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General Electric Blame Must Be Shared: Summary of Ex-CEO Jeff Immelt’s ‘Hot Seat’

March 4, 2021 By Nagesh Belludi Leave a Comment

Leadership is tough. Some things work out, and some don’t. Other things end up epic failures. But no company gets anywhere without trying.

In the fullness of time, when the company does well, as suggested by its stock price, such leadership attributes as optimism and foresight are heralded as brilliant. But when things go wrong, these very attributes are the first to get the blame.

“More complete telling of the truth”

Hot Seat: What I Learned Leading a Great American Company (2021) is former General Electric CEO Jeff Immelt’s response to the allegations that his ineffectiveness led to the collapse of the once-mighty company. It’s an engaging book that must be studied after Wall Street Journal reporters Thomas Gryta and Ted Mann’s worthwhile postmortem, Lights Out: Pride, Delusion, and the Fall of General Electric (2020; my summary.)

My legacy was, at best, controversial. GE won in the marketplace but not in the stock market. I made thousands of decisions impacting millions of people, often in the midst of blinding uncertainty and second-guessed by countless critics. I was proud of my team and what we’d accomplished, but as CEO, I’d been about as brilliant as I was lucky, by which I mean: too often I was neither.

General Electric Blame Must Be Shared: Jeff Immelt

Confluence of bad luck, bad timing, leadership mistakes

I’ve previously written a dissertation on what happened at General Electric (GE.) Immelt had a tough act to follow. Under the previous CEO, the exceptional Jack Welch, GE got spoiled by greed and got away with a lack of transparency.

Over the years Jack Welch had collected a group of idol worshippers and sycophants around and outside the company who fostered an unrealistic view of GE and of Jack himself.

Immelt was saddled with Welch’s doomed legacy, but Immelt failed to right-track it in his 16 years at the helm.

Early in his tenure as CEO, Immelt realized the scope of a potential disaster in GE Capital but couldn’t break its bad habits swiftly. In fact, Immelt went about pivoting the company around slow-growth industrial products. Still, as he did so, his strategy entailed relying on GE Capital to deliver easy profits. It was a hard addiction to break, and Immelt couldn’t discard GE Capital easily.

In the short term, GE Capital was our strategy. We had no other engines of growth. We had to keep our heads down and weather the scrutiny. … We would let the rest of GE Capital grow so that we could keep earnings on a steady path, while the industrial businesses could catch up.

On top, Immelt overpaid for acquisitions, most prominently for the French power generating equipment company Alstom. At the same time, his bet on fossil-fuel-based power equipment was spectacularly mistimed because market conditions deteriorated quickly.

In the final years, Immelt’s misfortunes, even in such previously thriving businesses as healthcare and transportation, piled on. When Immelt called Jack Welch after stepping down, Welch told him supportively, “We both know you never caught a break.”

Jeff Immelt Admits He Let Everybody Down.

'Hot Seat General Electric' by Jeff Immelt (ISBN 1982114711) Immelt’s Hot Seat is a fascinating account of what it takes to lead a significant global business in times of rapid change.

Immelt owns up his many mistakes with a certain self-awareness. He rebukes a few people while acknowledging he should have been more accountable for everything that happened under his watch. But Hot Seat is primarily a then-in-time rationale of his significant decisions.

Interestingly enough, Immelt doesn’t offer insightful misgivings for the lack of transparency in GE’s financial statements, his outsized compensation, and the mischaracterization of insurance charges and pension liabilities.

Be advised, though, there’re so many details in Hot Seat that are unknowable without a first-rate knowledge of GE’s people and business model, starting with the Welch era.

“Every job looks easy (until you’re the one doing it)”

Read Hot Seat: What I Learned Leading a Great American Company (2021.) General Electric’s fall is a complicated story. It deserves to be heard from insiders such as Immelt as it does from journalists and stockholders.

Hot Seat should leave you with a fair-minded assessment of General Electric, Jack Welch, Jeff Immelt, financial engineering, the conglomerate business model, and Wall Street-oriented capitalism itself. These, sadly, many people don’t understand or know completely.

Filed Under: Business Stories, Leadership Reading, The Great Innovators Tagged With: General Electric, Jack Welch, Leadership Lessons, Leadership Reading

Easy Money, Bad Deals, Poor Timing: The General Electric Debacle // Summary of ‘Lights Out’

December 14, 2020 By Nagesh Belludi Leave a Comment

The story arc of the unraveling of General Electric should be familiar to followers of business news over the last two decades. Wall Street Journal reporters Thomas Gryta and Ted Mann’s crisp Lights Out: Pride, Delusion, and the Fall of General Electric (2020) draws together the vital episodes in one impassive narrative. It’s brimming with lessons about the hazards of obsessively focusing on impressing Wall Street.

Decades of Bad Decisions and Careless Oversight Ruined GE

'Lights Out General Electric' by Thomas Gryta (ISBN 035856705X) The fall of General Electric is really the story of how long-time CEO Jeff Immelt got saddled with the doomed legacy of the previous CEO, Jack Welch.

In 2001, Immelt took over a ship that was in trouble but wasn’t sinking yet. Unbeknownst to many analysts and investors—and overlooked by Jack Welch-buffs,—General Electric had been spoiled by greed, lack of transparency, and “lax oversight and buried risks.”

