Critical Review of General Electric - Report Example

Introduction General Electric is certainly no longer what it was a few years ago under the dynamic and hard-driving leadership of Jack Welch. G.E. has a market cap of $169 billion but it had made huge bets in the financial sector which is not doing exactly very well for the last few years. As a result of this wrong bet, it is now scrambling to sell some assets and diverting cash away from dividends (Cox & Cyran, NYT). This is symptomatic of what seems wrong with G.E. today which is beginning to look like a poor shadow of its former self. It had been often compared to one of its rivals that can approximate G.E.s range of businesses in the aerospace, power generation and infrastructure sectors but with strong financial statements. That rival is United Technologies which has only $63 billion in market capitalization but has a very enviable healthy balance sheet. It is awash in cash and buying up assets which other companies are trying to sell, including those from G.E. itself. General Electrics example of an amalgamated business conglomerate with six divisions but several hundred individual business units under each division. Some experts are concerned it has become too big for one man to handle competently unless there is another executive in the mold of a Jack Welch, Jr. As a sample comparison, United Technologies returned 40% last year (includes stock price appreciation and dividends declared) while G.E. gave only a one-tenth of that amount. General Electric is under intense pressure from shareholders and stock analysts to produce the returns expected of it, a 4,000% increase in stock value over the 20-year reign of Jack Welch. General Electric today has clearly lost its footing, its firm grip on markets gradually eroded. It has ceased to be the financial juggernaut derived from its engineering expertise by venturing into so many un-related business areas that it has lost its core competencies in the process. Its much vaunted invincible market share has been torn to shreds by its lesser rivals. To better understand what is wrong with General Electric, it is best to re-examine its whole corporate strategy and structure in light of a changed economic environment. There is a debate going whether G.E. as a conglomerate is still valid as business model. In fact, experts think it has become an anachronism in todays globalized business environment. It is being increasingly viewed as a relic of a bygone era when more was better, that a company engage in unrelated business lines and come out a winner by exploiting certain synergies that can help whenever certain sectors of an economy are down and that this shotgun approach can help to diversify investment risks (Deutsch, NYT). General Electric grew rapidly in prior years pursuing this idea of empire-building, the belief that G.E.s management school can turn out managers good enough to manage anything thrown at them. Its portfolio of disparate and often unrelated products and services was seen as good hedge against economic downturns. Investors who wanted to diversify their portfolio risks only need to buy G.E. stock to achieve that objective. Even today, G.E. is a potpourri or hodgepodge of individual business units that manufactures aircraft engines, health imaging devices and power generators. It is a multinational in the true sense of the word too. This shotgun approach to doing business has been under criticism lately because it had sometimes failed to produce the promised synergies between business units. Secondly, there is a revival in the management concept of core competencies. G.E. today is still a market leader in many industries it is in but that lack of a central focus has withered away its competitive edge gradually. It is like a person who is doing multi-tasking which turns out to be not so very productive at all. Previously, multi-tasking by employees was hailed as a wonderful way to increase efficiency, which as it turned out, ends up a person doing nothing exceedingly well. General Electric shares had peaked at around $60+ in year 2000 and has stagnated since then between $30-$40 per share despite the best efforts of Jeffrey R. Immelt and his team. Discussion If there is one word to describe General Electrics actions today, it is defensive. It is no longer playing an offensive game in world markets because it had been hobbled by its huge bet on the financial market which had turned sour. At this point, it is still in search of a new strategy that will address the changed dynamics in the environments it operates in. For the mean time, it has to shore up its defenses by raising additional capital (Lohr, NYT) in private placement by Warren Buffett and an additional $12 billion in new share issuances last year. It reckons it has a total of around $90 billion in cash to play around with when the markets will turn around (Warren placed $3 billion plus G.E.s various credit lines with several banks plus its cash on hand) but this is quite uncharacteristic of General Electric which had traditionally relied on internally-generated