Power Failure: The Rise and Fall of an American Icon

by William D. Cohan

By the end of 1956, GE’s appliance division was for the first time generating respectable profits.

It was during Cordiner’s reign that GE created its world-famous research and training facility north of New York City, along the Hudson River in Crotonville, New York. “Just think,” Cordiner said of Crotonville, “how wonderfully mobile our management will be when this thing works out.”

It all might have worked out that way for Cordiner and for GE, but for the pressure that his new organization placed on executives to hit

quarterly and annual numbers and the illegal steps that some of them took to try to impress the boss. What Cordiner had failed to account for in his management theories designed to unleash an entrepreneurial spirit across GE was the temptation that some of his key executives might feel to collude with their counterparts at other power companies, and break the law in the process.

thirteen antitrust lawsuits filed against the company, including for price fixing and “patent pooling,” when two or more parties get together and decide who can license a patent.

“Sure, collusion was illegal,” one GE veteran told Fortune, “but it wasn’t unethical.”

Clarence Burke joined GE’s heavy-equipment business in 1926,

was also a hotbed of GE executives who believed in collusion,

At GE, the price-fixing conspiracy in the circuit-breaker division lasted from 1951 to 1958 and, according to the Justice Department, involved some $650 million of revenue, or around $75 million per year, most of which related to sales of electrical equipment to private utilities. The idea was to rotate the business among the four manufacturers of circuit breakers on a fixed percentage basis: GE would get 45 percent, Westinghouse 35 percent, Allis-Chalmers 10 percent, and Federal Pacific 10 percent. Every two weeks or so, the executives would meet to decide whose turn it was next, based on how much business each company had been doing lately. Also to be determined was what price would be the lowest bid for the job.

the constant pressure from Cordiner that division executives make their numbers.

Burke, for one, felt the pressure. “We did feel that this was the only way to reach part of our goals as managers,” he said. “Each year we had to budget for more profit as a percent of net sales, as well as for a larger percentage of available business.” His boss would not approve a budget unless it was a “reach budget,” he said. And, at least according to Burke, that meant “we couldn’t accomplish a greater percent of net profit without getting together with competitors. Part of the pressure was the will to get ahead and the desire to have the good will of the man above you. He had only to get the approval of the man above him to replace you, and if you wouldn’t cooperate he could find lots of other faults to get you out.”

At least seven other GE divisions were involved in the price-fixing conspiracy: among them industrial controls; power transformers; and turbine generators.

But in fact the conspiracy extended beyond four cartels and was widespread throughout the company.

there were actually nineteen cartels, spread across the company,

He reminded the managers that GE had 275,000 employees, some 50,000 vendors and suppliers, and more than 400,000 shareholders. “All of us must conduct ourselves in the interest of these larger groups and the customers and the public,”

Under Cordiner, GE’s revenues and profits were soaring. It was clear that, somehow, his decentralization plan was working, even if it had led to a price-fixing scandal exacerbated by ongoing demands for financial performance with minimal central oversight.

More often than not, business is smell, feel, and touch as much as or more than numbers. If we wait for the perfect answer, the world will pass us by.”

GE taught Jack was that he was that rare corporate executive who could play by his own rules and somehow succeed. That’s what he proceeded to do.

For reasons having to do with his unbridled ambition, his business acumen, his charm, his personality, his intelligence, and his powerful political skills, he was able to turn his misfortunes, or his mistakes, into corporate victories that would likely have flushed out those with lesser political skills. For the next seventeen years, Jack Welch ran Pittsfield as if it were his own fiefdom. He had his own private jet. He ran the business out of office space in a downtown Hilton hotel. He

pretty much did his own thing, making a huge success of what became known as GE Plastics.

Called Noryl, the product that Jack helped to develop and bring to market generated $1 million in revenue in 1966 and nearly $24 million in revenue five years later. It was a $50 million business by 1973. (Eventually, the product was generating sales of more than $1 billion per year.)

On the plus side, he has a driving motivation to grow a business, natural entrepreneurial instincts, creativeness and aggressiveness, is a natural leader and organizer, and has a high degree of technical competence. On the other hand, he is somewhat arrogant, reacts (or overreacts) emotionally—particularly to criticism—gets too personally involved in the details of his business, tends to overrely on his quick mind and intuition rather than on solid homework and staff assistance in getting into and out of complex situations, and has something of an ‘anti-establishment’ attitude toward General Electric activities outside his own sphere.”

Borch then asked Jones to set up a long-range strategic planning group so that GE executives would have some idea “in advance” which businesses to keep and which businesses to divest.

He conceded that determining what businesses GE should be in at the executive level was a break with both Cordiner’s and Borch’s decentralized approach, which “sharpened our operating abilities” but failed miserably from a long-term-planning perspective. Under Jones’s concept, GE would use centralized planning tools—computers, for instance—to closely monitor the financial performance of the various divisions.

