The Management Model that Jack Built : JOHN WELCH HAS SLASHED GE'S TORPID WORK FORCE, TOPPLED BUREAUCRATIC WALLS AND NOW SAYS HIS HUGE CORPORATION MUST BEAT WITH THE HEART OF A SMALL BUSINESS

By LINDA GRANT

May 9, 1993 12 AM PT

Linda Grant's last piece for this magazine was on the K - mart-Wal - Mart rivalry. She recently left The Times for U.S. News & World Report

CHARLIE RUITER, A HEAVYSET UNION OFFICER WITH A GAUCHO hat perched rakishly above steely eyes, stays in touch with his constituents at General Electric’s Lynn, Mass., plants by wheeling around in a pickup strewn with papers, its ashtray overflowing. Ruiter represents Local 201, International Union of Electrical Workers, at GE’s aircraft-engine and power-systems facilities. He has never met Bob Gedeon, an industrious 35-year-old mechanic at GE’s Cleveland-based lighting business, who refers to himself as “Dr. Bob” for his role in fine-tuning equipment for the manufacture of light bulbs. But the union man and mechanic share a fraternal bond: Both are key players on the team that John Francis Welch Jr., 57-year-old chairman and chief executive officer of GE, has assembled to compete in the next century’s global business Super Bowl.

“Welch is our Jimmy Johnson,” says Gedeon proudly, comparing the coach of the champion Dallas Cowboys with the executive many businessmen regard as the nation’s most successful CEO.

A compact 5 feet, 8 inches tall, athletic, the fiery Welch could in fact be the motivational Dallas coach as he jawbones, inspires, pressures and intimidates his minions into giving GE every last ounce of effort. Repeating a wrenching message over and over, Welch has convinced Ruiter, Gedeon and other GE workers to accept searing truths: In today’s business climate, only satisfied customers can guarantee their jobs, and only the best will survive. He has persuaded them to seize the initiative, to be innovative, to turn out top quality at rock-bottom cost. While other CEOs bite the dust daily, Welch’s company prospers and most of his employees believe in him, despite his heavy hand.

It was Welch who introduced restructuring to American industry--a concept that has saved some businesses while sending hundreds of thousands of blue- and white-collar workers to the unemployment lines. He was the first to recognize that the bloated bureaucracies built up within big corporations today threaten their hosts’ very existence, the first to devise a plan of revitalization targeted from the lowliest janitor to the bosses in GE’s executive suite.

The company Welch is transforming is arguably the world’s most complicated business enterprise, with hundreds of diverse products and services, from washing machines to television programs and aircraft leases. And it is humongous, with sales equivalent to the Hungarian gross national product. Its financial strength is daunting: GE is one of only 14 companies in the world that boasts a AAA credit rating from Moody’s Investors Service.

But a decade ago, Welch’s strategy wasn’t clear to Ruiter and Gedeon; they were not yet his quarterbacks. Ruiter came of age when the Lynn complex was a caldron of in-your-face labor relations, among the worst in the company. “I was a left-wing union radical for 20 years,” he says. “When Welch took over, we thought he was a bully and a tyrant.”

But in 1986, the shock of global competition hit Lynn with ballistic force. GE announced it would lay off nearly 5,000 workers and tear down four huge buildings in a Lynn complex known as the River Works. Says Ruiter: “We had to examine what was going on in the world. No investment was coming into our division. Other countries were taking our work. That really hurt. We decided as a union we had to go through a cultural change.”

Gedeon, on the other hand, couldn’t figure out what Welch was talking about in the early ‘80s when the chairman kicked off a campaign to cut through GE’s red tape and transfer decisions to workers. But once Gedeon got the message, he was converted. “I’m in control of my job,” he says. “We’re given parameters, goals and objectives, and we figure out how to achieve them. This leeway allows me to think. I take ownership. I’m always questioning.”

