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Neil Patel

Lessons on Winning and Profitability from Jack Welch

Neil Patel

Jack Welch is one of the most prominent CEOs of the last century. He has earned name recognition from people around the world.

For the uninitiated, Jack Welch is the former CEO of General Electric. He assumed the role in 1981 and remained in the position until his retirement in 2001. Welch is candid and shoots straight from the hip. He pulls no punches and encourages entire companies to do the same.

And if there’s anything to know about Jack Welch, it’s this – he’s all about winning. If a company or division at GE was not first or second in its industry, it would be sold or closed. The ultra-competitive Welch wants to win. And he did a lot of that as CEO of General Electric:

Welch believes that winning and being profitable is a company’s number one social responsibility. He believes that winning companies are able to give the most back to society and have the happiest employees. So, given his obsession with winning, it should come as no surprise that one of Welch’s books is entitled Winning.

Welch has been a ruthless cost cutter. At the beginning of his CEO tenure, Welch laid off thousands of employees, which earned him the nickname Neutron Jack.

You can argue with his tactics, but you cannot argue with the success he brought GE. Welch earned many awards for his work as CEO, including Fortune declaring him “manager of the century.” The Financial Times calls General Electric the most admired company, and Fortune ranked GE the most admired company in 1996 and 1997.

Let’s dive into some business lessons from one of the world’s best CEOs.

Innovation

Welch emphasizes boundaryless behavior and constantly searching for better ideas. Here’s what he says about innovation:

“If you’ve got a company that has a mentality inside that is filled with searching for a better idea every day, not just as a slogan but as a real concept, you will have innovation around you all the time.”

Ideas:

“You want people that grab ideas, that share them, that grow with them, that’s what you want. You want culture that just thirsts for them and doesn’t care where they come from. The stripes on the shoulder don’t determine the quality of the idea – the idea does. And the people that grab them are the heroes. The people who take ideas from innovators…and take them to new levels are the people you want to have around you.”

He expands on this in another interview:

“Simply put, boundaryless thinking meant we were open to the best ideas and practices from anywhere – another colleague, another department, another country or even another company. It changed our thinking and broadened our awareness. Boundaryless behavior increased the organization’s intellect and, thus, its effectiveness.”

On not being punished for taking risks:

To be an innovative company, you can’t punish every risk. Welch says:

“If you’re leading a group and you got somebody taking a swing, you’ve got to make examples out of them. Make them heroes for taking the swing.”

Welch brings up an example where GE sold an energy efficient light bulb in the early 80s for $10.99. Unsurprisingly, it wasn’t a big seller. Welch says the product was before it’s time. It took ten years for the costs to come down and the product to become a success. But GE rewarded the entire team (120-160 people) with new television sets, a trip to Disney World for a week, and public congratulations. The company wanted to show that it rewards risk taking and innovation.

“When should a boss take responsibility for failure of an employee? The answer is every day. Every single day. Unless the employee violates a policy, steals something, or does something else. [Otherwise] you’re in it with them. So every time you hear people out there trying things, you were there. You can’t walk away from it….to get a culture of risk taking, you need to reward risk taking. You get the behavior you reward…everything you measure and reward – you’ll get that behavior. If you ignore it, you won’t get it. If you want risk taking, reward it.”

On people and values:

“Performance got you in the game and values got you promoted…and values got your ass thrown out of there, too. Bad behavior got you out and we didn’t get everybody, but we found the biggest jerks we could find and got them out of there. Values count, they’re real.”

Welch believes that values really are just behaviors that set the principles for how a company operates.

The 20/70/10 Differentiation

Welch believes that in an organization, employees can be broken down into a performance differentiation. He believes 20% are all-stars and A players, 70% are average (and need to work to get into the top 20%), and 10% need to be gracefully released from the company. Let’s get into what he says:

“You embrace the top 20, deal with the middle 70, and you face into the bottom 10, and you do what’s right for them and for you.”

Welch believes that you need to treat the top 20% of people likes stars. “Make them feel loved, hug them, give them cash, give them rewards in the soul and wallet. Do everything for them. For the middle 70%, show them what they need to do to get in the top 20%. For the bottom 10%, tell them why they should move on. Do it over a year or so. Tell them what their shortfalls are, tell them they’re in the bottom 10%, don’t give them a raise, and ask them to leave. Tell them ‘Over the next several months, [we’ll] work together to get you in the right place.'”

Welch says this method is much better than false kindness, where employees aren’t told they aren’t good, and then they take a termination or layoff as a surprise. Welch advises that you should not create false kindness, but rather create candor.

On methods for treating the 20%:

“Your job is take the A’s (20%) at any moment in time [and] reward them in the pocketbook with lots of money, with promotions, with opportunities, with a vision of where they can go. You never want your A’s to think ‘Oh geeze I’ve done all this, but I’m getting the same as this person over here – it’s terrible.’ You want them saying ‘I got recognized, the company is taking care of me, they’re pushing me up.'”

