Winning (17 page)

Unlike a conventional budget, with its numbers cast in concrete, an operating plan can change as conditions change. A division or business can have two or three operating plans over the course of a year, adjusted as needed through realistic dialogue about business challenges. Such flexibility frees an organization from the shackles of a budget document that has become irrelevant—or even downright dead—because of changing market circumstances.

At this point, you might be thinking, “Yeah, yeah, this approach sounds great, but what about my bonus?”

That’s a good question. It’s the key question, in fact. And the answer is that this operating plan process can occur under only one condition:

For many companies, this condition would involve a radical change. People have been trained for years and years to hit their budget numbers no matter what, and managers have rigidly rewarded those who did and punished those who didn’t, no matter what.

That was the company I grew up in for twenty years, and largely the company that I inherited when I became CEO. Over the years, I was at the receiving end of plenty of Phony Smile meetings, and participated in dozens if not hundreds of Negotiated Settlement meetings on both sides of the table.

But as GE’s culture became more infused with candor, transforming its budgeting process became more realistic. Eventually, we were able to move our businesses away from budgets with rock-hard targets and toward operating plans filled with stretch goals.
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That transformation took time—several years, at least. Along the way, I promoted the change as often as I could.

In 1995, for instance, Appliances was having a brutal go of it. Competitors were churning out high-quality products at very low prices, and our team was struggling like crazy to catch up. They were innovating with several new product introductions of their own and improving manufacturing processes, getting more productive by the day. Still, at the end of the year, their earnings were 10 percent below internal expectations and about flat with the previous year.

At the same time, Plastics was having a great year. Their market took off, and shortages of material quickly developed, making it a seller’s market when it came to pricing. Their earnings jumped 25 percent, about ten points higher than the operating plan called for.

Back in the old budgeting days, Plastics would have gotten the big bonuses and Appliances would have gotten a lump of coal. But with the new approach, both businesses got increased payouts that were about equal in amount.

At our annual management meeting that year with five hundred of the company’s top people, I went out of my way to make this story widely known. In fact, I made a point of telling it in my keynote speech to the group.

Yes, I said, Appliances’ earnings were below plan and showed no rise over the previous year. But the business’s performance—in a brutal environment—was really impressive compared to its closest competitors, Whirlpool and Maytag, who had done worse than we had.

As for Plastics, yes, their earnings had beaten the plan, but it had been a layup. We cared more that one of their competitors had earnings growth of 30 percent and another had a 35 percent rise. We could have done better and we didn’t. In fact, we hadn’t been aggressive enough on price—a mistake, pure and simple.

You might expect that people in Plastics resented the bonuses paid out to Appliances, or that they wanted and expected more from headquarters for their results. But by that time, the reinvented approach to budgeting had permeated the organization. People understood how it worked, and how it made all of us better by looking outside the company to judge our performance. After all, what good is beating targets you set in a windowless room? The real world has its own numbers, and they’re all that matters.

GETTING IT GOING

As I said, it took years for this approach to financial planning to take hold at GE, but I know a case where it was up and running within two—and in China to boot, where modern management techniques in general are just taking hold.

It happened at 3M, the industrial conglomerate, which has been doing business in China for some twenty years.

To an outside observer, 3M’s track record in China has always been solid. In fact, when Jim McNerney became CEO in January 2001, the company’s Chinese businesses were posting 15 percent annual growth, about three times the company’s average. For years at budget time, the Chinese team had been congratulated for this level of performance and sent on its way.

But after his years of experience with the impact of stretch goals and operating plans at GE—where his last job was CEO of Aircraft Engines—Jim decided to transform budgeting at 3M, including its foreign operations.
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His first step, however, was
not
to install the stretch approach. “You can’t go to stretch directly,” he told me recently. “You have to get a culture of accountability first.” In other words, people have to mean what they say, deliver their operational and strategic commitments, and take responsibility if that doesn’t happen.

In the past, 3M had something of the Negotiated Settlement approach to budgeting, but with an added twist of benign neglect. The company called budgets “improvement plans,” which, as Jim notes, “had little commitment attached to them.” Headquarters and each business unit would come up with agreed-upon numbers during the budgeting ritual, and then amicably part ways until the same event the next year. In the meantime, goals would routinely be missed, and people at headquarters might have gotten angry, but nothing happened.

Over the past four years, as Jim and his team have changed the 3M culture, the “improvement plan” approach to budgeting has all but ended. There is new candor and trust—and accountability—throughout the organization. Enough, in fact, that Jim felt it was possible to introduce the stretch approach.

