There will be no room for the mediocre supplier of products and services—the company in the middle of the pack.
In the early 1980s, Jack Welch decided to pursue a strategy that would establish each of the company’s businesses as either number one or number two in its market.
He warned that without such a strategy, the company’s prospects would be dim.
The winners in this slow-growth environment will be those who search out and participate in the real growth industries and insist upon being number one or number two in every business they are in . . . or those who have a clear technological edge, a clear advantage in a market niche. Welch was establishing literally the highest possible standards for his businesses. He made it clear that he would accept nothing less.
SETTING THE BAR AS HIGH AS POSSIBLE
Given the large portfolio of businesses that he presided over, Welch felt he needed a breakaway strategy that would create a “survival of the fittest” mindset throughout the company.
GE’s managers, said Welch, now had to ask some difficult questions:
Where we are not number one or number two, and don’t have or can’t see a route to a technological edge, we have got to ask ourselves [management theorist] Peter Drucker’s very tough question: “If you weren’t already in the business, would you enter it today?” And if the answer is no, face into that second difficult question: “What are you going to do about it?”
Within the company, there was widespread unhappiness. “Why was it necessary to be number one or two?” anxious managers asked. What was wrong with being a solid number three or four?
In response, Welch pointed out that in many markets, it was the number three, four, five, or six businesses that suffered the most during cyclical downturns. Number one or two businesses could defend their market share either through aggressive pricing strategies or the development of new products. Runners-up could not.
Moreover, Welch argued, many managers who believed they were third or fourth in their markets were mistaken because they were considering only their domestic competition. When international competitors were factored in, they were likely to fall far lower in the “rankings.”
Citing his own experience, Welch explained the difference between a market leader and an also-ran:
I ran some businesses that were number one or two and some businesses that were four or five, so I had the luxury of a laboratory . . . And it was clear to me that one was a helluva lot easier and better than the other one. The other one didn’t have the resources and the muscle and the power to compete on a global scale that was emerging in the ’90s.
But the skeptics persisted. “Why sell off a business,” they asked, “when it’s making good money?” Again, Welch had an answer.
When you’re number four or five in a market, when number one sneezes, you get pneumonia. When you’re number one, you control your destiny.
One problem quickly presented itself. The company was producing a wide variety of seemingly unrelated products, from time-shares to nuclear reactors to microwave ovens. Could GE excel in so many different areas?
The answer turned out to be yes. By 2000, GE had achieved dominance or near dominance in dozens of markets across the globe:
- Number one in the world: industrial motors, medical systems, plastics, financial services, transport, power generation, information services, aircraft engines, and electric distribution equipment. NBC, which includes generalinterest programming (and its CNBC business-news offshoot), was ranked the number one American network.
- Number two in the world: lighting and household appliances.
ADJUSTING THE STRATEGY
So Number One, Number Two was a big win. By the mid-1990s, however, it was clear that the strategy had its limitations.
For one thing, it was vulnerable to GE managers defining markets in ways that benefited them. GE managers learned to define their markets in ways that guaranteed an outcome of number one or two, often by defining their own markets far too narrowly.
For example, GE’s power-generation business developed products for the large utilities and defined its market as “large power plants.” But by so doing, the division neglected the increasingly important distributed-power market.
Welch ordered the strategy revised in early 1996. The refinement came at an opportune time: just as GE was planning to expand its service offerings. For example, for years, GE had serviced only GE aircraft engines. In 1997, however, it expanded the business and started to offer repair and parts for Pratt & Whitney and Rolls Royce engines.
Might redefining these markets make it more difficult for divisions to retain their hard-won number one or number two positions? Temporarily, perhaps. But Welch insisted that he would stay the course as long as he was convinced that the company was (a) building on strengths and (b) had the opportunity to be number one.
By revising the Number One, Number Two strategy, Welch faced reality, embraced change, shook things up, and forced his key managers to scrutinize their businesses all over again.
WELCH RULES
- Develop market-leading businesses. Number one and number two businesses can withstand downturns, but laggards fall further behind when times get tough.
- Define markets broadly. Don’t make the mistake of defining markets so narrowly that you shut yourself out of growing market segments.