of his personality and increasing intolerance of dissent; the attempt to keep power beyond the mandatory retirement age; the selection of three candidates for succession; the decision to appoint one and fire the other two; the grooming, indeed attempted cloning, of his successor, Immelt. We then describe the Thermidorean reaction as it affected GE and its employees and Welch personally, including business and marital scandals that have left a permanent mark on Welch’s image. We conclude by answering the two questions above and by revealing the driving force underlying the rise and fall of American’s most successful and admired executive. Welch the Revolutionary The Origins of the Revolutionary Like many militant revolutionaries, Welch was born in a humble family of Irish descent at the margins of the ruling class. His father was a conductor on a commuter railroad, the Boston and Maine, who sold and punched tickets and never advanced in rank. More importantly, when Jack was born (1935), most members of the ruling class in the Boston area and executives in leading U.S. companies were WASPs (White Anglo Saxon Protestants). Welch was white, but Irish and Catholic, and regarded the ruling class with admiration, envy, and perhaps some hostility. Ireland, which had been repressed for centuries by England, had just recently gained independence, in 1922. 76 CREATIVITY AND INNOVATION MANAGEMENT © 2006 The Author Volume 15 Number 1 2006 Journal compilation © 2006 Blackwell Publishing We can draw a parallel with Napoleon Buonaparte, who came from an impoverished Corsican family, despised by the French nobility. Welch’s roots in a comparable poor, despised minority could have given rise to a comparable ambition to become the powerful ruler of the majority. Welch was smart enough to obtain a Ph.D. in engineering in three years. With his strong technical background, he was hired by a leading, technologically advanced, growing and progressive company, GE, which was the ideal vehicle for acquiring power. The Making of the Revolutionary Most potential entrepreneurs do not launch their enterprises until they are either stimulated or forced by a precipitating event, usually a negative one such as dismissal for unjust reasons, lack of recognition, or boredom (Timmons, 1999). Similarly, many potential revolutionaries initially attempt to work within the system, hoping they can modify it through persuasive or pacific means, until a major shock convinces them that revolution is the only possible solution. At the beginning of the French Revolution the oppressed Third Estate (the 98 percent of the population who were neither nobles nor clergy) addressed petitions to the French king that went unanswered. Only when the Third Estate was denied equal representation did they rebel against the king and storm the Bastille. In Mexico, Francisco Madero sought power through a democratic election and started a revolution only after the vote was rigged by the incumbent dictator Porfirio Diaz. In Russia, Lenin began by trying to gain control of the democratically elected Constituent Assembly. After he was forced into hiding, he decided to overthrow the government by violent means. Welch’s first job at GE was with the Plastics Division, an innovative venture outside GE’s conservative electrical core business. He was given responsibility for developing a new product and for the pilot plant. By working extremely hard, he achieved outstanding results his first year. He expected to be compensated financially and with a promotion, as he had been promised before he was hired. Instead his supervisor, apparently a bureaucrat who did not appreciate Welch’s zeal, gave him a minimal raise. This was the precipitating event that pushed him over the line. He decided to quit GE and look for more rewarding employment. Fortunately for GE, his potential had been noticed by a vice president who was able to convince Welch to stay thanks to a substantial raise and promises of a brilliant career. Welch realized he had a unique opportunity to revolutionize the system and make GE the world’s greatest company. To achieve this end, however, he had to gain power by becoming CEO. The Rise of the Revolutionary According to Machiavelli (1515) there were three ways to become the ruler of an Italian Renaissance state: (1) being chosen by the incumbent prince; (2) a palace revolution (coup d’état); (3) violence. Welch advanced by being chosen by the incumbent president and then implementing the coup d’état that allowed him to revolutionize GE. After the Reign of Terror, Napoleon, a penniless general, was asked to subdue with a ‘whiff of grapeshot’ the mob that wanted to restore the repressive regime of Robespierre. Napoleon rose politically, was elected consul, then first consul, then consul for life after a coup d’état in 1798. Finally he crowned himself emperor. In a similar progression, Welch had first gained recognition by working within the system before being selected as a candidate for succession and then, as CEO, revolutionizing GE. Although he hated GE’s highly politicized, sanitized, ‘superficially congenial’ (Welch, 2001) headquarters, with its bureaucratic policies and procedures, he exploited the system as he rose through the ranks. He gained recognition through hard work, detailed analyses, polished presentations, and most of all outstanding business results. Nonetheless, in 1975, he was not on the list of ten possible successors to CEO Reginald Jones, who was to retire in five years. The senior vice president of human resources believed Welch drove too hard for results and had too little respect for the company’s rituals and tradition (Welch, 2001). But Jones was also frustrated with GE’s slow-moving bureaucracy and wanted a successor who would shake things up. He insisted that Welch be the eleventh candidate. In 1979, Jones interviewed all of them according to the ‘airplane interview,’ whose format was: ‘You and I are flying in a company plane. The plane crashes and we both die. Who should be the next CEO of GE?’ The purpose was to determine each candidate’s opinion of the other contenders and whether they would be able to work together after Jones’ retirement. But Welch had his own agenda: to prove he was the best choice for CEO. He conveniently forgot he was supposed to be dead and proposed himself as Jones’ successor! As a final test, Jones named three of the candidates, including Welch, vice-chairmen. Welch proved his ability and was named CEO CASE STUDY 77 © 2006 The Author Journal compilation © 2006 Blackwell Publishing Volume 15 Number 1 2006 on April 1, 1981. He had gained limited power by climbing the traditional ladder. Over time he built a small, dedicated group of young, aggressive followers who shared his vision of the new GE and were loyal to him. As with Napoleon, these ‘dashing generals’ were rewarded with promotions, recognition as members of the elite team, and generous financial packages, as long as they kept winning. Welch’s Coup d’Etat To assert himself and prove he was in charge, Welch consolidated his power through a coup d’état. His goal was to seize the few neural centers where power was exercised and from there to conquer the entire constituency (Malaparte, 1931). Accordingly, he started at headquarters and eliminated the complacent bureaucrats who might offer passive resistance, firing 167 out of 200 and adding 67 members of his own loyal team. He also realized that the world was entering a recession and that GE should reduce expenses, becoming ‘mean and lean’ to face the double challenge of a recession and increased international competition. He laid off 80,000 employees the first year and 42,000 over the next two years, targeting older, more expensive employees who might be more resistant to change. There was one problem: GE’s long-standing policy that employees with 25 or more years of service could not be dismissed for lack of work. Welch realized that canceling this policy would have negative repercussions among stakeholders and the press and therefore decided to add the words ‘when appropriate’ to the policy. As far as I know, not one single case of ‘appropriateness’ was ever registered! In parallel with dismantling the infrastructure of the GE bureaucracy, Welch wanted to change the modus operandi at headquarters and in the field. This was exemplified by the preparation and review of the plans of GE’s 65 strategic business units (SBUs). From January to May, every SBU prepared strategic plans of 100 or more pages with detailed forecasts for the next five years. Staff headquarters checked and even graded them. They then prepared tough or irrelevant questions for the CEO and top executives to ask during the formal review in July. These reviews were elaborately prepared and rehearsed to avoid unpleasant surprises. Welch put an end to all this. He refused to see the books before the presentation and insisted on asking his own questions. The formal presentations with over 40 people in attendance became shirt-sleeve, informal, open discussions of the business and its challenges with fewer than 10 persons. Welch ended the dog-and-pony show. He wanted to lead rather than ‘review and approve.’ He did not want to see the books, but rather look into the heads and hearts of the business leaders and the passion they poured into their arguments. With two powerful actions – the massive dismissal of people and the dismantling of the bureaucracy – Welch showed that he was fully in charge. Now he was ready to start the revolution5 . Welch’s Creative Revolution (1981–2000) The Three Waves By definition, the goal of a revolution is to destroy a regime that is unsatisfactory to the majority of the people (‘stakeholders’ in business parlance) and replace it with a new order6 that, it is hoped, will meet their needs and aspirations. Welch achieved this goal over 20 years by bringing about a revolution in waves. The advantage of acting in separate waves rather than one continuous revolution is that revolutionary fervor cannot last forever. People become tired and want to relax and enjoy the rewards of their work. To make progress, they must be reenergized and pushed ahead in periodic waves. Welch’s 20-year revolution can be conceptualized as three waves with the following starting dates and major objectives: 1981, first wave (hard) Create a new vision and strategy to drive reorganization, mass dismissals, divestments and acquisitions. 1985, second wave (soft) Revolutionize GE to gain the strengths of a big company with the leanness and agility of a small company. 