One of its earliest believers was Kenneth Yu, managing director of 3M China and a 3M employee for more than thirty years, first in Hong Kong, then in Taiwan, and now in Shanghai. In his early fifties and a veteran of good results under the old budgeting system, Kenneth was an unlikely candidate to embrace such a major change. But he had, as Jim describes it, “a total reawakening” as to how business could be done.

“Once Kenneth realized that the stretch approach had a safety net, he really bought into the idea that stretching, even without getting there, could be a whole lot better than the old game,” Jim recalls.

Rather than come to Jim with the usual conservative growth plan and then beating it, Kenneth presented an operating plan to catapult the China operation to 40 percent annual growth. It involved bold, wide-open thinking about possibilities. For 2002, Kenneth proposed increasing 3M’s R & D investment in China in order to introduce many local product adaptations, and promoted new plant investment to support rapid growth.

In three years, 3M’s business in Greater China has grown from $520 million to $1.3 billion, with ambitious plans for the future.

This does not mean, of course, that stretch has totally taken hold at 3M. Jim says people are still getting used to the change, but they have definitely come to see that the company now celebrates and rewards people who think big. Today, “budgeting” at 3M is not about delivering good-enough plans and beating them. It’s about having the courage and zeal to reach for what can be done.

Doesn’t that sound like more fun than budgeting? And it works better too.

A WORD OF CAUTION

Before we finish up this chapter, I just want to make sure that I am not making this change sound too easy. Experience has shown me that while most people take to reinvented budgeting with enthusiasm, there are always a few diehards who do not and with their actions try to undermine it. Usually, these people are too steeped in tradition to let go of the old link between targets and bonuses. Sometimes they are just jerks. But whatever the reason, I would be a Pollyanna if I did not acknowledge that these types of managers haunt every company that switches over to the stretch approach. At GE, we never found or converted them all, but we never stopped trying.
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Here’s the modus operandi of these types: At the outset of the financial planning cycle, they appear to heartily buy into the new program and ask their people for big stretch goals. Then, without openly admitting it, they take the team’s stretch goal and use it as a commitment number—an old-fashioned budget target. When the end of the year rolls around, these managers take terrible advantage of their people. They identify the stretch number as the target, and they nail the team for not hitting it.

This behavior stinks, and it sets the whole process back by demonstrating to the people in the trenches that they can’t trust it. Next time when they’re asked to dream, you can be sure their dreams will be very small.

Part of the transformation process to a nonbudgeting company is to find the managers who pull this bait and switch. Call them on it, and take whatever action you need to make sure it doesn’t happen again.

When I talk to business audiences about the right way to budget, regardless of industry or country. I often get the same question: “The budgeting process in my company is too entrenched to change the way you describe. What can I do?”

My answer is not to give up. It’s too important.

It may be awkward at first, but change begins when you start talking, and one conversation leads to another and then another. Everyone knows about the Negotiated Settlement and Phony Smile dynamics, they’ve lived them, and they know that they take the energy and reality out of budgeting. So when you bring them up, people may not know how to deal with it—but they can’t just walk away.

The subject will resonate.

The fact is, there is a way to approach budgeting that blows it up and puts something much better in its place. It’s a system that can take a Chinese industrial business with modest annual growth and transform it into an enterprise growing 40-plus percent a year. It can inspire people to keep innovating and becoming more productive every day, even when global competition seems insurmountable. It can take people who once sat
across
the table from one another during debates about nothing less than the company’s direction and future and put them on the
same
side.

Very simply, the right “budget” process can change the way companies compete.

People usually groan when you mention budgeting—it’s a necessary evil.

It doesn’t have to be. It shouldn’t be. But the change to a better way has to start somewhere—how about with you?

O
NE OF THE MOST EXHILARATING
things about being in business is starting something new from inside something old—launching a product line or service, for example, or moving into a new global market. Not only is it a blast, it is one of the most rewarding paths to growth.

Another route to growth, of course, is through mergers and acquisitions, which we’ll look at in the next chapter. Here we’re going to talk about companies getting bigger organically.

Now, starting something new from within an established company is easier said than done for one good reason.

It requires managers to act against many of their perfectly reasonable instincts.

Few typical corporate managers, for instance, have the burning desire to send their best people to start up a manufacturing facility halfway around the world or to pour R & D dollars into a risky new technology. Nor do many have the urge to give new ventures, at home or abroad, a lot of leeway.

But to give any new venture a fighting chance to succeed, you
do
have to set it free (somewhat). And you
do
need to spend more money on it and cheer louder and longer for it than may feel comfortable.
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Managing a $50,000 new product line in its first year is harder than managing a $500 million business in its twentieth year. And going global is just as challenging. New businesses and new global ventures alike have few customers or routines. Neither has a handy road map to profitability. That’s why they need special treatment.

Too often they don’t get it.

