The Jack Welch Years and the Cash Flow Machine That Created the Largest Company on Earth
General Electric (GE) reached the pinnacle of capitalism in the 1990s. In 1999, Fortune called CEO Jack Welch the “Manager of the Century.” With a $600 billion market cap in 2000, it became the most valuable company in the world, about 20 times the size of other large companies at the time, like 3M or DuPont.
Welch’s final years were far from his best, maybe even downright destructive, but the value creation over time had already cemented his legacy, perhaps overshadowing a company that was beginning to slip. The celebrity that began to follow him served as a distraction for a CEO and an organization that had otherwise remained focused for the better part of two decades. Welch’s final move was selecting his successor, a fateful decision that has historians now questioning much of Welch’s legacy in its entirety. While Welch remained quiet during most of GE’s eventual decline, he would later admit that he was “deceived”—a comment that offers little solace to those who suffered from the largest destruction of shareholder value in American history.
Lessons from the Jack Welch Era
- Attacking the cost base should be the first step in any turnaround.
- Aggressive internal and external investment can coexist.
- Cash flow is the best weapon in an arms race.
- Moving a portfolio toward growth often means exiting popular businesses that are nearing maturity or where competition is rising.
- Reward people according to the strategy.
- Welch fired his bottom 10 percent each year. That’s too hard on a culture, but there is likely some level of turnover that makes sense.
- Welch’s worst years were his last two to three and unwound some of his legacy. This is common among CEOs. Boards should manage the exit strategy more aggressively.
How a Culture of Arrogance Led to the Largest Collapse in American History
GE’s struggles show the difficulty of maintaining focus over decades, especially across CEO transitions. How do you achieve and sustain the discipline necessary to prevent the kind of irresponsibility and arrogance that plagued GE? What kind of leadership, systems, and incentives will focus people on sustained profitability—not on a dressed-up fiction that serves only short-term interests?
Because for every sad corporate failure like GE, there are winners equally worth studying. Taken together, the lessons are extraordinary.
Lessons from the Jeff Immelt Era
- Arrogance is the default culture that follows historical success. Guard against it.
- Benchmarking and accountability are necessary to inject humility.
- CEO transitions are critical to a culture. All eyes are watching actions as much as words.
- Board size and composition matter. Smaller can be better.
- Managing complexity requires another level of skill, which may not be sustainable over time.
- Capital deployment must balance risk versus return; “game changing” is often “game over.”
- Starved factories with a lack of ingrained process are a recipe for disaster.
- Making increasingly bigger bets to “hit the numbers” is a strategy that rarely works.
A Struggle to Find Balance in Risk Management
Boeing’s task in the 2020s is now unprecedented. Successfully recovering from the fallout of the COVID-19 pandemic dominates the focus in the short term. Finding a stable financial position and building a sufficient cash buffer for future crises will inevitably be a primary focus for several years. However, this effort has to come alongside managing safety and quality risks first, while not losing discipline on the cost, schedule, and development fronts. New products will be required in due course, but they can’t come at the expense of long-term cost competitiveness and financial viability. Similarly, relationships with suppliers and labor have to be carefully structured to ensure operational and financial success without causing disruption. One thing is for certain: more crises lie ahead. The question is whether Boeing’s century-old franchise can evolve to manage the crises of the future without forgetting about balancing and sustaining the gains from the past.
Lessons from Boeing
- Most companies grasp the importance of innovation and growth, but many underestimate risk.
- Success often drives arrogance and/or complacency. Stay focused.
- The severity of most crises is underestimated; crisis management is best done in advance.
- Innovative companies run the risk of favoring engineering over financial viability, but being too financially focused is an easy way to lose sight of other important variables.
- Both the number and the importance of key stakeholder groups always grow over time.
- Overemphasis of one business objective runs the risk of underemphasis of others.
- Some leaders are better equipped to manage certain risks and stakeholders than others. Boards need to act decisively when executives are not equipped to handle a crisis before it spirals further out of control.
How Cultural Transformation Led One of the Greatest Turnarounds in History
Despite his lack of a pedigree and the fancy suits that help define success in a shallow world, Cote focused on the basics: having financial discipline in M&A, holding the line on fixed costs, and treating employees with compassion; and he did so with integrity. Cote used to say, “What you think, what you say, and what you do shouldn’t be three separate decisions. They should be the same.” That summarizes the Cote era perfectly. He delivered on his promises with a level of humility and transparency that builds the foundation for a great corporate culture and engenders a loyal following. It’s easy to forget about that in the good times, but in the tough times, it matters.
Lessons from Honeywell
- In massive conglomerates, complexity and bureaucracy become the accepted default.
- Turnarounds take time, patience, and persistence.
- Make the difficult and unpopular decisions as soon as possible.
- Cost structure and liabilities need to be addressed before growth can become the focus.
- Hold the line on fixed costs—people hire people who hire people—often unproductively.