As a rising star, Immelt was part of Welch’s apparatus, perhaps to a smaller extent, at the GE Medical Systems division that Immelt ran previously. Early in his tenure as CEO, Immelt realized the scope of a disaster in the making. However, he didn’t act quickly and decidedly enough to fix the ill-fated ship’s rotten bits.

To focus on the stock’s negative return during Immelt’s 16 years as CEO and pit it against the sixtyfold return over Welch’s 20-year term is myopic. This argument is definitely understandable, yet it is scarcely convincing.

Welch’s good times couldn’t last forever, and Immelt had a tough act to follow. Yes, Welch was a forceful numbers-obsessed management mastermind who transformed GE into the world’s largest, most profitable, and best-admired company during his tenure as CEO. However, many of the mistakes of his corporate strategy manifested years later.

Welch would argue that he pushed his underlings to produce results, not fraud. But even if the CEO didn’t bend the rules himself, Welch cultivated an environment of pressure that incentivized people to do just that.

Welch was fond of saying, “You reinforce the behaviors that you reward. If you reward candor, you’ll get it.” Welch’s playbook rewarded—and got—the worst traits of modern capitalism. In so doing, he sowed the seeds of the company’s tragic decline.

Jack Welch’s Playbook Was Long-term Destructive to GE

Welch had a take-no-prisoners attitude to running GE. He set overly aggressive targets for his managers. He engaged in accounting shenanigans and consistently “managed” the numbers to maintain the myth of consistency and limitless growth. Behind the scenes, Welch’s machination was made possible by crafty-but-legal accounting practices (with auditor KPMG’s blessings, nonetheless,) mazes of financial deals, and murky structures. Welch even underfunded reinsurance reserves by $9.4 billion, helping pump up profits from 1997 to 2001.

Managing financial results wasn’t unique to GE, but the degree of GE’s reliance on the practice was. Management, with its customary swagger, treated the frenzy of last-minute tweaks and transactions each quarter as entirely natural. GE executives have acknowledged that they worked to make sure earnings were always growing in a nice smooth trajectory.

Immelt knew—or came to comprehend—of all this tomfoolery but didn’t break GE’s bad habits swiftly. Specifically, Immelt didn’t dismantle the GE Capital unit, the company’s most significant liability, and it continued to haunt GE. Under pressure, the complex conglomerate structure that Welch had held together during the good times of the ’80s and the ’90s started falling apart towards the end of his tenure.

The winds were shifting on Welch. GE’s share price had soared for years, making it, for a time, the world’s most valuable company. [During Welch’s] final eighteen months, the share price fell 33 percent. … [Bond-market guru Bill Gross commented,] “Institutional investors have wondered why a company can continue to produce 15 percent earnings growth year after year, quarter after quarter.”

An Addiction That Was So Hard to Break

Decades of Bad Decisions and Careless Oversight Ruined General Electric At the heart of General Electric’s fall is how GE Capital came to gain an outsized influence over the parent company and ruined it. Under Jack Welch, GE Capital’s business model of high leverage and “financialization” was resoundingly successful. Financial engineering, e.g., recognizing revenue from long-term service contracts for power-plant repairs and jet-engine maintenance, is not only suspect, but it cannot manufacture results beyond the short term.

GE Capital was the nonbank bank that was embedded in the company’s fabric. Everything that GE produced was leased, rented, or loaned by GE Capital. In other words, the industrial side was sustained by the rise of GE Capital. It was too interlinked to everything else, and that impeded Immelt’s “definancialization” plans.

In the ’90s, Welch embraced the notion that it’s a lot easier to make money in financial services than in industrial manufacturing. The Capital unit provided huge dividends (with enormous risks) while the industrial side was less profitable but more stable.

No wonder, then, that Welch made GE Capital a gargantuan part of GE. GE Capital became the vehicle for his headlong obsession with enhancing pure shareholder value.

Sadly, Welch bet the farm on the continued success of GE Capital. It misused GE’s high-quality credit rating and became a colossal lender and a major shadow bank. Welch’s bet went sour in 2008—GE Capital was the largest commercial paper issuer going into the financial crisis. It needed a $139 billion government bailout, and it has continued to drain the company’s bottom line ever since.

Jeff Immelt focused on pivoting GE towards core industrial businesses. He doubled GE’s investment in R&D. He sold off slower-growth, low-tech, and nonindustrial businesses, but not soon enough. He managed to keep revenues growing and delivered high margins until the financial crisis hit.

Cleaning Up the Mess Left by Welch

Even as Immelt went about restructuring the company around industrial products, he continued to rely on GE Capital “for smoothing out rough quarters and delivering easy profits.” It was a hard addiction to break.

Lights Out acknowledges that Immelt was “playing with a tough hand,” and he knew that “his success would be attributed to his predecessor but his failure would be seen as all his own doing.”

The authors reveal plenty of leadership blind spots. Immelt was a genial and assertive salesperson, and he didn’t like hearing bad news. He didn’t like delivering bad news either.

CEOs are expected to be optimistic, but Immelt was unfailingly overoptimistic. Perhaps his overconfidence was a manifest outcome of the company’s cultural dynamics. Sadly, when a company is doing well, such CEO attributes as optimism, audacity, and foresight that Immelt’s leadership personified are heralded as brilliant, but when things go wrong, they’re the first to get the blame. Results are all that matters.

Some board members … had … a poor impression of Immelt’s deal-making skills. The knock on Immelt was that he chased trends, arrived too late, and paid handsomely. One rival CEO joked that he was “fad surfing.”

