by Jack Welch
Third, relentlessly seek out the best practices to achieve your big aha, whether inside or out, adapt them, and continually improve them. Strategy is unleashed when you have a learning organization where people thirst to do everything better every day. They draw on best practices from anywhere, and push them to ever-higher levels of effectiveness. You can have the best big aha in the world, but without this learning culture in place, any sustainable competitive advantage will not last.
Strategy, then, is simply finding the big aha and setting a broad direction, putting the right people behind it, and then executing with an unyielding emphasis on continual improvement.
I couldn’t make it more complicated than that if I tried.
SO WHAT IS STRATEGY?
Before we look at each of the three steps in some detail, a few thoughts about strategy in general.
At the time I retired from GE, the company employed more than three hundred thousand people in about fifteen major businesses, from gas turbines to credit cards. It was a complex, wide-ranging company, but I always said I wanted it to operate with the speed, informality, and open communication of a corner store.
Corner stores often have strategy right too. With their limited resources, they have to rely on a laserlike focus on doing one thing very well.
In our Boston neighborhood, for instance, within a block of each other on Charles Street, two little shops have constantly ringing cash registers and a nonstop flow of satisfied customers. One is Upper Crust Pizza. Its space is cramped, completely unadorned, and noisy, with self-service paper plates and a limited selection of soft drinks. Customers can eat either standing up or sitting at one large, benchlike table. The staff isn’t exactly rude, but they’re noncommittal. It is not unusual for your order—given at the cash register—to be greeted with a bland “Whatever.”
But the pizza is to die for; you could faint just describing the flavor of the sauce, and the crust puts you over the edge. Investment bankers, artists, and cops start lining up at eleven in the morning to see the “Slice of the Day” posted on the door, and around lunch and dinner, the line can run twenty deep. A fleet of delivery people work nonstop until closing.
At Upper Crust, strategy is all about product.
Then there’s Gary Drug, about half the size of a New York subway car. A large, newly renovated, twenty-four–hour CVS pharmacy is a short walk away. No matter. Gary Drug, with its single, narrow aisle and shelves packed to the ceiling, is always busy. Its selection ranges from cold remedies to alarm clocks, with tweezers and pencil sharpeners mixed in. There is a personable pharmacist tucked in back, and a wide selection of European fashion magazines in a corner up front. Everything the store sells matches the mix of the neighborhood’s quirky residents. Salespeople greet customers by name when they walk in and happily give advice on everything from vitamins to foot massagers. The store offers instant home delivery and a house charge account that bills you once a month.*
At Gary Drug, strategy is all about service.
Look, what is strategy but resource allocation? When you strip away all the noise, that’s what it comes down to. Strategy means making clear-cut choices about how to compete. You cannot be everything to everybody, no matter what the size of your business or how deep its pockets.
Corner stores have learned that survival depends on finding a strategic position where no one can beat them. Big companies have the same challenge.
When I became CEO in 1981, we launched a highly publicized initiative: “Be No. 1 or No. 2 in every market, and fix, sell, or close to get there.” This was not our strategy, although I’ve heard it described that way. It was a galvanizing mantra to describe how we were going to do business going forward. There would be no more hanging on to uncompetitive businesses for old times’ sake. More than anything else, the No. 1 or No. 2 initiative was a communication tool to clean up our portfolio, and it really worked.
Our strategy was much more directional. GE was going to move away from businesses that were being commoditized toward businesses that manufactured high-value technology products or sold services instead of things. As part of that move, we were going to massively upgrade our human resources—our people—with a relentless focus on training and development.
We chose that strategy after getting hammered by the Japanese in the 1970s. They had rapidly commoditized businesses where we had had reasonable margins, like TV sets and room air conditioners. We ended up playing defense in a losing game. Our quality, cost, and service—the weapons of a commodity business—weren’t good enough in the face of their innovation and declining prices. Every day at work was a kind of protracted agony. Despite our productivity improvements and increasing innovation, margins were eroding, as competitors like Toshiba, Hitachi, and Matsushita were relentless.
Meanwhile, overseeing GE Capital in the late ’70s, I was shocked (and delighted) to see how easy it was to make money in financial services, particularly with GE’s balance sheet. There were no union factories, no foreign competition, and plenty of interesting, creative ways to offer customers differentiated products and services. I remember the excitement in that period, seeing our people develop new private-label credit card programs and find niche after niche in middle-market industrial financing. Fat margins weren’t exactly low-hanging fruit, but close.
