(FORTUNE Magazine) – JACK WELCH and Roberto Goizueta don't know each other well--they see each other three times a year at meetings of the Business Council, and they exchange birthday cards in November. They have the kind of cordially formal relationship that comes naturally to members of the business gentry. And yet by the time they were well into a wide-ranging, two-hour conversation with FORTUNE editors, the chief executives of GE and Coca-Cola were finishing each other's sentences. Perhaps there really is a particular cast of mind that leads to the kind of management that enriches shareholders. Herewith, excerpts from our conversation with the two heavyweight champions:

FORTUNE: A lot of chief executives of big companies in effect flunked the Eighties. What went wrong?

Welch: I think the leaders you see today have a feeling that the day they get the job is the beginning of a new job. The beginning of a job. Without trying to make a broad-brush statement, a lot of the people who got the job in the late Seventies and the Eighties thought it was the culmination of a career.

Goizueta: If you look at the major companies, there was a sense of arrogance in all of them, whether it was GE or Coca-Cola or Kodak or any of them. I think in our predecessors, any insensitivity to the past was almost viewed as disloyalty. They wrapped themselves in the Coca-Cola flag or the GE flag or you name it, in order to prevent change from taking place.

FORTUNE: How did you avoid that trap?

Welch: I had the luxury of being an insider who ran high-growth businesses like plastics, or saw opportunities in wonderful things like GE Capital, and then had big, bureaucratic, hundred-year-old businesses reporting to me. I saw businesses that were No. 5 in the marketplace, not even No. 3, that we were holding on to as a shrine to our past.

GE trained me with good businesses and bad ones. I always felt sorry for the people in the bad ones because they never saw a good one. All they really did was work in the vineyard they were sent to toil in. They always compared themselves with their direct competitor. So if their returns were nine and their competitor's seven, they were doing very well. The fact that they should be getting 15 was difficult to comprehend.

Goizueta: My predecessor, Paul Austin, was terrific. He had problems at the end, but he did what it took: You'd plant your flag in a new country every time you needed to grow. We ran out of countries, so I had to do something different. Nobody had taken the time to explain what our cost of capital was, that we were not reinvesting in the business, that we were paying out in dividends 60-something percent of our earnings. When you explain those things, intelligent people will eventually come to their senses. Now once in a while you have to have a public flogging in the town square. We had to do that in a couple of instances. And I must say, the sound of the whipping, more than the hurt--the sound was what was important.

FORTUNE: How have you gone about creating market value--that is, putting wealth into the hands of shareholders?

Goizueta: Back in 1980 we made a study of the returns we were getting from our fountain business. And we found out that we were making much less than our cost of capital, which at that time, with no debt, was about 16%. So what we thought was a great business was, in fact, a lousy business. As a result of that, a number of things happened. We stopped buying all these expensive five-gallon, stainless-steel containers. We started delivering to McDonald's in big tank trucks, as opposed to thousands of little 20-gallon containers. So we eventually improved our return. We also found the same thing with our wine business [which was eventually sold]. Even in the best of circumstances, we were not earning the cost of capital. I didn't know anything about EVA or anything, but I knew something very simple, and that is: The way to become richer is you borrow money at a certain rate and invest it at a higher rate and pocket the difference. So we went very methodically over much of our business.

Welch: I would say that our whole thrust here was to get into the right businesses, find businesses with growth, get an organization that could respond to change quickly, and get as much out of the capital we employed as we possibly could. We didn't understand EVA or MVA or any of these other things, okay? But if you look at the Cokes and the GEs of the world, they've both gotten a lot out of their capital. You look at some companies that have had more difficulties, they've been investing a lot of capital without getting much out of it. So using capital efficiently is clearly a driving force.

FORTUNE: One of you sells essentially one product; the other sells thousands. One works to unload capital-intensive companies; the other uses them as a strength. One of you sells image; the other, performance. How do all these differences change the game of wealth creation?

Goizueta: We don't know how to sell products based on performance. When we had to sell boilers or desalting plants based on performance, we didn't know how to do it. Everything we sell, we sell on image. That's the reason we did so well with the wine business. Had it been a good business to start with--I mean, if we had found a way to store wine for 12 years with a return--we would have done very well. We did very well in selling it. But then we can spend $400 million on advertising and not bat an eyelash.

Welch: People say people are important in every business. But in a multibusiness company, where my knowledge of the business is far less than Roberto's knowledge of his company, I've got to have real experts and real good people to run businesses. Now, he has to have good people in his company too. But if I don't have them, the game's over. If he doesn't have them, he knows where they're not good.

FORTUNE: You both took over at about the same time, in 1981. Were there particular circumstances of that time that made what you did possible, or harder?

