INSIDE THE MIND OF JACK WELCH His ideas are simple: Face reality. Communicate clearly. Control your own destiny. But put together, they could rewrite the book on how to run a big company.
By Stratford P. Sherman REPORTER ASSOCIATE Cynthia Hutton

(FORTUNE Magazine) – I WAS AN ONLY CHILD,'' says Jack Welch. ''My parents were about 40 when they had me, and they had been trying for 16 years. My father was a railroad conductor, a good man, hardworking, passive. He went to work at 5 A.M., got home at 7:30 at night. My mother and I would drive down to the train station in Salem, Massachusetts, to pick him up. Often the train would be late, so we'd sit for hours and talk. I was very close to her. She was a dominant mother. She always felt I could do anything. It was my mother who trained me, + taught me the facts of life. She wanted me to be independent. Control your own destiny -- she always had that idea. Saw reality. No mincing words. Whenever I got out of line she would whack me one. But always positive. Always constructive. Always uplifting. And I was just nuts about her.'' According to Sigmund Freud, who was supposed to know, a man certain of his mother's loving approval keeps for life ''the feeling of a conqueror, that confidence of success that often induces real success.'' In the case of John Francis Welch Jr., at least, theory may coincide with fact. A charming firebrand with hot Irish blood, Welch seized the General Electric Co.'s vast bureaucracy by the scruff of the neck and shook it till it saw stars. Noel Tichy, a consultant who often works for GE, says Welch stoked the fire beneath the corporate caldron to avoid ''the boiled-frog syndrome.'' Tichy explains, ''If you put a frog in a pan of water and turn up the heat gradually, the frog will just stay put till it dies. But try to put a frog into boiling water and it will jump right out -- and survive.'' The high-heat treatment is hard to appreciate when you're the one jumping, but it saved GE from mediocrity, which Welch regards as the first sign of doom. In the eight years since he became chief executive at 45, Welch has remade the world's tenth-largest industrial corporation, focusing its portfolio of major businesses from about 100 sometimes marginal competitors to 14 with commanding shares of markets ranging from light bulbs and major appliances to aircraft engines, military electronics, and TV broadcasting (see table). He eliminated well over 100,000 jobs, one-quarter of GE's total, through layoffs, attrition, and the sale of businesses. He bought companies worth $16 billion, notably RCA and investment banker Kidder Peabody. He sold operations worth $9 billion -- coal mines and computer chips, and lines like TV sets and toaster ovens that once seemed GE's heart and soul. Yes, Welch has blown some big ones. He lost over $120 million trying to sell factory automation equipment to manufacturers that were unprepared to embrace his vision of the future. He wrote off more than that on two early acquisitions that turned out to be also-rans at producing computer chips and computer-aided design equipment. With the purchase of Kidder he unwittingly bought trouble in the form of an inside trader named Marty Siegel, who enmeshed the firm in his crimes. The feds forced GE to oust Kidder's management, and the firm has been hemorrhaging talent since. But on the whole Welch's performance to date has been sterling. Adjusted for inflation, earnings per share have risen an average of 7.6% a year, vs. 4.9% under his predecessor, Reginald H. Jones, and 1.6% under his predecessor, Fred Borch. GE throws off so much cash that even after reinvesting $6 billion a year, Welch has $2 billion left -- enough to buy a company the size of, say, Compaq Computer. Neutron Jack, as he is sometimes called, is widely regarded as one of the world's most ruthless managers. The truth is more complex. Some of his actions are indeed harsh, and he antagonized people inside the company and out by fixing something they didn't think was broke. What is becoming clear only now is how those moves fit into a larger plan to strengthen the enterprise and make its remaining employees more secure. At the center of Welch's business ethic are his mother's wholesome values: Face reality, even when doing so is uncomfortable, and communicate candidly, even when doing so may sting. These are necessary means to achieve that all important end: controlling your own destiny. Welch has hewn to those principles through years when most of the jobs he was facing and the facts he was communicating were extremely unpleasant. He is a sensitive man who views the world as tough. He sees global markets inevitably coming to be dominated by fewer, ever more formidable players -- steamrollers like Philips and Siemens and Toshiba. To prosper in this