1996, third wave (soft and hard) Develop an integrated, boundaryless, stretched, total quality company with A-players. The characterization of the waves as hard or soft refers to the means Welch employed. In the hard waves, the lives of the employees are physically disrupted by mass dismissals, divestments, acquisitions and major organizational changes. In the soft waves, the minds and habits of the employees are disturbed, because they must absorb new ways of operation and new working practices. Physical disruption is minimal, except for those who cannot cope with the new company environment and are forced to leave. 78 CREATIVITY AND INNOVATION MANAGEMENT © 2006 The Author Volume 15 Number 1 2006 Journal compilation © 2006 Blackwell Publishing The First Wave (1981–1984) Now that Welch had conquered headquarters, he had to conquer the field, including the minds of managers, staff, and workers of all ranks. To achieve this, Welch, for the first time in GE’s history7 , created a unified vision and strategy for the entire company, the famous three-circle concept. All GE businesses had to fit within three categories: 1. Core business (such as Power Generation, Appliances) with moderate returns, managed as cash cows with selective investments. 2. High-tech businesses (such as Medical Systems, Plastics and Aircraft Engines) with high growth, negative cash flow and high investments. 3. Services (such as GE Capital, NBC and Information Services) with high returns, high growth, cash generation and low investments. Welch then evaluated each business. Those that were first or second in their industry were placed inside one of the three circles. The others were given two years to become first or second. If they could not, they were closed or sold. Welch’s message to all employees was crystal clear: Be first or second! If not, you’re out! At the same time, Welch regrouped the 65 SBUs into 13 businesses, which he managed directly. Welch carried his message to the field and met formally and informally with employees of all ranks. Because of his working-class origins, Welch could relate easily to blue-collar workers and listen to their suggestions for improving efficiency. He regularly visited the GE executive training center in Crotonville, N.Y., to give lectures and meet informally with future general managers. He listened to their complaints about the lingering bureaucracy and delays in obtaining approvals and decisions from superiors. Welch’s ‘workout’ meetings (Ulrich et al., 2000) may be compared to Chairman Mao’s frequent meetings with Chinese workers and soldiers, and his management meetings to Mao’s open discussions with the younger party leaders. The Second Wave (1985–1995) Having achieved, almost by force, impressive financial results, Welch was concerned that GE’s organization would not be able to maintain its growth rate. Therefore, he embarked on a major reorganization that would ensure the motivation and the capability to grow successfully. He took the following actions: 1. Flattening of the corporate pyramid from eight to four levels. 2. Reducing staff and changing its role from controlling and revising to assisting and coaching. 3. Instituting a new reward system based more on performance bonuses rather than salaries, with more stock options. 4. Ending employment security. The company could dismiss anybody, any time, regardless of length of service or merit. At the same time, employees who found better jobs outside the company were free to leave and would not be considered disloyal. The first wave had created a smoothly functioning company that generated plenty of cash. A portion of this cash was paid to the stockholders, but the majority was reinvested in R&D, capital investments, and acquisitions, which, in turn, generated more cash, a concept developed by Welch that was called the ‘GE growth engine’ (Elderkin and Bartlett, 1993). The second wave created a more efficient, streamlined organization that reduced bureaucracy and motivated employees, through tangible incentives, to achieve improved financial results. The Third Wave Because GE’s success was identified with Welch personally rather than the new GE system, the challenge was to prevent a slackening of efforts and a slowdown in growth and profits after his retirement. In the third wave, he had to create new GE values, a new GE culture, and an emotional climate that would transcend his personality as well as his strategic and organizational reforms. The third wave was both soft and hard. On the soft side, it included watchwords like ‘speed, simplicity and self-confidence,’ ‘candor, openness, ownership,’ ‘integrated diversity,’ and even ‘evangelizing.’ On the hard side was the total quality (six sigma) initiative, which produced significant results. To enforce the six sigma culture, Welch made it clear that nobody would be promoted unless he or she was a certified ‘black-belt’ team leader (Heckett, 1999). Welch then started a similar campaign for digitization and e-commerce. All managers had to find a mentor who would teach them how to access the Internet (Bartlett and Glinka, 2002). Probably the most important aspect of the third wave was the selection of a top team of A-players, the future leaders of GE (Bartlett and McLean, 2004). We know that Welch studied the German strategies of World War I and admired the German general staff. He may also have read Karl von Clausewitz’s famous treatise Vom Kriege (On War) (1830). Welch’s CASE STUDY 79 © 2006 The Author Journal compilation © 2006 Blackwell Publishing Volume 15 Number 1 2006 criteria for selecting leaders are very similar to the criteria for selecting the elite members of the German general staff. As shown in the left matrix of Figure 1, Clausewitz classified all potential candidates as smart or stupid and as eager or lazy. There are four possible combinations: 1. The ‘smart and eager’ (top left quadrant) are the obvious choice, but there are not enough of them. 2. Therefore, the ‘smart and lazy’ will be forced to move from the lower left to the upper left quadrant. 3. If they do not respond, they will have to join the ‘stupid and lazy’ troops in the lower right quadrant. 4. ‘Stupid and eager’ is the worst combination because these people cause all kinds of trouble with their overzealousness. They should be thrown out! Welch’s Succession and Retirement The Hardening of Welch At the end of the third wave, faced with the prospect of mandatory retirement, Welch’s attitude hardened. He became more and more demanding, setting unattainable stretch goals, and more intolerant of dissent. For instance, while most companies would be content with a 10 percent annual increase in operating margins, say from 10 to 11 percent, Welch demanded a 50 percent increase, from 10 to 15 percent, and a doubling of inventory turns. Attempting to achieve such goals can cause exhaustion or ‘fixing the books;’ missing the goals can cause fear of sanctions and loss of morale. Welch also demanded more and more conformity with his tenets. For several years, GE managers were encouraged to carry in their wallets a card listing the GE values, just as Chinese party members, soldiers, and students had to carry Chairman Mao’s Little Red Book. Welch applied these same values as criteria for selecting GE’s future leaders. Welch characterized potential leaders in the new GE as achievers and non-achievers, believers and non-believers, as shown on the right side of Figure 1. There are four possible combinations: 1. ‘Achievers and believers’ are the obvious choice, but there are not enough of them. 2. Therefore, the ‘believers and non-achievers’ are motivated and trained to move from the top right to the top left quadrant. 3. ‘Non-achievers and non-believers’ should not be hired. 4. The ‘achievers and non-believers’ represented a problem for Welch. His attitude toward them changed over time. Initially he recognized grudgingly their contributions but also saw them as a management problem. Later, in his last letter to stockholders, Welch launched a crusade to eliminate type-IV managers: ‘. . . we have to remove these type IV’s because they have the power, by themselves, to destroy the open, informed, trustbased culture we need to win today and tomorrow . . . There are undoubtedly a few type IV’s remaining, and they must be found. They must leave the company because their behavior weakens the trust that more than 300,000 people have in its leadership.’ (GE Annual Report, 2000) Here again, a parallel with major revolutions is instructive. The French Revolution did away with the moderates, the Russian Revolution cast out the non-party specialists who had contributed to the post-war reconstruction, Figure 1. Welch’s third wave: selecting leaders. Source: Abetti (2001) Imperial Germany Smart Stupid The New GE NonAchievers Eager Lazy Achievers General Staff Out! Force Them Troops Teach and Stretch Out! Motivate and Train Do Not Hire Believers NonBelievers Karl von Clausewitz, 1830 Jack Welch, 2000 80 CREATIVITY AND INNOVATION MANAGEMENT © 2006 The Author Volume 15 Number 1 2006 Journal compilation © 2006 Blackwell Publishing and Mao’s Cultural Revolution purged intellectuals. History shows that all these purges caused economic disruptions. To summarize, during the first wave, Welch changed the physical infrastructure of GE and what people did. During the second wave he changed the organization and how people operated. During the third wave, he changed the culture and both what and how people should think. It should be noted that the psychological pressure on employees and their resentment and potential resistance increased as one wave was followed by the next. During the first wave, employees were told what to do. They recognized that it was part of management’s prerogatives, indeed of management’s duties, to direct their effort where it would be most valuable for the company. During the second wave, employees were told how to do their assignments. Thus, there was some concern that experimentation and creativity may have been curtailed during the second wave. During the third wave, employees were asked to endorse without reservations the new GE values, culture, and emotional climate. This new approach is potentially dangerous, because: 1. Some employees may be rewarded for being politically correct rather than for their results; 2. Some high-performing employees may be considered politically unreliable and forced to leave; 3. Some employees may be afraid to speak their minds