LESSON
Number 27
 

Business Strategy — What are the 'learnings' of J. Welch and M. Porter?

The distance afforded by time gives us a clearer view of two men who have greatly influenced U.S. business management. What have they 'preached' (one still does) and what have they changed? Are there belated consequences? The conclusion reached is emphatic ― and intentionally so.

The ambivalent — Jack Welch

As many are aware, the world's best admired CEO from 1980 – 2000 was Jack Welch of General Electric (GE) — a disciple of shareholder value and radical portfolio management. His dictum was that GE should always be at least No. 1 or No. 2 in its market segments and achieve continuous profitable growth: this means ― first, continually disposing of unsatisfactory businesses and 'underperforming' employees and outsourcing production to low-wage countries — second, aggressive M&A activity so as to monopolize markets and 'negotiate' higher margins, and enable cash-flows from different businesses (manufacturing, finance and services) to be combined to stabilize overall earnings. In this way, GE was redesigned to be a cash generator. The goal was to always exceed capital market expectations. Due to its large size, GE would be a global corporate empire, sui generis, unique and unequalled. The crowning act of Welch's 20-year reign was the proposed acquisition of Honeywell, thereby achieving his ultimate goal of making GE the world's biggest and most highly capitalized corporation.(1)

Not long after leaving GE, it was Jack Welch himself who surprisingly declared shareholder value to be the "dumbest idea in the world". Since then, as a popular teacher and speaker, Welch ceaselessly preaches the advantages of unregulated markets, and encourages managers to strive for more efficiency and greater size. As a representative of the special interest group, CEOs and Top Managers, he pocketed a large and growing annual salary; yet despite this reward for his work, he rejected the regular GE company pension. Later, during divorce proceedings, it emerged that Welch received extraordinary life-time benefits from GE.(2) Welch, a man from small beginnings, showed little interest in the affairs of society, and social considerations were alien to him. Tellingly, he did not believe that his nickname "Neutron Jack" was an insult ― he considered it an honor.

From today's perspective, Welch was an idol of capital market-oriented managers and investor capitalism. As the CEO of General Electric, he was unreservedly proud of the fact.(3)

The strategy guru — Michael Porter

Porter has been by far the most important teacher of management over the past 30 years and the leading representative of strategy hype or the cult of experts (as Kenneth & William Hopper call it in "The Puritan Gift"(5) He was not only a lecturer at Harvard Business School and Harvard University — he also held one of the few Harvard professorships. Porter has been a cosmopolitan and universal consultant for major corporations and governments. During the Reagan administration he was appointed to the Commission on Industrial Competitiveness and afterwards authored "The Competitive Advantage of Nations" (1989). He has advised in countries as diverse as New Zealand, Canada, Portugal, Ruanda, and even Libya, which was singled out to become one of Porter's 'most competitive' nations. In the USA, he was active for the state of Massachusetts on its Inner City project and the health care system. As joint-founder of Monitor Group, a strategy consultancy firm, he was a long-time salesman for his own Competitive Strategy concept.

Perhaps his greatest achievement is gaining widespread acceptance for his 'science of competition' method as described in "Competitive Advantage" (1980): this is a summary of his observations, taken from numerous business sectors, of market anomalies and inefficiencies. Here he clearly demonstrates his strengths: the skill of deriving apparently insightful categories from complex problems, the systematization of modes of competition, and of designing competitive and future strategies for companies, branches, regions and countries. His main focus was on identifying sustainable competitive advantage, which enables businesses to harvest uber-profits long-term. In this way, Porter's strategy was the perfect answer for all those CEOs who needed to justify themselves as 'the spirit of the corporate profit machine'.

In "Reinventing Capitalism" Porter (with Mark R. Kramer) developed a 'soft', expanded method of creating profit and growth opportunities: by integrating suppliers and taking greater account of local customer needs and disposable income, particularly in emerging countries. Multinational 'players' like Coca Cola and Unilever, in the foodstuffs sector, and Procter & Gamble, in household goods, deployed this strategy to boost their market power and capture customers early on. Seen in this way, Creating Shared Value(6) is a euphemism for behavior designed to ensure one-sided advantages for the major 'players'.

Since 2012, Porter has primarily addressed the economic future of the USA. After a survey of ten thousand Harvard Business School alumni showed a depressing 71 percent believed the USA was becoming less competitive(7), Porter launched a national strategy project "Prosperity at Risk". Soon after retiring, together with Jan W. Rivkin, a colleague at Harvard Business School, he headed the "U.S. Competitiveness Project" with a dozen other specialists participating. He was judged the ideal 'leader' for such a grand national challenge; which coincidentally confirmed his belief in his own conceptual uniqueness.

Porter up close

It is not only desirable but essential to question the advice given by anyone with 'guru' status. Here are some questions and answers:

First: Based on observations in the USA (1950s – 1970s) of market relations within often oligopolistic structures, Porter concluded that competitive relations undergo permanent change and only in a regulated market can they be stable and 'sustainable'. The case studies listed by Porter provide multiple evidence of this.

Second: It is not possible for a theory of competition to forecast the future. His examples of applied and retroactively 'rationalized' strategies are certainly illuminating, but of little practical use as directions for managers or recipes for success.

Third: Uber-profits are, according to Porter's theory, generally 'bought' with unfair means by
tying-in customers (anti-competitive practice), creaming off supplier profits, instrumentalizing employees (turning them into interchangeable, replaceable resources) or externalizing costs to society.

Fourth: Porter's consulting business, Monitor Group, marketed his 'Aladdin's Lamp' of strategic insight wherever lucrative fees beckoned. After the financial crisis, Monitor Group suffered a dramatic decline in clients, who had lost control of their businesses, before Monitor Group itself finally went bankrupt in November 2012. Conclusion: Porter's theories do not survive a check against reality.

