When Jack Welch became chief executive officer of General Electric in 1981, American business was more beleaguered than at any time since the Great Depression. Economic growth in the 1970s had slowed significantly on average from the pace of the 1950s and 1960s. Inflation appeared to be uncontrollable. Stock prices, after falling precipitously in the 1970s, had yet to climb back to the levels they first reached as early as 1966.
Global competition was also intensifying rapidly as Japanese, Chinese, other East Asian, and European products began to win customers from name-brand American companies. In succeeding years, the US consumer electronics business was more or less abandoned. The world market share of the US steel industry fell to less than half its former level. High wages in the US made some migration of businesses overseas inevitable, but even sophisticated manufacturing operations, in which American business should have excelled, often lost market share. Japan emerged as a major competitor in computers and semiconductors. European companies became market leaders in high-quality appliances and machinery. The Detroit auto companies were in difficulty, as both lower-priced Japanese cars and higher-priced European ones lured customers away. Most important, foreign competitors were learning how to make an adequate profit selling to smaller niche markets. American companies were locked into selling highly standardized products that required a huge mass market to make them profitable—a pattern from which they were slow to escape. The US trade deficit rose to record levels as a result—that is, Americans bought many more foreign goods than foreigners bought American goods.
Into this economic environment, Jack Welch injected his intelligence, energy, and ambition as the head of GE. It is not widely understood how much a product of his times he was. Welch’s management philosophy was consistent with an increasingly common view that American business was encumbered by unmotivated and inefficient bureaucracy. It was a version of the theme Adolf Berle and Gardiner Means famously anticipated in their influential book The Modern Corporation and Private Property, published in 1932. Since managers, not owners, increasingly ran companies, such managers might become more concerned with maintaining the status quo and retaining their jobs than maximizing the profitability and competitiveness of their firms. As late as 1978, for example, Ford Motor defensively complained that Japanese companies could make high-quality cars at low prices only because their wages were so low. In fact, Toyota and other companies made better cars in far fewer hours because they adopted revolutionary new managerial practices such as assembly teams with different skills to work together and “just-in-time” inventory techniques. That Americans failed to do so was a classic example of the defensiveness of bureaucrats; American business did not seem able to make the realistic decisions necessary to change.
One of the responses to corporate torpor at the time was a wave of takeovers that got underway just as Jack Welch was rising to the top at GE in the 1970s. The takeovers were led by a relative handful …