by Jack Welch
And frankly, candor is your job. In fact, once you become a manager, it’s your obligation to let everyone who works for you know exactly where they stand. That’s how you build the best team—and win.
Your question, by the way, is by no means unusual. We’ve heard every possible excuse for avoiding candor—it goes against politeness in Japan, for instance, and egalitarianism in Sweden. But by far, the age issue you raise is the most common reason for discomfort.
Let go of it. Some “old folks” might object at first, but the good ones have been waiting longer than you think for straight talk to arrive.
THE CASE FOR DIFFERENTIATION…EVEN IN SWEDEN
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You have long advocated a management approach called “differentiation”—promoting the top 20 percent of performers in a company, developing the middle 70, and letting go of the bottom 10. But how can your method be applied in Sweden, where it is not really possible to fire someone who is underachieving?
—GÖTEBORG, SWEDEN
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You ask about Sweden, but we’ve heard this question in dozens of countries, from Germany to Japan to Mexico. We’ve even heard it in the United States, with its relatively flexible labor laws. There, people ask the variation, “How can I apply differentiation in my company? We never fire anyone—we can’t.”
It’s just not true. Differentiation can be applied anywhere—if it’s done right. Yes, there are always people who claim at the outset that the system won’t work in their culture, but over time, they come to see how differentiation not only helps employees improve their lives, it changes the competitive game. And they come to understand how differentiation isn’t at odds with any particular national character or set of labor laws. In fact, quite the contrary.
Look, differentiation raises hackles, as you mention, because of its firing component. The irony is, once the system is in place, it hardly ever ends up with managers terminating anyone. That’s because differentiation forces companies to implement regular, candid performance appraisals so that a 20-70-10 curve can be established. When people are told during these appraisals that they are in the bottom 10 percent, they usually move along of their own accord, more often than not finding jobs that fit them better. Almost no one wants to stay where they are at the bottom of the barrel.
Meanwhile, the rest of differentiation does its powerful work. Great performers get rewarded in their souls and pocketbooks, usually increasing their zest to achieve even more, and middling performers get the development and training they need to deliver better results and increase their opportunities for growth. It really is a system where individuals win and the company does too.
That said, it is true that differentiation is an easier sell in some countries than others. You mention legal issues with firing in Sweden, a prospect that immediately sends most managers running for cover. And when we were in Stockholm recently, we heard a lot about the cultural value placed on egalitarianism, not exactly a 20-70-10 kind of concept.
Even in such situations, where differentiation appears to be a challenging cultural fit, managers shouldn’t balk. You may have to go more slowly, put more effort into it, and pay more to people with whom you part ways. But the benefits far outweigh these costs. Start by introducing honest appraisals, making sure they are conducted at least twice a year. Let people know where they stand—with no sugar coating or double-talk. Make candor a real organizational value. Talk relentlessly about why the rigorous personnel evaluations at the core of differentiation matter so darned much. After all, they field the best players, and everyone knows that the team with the best players wins.
And who doesn’t want that—even in Sweden?
STRATEGY FOR BIG AND SMALL ALIKE
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What do you see as the essentials of strategy for companies employing less than one hundred people? Recommendations from academics and consultants apply almost exclusively to large corporations, drowning us in a sea of advice that just feels irrelevant for small organizations with constrained resources.
—PITTSBURG, KANSAS
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We might have bad news for you. Strategy is strategy, whether the company is large or small. It’s that killer idea—a “big aha” as we call it—that gives you a sustainable competitive advantage. Put another way, strategy is just a winning value proposition, that is, a product or service that customers simply want more than the other options out there. Beyond that, strategy is all in its execution—and on that front, small companies actually have something of an advantage.
Now, we don’t blame you for feeling as if most of the advice on strategy that you hear today applies mainly to big companies. It’s all so complex, as if strategy is some kind of high-brain scientific methodology. In fact, with the arduous, intellectualized number crunching and data analysis being promoted, well…you’d have to be a large company to have the people, time, and money to attempt it.
Don’t bother. The more you grind down into details and different scenarios, the more you get tied up in knots. Look, once you have your big aha, strategy is just a general direction. It’s an approximate course of action that you revisit and redefine according to shifting market conditions. It’s got to feel fluid—it’s got to be alive!
Small companies—and large ones—can actually come up with their strategy just by probing five key questions. What does the competitive playing field look like? What have our competitors been up to lately? What have we done lately? What future events or possible changes keep us up at night with worry? And given all that, what’s our winning move?
This relatively fast, theory-free process obviously doesn’t require an academic textbook or consultants to complete. In fact, it requires only a team of informed, engaged employees who can dream big and debate intensely—and ultimately emerge with a dynamic game plan.
