What Makes Ge The Worlds Most Admired Company

In 1997, your Company had a great year a record year.

lOngoing revenues rose to $ 89.3 billion; up 13 per cent.

lGlobal (non-US) revenues rose to $38.5 billion, now 42 per cent of total revenues.

lEarnings increased to more than $8.2 billion; up 13 per cent.

lEarnings per share increased 14 per cent to a record $2.50.

lOngoing operating margin rose to a record 15.7 per cent, exceeding 15 per cent for the first time in the history of our Company.

lOperating cash flow rose to a record $9.3 billion. This, in combination with our Triple A debt rating, fueled the investment of $17.2 billion in more than 75 industrial and financial services acquisitions in 1997.

 

lThis record cash flow also allowed us to return $7 billion to share owners: $3.5 billion in dividends and $3.5 billion for the repurchase of GE stock. Dividends were increased by 15 per cent, our 22nd consecutive annual dividend increase.

lIn April, our share owners approved a 2-for-1 stock split, the fourth in the last 15 years.

Our share owners including our active and retired employees, who now own more than $12 billion in GE stock in their savings plans were rewarded for this performance. The total return on a share of GE stock was 51 per cent in 1997; this followed gains of 40 per cent in 1996 and 45 per cent in 1995.

We delivered these 1997 results by executing on our three major initiatives: globalization, a focus on product services and our drive for Six Sigma quality. Building on these same three initiatives will be critical to our future success.

The uncertainty brought about by the Asian economic difficulties creates both challenges and opportunities. For GE, Asia represents about 9 per cent of our revenues (about half in Japan) exposure that is by no means insignificant, but certainly manageable and we are confident that we can minimize any impact on our existing operations.

It has been our repeated experience that business uncertainty is inevitably accompanied by opportunity. The Asian situation should be no exception; it should provide us with a unique opportunity to make the strategic moves that will increase our presence and our participation in what we know will be one of the worlds great markets of the 21st century.

Weve been down this path before. In the early 1980s, we experienced a United States mired in recession, hand-wringing from the pundits and dirges being sung over American manufacturing. We didnt buy this dismal scenario; instead, we invested in both a widespread restructuring and in new businesses. We emerged into the recovery a much more competitive and productive company.

Our successful experience with US business uncertainty gave us a very different view of the European malaise of the early 1990s.

To us, Europe looked a lot like the United States in the 1980s, and in need of the same remedies: restructuring, spin-offs, and the like. So, while many were writing-off Europe, we invested heavily, buying new companies and expanding our existing presence. Following the restructuring of its industrial and financial structure, as well as a dose of the powerful export medicine of a devalued currency, Europe is now recovering, and GE Europe is now a $20.6 billion operation. Our revenues have more than doubled from 1994 to 1997; net income has tripled to more than $1.5 billion; and this growth is accelerating as the European recovery progresses.

Mexico in the mid-1990s was a similar story: dislocation, uncertainty and turbulence. Reacting to the peso crisis of 1995 and its aftermath, GE moved, acquiring 10 companies and investing more than $1 billion in new and existing operations. The result was revenue growth of 60 per cent and a doubling of earnings in the two years following the crisis.

Today, we are determined, and poised, to do the same thing in Asia we have done in the United States, Europe and Mexico: invest in the future.

Globalization

Globalization is one of the engines of GE growth, now and well into the next century. There will be dislocations and speed bumps on the road to prosperity in all the worlds critical markets, but one cannot afford to write off any region in difficulty. Bad business management or bad government polices that weaken competitiveness can be remedied by tough restructuring and policy change.

The same conditions that made restructuring and reform necessary frequently create a currency weakness that, when coupled with the increased competitiveness brought about by restructuring, leads the country about by restructuring, leads the country out of recession, via internal growth and increased exports.

The path to greatness in Asia is irreversible, and GE will be there.

Services

Another growth engine, which we have described for you in the past, is services. By any measure, GE is today a global service company, and in 1998 more than two-thirds of its revenues will come from financial, information and product services. Our second major initiative is focused on high technology product services. In 1997, we achieved a second consecutive year of double-digit growth in product service revenues and improved ongoing operating margin, while making 20 acquisitions and joint ventures, primarily in the industrial, power, medical and aircraft engine services businesses. Key among these were the $1.5 billion Greenwich/ UNC jet engine service acquisition and the recently completed $600 million acquisition of the gas turbine-related businesses of Stewart & Stevenson Services, a global power generation equipment service company.

The opportunity for growth in product services is unlimited. We have the ability, using high technology services, to make our customers existing assets (e.g, power plants, locomotives, airplanes, factories, hospital equipment and the like) more productive, and by doing so reduce their capital outlays. This growing capability, much of it information technology-based, will enable us to increase our revenues from product services by more than 30 per cent in 1998 to $13 billion.