funds for its own needs. This more or less matches total amount in outstanding commercial papers issued by G.E., sometimes as short as one month maturities. This was an unprecedented step made as an insurance bet against the probability that credit markets will dry up suddenly if there is another unexpected financial hiccup. However, this is a bit symptomatic of what ails G.E. today in that it has no clear-cut or strongly-worded strategy except a few statements about investing in growth areas like new products for the green movement. It has not crystallized what it wants to do about its organizational structure or the way it pursues business opportunities. What G.E. needs are new ways of looking at things besides acquiring new businesses and selling losing ones. It needs a paradigm shift. There is a certain disconnect between what GE is doing now (damage control) and the publicly-stated mission and vision of the company. Beyond this, it also needs to review how its strategy formulation and strategy implementation had gotten separated in the last few years (Grant 2005, p. 187). Even with todays remaining six divisions (infrastructure, industrials, commercial finance, GE Money, health care and NBC-Universal), it still needs to trim down. In other words, G.E. needs to reformulate its strategy and decide once and for all that it is no longer viable to be a conglomerate. The days of empire are over and it is best to start selecting the core areas in which it can compete effectively by disposing of non-core assets and businesses. It is only now that G.E. has finally tried to go past the shadow of Jack Welch whose influence lingers after he had left. Jack Welch is vehemently against breaking up GE and wants its present structure as a conglomerate (Schwartz, NYT, p. 3) which he had termed as virtual surrender of the very values he held dear throughout his stint at G.E. if the company is broken up. During his time with G.E., it had as many as 17 different divisions which got cut down to only six today. But this masks the several hundred businesses under this neat categories, actually a mishmash of different product lines and services. The culture at G.E. today is vastly different than the one under Jack Welch. It could be described as kindler and gentler under Mr. Immelt with his leadership style as more subtle if compared to Jack Welchs often abrasive style. Perhaps this is one of the problems to look at, how to motivate people to do their utmost. Under Mr. Welch, employees had worked in fear of being fired if they do not measure up. Any sub-par performance was reason enough to be shown the door and this had been one of the issues some investors did not like G.E. stock as it was perceived not a good working place under Welch (ibid. p. 3). But the bottom line is still stock price performance and G.E. failed in this regard. Jack may be feared but he got the job done during his tenure, keeping investors happy with returns not seen before or since. He was obsessed more with internal productivity gains by squeezing synergies out of every interlocking relationships with subsidiaries. He had also faced entirely different threats when he took over the helm from Reginald H. Jones in 1981. Back then, the main concerns were foreign competition and a bloated workforce which he had religiously trimmed down. The environment today is vastly different with globalization trends all over. The strategy at G.E. can be summed up in two words: technology and innovation. It is the two words that result in technical leadership which provides those high margins in the past and even today in some of the growth areas it had identified such as health care and renewable energy. G.E. had long left industries where there was price pressure and margins got thinner. By using technical leadership in industries it had chosen, it is possible to produce high-margin products, create new markets entirely and win by rewriting the rules of the game. However, it had gone slightly off-tangent in this regard by making a huge bet on the real estate market and losing big. It had strayed too far from its core competencies of aircraft engine manufacturing and other high-tech job orders that it had ventured instead into areas totally unrelated to its core businesses like consumer finance and entertainment. Ironically, the two areas of finance and entertainment were also the business lines where it was forced to take big hits by the billions in write-offs. On its core competencies like jet engines, it is in danger of being undertaken by smaller upstarts like United Technologies mentioned earlier. Anchored on its vision of technical leadership are services, customer focus, growth platforms and globalization. Each of them are linked ultimately to maintaining the technical leadership that G.E. is widely famous for. The company invests aggressively in research and development to create technical breakthroughs that redefine markets, bring higher margins and bring new products and designs to the consumer. Its obsession with innovation is the fear that todays innovations will become commodities