Is it just a weird vibe or is doom on the horizon? In the public eye, the downfall of an organization seems to happen quickly. Yet, behind closed doors, there are often clues that demise is imminent long before the trending LinkedIn story.
I’ve been reading a new book- The Man Who Broke Capitalism: How Jack Welch Gutted the Heartland and Crushed the Soul of Corporate America―and How to Undo His Legacy.
It’s a fascinating tale of the infamous former General Electric CEO, Jack Welch. GE was once the most significant company in America, employing hundreds of thousands of people, paying fair wages, and representing close to 1% of the American GDP. In 1981, Jack Welch took over General Electric with a single goal: To drive the stock price. And he did it, for several years.
But his gains weren’t lasting. His management style drove short-term profits, but over time, his approach destroyed the very things that made the organization valuable in the first place: people and innovation. GE is now a shell of its former self.
It’s a cautionary tale for today’s leaders. The pressure to drive short-term growth is immense; striving for quarterly capitalism can break even the most well-intended firm. But in the case of GE, and what I predict will be many organizations, the short-term gains were just that- short.
It took two decades for GE’s public stock price to drop (when Welch started, GE was sitting atop 100 years of innovation and goodwill). However, GE insiders felt things change long before the financial results turned. Here are three red flags that preceded demise:
Despite prosperous financials, Jack Welch always proclaimed that the economy (might be) heading towards a contraction. He claimed he wanted GE to be ahead of it, so he routinely implemented mass layoffs of tenured employees. The intent, and the result, was to increase the profits. Despite the fact that GE was financially sound at the time. It worked but the cost to morale and innovation took its toll.
We’re seeing troubling early inklings of this model today. Every day, another company is in the trending headlines for a layoff. Some firms may have a sound financial rationale for making cuts, but others are simply cutting because they fear a potential recession. When an organization prioritizes grabbing every penny before protecting their valued team members, they create a self-fulfilling prophecy.
Prior to Welch, GE built a slow, but steady business. Slow wasn’t going to cut it for Welch. He knew he could only sell so many toasters, washing machines, and jet engines. The markets weren’t big enough to support the size and speed of the bottom line growth he wanted. That’s when he started buying businesses, instead of creating them.
To be fair, acquisitions are not always a bad decision. The challenge comes when an organization makes acquisitions that have next to nothing to do with the core of the business; when the emphasis is on the financials of the deal, instead of serving customers better, innovating more boldly, or creating future markets. It’s usually just a thinly disguised play for the numbers, vs. sound strategy.
Even after mass layoffs and dealmaking, GE still wasn’t growing share prices fast enough for Welch. That’s where GE capital comes in. Prior to Welch, GE capital was a small division of the business. They provided small loans for consumers to buy appliances. Under Welch’s leadership, GE transformed from an admired industrial manufacturer into what was effectively an unregulated bank.
When a business does nothing more than move money, when they stop producing anything, it’s only a matter of time before the value erodes. The short-term profit from this drove the share price in the near term, but ultimately, failed to deliver in the long term.
For GE, the downward spiral took over a decade. That’s because GE had a century of innovation and sound corporate stewardship as their base, which initially mitigated the cost of a Milton-Friedman shareholder primacy devotee leader. They were also making decisions largely pre-social media, where the na`rrative is easier to control.
When an organization doesn’t have decades of success to rest upon, and their actions spread like wildfire across the web, deploying these three Welchian strategies will prompt the fall to happen much faster.