For the 70%:

“You want to send them to training, you want to give them stock options or ways to grow, you want to give them all that. But you [also] want to give them a path to becoming A’s.”

On treating the 10%:

“You want to tell them ‘This is not the place for you. This is the time for you to go over and work [for another company]. Take some time, take several months, we’re not firing you today, we’re not stamping you out. We’re telling you you’re not going to get a raise, you’re not going to get a promotion, your days here are numbered, move on.’ And do it before they’re 30 years old. That’s what we like to do….

“You want to keep building winning teams. And you don’t want to do it unfairly, you don’t want to do it cruelly, you don’t want to do it in one day. You want to coach them out. And then when you let them go, you don’t let them sit over here in limbo, you take them to lunch, you see how their job search is going. The exit is very important. You have to coach them out. And be sure they’re not getting bitter and angry and all the other stuff.”

Welch says as soon as you spot a 20 percenter, you let them know how good they are. Treat them like an A player. Don’t wait.

“In general you want people stretching always a little more than they are capable of. So they’re reaching for the moon all the time. And they’re never bored. You never want those A players bored.”

The Four Types of Managers

Welch believes that there are four types of managers. The types revolve around values and commitment, whether the commitment is financial performance or otherwise:

According to Welch, the ideal leadership criteria is as follows (taken from the 1992 letter to shareholders):

HR, When Used Appropriately, Is the Most Important Department of a Company

If the Human Resources department is functioning correctly and used in the correct manner, it’s the most important department in the entire company, according to Welch. He says:

“HR is the driving force behind what makes a winning team. We make the argument that the team that fields the best players wins. HR is involved in making sure we field the best players. That’s their job. And their job is to sit in every meeting, be involved in every part of the business equation. They are not the health and happiness, picnics, benefits team. They’re the development team, developing today’s and tomorrow’s leaders. If you have an organization where HR is relegated to forms and benefits, you got the wrong game going.

“I like to use one analogy, if you were running a sports team, whether it be the New York Yankees [or the] Boston Red Sox, would you like to hang out with the head of player personnel or the team accountant? Who would help you bring the best team to [the] field? Not the team accountant!

“The same thing is true in business. Get yourself a great HR person, preferably one with multi skills, in manufacturing perhaps or in sales, who happens to be a people person. Who understands that the role of the HR leader is to be both pastor and parent: pastor in keeping secrets and parent in keeping it straight. You get that person who loves to see people grow and you got yourself a winner.”

Welch believes that “business is all about people. And that’s not a slogan, that’s a reality. People that have it as a slogan don’t get it.”

Welch says anyone who believes the financial department is more important than the HR department has it all backwards. Every time he discusses this, he brings up the analogy of human resources being similar to the VP of player personnel on a sports team, and the financial department being the team accountant. They are far less relevant and don’t improve a team.

“Why the hell in business do you hang around this stupid finance manager? Everybody wants to hold hands with the finance manager. He’s usually dull, green eyeshade, boring, and all he does is tell you the score, he doesn’t create the score. The human resource person, if you’re using them right, is the person that builds the team that makes the score, that creates the winning formula. So many places have it ass backwards. It’s crazy.”

Six Sigma

Bring up Jack Welch to any business minded person and they’ll soon mention Six Sigma. But what exactly is Six Sigma? According to Wikipedia, it’s:

“Six Sigma seeks to improve the quality of process outputs by identifying and removing the causes of defects (errors) and minimizing variability in manufacturing and business processes. It uses a set of quality management methods, including statistical methods, and creates a special infrastructure of people within the organization (“Champions,” “Black Belts,” “Green Belts,” “Orange Belts,” etc.) who are experts in these very complex methods. Each Six Sigma project carried out within an organization follows a defined sequence of steps and has quantified value targets, for example; process cycle time reduction, customer satisfaction, reduction in pollution, cost reduction and/or profit increase.”

How Welch describes Six Sigma:

“Six sigma is a process [you can] put in place to reduce variation in your company. The idea is customers get what they want, when they want it, and it’s right the first time. So, Six Sigma is a technique which you can train your people in to reduce variation. Variation is evil. And once you reduce variation, your costs are improved dramatically and your market share gains are enormous because people get what they want when they want it.”

Before Six Sigma was implemented in 1996, GEs estimated waste was around $8-$12 billion annually, and GE had an error rate 10,000 times the Six Sigma quality level of 3.4 defects per million operations. A few years after implementation, they saved a lot of money when compared to the cost:

We won’t dive into Six Sigma too much, so just keep in mind that it reduces variations and errors, and GE saved lots of money when they implemented it. If you want to learn more, there are many books on the topic.

