DESCRIPTION
GE believes its ability to develop management talent is a core competency that represents a source of sustainable competitive advantage. This case traces the development of GE’s rich system of human resource policies and practices under five CEOs in the post-war era, showing how the development of talent is embedded into the company’s ongoing management responsibilities.
It describes the development of a 25-year-old MBA named Jeff Immelt, who 18 years later is named as CEO of GE, arguably the biggest and most complex corporate leadership job in the world and how he frames his priorities for GE and implements them, pulling hard on the sophisticated human resource levers his predecessors left him.
Immelt questions whether he should adjust or even overhaul three elements of GE’s finely tuned talent machine.
LEARNING OBJECTIVE
To examine the importance of managing human capital as carefully as financial capital as a scarce strategic resource.
SUBJECTS COVERED
Business policy; Competitive advantage; Core competencies; Corporate strategy; Diversified companies; Human resource management; Implementing strategy; Leadership; Management development; Organizational behavior
SETTING
Company Employee Count: 300,000 Company Revenue: $132 billion revenues Event Year Begin: 1960 Event Year End: 2003
BUILDING THE TALENT MACHINE: HISTORY OF GE’S HR PRACTICES
Strengthening the Foundations: Cordiner’s Contributions Ralph Cordiner was president of GE from 1950-1958 and CEO from 1958-1963.
Under his leadership, the following initiatives were implemented: 1. Decentralized GE’s management structure, transferring authority down to nearly 100 department-level businesses. 2. Spent $40 million annually on management education, almost 10% of its earnings. 3. Initiated a new management Assessment process known as “Session C,” which resulted in career development plans and the rating of subordinates on a six-point scale from “high potential” to “unsatisfactory.”
4. Introduced a system of objective performance Assessment tied to 28 position levels (PLs) that showed entry, median and maximum level salaries for each level. Systematizing HR Processes: Borsch and Jones Fred Borsch was CEO from 1963-1972. During his tenure he: 1. Implemented a new round of corporate diversification. 2. Overcame department managers’ tendency to keep talented managers to themselves, which was accomplished by having the top 2% of GE’s employees (PLs 13-27) report directly to him.
3. Had GE business leaders identify potential managerial talent and track all “high potentials” to make sure they were exposed to a wide range of GE businesses. Reg Jones was CEO from 1972-1981. He introduced a more formal and structured approach to strategic planning, creating 43 strategic business units and adding another organizational layer—the sector—to put groups together based upon common characteristics. Supercharging the System: Welch’s Initiatives Jack Welch became CEO in 1981. During his time as CEO, he: 1. Concentrated on improving performance in order for GE to become #1 or #2 in their current businesses. 2. Implemented the “fix it, sell it, or close it” strategy for businesses that were not #1 or #2. 3.
Eliminated over 100,000 jobs.
4. Collapsed the 29 positions levels (PLs) into seven broad bands. 5. Granted stock options for performance. 6. Invested heavily in management development. 7. Reconsidered competing for management recruits from the pool of most hunted college and business school graduates. Went after disciplined, self-motivated candidates from Midwestern engineering programs, night schools and former military officers.
8. Insisted managers be evaluated on how they live up to GE’s values, as well as objective performance measures. 9. Added a disciplined performance analysis to Session C by asking managers to rank subordinates on a “vitality curve”: the top 20%, highly valued 70% and least effective 10%. 10. Tightly integrated HR systems with other business elements to constantly look for “high potentials.”
THE MAKING OF A CEO: THE RISE AND RISE OF JEFF IMMELT
Jeff Immelt joined GE in 1982. He was a 25-year old Harvard MBA who impressed the GE Harvard MBA recruiting executive so much that Immelt didn’t even need to go through the normal process of going through the corporate referral center. The recruiting executive recommended Immelt to senior management and suggested that Jack Welch get involved to make sure Immelt didn’t take a job somewhere else. Within 30 days of his hiring, Immelt was part of a team presenting to Welch.
The Plastics Experience: Building Skills Immelt started out as a regional sales manager for GE Plastics with 15 people reporting directly to him. Over the next seven years, Immelt held positions as product manager, sales manager and global marketing manager. He was one of 150 other young “high potentials” being tracked for positions at the highest levels of the company. In 1987, Immelt was selected to attend the Executive Development Course at Crotonville. This course was important for Immelt’s possible selection as a company officer and provided him excellent networking opportunities with other high potential managers.
The Appliances Challenge: The Turnaround Test In 1989, Immelt was moved to the Appliances service business. He was placed in the Appliances business to figure out what to do with over one million defective refrigerators that had been sold by GE. Immelt knew this was an excellent opportunity and that he would either “sink or swim.” Over one million refrigerator compressors were replaced with new units that came from competitors. The recall operation went well and Immelt was asked to run the entire marketing and product marketing operations, reporting directly to the CEO of Appliances.