The about-face was apparent when union workers in Lynn joined with local managers to reorganize a plant scheduled to be closed. Today, they run the plant with self-directed work teams that have established a lofty goal: six-sigma quality, a mathematical measure of faulty parts per million pieces manufactured. Six sigma is perfection, or 3.4 defects per million, a number that theoretically cannot be bettered. The Lynn plant is now at 3.5 sigma and still climbing.

A year ago, another group of union workers, worried about defense cutbacks, took an unprecedented step: They formed a marketing team to seek new business. Welder Jim Tilden pored over design specs for generator casings at home, searching for ways to cut time and cost. He succeeded, and the team devised a low-ball bid to supply its products to three other GE plants, wresting the work away from Korean conglomerate Samsung. “We blew their socks off,” crows Ruiter. The team went on to recruit Canadair as a new customer for commuter-aircraft engines.

“Welch is a very hard, cold, calculating businessman,” says Ruiter. “He brought people around to reality. His thing isn’t ‘Win one for the Gipper,’ his thing is ‘Win one for yourselves.’ ”

Gedeon says he’s winning for his family by building a nest egg in GE’s ascendant stock, which has recently hit all-time highs above $95 a share. “I feel very secure with Jack Welch,” he says. “Even if something happens to my job, I know my shares are safe. I think of Welch as piloting the ship, and I’m stoking the furnace.”

Gedeon works at Cleveland’s Nela Park, the nation’s first industrial park, a complex of graceful, turn-of-the-century red-brick buildings and rolling green vistas where workers turn in 6% to 8% productivity increases every year.

There, an animated group of six employees--from mechanic Gedeon to vice president Robert D. Schwarz--interrupt each other during a spirited free-for-all. For this group, the thrill of winning is tangible. Says Jennifer I. Barry, a chemical engineer who is a project leader in the phosphor engineering group (phosphors are a form of chemical used in fluorescent lighting): “I now try to pretend that every quarter is the fourth quarter, which is when we really push for numbers. I thought, ‘If I do that, then our results will be even better.’ ”

Asked if they would be willing to return to the old hierarchical management system that has run U.S. companies since the Industrial Revolution, the group is speechless. Then Gedeon protests, “You can’t take away freedom!”

JACK WELCH IS DELIVERING A PEP TALK, PACING BEFORE AN AUDIence of managers who have been studying how to energize their staffs to think faster, smarter, more globally. “Everywhere you look, things are tougher and tougher with competition,” he tells the men and women in a room dubbed “the Pit” at GE’s Management Development Institute in Crotonville, N.Y.

His speech punctuated by a distinct Boston accent and a slight stutter, Welch tells them they must not rest on their laurels. “We’re in a global economy. I see every competitor in the world beating us up. We are not good enough; we’ve got to do a lot better.”

He tosses them a challenge: “Your work should be thrilling and open and constructive. You should come here excited, energized and feeling you get a fair chance, and if you don’t, go back and challenge the system.” His audience leaps to its feet, applauding.

For a man who lacks the gift of eloquence, Welch is an oddly riveting speaker. He communicates not only in words but also with intense concentration, sudden shifts in emphasis, a constantly moving body, rapid speech, gesticulating hands and a cascade of facts and ideas that pour from his Ph.D. scientist’s mind.

Warren Bennis, professor of business at USC and head of its Leadership Institute, observes after a recent session videotaping Welch, “I expected the only thing left in the chair when we finished would be cinders. He is, literally, General Electric.”

For the past 12 years, this impatient CEO, the son of a union man, has cut a swath through the decorous ranks of corporate America. Ask any consultant, business-school professor or chief executive today what CEO is showing the way to the future, and nine out of 10 will respond: Jack Welch. If GE can be transformed into a fleet-footed greyhound tearing up the track, analysts reason, perhaps there’s hope for autos, steel, banks.

Welch did not develop his strategy in a vacuum. GE’s Crotonville Institute has long been the Harvard of business theory, a crucible for new management ideas. After World War II, for example, Chairman Ralph Cordiner introduced the notion of decentralization; concepts such as strategic planning and management-by-objective followed. GE has always been a fertile source for headhunters, and today its alums are re-sculpting the corporate landscape: Lawrence Bossidy at Allied-Signal, Glen Hiner at Owens-Corning Fiberglas, Stanley C. Gault first at Rubbermaid, now at Goodyear Tire & Rubber.

