The 2 Crucial Principles of Business Management

What are the two essential principles of business management? What’s the importance of candor and differentiation in the workplace?

Whether you’re running your own company or trying to climb the corporate ladder, learning basic principles will help you become a better leader. Jack Welch’s book Winning has two big-picture principles for running a successful company: candor and differentiation.

Let’s look at these two principles and how you can apply them to your business strategy.

1. Candor

According to Welch, candor is one of the most important principles of business management to cultivate in your organization. People should be encouraged to be outspoken, direct, and honest in their communication

Welch claims that establishing candor in your organization helps in three key ways: 

  1. It produces ideas. When everyone in your company is accustomed to speaking their mind, and accustomed to others speaking their minds, without fear of punishment or ridicule, more meaningful and productive conversations occur. More ideas are presented, and these ideas are discussed and criticized until the best idea wins out. 
  2. It saves your organization time. Because ideas are being openly debated and discussed, your organization can get to the best ideas quicker. Instead of people keeping their mouths shut or tiptoeing around criticisms of their coworkers’ or bosses’ ideas, people will speak their minds and move on.
  3. It saves your organization money. A candid organization is less likely to waste money on meetings where nothing of substance is said or reports that don’t contribute value to the company’s bottom line. Instead, employees can focus on the things they feel are actually important.

According to Welch, the method for creating a more candid company culture is straightforward: Recognize and reward candid behavior as much as possible. Over time, people will grow accustomed to direct and honest communication, and they’ll grow to appreciate and see the value in it. 

2. Differentiation

Another guiding principle Welch advocates is what he calls “differentiation,” one of his most influential yet controversial ideas. Differentiation is a process in which you identify the best- and worst-performing people, products, and services within your company, then nurture your best performers and remove your worst. Welch claims that differentiation can greatly improve your organization’s chance of success.  

When it comes to products or services, differentiation means determining the most profitable sectors of your business and allocating resources to those key areas. With people, it means promoting or rewarding your best employees and firing your worst. Let’s look at both approaches.

Product Differentiation

Welch says that every company has its strong products or services and that investing more heavily in these will help your company flourish. To do this, you must first determine the criteria for what makes a “strong” product or service. For a large corporation, the definition of strong might be related to the product or service’s market share or growth rate. For smaller companies, you might determine your strongest products or services by the amount of revenue or profit they generate. Whatever your criteria, you need to have a clear understanding of the strong and weak parts of your business.

Employee Differentiation

The more controversial side of differentiation is employee differentiation, which involves systematically firing your worst-performing employees. 

Welch provides a specific method to implement employee differentiation: the 20-70-10 rule. The 20-70-10 rule recommends categorizing your workforce into the top-performing 20%, the middle 70%, and the bottom 10%. Then, reward the top performers, keep the middle, and fire the bottom. Though Welch admits that implementing employee differentiation can be brutal, in the end, it’s both an effective and moral practice.

Welch claims that employee differentiation is effective because it promotes candor and motivates employees. In a company that uses differentiation, employees know where they stand and if they need to improve. While some say that differentiation can be demotivating to the middle 70%, Welch claims that most people in the middle 70% will try to reach the top 20% to receive rewards such as bonuses, stock options, or promotions for their work. Furthermore, when the top performers aren’t rewarded for their production, they can become less motivated, which will substantially harm the business. 

The 2 Crucial Principles of Business Management

Katie Doll

Somehow, Katie was able to pull off her childhood dream of creating a career around books after graduating with a degree in English and a concentration in Creative Writing. Her preferred genre of books has changed drastically over the years, from fantasy/dystopian young-adult to moving novels and non-fiction books on the human experience. Katie especially enjoys reading and writing about all things television, good and bad.

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