by Jack Welch
And to what end? The answer is simple: innovation. There are, of course, other ways to compete, but without doubt, innovation is the most sustainable in today’s global marketplace.
Luckily, there are two ways to innovate, and together they can deliver a real knockout punch.
The first form of innovation is exactly what you would expect: the discovery of something original and useful—a new molecule, a breakthrough piece of software, a game-changing technology. This kind of classic innovation, of course, can happen by accident (in a garage, say), but far more often, it occurs when companies actively build a culture where new ideas are celebrated and rewarded. It happens, in fact, when companies basically define themselves as laboratories for new products or services. Think of Procter & Gamble and Apple. Both epitomize the innovation culture—and its competitive advantages.
But there is a second, less glorified way of innovation that is just as effective. It is the continuous, aggressive improvement of what you already sell or how you already do business. Yes, people must innovate by discovering totally new concepts, as we’ve just described. But companies can (and must!) also innovate by searching for best practices, adapting them, and continuously improving them. It is that activity, in particular around costs, quality, and service, which will most effectively drive the 30 to 40 percent cost reductions required in today’s competitive environment.
The process of continuous improvement really has no boundaries or limits. It is an R & D team finding a new way to make a long-established molecule do something different, and a software engineer finding new applications for an upgraded piece of old software. It is people throughout the organization pushing relentlessly to take established products and services to the next level, blowing up the status quo of “that’s how it’s done around here,” and replacing it with a mind-set that shouts, “We are never done looking for a better way.”
A best-practices culture, in other words, has no endpoint. Once a company thinks it has left the competition somewhere in the dust, it needs to start searching again for the “new and improved,” always staying one or two steps ahead.
If the search is continuous, it also has to be as wide as you can make it. Don’t just seek out best practices hiding under a rock in your own backyard, that is, down the hall in another department or a hundred miles away in another division. Look at other companies in your industry—and outside too. GE learned the nitty-gritty of lean manufacturing by visiting Toyota factories around the world. It learned the art and science of improving inventory turns by studying best practices at American Standard, a plumbing and air-conditioning company. In fact, if there is one thing you can be sure of, it is that companies—if they are not direct competitors, of course—love to share success stories. They are proud to showcase what they are doing well. All you have to do is ask. And ask is what people in best-practices cultures do—all the time.
At this point, perhaps, you are thinking that it is easy to extol the virtues of a best-practices culture but much harder to put one in place. You are absolutely right. Too often, companies resort to sloganeering on this front. They give best practices the old motherhood and apple pie treatment. Best practices are good, they say, we believe in best practices, and so on. Of course, this kind of generic cheerleading results in…nothing.
In real best-practices cultures, the fanatic pursuit of new ideas is baked into the mission of the company. Moreover, searching for best practices and the desire to continuously learn and improve are behaviors that are evaluated in every performance appraisal and rewarded financially. In best-practices cultures, leaders hire and promote only people who have a thirst for continuous learning.
Without doubt, putting an innovation culture in place is hard. But doing so is not one of those choices you can sit around and debate. Either you buy into discovery plus continuous, never-ending improvement as a way of life in your company, or you can wave at your competitors—as they pass you by.
IS CHINA FOR EVERYONE?
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We are a successful Canadian company whose two main competitors have just moved aggressively into China. We know they’re losing money there. But still I worry that we’re making a mistake by staying local—should I?
—ONTARIO, CANADA
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Actually, don’t just worry. Be afraid—be very afraid.
In a global world, scale is a competitive weapon you cannot ignore. And scale is what China can give you, with its vast markets, low-cost manufacturing, and increasingly strong technical talent. No wonder companies from around the world, including, it seems, your two main competitors, are tripping over themselves to get a foothold there.
It is also no surprise that your competitors, in their early efforts, are not yet profitable in China. Most foreign companies haven’t yet figured out how to take the pain out of entry there. Regardless, even if your competitors appear to be in that category, remain paranoid. Because if they eventually do find a way to take advantage of China’s opportunities, they could leap into another competitive league, leaving you far behind.
So, our first advice is to channel the energy you spend worrying to ask yourself a number of hard questions about why your competitors have gone to China. What exactly do they see? Is it just the huge market? Or do they have a unique product or service offering the Chinese will jump at? Is it a manufacturing cost edge, or is it a low-cost, low-investment process that will change the game? Is it access to new technologies that might change your product’s functionality or design appeal to customers? Is it potential partnerships with Asian companies that will, in due time, send imports of your product back to Canada and the rest of the world?
Throughout this soul-searching process, your operating assumption must be that your competitors know something about China’s upside that your company does not.
Even though that may not end up being true.
