Control Mechanisms at General Electric

Introduction In an effort to achieve organizational goals, a large part of General Electric’s overall strategy involves rigorous management oversight and dedication to controllership. Controls are processes that “direct the achievement of individuals toward the achievement of organizational goals” (Bateman & Snell, 2007). Four control mechanisms used by GE are Six Sigma, performance measurement, internal and external audits and financial controls and the following will discuss their effectiveness, positive and negative reactions to use of these controls and how the controls impact the four functions of management.

Six Sigma Control The Six Sigma methodology of quality control was developed at Motorola in the 1980’s. GE has become one of the most successful companies at installing the Six Sigma ethos into the company’s psyche. All GE employees are trained in the philosophy and language of Six Sigma (GE, 2007). According to the GE’s website “Six Sigma is a highly disciplined process that helps us focus on developing and delivering near-perfect products and services” (GE, 2007). By using the Six Sigma approach, GE can accurately measure what the company’s processes can deliver.

Knowing the limits of a process is important to understanding how the process can be improved. Many methods of control can be used to find process limitations. Six Sigma programs are different in that they accurately measure a process and measure improvements. This is the key reason for the success of the program. In striving for the ideal of Six Sigma control of a process, the result is the reduction in variability of the output of the process. The only way to reduce output variability of a process is to increase control over it. The next step after achieving control of a process is to increase the capabilities of the process.

The same methodologies are applied to identify limitations of a process and find ways of eliminating them. GE has saved billions of dollars by using Six Sigma controls. Within five years of implementing the program, GE had annual productivity gains of 266% and improved operating margins from14. 4% to 18. 4% (Lucier & Seshadri, 2001). Performance Measurement Performance measurement simply put is any way for management to gauge the productivity of a business. Some examples of the activities gauged would be pounds produced, removal efficiency, profit, and cycle times.

The list of these gauges is endless and depends upon the type of business being managed and the type of data a manager is looking for. GE has taken a revolutionary step in gauging performance by using a very basic gauge based on customer satisfaction. According to Richard Wargo, vice president of marketing and strategic initiatives for a unit of GE Capital Solutions, “A key challenge for management is to monitor customer relationships as rigorously as profits are scrutinized. Those relationships build the future” (Teresko, 2006). Within this and other business units GE emphasizes one question, “Would you recommend us to a friend?

” According to Wargo, “The process gives us a market-focused view of our performance relative to the competitive alternatives the customer could choose. Customer-identified problems become easy targets for corrective action. The results are greater potential for growth and future success” (Teresko, 2006). Based on customer feedback, GE ranks the responses from zero to 10, with 10 being the best. Once this data is collected management can then learn the reasons for high scores and how to retain these people as customers, and the reasons for the low scores and what action(s) need to be taken to make these people happy.

Since utilizing this approach in the first quarter of 2006, GE revenue was up 10% from the previous year. As can be seen from the increased profitability the positives of this gauge are obvious. However, there are a couple of potential negatives. For one, customers generally want to place his or her order or pick it up and not waste time taking part in a survey. On the same note, because customers are in a hurry they may not take the time to think about the question being asked, and therefore, give a score off the top of their head. A second potential negative is that the data is somewhat skewed.

For example, someone who gives a score of zero is put in the same category as someone who gave a six. Generally someone who gave a six is a fairly happy customer, whereas a zero is a customer who the company will probably never see again. Although, according to Peter McCabe, chief quality officer for GE’s health care business, “Ultimately it’s not about the number; it’s about focusing on the customer” (McGregor, 2006). This gauge is a perfect example of how all members of an organization must work together to achieve positive results.

It starts with the frontline employees receiving the initial customer feedback, this feedback then funnels through all levels of management in terms of what corrections need to be made or positives to reinforce, then comes back to the frontline employees for implementation of changes. This feedback affects the four functions of management because the organization and planning can now be adjusted based on the results. Leading and controlling also changes because the company has to adjust strategy for the next year’s plans. Internal and External Audits

One of GE’s methodologies is the accountability factors that include both internal and external audits within the company to measure their accountability and performance. Internal audits are done internally at GE to gauge the performance of the company. It all starts at GE with management using the managing, planning, organizing, and leading processes. The GE’s Board of Directors and GE’s Risk Committee perform the oversight and management of GE. Senior GE executives expect involvement, objectivity, and accountability by everyone. The Board of Directors oversees how management deals with the shareowners and other stakeholder’s interest.