world, Welch believes, GE must achieve competitive advantages that allow it to rank first or second in every market it serves. So often is this simple concept repeated around GE that people express it as a single, seven-syllable word: ''number-one-an'-number-two.'' While he is all for fair competition and level playing fields, Welch really wants to throw rocks down on rivals from above. If you don't see the world much the same way he does, he is willing to bet that you're deceiving yourself -- and he would be happy to compete against you, anytime, anyplace. Now that he has shucked off the losers and strengthened the winners, his revolution is moving inexorably onto new ground. During the height of the layoffs in Welch's first years, when one might have thought GE's productivity would have soared, it in fact crept along dishearteningly at less than 2.5% annually. In Welch's view, that's not nearly enough: GE must raise ^ productivity 5% to 6% a year -- every year -- if it is to hold its own in the global marketplace. This dictates an all-out war on what Welch regards as GE's excessive, obstructive bureaucracy -- ''the cramping artifacts that pile up in the dusty attics of century-old companies: reports, meetings, rituals, approvals, and forests of paper that seem necessary until they are removed.'' All this slows response times, weighs workers down in trivial pursuits, and gets in the way of what Welch desperately wants to achieve. The war on bureaucracy cannot be won by fiat, in the way Welch could, say, obliterate a division with a single stroke. Now he must win his employees' hearts and minds with gentle persuasion. That's what is so fascinating about this piquant moment at GE: Welch is engaged in a struggle of ideas. These ideas and the force he is willing to put behind them -- stressing competitive power and changing the bureaucratic character -- put him on the leading edge of the art of management. PEOPLE who don't know Welch may fear him, but those who spend time with the man tend to like him. Smart, unpretentious, and eager to laugh, he stands five-eight but seems bigger, fit from 6:30 A.M. workouts at the GE gym plus weekend golf and skiing. He favors cover-your-eyes bright ties with handkerchiefs to match. He is losing his hair and is plainly unhappy about it. Vulnerable, and confident enough to show it, he speaks as often about his feelings as about his thoughts, and stammers infectiously when he gets excited. If you are with him long enough, his eyes may lose their grip on yours for an instant and you may see the skull beneath the skin, the animal inside the man, driven and hungry. Robert Kunze, a GE alumnus who is now the San Francisco venture capitalist, has known Welch for nearly 30 years and describes him as having been ''tormented'' by the layoffs he ordered, in need of hand-holding from friends. ''But that side of him,'' Kunze says, ''is overwhelmed by wanting the company to be not just viable but outright sexy.'' BACK IN SALEM, Welch says, he grew up as ''an incredibly serious, believing Catholic'' -- a conviction he felt intensely until his mother died in 1966. He served as an altar boy into high school and met his first wife, Carolyn, attending Lenten masses as a graduate student at the University of Illinois in 1959. They had four children and divorced after 27 years of marriage. He is now engaged to Jane Beasley, 36, a mergers and acquisitions associate at the tony New York law firm of Shearman & Sterling. They met in 1987 on a blind date arranged by a GE director, former Citicorp chairman Walter Wriston, and his wife. Welch is a scrapper. His ideas are a gauntlet thrown down before anyone who does not share them. Noel Tichy, the consultant, believes that sports help explain that side of Welch's management style. At the University of Massachusetts, where Welch got a B.S. in chemical engineering, he lived in a jock fraternity dominated by hockey players. These days, when Welch is locked in debate, no better metaphor than hockey comes to mind. ''Hockey is the kind of game where people bang you up against the boards and then go out and have a drink with you after,'' says Tichy. Neither of his parents, the children of Irish immigrants, finished high school. Welch's mother, Grace, pushed him to get an education, and he earned a Ph.D. at Illinois, where he says he learned to ''wallow'' in a problem intellectually until he found the solution that worked. Upon graduation he took an engineering job in GE's plastics business in Pittsfield, Massachusetts. When he arrived, the facility had an engineering thermoplastic with great structural strength called Lexan, but no markets and virtually no sales. The operation, a kind of skunkworks designed to develop a new business without immediate pressure for profit, was distinctly