by Jack Welch
By the time you’ve finished this set of questions, the effectiveness of your strategy should be pretty clear. Your big aha is winning, or it needs to change. Even if you didn’t have a strategy before, this process should help you get one.
But either way, you’ve only just begun.
THE RIGHT PEOPLE
Here’s a familiar scene. Managers meet for months on end in intensive sessions about the company’s competitive situation and direction. Committees and subcommittees are formed. Surveys are conducted. Sometimes consultants are brought in. And then, at last and with tons of fanfare, the company’s leaders announce a new strategy.
Which just sits there.
Any strategy, no matter how smart, is dead on arrival unless a company brings it to life with people—the right people.
Forget speeches. They’re just hot air. The organization knows who’s important. Only if those important people are assigned to lead a new strategy will it take off.
Consider what happened in Power Systems when our push toward product services first got announced. Immediately, all the engineers wanted to know what the heck was going on. After all, they had joined GE because they wanted to build the biggest, highest-powered, most environmentally sensitive turbines. Suddenly, they were being told that the people who serviced their “masterpieces” were going to be the stars of the show.
Didn’t service people, they thought, carry oilcans?
Although the engineers heard the speeches, they didn’t take them seriously, which was easy enough, since services were buried in the existing organization.
What did we do? We eventually took Ric Artigas, a PhD and the engineering leader in Locomotives, and put him in charge of a new and separate P & L devoted to Power Systems’ services business. It was a real signal—Ric was a well-respected player. With his new stature, he had no trouble recruiting the best engineers in Power Systems, who were needed to design sophisticated software packages for turbine upgrades.
The services strategy was under way. In 2005, Ric’s operating profit of close to $2.5 billion will be about equal to revenues when he took over in 1997.
Getting strategy right also means matching people with jobs—a match that often depends on where a business is on the commodity continuum.
It goes without saying that you cannot pigeonhole. Good people are too multifaceted. That said, I would still make the case that due to their skills and personalities, some people work more effectively in commodities and others are better in highly differentiated products or services.
Let’s look at the motors business as an example. It’s about as commoditized as you’ll ever find. Several good companies make the product, and all have good service, quality, and cost.
The right people for this business are hard driving, meticulous, and detail oriented. They are not dreamers, they’re hand-to-hand combat fighters.
Lloyd Trotter is the perfect example. Lloyd joined GE in 1970 as a field service engineer in its high-intensity quartz lighting department, and for thirty years after that, his career was factories, factories, and more factories. He was a foreman, a production manager, and plant supervisor in Lighting, Appliances, and virtually every electrical distribution and control (ED&C) business we had. By the time Lloyd was made CEO of ED&C in 1992, he could tell you from the parking lot whether or not a factory was humming. Two steps closer and he could tell you what it could do better.
Of course, Lloyd liked thinking about strategy, but he liked implementing it more. He was in his element with people who sweated the nitty-gritty details like he did, talking about ways to squeeze efficiencies out of every process. He was a master of discipline. And that’s what made him exactly the right kind of leader to drive our commodities businesses.*
At the other end of the spectrum, it’s generally a different kind of person who thrives. Not better or worse, just different.
Take jet engines. Each engine is a unique, high-tech engineering miracle that requires about a billion dollars of investment to develop. The product life cycle is measured in years. And the customers are tough—the airlines themselves, perennially strapped for money, and the powerful airframers, Boeing and Airbus.
For many years, the jet engine business had its own distinct culture of romance. The people who gravitated toward it weren’t your usual business types—they were in love with the very idea of flying and the wonder of airplanes.
Brian Rowe was perfect for such an environment.
Brian started his career as an apprentice with DeHavilland Engines in England before joining GE as a factory-floor engineer in 1957. After stints in virtually every possible jet engine design project, he was named head of GE’s aircraft engine business in 1979.
Brian was a huge, gregarious guy—outspoken, opinionated, and visionary. He loved airplanes so much he would have worn goggles and a scarf to work if he could have.
Unlike Lloyd, Brian pretty much hated the nuts and bolts of management, and discussions of operating margins and cash flow bored him. But he sure did have the guts and the vision to place the big bets, laying a billion dollars on a single investment that would take years to pay off. Likewise, Brian’s personality made him a great salesman with customers, who shared his enthusiasm for every new technological advance.
Lloyd and Brian were both a case of perfect fit—right for their jobs, right for the business situation, right for the strategy. You won’t always get that lucky, and strategy can get implemented without an ideal match.
But you’re much better off with one.
BEST PRACTICES AND BEYOND
I’ve heard it said that best practices aren’t a sustainable competitive advantage because they are so easy to copy. That’s nonsense.
It is true that, once a best practice is out there, everybody can imitate it, but companies that win do two things: they imitate and improve.
