If you do not know Jack Welch, he was the CEO of GE for almost two decades and during this time, GE increased its market value from $12 billion in 1981 to $410 billion when he retired in 2001. Fortune magazine named him the “Manager of the Century,” and in 2000 The Financial Times named G.E. “the World’s Most Respected Company” for the third straight year. So, he was admired as the best CEO of the century and revered by and considered to be a master manager, specially by business people, academics. You will find a number of Harvard Business Review articles where he was described as a great manager and his strategy and actions were suggested to be followed by us.

But I failed to see why Jack Welch should be so admired. The way I see it, we should never follow his strategy and stay away from his model of doing business. Let me describe why.

In 2000, his last year as CEO, Welch had grown GE to over $450 billion in market capitalization, of which about 40% was in financial services. By the time Welch retired in 2001, financial services contributed 40 per cent of GE profits.

Let us put things into perspective. GE was and still is an engineering company. It is not a financial service company like JP Morgan or Bank of America. So, how come an engineering company makes 40% of its profit from financial services? Imagine, Apple is making 40% of its profit from Apple TV, but not from iPhone or Mac. If that is the case, Apple would be effectively a media company, not an electronics company. So, Welch basically converted an engineering company into a financial services company. But GE was never a financial service company and later its GE Capital, its financial services arm, were sold.

Now, let’s talk about Wlech’s people management mantra. He popularized so-called “rank and yank” policies used now by other corporate entities. Each year, he would fire the bottom 10% of his managers, regardless of absolute performance while rewarding those in the top 20% with bonuses and employee stock options. He also broadened the stock options program at GE, extending availability from top executives to nearly one-third of all employees. Welch is also known for abolishing the nine-layer management hierarchy and bringing a sense of informality to the company.

I would argue that this kind of year to year performance review is good for a financial service company or any other company where there is not much to invent. But for an engineering company which makes heavy engine and turbine, this is a recipe for disaster. In an engineering company, you plan for years to come and then invest money and time. It takes time when you want to invent something and make it work. It is not a one-year thing. This is short term thinking which will lead to ruin. Well, that’s exactly what happened.

Large engineering takes time. But when your people only think about the current year’s performance, they will not think long term and will find a short cut. I would argue that Welch’s short term thinking hurt GE in the long term and now we are seeing the results.

This type of short term strategy has some benefit - in the stock market. Your stock price will go up as you have less expenditure. But stock price could provide a false impression of the actual health of a company. And these types of practices usually lead to a gradual decline of the company which should think long term instead.

I would say this - because of Welch’s actions during his time as CEO at GE, the company is now suffering. I will also argue that because of this type of short term thinking, Boeing is suffering too.