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Jack Welch On Differentiation: Or, making winners out

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On Differentiation by Jack Welch

If there is one of my values that 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,unfairor all of the above.

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.

UNDERNEATH IT ALL
A company only has so much money. Winning leaders invest where the payback is the highest.
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.

DIFFERENTIATION DEFINED
One of the main misunderstandings about differentiation is that it is only about people. Thats 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
simpleits 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.

Lets look first at differentiation in terms of hardware. Its 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 ofstrong. At GE, strong meant
a business was No. 1 or No. 2 in its market. If it wasnt, 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 dont like investment criteria that are financial i nnature, 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
undestands. People may not like it, but they know it and they manage with it.

In fact, differentiation among businesses and product lines is a powerfu lmanagement 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 didnt make sense, but its so easy to do. Theres always that pressuremanagers
jockeying and politicking for their share of the pie. To avoid warfare, you give everyone a little
slice and hope for the best.
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 lets talk about the more controversial topic, differentiation among people. Its 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 keyit requires
managers to act on that distinction. I emphasize the wordact because all managers naturally
differentiatein their heads. But very few make it real.

Top 20%

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.

Middle 70%

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 thats the major challenge, and risk, in 20-70-
10keeping the middle 70 engaged and motivated.

Thats 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 70you want to improve
them.

Bottom 10%

As for the bottom 10 percent in differentiation, there is no sugar coating thisthey have to go.
Thats more easily said than done; Its awful to fire peopleI even hate that word. But if you
have a candid organization with clear performance expectations and a performance evaluation
processa big if, obviously, but that should be everyones goalthen 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 arent 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.

I learned it on the playground

Thats how differentiation works in a nutshell. People sometimes ask where I came up with the
idea. My answer is, I didnt 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 couldnt 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 were doing that.

REASONS TO HATE DIFFERENTIATIONAND NOT

So here are the criticisms of people differentiation. Some have truth in them, but more often than
not, they dont! Heres what I mean:

1. Differentiation is unfair because its always corrupted by company politics20-70-10 is just

a way of separating the people who kiss the bosss rear from those who dont.

It is true, without question, that at some companies, differentiation is corrupted by cronyism and
favoritism. The top 20 percent are the bosss 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 wont 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 time lines, 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.
2. Differentiation is mean and bullying. Its like the playground in the worst possible way
weak kids are made into fools, outcasts, and objects of ridicule.

Ive 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 fairto 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, its powerin fact, its liberating. When you know where
you stand, you can control your own destiny, and what is more fair than that?

Corollary: Im 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 orhumanity or a sense of history.And we all know of organizations that continue
to employ under performers 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 under performers always backfires. First of all,by not carrying their
weight, they make the pie smaller for everyone. That can cause resentment. Its also not what
you could call fair, and an unfair culture never helps a company win; it undermines trust and
candor too much.

The worst thing, though, is how protecting people who dont perform hurts the people
themselves. For years, they are carried along with everyone looking the other way. At appraisals,
they are vaguely told they aregreat or doing just fine. They are thanked for their
contributions.

Then a downturn occurs, and layoffs are necessary. The niceunder performers are almost
always the first to go, and always the most surprised, because no one has ever told them the truth
about their results, or lack thereof.

The awful thing is that this often happens when the underperformers are in their late forties or
fifties; theyve been carried along for most of their careers. Then suddenly, at an age when
startingover can be very tough, they are out of a job with no preparation or planningand a kick in
the stomach they may never get over. They feel betrayed, and theyshould.

As harsh as it may seem at first, differentiation prevents that tragedy because it is based on
performance measures that really count. Thats whyI believe you are never too nice to
implement 20-70-10, only too cowardly.

3. Differentiation pits people against one another and undermines teamwork.

Try telling that to Joe Torre!

The New York Yankees function perfectly well as a team (much to the dismay of Red Sox fans
like myself, I might add) with a highly transparent system of differentiation in place. Stars are
lavishly rewarded; under performers are shown the clubhouse exit. And if thats not enough to
make a system of differentiation perfectly clear, the players salaries are very public! You can
have no doubt that differentiation is going on when some team member smake $18 million a
year, and others wearing the same uniform make the MajorLeague minimum of $300,000.

And yet everyone pulls together for the team to win. Alex Rodriguez love sthe thrill of hitting a
grand slam home run, but Im sure it feels a lot better to him when the Yankees win. In July
2004, Derek Jeter made the catch o fthe year, diving into the stands and coming up with a black
eye and a cut face,a photo of which graced every newspaper in New York. A lot of the pain had
to be relieved when the Yankees won, coming from behind in the thirteenth inning,in one of the
great baseball games of all time.