This was no longer tenable. In 1970, Borch created a “corporate executive staff” and asked three top executives, Jones included, to come up with a system whereby GE could decide which deals to do and which business lines to pursue, not from a tactical standpoint but rather from a strategic, long-range-planning perspective.

GE Aviation was responsible for many aviation firsts: the creation of the first jet engine, in 1942, and the first turbojet engines that allowed jets to fly three times the speed of sound;

GE was one of the largest suppliers of engines for military jets and the commercial airline industry. (The business remains the envy of the world. The division received orders for $26 billion worth of jet engines in 2021 and its backlog totaled $303 billion.) The directive to focus on the jet engine business was a natural extension of GE’s electrical-power-generation origins—a jet engine and a power turbine are more similar than you might think.

From there, Jones structured the company into six divisions. Instead of

the BCG four-box matrix then all the rage—developed by a BCG partner in 1968—GE created a nine-box matrix, consultant jargon used, theoretically, to help CEOs to decide which businesses to keep and which to sell.

The beauty of strategic planning, Jones believed, was that “everybody was party to working out where they wanted to take a given business.”

By the end of the 1970s, GE had been transformed from a company where 80 percent of the net income derived from selling electrical equipment and supplies to one where that business represented 47 percent of net income.

Outside the walls of GE, Jones had also transformed Borch’s idea of the Business Roundtable

It wasn’t that he didn’t care about GE; it’s just that he cared more about policy, and influencing policy in Washington—tax policy, depreciation rules, capital formation—than he cared about the operations of GE. He used his platform as CEO of GE to get the policies he wanted in Washington. “He was the most admired CEO in the day,” Jack said. “In those days, they became statesmen.”

Jack was all about flouting convention, breaking the rules, delivering results, and having fun.

He kept on delivering the numbers for Fairfield, whether he was actually there in person or not. And when you get right down to it, in corporate America that’s the bottom line.

the point man on trying to reach an agreement with the state of New York on how to handle the fact that for years GE had been dumping PCBs—polychlorinated biphenyls—into the Hudson River in upstate New York.

With the permission of both federal and state authorities, GE continued to discharge thirty pounds of PCBs a day in the Hudson.

The state began an enforcement action against GE in the early 1970s, severely limiting PCB discharges into the Hudson and requiring that a water treatment facility be built near the Fort Edward plant.

In September 1976, Jack cut the deal of a lifetime with the state of New York. In a negotiated settlement with the state Department of Environmental Conservation, GE agreed to pay $3 million “toward cleansing” the Hudson of PCBs, the Times reported on its front page, and also agreed to pay another $1 million to research the effects of PCBs. The state also agreed to spend $3 million for the cleanup.

The Times article reiterated Jack’s argument that while GE had been dumping the PCBs into the Hudson for about twenty-five years, the company had “requested and obtained” state and federal permits to do so legally.

you’re not only stewards for all these tremendous physical resources of this company, but you’re stewards for its human resources. You’re really stewards for the economic lives of your employees and the economic life of an employee is a big chunk of his total life. It conditions, really, his total life. Don’t ever forget it.”

transform the renamed GE Capital from a business making $67 million in 1977 with fewer than 7,000 employees to one, by 2000, making $5.2 billion in earnings with 89,000 employees. It wouldn’t have happened without the impetus and vision of Jack Welch.

GE’s AAA credit rating, allowing it to borrow money very cheaply.

GE could also use GE Capital to reduce the taxes GE would otherwise pay on earnings from its very profitable industrial businesses.

With that logic, GE Capital would buy the jets, lease them to the airlines at commercially attractive rates, and then use the depreciation on the jets to reduce the pretax income at GE.

Part of the way Jack made his numbers was by aggressively slashing costs.

Jack forged ahead, tying von Clausewitz to General Electric—not the easiest thing to do—and declared that in the 1980s, which he predicted would be a slow-growth decade, the only way for companies to survive was to “insist upon being number one or number two” in every business they chose to be in. The corollary to his thesis was to wonder if it still made sense to be in businesses where it was not possible to be among the industry’s market leaders.

When Jack took over as CEO, GE had a market capitalization of $12 billion, and by the end of 1981, it had $28 billion in revenue, $1.6 billion in profits, $1.5 billion in cash on its balance sheet, and a AAA credit rating. It was the largest diversified industrial company in the country.

Creating the next generation of factories became a “holy grail” inside Jack’s GE. But it failed. Jack’s vision for “Factories of the Future” proved “ineffective,” according to Paul Street, a former McKinsey consultant who was a senior GE Capital executive.

In his first nine months, he fired forty thousand employees, and another sixty thousand during his first two years.