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 / Fourth Quarter 2002 / Issue 29(originally published by Booz & Company)


Best Business Books 2002: Strategy

Because much of the Welch saga is so well known to business executives, it’s fair to ask what use a strategist can make of Straight from the Gut. Very few companies, we hypothesize, can adopt GE’s evolutionary strategy approach. As Welch’s memoir makes clear, that methodology requires an extremely strong management team, world-class management development, and a succession of ideas that supercharge performance. The poor track records many ex-GE executives have registered as CEOs of other companies supports our hypothesis; even extraordinary managers have trouble adapting techniques that work in talent-rich organizations to more typical companies. The current poster child for corporate excess and failure, Enron, exemplifies the dangers of a bottom-up evolutionary strategy approach guided only by the financial results achieved, rather than the discipline of Welch’s “single idea” and his continual probing of each business unit. Many of Enron’s financial shenanigans were cover-ups for the failures of all the businesses it spawned.

However, almost any company can benefit from Welch’s four transformation initiatives, which have proven their efficacy across an extremely diverse portfolio of businesses in a company that was already an excellent performer. These are:

• Globalization.  During the 1980s, most GE businesses were U.S.-centric. Non-U.S. sales increased from $9 billion (19 percent of GE’s revenue) in 1987 to $53 billion (more than 40 percent of GE’s revenue) today. Although acquisitions and alliances were the vehicle for much of GE’s growth, Welch focused the businesses on deals in regions that were either in transition or out of favor, as Europe was in the early to mid-’90s. In addition to pursuing this contrarian investment strategy, GE committed some of its best people to global assignments — not as business-unit general managers, but in “looking for deals, building business contacts, and being a champion for” the region.

• Services. Services were an equally important element of GE’s growth. For example, in Medical Systems, service sales increased from 18 percent of a $600 million business in 1980 to 41 percent of a $7 billion business in 2000. Overall, Welch projects that services will grow into an $80 billion business for GE by 2010, 10 times the size it was in 1995. As with the globalization initiative, GE’s services success required the commitment of great people, alliances, and acquisitions. In addition, investment in technology for services enabled GE to sign long-term service agreements, deliver rapid payback to customers, increase customer intimacy, and increase service margins (e.g., tripling service margins in transportation).

• Six Sigma. Six Sigma — the quality management program pioneered by Motorola, and significantly improved by GE during Welch’s tenure — drove the increase in GE’s margins from 14.8 percent in 1996 to 18.9 percent in 2000. GE-style Six Sigma is much more than the Total Quality Management programs that many companies have launched. Like all major initiatives at GE, Six Sigma commanded GE’s best people (only Six Sigma “black belts” receive GE stock options) and was designed to have a measurable effect on earnings.

• E-business. Like Six Sigma, GE’s digitization initiative focused initially on cost reduction, on “taking out the low-value-added work in the guts of the company.” At first, digitization saved 5 to 10 percent on the $50 billion of goods and services GE purchases annually, and another $1 billion in its backroom operations, while increasing service levels to customers (online sales were $15 billion in 2001). Welch expects that eliminating “touch points” — the steps in a process when paper has to be handled by an employee — will reduce overhead costs by a total of 30 percent ($10 billion).

Gaining the benefits of these initiatives requires both a GE-like commitment to bringing improvements to the bottom line and a Welch-like championing of only one or two initiatives at a time in every internal forum for several years. That’s a formidable leadership challenge. But as GE has shown, it can be done.

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