Welch: I think we may have faced different worlds. We were in a period of very high inflation in the late Seventies. We were dealing with Asian threats across every business. It was a reminder that we'd better get a lot better, faster. So I guess my message in our company was, "The game is going to change, and change drastically." And we had to get a plan, a program together, to deal with a decade that was totally different. The Japanese had moved since the late Sixties and early Seventies from poor quality and low price to low price and high quality. And their plants and their quality and their discipline were overwhelming us in some businesses.

Goizueta: I think in our case the situation was much more internal. We really lost focus on who our customer was. We felt our customer was the bottler, as opposed to the McDonald's and the Wal-Mart. So consequently, we were being either cheerleaders or critics of our bottlers. But hands off; we didn't have anything to do with it--that was their job. Item two, we really got to believe inside the company what was portrayed in the press as the graying (or the maturing) of the soft-drink industry. Also, we were terribly slow.

FORTUNE: Both of you said, in effect, "Something is terribly wrong here, and the world is changing, and we're going to change the way we run these businesses, and here's how we're going to do it." You spelled it out in your annual reports and to your employees, and both of you were largely ignored outside your own companies. Why?

Goizueta: I think the worst thing we ever had to do was to establish a sense of direction...

Welch: The game plan...

Goizueta: ...so that they know where they're going. Then you can let them have a lot of freedom. But if they don't know where they're going, I mean, you don't want them to get there very fast, I'll put it that way.

Welch: Well, in hindsight, if there's a criticism [at GE], it was too evolutionary. It was perceived on the outside as revolutionary, but if you want to criticize what the hell went wrong, I didn't do it fast enough. We didn't get at those things fast enough. It took us a decade to do a lot of the things we had to do.

FORTUNE: One thing the two of you have in common is that you seem personally demanding. Really, really demanding. True?

Goizueta: I hate to lose. I'll start with that one. I don't like to lose. I'd rather not play, you know.

Welch: No, I'd rather play.

Goizueta: And lose?

Welch: I'd rather play. But I like to fight like hell before I lose.

Goizueta: As it has been said, the way to win against Bobby Fischer is, don't play him at chess.

Welch: Pick another game. I think that's important in business. Don't play with businesses that can't win.

FORTUNE: You could argue that these are the two most global companies based in America, certainly among the most global in the world, yet the way you operate globally is very different. Right?

Goizueta: Soft drinks are very much a local product. I'd love for the Chinese to arrive in New York and say, "My goodness, they have Coca-Cola here too," you know.

Welch: We compete with giants. So we have an enemy, if you will. We compete with companies and governments.

Goizueta: That's great. If you don't have an enemy, the best thing is you create one.

Welch: You've got to have one.

Goizueta: You have to have one.

FORTUNE: Why?

Goizueta: That's the only way you can have a war.

Welch: You have to rally around a benchmark. There has to be a benchmark.

Goizueta: He's exactly right.

Welch: We're playing in a game where we'll show up and we'll be selling an engine against another engine competitor. Now, to get the deal, you've got to have performance and all the other things, but you'd better have low cost. And as you go around the world, and you want to sell turbines to developing countries, you'd better have a low cost base. Because in the end, you could have performance, you can have quality, but you'd better have cost. In our game, you have to have cost, and we've got to be more productive. That is a driver that you have to keep benchmarking.

Goizueta: Take, for example, this private label [the emergence a few years back of aggressive, store-brand soft drink marketing stratagems]. We were too slow to react in Canada because, you know, we're Coca-Cola; we can charge a little more. But the consumer may not want to pay more for Coca-Cola. Historically, our business in Germany was built by selling Coca-Cola at a premium. That no longer exists. Now we have reduced costs, and we're eating up the private-label business, and so is our main competitor [Pepsi]. Because now, if they lower the price, so can we.

Welch: Take a look at what a refrigerator cost 15 years ago, and take a look at what an automobile cost 15 years ago. A refrigerator sells for just about the same price as 15 years ago. An automobile is 22 times, or whatever it is. We've had to fight in competitive industries like that every day and grow margins and grow returns. Our price index for the last seven years is probably negative as a company, and yet our profits have grown at double-digit rates. That comes from using capital more efficiently, using people more efficiently, from systems behavior.

Goizueta: A two-liter Coke, per ounce, is pretty much like it was--a little over a penny.

FORTUNE: You both are strong advocates of the kind of business you're in: GE, the diversified portfolio; Coke, the one-trick pony. Why?

Goizueta: Our return on capital is almost 33%, about three times our cost of capital.

Welch: All our industries don't grow at the same rate. Our plastics business might be more like Roberto's business in terms of top-line growth. But in our other businesses, it allows us enormous staying power. For example, next year we'll go from A to B. I think I know how I'm going to go from A to B, and I know the company in total will get from A to B. I'm not sure the 30 or so businesses are going to get from A to B exactly as they all planned it, but I've got enough muscle that I can get from A to B.

If one of the businesses is going to be weak, and it's a great business but it's in a difficult moment, I can support it. If I'm a single-product guy in a weak business like that, in a business that cycles dramatically, I get whacked. So the staying power that our businesses have allows us to stay for the long haul.

