Former General Electric CEO Jack Welch made Six Sigma famous, teaching a generation of business leaders to cut costs, hit their targets, and always keep the stock price up. But modern executives are starting to move on.
- As General Electric CEO, Jack Welch focused on maximizing shareholder value.
- He was known for ruthless management strategies like Six Sigma, which involved eliminating imperfections at all costs. Often that meant firing a slew of staffers.
- Wall Street loved Welch because GE's market capitalization increased thirtyfold under him. So a whole generation of executives and managers emulated Welch's practices.
- But that is starting to change. Today's business leaders say they're interested in maximizing value for all stakeholders, including employees and customers. And Six Sigma isn't conducive to innovation, which is a top priority for companies today.
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Jack Welch, who died this week at the age of 84, cast an immense managerial shadow as the CEO of General Electric from 1981 to 2001.
He was the very model of a modern chief executive during the shareholder value era of the '80s and '90s, which prioritized a public company's returns to its stockholders above all else. That meant the needs of employees, customers, and overall society were often shunted aside.
And executives are just now beginning to move on.
Under Welch's leadership, GE's revenue grew from about $25 billion to $130 billion. Its market capitalization increased thirtyfold, to roughly $140 billion. (GE's market cap has since declined significantly.)
Perhaps none of Welch's management practices summed up his mentality so much as "Six Sigma," a manufacturing philosophy that originated at Motorola in the 1980s. The goal was to improve quality, and increase profitability, by minimizing variation within a single line of products.
The term "six sigma" refers to the idea that there should be no more than six standard deviations (also known as sigma) between any individual product and the average product. According to GE's website, Six Sigma means that a process cannot produce more than 3.4 defects per every million outcomes. In other words: Make it virtually impossible for anything to go wrong.
A major Welch innovation was to apply Six Sigma strategies across GE - not just to manufacturing operations, but to every business area. That included hiring, firing, and managing people.
But Six Sigma may be better suited to the manufacturing processes it was originally developed to address than to managing a global, human workforce. That's especially true today, when a company's competitive edge is its capacity to innovate, often bound up in its people.
Consider a 2019 KPMG survey, which found that 68% of leaders think their business will go bankrupt if their organization moves too slowly - and if its workforce fails to recognize and respond to signs of change. Claudia Saran, the chief culture officer at KPMG, described the reskilling of employees as "updating" people the same way you'd update technology.
Welch's broader emphasis on eliminating organizational imperfections and maximizing shareholder value may also be outdated. The world's top business leaders say they're interested in creating value for all stakeholders, including employees and customers - not just shareholders.
Six Sigma management doesn't necessarily facilitate innovation
Welch introduced Six Sigma at GE in 1995.
As Fortune's Geoff Colvin wrote in Welch's obituary, Welch wanted to free up GE managers to create value, as measured by the company's stock price. To that end, he cut through layers of bureaucracy - and fired a slew of employees.
Welch famously had managers rate their reports on a scale of one to 5, so that the ratings were evenly distributed across the company. The bottom fifth of the workforce was typically let go.
In the decades that followed, several top employers - including Microsoft and Yahoo - adopted versions of this type of stack ranking (also known as "rank-and-yank"). It wasn't always effective.
Microsoft, for example, eliminated stack ranking in 2013 as part of a broader shift from a competitive culture to a collaborative one. Since beginning that cultural overhaul under CEO Satya Nadella, Microsoft's market cap has increased from around $300 billion to more than $1 trillion.
Some research helps explain why cultivating collaboration is linked to greater innovation - and to better performance on the stock market. Studies by Stanford's Carol Dweck have found that companies that reward a select group of top performers - and effectively ignore everyone else's contributions - are less innovative than companies that embrace collaboration.
And innovation has never been more important than it is today. Oliver Staley points out in an article on Quartz that in today's economy, innovation is more valuable than efficiency. Most organizations have already achieved technical proficiency, meaning that a process designed to eliminate defects may not be so helpful.
Meanwhile, the pace of technological advancement continues to increase and executives face new challenges daily, as evidenced by the CEOs who told KPMG that their organizations need to stay agile. An organization that can't be flexible is done for.
Welch's approach to people and product management may be outdated
In 2019, the heads of some of the biggest companies in the US, including Apple and JPMorgan Chase, issued a Business Roundtable statement declaring that their companies exist "for the benefit of all stakeholders - customers, employees, suppliers, communities and shareholders."
As Business Insider's Richard Feloni reported, that statement is partly a response to the demands of millennials, who now make up the largest generation in the US labor force. Millennials are generally more interested in working for and buying from companies that are transparent about their business practices, and that take action on issues like climate change and paid family leave.
Since GE's decline, Six Sigma management has largely fallen out of fashion. Under Welch's successor, Jeffrey Immelt, the company lost more than $100 billion in market value. That dip was was due in large part to the unwinding of Welch-led initiatives, such as the financial-services division GE Capital.
Instead of Six Sigma, many companies have adopted lean management, an approach to manufacturing and management (and life in general) that's designed to maximize customer value and minimize waste. Other organizations have implemented a combination of lean and Six Sigma.
Lean and Six Sigma are different: According to the American Society for Quality, Six Sigma focuses on making sure all outcomes look the same, while lean focuses on waste reduction. But the dual approach may be suited to large corporations that are trying to operate as nimbly as a Silicon Valley startup.
Six Sigma may still be useful in certain business contexts
In some cases, Six Sigma may still be the right management tool.
A Microsoft blog post published in 2016 described how its datacenter applies Six Sigma to achieve a "zero defects culture."
Former Amazon Product Manager West Stringfellow wrote in a 2018 Medium post that he received his Six-Sigma Green Belt from Amazon about a decade ago. (Different color belts indicate different levels of expertise in Six Sigma methodology.) According to Stringfellow, Amazon used "Six Sigma for Dummies" as its training manual.
At GE, Six Sigma is still a management strategy, if not the only management strategy. GE's website reads: "Six Sigma is a vision we strive toward and a philosophy that is part of our business culture."
At one point after taking over from Welch as CEO, Immelt tried to replace Six Sigma with "simplification," or streamlining the business. And GE has adopted some product-development processes designed to prototype a product and introduce it to the market as soon as possible, like "FastWorks."
But ultimately, GE's website still says that a key goal of Six Sigma is to improve each customer experience and "deliver world-class levels of quality. This is what Six Sigma strives to produce."
Get the latest General Electric stock price here.
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