But none of GE’s innovators roared in with the cyclonic force of this undiplomatic, redheaded Irishman. Shortly after he was elevated to CEO, Welch threw GE into turmoil by declaring that the company must radically transform itself. It was a solitary view. Analysts and businessmen regarded GE as a solid performer, growing apace with the gross national product.

But Welch had worked at GE for 21 years; appalled by his inside view, he thought the company was teetering on the brink. He said that if GE was to survive the coming era of fierce competition, it must destroy its ludicrously swollen, inward-looking bureaucracy.

At one division, for example, computers churned out seven daily reports, one of which, sales information, stretched 12 feet tall when stacked. Welch argued that dinosaurs choking on indigestible information would be buried by swift technological change and global challengers. He denounced the company with vivid imagery: “We have our face to management and our ass to customers.”

Welch launched a crusade to restructure GE under a strategy called “No. 1, No. 2.” He directed managers to “fix, close or sell” every business that was not first or second in worldwide market share. When the dust settled, GE had sold 400 businesses and product lines--including housewares and mining operations--worth $15 billion and acquired 600 worth $26 billion, including RCA and the $1-billion Employers Reinsurance. Four layers of middle managers had been squeezed out. All together, Welch had lopped off 170,000 jobs in about 10 years--roughly equivalent to the population of Bakersfield.

Most Americans, both within GE and without, hated Welch’s message. In 1982, Newsweek bestowed a moniker that stuck: “Neutron Jack,” after the bomb that would leave buildings untouched while it killed people.

But smart businessmen understood. Charles Munger, vice chairman of Berkshire Hathaway, the Omaha-based conglomerate, identifies “No. 1, No. 2” as the key to GE’s success. “Welch determined which businesses had a competitive advantage,” Munger says. “I’m not sure anything else he’s done has had quite the impact.”

Nevertheless, the slings and arrows kept coming. Fortune labeled Welch “the undisputed premier” among America’s toughest bosses in 1984. This was the Reagan era of debt-heavy, feel-good economics, when the ostrich approach was more politically correct than Chicken Little’s. Stories of Welch’s ruthlessness made the rounds. One told of GE executives who, worried Welch might fire certain underlings, hid vulnerable employees when he dropped by. Those in hiding were called “mummies.”

But the executives who survived successive cuts discovered that although Welch didn’t bother with pleasantries, his wasn’t a military regime that ordered you to bite your lip through a tongue-lashing. Welch was a street fighter from a blue-collar Boston suburb. He expected people to fight back, defend themselves, argue with him. More important, Welch’s logic was undeniably compelling, given credence by the pitiful state of once-proud auto companies, steelmakers and industrial manufacturers, which seemed to have no better strategy than to plead for government protection.

By 1988, Welch was satisfied with GE’s mix of companies. They were organized into 14 major high-tech or service businesses that he thought had tremendous growth potential. (Two were subsequently closed or sold.) It was time, he decided, to move to the next level of his revolution, the so-called “soft” phase that continues to this day.

WELCH’S NEW GOAL IS TYPICALLY HERCULEAN: TO INSTILL IN GE’S colossal body the heart of a small company, with everyone on the team, regardless of rank. The absence of red tape means the elimination of turf wars and the acceleration of response to market demands. No longer would an idea go up and down the marketing ladder for approval, then over to engineering for its blessing. Says Welch: “Tear all the walls down, and put teams from all functions together in one room to bring new products to life. One room, one coffeepot, one team, one shared mission.”

He admits it’s “a dream, a long reach.” But if a small-company soul could be combined with a giant multinational’s muscle, he argues, the possibilities would be limitless. Welch venerates small businesses because they are “uncluttered, simple, informal. They thrive on passion and ridicule bureaucracy.” Most important, “When they move, they have to move with speed. Their survival is on the line.” He wants each of GE’s remaining 230,000 employees to behave as if the company’s future rests in their hands.

