Winning (4 page)

I was too young and politically clueless to notice at the time, but I was covered because our business was growing by leaps and bounds.
*

If we had the guts to be candid, it didn’t feel that way at the time—we didn’t know enough to know what candor was. It just felt natural to us to speak openly, argue and debate, and get things to happen fast. If we were anything, it was crazily competitive.

Every time I got promoted, the first cycle of reviews—be it budgets or appraisals—was often awkward and unpleasant. Most of the new team I was managing wasn’t used to wide-open discussions about everything and anything. For example, we’d be talking about a direct report at a personnel review, and in conversation, we would agree that the guy was really awful. His written appraisal, however, made him look like a prince. When I challenged the phoniness, I’d hear, “Yeah, yeah, but why would we ever put that in writing?”

I’d explain why, making the case for candor.

By the next review, we’d already be seeing candor’s positive impact with a better team in place, and with each successive cycle, more and more people made candor’s case with me.

Still, it wasn’t like I was singing with the whole chorus.

From the day I joined GE to the day I was named CEO, twenty years later, my bosses cautioned me about my candor. I was labeled abrasive and consistently warned that my candor would soon get in the way of my career.

Now my GE career is over, and I’m telling you that it was candor that helped make it work. So many more people got into the game, so many voices, so much energy. We gave it to one another straight, and each of us was better for it.

We’ve talked a lot in this chapter about one word. But it’s really very simple—candor works because candor unclutters.

Yes, yes, everyone agrees that candor is against human nature. So is waking up at five in the morning for the 6:10 train every day. So is eating lunch at your desk so you won’t miss an important meeting at one. But for the sake of your team or your organization, you do a lot of things that aren’t easy. The good thing about candor is that it’s an unnatural act that is more than worth it.

It is impossible to imagine a world where everyone goes around saying what they really think all the time. And you probably wouldn’t want it anyway—too much information! But even if we get halfway there, lack of candor won’t be the biggest dirty little secret in business anymore.

It will be its biggest change for the better.

I
F THERE IS ONE OF MY VALUES
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.

When all is said and done, differentiation is just resource allocation, which is what good leaders do and, in fact, is one of the chief jobs they are
paid
to do. A company has only so much money and managerial time. Winning leaders invest where the payback is the highest. They cut their 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.

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 understands. 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.

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 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 for everyone. And the kids who couldn’t make the cut usually found other pursuits, sports and otherwise, that they enjoyed and excelled at. Not everyone can be a great ballplayer, and not every great ballplayer 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:

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 prevented 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.

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.

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.