Goizueta: To GE, it is different businesses. In our case the hedge comes from different geographies. Different countries.

FORTUNE: What would happen if you were to swap jobs? Would you enjoy it? Would you be good at it?

Goizueta: I know I wouldn't. Jack has been in the good businesses of GE and the bad businesses of GE. If you take somebody who's only been in a good business...It's just like when somebody in our business tells me, "You know, he hasn't had a failure yet." Watch out.

Welch: I happen to like the diversity, so I like being a little bit of everything, okay? On the other hand, it would be fun to run a machine as great as he has built. That'd be exciting. I like advertising. I like promotion. I'm the advertising manager of our company. I love it.

Generally, though, I wouldn't like a single-product business. One of the things I sell people on why you join GE is the stimulation of playing many different fields.

FORTUNE: Tell us about how you have approached the choice of a successor.

Welch: The challenge we have is to put lots of people in lots of different jobs, which we are doing, and have the board and the senior management team look at them and see how they perform under all kinds of different circumstances. It's interesting. You see people in different periods. Some people can do just fine as long as the growth curve's growing, but when all hell breaks loose, you see them change their whole personality. Some can adapt to any situation. You've got to watch all that. Then take a guess and pray you're right.

FORTUNE: What, specifically, are you looking for?

Goizueta: I don't think any of us can say we know beforehand.

Welch: No, but I think I know. I want somebody with incredible energy who can excite others, who can define their vision, who finds change fun and doesn't get paralyzed by it. I want somebody who feels comfortable in Delhi or Denver. I mean, somebody who really feels comfortable and can talk to all kinds of people. I don't know what the world's going to be; all I know is it's going to be nothing like it is today. It's going to be faster; information's going to be everywhere. I've seen our jobs--I'm sure Roberto would say the same thing--my job is three times as fast as it was.

Goizueta: Oh, God.

Welch: I mean, the activity, the action, the pace, from what it was in '80 till now, is not hardly even the same game.

Goizueta: I couldn't agree with you more. You've heard me say energy is No. 1. I will add two more qualities. I think integrity and intellectual courage are extremely important. That somebody who really has the intellectual courage to go on and do something. I think then you have to take the little jump in faith or the big jump in faith because, after all, you are judging somebody by...

Welch: the past...

Goizueta: So you take that little jump in faith to see how he is going to be in the future. If I were to judge by who is the fellow who does his present job the best, it's really nobody but my driver. But you know, I'm not going to put him in...

FORTUNE: What does the future hold for Coca-Cola and GE? What's on the agenda for the rest of the decade?

Goizueta: One advantage when you're No. 1 or 2 in an industry is that you can really have a hell of a lot of say in what the future's going to be like by what you do. I'm not a believer in always forecasting the future. But if you take actions that can create that future, at least shape it, then you can benefit from it. For example, time and again I have to correct folks in our company who say, "We grew our volume at 10%, and the industry grew at less than that." I say, "Well, what share of the industry do we have?" "We have 60%." I say, "Well, damn it, we are the industry. Why can't we grow faster?" It's creating what it can be, as opposed to what it is.

FORTUNE: So we can look for Coca-Cola to stay in its core business for the rest of the decade. How much will GE's business mix change?

Welch: I think, without question, that financial services, because of the opportunities available, will become an increasing mix of our business. That is absolutely going to happen. Not 70/30, but it'll be more than 30% or 33%.

Goizueta: That's interesting. I would never find excitement in the financial services. I would like to produce something that I could touch.

Welch: Our challenge in life is to take industries that may not be perceived as growth industries, pick the growth elements of those industries, and get on them. For example, plastics. We are on every PC that's being sold today, with a high-margin product. So plastics is growing. Take retail lighting. Going with the winners--having Wal-Mart, having the winners in distribution. That's the game. The point is you can take what seemingly looks like mature industries and tie your horse to winning elements.

Goizueta: I'd like to say the day that faucet in your kitchen sink is used for what God intended it to be used, then we will have a mature [soft drink] industry. But until that time arrives, there is room for growth.

Welch: The facts are, it's limitless. Our productivity is at the beginning stages. There's so much waste. There's so much more to get, it's unbelievable. And somehow or other, people think all these things are finite.

Goizueta: If you go back in history, all the changes take place when a new prince is made king. And then the king kind of works hard at keeping things the same. Now, GE and Coca-Cola--we're trying to change every day. The king of Coca-Cola and the king of GE are trying to change the thing every day because if we don't change, we're going to be left behind.

Welch: It's the biggest challenge we have. I'm always scared, okay? It's true. And [Roberto], I think you are probably. I mean, you're always scared.

Goizueta: They say, "Do you sleep well at night with all the competition?" I say, "I sleep like a baby." They say, "That's wonderful." I say, "No, no, I wake up every two hours and cry." Because it's true, you know. You have to feel that restlessness.