The method for inspiring such camaraderie and commitment came one night at Crotonville in 1988. Weary from hearing complaints about how slowly middle managers were eliminating cumbersome practices, Welch exploded. “Damn this thing!” he said, and told GE’s education director, James Baughman, they had to come up with a technique to speed change. Together, they outlined a program called “Work-Out,” which called for groups to meet with trained “facilitators” until hurdles were overcome. Work-Out rules called for groups to meet for several days and come up with a list of suggestions to improve their businesses. Bosses would be called in, and the group’s ideas would be thrown at them one after the other. Bosses on the hot seat had to say yea or nay on the spot. Certain items could be left hanging if they required more research, but only for 30 days.

Nothing has rallied workers more effectively than Work-Outs. They’re so popular that GE workers sometimes convene them spontaneously, without referees, when they feel the need to get to the bottom of a vexing problem. Other companies are copying the technique. “They’ve become a natural act,” Welch says.

At a Lynn plant, posters track items still to be resolved from four recent Work-Outs. Team 1 was struggling with redesign of a part for a T-700 turbine casing. Joseph T. Hanley, an inspector, explains that the part was often misshapen, which meant it had to be re-cut--a slow and expensive process. The Work-Out team discovered that a cap on the cutting machine was distorting the part by applying too much pressure. The solution: “We reversed the way we make it. Now we hold it by the inside and cut up and around the flange.”

People like Hanley, Charlie Ruiter and Bob Gedeon have caught the fire. But others feel trapped between the old order and the new. While Welch demands they pare their activity to essentials and eliminate unproductive details, too many bosses still demand busywork.

Says a recently departed computer programmer, “Welch’s ideas are wonderful, but there’s something wrong with the way they’re carried out. His point is we should only do productive things, and we agree. But in reality, middle managers pressure us for work that we know isn’t important--and Welch knows it isn’t important.”

The result: long hours, heavy workloads and resentment. The only Welch statement the former employee ever heard jeered came from one of his videotaped talks to employees. Welch told them if they were working more than 40 hours a week, they were doing something terribly wrong. “I go skiing on the weekend,” he said blithely. “You’ve got to do the same, or you’ve got a bad deal.”

“That angered people,” says the programmer. “They made a bitter joke of it. Asked what they were doing when they worked late, they’d say, ‘Oh, I’m going skiing.’ ”

But even malcontents recognize that Work-Outs are hacking away at obstacles confronting two of Welch’s goals: making GE “boundaryless” by tearing down bureaucratic walls at home while increasing its share of global revenues. Because nearly 40% of GE’s sales derive from foreign markets--and Welch wants more--GE executives will have to become as comfortable in Bombay as Cincinnati. When GE buys foreign operations, such as a light-bulb company in Hungary, it sends top people overseas for a year or two. In Welch’s view, only those companies that have strong international operations will survive.

So far, he’s been right. Even with economies around the world in recession, GE last year earned $4.7 billion on sales of $62 billion. For the past three years, Forbes magazine has judged GE the world’s most powerful corporation based on revenue, profit, market value and assets.

Despite its size, earnings have grown at an average annual rate of more than 10% over the past decade. Cumulative total return to share owners since 1981 is $851 per share, compared with $573 for the Dow Jones Industrial Average. Stock market value totaled $80.2 billion in mid-April, up from $13 billion when Welch took charge, making GE the second most valuable company in the United States after Exxon.

Everything about Welch is big, and his mistakes have been lollapaloozas, too. GE wrote off losses of more than $250 million in the mid-’80s when customers yawned at the boss’s pet project--automating factories with GE robots and computers. And disenchanted employees at two highly visible New York companies --NBC, acquired in a merger with RCA in 1986, and the investment-banking firm Kidder, Peabody, acquired by GE Capital Services the same year--mock his cheerleading.

