One of Jack Welch’s most famous strategic decisions was the decision that every GE business unit would be the #1 or #2 players in their respective markets. That decision became the basis of his “#1, #2, fix, close or sell” strategy.
In the 1990s, however, several young executives challenged Welch, saying in essence, that this strategy was costing the company significant growth. They claimed that business unit leaders were defining their markets so tightly so that they could justify their position. As a result, the market focus became smaller and growth opportunities were being missed. Welch rethought his strategy and required all business unit leaders to “redefine their markets so that they had no more than 10% market share.” The rest, as they say, is history.
I confront this challenge every day with my clients (and several times this week). Far too often, companies and the salespeople that support them define their markets by the commodity they provide. I can’t blame them – after all, the last few years have been characterized by significantly increased competitive pressures, and now the talk is of an economic downturn. The concern is that if you don’t focus on providing the commodity at least, there won’t be enough revenue to show for at the end of they day (or quarter, fiscal year, etc.).
These competitive pressures have had the effect of forcing sales and marketing types into a deeper marketing myopia. It’s contributing to the commoditization trap that I’ve been writing about over the last four years. As counter-intuitive as the advice "When the pressure is on justifying your commodity, move away from focusing on your commodity" is, when companies follow this advice, they grow their markets, increase their commodity sales, and protect their margins.
We have the benefit of looking at the Welch strategy and adjustment to guide our actions going forward. Here’s a 2-minute history lesson:
When Jack Welch took over 1981, GE was being called a “GDP company.” This meant that the belief at the time was that GE’s growth was going to be limited to the growth of the market – and no more. If you can remember the growth rates in 1981, you’ll realize there was no excitement in that.
Welch’s first focus was to break “the GDP trap.” He realized that the only way to do that was to be the best in a market (which he defined as #1, or #2). This coincides with the advice I regularly give companies: There are only two types of companies – Best Companies and Me-Too Companies. Only best companies can sustain above market rates of growth, and, especially, ROI.
The #1/#2 strategy worked and forced GE’s operating units to become “Best” or to become somebody else’s problem. Business historians know that GE’s product/revenue mix changed dramatically over that time – and it still does today under Jeffrey Immelt.
Once the “Best Issues” were addressed, that strategy became ineffective and reduced the risk executives were willing to take to grow business. The problem with that is that the only strategy worse than taking risks is to avoid taking them. This (albeit slightly oversimplified) is what led to Welch’s change to the “define your markets so that you have no more than 10% market share.”
The strategic byproduct of this action was that it forced GE’s operating units to redefine themselves to become more than just commodity providers – they became problem solvers. They stopped focusing on the commodity of CAT scanners, and began to focus on enabling hospitals to run their radiology units more effectively. Instead of [fulfilling demand] they [created demand]. The result: they sold more of their commodities BY NOT FOCUSING ON THEM.
Taking this approach is by no means easy – if it were, GE wouldn’t be so famous for having done it. The transformation can be painful and leaders and managers throughout the entire organization will need to learn new skills and new rules to play by. Short-term pressures will constantly “tell you” that you must make these changes “later.” You’ll fall back on old habits and your customers won’t immediately understand the rationale for the change. They may even tell you that they liked things just fine the ways things were.
Very few companies will ever attempt this transformation – and of those that do even fewer will stick with it and successfully make the transformation. While the process is painful, the failure to make this change means that margins will continue their accelerated compression, you’ll have to work harder, expand and cut as markets expand and recede, and your reward will be market rates of return – at best.
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