Over the years, I saw countless new businesses launched within GE and many expand globally. Recently, I have been involved with several companies in their quests to grow, and in Q & A sessions, I’ve heard people describe their difficulties in starting new ventures.

It seems there are three common mistakes companies make in launching something.

First, they don’t flood start-up ventures with adequate resources, especially on the people front.

Second, they make too little fanfare about the promise and importance of the new venture. In fact, instead of cheering about the potential of the new venture, they tend to hide it under a bushel.

Third, they limit the new venture’s autonomy.

All of these mistakes are completely understandable. Starting a new venture, be it a new voice-over-IP device or a call center in India, means making a bet. Most people instinctively hedge their bets, even as they place them. The irony is that such hedging can doom a new venture to failure. When launching something new, you have to go for it—“playing not to lose” can never be an option.

Here are three guidelines for making organic growth a winning proposition. Not surprisingly, they are antidotes to the mistakes just listed above.

Companies tend to size their investments in new ventures according to the size of the venture’s revenues or profits starting out. That’s shortsighted, to be polite about it. Investments in R & D and marketing should be sized as if the venture is going to be a big winner. And people selection should be made with the same mind-set.

Speaking of people, companies have a habit of sending expendable bodies to run new ventures: The old manufacturing guy whose children have grown and is looking for added adventure in the two years before retirement is sent to a foreign location to start up a new plant. An OK but unexciting manager who has been quietly running another business is given a new product to launch.

It’s nuts. For a new business to succeed, it has to have the best people in charge, not the most available.

In fact, leaders of new ventures have to have some of the “garage entrepreneur” in them. They need to have all four Es and plenty of P.

One thing is for sure: new businesses with limited resources and good-enough people stay small.

I can think of two cases when we almost killed new ventures within GE by underspending on resources and people.

PET is a cancer-detecting imaging technology that was selling about $10 million in equipment in 1990 from within the huge medical systems business.

And in 1992, we had a $50 million business making small jet engines. It was practically invisible compared to the multibillion-dollar business we had in big commercial engines.

Neither PET nor Small Jet Engines got much in terms of time, attention, or investment from their divisions or headquarters, and they languished. Luckily for Small Jet Engines, it had a VP named Dennis Williams, who believed in the business and somehow managed to keep it alive. But PET came into our gun sights only when we tried to sell it—and no one would buy.

Market conditions eventually brought us to our senses, and only then did we begin to invest heavily in both businesses. Today, they are doing well. PET is a $400 million business. Small Jet Engines has gotten an enormous boost from the growth in commuter airlines. Its sales are about $1.4 billion, and it is the fastest-growing part of GE’s commercial engine business.

We got resource allocation a lot closer to right with China.

Back in the early ’90s, Asia for GE was mainly about Japan, where we had revenues of about $2 billion. But we knew that Asia was a lot more than Japan and that we had to get into China.

So we took one of our best leaders and put him in charge. It was Jim McNerney, whom I mentioned in the previous chapter on budgeting.

At the time, Jim was the CEO of GE’s $4 billion industrial systems business in Plainville, Connecticut. He was, in every way, a big hitter. He had twenty-five thousand people reporting to him in one of our mainstay businesses, a comfortable office, and a well-trained, hand-picked staff. Most people in the company believed that Jim had a very promising future with GE and that his next step would be vice-chairman, at the very least.

Instead, we put him in an office in Hong Kong with an assistant and a few employees.

The impact was immediate. Jim was like the Pied Piper. As soon as headquarters raised the bar and sent someone to China who was widely acknowledged to be a star, all of our businesses started sending their best people too.

Jim and his team launched GE businesses in China into the $4 billion operation they are today. He has since gone on to do a great job as CEO of 3M.

When we sent Jim McNerney to Asia, we didn’t just send out a press release and let the news go at that. Instead, we made a hoopla about the event. I ranted and raved about Jim’s appointment at every senior management meeting, and when I was in the field visiting businesses, I made sure everyone got the message that GE was going aggressively into China and we had to send our best. Jim was the perfect role model for the point I was trying to convey.

In the same way, when NBC launched the cable channels MSNBC and CNBC, I gave them an inordinate amount of attention in every public setting I could find. At NBC business reviews, for instance, I would focus much more intently on these cable presentations than on NBC’s West Coast team promoting their new network comedy shows. I didn’t ask questions about the stars appearing in NBC’s next promising big hit. Instead, to demonstrate my support, I would ask the executives of MSNBC and CNBC—neither one then posting any revenues to speak of—about subscriber growth and content.
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Start-ups need cheerleading—constant and loud.

Cheerleading, however, isn’t just about senior managers making noise. It’s also about giving new ventures sponsorship. This may mean breaking old bureaucratic norms, but with a new venture, organizational visibility is critical. For instance, new ventures should report at least two levels higher than sales would justify. If possible, they should report directly to the CEO. At the very least, they should always have a special place on the CEO’s priority list.