Some analysts believe that GE’s ideas have failed to penetrate NBC and Kidder because broadcasting and investment banking depend upon individualists who disdain team play. Both businesses also pay celestial salaries to prima donnas. (Only certain stars at NBC and a few traders at Kidder earn more than Welch.) Neither company is losing money, but their desultory performances and low morale feed constant rumors that they are for sale.

Robert Wright, a Welch colleague for three decades, has run NBC for the past six years, lurching from one humiliating debacle to another. The network recently sank to No. 3 in ratings (it was No. 1 when GE took over seven years ago), then lost David Letterman to CBS. The doctored footage in a documentary on General Motors pickup trucks left an ugly stain on the network’s once-proud news division. But Welch denies that NBC is seriously troubled. “If you add up our cash, we’ve made a very nice return,” he says.

At Kidder, an insider-trading scandal broke soon after GE bought the firm, and Kidder has never regained its former Wall Street prestige. GE has poured an estimated $1 billion into Kidder, but only recently has it realized a solid return, estimated at about $300 million in 1992 pretax operating profits.

Controversy has dogged GE in other areas. Some public advocates regard the company as a poor corporate citizen, citing a skein of scandals as evidence. The most recent was a GE guilty plea last summer to civil and criminal fraud charges of conspiring with an Israeli air force officer to submit fictitious bills to the Pentagon. Others rail against GE’s aggressive Washington lobby and enormous PAC contributions to congressional candidates. Environmental and anti-nuclear activists have long protested GE’s involvement in nuclear weapons and defense products (GE recently sold its dwindling defense business to Martin Marietta).

Meanwhile, some analysts worry that Welch’s constant emphasis on improving performance is stressful and could eventually burn out talented employees. The “No. 1, No. 2” credo hangs like a guillotine over GE’s companies, and people are still being laid off, most recently 3,900 in its aircraft-engine plants. Arthur D. Little consultant Robert Tomasko sums up Welch’s legacy: “He has told the truth. There is no security for anyone.”

But in the judgment of Warren Bennis, USC’s leadership scholar, Welch’s ability to revitalize a huge work force sets him apart. “He recognized that companies must tap into the brains of the people working for them--their intellectual capital--if they hope to thrive in the next century.”

THE SIZZLE OF SMALL BUSIness--speed, total immersion, roller-coaster emotions, camaraderie, informality--first captivated Jack Welch 33 years ago when GE hired him right out of graduate school to work at its fledgling plastics business in Pittsfield, Mass.

Perched on the edge of his chair one recent afternoon, in a conference room at the company’s bucolic Fairfield, Conn., headquarters not far from his estate, the CEO leans forward and with typically intense, rapid-fire delivery, recalls the excitement of those days. “I was fortunate to start out as a one-man band. The first employee I hired came to my home for dinner, and we shared everything. He was a technician, and I was sort of a king, emperor, manager. Yet we were best friends, and we built a business.

“I was coach, facilitator, cheerleader, a whole variety of things, but there was no hierarchy. We all had ideas. When we got an order, we ran down the hall. We started with two, then four, then 12. We didn’t have time for structure. I was always popping into someone’s office. We’d go to anybody who had information.”

An executive who worked with him then puts it a little more sharply: “He was a madman--restless, impatient, competitive.”

A characteristic of leaders like Welch is supreme self-confidence. In his case, an unshakable belief in his superior abilities was instilled by an adoring Irish mother, Grace, who had tried 16 years for a child before her son was born in her early 40s.

Welch’s dad was a train conductor for the Boston & Maine, working 14 hours a day from dawn to dusk. When Jack and his mother went to pick him up at the Salem station, the train was often late, and mother and son would talk for hours. A devout Catholic, she dragged him to church every morning as a child. (An intense religious conviction faded after she died in 1966.) And she treated him like an adult; from age 6, he played poker and gin rummy with her for money.

At every opportunity, Grace Welch framed a positive interpretation about things troubling her precocious son. For example, she assured him that his stammer was just a sign that his mind was outracing his tongue. Welch told Fortune editor Stratford Sherman four years ago, “I was very close to her. . . . She always felt I could do anything. And I was just nuts about her.”

