Cycles of Learning: Observations of Jack Welch - ASQ

Cycles of Learning: Observations of Jack Welch

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Gregory H. Watson, Business Systems Solutions Inc.

When the student is ready, the teacher will come.

“Opportunity is missed by most because it is dressed in overalls and looks like work.”
—Thomas Edison, founder, General Electric Company

Starting the Journey

Noel Tichy, University of Michigan professor of management and consultant to many of the nation’s business leaders, has said, “The two greatest corporate leaders of this (20th) century are Alfred Sloan of General Motors and Jack Welch of General Electric (GE). Welch would be the greater of the two because he set a new, contemporary paradigm for the corporation that is the model for the 21st century.”

John Frances Welch Jr.—Jack Welch as he is usually called—is almost unanimously heralded as the modern role model for excellence in business leadership, but he wasn’t born that way. He matured into greatness as a leader through a progressive sequence of lessons learned over his 20 years at the helm of GE.

Jack Welch, and his journey as a learner and teacher, provide a wonderful observation platform of the work that chief executive officers perform and the winning rationale for choosing Six Sigma quality as a business-building strategy.1 It is notable that at the very beginning of his career as GE’s CEO, Welch did not have a corporate quality officer or a formal quality management system for the whole corporation. He cautiously avoided both “fads” and “emerging” management trends. Although GE is recognized as having one the world’s top industrial statistics groups, it has never had a strong corporate quality function.

That does not mean that Welch did not appreciate quality as a business improvement methodology. In his first letter to GE shareholders as CEO (1981), Welch laid out the challenge to make “excellence the dominant aspect of our company’s culture.”2 What did he mean by excellence? He defined it this way:

“‘Excellence’ means being ‘better than the best.’ Its achievement requires an introspective assessment of everything we do, say or make, and an honest inquiry: ‘Is it better than the best?’ If it is not, we will ask ourselves, ‘What will it take?’ and then rally the resources to get there. If the economics or environment determines that we can’t get there, we must take the same spirited action to disengage ourselves from that which we can’t make ‘better than the best.’ This commitment to the utmost in quality and personal excellence is our surest path to continued business success. Quality is our best assurance of customer allegiance. It is our strongest defense against foreign competition and the only path to sustained growth and earnings.”

Welch was a believer in the value of quality and in the need for personal
commitment to quality, but he also believed that quality was driven at the operating level of a company, not from its central office. His current iconlike position as the global spokesman for Six Sigma is all the more incredible considering this initial mental framework. How did he make this journey?

After studying Welch for some time, it is clear that his approach to business improvement has gone through three cycles of learning:

  1. In the first cycle (early 1980s to late 1980s) he focused GE on the elimination of variety in its portfolio of businesses by reducing the nonperforming business units as judged by market performance.3
  2. During a subsequent learning cycle (late 1980s to mid-1990s), Welch focused the company on simplifying and eliminating nonvalue-added activities through creative efforts of teams using Work-Outs and the Change Action Process (currently called the Change Acceleration Process).
  3. In 1995, Welch discovered Six Sigma and studied its implementation at both Motorola and Allied Signal. This third phase of discovery focused on the elimination of variation from already lean business operations to drive gains in productivity and financial performance.

By examining each of these three learning cycles, insights can be drawn for students of the Jack Welch management phenomena to uncover observations that other executives might make about pursuing a “best practice” approach to business improvement through implementation of Six Sigma quality.

Cycle I: Eliminating Nonperforming Businesses

Restructuring in the early 1980s was an indispensable stimulus for increasing the level of GE’s competitiveness. By focusing the business on leveraging, growing and investing in the “cash cows” and releasing the “dogs” in the market portfolio, Welch allowed a better use of working capital and the capital investments became more focused on business areas that could become dedicated winners in their markets. The central idea that guided GE’s business decisions was that those business areas that intended to compete in global markets must either be or become number-one or number-two in their market places. Those businesses that had no chance of attaining this goal were to be fixed—either sold or closed.