Employees Need to Know Where They Stand

“You have no right to be a leader if someone who works for you doesn’t know where they stand.”

-Jack Welch

Welch believes in being close to his employees and always letting them know how they’re doing.

“One of the things a manger…has as an obligation about…is to let every employee who works for you know where they stand. Are they doing well? Do they need to improve? Four times a year everybody who worked for me got a sheet of paper. [It said on one side] here’s what I like about what you’re doing, [and on the other side] here’s some things you need to improve. And in 18 months or so, if they didn’t improve, I brought them in and said ‘It’s time for us to separate ways.’

“People gotta know where they stand, and you have to let them reach for greater things, and you’ve got to tell them how they’ll be rewarded if they reach for greater things.”

We’ve all had annual performance reports. For many, there are only two categories for each criterion – Meets Expectations and Needs Improvement. It’s shallow and doesn’t give you a ton of feedback. If you’re meeting expectations in every category, you’re allowed to be satisfied. You know you’re doing your job well enough to not be fired. But if you want to improve or get a promotion, the typical performance review gives you nothing to work off of.

The Jack Welch performance reviews are done quarterly and tell the employee where they stand and what they can do to be better and qualify for a promotion. This works best for both employers and employees. Employers can set clear goals for employees, and the employees know where they stand and how they can get better. If the employees don’t get better, employers know what kind of employee they have.

Quotes

When asked about his principles of success and what it takes to be a good manager:

“You’ll be challenged a thousand times on this…be yourself. For no job in the world, for no situation in the world, ever stop being yourself. Who you are is very important, and the self-confidence you build (whether it’s [at] your mother’s knee or through life experiences) are absolutely critical to you. [What] I see as the ingredients for success [are] four e’s wrapped in a p…

On star employees:

“Your stars have to know every day how important they are.”

The value of social responsibility in a company:

“I think a company’s social responsibility is first and foremost to win…because winning companies are the only companies that can give back. Winning companies pay taxes, their people are excited and energized….a winning company gets the insecurity out of people. Do you think the people that are at the companies that are hanging on for dear life have got time [to give back]?

“A winning company does so much for the spirit of the community and it gives back. It doesn’t cut corners on the environment, it doesn’t have to cut corners in business dealings, its people are energized. It’s nothing but good. Don’t feel guilty about being a winning enterprise. It’s really, in the end, all you can be….if you don’t win, there’s nothing to give back. And I think that’s the number one social responsibility of a company. After that, all goodness flows.”

On finding a great job:

On how leaders serve people:

“The day you become a leader, it becomes about them. If it becomes about them, your job is to walk around with a can of water in one hand and a can of fertilizer in the other hand. And think of your team as seeds and try and build a garden. Now you’ll end up with some weeds and you’ll have to cut out some weeds. But that’s your job, it’s about building these people”

To college students:

“You’re going to laugh at how little you know now 5 years from now.”

Good managers have a generosity gene:

“There’s a gene of good managers or good leaders. And that gene is a generosity gene. You love to give raises to good stars. It’s a turn on to call them in, give them money or give them a promotion. It’s a big deal.”

On managing people:

“As you lead a group of people, you have an obligation to let them know where they stand. That’s what leadership is about. So nobody can be surprised about anything that happens in your [organization].”

Why winning is the only way:

“If you don’t win and if you’re not competitive, forget about it. Close it down! You can’t give anything back to society! Only winning companies can give back to society. Losing companies don’t have happy employees making good money, paying taxes. Only winning companies.

“We had 46,000 employees mentoring children – from Thailand, to Indonesia, to Beijing, to Boston, to Cleveland. That’s what winning companies do. They give back.

“[In] losing companies, people are hanging on, they’re frightened for their jobs, they don’t give back to society [because] they don’t have any profits to give back. That’s why the most important thing a company can do is win. Win, because when it wins, its people win and its society wins.”

On how close a leader should be to the employees:

“My belief is they’ve got to feel you in their skin every day. You want to be part of them. And they’ve got to think you care for them, you trust them, and you want to see them succeed. You want them to be successful more than anything in the world – and they [need to] know it. They know it. But they also know if they’re not good enough, they’re not going to make it. Because you’re always telling them [how they’re doing].”

Tell people early on if they’re a fit:

“The kindest thing you can do for a person is tell them they don’t fit early in their career.”

On what bad leadership is:

“The person that sits in their room and doesn’t engage the people, that doesn’t have a culture of open exchange [through] every level of the group, a person that thinks they know it all, that sits within their own company’s intellect rather than reaching outside for intellect, a company who is led by somebody who is a bastard, who is not straight with the people, who surprises them, who is mean spirited, who doesn’t care about them and is trying to gain it for themselves.”