for fear of retaliation. Here again, a parallel with revolutions is instructive. The situation above corresponds to the beginning of the Terror during the French Revolution (1793)8 . A fourth wave from Welch would not have been viable because it would have demanded more conformity than was good for the company and more submission than the employees were willing to accept. But in line with GE policy, it was time for Welch to retire. Welch’s Last Stand Welch, however, was not ready to give up power. He wanted to leave with a bang, some major business coup that would satisfy his ego and consolidate his fame as the world’s most admired executive (Murray et al., 2000). Having heard that Honeywell was being sold, Welch made a last-minute offer at an inflated price. Then he stated that he would not retire until this acquisition was consummated and Honeywell was successfully integrated within GE. Fortunately for GE stakeholders, Welch was unable to obtain approval from the antitrust authority of the European Economic Community. The deal fell through and Welch finally retired, having lost glory and credibility. Welch’s Succession Although he was in no hurry to retire, Welch selected potential successors following GE’s personnel policies and the example set by Reginald Jones (Bartlett and McLean, 2004). However, the way Welch treated his potential successors, especially the two losing candidates, was quite different. Like Jones, Welch narrowed his search to three candidates, but they were all working in the field, not at headquarters. Welch challenged each one to outperform the others and to develop a successor who would be able to take over if that candidate was appointed CEO. After heated competition, Welch selected Jeff Immelt, whom he had mentored for many years, and who was loyal to him. Immelt had been in charge since 1997 of GE Medical Systems, Welch’s most successful business before he was named CEO (Khanna and Weber, 2002). The day before he announced his successor, Welch took the company plane to Milwaukee to give the good news to Immelt. Then he flew to Cincinnati and Schenectady and fired the two losing candidates. GE was known as the company that trained future CEOs and, in fact, some of the unsuccessful front runners for Welch’s job had already left GE to head Fortune 500 companies. Welch told the two losers ‘You are going to be offered a CEO position sooner or later, so you should leave right now!’ As a ruthless politician he knew the losers could do nothing more for him and thus followed the maxim: ‘In politics there is no gratitude because nothing is ever given’ (Guzman, 1951). On November 27, 2000, Welch and Immelt appeared on television in identical blue shirts open at the collar, navy sports coats, even matching tasseled loafers–the non plus ultra of conformity! No wonder Fortune called Immelt ‘The Man who would be Welch’ (Moore, 2000). From then on, Immelt’s problem was being considered Welch’s clone, and clones are never as good as the original. Welch kept Immelt on a leash for nine months as he gradually turned over power. According to Sonnenfeld’s typology of succession patterns (1988), Welch was a general who was leaving reluctantly and trying to stay in charge. Welch retired in September 2001, and it was only after three years that Immelt began to shake his image as Welch’s follower. In 2004 Fortune changed its tune and the headlines were ‘Another boss, another CASE STUDY 81 © 2006 The Author Journal compilation © 2006 Blackwell Publishing Volume 15 Number 1 2006 revolution. Jeff Immelt is following a timehonored GE tradition: abandoning the most treasured ideas of his predecessor’ (Useem, 2004). The Thermidorean Reaction Welch’s ‘Terror’ As the French Revolution evolved and France fought to prevent European powers from invading and reinstating the king, Robespierre became dictator and instituted the Reign of Terror. Two hundred years have passed, and GE is not France, nor are its competitors striving to conquer GE. Nonetheless, Welch instituted his own polices of conformity, as described above, as well as a reign of terror (Byron, 2004) to consolidate and assert his power. GE managers and employees were scared by Welch’s increasing outbursts of rage, even over small issues, that were punctuated by foul language. The worst, however, was his policy that every year ten percent of employees in each department must be replaced. Across the board the lowest performers were removed, regardless of their actual performance. This policy is not effective (Lawler, 2002), and in the case of GE was clearly unfair, because some departments had excellent results, others poor results. No matter, ten percent had to go (Welch, 2001)! Also, as discussed above, some higher performers who were suspected of disloyalty to Welch’s values or who lacked political support were fired. In this way Welch kept everybody on edge and paved the way for the Thermidorean reaction. The Thermidorean Reaction in France (1793–98) During the Reign of Terror, Roberpierre demanded complete loyalty to the principles of the Revolution, and he executed anyone suspected of dissent or disloyalty. This lasted until July 27, 1794 (9 Thermidor, year II according to the new Revolutionary calendar), when Robespierre and his