At General Electric, Jeff Immelt Made Bad Decisions and Was Slow to Make Changes

Immelt Made Bad Decisions and Was Slow to Make Changes

Immelt spent over $100 billion on ill-timed share buybacks to shore up earnings-per-share and so the stock price. He had a history of overpaying for acquisitions. He was reluctant to back away from deals that he was dead set on, even when the deal’s prospects became dubious during the parleying.

Immelt tended to start negotiations too high, sometimes to the surprise of others involved in the deal, leaving little room for negotiation. It wasn’t uncommon for the board to approve one of Immelt’s deals, only to have him ask for approval to pay more in order to make the deal work. In some ways, this tendency simply reflected Immelt’s experience as a salesman. He’d always needed to close deals, and for a company like GE, paying a little more didn’t seem to cause any concern.

No decision could be more illustrative of Immelt’s fateful deal-making than the one for Alstom, the French power generating equipment company. Immelt set his reputation on that deal because GE Power would be “the centerpiece of his new GE.” Immelt didn’t walk out on the deal even after regulators forced General Electric to divest Alstom’s lucrative service business and take on 30,000 high-cost employees in Europe.

Worst of all, the deal was spectacularly mistimed. With the Alstom purchase, Immelt doubled down on fossil-fuel-fired turbines just as renewables were becoming more cost-competitive. Demand for GE Power’s products collapsed in next to no time, and that unit’s profit plunged 45% in 2017. The whole Alstom transaction turned out to be an out-and-out disaster. In 2018, General Electric took a $22 billion goodwill impairment charge for the Alstom acquisition.

Hope and Optimism Could Take Immelt Only So Far

It’s both easy and unfair to comment on what GE should have done. Immelt’s prospects were seriously encumbered by the September 11 attacks, post-Enron accounting rules, the 2008 financial credit crisis, and a substantial recession that hit the energy industry.

The world in which Jeff Immelt had thought he would be leading GE had been turned upside down. The recession and the uncertainty that followed the terrorist attacks had dampened the global growth on which GE’s industrial businesses depended. And changes to accounting rules in the wake of the Enron scandal, by requiring that the company now account for the vast financial holdings on its balance sheet at GE Capital, had eliminated an easy and reliable source of paper profits to smooth over rough periods.

Lights Out explains how, during the last five years of his tenure, Immelt’s misfortunes piled on. GE Healthcare took a pause (it’s innovative, high-profit machines had become increasingly commoditized.) The GE Renewables business rarely turned a profit. The GE Transportation unit’s sales stagnated. GE Power built an extensive inventory hoping for a return in demand for its large, expensive machines. The merger of GE Oil and Gas with Baker Hughes turned out to be untimely too.

For many investors, GE had lost its mojo. Its lackluster performance, fuzzy financials, and unknown risk just didn’t fit with a lot of investment portfolios.

Leadership Mismanagement, Self-Dealing, Collusion

The deplorable collapse of General Electric, and GE Capital, in particular, was fostered by the board’s abysmal stewardship.

GE’s board was dysfunctional. It comprised too many directors who owed their cushy positions to Welch and Immelt and merely rubber-stamped their strategic actions. As chairman of the board, Immelt promptly cast out Welch-appointed directors who objected to his plans.

As they’d done under Welch, the board usually tended to approve Immelt’s recommendations and follow his lead. Some felt that Immelt manipulated the board, and it was whispered that members were chosen and educated to see the company through his visionary eyes. There was concern that the board didn’t entirely understand how GE worked, and that Immelt was just fine with that. Like many CEOs who are also their company’s chairman, he made sure that his board was aligned with him.

Just last week, GE agreed to a $200 million fine to settle a Securities and Exchange Commission probe into feel-good accounting at its Power and Insurance units.

General Electric Recent CEOs: Jack Welch, Jeff Immelt, John Flannery, Larry Culp

Too Steeped in the GE Culture to Effect a Major Transformation

Immelt was replaced by John Flannery, a finance specialist. Flannery had run the business development team when GE Power bought Alstom. He wasn’t likely to kick off any dramatic changes in GE’s business strategy. His proposals for GE’s transformation were consistent with Immelt’s strategy.

Flannery tried to stop GE’s hemorrhaging of money but wasn’t quick enough either. He showed reluctance—caution perhaps—to take risky and complicated actions that could have been costly or even impossible to reverse.

If Immelt was known for his vaulting optimism, Flannery soon became known for his indecision and endless analysis. Few decisions, even major ones, were final. A critical strategic move, like the separation of a major division, could be made, only to be reassessed at any time. Flannery’s style was quickly grating on top executives who worked with him.

The board got insecure quickly because of widespread public criticism that it had waited too long to remove Immelt. “After sixteen years of Immelt, Flannery thought that he had more time to turn the ship around, but when he looked for support from the board, there was none there.” Fourteen months into his term, Flannery was forced out.

For the first time in its 126-year history, GE, which prided itself as a talent factory, handed the leadership baton to an “outsider” to bring a fresh perspective.

New CEO Lawrence “Larry” Culp is generally admired for his stellar record of accomplishment at Danaher, a smaller industrial conglomerate. “Culp had more experience, and he also had no emotional attachment to GE.” Culp had joined GE’s board six months before and had started questioning the wisdom he’d received from Flannery and his team.

Having an outsider take charge of a storied company marks how much change the board desired. GE may not reclaim its once-celebrated footprint. But it’ll continue to be one of the great American business stories.