The fact is: China is littered with the wrecks of companies that went to China just to go to China. They went, for instance, because their two main competitors had gone, and someone in the organization (like you, perhaps) couldn’t get a good night’s sleep because of it. They went because the “China or bust” mantra is invoked everywhere these days, from business school classrooms to boardrooms, all duly reported in the media. They went because, well, there is just a pervasive sense that everyone is going.
None of these are good enough reasons.
Yes, the allure of China’s scale is enormous, and the competitive power of scale is real. But there is no point going to China if you don’t know how China’s scale is going to make you a better, more productive, more profitable company. In that way, the decision to go to China is just like the decision to enter any new market, be it over a state line or across an ocean. It has to make strategic and financial sense. Maybe not immediately, but in a reasonable amount of time.
So, our final advice to you is where we started—that you should indeed worry. In fact, you should assume that your competitors have figured out how China’s scale will improve their market position and economics going forward. Then take that fear and use it to start a conversation in your company about why you haven’t figured out your company’s China advantage.
It could be that there isn’t one. Not every company has to go to China, but most do and most should.
As long as they know why.
REGARDING RUSSIA
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Everybody’s so excited about China. My company recently signed a joint venture there, but we’re also thinking of moving into Russia. What do you think about its potential?
—CHARLOTTE, NORTH CAROLINA
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Your comfort level with doing business in Russia depends on how much stomach and capacity you have for risk. Russia has huge potential for opportunity but plenty for disappointment too. You could say the same thing about China, perhaps, but it seems to us that by comparison, Russia has less upside and more obvious downside.
To start with, let’s look at wha
t’s promising about Russia. Sure, it’s a fraction of China’s size, with China’s one billion head count, but with 140 million people, Russia is bigger than every single-country market in Europe, not to mention Japan.
And without doubt, some sort of economic transformation is occurring in Russia. GDP growth has averaged more than 6 percent per year for the past six years. Compare that to France or Germany! Meanwhile, over the last five years, capital spending has averaged annual gains of greater than 10 percent, and personal income 12 percent.
The driver of all this growth has been Russia’s enormous store of natural resources—timber, minerals, and most of all, oil. In fact, Russia has enough oil to make itself not only energy self-sufficient, but a significant exporter as well.
The Russia picture darkens, however, when you look at other facts. Something like a quarter of Russia’s economy is underground, riddled with corruption, and impervious to any kind of regulation that makes business fair and transparent. We have long railed against regulation as a hallmark of bureaucracy, but for an outside investor, Russia makes a compelling case for the opposite view. You can really come to love regulation when you try to do business in a country that doesn’t have any.
Russia, of course, doesn’t have a lock on lawlessness. China has a veritable army of pirates, and many foreign companies trying to do business there have been stymied (or worse) by what we would consider blatant violations of intellectual property law. Chinese lawlessness, however, is somewhat surreptitious compared to Russia’s, which we would take as a (small) sign that it is less accepted by officialdom.
Two more points of comparison about Russia and China bear quick mention. The first is manufacturing. China’s is thriving. Russia’s factories remain stuck in a state of grim Communist-era disrepair. There just hasn’t been significant investment in bringing these facilities into the twenty-first century. Meanwhile in China, new factories are being built with an eye toward the future.
The second is social stratification. Russia is cash rich—that oil!—but its distribution of wealth is a throwback to the days of the czars. A tiny number of people have a ton of money; most people, especially those in the vast countryside, have very little. There is virtually no in-between. China, by contrast, has a growing consumer base of more than one hundred million people—almost as large as Russia’s total population. Their purchasing power will increasingly be able to support a healthy, sustainable economy.
Now, we don’t want to sound too pessimistic about Russia and too bullish on China. Both countries are in the midst of grand experiments. Russia is trying to create some mix of capitalism and democracy while using a totalitarian approach to fighting both general lawlessness and the scourge of terrorism. China is trying to create a form of society with no antecedent: a market-driven (i.e., free) economy within a Communist superstructure that limits personal freedom. Who knows where either of these works in progress will end up ten years from now, let alone fifty.
But when you come right down to it, China does have an edge for outside investors. Its population is bigger by almost a factor of ten, for starters. Second, its culture is more entrepreneurial; in our experience, there are simply more people in China than in Russia who are energized to win, creative, fierce, and ambitious. Third, China provides a more attractive export base, given its broad manufacturing and technology capabilities. And finally, and perhaps most important, China is focused on the industries of the future—electronics, medical devices, and other forms of technology. After oil and other natural resources, Russia’s major industries are machine building and metalworking. Those are more yesterday’s stories.
All in all, that’s why for us, it feels hard to get as excited about Russia as about China. Still, your company is not unwise to expand there. It could turn out to be very smart. Time will tell.
