Was GE’s Management Style Part of its Downfall?

December 14, 2018 Updated: January 28, 2019

Commentary

Many financial experts say that stock in General Electric will soon be downgraded to the equivalent of junk-bond territory unless management can figure out how to turn things around. It’s been a horrible year for GE stock and GE shareholders.

Financial analysts point to the kind of big-picture issues they are paid to consider: long-term debt, the future insurance obligations portion of its debt, declining sales, and management uncertainties.

There’s no doubt that those grand strategy positions matter when considering the financial health of a company as large and influential as GE. That said, I can’t help but wonder if there are other issues—“boots on the ground” kind—that have played a role in the demise of GE.

Two issues come to mind: GE’s investment in renewable energy and the company’s management policies.

The economics of renewable energy, especially devoid of the extra-generous tax credits available, are sketchy at best. GE isn’t the first, nor surely the last, to stumble over that gopher hole.

I find the management issue more interesting.

The “GE Way”

I’ve worked with industries across the nation on a variety of projects for 35 years. Inevitably, I’ve run into current and former GE employees involved in these projects. Many—not all—have the same complaint about the “GE way”: they don’t want specialists in management positions. Managers are supposed to be generalists and the system will somehow fill in the gaps.

So, for example, someone on the GE leadership track would end up running a plant that makes products for GE Power Systems one year, and may be transferred to GE Healthcare the next.

A friend who worked for GE for four years related how his division had seven different business leaders during that span. None had time to actually learn the intricacies of the business before they were moved somewhere completely different.

A GE executive proudly explained that their business leaders are “a mile wide and an inch deep.” Put another way, the GE management model was to train its leaders to know very little about a whole lot.

In that kind of culture, success wasn’t so much measured by performance as by mobility. If a manager on the GE leadership track was at one location for more than a year, his or her career path might be in jeopardy. If they hadn’t moved on after 18 months, they were definitely in trouble.

Jack Welch, chairman of GE from 1981 through 2001, was widely credited with turning GE around during his tenure. But there’s another side to Welch’s legacy: his personal management style.

His nickname, in some circles, was “Chainsaw.” According to the Welch playbook, you maximized the value of the corporation by maximizing the value of the companies the corporation acquired. That’s how you grow. Makes sense so far. But, according to some, the way Welch maximized the value of the companies acquired under his tenure was to cut, cut, and cut some more. Not just trimming fat, but slicing through muscle down to the bone.

While that kind of strategy can make the bottom line look great for a few years—hopefully, long enough to sell the joint at a nice profit to some sucker who didn’t know what he was really buying—it’s hardly a formula for long-term resilience.

Forced Ranking

Welch also instituted a management practice known as “forced ranking.” Under this system, employees are divided into three groups. The top 20 percent are the “A” players—the stars who get the best raises and bonuses and positions. The next 70 percent are the “B” players—the ordinary Joes and Josephines who are necessary and who get thrown a bone or two, but aren’t really fit for the big time. And, finally, there are the 10 percent in the “C” class, the business model’s equivalent of lepers—unloved, unwanted, and virtually invisible to the rest of the tribe.

In theory, the forced ranking was supposed to separate the wheat from the chaff. And, because it was a system—his system—Welch figured it could be implemented everywhere and would ensure success everywhere. In reality, many say it leads to an unhealthy and unproductive work environment.

People become so obsessed with making the A group, and all the goodies that go along with that designation, that their mission becomes to: 1) always cover their own butts; 2) take no risks because then they make no mistakes; and 3) tear down their fellow employees when possible so they look better by comparison. It’s even said that some managers would intentionally hire unqualified applicants so they could have C-group employees to fire.

It’s sad to see the company that Thomas Edison founded, one with such a rich history, fall so far and so fast. One certainly hopes it can recover and that managers of the future will learn from the mistakes of the past.

Richard Trzupek is a chemist and environmental consultant as well as an analyst at The Heartland Institute. He is also the author of “Regulators Gone Wild: How the EPA Is Ruining American Industry.”

 

Views expressed in this article are the opinions of the author and do not necessarily reflect the views of The Epoch Times.

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