Welch, innovation, and American manufacturers
By Kevin Parker, editorial director -- Manufacturing Business Technology, 11/1/2005 7:00:00 AM
Former CEO of GE, Jack Welch, was the featured speaker at a recent SAP Business Forum held in Chicago. "We've got a good economy at the moment," said Welch. "Many, many entrepreneurial-minded individuals are coming out of business schools. We've got a wonderful venture capital market."
The audience of more than 1,000 local executives repaid the compliment with a bevy of respectful questions and a standing ovation at the conclusion of his remarks.
Afterward, Welch said he'd found fascinating an article in the October 11 edition of The Wall Street Journal about an industrial area in Japan that had revitalized itself by focusing on highly innovative processes and products. "Innovation" is one major element of the prescription Welch and others recommend for U.S. manufacturers feeling the stress of globalization.
"If you're making widgets with a 35-percent labor component, and don't have a unique business proposition," said Welch, "it's only a matter of time."
Manufacturers in the Nagoya area of Japan have moved production of low-end products overseas, but continued to make lucrative high-end goods at home. The story also says manufacturers in the region spend robustly on research & development (R&D).
Interestingly enough, another story in the Journal that day concerned a Booz Allen Hamilton study that found companies that spend proportionately greater sums on R&D than their industry peers didn't enjoy greater revenue gains or better profits.
Asked about the apparent contradiction, Welch said, "We don't know if what's being said about those Japanese manufacturers is true. We've only read the story. But you can make numbers say anything you want, and if that study is saying research & development isn't a significant factor in long-term profitability, they're dead wrong."
Toyota, headquartered in the Nagoya area, the Journal article says, "churns out Corolla compacts and Camry sedans in plants all over the world. But its premium Lexus vehicles, and its popular Prius model and other hybrids that use both gasoline and electricity, are made only in Japan."
Yet the Booz Allen study points out that Toyota spent only 4.1 percent of revenue on R&D last year, but "has consistently outperformed Ford Motor Co., which spent 4.3 percent of sales on research & development."
Barry Jaruzelski, Booz Allen VP of global technology practice, says, "It is the culture, the skills, and the process more than the absolute amount of money available."
It's often said that U.S. publicly owned companies' intense focus on quarterly statements works to the detriment of their long-term prospects. But Welch wasn't having any of that. "It's the job of any CEO or executive to balance the long term and the short term," he said.
And in his latest book, Winning, Welch says the following:
"My advice, then, is when you think strategy, think about decommoditizing. Try desperately to make products and services distinctive and customers stick to you like glue. Think about innovation, technology, internal processes, service add-ons—whatever works to be unique."
Finally, Welch sees reason to be bullish. Asked why—given good earnings, mountains of cash, and cheap money—American companies weren't investing more, he exclaimed, "But capital spending increased 15 percent in the last quarter," sending at least one editor back to his desk for further research.
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