associates were overthrown and executed in a coup d’état. The people of France, tired after years of turmoil, gave a sigh of relief and supported the new, more moderate leaders, who were called Thermidoreans. This was the beginning of the Thermidorean reaction, which lasted until Napoleon took power. It was characterized by relaxed moral standards, conspicuous consumption, drunkenness, orgies and sexual license, all fueled by war profiteering, political payoffs and corruption. The Thermidorean Reaction at GE (2002–2004) In the case of GE, the Thermidorean reaction, which came after 20 years of Welch’s revolution, had three main aspects: 1. Lassitude among GE employees who hoped to relax under Immelt, who was reputed to be less ‘mean’ than Welch. Their attitude was ‘let’s wait and see which way Jeff will go.’ 2. A reexamination by business analysts and the press of GE’s financial results, accounting practices, and forecasts. For instance, The Economist published an article critical of GE with the headline ‘The Jack and Jeff show loses its luster’ (Economist, 2002). 3. A long period of transition (2002–2004) while Immelt was reenergizing GE and differentiating himself from Welch. Welch’s ‘Thermidor’ For Welch the Thermidorean reaction led to changes in his personal and professional behavior that tarnished his image. Suffice it to say that The Economist, which had often praised Welch to the sky, became disillusioned and excoriated him as an ‘aging philanderer’ (Allio, 2003). This radical change in Welch’s image was due to two episodes that were treated as scandals in the press and in a book: his severance package and his affair with a prominent editor. The policy and practice at GE has always been no employment contracts. Employees can be terminated by the company at will, and they can also leave at anytime. In 1996, five years before his retirement, Welch negotiated a contract that included an extremely generous, even lavish, package of life-long, postretirement benefits. This contract came to light when Welch’s second wife sued for divorce and claimed a payment of almost half a billion dollars. Welch, who had been praising ‘openness, simplicity and unyielding integrity,’ was condemned by the press. He had no choice but to give up the entire package and repay GE for $2 to $2.5 million annually in services (Welch, 2002). The second scandal was caused by an interview with the editor of Harvard Business Review that promoted Welch’s autobiography. The resultant headline in Business Week was ‘Too Close for Comfort. GE’s legendary former CEO Jack Welch kicks up a controversy over his affair with a journalist.’ The journalist boasted openly of her relationship with Welch and ‘quit after having lost the confidence of her staff’ (Orecklen, 2002). Due to the conflict of interest, a watered-down version of the interview was edited by others (Collinwood 82 CREATIVITY AND INNOVATION MANAGEMENT © 2006 The Author Volume 15 Number 1 2006 Journal compilation © 2006 Blackwell Publishing and Coute, 2002). Other dismal aspects of Welch’s Thermidor were publicized as a result of the divorce proceedings but will not be discussed here. Conclusion Answers to the Two Questions After having described the rise and fall of the revolutionary Jack Welch, his creative transformation of GE, and the Thermidorean reaction, we turn to the two questions at the beginning of this paper: 1. Was Welch a product of GE, as claimed by Collins and Porras, or was GE (after 1981) a product of Welch? Our conclusion is that, while GE would have selected another capable executive in his stead, GE’s revolutionary transformation was due primarily, if not exclusively, to Welch’s creative leadership. In fact, it is clear that Welch, as a true revolutionary, intended to overthrow the GE system after his disillusionment with his first year of employment, and that he worked within the system in order to become CEO, seize power through a coup d’état, and destroy the old system. 2. Was the major decline of GE’s stock value due to the collapse of the Internet bubble or to the Thermidorean reaction, which in turn had its root cause in Welch’s last years as CEO? GE’s stock fell 45 percent from 2000 to 2003, while the S&P Index fell by 32 percent. Other large, well-managed companies were less affected. Microsoft fell 19 percent, WalMart 10 percent and IBM 22 percent. As discussed above, Welch’s hardening and his determination to stay in power would have made a fourth wave of change ineffective, indeed dangerous, for GE. We have also shown that Welch’s insistence that his successor should be his clone reinforced the effects of the Thermidorean reaction and delayed for three years Immelt’s establishment as the new CEO and his differentiation from the Welch legacy. Our conclusion is that Welch was the major cause of both GE’s success and GE’s decline. Welch’s Accomplishments and Driving Force In spite of the managerial and personal shortcomings at the end of his tenure, Welch’s accomplishments are unique in the history of business. He transformed a mature electrical company with a slow-moving, overstaffed bureaucracy, poor cash flow, and lethargic stock into a global powerhouse, where electrical products represent only 15 percent of sales, other innovative