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Sunday, October 25, 2015

Differentiation Vitality Curve Revisited

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.

This is based, in part, on the old Pareto Principle that 80% of your profits come from 20% of your actions and that 20% of your profits come from 80% of your actions.  This principle is often a good rule of thumb, but is only a rule of thumb and should not be seen as an absolute.

In his book,Jack: Straight from the Gut Jack Welch admits that in the first year, it is not very difficult to identify the bottom 10%.  

Once this bottom 10% is found, you get rid of them.  It is harder the second year to identify the bottom 10%.

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. However, if a good team was assembled in the first place, it probably is true that there are no C players remaining.

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, when compared to the others, will 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%.

Jack Welch likes to use baseball teams for his analogies, so let us use a baseball team as an example.  There are nine field positions on baseball team. On our team, we have only ten players. We have two pitchers, one catcher, one player for each base, a short stop, and three outfielders. This totals ten players.

Every player is good at their job.  None of them ever commits any errors.  Both pitchers always pitch no-hitters and never, ever throw a single ball.  Each inning consists of nine pitches. There are three up-at-bats each inning and three consecutive strikes for each up-at-bat.

Three years in a row the team goes completely undefeated. They win the World Series each year.

Jack Welch buys the team and introduces Differentiation. One person has to go since the bottom ten percent has to go.  Remember everyone is error-free.  The only logical choice is one of the pitchers since you have two of them.  Which pitcher gets the ax?

You get rid of one pitcher.  Now you have nine people on the baseball team. Under Jack, you must get rid of the bottom 10%.  Next year, you have nine people and have to cut ten percent of nine people. You cannot do that.  It is impossible to get rid of part of a person and if you get rid of an entire person, you no longer qualify as a baseball team.

The concept of differentiation works perfectly if you let the idea of differentiation be mixed with a little common sense.  I suspect that Jack did exactly that.

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 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.

This also means that one of the stores will be closed. Welch’s concept of differentiation covers not only employees but businesses as well.

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. He is not sure what he will have to do about the assistant managers. This store may close completely.

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.  Employees begin to look for other jobs.

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 of the stores is sold and is now a direct competitor for the chain.

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 gives 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. However, if everyone is pulling their own weight, 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%.

Welch likes to compare differentiation to choosing sides to play ball on the playground.  The best players get chosen first.  The okay players are chosen next.  Players like me have to sit and watch.

The whole system can become one of politics and favoritism if not controlled carefully.  That is what happened with Enron’s performance review committee (PRC).  People began to game the system by colluding to support one another’s people to the exclusion of others.

However, Welch makes a good point in that management must use candor in management.  This means that one must be brutally honest with employees about where they shine and where they could use improvement, without sugar-coating it.   If someone’s performance is below expectations in one area, they should be told so and given suggestions on where and how to improve.

Welch makes an excellent point in that all the numbers should be shared all of the time with everyone on the team.  Each person should know where they stand. 

My opinion is each person should be told where they stand. This should not be based upon comparisons with other employees, but based upon expectations.  You are falling well below expectations or you exceed expectations.

Provided that the implementation is not ruled by the numbers, differentiation can be a very great way to run a company or a division.  

However, when people have to go because they are part of an arbitrary number, regardless of their actual performance, the system fails.

What is your opinion of this ranking system?  Does Jack have a good idea?  Send me an email.


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

The opinions or advice listed in this blog or website should be used as a place to start only. It is not a substitute for the use of a professional.

Please be sure to consult your attorney and/or accountant with any specific questions.
There is no one right answer to any business question that will cover all circumstances.

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