Admittedly, imitating is hard enough. I remember a software company executive at one Q & A session lamenting, “My people don’t copy very well. They just don’t want to—they like the way they do it.” This reluctance to imitate is a common phenomenon. Maybe it’s just human nature.
But to make your strategy succeed, you need to fix that mindset—and go a lot further.
In fact, the third step of strategy is all about finding best practices, adapting them, and continually improving them. When you do that right, it’s nothing short of innovation. New product and service ideas, new processes, and opportunities for growth start to pop out everywhere and actually become the norm.
Along with getting the right people in place, best practices are all part of implementing the hell out of your big aha, and to my mind, it’s the most fun.
It’s fun because companies that make best practices a priority are thriving, thirsting, learning organizations. They believe that everyone should always be searching for a better way. These kinds of companies are filled with energy and curiosity and a spirit of can-do.
Don’t tell me that’s not a competitive advantage!
Back in the old days—after World War II and before global competition—most industrial companies, GE included, were stuck in a not-invented-here (NIH) mind-set. The focus was on their own inventors, with plaques and bonuses reserved for the people who came up with and implemented original ideas.
Once the ’80s arrived, we had no choice but to radically broaden the NIH mind-set, and we did so by celebrating people who not only invented things, but found great ideas anywhere and shared them with everyone in the company. We came to call this behavior “boundarylessness.” This awkward word basically described an obsession with finding a better way—or a better idea—whether its source was a colleague, another GE business, or another company across the street or on the other side of the globe.
The impact of boundaryless thinking on our strategy implementation was enormous. Here’s just one example:
GE was always trying to improve its working capital usage; we were always using too much, and increasing our inventory turns would h
elp. But try as we might with all sorts of programs and tweaks, we just couldn’t seem to get our annual turns above four.
In September 1994, Manny Kampouris was scheduled to speak at a dinner for the top thirty leaders in our company. At the time, Manny was the chairman and CEO of American Standard, the global plumbing and air-conditioning supply company and one of the largest customers of our motors business.
You couldn’t help but notice that Manny wore a lapel pin emblazoned with the number “15” at its center. And soon enough, we all knew why.
For most of his talk that night, Manny regaled us with stories of how they had drastically improved inventory turns at American Standard, a company that produced a broad and varied mix of porcelain toilet bowls and sinks in factories in just about every corner of the world. Manny and American Standard were obsessed with inventory turns. The reason was simple: the company had recently gone through a leveraged buyout, and cash flow was king.*
Our team was awestruck. You could hear people thinking, if American Standard can improve inventory turns with its product mix and complicated manufacturing processes, why can’t we? Before Manny could finish his talk, our business leaders were peppering him with question after question.
But that was just the beginning.
What followed was an avalanche of GE people visiting American Standard facilities, meeting with foremen and factory managers—all of them wearing lapel pins like Manny’s. There was the occasional black sheep with a “10,” but many more plant managers who wore pins boasting of twenty or twenty-five turns. We crawled all over their plants and picked their brains.
They were happy to help. One thing I have learned from boundarylessness over the years is that companies and their people—if they’re not direct competitors, of course—love to share success stories. All you have to do is ask.
The GE people who visited American Standard put what they had learned into practice in their own businesses. Over the next several years, these businesses adapted many of American Standard’s processes to GE, and continually innovated and shared with each other. It worked. By 2000, GE’s inventory turns had more than doubled, freeing up billions of dollars of cash.
Over the years, GE borrowed great ideas with visits to Wal-Mart and Toyota and dozens of other companies. We also borrowed ideas from one another. At our quarterly meeting of business leaders, we asked attendees to present their best practice that others could use. If a leader tried to present a practice that wasn’t applicable to the other businesses, we would give him the hook.
It was in that way that the junior military officer recruiting program, which started in Transportation and spread to every corner of the company, and Internet-selling techniques that helped Plastics reach its customers, made their way to Medical Systems and beyond. The list of these best practice transfers goes on and on.
And it’s hardly exclusive to GE. Yum! Brands Inc. is a case in point. Yum! is a 1997 spinoff from PepsiCo composed of five consumer restaurant brands—KFC, Taco Bell, Pizza Hut, Long John Silver’s, and A&W All American Food—with more than thirty-three thousand total outlets. Yum!’s CEO, David Novak, is an enormous believer in best practice transfer and considers each outlet an individual laboratory of ideas. David told me recently that he considered the major advantage to “bulking up”—in other words, adding chains and outlets—is to share learning. Otherwise, he said, size is just a drag.
Here’s what he means. A couple of years ago, Taco Bell was rated fifteenth in service for drive-in restaurants, with customer service time of 240 seconds, or four minutes, per order. The chain introduced a new process, and within two years, managed to bring that number down to 148 seconds, making it No. 2 in the drive-through industry. Immediately, the Taco Bell practice was transferred to KFC, and last year, its customer service time moved from tenth to eighth—211 seconds to 180 seconds, a full half-minute improvement.