Time has already told with China. In today’s global marketplace, you have to be there. That’s not true of Russia, even with its expanding economy. But if you have the resources to absorb the risk of doing business there, why not?
WHY PARIS BURNED
When we were in Paris one weekend in November 2005, the riots were raging, and they were raging stil when we left for Stockholm a few days later. It was there—in Sweden, where immigrants make up a fifth of the population, and about 40 percent of this group’s younger adults are unemployed—that a journalist urgently asked us to comment on the fierce debate that erupted along with the violence:
What, she wanted to know, should the leaders of France do to stop the bleeding? And what should the leaders of other European nations do to make sure it doesn’t start?
Our answer, very simply, was that European governments needed to work together with private enterprise to create jobs. Not make-believe jobs in civil service, but real jobs in new companies. This can be achieved, we said, through tax and employment laws that encourage and reward entrepreneurialism, risk taking, and investment.
You would have thought we’d called for the public drowning of puppies and kittens. The journalist was apoplectic.
“You are wrong!” she said. “The way to solve this problem is for the government to give unemployed people more money and benefits. Why do you oppose that solution?”
We oppose that solution because it is not a solution.
Look, we may never know exactly what caused the riots in France, but we can be sure of one thing. People who believe their future holds upward mobility and financial security rarely set cars on fire. Riots are an expression of frustration and anger. They are the outcry of the desperate.
There will be much less chance of riots in Europe when its underclass has hope.
Hope comes from many things—freedom and dignity foremost among them. But hope also comes in large part from work that has meaning and opportunity. Which brings us back to jobs—real jobs.
Now, government jobs are all well and good. They must be, since one in five French people hold one, and a recent survey found that 76 percent of all French people aged fifteen to thirty consider civil service jobs “attractive.”
But no country can have a perpetually stagnant economy and at the same time feed more and more people into the civil service while continuing to support a generous social system of health care and education, as is the case in most developed European nations. With everyone working in dead-end positions, who would be left to pay the taxes necessary to fund the machine?
The facts are, Europe needs jobs in the private sector, and it needs them in a big way. Consider this stunning statistic, reported recently in a Wall Street Journal op-ed piece by Joel Kotkin of the New America Foundation. Over the past thirty-five years, Kotkin wrote, the U.S. economy has created fifty-seven million new jobs. Europe—with a combined GDP about the same size as that of the United States—has created just four million.
Four million! What is going on?
What’s going on are laws and regulations that make investment costly, to put it mildly. In countries like France and Germany, there are few tax incentives for risky investments. And employment laws make it so expensive to lay people off that companies are loath to hire people in the first place.
And what’s also going on is a pervasive European attitude, which can be summed up in one phrase: severe risk-aversion. When we were in Germany not long ago, we met many businesspeople and talked about that country’s economic situation. All agreed that balance sheets in Germany—and Europe in general—had never looked healthier. And despite what appeared to be political logjams, underneath it all, corporations were “restructuring” to make existing businesses more competitive. That’s healthy—but in most cases not good for new jobs. But when we asked why cash-rich companies weren’t investing in new ventures and pumping up their M & A activity, you could practically see the beads of sweat forming on foreheads around the room.
“Oh, no, no—we invested in Internet companies in the late nineties,” one executive said, “and we lost a lot. We don’t need or want that kind of mess again!”
With all due respect, we said, it’s time to get over the trauma. Business is about managing risk—not running from it. The best thing about the Internet bubble is what business learned from it. Traditional venture capitalists see losses as just part of the process.
Later, a pension fund manager in Sweden defended the lack of investment on the part of European companies by pointing to the growth of private equity across Europe. Yes, that trend is happening, and it is a good thing, but far from sufficient.
Private equity provides a transfusion to a sick patient—frequently a laggard division bought out of a large company. The first part of the “cure” is often to reduce employment. Now, restructuring is very good for competitiveness. And it’s also very good for the company’s country, as a healthy company will contribute to tax receipts. But to be clear, if and when private equity ever creates jobs, the growth is rarely explosive and usually takes quite some time.
The kind of job growth that Europe needs must give people hope—that is, opportunity—and that can come only from new businesses, the kind that pop up in the United States every day.
They pop up for many reasons.
First, the government makes it easy for them. The tax laws put in place in the 1980s and enhanced by President George W. Bush encourage capital formation. And employment laws make a flexible workforce possible.
Second, the U.S. culture celebrates risk taking. Entrepreneurs are national heroes—people who start huge job-creating machines, like Bill Gates, Michael Dell, Steve Jobs, and a host of others. During the U.S. publicity tour for our book, Winning, we spoke with about twenty thousand newly minted MBAs at thirty-seven schools across the country. According to our (unscientific) estimate, some 20 percent of these students told us that they were planning on starting their own businesses.