Jack Welch’s GE: Everything Worked Until It Didn’t

Recommendation: Must-Read Thomas Gryta and Ted Mann’s excellent Lights Out: Pride, Delusion, and the Fall of General Electric. It’s a great reminder that even America’s most iconic companies—and the world’s leading businesses—can go off the rails if things go wrong.

It wasn’t Immelt’s fault that the entire oil sector had turned south. But he was responsible for GE investors being so openly exposed to the collapse. … He had spent sixteen years at the top and, regardless of what Welch had left for him; he’d had plenty of time to fix it.

Lights Out is a revealing, reasonable, and accessible narrative of how a thriving company was humbled by sheer misfortune and poor leadership.

Jack Welch’s razzle-dazzle capitalism party could last only so long.

Filed Under: Business Stories, Leadership, The Great Innovators Tagged With: General Electric, Jack Welch, Leadership Lessons, Leadership Reading

Making It Happen // Book Summary of Larry Bossidy’s ‘Execution’

November 5, 2020 By Nagesh Belludi Leave a Comment

It’s back-to-basics in Larry Bossidy and Ram Charan’s Execution: The Discipline of Getting Things Done (2002.) Bossidy is a retired business executive (General Electric, AlliedSignal/Honeywell,) and Charan is a distinguished business consultant.

Execution was the best-seller that defined the corporate zeitgeist in America after the dot-com meltdown and the Enron and WorldCom scandals. Catchphrases such as “execution,” “shaping the broad picture,” “straight talk,” and “robust action” became caricatures of how American companies got things done.

Here’s a distillation of the main ideas in Execution:

  • Ideas are well and good, but how thoroughly you implement them is what “determines success in today’s business world.” Companies are hindered by the gap between what the company’s leaders want to achieve and their ability to achieve it. “The real problem is that execution just doesn’t sound very sexy. It’s the stuff a leader delegates.”
  • 'Execution Discipline of Getting Things Done' by Larry Bossidy (ISBN 0712625984) There’s no room for fluffiness if you want to get things done. Straight talk is “live ammo.” “You need robust dialogue to surface the realities of business the kind that can leave people feeling bruised if they take it personally.”
  • The leader sets the tone and leads the change. A good motto to follow is, “Truth over harmony.” Focus on “raising the right questions, debating them, and finding realistic solutions.” Avoid discourses that are “stilted, politicized, fragmented, and butt-covering.” “Candor helps wipe out the silent lies and pocket vetoes, and it prevents the stalled initiatives and rework that drain energy.”
  • Informality is critical to candor. Formal and ceremonial conversations and presentations leave little room for debate. Too often, communication is scripted and predetermined. Informality encourages questions and is more likely to promote intuitive and critical thinking.
  • Strategic, people, and operational processes are the building blocks for execution—and they’re interrelated. “The foundation of changing behavior is linking rewards to performance and making the linkages transparent.”

Recommendation: Skim Larry Bossidy and Ram Charan’s Execution: The Discipline of Getting Things Done (2002.) Most of the book is about setting expectations, holding people accountable, and following through. There’re no instructive case studies. There’re no new magic pills. The substance is genuinely elementary, and the tone self-righteous. You don’t need a book for exhortations like “put the right person in the right job,” “know your people and your business,” “test critical assumptions,” “follow-through,” “deal with non-performers,” and “expand people’s capabilities through coaching.”

Filed Under: Leading Teams, Managing People Tagged With: Change Management, Delegation, Getting Ahead, Great Manager, Jack Welch, Performance Management

Inspirational Quotations #862

October 11, 2020 By Nagesh Belludi

You make a living by what you get. You make a life by what you give.
—Winston Churchill (British Head of State)

Do not talk about disgrace from a thing being known, when the disgrace is, that the thing should exist.
—William Faulkner (American Novelist)

The worst disease which can afflict executives in their work is not, as popularly supposed, alcoholism; it’s egotism.
—Harold S. Geneen (American Businessman)

One can never pay in gratitude; one can only pay “in kind” somewhere else in life.
—Anne Morrow Lindbergh (American Author, Aviator)

It is a curious thought, but it is only when you see people looking ridiculous that you realize just how much you love them.
—Agatha Christie (British Novelist)

Laws are always unstable unless they are founded on the manners of a nation; and manners are the only durable and resisting power in a people.
—Alexis de Tocqueville (French Historian, Political Scientist)

If there is any great secret of success in life, it lies in the ability to put yourself in the other person’s place and to see things from his point of view—as well as your own.
—Henry Ford (American Businessperson)

A thread will tie an honest man better than a chain a rogue.
—Scottish Proverb

The secret of Happiness is Freedom, and the secret of Freedom, Courage.
—Thucydides (Greek Historian)

Reality is not easy, but all this make-believe doesn’t make it easier.
—Ayaan Hirsi Ali (Dutch Politician, Activist)

A child’s education should begin at least one hundred years before he is born.
—Oliver Wendell Holmes, Sr. (American Physician, Essayist)

The essence of repression lies simply in turning something away, and keeping it a distance from the conscious.
—Sigmund Freud (Austrian Psychiatrist)

Which of us that is thirty years old has not had his Pompeii? Deep under ashes lies the life of youth—the careless sport, the pleasure and passion, the darling joy.
—William Makepeace Thackeray (English Novelist)

Think left and think right and think low and think high. Oh, the thinks you can think up if only you try.
—Theodor Seuss Geisel (‘Dr. Seuss’) (American Children’s Books Writer)