unlike the rest of GE. In this safe backwater, Welch was allowed to follow his instincts, flout convention, and flourish. He proved a natural manager. He got his first profit-and-loss responsibility at 27 and rose fast. Welch relied on unorthodox techniques to build the new business. Twenty years before the word ''globalization'' became popular, he formed joint ventures in Japan and the Netherlands. (For more on such strategic alliances, see Competition.) Pitching Lexan as a replacement for glass, he made a TV commercial with a bull in a china shop. Naturally, everything but Lexan broke. That image -- rude havoc that reveals a Darwinian truth -- is Welch in a nutshell. He remained in Pittsfield for 17 years, earned bigger bonuses than his peers, frequently complained about the way GE treated him, and threatened to quit. In 1966, testing a new manufacturing process, he blew up a pilot plant. But such mishaps never dented his career. His secret? Performance: Once he got the plastics business off the ground, Welch produced average earnings growth of 33% a year. In 1977 he moved to GE's headquarters in Fairfield, Connecticut, as a senior vice president for consumer products. There, in a building where the office doors of top executives whoosh open and close at the touch of a button, he encountered a bureaucracy that brings imperial Russia to mind. Three years earlier, when Jones asked his staff to list 20 candidates to succeed him, Welch's name didn't come up. Too young. Too unusual. But the maverick's performance had attracted the CEO's attention. Under the slender, soft-spoken Jones, a finance man who was considered one of the finest managers of his day, GE went from a chronic state of cash shortage to immense financial strength. But Jones built up the bureaucracy, adding more complex financial reporting to the military-style command-and- control systems GE already had in place. The new reports collected vast amounts of data -- ''I found you never get all the information you'd like,'' Jones recalls -- and forced decisions through thickets of reviews. Translated and amplified by his subordinates, Jones's thirst for data led to ridiculous excess. Dennis Dammerman, 43, now GE's chief financial officer, says that he had to stop computers in one GE business from spitting out seven daily reports. Just one made a stack of paper 12 feet high, containing product-by-product sales information -- accurate to the penny -- on hundreds of thousands of items. The bureaucracy routinely emasculated top executives by overwhelming them with useless information and enslaved middle managers with the need to gather it. Old-timers say that as mastery of the facts became impossible, illusion sufficed. Briefing books had grown to such dense impenetrability that managers simply skipped reading them. Instead, they relied on staffers to feed them tough questions -- ''gotchas'' in GE lingo -- with which to intimidate subordinates at meetings. Jones was realist enough to know that the company needed something more. In choosing Welch as his successor, he went for an engineer who was comfortable with technology, had a record of sizzling financial performance, and was a proven master at managing change. WITH THE restructuring largely behind him, Welch is moving to the second phase of his plan: an attempt to ignite productivity. To measure productivity, GE begins by computing what might be called ''real'' revenues (revenues after the effects of price increases have been removed) and real costs (costs after discounting for the effect of inflation). GE then divides the real revenues by the real costs to determine a measure of efficiency, which it calls the level of productivity. The pace at which that measure rises from year to year is what GE calls productivity growth. Tiny changes in the growth rate can have phenomenal effects on profits. A single percentage point increase in productivity translates into an extra $300 million of pretax income. Welch sees productivity as crucial to GE's ability to control its destiny. The higher it is, the more cushion GE has to cut prices and go for market share. Welch has aggressively pursued just that policy since taking command: Over his eight years GE has held price increases to 0.5% a year while inflation has grown at 3.5%. The key to future productivity growth, Welch believes, is to ''liberate'' and ''empower'' middle managers. GE still has 300,000 souls on the payroll, nearly a third of them professionals. Welch is confident that his ideas and beliefs are shared by the 2,000 or so highest-ranking executives. But that took eight years, a lot of hiring and firing, and leaves 99.33% of the organization still to conquer. By GE's measures, productivity growth has improved since the early Eighties, to a 4.5% rate in 1988. But with the major