Kevin Maney
Posted by Kevin Maney
  |   2 Minute Read
Understanding Jack Welch’s Legacy

Jack Welch built his strategy for General Electric on category thinking.

Welch, who died this week at 84, was CEO of GE from 1981 to 2001. The company’s market value was $13 billion when Welch took over, and he grew it to $525 billion before it tailed off after the market dips of 2000 and 2001. 

While Welch drove a lot of change at GE, he most famously built the business around the concept of being No. 1 or 2 in a market category. “When you’re number four or five in a market, when number one sneezes, you get pneumonia,” Welch once said. “When you’re number one, you control your destiny.” 

In an interview with Harvard Business Review, Welch added: “So being number one or number two globally is more important than ever. But scale alone is not enough. You have to combine financial strength, market position, and technology leadership with an organizational focus on speed, agility, and simplicity.”

This is the case we made in the book Play Bigger. It’s the same case that economist Paul Geroski made in his 2003 book The Evolution of New Markets. As market categories evolve, the public eventually chooses what Geroski called the “dominant design.” The company that owns that dominant design dictates the market, and competitors must respond. Think of Apple with its iPhone as the dominant design in smartphones, or Amazon’s AWS with its dominant design in cloud computing.

Over time, the dominant-design company takes the majority of market share – often three-quarters of the market – while a number two takes most of the rest, leaving a lower tier of companies to scrap for the rest.

At GE, that philosophy led Welch to sell off appliance manufacturing businesses that could no longer beat global competitors, while doubling down on businesses such as jet engines, where GE could dominate, and financial service sectors where GE could play in the top tier. By the time he retired, he’d led 600 acquisitions aimed at making GE businesses into category leaders.

Today, Welch’s tenure at GE gets criticized as much as praised. His concept of a corporation as a multi-faceted conglomerate is out of favor, and over the past year Welch’s type of relentless focus on shareholder value has come into question by groups like the Business Roundtable. 

But Welch was right about category leadership, and it’s even more pronounced in today’s digital markets. If you’re not the dominant design, you don’t control your destiny.