I could tell you many other stories about how Yum!’s “laboratories” have spawned new processes, and how they have spread to improve all of its businesses. However, to make a long story short, I’ll just give you the results. Even with the tough economy, in the seven years since its spinoff, Yum!’s market capitalization has jumped from $4.2 billion to $13.5 billion. Mainly because of ideas being shared and stretched!
A focus on best practices may not sound like strategy, but try implementing strategy without it.
Best practices are not only integral to making strategy happen, they are a sustainable competitive advantage if you continually improve them, with if being the key word here.
That’s not just a mind-set. It’s a religion.
The other evening we were eating at Torch, a wonderful little restaurant one door down from Upper Crust Pizza, and from our seats in the window, we could see its delivery people on bikes, in cars, and on foot zipping back and forth in nonstop motion.
We started to play with the economics of the place, using rough numbers, but even with the most conservative estimates, we could only conclude that Upper Crust is very profitable.
You’ve got to believe that the people running Upper Crust have never held a strategy review session, let alone worked through five slides to reach a big aha.
Their big aha is all in the sauce.
Look, I don’t want to oversimplify strategy. But you just shouldn’t agonize over it. Find the right aha and set the direction, put the right people in place, and work like crazy to execute better than everyone else, finding best practices and improving them every day.
You may not run a corner store, but when you’re making strategy, act like you do.
Budgeting
* * *
REINVENTING THE RITUAL
NOT TO BEAT AROUND THE BUSH, but the budgeting process at most companies has to be the most ineffective practice in management.
It sucks the energy, time, fun, and big dreams out of an organization. It hides opportunity and stunts growth. It brings out the most unproductive behaviors in an organization, from sandbagging to settling for mediocrity.
In fact, when companies win, in most cases it is despite their budgets, not because of them.
And yet, as with strategy formulation, companies sink countless hours into writing budgets. What a waste!
I’m not saying financial planning is bad. Without question, you have to have a way to keep track of the numbers—just not the way it’s usually done.
In this chapter, I’m going to talk about a totally different approach to budgeting. It aligns employees with shareholders, puts growth, energy, and fun into financial planning, and inspires people to stretch. In fact, this approach is so unlike the typical budget process that when we started using it at GE, we stopped using the word budget altogether.*
But more on that later.
The good news is that the process
I recommend is not very hard to do.
It is certainly no harder than the slogging, mind-numbing budgeting process that is the status quo.
But this new process can be practiced only if a company has trust and candor flowing through its veins. As I’ve mentioned throughout this book, that’s rare. Perhaps budgets that actually inspire creativity and growth will make the case for that to change.
Most companies use budgeting as the backbone of their management systems. And so the right budgeting process can actually change how a company functions—and reinventing the annual ritual makes winning so much easier, you just can’t afford not to try.
BUDGETS, THE WRONG WAY
Before describing how to devise budgets the right way, let’s look at the two killing dynamics that are the norm. I call them the Negotiated Settlement and the Phony Smile approaches to budgeting.
These dynamics, incidentally, aren’t only the purview of big corporate bureaucracies. No matter what size company you work in, one of these two approaches, maybe both, will probably sound very familiar to you. In my Q & A sessions around the world, I’ve heard about them in virtually every country and in companies with as fe
w as a couple hundred employees, even in organizations that call themselves entrepreneurial. Bad budgeting is just that insidious; it creeps in everywhere and establishes itself as an institutionalized process. It’s amazing how many times I have heard audience members decry entrenched budgeting systems, only for them to wearily conclude, “But that’s just the way it’s done.”
It doesn’t have to be. But first you have to undo those killing dynamics I just mentioned.*
SPLIT THE DIFFERENCE
Of these dynamics, the Negotiated Settlement is the more common.
This process begins when the ink is barely dry on the strategic plan. That’s when the businesses in the field start the long slog of constructing the next year’s highly detailed financial plans from the bottom up. These will be presented in several months’ time at the Big Budget Meeting with headquarters. The numbers cover everything—from costs to pricing assumptions.
In all their assumptions, the people in the field are operating with one simple goal, albeit unstated: to minimize their risk and maximize their bonus. In other words, their underlying, galvanizing mission is to come up with targets that they absolutely, positively thinkthey can hit.
Why? Because in most companies, people are rewarded for hitting budget. Missing your budget gets you a stick in the eye or worse. So of course people want to keep their budget numbers as low as possible. No wonder their budgets are filled with layer after layer of conservatism.
Meanwhile, back at headquarters, senior managers are also preparing for the Big Budget Meeting. Their agenda, however, is the exact opposite of the field. They’re rewarded for increased earnings, and so what they want from the budget review at every business is significant growth in sales and profits.