There was little mercy in this initial stage of implementing this learning about organizational focus, and today Jack Welch bears the nickname “Neutron Jack” for closing businesses that were unprofitable and had little potential of turnaround. However, Welch continued to learn as his career progressed and has come to prove himself exceptionally enlightened by the lessons that he drew during the next two cycles of learning.

This early emphasis on managing the portfolio of businesses helped to assure that GE would make a positive use of its capital for appropriate investments. In the early years that meant sustaining the business and managing through the transition from a basic manufacturing oriented business into the heavily service oriented business that GE is today. It also meant investing in the right process capabilities and personal competence to prepare GE for the challenges it would face in the future. Welch built a GE culture that came to relish change: “We’ve long believed that when the rate of change inside an institution becomes slower than the rate of change outside, the end is in sight. The only question is when.”

Once an organization has focused itself on targeted business areas, then it needs to enter the next level of improvement. What did Welch do to maintain the momentum? The second cycle of learning in Welch’s CEO learning journey came when he embraced Work-Out as a way to challenge his people to discover creative ways to simplify the business and the Change Action Process as a way to implement this learning.

Cycle II: Nonvalue Elimination

Only so much gain can come from managing a portfolio of businesses or the act of delayering: removing sectors, groups, and strategic and business units; streamlining the extensive command and staff structure used to run companies; or eliminating bureaucracy. The next breakthrough in business improvement came in the late 1980s stimulated by the advent of Work-Out.

This tool is used to assure rapid decision-making based on the consideration of the ideas and analysis of all involved people from all ranks, levels and functions: managers, secretaries, line workers, engineers and even customers and suppliers (if appropriate). These people would be gathered into a room to focus on a single problem or opportunity, evaluate the data about it, determine the alternatives and rapidly and decisively act on the best ideas that have been developed regardless of their source. GE designed Work-Out based on the basic behavioral premise that those people who are closest to the work know it best and are in the best position to determine how to improve it.

Again, Welch commented:

“Work-Out is a relentless-endless companywide search for a better way to do everything we do. We’ve had a year of Work-Out under our belts (started in 1989) and we could not be more excited and encouraged by what we have seen. Some go into the sessions cynics—wary of yet another ‘program’—but nearly all come out true believers, not in some ‘system’ but in awe of what they are finding within themselves—creativity that in many cases had been ignored by the eight-to-five existence that routine and bureaucracy can create.”

Work-Out fostered the idea of “boundaryless learning” throughout GE. This concept means that the artificial barriers and walls that people build around themselves or their work group for reasons of status or to make their own environment secure by banishing change are demolished. Everyone is given access to the same information, everyone pursues the same goals and drives the organization in the same direction—and, also importantly—everyone shares in the rewards of success.

“The idea flow from the human spirit is absolutely unlimited. All you have to do is tap into that well,” Welch said. “I don’t use the word ‘efficiency.’ It’s ‘creativity.’ It’s a belief that every person counts.” This became a fundamental thesis of Work-Out—the critical tool used by GE in the early 1990s to harness the creative power of its people to streamline the entire organization by focusing on simplifying work, removing nonvalue-added steps from its work processes and tightening up the way people work.

There are three differentiators that Welch focused GE upon to emphasize this shift:

  1. “Speed … From decision making to deal making to communications to product introduction, speed more often than not ends up being the competitive differentiator.
  2. “Stretch … A stretch atmosphere replaces a grim, heads-down determination to be as good as you have to be, and asks, instead, how good can you be?
  3. “Simplification … We are going to de-complicate everything we do and make at GE.”