high-tech products (aircraft engines, engineering plastics, man-made diamonds, medical diagnostic systems, etc.) 10 percent, and services 75 percent. While there have been many revolutionary leaders in politics and business with clear vision and unbreakable motivation to implement their vision, not many have succeeded in maintaining the momentum for 20 years. Welch is unique in his successful implementation of revolutionary change in a company that was already among the most admired when he became CEO. How did Welch achieve this? The progress of nations is marked by revolutions that lead to a higher level of wellbeing for the citizens. As Thomas Jefferson wrote in 1787 ‘A little rebellion now and then is a good thing’ (Jefferson, 1853–54).9 In a similar manner, according to Greiner (1972), companies do not grow continuously and smoothly but rather go through periods of evolution and revolution, separated by crises. According to Collins and Porras (1997): Visionary companies install powerful mechanisms to create discomfort to obliterate complacency and thereby stimulate change and improvement before the external world demands it. Visionary companies are created by visionary leaders who take advantage of impending external crises (as an economic recession) or even create their own crises in order to revolutionize the company and raise it to a higher level of performance. Markides (1998) states: The successful innovators were not afraid to destabilize a smooth running machine and to do so periodically but continuously. . . . The development of positive crises. . . . is a powerful mechanism to destabilize the system and start the thinking process again. . . . However, one revolution is not enough. The revolutionary spirit fades over time, and a Thermidorean reaction follows10. At the same time, few visionary company leaders are willing and able to maintain the revolutionary drive over their entire tenure. It takes a great leader to fundamentally question his or her mental models continuously and escape the trappings of success more than once (emphasis added) (Markides, 1998). CASE STUDY 83 © 2006 The Author Journal compilation © 2006 Blackwell Publishing Volume 15 Number 1 2006 In conclusion, the driving force of Welch’s undeniable accomplishments was his will and ability to create a new vision of GE, to implement it through a continuous revolution, to question the status quo, to dynamically modify his vision and strategy, and to propel the company to ever higher levels of performance and success. Notes 1 The literature on revolution is enormous. A basic reference is the Encyclopedia of World History (Langer, 1968). The French and Russian revolutions are analyzed by Crane (1957), the Mexican revolution by Johnson (1968), the Chinese revolution by Guillermaz (1972), the Fascist revolution by De Felice (1981), and the National Socialist revolution by Bullock (1952). 2 The sales of large multinational corporations are often compared to the GNPs of developing countries. A better measure is the value added by a company (Bartlett, Goshal, Birkinshaw, 2004). 3 Following the example of Machiavelli (1515) we present the leaders as they were and their actions without passing judgment. 4 From the Greek γιος = saint and γρ ϕος = writer, the writers of the ‘Lives of the Saints’ of early Christianity. 5 According to Welch, Reg Jones did not expect drastic changes. In fact, Jones was often disappointed with Welch’s behavior starting with the coming-out party he organized just before Welch officially became CEO (Welch, 2001). Although Jones had doubts about the wisdom of his choice, Jones did not interfere after retirement (Byron, 2004). 6 For instance, the ‘Novus Ordo Seclorum’ (New Order of Centuries) of the American revolution, as shown on one dollar bills. 7 Attempts to develop a ‘GE Strategy’ under Reg Jones failed for three reasons: (1) the task was delegated to analysts, (2) the top executives were not involved and kept changing their minds, (3) the strategy was top-secret, and only five executives (out of 400,000 employees) had access to the documents. 8 Other examples are the early Stalin era in the Soviet Union (1927–37) and Chairman Mao’s cultural revolution (1966–67). 9 Jefferson referred to the American revolution as a ‘rebellion’. 10 To forestall the slackening and bureaucratization of the Soviet revolution, Trotsky developed the theory of the ‘permanent α′ α′ revolution’ (Deutseher, 1954) which was anathema to Stalin, who wanted to consolidate his power by stabilizing the Soviet Union. 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Prior to joining Rensselaer Polytechnic Institute in 1982, as Professor in the Lally School of Management and Technology, he worked 32 years for the General Electric Company (USA). He was manager of the Electrical and Information Advance Technology Laboratories and manager of General Electric’s Europe Strategic Planning Operation. He presently teaches management of technology and technological entrepreneurship courses in the USA, Finland, and Tunisia. Author of two books and more than 150 technical and management papers in five languages, he was the recipient of the 1993 Kaufman Foundation Award as University E

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