3
Differentiation
CRUEL AND DARWINIAN? TRY FAIR AND EFFECTIVE

I

F T H E R E I S O N E O F M Y VA L U E S

that really 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. Once, during a radio talk show about my first book, a woman in LA pulled off the highway to call in and label differentiation “cruel and Darwinian.” And that was just the beginning of her commentary! 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.
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When all is said and done, differentiation is just resource allocation, A company has only so which is what good leaders do and, much money and in fact, is one of the chief jobs they managerial time. are paid to do. A company has only Winning leaders invest so much money and managerial time. Winning leaders invest where where the payback is the the payback is the highest. They cut highest. They cut their their losses everywhere else. 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. When I was at GE, people discussed differentiation vigorously, but over the years, most people came to strongly support it as our way of doing business. By the time I retired, differentiation was not really a hot topic anymore. The same can’t be said for outside the company! Without a doubt, differentiation receives the most questions I get from audiences around the world. As I said, people tend to love it or hate it, but a pretty large number are just confused by it. If I could change one thing about my first book, it would be to add more pages to the discussion of differentiation, explaining the topic inside and out, and stressing that differentiation cannot—and must not—be implemented quickly. At GE, it took us about a decade to install the kind of candor and trust that makes differentiation possible. But this chapter is not about implementation. It’s about why I believe in differentiation and why you should too.

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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 in nature, 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 under— 39 —

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stands. People may not like it, but they know it and they manage with it. In fact, differentiation among businesses and product lines is a powerful management 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. Companies also sprinkle money evenly for sentimental or emotional reasons. GE hung on to a marginally profitable central air-conditioning business for twenty years because people thought it was necessary in order to have a full-line major appliance company. In reality, headquarters hated air-conditioning because its success was so dependent on the installers. These independent contractors would put our machines into homes and then drive off, and GE lost control of the brand. Worse, we had a small share of the market and just couldn’t make much money on central air-conditioning. With the No. 1 or No. 2 framework, we had to sell the business, and when we did—to a company that lived and breathed air-conditioning very successfully—GE’s former employees discovered the joy of being loved! Moreover, management attention was no longer diverted to an underperforming business, and shareholders had better returns. Everybody won. 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 choices and live by them.

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THE PEOPLE PART

Now let’s talk about the more controversial topic, differentiation among people. It’s a process that requires managers to assess their employees and separate them into three categories in terms of performance: top 20 percent, middle 70, and bottom 10. Then— and this is key—it requires managers to act on that distinction. I emphasize the word “act” because all managers naturally differentiate—in their heads. But very few make it real. When people differentiation is real, the top 20 percent of employees are showered with bonuses, stock options, praise, love, training, and a variety of rewards to their pocketbooks and souls. There can be no mistaking the stars at a company that differentiates. They are the best and are treated that way. The middle 70 percent are managed differently. This group of people is enormously valuable to any company; you simply cannot function without their skills, energy, and commitment. After all, they are the majority of your employees. And that’s the major challenge, and risk, in 20-70-10—keeping the middle 70 engaged and motivated. That’s why so much of managing the middle 70 is about training, positive feedback, and thoughtful goal setting. If individuals in this group have particular promise, they should be moved around among businesses and functions to increase their experience and knowledge and to test their leadership skills. To be clear, managing the middle 70 is not about keeping people out of the bottom 10. It is not about saving poor performers. That would be a bad investment decision. Rather, differentiation is about managers looking at the middle 70, identifying people with potential to move up, and cultivating them. But everyone in