restructuring accomplished and the company still shy of Welch's 6% goal, future gains will depend on the voluntary behavior of people, from the head of manufacturing at GE's Erie, Pennsylvania, locomotive plant to the marketing manager for Lexan in Japan. As Welch explains: ''It has nothing to do with whips and chains and taking heads out. We're trying to unleash people to be self-confident, and so to take on more responsibility.'' Welch's rationale is founded on his perception of how competitive forces will play out on a global scale: ''The U.S. system has the most free enterprise in the world, with Britain next,'' he says. ''After that, it falls off dramatically. In Japan the relationships between the government, the banks, and the companies are very intertwined. Your bank allows you to have low returns, and your government will support your R&D and finance your exports. Or take Europe. Ronald Reagan goes to Russia, and he talks about reducing nuclear weapons. Then Helmut Kohl comes with all the German businessmen, and they sign contracts to do deals. That's their system. ''What our system has is freedom. It allows people like me to become chairman of GE in one generation, it allows the talented young engineers in our company to move up fast. If we put bureaucracy and rigidness into our system, we play into our competitors' hands in global markets. Because we don't get the benefits of the protected markets, the government support, the presidential relationships. But if we let our people flourish and grow, if we use the best ideas they come up with, then we have the chance to win. The idea of liberation and empowerment for our work force is not enlightenment -- it's a competitive necessity. When you look at the global arena'' -- Welch makes a sweeping gesture -- ''that's what our competitive advantage is.'' Making believers of GE's middle managers will not be that easy, if it is possible at all. On average, they joined the company five years before Welch became boss: They belong to a gentler era. A remarkably resilient organism, the bureaucracy continues to resist change. Many managers who survived the purges have kept the old ways alive, by attempting to do all the work once accomplished by many more people. If they are expecting thanks from Jack Welch, forget it. Much of that extra effort he views as wasted. Says he: ''If someone tells me, 'I'm working 90 hours a week,' I say, 'You're doing something terribly wrong. I go skiing on the weekend, I go out with my buddies on Friday and party. You've got to do the same or you've got a bad deal. Put down a list of the 20 things you're doing that make you work 90 hours, and ten of them have to be nonsense, or else somebody else has got to do them for you.' '' This campaign brings out the full force of Welch's moral fervor. He regards bureaucracy as evil because it destroys productivity by distracting attention from useful work. It makes people look inward, at the organization, rather than outward, to the customer and the competition. As Welch, fuming, told an assembly of GE's top managers in January, ''This internal focus has wasted our time, wasted our energy, frustrated us, made us so mad some nights over some bureaucratic jackass boss that we'd punch a hole in the wall.'' Welch is doing all he can to bypass the bureaucracy to communicate directly with employees. He meets subordinates face to face as often as possible, primarily through the sophisticated management-training institute GE maintains on a secluded campus in Crotonville, New York. Once attended exclusively by high GE executives, it has been expanded by Welch to receive 5,000 GE | employees annually, including everyone hired as a manager or promoted to that rank. Every three weeks or so Welch choppers over to pitch his ideas to a new group and then debate them, rough-and-tumble, in an amphitheater called the Pit. In an organization of GE's size, one has to organize to beat bureaucracy. Hence the first step in what Welch views as a long-term effort, a brand-new program called Work-Out. It is an elaborate, systematic attempt to wring unnecessary work out of the system. The idea is to get the heads of the 14 main business units to join their salaried employees in groups that must agree on lists of unnecessary meetings, reports, approvals, and tasks -- and formally pledge to eliminate them. Then, soon, a follow-up meeting takes place. If the business chiefs don't make good on their commitments, they expose themselves to their subordinates' contempt. The medical systems business's X-ray unit near Milwaukee ran a similar program recently and came up with 55 items that could be eliminated or improved. Small but telling example: The group determined that the head of the computer lab should be allowed to spend petty cash and sign for