On avoiding company layers:

“You know what layers are? They’re blankets. And you know if you wear 10 blankets in the winter, it doesn’t feel cold. You don’t know what’s happening outside. Layers are like blankets. If you walk out with one blanket on, you freeze. You go out with 10 [and] you don’t know what the hell is happening. That’s what happens with a company with layers. Layers are filters, they block.”

On developing and improving:

“If you are any good, you will wake up in the morning tomorrow and you will see on your mirror ‘Find a better way today.’ And you will think to yourself, son of a bitch, I gotta go find a better way. And that’s what I want you to do; I want you to be constantly thinking about getting a better way, and you can get it from [anywhere]….and that’s the way you gotta think.

“[They] know something that I don’t know. My job is ‘What is it?’ I gotta find it out, it’s a mindset. And you do that all the time. And you read magazines and see in the magazines [that] Toyota’s doing something (in reference to their Just-in-Time system). You pick up the phone and you go see it. That’s how you change a culture. You open your mind up to a zillion ideas.”

Leaders must have a “relentless attention all the time of continuing to upgrade the intellectual capability of the organization. So the organization is constantly getting better, they are never satisfied, they are never happy where they are, they have a relentless search to find a better way every day and they are open to ideas from anywhere.

“One of the dangers of a company…[is the] not invented here [mentality], they had all the ideas. That’s crazy; you must wake up every morning knowing somebody else has got better ideas and go find them. A company has to have that learning culture, to constantly be learning from all over the globe.”

What the best executives do:

“The best executive today is the executive that can see around that corner. [They can see] what’s coming. Not when you’re in the tunnel and the train is coming right at you. Anybody can make change then. The job is to change before that’s necessary, and it’s the hardest thing in the world.

“It’s easy to change a company when the fire is burning in the back of the room. It’s much harder to change a company because you smell something or feel something coming at you [in another direction]. And that’s the challenge all of you have, is to not sit on what you’re sitting on. Always be paranoid that somebody is going to take that away from you. Be thinking about the next jump. It’s almost like a chess game, you think the next move before it’s upon you.”

On how lawyers factor into big decisions:

“Lawyers are always not the first people you want to talk to. I think you have a trusted council of advisors, generally speaking, and whatever the particular deal you’re doing, you might go at any level of the organization to get with the people that know most about [the deal].

“There’s no, if you will, cabinet. There’s a group of people that would know the most about it. You’d assemble them and you would listen to their opinions. Eventually, of course, you’d let the lawyer in on what you were doing but it would not be the first line of offense.”

On the primary role of a leader:

“The facts are if the leader doesn’t engage their employees [they aren’t a leader]. Employee engagement, getting them to understand the purpose of why they’re there, and to believe in the purpose, and to buy into it with their hearts and souls as well as their minds, a leader is not a leader [if they don’t do those things]. So that’s not going to change no matter what happens.”

On forming a winning team:

“You fiercely fight to get the very best all the time. You’re constantly coaching, you’re constantly raising the bar, you’re trying to get better and better performance [from employees]. And people that aren’t delivering, you ask them to leave – but you don’t fire them. You take them out and you explain to them why they don’t fit in this particular strategy and you give them a new job.

“Meetings, reviews, watching their behavior [are good tools to gauge an employee]. For example, when somebody comes in for an acquisition, I always start it out with ‘No, bad idea.’ I wanted to see how they fought back, how much they cared about it, how much they would work on it, what they would put on the line to deliver it, and you can test people that way [and] see their commitment to the issue.”

More advice for leaders:

“Manage short and think long.”

The benefits and risks of being a #1 or #2 market leader:

“Clearly complacency, arrogance [are risks]. The line between self-confidence and arrogance is [very thin]. So one gets in a position of knowing it all, having been successful [and following a motto of] ‘This is how we do it.’

“The only way to break that is to make sure that everybody in your [company] comes to work every day trying to find a better way. You have to absolutely look outside, inside, [and] know that somebody is doing it better than you and you’ve got to drive that into every person in your organization. ‘There is a better way of doing this, damn it, find it!’ You may be number one, but you’re only number one for as long as the snapshot [in time] and somebody is always shooting at you. So this is a drive that people have to come with.

“The idea of NIH (not invented here) resides in number one companies. You’ve seen them all, from automotive to steels to high tech companies who have not been able to maintain their positions because of NIH. Never let yourselves ever get to the point where you think you know it all. Know that somebody is doing it better than you every day and, damn it, get out and find it. Read about and learn about it and chase it so that you’re always getting better.”

Jack Welch Tidbits

Additional Resources:

Jack Welch on Twitter

Jack Welch books

Jack Welch’s posts on LinkedIn.

Anything you would like to add about Jack Welch? Any feedback on the post?

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About the Author: Zach Bulygo is a blogger, you can find him on Twitter here.

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