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the middle 70 needs to be motivated and made to feel as if they truly belong. You do not want to lose the vast majority of your middle 70—you want to improve them. As for the bottom 10 percent in differentiation, there is no sugarcoating this—they have to go. That’s more easily said than done; It’s awful to fire people—I even hate that word. But if you have a candid organization with clear performance expectations and a performance evaluation process—a big if, obviously, but that should be everyone’s goal—then people in the bottom 10 percent generally know who they are. When you tell them, they usually leave before you ask them to. No one wants to be in an organization where they aren’t wanted. One of the best things about differentiation is that people in the bottom 10 percent of organizations very often go on to successful careers at companies and in pursuits where they truly belong and where they can excel. That’s how differentiation works in a nutshell. People sometimes ask where I came up with the idea. My answer is, I didn’t invent differentiation! I learned it on the playground when I was a kid. When we were making a baseball team, the best players always got picked first, the fair players were put in the easy positions, usually second base or right field, and the least athletic ones had to watch from the sidelines. Everyone knew where he stood. The top kids wanted desperately to stay there, and got the reward of respect and the thrill of winning. The kids in the middle worked their tails off to get better, and sometimes they did, bringing up the quality of play I didn’t invent for everyone. And the kids who couldn’t make the cut usually found differentiation! I learned other pursuits, sports and otherwise, it on the playground that they enjoyed and excelled at. when I was a kid. Not everyone can be a great ballplayer, and not every great ballplayer
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can be a great doctor, computer programmer, carpenter, musician, or poet. Each one of us is good at something, and I just believe we are happiest and the most fulfilled when we’re doing that. It’s true on the playground, and it’s true in business.
REASONS TO HATE DIFFERENTIATION—AND NOT

I could spend the next couple of pages explaining all the reasons to love differentiation, but instead I’m going to list the most common criticisms the concept receives. I’m leaving aside “hardware” differentiation here, because it doesn’t get anything like the heat that 20-70-10 does. So here are the criticisms of people differentiation. Some have truth in them, but more often than not, they don’t! Here’s what I mean: Differentiation is unfair because it’s always corrupted by company politics—20-70-10 is just a way of separating the people who kiss the boss’s rear from those who don’t. It is true, without question, that at some companies, differentiation is corrupted by cronyism and favoritism. The top 20 percent are the boss’s head-nodders and buddies, and the bottom 10 percent are the outspoken types who ask difficult questions and challenge the status quo. The middle 70 are just ducking and getting by. That happens and it stinks, and it is a function of a leadership team lacking in brains or integrity or both. The only good thing I can say about a merit-free system like this is that eventually it destroys itself. It collapses from its own weight or has to change. The results just won’t be good enough to sustain the enterprise. Luckily, cases of “differentiation abuse” can generally be pre— 43 —