In business, there probably would be pandemonium if companies started publishing everyones

salary, and Im not advocating that here. And yet, people always seem to know what their
coworkers are making, dont they? Thats why they get mad when everyone on a team gets
rewarded the same way when only a few people have done the work. They feel cheated and
wonder why management cant see the obviousthat not every team member is created equal.

Differentiation rewards those members of the team who deserve it. By the way, that annoys only
the under performers. To everyone else, it seems fair. And a fair environment promotes
teamwork. Better yet, it motivates people to givetheir all, and thats what you want.

4. Differentiation is possible only in the United States.

I wish I could implement it, but because of our cultural values, the people in mycountry simply
wont accept it.

I have heard this critique of differentiation since its earliest days at GE,when one of our
managers explained that 20-70-10 couldnt be implemented in Japan because in that culture
politeness was valued far more than candor. Since then, I have heard the national-culture excuse
from people in hundreds of companies in dozens of nations. Recently, managers in Denmark told
us that their country values egalitarianism too much for differentiation to be widely accepted.
Weve heard that case made in France too. A manager at a meeting in Amsterdam told us last
year that there was too much Calvinismin Dutch bones for the system to work in the
Netherlands. I guess the manager believed all rewards come only in Heaven, if youre chosen to
get there! And in China we heard that differentiation is a long time coming because in most
state-owned enterprisesstill more than 50 percent of the economy despite market reforms
many of the best jobs and rewards go to the most loyal members of the party whether they are
the most talented or not.

Basically, I think the excuses we hear about differentiations cultural obstacles are just that
excuses. At GE, we couldnt have a company where differentiation existed only in our U.S. for
differentiation and performance appraisal did in Ohio. Once we made the case we linked it to a
candid system, it worked as well in Japan as it operations. First of all, we just believed too much
in differentiations effectiveness. But we also knew that having differentiation only in the United
States would have been unfair and confusing,especially for the businesses with both U.S. and
global divisions, and for the people who moved around the world for us. We decided early on
that we would push through differentiation everywhere we did business, dealing with whatever
cultural issues that confronted us.

5. Differentiation is fine for the top 20 percent and the bottom 10 because they know where
they are going. But it is enormously demotivating to the middle70 percent, who end up living
in an awful kind of limbo.

Again, an element of truth in this complaint. The middle 70 percent is the hardest category to
manage in differentiation. The biggest problem comes with the individuals in the top tier of the
70 percent because they know they arent a whole lot different from the top-20 performers, and
often a whole lot better than the bottom tier of their own guard.And yes, that can be
enervating, and sometimes talented middle-70 people leave because of it.

The silver lining to this difficult situation is that the existence of a middle 70 forces companies to
manage themselves better. It forces leaders to scrutinize people more closely than they would
ordinarily and to provide more consistent, candid feedback. It pushes companies to build training
centers that really make a difference. For instance, before differentiation, our Crotonville, New
York, training center was often used in the 1970s as a warehouse where businesses could afford
to send their under performers. It wa slike a way station on the road to early retirement.

The rigor of 20-70-10 helped us change that. We turned Crotonville into a place where the top 20
and the best of the middle 70 talked about ideas,debated our approach to business, and got to
know and understand one another a lot better. And since senior management spent several hours
with each class, it also gave us a rough idea as to just how rigorously differentiation was being
practiced in the field.

Another piece of silver lining is that while being in the middle 70 percent can be demotivating to
some people, it actually revs the engines of many others. For the people in the top 20, for
instance, the very existence of amiddle 70 gives them yet another reason to pull out all the stops
every day.They have to keep getting better to keep their high standingwhat a rush that can be!
After all, most people want to improve and grow every day.

For a lot of people in the middle 70, getting better is energizing too.Getting into the top 20 gives
them a tangible goal, and having that goal make sthem work harder, think more creatively, share
more ideas, and, overall, fight the good fight every day. It makes work more of a challenge and a
lot more fun.

DIFFERENTIATION
I dont know if its good or bad, but the world generally favors people who are energetic and
extroverted. Thats also something you learn young, and its reinforced in school, at church, at
camp, in clubs, and usually at home too. By the time you get to work, if you are still shy and
introverted and somewhat low in energy, there are professions and jobs where those
characteristics are advantageous. If you know yourself, you will find them. This criticism of
differentiation, which I hear now and then, is not really about differentiation, but about societys
values.

I might add that in business, energetic and extroverted people generally do better, but results
speak for themselves, loud and clear. Differentiation hears them.

If you want the best people on your team, you need to face up to differentiation. I dont know of
any people management system that does it betterwith more transparency, fairness, and speed.
It isnt perfect.

But differentiation, like candor, clarifies business and makes it run better in every way.