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Monday, October 13, 2014

Differentiation Vitality Curve





Differentiation Vitality Curve


Jack Welch, the former CEO of GE, has this great idea called the Differentiation Vitality Curve.  A company is made up of the top 20% who are A players.  Then, there is a middle 70%, which are the B players. Finally, the bottom 10% is made up of the C players and they have to go.

In his book, Jack: Straight from the Gut,  Jack Welch admits that the first year it is not very difficult to find the bottom 10% and get rid of them.  The second year is harder. By the third year, managers tell him that they have no C players on their staffs. Jack does not seem to believe this is true.

The problem with all of this is that, once you remove the bottom 10%, some of your B players are now C players by comparison. Therefore, no matter what you do, you will always have some people that rank at the bottom.

On a professional football team, everyone is supposedly very good at what they do.  However, on any given team you will find some people who, compared to the others, would not be as good. They are still great players and any team would do well to have them on their team. Still, they would be the bottom 10%.

An example of differentiation gone wrong might be the following.  A company has ten stores.  Each of those stores has a manager, three assistant managers, and ten line-level employees.  All stores are in the same geographic area in the same city.  Each store has about the same level of sales per square foot.  All stores are laid out the same way as set by corporate.

The managers have all been with the company for over ten years.  These managers are friendly with one another and often discuss innovations they have made in their stores.  Sometimes one store will swap merchandise with another store so that items that move slowly in one store can be sold in a store that has a higher volume in the store for that item.  This keeps merchandise fresh and improves inventory turns in both stores.

Sometimes when a store has a temporary staffing problem, one store will send another store some of their employees.  This keeps service levels at their peak.  Customers benefit from this.

One day the CEO reads the book Jack: Straight from the Gut
.  Then he reads Winning.  The CEO decides that Welch must know what he is doing.  He looks at his sales figures.  He determines that all stores are operating above the standard for the industry and sales in all stores are improving in a stagnant economy.  Still, he thinks Welch must be right.

The CEO introduces the concept of the differentiation vitality curve to his employees.  He tells managers that they must get rid of the bottom ten percent of their employees.  He further tells his managers that by this time next year one of them will have to go.

The managers take a hard look at their employees.  The team works well together.  They swap shifts with one another and they work together to serve their customers.  Sometimes when a floor needs to be mopped due to a customer spill, an employee will grab a mop even if it is not their job to do so.  Everyone works for the good of the team.

Each manager tells his team that by this time next year one of the line-level employees will be gone and he is not sure what he will have to do about the assistant managers.

In each store, it becomes dog-eat-dog.  No one is swapping shifts.  Everybody is doing only his job.  There is no longer a team.

Managers stop sharing information with one another.  It becomes a contest between stores.  Employees are not being swapped when there are staffing problems.  Inventory sits at one store while there is an outage at another.  Managers keep innovations to themselves so other managers in the chain cannot beat them.  It is a fight to the death.

Sales at all stores begin to decline.  The bottom person on the totem pole has been removed (I am Native American so I can use this term) from each store.  Some assistant managers have left the company for fear of losing their jobs.  Those that left were the better ones and now they all work for a competitor.

One manager is fired and a new guy is hired.  This new guy is told he will get one year to get up to speed.  In his second year, he will have to compete in this “Differentiation Vitality Curve”.  The CEO asks the other managers to train the new guy.  Each does a half-hearted effort because he knows that next year he will be in competition with the new guy. 

The company is no longer a great place to shop.  Some stores have old merchandise in one category and outages in others.  Customers have to wait in line because each store has one fewer well-trained line-level employee and in their place is a trainee.

Customer service has slipped.  This all took place because an arbitrary number of ten percent was set.

Would it be better if we forgot all about ranking people by A, B, and C?  Instead, if an employee is not pulling his weight, they have to go.  If it means firing all C level people, so be it.  If it means firing everyone and starting over, then do it. But, if it means that everyone is pulling their own weight, then they should not have to be concerned that they will be fired just because they are not at the top of the heap.

In my opinion, this erodes team spirit since everyone is trying to step on one another to keep from being in that bottom 10%.
What is your opinion of this ranking system?  Does Jack have a good idea?

References


Welch, J., & Byrne, J. A. (2001). jack: Straight from the Gut. New York, New York, USA: Warner Books. Retrieved July 30, 20133, from www.twbookmark.com
Welch, J., & Welch, S. (2005). Winning. New York, New York, USA: HarperCollins. Retrieved July 31, 2013







Cite This Page
© 2008-2013 McClendon Enterprises
Blog name: Redneck-MBA
Article Name:  Differentiation Vitality Curve
Author: David E. McClendon Sr.
Editor: Suzanne G. McClendon




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There is no one right answer to any business question that will cover all circumstances.


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