CEOs can have a powerful effect on the companies they oversee. A bad CEO, or even an indifferent CEO, can quickly bring a good company down, while a good CEO can transform a mediocre company into a business that attracts only the best employees. These three great CEOs morphed their companies into appealing entities for employees, the public and shareholders. Read on to learn how Visa (NYSE:V), General Electric (NYSE:GE) and McDonalds' (NYSE:MCD) early days were shaped by their trailblazing CEOs.
Dee Hock - Visa
When Dee Hock came onto the scene, many people thought that credit cards had already reached their apex. Since the introduction of the Diners Club and the BankAmericard, the credit card industry had broken wide open. It was the success of the BankAmericard in the 1960s that prompted more banks to jump in the credit card pool and issue cards.
Cards were mailed en masse to everyone: toddlers, pets, inmates and the dead. As a result, fraud became rampant and even legitimate transactions couldn't be properly sorted out with the huge inflow of paper work. As a result of this mayhem, member banks were losing money in a big way. When Dee Hock took over the organization in 1970, he began to implement his vision for consumer credit.
Hock's vision was to make plastic a universal currency, but first he had to make it a proper domestic one. Under Hock, the organization led the way into electronic processing for transactions, to cut processing time from five minutes to 56 seconds. It also limited fraud by detecting it sooner and reducing repeat fraud with unauthorized or stolen cards. Hock then focused on expansion, decentralizing the management process and allowing member banks to compete with each other for the same sales territory.
This concept, based heavily on evolutionary concepts of self-organizing systems and chaos theory, was in stark opposition from the patriarchal top-down models of corporate management that ruled up to then. Visa quickly spread nationwide, and then internationally, even as more and more merchants were goaded and pressured into accepting the company and its system. By letting the member banks compete, Hock increased the rate of acceptance, as many of those banks had existing business relationships with local merchants and far more bargaining power than any centralized organization would've had.
In 1976, the organization was renamed Visa, and it was both the largest and hungriest of the credit card issuers. Seeing his vision of a universal currency well on its way to fruition, Hock stepped down in 1984, but Visa has continued to grow using the model of controlled chaos that he introduced. (For more on the history of credit cards read Credit Cards: Birth Of A Plastic Empire.)
Jack Welch – General Electric
Jack Welch's first challenge as CEO of General Electric was convincing the company that it needed change. General Electric was large and dominant in many different businesses, most of them based in manufacturing. Welch stuck to a single message: if GE did not evolve and start growing, the company would be left behind. Welch came up with a strategy to make GE work like a smaller, hungrier company, while still enjoying market dominance. GE exited many of the traditional markets in which it had competed for years (consumer appliances, air conditioning), and entered completely new areas like medical technology, finance, television and services. Welch believed that if he had the right people, each new venture could result in success.
To increase productivity, Welch fired the bottom 10% of his managers and employees each year during the early 1980s - a strategy that earned him the moniker "Neutron Jack," as he would eliminate the people while leaving the buildings intact. He also had GE cut all businesses that weren't considered in the top two in their markets. Welch's massive housecleaning project included removing the layers of bureaucracy that build up in any large organization, making the flow of ideas much faster. GE soon became one of the most coveted places to work.
The soft economic moat created by GE's corporate culture led to dominance in its core operations, as well as new business acquired in the 1980s. However, this dominance was, once again, limiting the room left for growth. Being in the top two companies in a certain market may mean profitability, but also means the company's growth is dependent on the advancement of the market.
Welch and his management team redefined goals to get around this barrier. GE had been focusing so tightly on a specific market, such as airline engine maintenance in the U.S., that it easily became one of the top companies. It reworked its narrow definitions within each business' market so that no division controlled more than 10% of the entire company. Under Welch, GE grew from a $14-billion company to a $400-billion one. (To learn more, read You Don't Know Jack Welch and Economic Moats Keep Competitors At Bay.)
Ray Kroc – McDonald's
Ray Kroc straddles the fine line between CEO and entrepreneur, but for our purposes he'll be regarded as a CEO. In 1954, Kroc, then a milkshake machine salesman, was curious about what the McDonald brothers were doing to require twice as many milkshake machines as any other restaurant. What he found was a clean restaurant with a cheap, nine-item menu and almost no tables. Working class families would drive up, order their food and drive away with the meal in a few minutes.
Kroc was entranced and approached the brothers about franchising. It turned out that they'd sold a few franchises with mixed results, but they allowed Kroc to give it another try for 0.5% of the sales from franchisees. Kroc began selling franchises for $950 - an extremely low price - and collecting 1.9% of sales. 0.5% of this went to the McDonald brothers and Kroc struggled to make the remaining 1.4% cover the overhead.
Less than six years later, Kroc's parent company was on the edge of insolvency, despite strong sales growth at its franchises. Kroc wanted to keep good relations with the franchises. He wanted to treat the franchises like business partners, rather than milking them for income as some companies did - but he was going broke.
One of Kroc's managers came up with the idea of acting as the landlord for franchises. The parent company would buy prospective land and rent it to franchisees. This would also solve the problem of franchisees setting up helter skelter, sometimes infringing on each others sales territory. With a new subsidiary, Franchise Realty Corporation, the parent company started to see more revenue.
Keeping his franchise fees low, Kroc decided to use the inflow of cash to bring the same standardization to the hamburger as Henry Ford did to the automobile. Kroc opened Hamburger University to train operators in management and scientific precision. All McDonald's hamburgers would have the same diameter, fat content and amount of pickles, just as every outlet had the same basic menu and procedures. Kroc even opened an R&D department to look into food storage and other areas.
Kroc wanted all franchisees to focus on quality, service, cleanliness and value. But despite his exacting standards, Kroc didn't want to lose the entrepreneurial edge by restricting franchisees too much. Many of McDonald's game-changing ideas filtered up from franchisees trying different things, including national advertising campaigns, the Big Mac and the company's spokesclown, Ronald McDonald.
McDonald's went public in 1965, and the company quickly began to fill the domestic market. Kroc set his sights overseas, opening up franchises - and buying land - in Japan, Germany, London and almost everywhere else imaginable at the time. Everywhere McDonald's spread, Kroc instituted the same mix of standardized fare and local entrepreneurial spirit. Stepping down as president in 1968, Kroc watched McDonald's spread across the globe. Kroc passed away in 1984, one year before McDonald's entered the Dow based on the strength of its multibillion dollar real estate holdings. (For a look at some of the tactics used by unsuccessful CEOs read our related article Pages From The Bad CEO Playbook.)
The common link between Hock, Welch and Kroc is vision. All three saw a strong future for their companies, and were able to bring others on board to realize that future. This ability to both set and realize goals is what sets the very best CEOs apart from the rest. In a time when many CEOs are falling short of the expectations stemming from their compensation, it's refreshing to see that the right person can make a difference, no matter how big or small the company beneath him may be.