Control your destiny or somebody else will.
—Jack Welch (American Businessperson)

Nine-tenths of tactics are certain, and taught in books: but the irrational tenth is like the kingfisher flashing across the pool, and that is the test of generals.
—T. E. Lawrence (British Soldier, Writer)

Filed Under: Inspirational Quotations

Fire Fast—It’s Heartless to Hang on to Bad Employees

August 27, 2019 By Nagesh Belludi Leave a Comment

Firing is About an Underlying Commitment to Retaining Great People

The former General Electric leader Jack Welch earned the moniker “Neutron Jack” for sacking some 100,000 employees in the early years of his tenure as chief executive. Welch defended the dismissals by emphasizing that it would have been far more heartless to keep those employees and lay them off later when they had little chance of reinventing their careers. The dismissals were part of his deliberate efforts to establish a corporate culture that emphasized honest feedback and where only the “A players” got to stay.

Many Fired Employees Feel Surprised That the Axe Didn’t Fall Sooner

Fire Fast---It's Heartless to Hang on to Bad Employees Managers know that ending a bad fit sooner is better than doing it later. Firing a bad employee is often better for both the employee leaving and the employees remaining.

Then again, many managers hesitate because firing is awfully difficult. No one likes to fire people. Looking an employee straight in the eye and telling he’ll no longer have a job is one of the harshest things a manager will ever have to do.

Besides, some managers are so uncomfortable with conflict that they are unwilling to deal directly and honestly with a problem employee, not to mention of confronting the risk of a wrongful termination claim.

If an Employee is Not Working out for You, Fire Fast

By holding on to a bad employee, you are really doing a disservice to the employee. Forcing a person to be something he’s are not, and giving him the same corrective feedback—week after week and quarter after quarter—is neither sustainable nor considerate. Trying to keep the employee in the wrong role prevents his personal and professional evolution.

  • Give the employee a chance to turn the situation around—people can change.
  • Try to find him an appropriate role within your company. Recall the old Zen poem,

    Faults and delusions
    Are not to be got rid of
    Just blindly.
    Look at the astringent persimmons!
    They turn into the sweet dried ones.

    However, if the employee is a truly bad fit, reassigning him just shifts the problem to a different part of the company.

  • If your efforts to remediate a bad employee haven’t worked out, cut your losses and fire him promptly. Help the employee move on to a job or a company where the fit is much better.

Idea for Impact: It is much worse to retain someone who is not suited for his job than it is to fire him. Help him find a new role quickly and land on his feet.

Filed Under: Career Development, Leading Teams, Managing People Tagged With: Change Management, Coaching, Conflict, Conversations, Employee Development, Feedback, Great Manager, Hiring, Hiring & Firing, Human Resources, Mentoring, Performance Management

3G Capital and the Fringes of Cost Management // Summary of Bob Fifer’s ‘How to Double Your Profits in 6 Months or Less’

April 24, 2019 By Nagesh Belludi Leave a Comment

3G Capital’s Playbook: Look at EVERYTHING—There are No Sacred Cows in Cost-Cutting

Brazilian private equity firm 3G Capital's Playbook for Cost-Cutting: Zero-based Budgeting During the past decade, the achievements of the Brazil-based private equity group 3G Capital have drawn attention to the aggressive cost cutting methods outlined in management consultant Bob Fifer’s How to Double Your Profits in 6 Months or Less (1995.)

3G has raised the profitability of its acquired businesses by sacking thousands of workers, shutting down factories, simplifying operations—even using cheaper ingredients. In Israel, the 3G-controlled Heinz was forced to rebrand its iconic ketchup as “tomato seasoning” after a cost cutting-inspired shift to GMO-derived constituents. 3G’s playbook, however, encourages increasing budgets for strategically important business functions—for instance, Kraft Heinz has increasingly expanded spending on advertising and product improvement.

At every 3G-run company—Anheuser-Busch InBev, SABMiller, Heinz, Kraft Foods, Burger King, Tim Hortons, Popeyes,—the “zero-based budgeting” accounting tool forces managers to justify all claims on their organizations’ financial resources. As I noted in a previous article, this method forces managers to justify every line item on a team’s budget as if it were new a claim for an entirely new project, instead of merely being carried over from the prior year:

Zero-base budgeting advocates say that it detects inflated budgets and unearths cost savings by focusing on priorities rather than simply relying on the precedent. Managers secure a tighter focus on operations by justifying each line-item in their budgets, thereby reducing the money they allocate to the lowest level possible. Managers can also contrast competing claims on their ever-scarce financial resources and therefore shift funds to more impactful projects.

How to Double Your Profits has become a must-read for all managers affected by any 3G deal. This obscure book, purportedly written in just 15 hours, was also a favorite of such business luminaries as Sanford Weill (of Citigroup,) Bob Lipp (Travelers Insurance,) and Jack Welch (General Electric.)

3G’s methods have upended an entire industry known for characteristically lower profit margins. The specter of being acquired by 3G has forced Unilever, General Mills, J.M. Smucker, Nestle, Pilgrim’s Pride, Phillip Morris, and other consumer staples companies to implement sweeping cost cutting programs.

Every Expense is Evaluated to Be Cutback Unless It Contributes Directly to the Bottom Line

'Double your profits' by Robert M Fifer (ISBN 0963688804) How to Double Your Profits obsesses about cutting costs by any and all means possible. Every corporate resource is a cost-center that must be pared down to the bone—unless it’s a strategic function. When it comes to marketing, for example, the author recommends outspending the competition in both good and bad times.

