On Differentiation by Jack Welch
If there is one of my values that pushes buttons, it is differentiation. Some people love the idea; they swear by it, run their companies with it,and will tell you it is at the very root of their success. Other people hate it. They call it mean, harsh, impractical, demotivating, political,unfair—or all of the above. Obviously, I am a huge fan of differentiation. I have seen it transform companies from mediocre to outstanding, and it is as morally sound as a management system can be. It works. Companies win when their managers make a clear and meaningful distinction between top- and bottom-performing businesses and people, when they cultivate the strong and cull the weak. Companies suffer when every business and person is treated equally and bets are sprinkled all around like rain on the ocean. UNDERNEATH IT ALL
A company only has so much money. Winning leaders invest where the payback is the highest. When all is said and done, differentiation is just resource allocation, which is what good leaders do and, in fact, is one of the chief jobs they are paid to do. A company has only so much money and managerial time. Winning leaders invest where the payback is the highest. They cut their losses everywhere else. If that sounds Darwinian, let me add that I am convinced that along with being the most efficient and most effective way to run your company,differentiation also happens to be the fairest and the kindest. Ultimately, it makes winners out of everyone. DIFFERENTIATION DEFINED
One of the main misunderstandings about differentiation is that it is only about people. That’s to miss half of it. Differentiation is a way to manage people and businesses. Basically, differentiation holds that a company has two parts, software and hardware. Software is simple—it’s your people. Hardware depends. If you are a large company, your hardware is the different businesses in your portfolio. If you are smaller, your hardware is your product lines. Let’s look first at differentiation in terms of hardware. It’s pretty straightforward and a lot less incendiary. Every company has strong businesses or product lines and weak ones and some in between. Differentiation requires managers to know which is which and invest accordingly. To do that, of course, you have to have a clear-cut definition of“strong.” At GE, “strong” meant a business was No. 1 or No. 2 in its market. If it wasn’t, the managers had to fix it, sell it,or as a last resort, close it. Other companies have different frameworks for investment decisions. They put their money and time only into businesses or product lines that promise double-digit sales growth, for instance. Or they invest only in businesses or product lines with a 15 percent (or better)discounted rate of return (DCRR). Now, I generally don’t like investment criteria that are financial i nnature, like DCRR, because the numbers can be jiggered so easily by changing the residual value, or any other number of assumptions, in an investment proposal. But my point is the same: differentiation among your businesses or product lines requires a transparent framework that everyone in the company undestands. People may not like it, but they know it and they manage with it. In fact, differentiation among businesses and product lines is a powerfu lmanagement discipline in general. At GE, the No. 1 or No. 2 framework stopped the decades-long practice of sprinkling money everywhere. Most GE managers in the old days probably knew that spreading money all around didn’t make sense, but it’s so easy to do. There’s always that pressure—managers jockeying and politicking for their share of the pie. To avoid warfare, you give everyone a little slice and hope for the best. Running your company without differentiation among your businesses or product lines may have been possible when the world was less competitive. But with globalization and digitization, forget it. Managers at every level have to make hard...
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