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vented by a candid, clear-cut performance system, with defined expectations and goals and timelines, and a program of consistent appraisals. In fact, differentiation can be implemented only after such a system is in place, a process that we will discuss more specifically in the chapter on people management. Differentiation is mean and bullying. It’s like the playground in the worst possible way—weak kids are made into fools, outcasts, and objects of ridicule. I’ve heard this one a hundred times, and it really drives me crazy because one of the major advantages of differentiation is that it is good and fair—to everyone! When differentiation is working, people know where they stand. You know if you have a strong shot at a big promotion or if you need to be looking for other opportunities, inside or outside the company. Maybe some information is hard to swallow at first, and yes, “bad” news often hurts, but soon enough, like all knowledge, it’s power—in fact, it’s liberating. When you know where you stand, you can control your own destiny, and what is more fair than that? Interestingly, when people raise this criticism with me at speaking engagements, I often ask them a question back. I ask if they ever received grades in school. Naturally, everyone says yes. I then ask, “Did you think getting grades was mean?” “Well, no,” they usually say. Sometimes grades sting, but kids somehow always live through it. And grades have a way of making everything pretty clear. Some people graduate and go on to be astronauts or research scientists or college professors, others become marketing managers or advertising executives, and still others become nurses,chefs,or even professional surfers.Grades,in fact,guide us, telling us something about ourselves that we need to know.
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So why should we stop getting grades at age twenty-one? To prevent meanness? Please! Corollary: I’m just too nice to implement 20-70-10. Usually, people with this complaint about differentiation assert that differentiation, as a managerial system, does not value people who add intangible things to a business, like a “feeling of family” or “humanity” or “a sense of history.” And we all know of organizations that continue to employ underperformers for a long time mainly because they are really nice individuals. I fully understand not wanting to manage out somebody nice. But the fact is protecting underperformers always backfires. First of all, by not carrying their weight, they make the pie smaller for everyone. That can cause resentment. It’s also not what you could call fair, and an unfair culture never helps a company win; it undermines trust and candor too much. The worst thing, though, is how protecting people who don’t perform hurts the people themselves. For years, they are carried along with everyone looking the other way. At appraisals, they are vaguely told they are “great” or “doing just fine.” They are thanked for their contributions. Protecting underThen a downturn occurs, and performers always layoffs are necessary. The “nice” underperformers are almost always the backfires. The worst first to go, and always the most sur- thing, though, is how prised, because no one has ever told protecting people who them the truth about their results, or don’t perform hurts the lack thereof. The awful thing is that this often happens when the under- people themselves. performers are in their late forties or
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fifties; they’ve been carried along for most of their careers. Then suddenly, at an age when starting over can be very tough, they are out of a job with no preparation or planning and a kick in the stomach they may never get over. They feel betrayed, and they should. As harsh as it may seem at first, differentiation prevents that tragedy because it is based on performance measures that really count. That’s why I believe you are never “too nice” to implement 20-70-10, only too cowardly. Differentiation pits people against one another and undermines teamwork. Try telling that to Joe Torre! The New York Yankees function perfectly well as a team (much to the dismay of Red Sox fans like myself, I might add) with a highly transparent system of differentiation in place. Stars are lavishly rewarded; underperformers are shown the clubhouse exit. And if that’s not enough to make a system of differentiation perfectly clear, the players’ salaries are very public! You can have no doubt that differentiation is going on when some team members make $18 million a year, and others wearing the same uniform make the Major League minimum of $300,000. And yet everyone pulls together for the team to win. Alex Rodriguez loves the thrill of hitting a grand slam home run, but I’m sure it feels a lot better to him when the Yankees win. In July 2004, Derek Jeter made the catch of the year, diving into the stands and coming up with a black eye and a cut face, a photo of which graced every newspaper in New York. A lot of the pain had to be relieved when the Yankees won, coming from behind in the thirteenth inning, in one of the great baseball games of all time.
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Without question, these two stars love to excel for their own Differentiation rewards sakes. But you can bet it is always those members of the more fun and exciting when the team who deserve it. team wins. Their teamwork is a testament to two other things. First, great leadership. Joe Torre obviously understands the challenges of managing in a differentiation environment. Second, the cohesiveness of the Yankees, and of so many other sports teams, shows the positive impact of an open, honest management system built on candid performance assessments and aligned rewards. In that way, differentiation doesn’t undermine teamwork, it enhances it. In business, there probably would be pandemonium if companies started publishing everyone’s salary, and I’m not advocating that here. And yet, people always seem to know what their coworkers are making, don’t they? That’s why they get mad when everyone on a team gets rewarded the same way when only a few people have done the work. They feel cheated and wonder why management can’t see the obvious—that not every team member is created equal. Differentiation rewards those members of the team who deserve it. By the way, that annoys only the underperformers. To everyone else, it seems fair. And a fair environment promotes teamwork. Better yet, it motivates people to give their all, and that’s what you want. Differentiation is possible only in the United States. I wish I could implement it, but because of our cultural values, the people in my country simply won’t accept it.

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I have heard this critique of differentiation since its earliest days at GE, when one of our managers explained that 20-70-10 couldn’t be implemented in Japan because in that culture politeness was valued far more than candor. Since then, I have heard the nationalculture excuse from people in hundreds of companies in dozens of nations. Recently, managers in Denmark told us that their country values egalitarianism too much for differentiation to be widely accepted. We’ve heard that case made in France too. A manager at a meeting in Amsterdam told us last year that there was too much “Calvinism in Dutch bones” for the system to work in the Netherlands. I guess the manager believed all rewards come only in Heaven, if you’re chosen to get there! And in China we heard that differentiation is a long time coming because in most stateowned enterprises—still more than 50 percent of the economy despite market reforms—many of the best jobs and rewards go to the most loyal members of the party whether they are the most talented or not. Basically, I think the excuses we hear about differentiation’s cultural obstacles are just that—excuses. At GE, we couldn’t have a company where differentiation existed only in our U.S. operations. First of all, we just believed too much in differentiation’s Once we made the case effectiveness. But we also knew for differentiation and that having differentiation only in we linked it to a candid the United States would have been unfair and confusing, especially for performance appraisal the businesses with both U.S. and system, it worked as global divisions, and for the people well in Japan as it who moved around the world for did in Ohio. us. We decided early on that we would push through differentia-