- Pay top talent not just for the job they do today, but for the job they will be offered tomorrow.
- Localized strategies often yield better results than global strategies.
- Favorite “Cote-ism”: “What you think, what you say, and what you do shouldn’t be three separate decisions.”
The Dangers of Fixed Incentives
Today’s new economy firms may be especially vulnerable to simple, rigid incentive plans, as they tend to favor highly ambitious and narrowly focused or even singular goals earlier on in a company’s life cycle. UTC’s experience shows that a single overarching goal can help drive transformation in the short term, but the organization needs new goals after that transformation.
For organizations large and small, it’s nearly impossible to find singular metrics that appropriately drive the needed behavior across organizations, especially over extended periods of time. Business conditions, competitive dynamics, product/technology cycles, and talent availability are all dynamic variables. Compensation and incentives for executives and managers should be as well. Few companies do this well. It requires a thorough examination of the particular opportunities and constraints that an organization faces over both the short and long term and the courage to shift course when internal and external conditions change.
Lessons from United Technologies
- Incentives drive organizational behavior.
- Sustainable success requires changing incentives on a semiregular basis.
- The best incentives are dynamic and fuel long-term, systematic improvements.
- CEO transitions are opportunities to apply fresh thinking across the business.
- Underinvestment trades short-term gains for longer-term pain.
- Don’t fire the bearers of bad news. Feedback is essential.
Avoiding the Forecasting Trap
The problem is companies are just too tempted to shortcut the process. The hard part about business systems isn’t getting started, nor is it doing kaizens or talking about Lean; the hard part is staying committed. It’s all too easy for a management team to see its time filled with planning, forecasting, and budgeting and then to set systems aside to chase growth when given the chance.
Operational excellence takes tremendous discipline and patience. Either missing out on sales or overproducing or underproducing is unavoidable. It takes a lot of discipline to let that improvement process play out knowing what’s being given up. Most new CEOs we see, particularly in struggling companies, feel pressure to make quick, bold, and impactful changes. It might work, but then again, it might turn ugly.
Lessons from Caterpillar
- Volatility is inherent in all markets and is difficult to predict. Forecasting with any accuracy over time is almost impossible.
- New leaders face pressure to fix difficult situations quickly, but tackling everything all at once rarely works.
- There are no shortcuts to building a continuous improvement culture. “Band-Aid” fixes are inevitably inadequate in the long run.
- Cultural change is hard to achieve in an insular organization. Bringing in outside perspectives is often necessary to navigate new challenges.
- Employee relations matter. Getting buy-in at all levels of the organization is critical to success.
- Accountability and compensation systems are vital. It can take years to correct bad habits.
How to Turn a Million into a Billion
There is an ongoing debate about whether TransDigm is cheating through aggressive pricing or simply doing things much better than everyone else. While that debate rages on, TDG continues to succeed by knowing exactly where and how to apply effort, focus, talent, and capital. If nothing else, TransDigm has shown that even good businesses can often be much better. Good is simply not enough, and greatness often lives in organizing everything around the core value creation engine of a company. TransDigm is what great looks like. Other businesses and their leaders can be well served by understanding the discrete advantages of their end markets and product lines and designing an operating and financial system that aims to maximize those characteristics.
Lessons from Transdigm
- Even good businesses can always be better.
- Know your unique advantages and always focus on maximizing them.
- Simple goals create focused outcomes. Complex goals breed confusion.
- Cash and capital structure are often overlooked tools for enhancing value creation.
- M&A strategy should almost never stray from core competencies.
- Employees should think and be compensated like long-term owners.
- Bottom-up management can be far more effective than top-down management.
STANLEY BLACK & DECKER
Adding a Digital Layer
Stanley Black & Decker took the flywheel of margin improvement and capital redeployment and added in a technology layer. The acquisition of the Craftsman brand exemplifies the synergistic opportunities that have been unlocked with SBD’s transformation. The company’s ability to improve margins and operational processes, coupled with its new innovation focus, gave management confidence that it could improve and revive this old brand better than others could. Sales results in the first years of the Craftsman relaunch have been far above expectations.
The company continues to push its operating system forward, focusing on people and integration of technology, innovation, customers, and operational excellence. The result is a fully developed operating system, now called the SBD Operating Model, which continues to evolve. From a starting point behind most industrial companies, Stanley Black & Decker is now far ahead.
Lessons from Stanley Black & Decker
- Cost-cutting can be painful—it can create dislocations in the organization—but may be necessary to survive.
- Given sustained effort, even old businesses can be transformed. New challenges often demand it.
- Business systems can evolve to suit the needs of the time. SBD started with Lean, but it has pivoted toward innovation and technology.
- Stars want to go where the organization is moving. Clear signals from the top encourage the optimal allocation of talent.
- Embracing technology or new ideas requires openness, external networks, collaboration tools, and repeatable processes.