Then it’s time to implement, and that’s when small companies really have it made. When there are only one hundred employees, or even a thousand, it is just so much easier to communicate strategy and get people excited about it with a shared, contagious intensity and spirit of can-do. And once the strategy is launched, small companies, like little powerboats, are able to adjust direction more quickly than corporate ocean liners. They can also hire faster, make decisions with fewer bureaucratic hurdles, and generally see their mistakes (and fix them) sooner than hulking rivals.
With that said, small isn’t totally beautiful when it comes to strategy. Here’s the rub: with constrained resources, you have to be right more often. Big companies can take a lot of swings; they can afford to invest in one or two or three big ahas that don’t work out. By contrast, one big strategy mistake can put a small company out of business.
The imperative for small companies, then, is to hold their value proposition to a higher standard. They really have to make sure they’ve got something singular—a new idea with a patent, a breakthrough technology, an extremely low-cost process, or a unique service offering. Whatever—it just has to have the power to attract customers and make them stick.
And when they do, small companies can celebrate a strategy that’s winning, knowing they did it without all the charts, graphs, reports, studies, and big fat stacks of PowerPoint slides that no one really needs, not even the big guys.
THE CONSULTANT CONUNDRUM
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Are consultants good or bad? Under what circumstances would you bring them in, and what does bringing them in say about the skills of your own people?
—ALBANY, NEW YORK
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Your question is sort of like asking, “Are doctors good or bad?” The answer is, some are good and some are bad—but either way, you want to spend as little time with them as you can.
Look, the problem with consultants is they’re fundamentally (if surreptitiously) at loggerheads with the managers they want to work for. Consultants want to come into a company, solve its mess, and then hang around finding and solving other messes—forever. Managers want consultants to
come in, solve their specific problem fast, and get out, also forever. The tension between these conflicting goals is what makes the use of consultants intractably problematic.
There are, of course, situations when consultants are useful. Sometimes a company needs fresh eyes to assess an old strategy or a new product. Sometimes a company simply does not have the in-house skills needed to make an informed decision. Private equity firms today, for example, use consultants very effectively to quickly evaluate the markets and industries of potential acquisitions.
But the byword with consultants is “Be careful.” Before you know it, they could be doing the ongoing work of your business. After all, that’s what they want, even if you don’t.
THE DANGER OF DOING NOTHING
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Five years ago, we started a company in the then red-hot fiber communication industry. We’ve fought hard to stay viable, but now it’s obvious that the “growth space” for our company is much more limited than we’d hoped for. Should we give up and start again in a new area or stay in the survival game?
—SUNNYVALE, CALIFORNIA
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Since you’re from Silicon Valley, it seems to us that you probably know the answer to your question: the survival game stinks, perhaps no place more than the technology sector. In fact, sticking it out in a low-growth technology business is a fast road to commodity hell, where you will be forced to endure a painful eternity of low-cost slugfests with offshore manufacturers. What a way not to go.
Clearly, then, you would be better off finding a new area where you and your team can grow and flourish.
It appears your company has a business model where survival, at least for the foreseeable future, is an option. That’s good news. It means your immediate challenge will be harvesting the living daylights out of what you have to keep the cash flow coming. Meanwhile, you can figure out the new game, allocating the resources to acquire a business or start one from scratch.
Now, none of this may seem particularly easy or particularly pleasant—exiting a business rarely is—but you can take solace in knowing that your situation is entirely common. The environment starts to change under your feet, and suddenly your business doesn’t make that much sense anymore. This happens every day, all over the world, not just in entrepreneurial start-ups. In fact, it’s particularly common at older, established companies, where new competitive dynamics emerge seemingly out of nowhere to upend the status quo. Unfortunately, all too often in these big companies, certain businesses have become such shrines that managers do not react with the kind of clear-eyed realism that your letter suggests.
Look, change requires leaders to overcome all sorts of completely human dynamics, like inertia, fondness for tradition, and hopefulness that things will get better. But strategic moments require a kind of courage, or at least a lack of sentimentality, which is rare. It is in these moments that the best leaders find a mirror and ask the defining question that the late, great Peter Drucker posed nearly fifty years ago: “If you weren’t already in your business, would you enter it today?” If the answer was no, Drucker said, you needed to face into a second tough question: “What are you going to do about it?” Every leader today should heed his advice and, if need be, follow it through to its conclusion, whether it is to fix, sell, or close the business.
Congratulations for having done that already. Your decision may be tough in the short run, but it will ultimately release your people from a losing work environment and give them a chance to find a future filled with opportunities, perhaps even with your new venture.
HOW HEALTHY IS YOUR COMPANY?
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If you had to pick, which three measurements would you say give the best sense of a company’s health?