Admittedly, there is one big problem with making a huge scene about a new venture.

How dumb you look if it fails.

You can end up looking very dumb. That is part of the gamble, and I’m not going to minimize it. It was widely reported how strongly I supported the XFL, the new extreme football league that NBC launched in 2000. As a business opportunity, I couldn’t think of a thing wrong with it, and I said so, over and over again! When the XFL failed after a painful twelve-week season, losing $60 million for the company, the press had real fun with it, making me and Dick Ebersol, the XFL’s other vocal sponsor, the butt of plenty of jokes. Fortunately, the hammering ended relatively quickly.

So what’s the bottom line here?

Even with the risk, go ahead and make a scene for new ventures—an exaggerated scene. You’ll doom them if you don’t. If the venture fails anyway, recognize your part. Don’t point fingers. You believed, but it didn’t work out.

If the venture wins, relish the team’s success. It will feel great.

This is a guideline that is not really a guideline, because when it comes to how much autonomy to give a new venture, there is no formula, only an iterative process. The main thing to remember is: throughout that process, give a new venture more freedom than you might like, not less.

Finding the right balance between supporting, monitoring, and smothering a new venture is not unlike when you send your kid off to college. Now that he’s on his own, you want nothing more than for him to take full responsibility for his life. You also don’t want him to flunk out or carouse too heavily. And so you begin a game of give-and-take. At first, you visit and call a lot. You frequently inquire about tests, new friends, and weekend activities.

When everything seems to be running smoothly, you let out the rope.

When the first C minus comes home, you pull it in.

When the next report card is all As and Bs, you let it out.

When you get a call from the campus police because of an unfortunate drinking episode, you really crank it in.

That’s how it goes with new ventures, except that you can’t replace your kid. You can—and should—replace a new venture’s leaders if too much cranking is required.

Ultimately, you want this iterative process to lead to a new venture having more and more autonomy.

Now, we all know that in large companies, brand-new ventures have neither the results nor the political capital to get their own shops. In small companies, it’s too easy to fold a new business into the core.

But autonomy gives people ownership and pride. In ideal situations, new ventures with strong leaders should have all their own tools, like their own R & D, sales, and marketing teams. They should be allowed to place their own audacious bets on people and strategies.

My commitment to autonomy for new ventures has its roots in my earliest days as the venture manager for Noryl, the new plastic that had about as much promise as mud when we started experimenting with it in 1964. But as soon as the team got Noryl’s chemical composition to work and eliminated its technical flaws, I fought for my own operation.

The higher-ups thought I should use the pool sales force and let Noryl be sold in the basket along with GE’s other plastics. But I believed that no salesperson in the world would push Noryl, which was landing $500 orders in those days, when he had Lexan to sell in $50,000 batches to Boeing or IBM. As far as I was concerned, you could sell Lexan sitting in an armchair—Noryl needed maniacs running around! I made this case with enough fervor and persistence—in other words, obnoxiousness—that after a couple of years my bosses relented.

When Noryl finally got on its own, it took off—all of us felt and acted like entrepreneurs, albeit with a big bank in our back pocket. Over the next two years, Noryl grew by leaps and bounds. In 1969, when I was promoted to run the entire Plastics division, I kept Noryl as a separate business because—even with its successful launch and rapid growth—I thought it would still benefit from autonomy. In fact, Noryl (now a billion-dollar business) wasn’t folded into the Plastics marketing and sales operation for fifteen years.
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IF YOU’RE RUNNING THE VENTURE…

The guidelines I’ve just listed are directed in many ways at the executives sponsoring a new venture. But they have important implications for the venture’s actual leaders—the people running the new show.

Consider the first guideline, about spending on resources and people. More often than not, you will find you are not getting enough money from the mother ship, nor are you getting the best people. What do you do?

Fight like hell. Get yourself in front of senior management and make your case. And work the personnel front on your own. Ferret out good candidates both inside and outside the company, and make your pitch directly to them. Just go get the best people, even if you have to throw a few elbows.

Now about hoopla. You need to realize it’s a two-edged sword. You want it in order to get commitment from those above you. But when you get that commitment, it is sure to tick off your peers. In particular, established businesses with fat profits absolutely hate it when little upstarts with no profits get a disproportionate amount of company resources and attention. They are certain they need more resources and would spend them more wisely than your risky little venture.

Their attitude may annoy you, but the last thing you need is to have anyone in the company rooting for you to fail. Recognize that resentment toward new ventures is natural. Keep your mouth shut if it bothers you. Humility will serve you well with your peers; someday soon, you’ll need their support.
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