Our Principles  >>  Differentiation

If there is one of our fundamental principles 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 Jack's first book, a woman in L.A. pulled off the highway to call in and label differentiation “cruel and Darwinian.” And that was just the beginning of her commentary!

Obviously, we are huge fans of differentiation. We have seen it transform companies from mediocre to outstanding, and it is as morally sound as a management system could be. It works.

Look, 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 out 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 only has 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 us add that we are 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 Jack was at GE, people discussed differentiation vigorously, but over the years, most people came to strongly support it as the company's way of doing business. By the time Jack 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 we both get from audiences around the world. As we said earlier, people tend to love it or hate it, but a pretty large number are just confused by it. In particular, they don't understand the pace of implementing it as a practice. The facts are, differentiation cannot, and must not, be implemented quickly. At GE, for instance, it took about a decade to install the kind of candor and trust that makes differentiation possible.
 

But this section is not about implementation. It’s about why we 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.

To do that, of course, you have to have a clear-cut definition of “strong.” At GE, “strong” meant a business was #1 or #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 only put their money and time into businesses or product lines that promise double-digit sales growth, for instance. Or they only invest in businesses or product lines with a 15 percent (or better) discounted rate of return (DCRR).

Companies also sprinkle money evenly for sentimental or emotional reasons. GE hung onto a marginally profitable central air conditioning business for 20 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 #1 or #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 under-performing 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 between 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, of course. 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 how Jack came up with the idea. His answer always is that he didn’t invent differentiation, he  learned it on the playground as a kid, when baseball teams were being formed. 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 asses 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 its true in business.