Seventy-eight brief chapters (“steps”) deal with every possible drain on time, money, and people in the modern corporation: reducing layers of management, cutting the amount of time managers spend in meetings, shrinking corporate expense accounts, eliminating first-class air tickets, getting rid of pointless reports, and so on.

  • Focus on profits. “We’re here to make a profit. In fact, we’re here to make as much profit as we possibly can. Profit is the most accurate, most all-encompassing measure of whether we truly are the best. … Profits benefit all of us … when the profits slow down, we all suffer.”
  • Run a true meritocracy. Set expectations about how performance will be measured and what rewards will accrue to what levels of performance. “Within any level or group of employees, there must be wide disparities in salary, tied to demonstrable differences in performance and contribution to the bottom line.”
  • Avoid paralysis by analysis, make decisions faster. “Superb managers are instinctual, making the right decision most of the time based on limited data. The quantification that less-skilled managers insist upon is in fact illusory: They wind up making decisions based upon that which can be quantified rather than that which is important. Most of the critical variables in any business decision can only be judged and evaluated based on experience and instinct, not quantified.”

Much of the advice is effective, if predictable, but some suggestions are clearly crooked:

  • Step 24 / Declare Freezes and Cuts: “Send a letter declaring an across-the board 3% reduction to suppliers. Make sure the letter is from someone high up and intimidating….(after getting the bill) deduct 3% from the bill and say, ‘Didn’t you read my CEO’s letter? Are you trying to get me fired? “
  • Step 37 / Accounts Payable: “Never pay a bill until the supplier asks for it at least twice. You’ll be surprised: A few suppliers will take as much as two years before they finally get around to asking for their money.”

But Then Again, There is only so Much Fat to Cut out: The Crisis at Kraft Heinz

When discharged without due forethought, elements of Fifer’s cost-cutting mindset could lead to corporate myopia and an utter disregard for such intangible assets as human capital, brand value, and corporate philanthropy.

Certainly, in businesses with substantial cost inefficiencies and bloat, cost-cutting can produce considerable gains in profits, but even with these firms, gains will be time-limited, because there is only so much fat to cut out.

Cost Cutting and The Crisis at Kraft Heinz Aggressive cost-cutting has been blamed for the recent travails at Kraft Heinz. Over the last three years, Kraft Heinz’s fading return on invested capital and decreasing sales point toward a leadership team that has been giving precedence to near-term cash flows to the detriment of its long-term competitive position (“moat.”)

With the expansion of cut-price private-label brands, consumers are no longer remaining devoted to brands like they once did. Kraft Heinz’s roster of products is less appealing to customers than it used to be, and cost cutting hasn’t helped—Kraft Heinz has invested just 2%–3% of its sales on brand spending, as against 7%–9% at comparable consumer goods companies.

Recommendation: Fast Read ‘How to Double Your Profits’

Bob Fifer’s How to Double Your Profits in 6 Months or Less, even if out-of-date and brash in style, could help drive systematic cost-consciousness in large firms that have bloated cost structures in the hypercompetitive business environments.

Entrepreneurs, managers, and employees will find in How to Double Your Profits many ideas for establishing a culture where every employee feels liable for adding value to the organization’s bottom line. The key takeaway lessons are:

  • Determine which costs are strategic (costs that bring in business and improve the bottom line) and over-invest in those processes as long as they are effective, i.e. producing better results. “Place the burden of proof on justifying costs, not on eliminating them.”
  • Avoid over-quantifying and over-analyzing processes and results, particularly when the extra precision will not have any bearing on business decision-making.
  • Consider business processes as a means to an end—a focus on business results should trump a focus on business processes. In other words, focus single-mindedly on business results.

Complement with Francisco Souza Homem de Mello’s The 3G Way (2014) and Cristiane Correa’s Dream Big (2014)—informative books on 3G written by Brazilian business journalists who’ve covered 3G and its founders over the years. Warren Buffett, who regularly teams up with 3G Capital, recommends these books.

Filed Under: Leading Teams, Managing Business Functions, Managing People, MBA in a Nutshell, Mental Models Tagged With: Budgeting, Discipline, Efficiency, Entrepreneurs, Leadership Lessons

Inspirational Quotations #778

March 3, 2019 By Nagesh Belludi

Men would live exceedingly quiet if these two words, mine and thine were taken away.
—Anaxagoras (Greek Philosopher)

Losses have propelled me to even bigger places, so I understand the importance of losing. You can never get complacent because a loss is always around the corner. It’s in any game that you’re in—a business game or whatever—you can’t get complacent.
—Venus Williams (American Tennis Player)

A country’s greatness lies in its undying ideals of love and sacrifice that inspire the mothers of the race.
—Sarojini Naidu (Indian Feminist, Poet)

I did not think; I investigated.
—Wilhelm Roentgen (German Physicist)

Whoever honors his own sect and disparages another man’s whether from blind loyalty or with the intention of showing his own sect in a favorable light, does his own sect the greatest possible harm. Concord is best, with each hearing and respecting the other’s teachings.
—Ashoka (Emperor of India, Patron of Buddhism)

In societies where modern conditions of production prevail, all of life presents itself as an immense accumulation of spectacles. Everything that was directly lived has moved away into a representation.
—Guy Debord (French Philosopher)

Perhaps time’s definition of coal is the diamond.
—Khalil Gibran (Lebanese-born American Philosopher)

