Jack Welch's business gospel is given an overhaul

published 22 August 2006

Jack Welch is the business gurus' business guru. The management principles he espoused during his transformation of General Electric in the 1980s from underperforming behemoth to moneymaking machine have become business gospel; he was the ultimate star chief executive. But according to Fortune's Betsy Morris, the thinking that defined Welch and his era needs revising in today's globalised economy. Fortune's suggestions include the following:

Old rule: big dogs own the streetNew rule: agile is best

Size matters, says Welch "it's great to be big". But scale has become less important. Large pharmaceutical companies have lost their innovative edge to the small biotech firms, notes Morris, while Dell achieved success by outsourcing hardware production and concentrating on direct selling.

Old rule: be No. 1 or No. 2 New rule: find a niche

Thanks to Coke's obsessive emphasis on the market share of its core product, it underestimated the rise of high-margin energy drinks. This allowed a small soft-drink maker, Hansen Natural, which had noticed a trend towards vitamin and energy drinks, to exploit the nascent market; its sales have quadrupled in four years.

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Old rule: be lean and meanNew rule: look out, not in

Welch's drive to improve quality and cut costs gave margins a big boost at GE; in four years they rose from 15% to 18%. But if a firm's talent and energy is devoted to looking inward, it can fall behind in a dynamic market. The new GE boss, Jeffrey Immelt, says that the world changes so quickly today that not watching the marketplace closely enough means companies can quickly lose their edge.

Old rule: shareholders ruleNew rule: the customer is king

The continuous drive to boost shareholder value has meant that customers have been neglected. Bosses have worried too much about earnings per share, rather than new products and services. Morris cites a survey by management consultancy Bain, which revealed that while 80% of executives thought they were doing a great job serving customers, only 8% of customers agreed; Bain also says that that every four years the average firm loses half its customers. Apple, however, has put consumers first, concentrating on anticipating what they might want; it ended up with the goldmine known as the iPod.