next year that will erode profit margins and wipe out its technological advantages. Its services sector is more on after-sales service in the areas of power generation, locomotion, flight and delivery of medical imaging equipment. The idea is to help in the maintenance of them and earn money for the customer. Customers are treated as partners and not merely as buyers. G.E. looks at the whole world as its market and in 2007 foreign revenues exceeded domestic sales. Last is seeking new growth areas. SWOTT Analysis The primary strength of General Electric lies in its technical innovation achieved via heavy R & D expenditures. It has approximately about 2,000 people working in its R & D department working on a range of products using cutting-technologies. This is an advantage that cannot be matched by any company of any size and it intends to maintain this lead. The laboratory at General Electric probably contains products which it does not have immediate use for, such as the case of the “Silly Putty” years ago (Cohen 2006, p. 69). The silly product that originally had no practical use illustrates the three factors needed for innovation to push through and these are shared goals (common vision), tolerance for risk-taking, failure, strange and bizarre and lastly, to reward successful innovations. The global culture at General Electric long embedded being a multinational company makes it easier to implement corporate strategy worldwide. It is this ease and speed that is one of its core strengths as a business giant. Despite its size, G.E. has not lost its entrepreneurial spirit. The spirit of competition is alive and well at General Electric but what it needs are clear directions of where it is going today. That can come only from the top. Another strength of the company is the ability to bring financial resources to what it plans to do. Its size gives it ample financial resources to execute plans without being hindered by financial considerations of sourcing the capital to do it. Although it had to raise new capital lately from the hits it took in the financial markets, the company had historically been strong in regards to its finances. This can be shown by the excellent rating it gets from credit rating agencies that allows it to borrow money at favorable rates and even on short notice. GE Capital alone provides some 80% of the firms total financial assets that gives two advantages: it can engage in more R & D than its competitors without jeopardizing stability with long term investments and it does not rely on immediate profits (Motta 2004, p. 383). General Electric has an excellent reputation for quality products and services which is one of its strengths. Its brand name is also synonymous with innovation in the various fields it is engaged in and consumers look at the brand with trust and confidence. This is shown by the huge number of hospitals who bought and installed its medical imaging equipment today. The users (doctors and patients) ascribe a high approval and satisfaction of these products which they equate with quality and reliability coupled with G.E. customer focus and services. The company has an almost complete hold of the MRI (magnetic resonance imaging) equipment in hospitals today with the acquisition of three competitors (Cohen & Hanft 2004, p. 77). Along the line of pursuing emerging growth areas, General Electric was quick to jump into connecting computerized patient records among hospitals and health care practitioners. This will hopefully bring down costs and at the same time increase the quality level of health. This ties up nicely with G.E.s dominance in medical equipment by providing a more efficient way to process patient records as well but the main problem is what standards to use. Either the company can use proprietary standards or open industry standards (Wilkinson, NYT). A prime weakness of General Electric is the seeming lack of focus with regards to its core mission. It needs to re-focus itself on its core competencies as a business empire such as exploiting its technological advantages to the maximum without the distractions of non-core businesses. Further, it must seriously consider the option of going in the opposite direction, by divesting itself of unprofitable businesses. It must get out of the industries in which it is not a clear leader or a strong number two. This will help to conserve its strained financial resources at the moment when storms are buffeting the financial markets and might produce unexpected events. It is now high time for a strategy of consolidation rather than the unbridled expansion of the past. Its considerable war chest should be held in reserve in the meantime but any new acquisitions must make sense with regards to its core areas of business (Schwartz, NYT p. 1). Lately, it had spent about $75 billion in various acquisitions related to water treatment, renewable energy, aviation and health care but I think the time has come to seriously consider the suggestion of some analysts for G.E. to be broken into a manageable business enterprise. It had steadfastly refused