“The Man Who Broke Capitalism” is an interesting book about Jack Welch, a cult figure of the 2000s with a management philosophy that, while hugely popular for a long time, worked to destroy a company’s long-term value and has done serious damage to several large American businesses. Welch’s style is in effect the opposite of what Warren looks for in a manger.
It is a good story and well written; however, to my taste, it would have been a better book if it had been written by someone who was not a reporter for the New York Times, as is David Gelles, the author of this book. While the facts presented are accurate, the lessons Gelles draws from those facts are too way woke.
I post this here because of an argument I was involved in with several posts on this board in 2000 or 2001. My contention was that Warren Buffett was a better business manager than Jack Welch. It was an argument that I lost then, as Welch was at the time considered to be the “manager of the century,” And Buffett was supposed to be just a great money manager. Even today, I think that we underrate the importance of his understanding of the best way to manage a business. It has been and still is fundamental to his investment choices.
But I could win this argument today. Gelles does a great job of showing why and detailing what was wrong in Welch.s management Philosophy by examining the results at companies led by Welch’s disciples, such as Boeing, Home Depot, and GE. For example, Boeing was led by Welch’s disciples, Harry Stonecipher, who took over when Boeing Merged with McDonnell Douglas.; Jim McNerney, president and CEO from 2005 to 2015; and Dave Calhoun, who took over after the two 737 crashes.
Nowhere is the impact of Welch’s management philosophy more clearly demonstrated than at Boeing, a company that has run a world-class franchise into a potential disaster. Welch’s emphasis was always on the short term. So it was important to keep quarterly earnings reports showing steady growth. ( keep the stock price up and the shareholders happy).
In contrast, Buffett tells his managers to pick companies with managers who ignore the short-term focus five to ten years down the road and work every day to increase their company’s moat by focusing on product quality and design. Instead, Boeing, in 2012, decided to re-engine a 50-year-old airframe (the 737) because it was the best way to improve the short-term return for shareholders. So how do shareholders feel about that approach today?
A manager with Buffett’s philosophy to sacrifice short-term prospects to build a bigger moat with a better product would not have re-engined a 50-year-old airframe but started with a clean sheet designed for a new single-aisle airplane with a composite airframe and a more efficient wing design. As a result, a decision that would have penalized Boeing’s earnings for several years would have left Boeing today instead of struggling to survive, with strong sales and a product that was vastly superior to its competition.
With the 787, Boeing did come up with a great design, but to keep the cost down. They farmed out the manufacture of many different parts to many companies in many countries. As a result, today, Boeing has not been able to deliver any of these magnificent airplanes for two years because all of the pieces do not quite fit together right.
It would have cost more and penalized short-term profits to keep the manufacturing in-house to control the quality of the product. So which choice do you think a Buffett Manager would have made?
triggered.