Porter handcuffed himself to his own strategy model that took insufficient account of the main strands of successful business leadership: customers, employees and innovation — the entire operational side of business. A different perspective, less focused on a competitiveness strategy and better understanding practical realities, as practised by the German mittelstand (keyword: hidden champions), would have much sooner exposed the failings of corporate managers who overemphasize the short-term, capital markets, and competitiveness.

Porter's recent discovery that the USA has lost economic strength over the past 20 years demonstrates a surprising lack of awareness. Was this not apparent long ago?

Porter's initial insights on the competitive position of the USA are clearly one-sided. He blames US politics (government/state) for overlooking innovation, infrastructure and vocational training, and instead focusing on the short-term while significant upfront investments are needed to achieve long-term competitive advantages. He only briefly mentions any disloyal or opportunistic behavior by managers: whether lobbying (especially on tax legislation) or offshoring of production, relentless over the past two decades. It is remarkable how Porter has only belatedly recognized that it would take one or two generations to correct the damage done, as the economic situation is now so complex, with US politics and society not only badly equipped to solve it, but also even blocking urgently needed solutions. Porter appears to have had little experience or hardly thought about the national economic impact of offshoring(8). Perhaps this one-side, business unit-centered perspective, is typical of the socio-economic world according to Porter.

Key lessons for us

First: Never pray to idols — certainly not in the business world — instead, think for yourself and go your own way. Observe, judge and take account of case studies in success and failure: this is better than following the concepts and practices sold by consultants, business schools(9) and repeated by the media. Lesson number one: Never trust 'gurus' or their disciples.

Second: The interaction of businesses, the economy, and society must be considered as a whole. Macro-economics (national economics) and micro-economics (including economics of the firm or business studies) are actually separate fields. In FACT, in German-speaking countries they are recognized as two distinct disciplines: Volkswirtschaft and Betriebswirtschaft. This might explain why the (national economic )social dimension, in particular, has been generally ignored not only by management practitioner Welch, but also by management theoretician Porter. A healthy national economy, a social-market economy, is similar to an organism: it cannot function properly if even one of its organs is continually, parasitically living off other organs. It is a fundamental insight that business enterprises must 'include' their workforce and be anchored in community and society ― in particular in their homeland. Transnational corporations must also be inclusive, if they want to survive over the long-term.

Third: Customers, employees and innovation (not mere productivity) are crucial. Profit (or capitalization) cannot be the sole purpose of an enterprise, because a business, as Peter Drucker emphasized, is a means and never an end. Business managers who focus solely on profit, intentionally or unintentionally, undermine civil society and government. To be free to make profits, while government and civil society take care of the rest, is an extreme and extractive position.

Fourth: Overestimating strategy and strategy consulting.

The application of analytical '"drawing board" concepts usually fails, because not enough attention is given to existing relationships and circumstances, and failing to understand real operational requirements:, (the latter is) often due to shortages of experienced employees, and an unsatisfactory corporate 'eco-system'. Offshoring leads to permanent loss of skills and experience (without 'corporate strategists' even noticing). Looking at the 'strategy density' (consultants and fees) of an economy/sector and comparing this with its innovative strength/competitiveness is illuminating. The correlation is not at all favorable.

Conclusion: Don't follow their advice ― it could be fatal

Welch and Porter have been and still are praised by media and business schools as icons of progressive corporate leadership and rational competitiveness(10). This is understandable: they were the idols of US business thinking over the past quarter century. Welch has always exhibited an extractive attitude — and was a successful extractor of 'efficiency' at GE. But copycats such as Tyco have failed dramatically. Welch's ex-colleagues and former competitors for the CEO job were a disaster at leading other companies the 'GE way'.(11) In fact, Welch's most prominent German disciple, Jürgen Schrempp the ex-CEO of Daimler, is notorious for being Germany's biggest money loser for decades.

For a long time the worth of Welch and Porter for the economy and society has been exaggerated; those guilty of this include corporate managers in Germany (Dax30 companies). The time has now come to correct this false perception, once and for all.

Manfred Hoefle, July 2013

 

Footnotes

(1) The merger was vetoed by the European Commission; Welch aimed to extend his CEO contract to complete the deal.
(2) Several sources estimated the total package at over US$ 400 million.
(3)His successor, Jeffrey Immelt, distanced himself from Welch in important ways: less General Management and more Domain Knowledge, more R&D and less M&A, less Capital Business and more conventional Products and Systems
(4) "He has influenced more executives and more nations than any other business professor on earth. Now, at 65, he and an all-star team aim to rescue the U.S. economy." (Geoff Colvin, Senior editor-at-large, FORTUNE Magazine)
(5) www.puritangift.com/en
(6)"Companies must take the lead in bringing business and society together." (The question remains: Who caused them to diverge in the first place?)
(7) Two-thirds of respondents voted against the USA as a business location.
(8) In 2007, the former president of the Fraunhofer Society, Hans-Jörg Bullinger, said, "Outsourcing is often the result of mistaken decisions by struggling managers ... ". In practise, it is easier and quicker to increase productive efficiency by 20 percent in-house and also less risky than outsourcing it.
(9) For a detailed description of the clear preference by business schools for the ' extractive' method see www.managerism.org/
(10) Circumspective management teachers like Peter Drucker (who described himself a 'non-guru') are increasingly overlooked.
(11) Bob Nardell was named "Worst manager" (Home Depot and Chrysler) by Fortune magazine; James. W. McNerny: former CEO of 3M and then Boeing, where in 2010 he earned more than Boeing paid in taxes.