to consider options of breaking up and wants to stay a conglomerate forever despite changing times that call for smaller but more nimble companies. It still has an expansionist mindset in a changed environment which calls for more focus on certain areas. What Mr. Immelt had done so far was imitate Mr. Jack Welchs moves, which was to purchase some companies he finds attractive and sell all those losing units such that both can claim that they had changed the company. What had probably changed is the composition of the firm in terms of its business units but not the mindset of those running it. In retrospect, Mr. Immelt was chosen because his style resembled that of Jack Welch himself under whom he had worked for 25 years so it is only understandable if he ends up imitating him. It had left him with an impression of Welchs management style which he cannot shake off despite some honest claims to the contrary. Welch had been his mentor and he the diligent student. Mergers and acquisitions can be fashionable for a while but it does not make sense for a business as big as G.E. to keep on expanding without rhyme or reason. General Electric has even modified its approach to business expansion in general by showing a willingness to hold less than majority control of joint venture agreements. This was exemplified by its previous dictum of not doing a deal if there was no full control but it still pursues a policy of expansion by changing its corporate philosophy in this regard. This shows its mindset has not changed. For example, its commercial finance division alone is composed of 11 separate businesses, each one of them big enough to be in the Fortune 500 as a separate entity. And its real estate holdings is worth more than $50 billion and one often wonders what G.E. is doing in an area so far away from its core competence of manufacturing and technical innovation. Conclusion General Electric today is at an important crossroad in its corporate life. It has to find new ways of doing things such as generating new revenue streams from emerging growth areas of the world economy. The important thing to do first is to consolidate its position in the face of the global recession as majority of its revenues are now from foreign sales. The US domestic market had now been relegated to second place in G.E.s order of priorities as what Mr. Immelt himself had remarked “that the US economy is still important but not what it was five or ten years ago.” There is now a dangerous dichotomy that cropped up which is the idea that what is good for General Electric may no longer be equally good for the US economy. It used to be that what is good for America is also good for General Electric. The many industries it is engaged in is truly eclectic and G.E. as a company in itself is a microcosm of what happens in corporate America as a whole. In fact, G.E. is considered as a good proxy for the entire stock market as far as portfolio diversification is concerned. However, the company must abandon its corporate philosophy that bigger is better and that more acquisitions are beneficial to the mother firm. Its strategy of diversification must now be highly selective and it must embark at the same time a strategy of disposition of non-core business units, more so of units which are losing money and does not fit into the overall core competence of G.E. It requires drastic action and a paradigm shift in the way GE management views its role today. Reference List Cohen, W. A. (2006). Secrets of Special OPS Leadership: Dare the Impossible, Achieve the Extraordinary. New York, NY: Amacom Division. Cohen, A. B. & Hanft, R. S. (2004). Technology in American Health Care: Policy Directions for Effective Evaluation and Management. Ann Arbor, MI: University of Michigan Press. Cox, R. & Cyran, R. (November 12, 2009). “As GE Struggles, A Rival Steps Up.” The New York Times. Accessed November 17, 2009 from http://www.nytimes.com/2009/11/12/business/12views.html?_r=1&scp=1&sq=General%20Electric,%20strategy&st=cse Deutsch, C. (April 08, 2008). “General Electric Company.” The New York Times. Accessed November 17, 2009 from http://topics.nytimes.com/top/news/business/companies/general_electric_company/index.html?inline=nyt-org Grant, R. M. (2005). Contemporary Strategy Analysis. Hoboken, NJ: Wiley-Blackwell. Lohr, S. (October 01, 2008). “Buffetts Bet on GE: Almost as Good as a Bailout.” The New York Times. Accessed November 17, 2009 from http://www.nytimes.com/2008/10/02/business/02electric.html Motta, M. (2004). Competition Policy: Theory and Practice. Cambridge, UK: Cambridge University Press. Schwartz, N. D. (July 22, 2007). “Is G.E. Too Big for its Own Good?” The New York Times. Accessed November 17, 2009 from http://www.nytimes.com/2007/07/22/business/yourmoney/22ge.html Wilkinson, P. (October 29, 2009). “G.E.s Bid to Connect Computerized Health Records.” The New York Times. Accessed November 18, 2009 from http://community.nytimes.com/comments/bits.blogs.nytimes.com/2009/10/29/ges-bid-to-connect-computerized-health-records/?scp=4&sq=General%20Electric,%20strategy&st=cse Read More