This is the second element of the social architecture or “genetic code” that GE used to drive change management. “Boundaryless means the removal of every organization and functional obstacle to the free and unimpeded flow of ideas—inside the company across every operation and outside the company from the best thinking in world business. We measured this boundaryless behavior in our leadership.” Welch used his tools of Work-Out and Change Action Process supported by management selection and development processes to make GE the leanest of lean competitors. Now that his company was both focused and lean, what was Welch to do to keep generating improvements?

Cycle III: Variation Elimination

All along this learning journey, Welch had challenged his people to keep looking for creative ways to apply new learning from any source to improve the business. He had always measured growth in terms of bottom-line performance—growing value for the shareholders. While other CEOs have focused on quarterly performance, Welch had a more expansive view:

“You can’t grow long-term, if you can’t eat short-term. Anybody can manage short. Anybody can manage long. Balancing those two things is what management is.”

The job of leadership is to deliver both short-term profits and long-term organizational strength. Compromise of one or the other of these two objectives results in less than a world-class organization because the success in one time period or the other is purchased at the sacrifice of the other. The way to achieve both of these objectives simultaneously is through pursuit of Jack Welch’s third cycle of learning: variation elimination through application of the collection of analytical methods associated with the Six Sigma business improvement process.

In 1995, the year that Welch initiated GE’s Six Sigma initiative, he had just confessed (to GE shareholders) that they had missed two major stretch improvement goals related to operating margins and inventory turns. After implementing Six Sigma this shortfall was erased. GE demonstrated performance in both areas based on its Six Sigma journey:

  • Operating margins improving from 13.6% to 18.9%.
  • Inventory turns moving from 5.8 to 8.5.
  • Asset efficiency (ratio of plant and equipment expenditures to depreciation) moving down toward 1.0 (with future movement projected to 0.8—which indicates finding free production capacity concealed among current corporate assets by removing the “hidden factories” caused by waste and rework).
  • Earnings per share doubling over the five years of implementing Six Sigma.

Welch has grown GE over this time through a combined approach that uses this capital effectively for acquisition, supported by both Six Sigma cost reduction and natural business growth through market and product innovation that fuels the ability for further reinvestment.

Why did Welch become convinced that Six Sigma was the final stage in the sequence of improvement initiatives that he championed as CEO? What value did he perceive from the integration of Six Sigma with his ideas of portfolio management, the boundaryless organization and institutional learning?

“We have been working on moving the mean. The problem is the mean never happens. The customer only feels the variance that we have not yet removed. Variation is evil in any customer-touching process. Improvement to our internal processes is of no interest to the customer.”

Welch’s previous initiatives had focused GE on the businesses that should deliver the future strength of the company (portfolio management) and had challenged his people to apply their creative abilities to simplify and streamline their work by eliminating bureaucracy and nonvalue-added activities. He saw clearly that the remaining frontier for business improvement was to take these lean processes and wring out the variation that caused the performance to fluctuate over time.

The effort Welch orchestrated by implementing Six Sigma focused his management team on eliminating the common cause variation found in business and work processes. For many years, GE had worked to control special cause variation (changes in work process performance due to specifically attributable causes), but when the call came to implement Six Sigma, Welch was moving them to the next level of business improvement—what W. Edwards Deming long ago recognized as the job of management: removal of common cause variation, the variation inherent in design and implementation of business processes.

Welch had discovered the next level of business efficiency: Workers cannot eliminate the common cause variation found in a business system by focusing on the daily activities of work process management. It must be the work of the management team to eliminate common cause variation. The GE Six Sigma initiative is the management approach to satisfy this improvement objective. It prepares the business to be a reliable organization that produces the right product through value-added processes that consistently perform as designed to deliver the value that has been demanded by customers and markets.

How enduring will this emphasis on Six Sigma be? According to Welch, “Six Sigma is quickly becoming part of the genetic code of our future leadership. Six Sigma training is now an ironclad prerequisite for promotion to any professional or managerial position in the company—and a requirement for award of stock options.” By embedding Six Sigma into the performance evaluation process and linking Six Sigma to the reward system of GE, Welch ensured that he would gain and hold the attention of his entire management team. Welch has built a business system one step at a time and integrated the pieces with his holistic leadership style to deliver sustained competitive performance.