Just because you can prove someone wrong, doesn’t mean you should.
—Marty Nemko (American Career Coach, Author)

Spring passes and one remembers one’s innocence. Summer passes and one remembers one’s exuberance. Autumn passes and one remembers one’s reverence. Winter passes and one remembers one’s perseverance.
—Yoko Ono (Japanese Artist, Musician)

The difficulty lies not so much in developing new ideas as in escaping from old ones.
—John Maynard Keynes (English Economist)

Probably no greater honor can come to any man than the respect of his colleagues.
—Cary Grant (British-American Film Actor)

Strong managers who make tough decisions to cut jobs provide the only true job security in today’s world. Weak managers are the problem. Weak managers destroy jobs.
—Jack Welch (American Businessperson)

Facts by themselves are not great or small; it is the forces behind them that give them their real stature. Facts have value in so far as they are significant—significant of forces, of dynamic possibilities that work out in and through them. Facts in their outward form may even directly contradict the very forces that manifest through them or are embodied in them.
—Nolini Kanta Gupta (Indian Hindu Revolutionary)

Even though your kids will consistently do the exact opposite of what you’re telling them to do, you have to keep loving them just as much.
—Bill Cosby (American Actor)

Fear of life in one form or another is the great thing to exorcise.
—William James (American Philosopher)

Filed Under: Inspirational Quotations

Inspirational Quotations #753

September 9, 2018 By Nagesh Belludi

Men of sense often learn from their enemies.—It is from their foes, not their friends, that cities learn the lesson of building high walls and ships of war; and this lesson saves their children, their homes, and their properties.
—Aristophanes (Greek Comic Playwright)

People expect a certain reaction from a business and when you pleasantly exceed those expectations, you’ve somehow passed an important psychological threshold.
—Richard Thalheimer (American Entrepreneur)

This is something I’ve struggled with a lot: how to relate to the fear in a constructive way. It’s not that you eliminate the fear. We have all the fears. That’s natural; that’s human beings. But how do you deal with the fears, how do you engage with your fears in a way that’s productive?
—Brad Feld (American Entrepreneur, Investor)

Emotion always has its roots in the unconscious and manifests itself in the body.
—Irene Claremont de Castillejo (British Psychoanalyst)

The less you know about a field, the better your odds. Dumb boldness is the best way to approach a new challenge.
—Jerry Seinfeld (American Comedian)

Any successful journey begins by packing your luggage full of imagination.
—Kathrine Palmer Peterson (American Author of Grief Books)

What’s the good of all our learning, knowing how to read and write and spell if no one ever teaches us the value of life, of our uniqueness, and personal dignity?
—Leo Buscaglia (American Motivational Speaker)

Business success is less a function of grandiose predictions than it is a result of being able to respond rapidly to real changes as they occur.
—Jack Welch (American Businessperson)

We cannot tell the precise moment when friendship is formed. As in filling a vessel drop by drop, there is at last a drop which makes it run over; so in a series of kindnesses there is at last one which makes the heart run over.
—James Boswell (Scottish Biographer, Diarist)

I’m amused by self-styled “busy” people. Busyness is as much a matter of identity as it is a reflection of time availability and schedule.
—Ben Casnocha (American Entrepreneur, Investor)

It’s better to be boldly decisive and risk being wrong than to agonize at length and be right too late.
—Marilyn Moats Kennedy (American Career Strategist, Author)

A mother takes twenty years to make a man of her boy, and another woman makes a fool of him in twenty minutes.
—Robert Frost (American Poet)

Happiness is your nature. It is not wrong to desire it. What is wrong is seeking it outside when it is inside.
—Ramana Maharshi (Indian Hindu Mystic)

It is the responsibility of leadership to provide opportunity, and the responsibility of individuals to contribute.
—C. William Pollard (American Businessman, Author)

There exists a kind of laughter, which is worthy to be ranked with the higher lyric emotions and is infinitely different from the twitching of a mean merrymaker.
—Nikolai Gogol (Russian Novelist, Dramatist)

If you understand, things are just as they are; if you do not understand, things are just as they are.
—Zen Proverb (Japanese School of Mahayana Buddhism)

Filed Under: Inspirational Quotations

Lessons from Peter Drucker: Quit What You Suck At

March 1, 2018 By Nagesh Belludi 1 Comment

Peter Drucker and Jack Welch on Strategic Prioritization: Strengthen or Abandon

The essence of leadership is risk- and opportunity-assessment and resource allocation. It follows that one of the persistent responsibilities of leadership is to mull over each individual and organizational endeavor and investigate, “Do we produce results that are meaningful and profitable enough for us to justify investing our resources to this purpose?”

Jack Welch’s Strategy for General Electric: #1 or #2 Businesses Only

When Jack Welch became CEO of General Electric (GE) in 1981, he set out to make GE “the world’s most competitive enterprise.” However, the company was a hodgepodge of many businesses—some unrelated or irrelevant, several unprofitable, and a few at the brink of failure.

Management pioneer Peter Drucker famously advised Welch to ask of each constituent of the GE business portfolio he now presided over, “If you weren’t already this business, would you enter it today? And, if the answer is no, what are you going to do about it?”

Welch’s responded with his legendary dictum that every GE division be—or become—the leading or the runner-up business in its respective industry, or plan to exit it completely.

Welch argued that in many markets, the number three, four, five, or six players suffered the most during cyclical downturns. On the contrary, number one or number two businesses could protect their market share by way of aggressive pricing approaches or by developing new products. Welch’s approach portended the emergence of oligopolies in many industries.