deliveries without approval from a superior. Another exercise, in the company's finance organization, revealed that some 1,000 people worked nights and weekends at the end of every quarter to ensure that GE was the first company its size to publicly report earnings. Save your strength, said Welch: ''Who the heck cares about reporting first? Maybe somebody did, once. Or maybe someone thought someone did.'' WELCH INSISTS on talking about ''leaders'' instead of ''managers.'' He says, ''Call people managers and they are going to start managing things, getting in the way. The job of a leader is to take the available resources -- human and financial -- and allocate them rigorously. Not to spread them out evenly, like butter on bread. That's what bureaucrats do. It takes courage and tough- mindedness to pick the bets, put the resources behind them, articulate the vision to the employees, and explain why you said yes to this one and no to that one.'' Speed is crucial to competitive advantage. Argues Nigel Andrews, 41, GE's British-born strategic planning chief: ''Making the right decision late is the same as making the wrong decision.'' That belief is what drives Welch to fight GE's natural propensity for information overload. GE can never be as quick as a startup company, he knows, but pitted against other sumo-size contenders, it must be the most agile. He proved the value of speed in January in the race to make a deal with General Electric Co. of Britain, an unrelated entity known as GEC. He and seven key managers dashed to London to negotiate joint ventures in gas turbines, medical equipment, circuit breakers, and appliances. They locked up an agreement in just three days, outsprinting AT&T, Plessey, Thomson, and Northern Telecom. Welch treats the 30-odd members of his executive council almost like fraternity brothers, teammates who made the varsity cut. They enjoy intellectual roughhousing, and their debates make for fast, effective decision-making. But the arrogant brashness of the new culture Welch is creating is a cause for some concern. At NBC, Kidder, and elsewhere, members of GE's hard-shouldered management team have alienated people unused to the ethos of varsity hockey. The quality Welch seems to value most in people is self-confidence, and he works hard to inspire it in others. His challenge is finding a way to share this heady sense of belonging with an organization shaken by years of upheaval. How to make 300,000 people feel good about themselves? Getting rid of losers was a start, says Welch: ''We cut and ran from the ones that didn't have a chance of becoming No. 1. In televisions we were tied for No. 4, and we were almost a whipping boy. Wham! The Japanese are lowering prices! Whomp! There goes the quarter! We haven't got a business like that today. They're all producing either cash or earnings, and everybody who's still here has a role.'' Perhaps the most encouraging indicator of GE's future is the light-bulb business that gave the company its start. Grown fat and complacent, it started to slip in the mid-1980s as Philips and other European companies invaded its turf. Welch threw in a new team that has boosted productivity growth from 2% a year to 9%, the highest in GE. Part of the trick was soliciting employee ideas for low-risk projects. For example, GE found ways to load more boxes of bulbs into trucks, increasing the payloads. The average benefit of such projects was just $16,600 a year, but they inspired confidence and added up. Welch stands at the end of a proud line of management innovators going back at least as far as Ralph Cordiner, GE's chairman in the 1950s and early 1960s, who invented the concept of decentralization that swept American industry in his day. Welch's favorite management thinker is not Cordiner but Helmuth von Moltke, a Prussian general who served as military adviser to the Ottoman court -- the 19th-century equivalent of a management consultant. ''Von Moltke believed strategy was not a lengthy action plan,'' Welch explains, ''but rather the evolution of a central idea through continually changing circumstances.'' An idea, perhaps, like Grace Welch's idea about controlling your own destiny. At his age, Grace's son could remain on the job for another decade -- plenty of time for him to write his chapter and for others to judge its worth.


-- Face reality as it is, not as it was or as you wish it were.

-- Be candid with everyone.

-- Don't manage, lead.

-- Change before you have to.

-- If you don't have a competitive advantage, don't compete.

-- Control your own destiny, or someone else will.

CHART: NOT AVAILABLE CREDIT: NO CREDIT CAPTION: HOW A DOZEN GE BUSINESSES RANK . . . Twelve of GE's 14 units are market leaders. Financial services and communications serve markets too fragmented to rank.