Observations and Conclusions

This learning goes hand in hand with the evolving concept of leadership required to sustain a winning competitive position. As Welch observed: “This company cannot be ‘managed’ to perpetual double-digit growth. Management implies stewardship of an asset, order, structured, tightly controlled. With leadership the question at the beginning and end of each day is, ‘how far can we take this … how big can we grow it … and how fast can we get there?’”

Management focus on stewardship, strict accounting-based business controls, and highly ordered and rigorous decision-making processes can immobilize an organization causing it to reduce agility in managing change. On the other hand, the learning culture Welch focused on building developed an insatiable thirst for new ideas in operating businesses and stimulated the ability to grow faster and perform better as a continuing challenge.

The sequence of learning is important when it comes to business process improvement. It makes no sense to waste an organization’s resources on eliminating non-value-added work from businesses that are not long-term winners. It also makes no sense to drive out variation from business processes that add no value to customers. The sequence of the learning observed in Welch’s activities as CEO is just as important as the lessons that may be taken away. Winning companies use all of their resources more effectively than do their competitors.

All three levels of learning have prepared GE to face its next challenge: digitization or the adoption of e-business as a means to automate the work that has been optimized with respect to their customers and markets. Welch used the GE learning process to prove a final lesson compared to an organization such as General Motors (GM): While GM had invested over $80 billion in automation during the decade of the 1980s—with little to no apparent financial benefit—Welch observed that there is a different way to improve business than by purchasing assets.

Welch built into the business asset efficiency through his three cycles of learning, thereby earning the right to automate work processes that have been simplified and optimized. GM did not learn this lesson for the 21st century and failed to create the much-touted “factory of the future” because its investment in “e-business” was biased toward the acquisition of equipment that enabled automation. GM had failed to focus its business and fix its work processes as prerequisites to automation. Welch’s process for continuous learning led to the discovery that business must simplify first, then automate best practice that has been designed for robust performance in the face of variation in business conditions.

In Welch’s own words:

“It is what makes GE work. It’s the fabric of the learning culture. Such an operating mechanism is difficult to bring alive on paper or in a chart, but is vividly clear when one observes the ferment and sharing of ideas. … It is this passion for learning and sharing that forms the basis for the unrelenting optimism with which we view the future, and for the conviction that our greatest days lie ahead.

“We believed then and we are convinced today … that there is an ‘infinite capacity to improve everything’—but there was no methodology or discipline attached to that belief. There is now. It’s Six Sigma quality, along with a culture of learning, sharing and unending excitement.

“Work-Out in the 1980s defined how we behave. Today, Six Sigma is defining how we work.”

Learning quickly and rapidly translating learning into action is the ultimate competitive advantage. What is the real lesson for CEOs as architects of change? First, eliminate the nonperforming businesses. Next, focus on eliminating nonvalue-added activities by simplifying the business and unlocking the creativity of your people. Lastly, eliminate variation in business and work processes using Six Sigma quality methods. Then, and only then, has a business earned the right to automate its operations. Over his tenure as CEO, Jack Welch created this formula for sustainable success. Perhaps this is why so many CEOs are paying attention to his comments and observations regarding Six Sigma.

REFERENCES

  1. Six Sigma is a registered trademark of Motorola Corp. Motorola Corp. has granted the permission for its widespread use to refer to the set of methods and tools pioneered by the Motorola Six Sigma Research Institute.
  2. All quotations in this article are taken from the official General Electric Company Web site at www.GE.com and have been attributed either directly to Jack Welch or are statements from his Letters to Shareholders (1981 to 2001).
  3. This logic of the “elimination sequence” follows a model that was initially published in an earlier book by the author: Business Systems Engineering (New York: John Wiley & Sons, 1994)

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