The resultant strategic focus eventually led to an immense restructuring of GE. Welch sold or discontinued dozens of divisions—including computers and time-shares. Over the next decade, he cut nearly one in four jobs at GE, warranting the nickname “Neutron Jack.”

By year 2000, GE had reached dominance or near dominance in most of its business markets across the globe.

Peter Drucker on Strategic Reprioritization

'Post-Capitalist Society' by Peter Drucker (ISBN 0887306616) Explaining this method of strategic reprioritization, Drucker wrote in Post-Capitalist Society (1993,)

To turn around any institution—whether a business, a labor union, a university, a hospital, or a government—requires always the same three steps:

  1. Abandonment of the things that do not work, the things that have never worked; the things that have outlived their usefulness and their capacity to contribute;
  2. Concentration on the things that do work, the things that produce results, the things that improve the organization’s capacity to perform; and
  3. Analysis of the half successes, half failures. A turnaround requires abandoning whatever does not perform and doing more of whatever does perform.

'Five Most Important Questions' by Peter Drucker (ISBN 0470227567) Drucker further elaborated on abandonment as the keystone for strategic reprioritization in his Five Most Important Questions (2015,)

To abandon anything is always bitterly resisted. People in any organization are always attached to the obsolete—the things that should have worked but did not, the things that once were productive and no longer are. They are most attached to what in an earlier book I called “investments in managerial ego.” Yet abandonment comes first. Until that has been accomplished, little else gets done. The acrimonious and emotional debate over what to abandon holds everybody in its grip. Abandoning anything is thus difficult, but only for a fairly short spell. Rebirth can begin once the dead are buried; six months later, everybody wonders, “Why did it take us so long?”

Idea for Impact: Assess What Endeavors Must Be Intensified or Abandoned

Don’t do—or continue to do—something just because it’s been a tradition, custom, or habit. Strengthen, abandon, or stay on. Align your efforts with your mission, your values, and the results you want to achieve.

If you abandon something important mistakenly, you can quickly pick up where you left off.

Invest your precious resources where the returns are rich.

Figure out what’s vital and stay focused, even if you have to cut your losses (read about sunk costs.)

Filed Under: Business Stories, Leadership, Leading Teams, Sharpening Your Skills Tagged With: Biases, Decision-Making, Discipline, Jack Welch, Leadership, Leadership Lessons, Management, Peter Drucker, Strategy, Targets, Time Management, Wisdom

Inspirational Quotations #720

January 21, 2018 By Nagesh Belludi

The major reason for setting a goal is for what it makes of you to accomplish it. What it makes of you will always be the far greater value than what you get.
—Jim Rohn (American Entrepreneur)

Giving people self-confidence is by far the most important thing that I can do. Because then they will act.
—Jack Welch (American Businessperson)

Sin is whatever obscures the soul.
—Andre Gide (French Novelist)

My own experience and development deepen everyday my conviction that our moral progress may be measured by the degree in which we sympathize with individual suffering and individual joy.
—George Eliot (Mary Anne Evans) (English Novelist)

There is a kind of courtesy in skepticism. It would be an offense against polite conventions to press our doubts too far.
—George Santayana (Spanish Philosopher)

Forgiveness is a virtue of the brave.
—Indira Gandhi (Indian Head of State)

The beginning of love is to let those we love be perfectly themselves, and not to twist them to fit our own image. Otherwise we love only the reflection of ourselves we find in them.
—Thomas Merton (French-born American Clergyman)

In all the affairs of life, social as well as political, courtesies of a small and trivial character are the ones which strike deepest to the grateful and appreciating heart.
—Henry Clay (American Politician)

One father is more than a hundred schoolmasters.
—George Herbert (Welsh Anglican Poet)

There are no rules for friendship. It must be left to itself. We cannot force it any more than love.
—William Hazlitt (English Essayist)

Virtually nothing comes out right the first time. Failures, repeated failures, are finger posts on the road to achievement. The only time you don’t want to fail is the last time you try something … One fails forward toward success.
—Charles F. Kettering (American Inventor)

Action makes more fortune than caution.
—Luc de Clapiers, marquis de Vauvenargues (French Moralist)

I learned that courage was not the absence of fear, but the triumph over it. The brave man is not he who does not feel afraid, but he who conquers that fear.
—Nelson Mandela (South African Political leader)

Suspicion is most often useless pain.
—Samuel Johnson (British Essayist)

Our safety is not in blindness, but in facing our danger.
—Friedrich Schiller (German Poet)

Friendship is always a sweet responsibility, never an opportunity.
—Khalil Gibran (Lebanese-born American Philosopher)

Most of one’s life is one prolonged effort to prevent oneself thinking.
—Aldous Huxley (English Humanist)

There is no end of craving. Hence contentment alone is the best way to happiness. Therefore, acquire contentment.
—Sivananda Saraswati

Filed Under: Inspirational Quotations

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About: Nagesh Belludi [hire] is a St. Petersburg, Florida-based freethinker, investor, and leadership coach. He specializes in helping executives and companies ensure that the overall quality of their decision-making benefits isn’t compromised by a lack of a big-picture understanding.

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Unless otherwise stated in the individual document, the works above are © Nagesh Belludi under a Creative Commons BY-NC-ND license. You may quote, copy and share them freely, as long as you link back to RightAttitudes.com, don't make money with them, and don't modify the content. Enjoy!