By the time I was made CEO, I knew that GE had to get as far away as it could from any business that smelled like a commodity and get as close as possible to the other end of the spectrum. That’s why we divested businesses like TV sets, small appliances, air conditioners, and a huge coal company, Utah International. It is also why we invested so heavily in GE Capital; bought RCA, which included NBC; and poured resources into developing high-technology products in our power, medical, aircraft engine, and locomotive businesses.
Now, in such changing times, how and why did GE stick with one strategy over twenty years? The answer is that strategies, if they’re headed in the right direction and are broad enough, don’t really need to change all that often, especially if they are supplemented with fresh initiatives. To that end, over the years, we launched four programs to bolster our strategy—globalization, service add-ons, Six Sigma, and e-business.*
More than anything, though, our strategy lasted because it was based on two powerful underlying principles: commoditization is evil and people are everything.
Virtually every resource allocation decision we made was based on those beliefs.
Yes, some companies can win in commodity situations—Dell and Wal-Mart are great examples of companies that have pulled the levers of cost, quality, and service to succeed in extremely competitive games. But that is really tough. You just can’t make any mistakes.
My advice, then, is when you think strategy, think about decommoditizing. Try desperately to make products and services distinctive and customers stick to you like glue. Think about innovation, technology, internal processes, service add-ons—whatever works to be unique. Doing that right means you can even make a few mistakes and still succeed.
That’s enough theory!
MAKING STRATEGY REAL
The first step of making strategy real is figuring out the big aha to gain sustainable competitive advantage—in other words, a significant, meaningful insight about how to win. To do that, you need to debate, grapple with, wallow in, and finally answer five sets of questions.
Going into this exercise, I’ll assume that you have a strategy to begin with, either written somewhere or in your head.
That said, having a strategy doesn’t mean it’s working.
The five slides we’re going to look at here are a way to test your strategy, to see if it’s getting you where you want to go, and figure out how to fix it if it’s not, even to the point of changing it entirely.
I strongly believe this questioning process should not be a wide-scale, bottom-up event. While others may disagree, I know that strategy is the job of the CEO or the unit leader, along with his or her direct reports. If the culture is h
ealthy, they can see the organization in all its various, interdependent parts. They know its people, as well as its sources of ideas and innovation, and can best determine where the most exciting opportunities lie. Moreover, they are the ones who will ultimately commit the resources the strategy requires. They get the plaudits if the strategy succeeds and hold the bag if it fails.
If you have a good team—candid, insightful, passionate about the business, and willing to disagree—completing this exercise should be fun and energizing. With intensity, it should take somewhere between a couple of days and a month. After that, it’s time to act.
* * *
SLIDE ONE
What the Playing Field Looks Like Now
Who are the competitors in this business, large and small, new and old?
Who has what share, globally and in each market? Where do we fit in?
What are the characteristics of this business? Is it commodity or high value or somewhere in between? Is it long cycle or short? Where is it on the growth curve? What are the drivers of profitability?
What are the strengths and weaknesses of each competitor? How good are their products? How much does each one spend on R & D? How big is each sales force? How performance-driven is each culture?
Who are this business’s main customers, and how do they buy?
* * *
Over the years, I have been amazed at how much debate this simple grounding exercise can spawn. In fact, it’s not unusual for people who share the same office space to have widely different views of the same competitive environment.
Many people have a terrible time admitting their business is a true commodity. No matter how hard we tried, it was next to impossible to get people in our motors business, for instance, to accept this reality. And I have sat through countless meetings where this set of questions has surfaced that discomfort and generated enormous heat about the level of resources to commit to R & D and marketing in an attempt to make the product more unique.
Another of the many important issues this slide surfaces is market size. Too often, people like to call themselves the market leader, so they end up limiting the scope of their playing field to make that happen. In our case, the No. 1 or No. 2 mantra inadvertently had that exact effect. After more than a decade, we realized that businesses were increasingly tightening their overall market definition so that their shares were enormous.
We fixed that by saying that businesses had to define their market in such a way that their share of any market they were in could not be more than 10 percent. With that restriction, people were forced into a whole new mind-set, and opportunities for growth were suddenly everywhere.
On the road in Q & A sessions, this is how I talk about the market definition dynamic: Since I am usually sitting in a chair, I ask audience members to imagine that they are a chair manufacturer. They can define their market as the kind of chair I am usually in—with curved metal arms, blue fabric, and wheels. Or they can define it as all chairs. Best yet, they can define their market as all furniture. Imagine the share differences and the implications for strategy!