They do this by adopting corporate governance principles that make sure the Board is independent and informed on key risks and strategic issues that GE is facing. Each committee oversees certain activities in relation to the accountability role. The internal audits look at the performance of GE. And what GE has done for customers and whoever has received their goods and service. External audits are made by a public accounting firm to form an opinion on the audit of the financial statements for GE. The information is subject to the auditing procedures that are used to help form the opinion.

The external audits help prevent problems from occurring at GE. “Our responsibility is to express an opinion on these consolidated financial statements, and opinion on management’s assessment, and an opinion on the effectiveness of GE’s internal control over financial reporting based on our audits” (KPMG LLP, 2007). The internal and external audits are done at GE to help assess the performance and accountabilities where management needs to look at and address. GE is committed to reliable financial record keeping, transparent reporting and disclosure, and protection of physical and intellectual property.

Financial Controls One control that GE uses is the financial reporting within the company and management has a huge amount of oversight when it comes to the company’s financial situation. By catching opportunities and seeing problems at an early stage, it allows the company to respond quite rapidly to whatever needs to be done. If there is an idea where the company could make a microwave out of aluminum plating instead of steel, and save money in the process, this can be taken care of before the product even begins to be produced.

Managers will also have another group above them to make sure all the decisions are well thought out and would be a good fit for the company. This way GE will have a sort of checks and balances system. Managers know that the final word will come from the top, instead of having to make a definite decision on their own. This action takes the pressure off the managers and allows them to make more intelligent decisions instead of worrying whether or not they are doing the correct thing.

Managers must also make sure the record keeping is both reliable and understandable. The accounting department must be kept up to date at all times. This is not a department where one can play catch-up once a week. Managers must know at all times where the company is sitting financially in order to make certain decisions related to what will be the best way to move the company forward. The finance of a huge company such as GE is not an easy thing to keep track of. Tracking is up to the managers to make sure everything is going in the right direction every day.

If they overlook even the slightest item, it could mean the difference of the entire company going bankrupt. GE’s corporate governance efforts ensure that financial reports are certified by the CEO and in compliance with the Sarbanes Oxley Act. Financial reporting as a control mechanism has a huge impact on the four functions of management, as the bottom line is the focus for most all goals. Conclusion In conclusion, all four control mechanisms discussed have an impact on the planning, organizing, leading and controlling functions of management.

The results of the control mechanism impacts the planning process as goals are re-evaluated and changed as needed. Results also impact the organizational and leadership functions of management by exposing strengths and weakness in those functions that need to be enhanced or changed. Control mechanisms also show where additional controls may need added or enhanced. The control mechanisms discussed are an important part of GE’s success in meeting their organizational goals and ensuring the company’s management functions operate in an effective and efficient manner.

References Bateman, T. S. , & Snell, S. A. (2007). Management: The New Competitive Landscape (7th ed. ). New York, NY: McGraw-Hill/Irwin. GE (2007), GE imagination at work website, http://www. ge. com/en/company/companyinfo/quality/qualityforcustomer. htm KPMG LLP. (2007, February). “Report of Independent Registered Public Accounting Firm. To Shareowners and Board of Directors of General Electric Company. P1. Retrieved March 7, 2007, from http://www. ge. com/en/citizenship/govcomp/board/index. htm. Lucier, G. T. & Seshadri, S.

(2001, May). GE takes six sigma beyond the bottom line. Strategic Finance, 82(11), 40, 7pgs. http://proquest. umi. com/pqdweb? did=71775356&sid=1&Fmt=3&clientId=2606&RQT=309&VName=PQD retrieved from ProQuest database, March 6, 2007. McGregor, Jena (2006). Business Week: Would You Recommend Us? http://businessweek. com/print/magazine/content/06_05/b3969090. htm? chan=gl Teresko, John (2006). Industry Week: Performance Measurement: GE Asks The Ultimate Question http://www. industryweek. com/ReadArticle. aspx? ArticleID=11964&SectionID=1