In Salem, a factory town, boys gathered at a playground called “the Pit,” the namesake of the arena at Crotonville. There Welch learned how to fight, a skill reflected in his tough persona. He was a pugnacious hockey player and was elected captain of his high school hockey and golf teams.

Academically, Welch always stood out, especially in math and science. After graduating from the University of Massachusetts at Amherst with a degree in chemical engineering, he earned master’s and doctoral degrees in the same field from the University of Illinois. When Welch joined GE’s plastics business in 1960 at $10,500 a year, it was a corporate backwater with one product, no markets and few sales. GE told Welch to see if the business had a future, then pretty much ignored him. Tooling around in a VW bug, Welch cut a decidedly unconventional figure. He complained about his salary and threatened to quit.

But he crafted a lasting success. By the time he left 17 years later, GE’s plastics business had grown into a $500-million enterprise. Annual earnings increases averaged 34%. Along the way, Welch developed a reputation as a precocious marketer. He even developed a wacky TV commercial in which a bull in a china shop broke everything but products made with GE’s Lexan plastic.

In 1977, the company recognized his achievement by moving him to Fairfield as senior vice president for consumer products. Again he demonstrated his management flair, revitalizing the lagging medical-systems business. He won a gamble that computer-assisted tomography scanners, known as CAT scanners, would take off; today GE leads the world in medical imaging. He redirected GE Credit’s efforts from financing manufactured products at lackluster returns to offering sexy financial services, including the leasing of aircraft, auto fleets and oceangoing containers for bountiful profits. By 1992, GE Credit accounted for a whopping one-third of all GE profits.

But Welch was shocked by what he saw as he climbed the corporate ladder. “They were so much more formal than anything I’d known. I couldn’t believe all the structure, the incredible bureaucracy and layering--which still exists today, by the way, as hard as we work on it.”

Welch guards his privacy zealously, but this much is known: He met his first wife, Carolyn, while attending Catholic Mass in 1959; they were married shortly thereafter, had four children and divorced six years ago. Welch married Jane Beasley, an attorney, in 1989. They met on a blind date arranged by his friend and GE director, former Citicorp Chairman Walter Wriston. Friends say Beasley, who quit working after marrying Welch, delights in matching wits with her voluble husband at dinner parties. They have no children.

Those seeking a glimpse into Welch’s character must settle for office anecdotes and stories about his polished golf game (he maintains a single-digit handicap), his passion for the Red Sox, his biting humor. Former GE executive Paul Van Orden, now at Columbia Business School, tells this story about Welch’s struggle with his short fuse shortly after he arrived in Fairfield.

His face reddening as he listened to reports from executives, Welch suddenly ripped apart a presentation. Then he stopped. “Wait a minute,” he said. “I apologize. This has nothing to do with your presentation. I just got a phone call, and it got me upset. I’m taking it out on you, and I shouldn’t.”

He got up to add ice to his soft drink. Instead, he took the ice bucket, put it on the floor next to him and started chewing on the pieces. Says Van Orden: “In the next half hour, he ate the whole bucket.”

The only vulnerability Welch reveals in a two-hour interview is his pain over the “neutron thing,” as he calls his derogatory nickname. After all, 10 years after it was applied to him, nearly every American family has been touched by corporate restructuring. Companies such as Sears, IBM and GM have laid off tens of thousands of workers and still seek coherent strategies. No credible analyst denies that global competition has cut deeply into U.S. spendable income. Yet the nickname sticks. “I just don’t think it’s fair,” he says softly, looking at the floor.

Welch, who retires in eight years, has a firm lock on his own security. The GE board raised his pay 9% last year to $3.5 million, and he exercised stock options worth $6.7 million. The board also gave him two more option awards, one valued at $7.8 million if he remains until retirement.

Which seems likely. “We’re on a long journey,” Welch sighs. “This is threatening to a lot of constituencies. I never realized what a hard sell this stuff is. I never realized this isn’t what everyone would want.”