General Electric Performance over a Half Century: Evaluation of Effects of Leadership and Other Strategic Factors by Quantitative Case Analysis
Franke, Richard H., Mento, Anthony J., Prumo, Steve M., Edlund, Timothy W., International Journal of Business
We conducted quantitative case analysis of inflation-adjusted profitability and relative market value at General Electric over a half-century, to examine the influence of Jack Welch and others as CEO and of various strategic and environmental factors. Over the first decade of Welch's leadership, there was no improvement in GE's real ROE. However, there was market value increase, and later there were improvements in both measures due to declining competition. Over 90% of variances in real profitability and comparative market value were explained using measures often considered in strategy--changes in competitive environment, leadership and corporate culture, labor relations and plant closings, and economic and financial environments. It appears that systematic appraisal of corporations can aid understanding of factors that determine profitability and market value.
JEL Classification: C32, C53, C81, D21, D23, D24, D43, E31, E51, J24, J52, K42, L13, L21, L22, L25, L26, M12, M14, O30.
Keywords: Quantitative Case Analysis (QCA); Profitability; Real ROE; Market value; Capital intensity; Corporate management; Leadership; Corporate culture; Achievement motivation; Power motivation; Competition; Money supply; Inflation; Oil shocks; Labor relations; Downsizing.
* An earlier version of this paper was presented to the 23rd Annual International Conference, Strategic Management Society, November 10, 2003, in Baltimore, Maryland.
Jack Welch, who was the CEO of General Electric from 1981 through 2000, is one of the most widely acclaimed and admired contemporary business leaders in the United States. During his tenure at GE, Welch produced more money for shareholders than anyone else except Bill Gates at Microsoft (Byrne, 1998). The market capitalization of GE shares went from 12 thousand million dollars in 1981 to 500 thousand million dollars by 2000 (Multinational Monitor, 2001).
A. Welch's Style as a Model for Effective Management
In describing elements of Welch's operating style that may have contributed to success, Edwin Locke (2002) identified leader's guides to action including: (1) Face reality as it is, not as you want it to be. (2) Control your destiny or someone else will. (3) Change before you have to. (4) Compete to win. Under Welch's leadership, Locke noted a clearly articulated set of institutional guidelines which included: (1) Show integrity. (2) Hate bureaucracy. (3) Be open to new ideas, regardless of the course. (4) Pursue high quality, low cost, and speed. (5) Have self confidence. (6) Have a clear, reality-based vision. (7) Have a global focus. (8) Use stretch goals and differential rewards. (9) View change as an opportunity, not as a threat. (10) Finally, possess energy and energize others. Locke (2002) appraised six books about and one written by Welch, stressing the importance of simplicity. As stated by Welch (Lowe, 1988: 155): "Simplicity is a quality sneered at today in cultures that like their business concepts the way they like their wine, full of nuance, subtlety, complexity, hints of this and that ... cultures like that will produce sophisticated decisions loaded with nuance and complexity that arrive at the station long after the train has gone ... you can't believe how hard it is for people to be simple, how much they fear being simple. They worry that if they're simple, people will think they are simpleminded. In reality, of course, it's just the reverse. Clear, tough-minded people are the most simple."
According to Tichy and Sherman (1993), Jack Welch saw reality objectively and consistently applied this orientation. He was willing to face reality, even if it was different from that in the past: "Facing reality as it is, not as it was or as you wish ... facing reality is crucial in life, not just in business. You have to see the world in the purest, cleanest way possible or you can't make decisions on a rational basis. …