—ORLANDO, FLORIDA
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Every type of business, not to mention every type of manager, has a different set of vital statistics that really matter. For manufacturing people, it could be inventory turns, on-time delivery, and unit cost. For marketing people, it could be new account closings, market share, and sales growth. For call center managers, it could be time to answer, the number of dropped calls, and employee retention.
But if you’re running a business, whether it’s a corner store or a multiproduct multinational, we’d say there are three key indicators that really work: employee engagement, customer satisfaction, and cash flow.
These measurements won’t tell you everything you need to know, but close to it. They get right to the guts of a company’s overall performance, now and in the future.
Employee engagement first. It goes without saying that no company, small or large, can win over time without energized employees who believe in the mission and understand how to achieve it. That’s why you need to test for employee engagement at least once a year in anonymous surveys where people feel completely safe to speak their minds.
But watch out. Do not fall into the common trap of letting these surveys devolve into the little stuff, with questions about the quality of food in the company cafeteria or the availability of parking spaces in the company lot. The best, most meaningful employee engagement surveys are a world apart from that. They probe how employees feel about the strategic direction of the company and the quality of their career opportunities. They ask, “Do you believe the company has a set of goals that people fully grasp, accept, and support?” and “Do you feel the company cares about you and that you have been given the opportunity to grow?” and “Do you feel that your everyday work is connected to what company leaders say in their speeches and in the annual report?”
Basically, the best employee engagement surveys are getting at one question: “Are we all on the same team here?”
Of course, growth is the key to long-term viability, which is why customer satisfaction is the second vital sign for general managers. Again, this measurement can be obtained by surveys, but those are rarely enough to give you the gritty data you need for a real read of the situation. No, you need to make visits. And don’t just go chat with your “good” customers. Go to see the most difficult, the ones whose orders are inconsistent or dropping. Go to see the ones your salespeople don’t like to see themselves.
Make these visits about learning. Find a dozen ways to ask, “What can we do better?” And don’t leave without finding out if each customer would recommend your products or services. That’s the acid test of customer satisfaction.
Finally, there’s cash flow, which is valuable because it just does not lie. All your other P & L numbers, like net income, have some art to them. They’ve been massaged through the accounting process, which is filled with assumptions. But free cash flow tells you the true condition of the business. It gives you a sense of your maneuver-ability—whether you can return cash to shareholders, pay down debt, or borrow more to grow faster, or any combination of these options. Cash flow, basically, helps you understand and control your destiny.
Without doubt, there are plenty of measurements that give you a pulse of your business. But if you have employee engagement, customer satisfaction, and cash flow right, you can be sure your company is healthy—and well on the way to winning.
THE REAL JOB OF HR
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If HR is the most powerful part of an organization, as you always say, why is its impact only felt in a negative way?
—LOUISVILLE, KENTUCKY
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Because at too many companies, unfortunately, HR gets it wrong—either operating as a cloak-and-dagger society or a health-and-happiness sideshow. Those are extremes, of course, but if there is anything we have learned over the past five years of traveling, it is that HR rarely functions as HR should.
That’s an outrage, made only more so by the fact that most leaders aren’t scrambling to fix it.
Point blank: HR should be every single company’s killer app. What could possibly be more important than who gets hired, developed, promoted, or moved out the door? After all, business is a game, and as with all games, the team
that puts the best people on the field and gets them playing together wins. It’s that simple.
You would never know that, though, to look at the companies today where the CFO reigns supreme and HR is relegated to the background. It just doesn’t make sense. If you owned the Red Sox, for instance, would you hang around with the team accountant or the director of player personnel? Sure, the accountant can tell you the financials. But the director of player personnel knows what it takes to win: how good each player is and where to find strong recruits to fill talent gaps.
That’s what HR should be all about.
And as you point out, it’s usually not.
That was never as painfully clear to us as it was several years ago when we spoke to five thousand HR professionals in Mexico City. At one point, we asked the audience, “How many of you work at companies where the CEO gives HR a seat at the table equal to that of the CFO?” After an awkward silence, fewer than fifty people raised their hands. Awful!
Since then, we’ve tried to understand why HR has become so marginalized, and as noted above, there are at least two poles of bad behavior. The cloak-and-dagger stuff occurs when HR managers become stealthy little kingmakers, making and breaking careers, sometimes not even at the CEO’s behest. These HR departments can indeed be powerful but often in a detrimental way, prompting the best people to leave just to get away from the palace intrigue of it all. Just as often, though, you get the other extreme: HR departments that plan picnics, put out the plant newsletter, and generally drive everyone crazy by enforcing rules and regulations that appear to have no purpose other than to increase bureaucracy. They derive the little power they have by being the “You can’t do that” police.