Six Sigma

We have described our progress in globalization and services rather quickly so we could cover in depth something we talk to each other about all day: the centerpiece of our dreams and aspirations for this great Company the drive for Six Sigma quality. Six Sigma is a disciplined methodology, led and taught by highly trained GE employees called Master Black Belts and Black Belts, that focuses on moving every process that touches our customers every product and service toward near- perfect quality.

Six Sigma project work consists of five basic activities: defining, measuring, analyzing, improving and then controlling processes. These projects usually focus on improving our customers productivity and reducing their capital outlays, while increasing the quality, speed and efficiency of our operations.

We didnt invent Six Sigma we learned it. Motorola pioneered it and Allied Signal successfully embraced it. The experiences of these two companies, which they shared with us, made the launch of our initiative much simpler and faster.

GE had another huge advantage that accelerated our quality effort: we had a Company that was open to change, hungry to learn and anxious to move quickly on a good idea.

This learning environment came from a decade-long, soul-transforming cultural initiative called Work-out. Work-out is a continuing effort to achieve what we call boundaryless behaviour business behaviour that tramples or demolishes all barriers or rank, function, geography and bureaucracy in an endless pursuit of the best idea in the cause of engaging and involving every mind in the Company.

After a decade of Work-Out, most of the old bureaucracy and the boundaries among us have been demolished. (We are, however, aware that bureaucracy is the Dracula of institutional behaviour, and will rise again and again, requiring everyone in the organization to reflexively pound stakes through its reappearances.) But at GE today and we are obviously proud of this finding the better way, the best idea, from whomever will share it with us, has become our central focus.

Nowhere has this learning environment, this search for the better idea, been more powerfully demonstrated than in our drive for Six Sigma quality. Twenty-eight months ago, we became convinced that Six Sigma quality could play a central role in GEs future; but we believed, as well, that it would take years of consistent communication, relentless emphasis and impassioned leadership to move this big Company on this bold new course.

We were wrong!

We are the ones who now find ourselves running to keep up with the excited charge of tens of thousands of GE employees who have seen the transformational magic - the rejuvenation - that this combination of rigid discipline and cheerful fanaticism can achieve in our businesses. Projections of our progress in Six Sigma, no matter how optimistic, have had to be junked every few months as gros s underestimates.

Six Sigma has spread like wildfire across the Company, and it is transforming everything we do...

We had our annual Operating Managers Meeting 5000 of our senior business leaders from around the globe during the first week of January 1998, and it turned out to be a wonderful snapshot of the way this learning Company - this new GE has come to behave, and now, with Six Sigma, how it has come to work.

Today, in the uncountable number of business meetings across GE both organized and in-the-hall the gates are open to the largest flood of innovative ideas in world business. These ideas are generated, improved upon and shared by 350 business segments or, as we think of them, 350 business laboratories. Today, these ideas centre on spreading Six Sigma best practices across our business operations.

At this particular Operating Managers Meeting, about 25 speakers, from across the Company and around the world, excitedly described how Six Sigma is transforming the way their businesses work. They shared what they had learned from projects such as streamlining the back room of a credit card operations, or improving turnaround time in a jet engine overhaul shop, or hit-rate improvements in commercial finance transactions. Most of the presenters focused on how their process improvements were making their customers more competitive and productive;

lMedical Systems described how Six Sigma designs have produced a 10-fold increase in the life of CT scanner x-ray tubes - increasing the uptime of these machines and the profitability and level of patient care given by hospitals and other health care providers.

lSuperabrasives -our industrial diamond business described how Six Sigma quadrupled its return on investment and, by improving yields, is giving it a full decades worth of capacity despite growing volume without spending a nickel on plant and equipment capacity.

lOur railcar leasing business described a 62 per cent reduction in turnaround time at its repair shops: an enormous productivity gain for our railroad and shipper customers and for a business thats now two to three times faster than its nearest rival because of Six Sigma improvements. In the next phase, spread across the entire shop network, Black Belts and Green Belts, working with their teams, redesigned the overhaul process, resulting in a 50 per cent further reduction in cycle time.

lThe plastics business, through rigorous Six Sigma process work, added 300 million pounds of new capacity (equivalent to a free plant), saved $400 million in investment and will save another $400 million by 2000.

At our meeting, zealot after zealot shared stories of customers made more competitive, of credit card and mortgage application processes streamlined, of inventories reduced, and of whole factories and businesses performing at levels never believed possible.

The sharing process was repeated at another level two weeks later in Paris, as 150 Master Black Belts and Black Belts, from every GE business throughout Europe, came together to share and learn quality technology. This learning is done in the boundaryless, transcultural language of Six Sigma, where CTQs (critical to quality characteristics or DPMOs (defects per million opportunities) or SPC (statistical process control) have exactly the same meaning at every GE operation from Tokyo to Delhi and from Budapest to Cleveland and Shanghai.

The meeting stories are anecdotal; big companies can make great presentations and impressive charts. But the cumulative impact on the Companys numbers is not anecdotal, nor a product of charts. It is the product of 276,000 people executing ...and delivering the results of Six Sigma to our bottom line.

