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Published: August 26, 2005

 
 

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But by 1986, Mr. Welch was ready to begin stage two: rebuilding GE into a company fit for the 21st century. He lavished attention and money on GE’s executive training facility at Crotonville, N.Y., and encouraged innovation and the exchange of ideas. In the mid-1990s, Mr. Welch adopted Six Sigma quality standards, insisting that GE master the new capability and investing in the time and training required to do so. This was Theory O in action.

As a result of this E and O strategy, during Mr. Welch’s 20 years as CEO, GE grew from a $13 billion company into a $400 billion–plus colossus, producing 100 consecutive quarters of increased earnings from continuing operations. Over the same period, GE sales rose to $173 billion from $27 billion, and profits were up nearly sixfold, to more than $10 billion.

But, Professor Beer stresses, this strategy works only when O follows E. When the strategies are implemented the other way around, employees feel betrayed.

The author argues that his finding is supported by the analysis in Jim Collins’s best-selling book Good to Great (HarperBusiness, 2001). Professor Collins’s study of every company that had made the Fortune 500 — more than 1,400 firms in all — showed only 11 were able to achieve and sustain high performance (cumulative stock returns 6.9 times the general market) for a 15-year period following a transformation. The 11 that did all used an integrated E and O strategy, according to Professor Beer.
 


What Are Firms?
Steven N. Kaplan (steven.kaplan@chicagogsb.edu), Berk Sensoy (bsensoy@chicagogsb.edu.), and Per Strömberg (per.stromberg@chicagogsb.edu), “What Are Firms? Evolution from Birth to Public Companies.” Click here.

A company is formed. Armed with a business plan, its founders raise money from venture capitalists. Over time, its revenues grow, as do its assets and market capitalization. Even though profits are elusive, it becomes a public company. The number of employees, 22 at the time of the business plan, grows to 124 at its initial public offering (IPO) and 378 by the time of the company’s third annual report. Assets grow from $2.6 million to $19.6 million at IPO, and then to $96.7 million. This is a familiar story. But during this period, how does the company — along with its legal, organizational, and cultural characteristics — change?

Steven N. Kaplan, the Neubauer Family Professor of Entrepreneurship and Finance; Berk Sensoy, a Ph.D. candidate; and Per Strömberg, an associate professor of finance, all at the University of Chicago Graduate School of Business, examined 49 venture capital–financed companies to explore how such entities evolve as they move from early business plans to initial public offerings.

The research produced an intriguing finding: As these companies developed, a large majority displayed surprising stability and continuity in their operations. In other words, small, high-growth companies are not the stereotypical free-for-all.

This stability was exhibited in a variety of ways. Although the companies were growing quickly, they usually stayed in the same core business. Indeed, only one organization in the 49-company sample made a fundamental shift away from its original business. Others evolved their core activities — for example, moving from offering a new computing platform to offering a new operating system to offering a range of software programs. Their business model was consistent and they tended, perhaps at the insistence of their backers, to adhere to their business plan. Assets such as patents, intellectual property, and physical assets were relatively stable. And their competition remained largely the same during the process of evolution.

But while there was widespread stability in the nonhuman side of these businesses during their evolution, human capital was far from constant. People came and went. And over time, the importance of human capital appeared to diminish. At the business-plan stage, 50 percent of the companies emphasized the expertise of their personnel. By the time of the IPO, less than 15 percent played up the importance of the human element.

 
 
 
 
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