This kind of discussion is why this slide really deserves to be wallowed in. A rich, wide-ranging conversation puts everyone on the same page—just where they have to be to ultimately find the big aha.
* * *
SLIDE TWO
What the Competition Has Been Up To
What has each competitor done in the past year to change the playing field?
Has anyone introduced game-changing new products, new technologies, or a new distribution channel?
Are there any new entrants, and what have they been up to in the past year?
* * *
This set of questions brings the players on the field to life. Competitor A has been stealing your key salespeople. Competitor B has introduced two new products. Competitors C and D have merged and are having all kinds of integration difficulties.
Some of this information may have surfaced during the wallowing of the first question set, but now it’s time to dig deeper into each competitor’s behavior.
Be granular—know what each competitor eats for breakfast.
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SLIDE THREE
What You’ve Been Up To
What have you done in the past year to change the competitive playing field?
Have you bought a company, introduced a new product, stolen a competitor’s key salesperson, or licensed a new technology from a start-up?
Have you lost any competitive advantages that you once had—a great salesperson, a special product, a proprietary technology?
* * *
The best thing about this slide is that it hits you between the eyes if you’re being outflanked. Very simply, the comparison of slides two and three tells you if you are leading the market or chasing it.
Sometimes these two slides show you that your competitors are doing a whole heck of a lot more than you are. You’d better find out why.
Other times, the comparison of these two slides paints a vivid picture of your business’s competitive dynamics.
Case in point is what happened in our medical business in 1976. The British company EMI had invented the CT scanner in the early ’70s, forcing the traditional X-ray manufacturers—Siemens, Philips, Picker, and us—into an intense equipment war. Soon enough, all of us were coming out with million-dollar machines six months apart, each claiming to be thirty seconds faster in scan time than the last entry. No one was particularly happy with this situation. The CT competitors were in a slugfest, and our customers—the hospitals—were frustrated that they had to make big capital outlays for technology that could be outdated within a year.
Seeing that dynamic, Walt Robb, the head of our medical business, and his team, came up with a breakthrough idea. GE would allocate its resources to design scanners that could be continually upgraded with hardware or software that would cost less than $100,000 a year. We would sell our machines by saying, “Buy a CT scanner from our Continuum Series, and our upgrades will keep you from becoming obsolete for a fraction of the price of new equipment.”
The Continuum concept changed the playing field. It made us No. 1 and has kept us there for twenty-five years.
The main point here is that slides two and three work as a pair. They take anything static out of strategy and get you ready for the questions that come next.
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SLIDE FOUR
What’s Around the Corner?
What scares you most in the year ahead—what one or two things could a competitor do to nail you?
What new products or technologies could your competitors launch that might change the game?
What M & A deals would knock you off your feet?
* * *
This set of questions is, with doubt, the one that most people miss.
They just don’t give it the paranoia it deserves.
Most people answering this set of questions underestimate the power and capabilities of their competitors. Too often, the assumption going in is that competitors will always look the way they do in slide one—they’ll never change.
Take the case of Aircraft Engines in the 1990s, when our engineers believed that they had designed the perfect engine for the Boeing 777—the GE90. We spent more than $1 billion to get more than 90,000 pounds of thrust out of a brand-new design, based on the assumption that Pratt & Whitney could not afford to launch a new engine and would be unable to extend their existing engines to that level.
We were wrong.
Pratt & Whitney, with only $200 million in development, did get 90,000 pounds of thrust out of their existing engines. Because their costs were less, we had to sell the GE90 at lower prices than we planned. We had underestimated the competition because we thought we had all the technical answers.
This story had a lucky ending. Several years later, Boeing developed a long-range version of the 777. It required 115,000 pounds of thrust, which the GE90 could meet since it was a new design and could be expanded. We en
ded up being chosen by Boeing as their sole source, but because of our early miscalculation, we suffered through a few painful, less profitable years.
Getting the right strategy means you have to assume your competitors are damn good, or at the very least as good as you are, and that they are moving just as fast or faster.
When it comes to peering into the future, you just can’t be paranoid enough.
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SLIDE FIVE
What’s Your Winning Move?
What can you do to change the playing field—is it an acquisition, a new product, globalization?
What can you do to make customers stick to you more than ever before and more than to anyone else?
* * *
This is the moment to leap from analysis to action. You decide to launch the new product, make the acquisition, double the sales force, or invest in major new capacity. In reality, this is when Walt Robb and his team made the decision to allocate major resources to the Continuum Series, the strategic move that would keep GE’s medical customers “sticky” for decades.