When it comes to running a business, General Electric used to be the beacon for the rest of the world. But that was before Jack Welch left as CEO on Sept. 6, 2001. During his 20 years there, Welch boosted GE's stock price 23 percent a year and produced so much management talent that its castoffs ended up running many of world's biggest companies.
On Sept. 10, 2001, Jeff Immelt took over. Since then, GE's revenues, profits and stock price have all fallen. To be fair, GE's stock has had a nice run since it bottomed out at $6 a share in February 2009.
Nevertheless, during my "Strategy and the CEO" class at Babson College earlier this week, my 39 MBA students explored GE's people strategies and articulated four lessons for startups.
Before getting into the lessons, here's a summary of how GE's "CEO factory" worked under former CEO Jack Welch. GE hired engineering graduates from state schools -- especially Purdue -- and shunned newly minted Harvard MBAs. Those Welch would hire after they had burned out from consulting and investment banking.
The idea was to start with a big pool of 25-year-olds and 20 years later end up with a handful of candidates to take over as GE's CEO at age 45 -- giving the winner a 20-year-run as CEO.
The leading candidates were quickly identified through GE's "vitality curve" that identified who was in the top 10 percent, the middle 70 percent and the bottom 10 percent. Those in the latter group were encouraged to find employment elsewhere.
Meanwhile, GE kept winnowing its top talent based on how well the top 10 percent did in a series of ever harder managerial challenges -- such as dealing with a product recall, managing a business with big swings in demand and boosting revenue in a more technology-intensive product category.
My students took away the following four key lessons:
1. Weed out C players. Many of my students commented on how discouraging it is to work with people in the bottom 10 percent and liked GE's idea of encouraging them to leave. One student told me that a manager's inability to rid a company of C players caused the A players to bolt. And while a bigger company might be able to trundle along, for a startup this kind of talent leak could be fatal.
2. Hire A managers. GE's system ranked people based on whether they met their numbers by following the company's values.
One student shared how his company promoted to manager an individual contributor who made his numbers but hated people.
Such a promotion would not have happened at GE. One basic lesson for startups is to make sure that its managers create an environment where the most talented people are motivated to work hard to achieve great results.
3. Bring in broadly talented people. My students liked the idea that GE's different business units presented aspiring CEOs with a variety of different strategic situations that would develop their skills so that they could handle a spectrum of business challenges.
Since smaller companies don't have that variety of developmental opportunities, a few students thought it would be a good idea -- if internal candidates were lacking -- to hire talented people from outside who had previous experience overcoming the new challenges facing the startup.
4. Link rewards to performance. GE pays people who perform better than those who do not. One student who works for a government agency expressed his keen disappointment that after a while those who clocked in and did very little there got paid just as much as people who worked hard and excelled in their jobs.
While he is looking for the exit, his comment raised an important point. No organization -- particularly no startup -- can survive in a competitive market unless it measures performance consistently and rewards the stars and either helps the weak performers to improve or manages them out (that is, considers their leaving the team).