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tion everywhere we did business, dealing with whatever cultural issues that confronted us. Then an amazing thing happened. Very many cultural issues didn’t confront us. Once we made the case for differentiation and we linked it to a candid performance appraisal system, it worked as well in Japan as it did in Ohio. In fact, people who at first thought it could never work in their country came to support it strongly for its honesty, fairness, and clarity. As I mentioned, very often when I get the comment “We can’t have differentiation in my country,” it comes from managers who admit they themselves support the approach. Their resistance grows out of the assumption that their people will object based on cultural values. My advice to them is to move slowly but go for it anyway. They will be surprised that they are not alone because differentiation, once in practice for a while, makes its own case in any language. Differentiation is fine for the top 20 percent and the bottom 10 because they know where they are going. But it is enormously demotivating to the middle 70 percent, who end up living in an awful kind of limbo. Again, an element of truth in this complaint. The middle 70 percent is the hardest category to manage in differentiation. The biggest problem comes with the individuals in the top tier of the 70 percent because they know they are not a whole lot different from the top-20 performers, and often a whole lot better than the bottom tier of their own “guard.” And yes, that can be enervating, and sometimes talented middle-70 people leave because of it. The silver lining to this difficult situation is that the existence of a middle 70 forces companies to manage themselves better. It

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forces leaders to scrutinize people more closely than they would ordiWhile being in the narily and to provide more consismiddle 70 percent can be tent, candid feedback. It pushes demotivating to some companies to build training centers people, it actually revs the that really make a difference. For instance, before differentiation, our engines of many others. Crotonville, New York, training center was often used in the 1970s as a warehouse where businesses could afford to send their underperformers. It was like a way station on the road to early retirement. The rigor of 20-70-10 helped us change that. We turned Crotonville into a place where the top 20 and the best of the middle 70 talked about ideas, debated our approach to business, and got to know and understand one another a lot better. And since senior management spent several hours with each class, it also gave us a rough idea as to just how rigorously differentiation was being practiced in the field. Another piece of silver lining is that while being in the middle 70 percent can be demotivating to some people, it actually revs the engines of many others. For the people in the top 20, for instance, the very existence of a middle 70 gives them yet another reason to pull out all the stops every day. They have to keep getting better to keep their high standing—what a rush that can be! After all, most people want to improve and grow every day. For a lot of people in the middle 70, getting better is energizing too. Getting into the top 20 gives them a tangible goal, and having that goal makes them work harder, think more creatively, share more ideas, and, overall, fight the good fight every day. It makes work more of a challenge and a lot more fun.

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Differentiation favors people who are energetic and extroverted and undervalues people who are shy and introverted, even if they are talented. I don’t know if it’s good or bad, but the world generally favors people who are energetic and extroverted. That’s also something you learn young, and it’s reinforced in school, at church, at camp, in clubs, and usually at home too. By the time you get to work, if you are still shy and introverted and somewhat low in energy, there are professions and jobs where those characteristics are advantageous. If you know yourself, you will find them. This criticism of differentiation, which I hear now and then, is not really about differentiation, but about society’s values. I might add that in business, energetic and extroverted people generally do better, but results speak for themselves, loud and clear. Differentiation hears them. ■ If you want the best people on your team, you need to face up to differentiation. I don’t know of any people management system that does it better—with more transparency, fairness, and speed. It isn’t perfect. But differentiation, like candor, clarifies business and makes it run better in every way.

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Copyright

WINNING. Copyright © 2005 by Jack Welch, LLC. All rights reserved under International and Pan-American Copyright Conventions. By payment of the required fees, you have been granted the non-exclusive, non-transferable right to access and read the text of this e-book on-screen. No part of this text may be reproduced, transmitted, down-loaded, decompiled, reverse engineered, or stored in or introduced into any information storage and retrieval system, in any form or by any means, whether electronic or mechanical, now known or hereinafter invented, without the express written permission of PerfectBound™.

PerfectBound™ and the PerfectBound™ logo are trademarks of HarperCollins Publishers, Inc. Adobe Acrobat eBook Reader March 2005 ISBN 0-06-079621-9 Library of Congress Cataloging-in-Publication Data Welch, Jack, 1935Winning / Jack Welch with Suzy Welch.–1st ed. p. cm. Includes index.

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