Immelt got frank feedback during his Session C Assessments and was counseled that he needed to listen better, to empower his subordinates more and to channel his energy into bringing his people along with him when he wanted action. In 1992, Jack Welch moved Immelt back to Plastics. Plastics Redux: Trial by Fire After a year back at Plastics, Immelt was named head of Plastics Americas, reporting directly to the CEO of Plastics. Immelt faced challenges when his operation missed its numbers by $30 million, due to cost overruns, and he had tried to renegotiate prices with its big customer, General Motors.
GM was ready to stop doing business with GE when Welch and GM’s CEO decided to work together in order to solve the problem. Welch checked with Immelt regularly to see how Immelt was handling the situation. Welch was not happy with Immelt, but he watched Immelt closely and allowed the decisions made regarding the relationship with GM to be Immelt’s. Immelt understood that he would not be punished for making a mistake.
He knew, however, that “you can fail” but “we don’t allow you to make the same mistake twice.” Medical Systems: Putting It All Together In 1997, Immelt was appointed to run GE Medical Systems. Prior to Immelt’s arrival, GE Medical had been focusing on cost-cutting. Instead, Immelt emphasized growth and started to expand into other businesses and make GE Medical a more global company. He started acquiring companies, investing in new technologies and restructuring global operations. Immelt’s style was to engage and energize those around him.
Immelt began to mentor and coach other high potential managers, and as a result of his leadership and the success of his team, in four years, GE Medical’s sales doubled and its profit more than doubled. Because of his excellent work leading GE Medical, by 2001, Jeff Immelt had become one of the front-runners to succeed Jack Welch as CEO of GE.
The Succession Process Welch’s list of CEO succession candidates included then-current business heads, some senior corporate officers and about a dozen young “hot shots,” like Immelt. From 1994, members of GE’s board visited various GE businesses to get a direct impression of potential CEO candidates. By 2000, it was widely speculated that the three top contenders were Jeff Immelt, Jim McNerney and Bob Nardelli. In October 2000, the board discussed the three finalists and in November, Immelt was unanimously voted CEO designate.
NEW HANDS ON THE CONTROLS: JEFF IMMELT, CEO Jeff Immelt’s first day as CEO was September 10, 2001. He called it the “one good day” of his first year on the job. The next day was 9/11 and from then on, GE’s businesses, like those of other companies, faced hard times and a drop in its stock price. Immelt’s Priority: Leveraging Human Capital for Growth Immelt was committed to GE’s continued growth and he spent an estimated 40% of his time on human resource issues.
He said, “Every initiative I’m thinking about gets translated immediately into recruiting, Crotonville and Session C.” Immelt’s five key human resource initiatives were: 1. Target technology skills during Session C reviews. Review the business’s engineering pipeline, the organization of its engineering function and evaluate the potential of its engineering talent. (Immelt was concerned that technology-oriented managers were under-represented in GE’s executive ranks.) 2. Open new channels of communication between businesses and geographical areas. Share ideas. 3. Emphasize customer relationships and marketing.
4. Develop GE’s globalization strategy. (Immelt appointed Ferdinando Beccalli as the company’s first CEO of GE Europe; named a new president and CEO of China; and began offering courses at Crotonville to Chinese management and Chinese customers.) 5. Invest in businesses heavier in human capital than in physical capital. (Immelt identified six growth platforms—healthcare information technology, water technology and services, oil and gas technology, security and sensors, Hispanic broadcasting, and consumer finance.)
THE TALENT MACHINE IN 2003: SERVICE, TUNE UP, OR OVERHAUL? In 2003, Immelt was reflecting on his first full year as CEO. Times had not been good; GE’s stock was down and employees were uneasy about the economic downturn. Management and employee turnover was low, but Immelt wanted to make sure that when the economy picked up, employees would be motivated and engaged. He wondered if it was time to adjust or overhaul GE’s talent machine. The Vitality Curve While the rankings-based vitality curve had been controversial to many outsiders, long-term GE employees viewed it as part of the company’s meritocracy-based culture.
Immelt felt that other companies had experienced difficulty with the process because it requires feedback, coaching, training and clear performance goals. All the elements of the Assessment system must work together. However, in early 2003, Immelt noticed that BankAmerica had successfully recruited over 90 GE employees. These employees had been targeted, not from the top 20%, but from the highly valued 70%.
Immelt felt this group was the backbone of GE and were not to be considered just average. Should the system be modified to differentiate within this group? Should recognition and rewards be less sharply focused on the top 20%? Or, should the entire concept of performance ranking at GE be questioned? Recruitment GE was driving toward more service-intense global businesses. Immelt wondered about the talent pool he would need to run these businesses. One proposal was to target MBAs with marketing management career interests. Immelt also wondered if GE was not over-reliant on its US-based recruitment programs.
Since 40% of GE’s revenues were generated offshore, should there be more non-Americans in executive positions? Executive Bands One problem with the collapse of the 29 PLs into seven broad executive bands was that some employees, especially in international locations, felt that their promotion opportunities were limited and the frequency of clearly defined job promotions decreased. In more hierarchical business cultures, such as India, perceived status and level were highly valued. While there might not be a real difference between a PL15 and PL16, for many it represented an important psychological reward.
