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Two Questions Every CEO Should Ask

January 15th, 2011

In 1981 after being appointed CEO of General Electric Jack Welch asked Peter Drucker to visit him at the company’s headquarters. They spent a day together during which time Drucker asked Welch just two questions.

The first was: “If you were not already in this business (referring to each of GE’s business units) would you enter it today?”  The second question was: “If the answer to the first question is no, what would you do about it?From this discussion Jack Welch framed a strategy that would change the face of GE and arguably, the business world, forever.

Welch’s strategy was simple: we will either be number 1 or number 2 in every industry we’re in or we’ll fix, sell or close the business unit.  The year before Welch took over GE it had revenues of approximately $28 billion.  The year before his retirement revenue had grown to $130 billion and the market capitalization of the company had grown by nearly $400 billion.  You could say each of these questions was worth $200 billion!  I wonder if Drucker was into value pricing at that time.

The reason I mention this is not to signal Drucker’s or Welch’s genius – that’s self evident and needs no confirmation from me.  But what I do want to signal is the power questions have in changing the way we look at things and most importantly, the power of these two questions.  As a leader of your own organization and as an advisor to your business clients these questions should be asked right now.

Drucker’s advice to the owner of a small local business that is not already #1 or #2 is a difficult pill to swallow.  But let’s think about what being #1 could mean in a local community setting.  Seth Godin gives us some insights in his great little book called The Dip which is worth reading if you feel your business is not getting traction.  Godin supports Drucker in that he suggests you need to strive to be #1 or quit but he adds a qualifier that makes it a more palatable, and in my view, a more realistic strategy.

He qualifies his advice by the way he defines #1. He argues that one customer’s #1 best-in-the-world service provider is not necessarily another customer’s provider of choice.  In other words he suggests that many providers can be, and in fact are, #1.  He writes (page 10):

Anyone who is going to hire you, buy from you, recommend you, vote for you, or do what you want them to do is going to wonder if you’re the best choice.

Best as in: best for them right now, based on what they believe and what they know. And in their world as in: their world, the world they have access to.

He goes on the make the point that “best” is subjective.  It’s something your customers decide not what you decide.  If enough of them decide you are the best you will become #1.  If enough of them decide you are not their best choice you won’t.  This is an interesting way to look at it because it very clearly gives you the opportunity and permission to strive to be the best irrespective of your starting position. That is, being the best is a journey, not a destination.

Godin’s truly powerful idea is the reminder that mediocrity (those service providers who reside in the middle of the bell curve, those who are OK with average) are the ones who settle for less than they are capable of, or as he says, “For good enough instead of best in the world.”  This is precisely the advice Drucker gave to Welch back in 1981.

And that brings me to a powerful idea I expressed in my April 2010 blog titled Are all your clients profitable to service? My research has shown that many accounting firms (I suspect most) are just breaking-even or losing money on about 50% of their clients.  One way to look at that there is not a good fit between many of these clients and the firm e.g. they do not want higher value services, they are costly or difficult to service, they are highly price sensitive, they are not conducive to taking advice.  Another way is they do not consider the firm to be #1 or even striving to get there.  Yet another way to look at this is these clients form a business unit within the firm that is not a profit contributor.

Drucker’s advice to Jack Welch for a business unit of this type was to fix it, sell it or close it.  Godin nicely explains why this is the logical thing to do “…because it distracts management attention. It sucks resources and capital and focus and energy. And most of all, it teaches people in the organization that it’s okay not to be the best in the world.”

My two questions for you are: Do you have clients that need fixing, selling or firing? And, are you doing everything you can for your firm to be the best in your world?

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