Jack Welch’s GE Was The Wrong Model To Take From The 90s. Lou Gerstner’s IBM Is The Right One

When Fortune magazine named  General Electric CEO Jack Welch “Manager of the Century.” it lauded the CEO’s ability to increase the stock price and deliver consistent earnings growth. Nicknamed “Neutron Jack,” he was known as a fierce competitor and a ruthless cost cutter. In the late 20th century, he was nothing less than an icon, an example other leaders wanted to emulate.

When Lou Gerstner took over at IBM in 1993, the company was near bankruptcy. Many thought it should be broken up. Yet Gerstner saw enormous value could be unlocked through reviving the culture that made the iconic company successful in the first place. His turnaround of the firm was perhaps the most impressive in corporate history.

It’s been a quarter century since both left their jobs at the helm and it’s time to take stock on the two radically different approaches. Welch created a fiercely competitive environment. Gerstner stressed values. By now it should become clear that Gertner’s approach was far more successful, creating enormous value for IBM and for society. Welch is a cautionary tale.

The Welch Way

When Jack Welch was named CEO of General Electric in 1981, American industry was seen as sclerotic and bureaucratic. There was a great need of some trimming down and Welch was truly an optimized fit for the environment. He voraciously cut through GE’s red tape and earned his moniker, “Neutron Jack” because it was said that he got rid of all the people and left  only leaving the buildings standing,

He pioneered the policy of rank and yank, in which employees would be designated as “A,” “B,” or “C” players, the weakest would be culled from the herd. He was also an early advocate of offshoring to cut costs. Profits soared, Welch became a prophet and “Welchism” a religion. Corporate boards recruited GE executives as leaders to spread the gospel at their companies.

Yet as David Gelles explains in his book about Welch’s tenure, The Man Who Broke Capitalism, not all was as it seemed. Yes, Welch made GE more efficient and profitable, but he also increased risk through “financializing” the industrial company, undermined engineering and innovation by moving manufacturing facilities overseas and cooked the books to make profits seem much smoother than they were.

GE would eventually implode, but the damage went much further and deeper than one company. Because Welchism was seen as the “one best way” to run a business, many other firms replicated its methods. The results have been alarming. In fact, a 2020 report by the Federal Reserve found that business dynamism in America has steadily declined since Jack Welch took the helm at GE in 1981.

The Gerstner Miracle

When Lou Gerstner took over in 1993, IBM was near bankruptcy. Many thought it had to be broken up and sold for parts. Yet Gerstner saw that its customers needed it to help them run their mission-critical systems and the death of the company was the last thing they wanted. He knew that to save IBM, he would have to transform it and he started with its values.

“At IBM we had lost sight of our values,” Irving Wladawsky-Berger, one of Gerstner’s chief lieutenants, told me. “IBM had always valued competitiveness, but we had started to compete with each other internally rather than working together to beat the competition. Lou put a stop to that and even let go of some senior executives who were known for infighting.”

Pushing top executives out the door is never easy. Most are hard working, ambitious and smart, which is how they got to be top executives in the first place. Yet sometimes you have to fire nasty people, even if they outwardly seem like good performers. That’s how you change the culture and build a collaborative workplace.

Gerstner led one of the greatest turnarounds in corporate history. By the late 1990s, his company was thriving again and continues to be profitable to this day. That would have never been true if he saw the problem as one of merely strategy and tactics. IBM had to change how it saw itself and its mission before it could carve out a place for itself in the market.

A Vivid Contrast

Both leaders transformed their companies, but in very different directions. Welch was famously combative and he ran GE with a single-minded focus on profits. He insisted that every business had to be number one or two in its category or sold off. Manufacturing operations were offshored and much greater emphasis was put on its finance unit.

Gerstner also ruthlessly cut costs, but only to the point that the company was financially stable and, even as he cut costs he looked to invest in the future. He made this clear from the start when, in the very first month of his tenure, he made it a point to visit the famed T.J Watson Research Center at Yorktown Heights and underscore that he considered research investments crucial to IBM’s future. IBM remains a research leader today.

During Gerstner’s tenure at IBM the company made a number of technological advances. It refocused its business on the Internet, helping its customers adapt to a new era. It helped pioneer open source software, being the first major firm to back the Linux operating system and its Deep Blue became the first computer to beat a human champion at chess. GE, on the other hand, hasn’t had a major invention since the CT scanner back in the 1970s.

While lauded during his lifetime, today Welch has become a symbol of the excesses of an earlier age. Yes, he racked up profits, but he undermined its ability to compete for the future and set the stage for its collapse. Gerstner, on the other hand, not only brought a struggling form back to profitability, he made key investments that continue to pay off today.

Great Leaders Serve The Mission Of The Enterprise

When Jack Welch  was named “Manager of the Century” by Fortune magazine in 1999, it was still unclear what his legacy was going to be. Yet all the success belied serious problems rumbling underneath the surface. Welch increased profits largely by “financializing” the firm. Innovation languished.

Yet perhaps the greatest indictment of Welch is those he chose to carry on his legacy. Jeffrey Immelt, quite famously, ran GE into the ground. Other proteges such as Bob Nardelli and Jim McNerney went on to do untold damage at iconic firms such as Home Depot, Chrysler, 3M and Boeing. Far from a model to emulate, Jack Welch’s legacy seems more like a cautionary tale. Cost cutting and efficiency will only get you so far.

Lou Gerstner understood that and his tenure at IBM produced not only outstanding financial results, but genuine discoveries, such as quantum teleportation, that would serve IBM well for decades. He made it possible for the nearly century-old firm to become a pioneer in open-source development, artificial intelligence and genomics.

Perhaps most of all, great leaders serve the mission of the enterprise by crafting a culture that honors it. As Gerster himself put it, “culture isn’t just one aspect of the game; it is the game. In the end, an organization is nothing more than the collective capacity of its people to create value…What does the culture reward and punish – individual achievement or team play, risk taking or consensus building?”

That’s why if you want to be an effective leader, you need to clearly define what you are leading toward. Leading implies a direction and a purpose. The ancient Greeks would call it telos. Wise leaders act in the service of something bigger than themselves, poor ones for their own aggrandizement.

We learn from the past only if we take the right lessons.

Greg Satell is Co-Founder of ChangeOS, a transformation & change advisory, an international keynote speaker, and bestselling author of Cascades: How to Create a Movement that Drives Transformational Change. His previous effort, Mapping Innovation, was selected as one of the best business books of 2017. You can learn more about Greg on his website, GregSatell.com and follow him on Twitter @DigitalTonto and on LinkedIn.

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