Operating margin, a critical measure of business efficiency and profitability, hovered around the 10 per cent level at GE for decades. With Six Sigma embedding itself deeper into Company operations, GE in 1997 went through the impossible 15 per cent level approaching 16 per cent and we are optimistic about the upside.

Six Sigma, even at this relatively early stage, delivered more than $300 million to our 1997 operating income. In 1998, returns will more than double this operating profit impact.

Six Sigma is quickly becoming part of the genetic code of our future leadership. Six Sigma training is now an ironclad prerequisite for promotion to any professional or managerial position in the company and a requirement for any award of stock options.

Senior executive compensation is now heavily weighted toward Six Sigma commitment and success success now increasingly defined as eatable financial returns, for our customers and for us.

There are now nearly 4,000 full-time, fully trained Black Belts and Master Black Belts: Six Sigma instructors, mentors and project leaders. There are more than 60,000 Green Belt part-time project leaders who have completed at least one Six Sigma project.

Already, Black Belts and Master Black Belts who are finishing Six Sigma assignments have become the most sought-after candidates for senior leadership jobs in the Company, including vice-presidents and chief financial officers at some of our businesses. Hundreds have already moved upward through the pipeline. They are true believers, speaking the language of the future, energized by successful projects under their belts, and drawing other committed zealous upward with them.

In the early 1990s, after we had finished defining ourselves as a company of boundaryless people with a thirst for learning and a compulsion to share, it became unthinkable for any of us to tolerate much less hire or promote the tyrant, the turf defender, the autocrat, the big shot. They were simply yesterday.

As we move toward 2000 and beyond, with six Sigma permeating much of what we do all day, it will be likewise unthinkable to hire into the Company, promote or tolerate those who cannot, or will not, commit to this way of work. It is simply too important to our future.

And as we raise the bar from three to four to five and then to Six Sigma ... we must raise, again, the bar of quality as it applies to ourselves. The reality is, we simply cannot afford to field anything but teams of A players.

What is an A? At the leadership level, an A is a man or woman with a vision and the ability to articulate that vision to the team, so vividly and powerfully that it also becomes their vision.

An A leader has enormous personal energy and, beyond that, the ability to energize others and draw out their best, usually on a global basis.

An A leader has edge as well: the instinct and the courage to make the tough calls decisively, but with fairness and absolute integrity.

As we go forward, there will be nothing but As in every leadership position in this Company. They will be the best in the world, and they will act to field teams consisting of nothing but A players. The best leaders the As are really coaches. What coach, with any instinct or passion for winning, would field an Olympic swimming or gymnastics team, or a Super Bowl team, that wasnt made up of the absolute best available? In the same vein, what business leader worthy of the name would even consider fielding a team with anything other than the very best, the A players?

What characterizes A players? In finance, for example, As will be people whose talents include but transcend, traditional controllership. The bigger role is one of full-fledged participant in driving the business to win in the marketplace a role far bigger than the dreary and wasteful budget drills and beancounting that once defined and limited the job.

In engineering, As are those who embrace the methodology of Design for Six Sigma. A engineers cant stand the thought of riding it out in the lab, but rather relish the rapid pace of technological change and continually re-educate themselves to stay on top of it.

In manufacturing, A players will be people who are immersed in Six Sigma technology, who consider inventory an embarrassment, especially with a whiff of deflation in the air people who understand how to drive asset turns and reduce inventory while at the same time increasing our readiness to serve the customer.

In sales, A players will use the enormous customer value that Six Sigma generates to differentiate GE from the competition, to find new accounts, and to refresh and expand the old ones as contrasted with C players whose days are spent visiting friends on the milk-run circuit of customer calls.

This is now the business of your Company: A products and A services delivered by A players around the globe.

We are feverish on the subject of Six Sigma quality as it relates to products, services and people maybe a bit unbalanced because we see it as the ultimate way to make real our dreams of what this great company could become.

Six Sigma has turned up the voltage in every GE business across the globe, energizing and exciting all of us and moving us closer than ever to what we have always wanted to become: more than a hundred-billion-dollar global enterprise with the agility, customer focus and fire in the belly of a small company.

In our 1994 letter to you, we addressed the perennial question put to management teams, which is how much more can be squeezed from the lemon? We claimed, then, that there was in fact unlimited juice in this lemon, and that none of this had anything to do with squeezing at all. We believed there was an ocean of creativity and passion and energy in GE people that had no bottom and no shores. We believed that then, and we are convinced of it today. And when we said that there was an infinite capacity to improve everything, we believed that as well viscerally but there was no methodology or discipline attached to that belief. There is now. Its Six Sigma quality, along with a culture of learning, sharing and unending excitement.

For GE, these are the best of times, and in our view they will only get better.

Thanks, as always, for your continuing support.

(Dated February 13, 1998, the statement was signed by John F Welch Jr, chairman of the board and chief executive officer; Paolo Fresco, vice-chairman of the board and executive officer; Eugene F Murphy, vice-chairman of the board and executive officer and John D Ople, vice-chairman of the board and executive officer.)