Key Economic Elements of General Motors' Perfomance - Case Study Example

General Electric Company XXX XXXX Baker College for Graduate Studies Abstract . . . . . . . . Introduction . . . . . . . Market . . .. . . . . . Demand and Supply . . . . . . Determinants . . . . . . . . Production . . . . . . . Market Structure . . . . . . Pricing . . . . . . . . Pricing and Factor Markets . . . . . Pricing Strategies . . . . . . Capital Budgeting and Risks . . . . . Government . . . . . . . Conclusion . . . . . . . References . . . . . . . Abstract . For over one hundred years, General Motors has been one of the leading lights of American business. In the last few decades, the company has ventured more aggressively into overseas markets. This paper focuses on key economic elements that influence the performance of a company. While it is recognized that economic factors can be critical, the decisions that a company makes, in terms of pricing strategy, which markets to operate in, and what kind of products to make, are all important. GE’s success has been in part to the company’s heavy investment in research and technology along with the close connection between research and market needs. Introduction General Electric Company (GE) became storied for its success under Jack Welch. The company, founded in 1879, is a diversified company dealing in products ranging from appliances. During Welch’s “tenure at GE, Welch produced more money for shareholders than anyone else except Bill Gates at Microsoft (Byrne, 1998). The market capitalization of GE shares went from 12 thousand million dollars in 1981 to 500 thousand million dollars by 2000 (Multinational Monitor, 2001; cited in Franke et al. 2007). Today, while specialization is prized by some companies, GE takes pride in the range of business areas in which it excelled for so long. As the company notes on its website, “GE is a global infrastructure, finance and media company taking on the world’s toughest challenges. From everyday light bulbs to fuel cell technology, to cleaner, more efficient jet engines, GE has continually shaped our world with groundbreaking innovations for over 130 years” (GE www.ge.com). Though the company’s reputation has been based in large part on the innovation that has come to characterize its products whether in the field of wind turbines or brain scanners, the company also made great inroads into the financial sector. In fact, Last year the outfit generated a profit of $8.6 billion, or almost 48% of GE’s total earnings. By exploiting its AAA rating, GE Capital was able to raise capital cheaply and then deploy it to fund everything from commercial-property and home loans to credit-card lending and insurance. But the chaos triggered by the credit crunch has taken the shine off GE’s cash machine, which has seen some of its property and other loans turn sour. Announcing its decision to downgrade the business, S&P predicted rising credit losses in coming months in several areas of GE Capital’s portfolio. (GE A Slipping Crown 2009). GE, in particular, under Jack Welch, was a company that was focused on success despite what seemed like a sprawling business. In fact, “A related aspect of Jack Welch's leadership was to set goals that seemed difficult or even impossible (Locke, 2000). He required that every business in GE's portfolio be number one or two in its industry-in the United States, and later in the world as a whole” (Franke et al. 2007). And even though GE had a long run of success, the company’s current problems reveal clearly that past success cannot always be counted upon to guarantee success now or in the future. As with many other top-notch companies that have either gone bankrupt or are struggling, GE has not been immune to the downturn in today’s market though perhaps the reason the company is still around is precisely because of some of the successes of years past, which have provided some cushion in these bleak times. Market The three areas where GE has tried to hold the strongest stake are those of infrastructure, finance, and media. With globalization driving people towards better access to finance, healthcare as well as information and entertainment, GE has tried to ensure that those who can benefit from the company’s services are well served. As noted above, GE Finance has emerged as a strong partner of businesses and consumers alike, and company’s ownership of NBC news, as well as production and marketing, truly define a company with tentacles that reach clear across the globe. GE is a true multinational corporation. The sheer range of the products it offers allows the company to have something of potential benefit for consumers and companies around the world. Even in Africa, which is not generally considered a lucrative market, GE has been able to access some of the countries with health-related equipment. Without a doubt, however, in recent years, China has emerged as one of the key markets for companies such as GE. But other countries such as Malaysia, Indonesia, the Philippines, and Vietnam, are also served by GE. Demand and Supply Because of GE’s versatility and high level of expertise, the company is able to go where its services are most needed and to deliver the kind of high quality that ensures that it can garner more and more clients from the same region. For example, GE has been able to supply to East Europe and China some of the infrastructure and other services that they need, making the company’s presence in these markets an increasingly important and potentially lucrative one. Since Eastern European nations were able to escape from the influence of the Soviet Union in the 1990s, they have been eager to catch up on the kind of development that they missed during those repressive years. But the kind of infrastructure projects that Eastern European nations, including Hungary, Latvia, Poland, Romania, and others have on their drawing boards require a great deal of money. While many American financial institutions have shied away from the Eastern European market, in the past 15 years, GE Money has established itself as a coming force in emerging Europe. It now has a presence in eight countries (the Czech and Slovak Republics, Hungary, Latvia, Poland, Romania, Russia and Turkey) achieved primarily through acquisitions and strategic partnerships -- a policy it has replicated throughout its international businesses. "We've grown through 90 acquisitions," says Dave Nissen, chief executive and president of the firm -- and in a relatively short amount of time. "GE Money didn't really exist outside the US until the early 1990s so it's a relatively young business," he adds. (GE Money 2008 ) To put matters in proper perspective, while GE Money had a total asset base of $2 million in 1999 in Eastern and Central Europe, in 2008, the figure was $23 biillion (GE Money 2008). The company is gradually moving away from consumer-oriented services such as credit cards and mortgages and making inroads into lending funds for small and medium-sized companies as well as providing finance for infrastructure projects. In China, among the wide range of products GE has delivered to the market is a locomotive that has been billed as the most advanced of its kind, in terms of fuel efficiency and low emissions. The company has also been commissioned by China Railways to modernize old locomotives and introducing GE technology such as the TRIP Optimizer to lower fuel consumption. The company’s ability to exceed expectations, such as developing the locomotive system three months ahead of schedule, certainly helps it to maintain a sterling reputation among clients. "Our customer MOR sought a product that would significantly improve hauling capability and running speed on the China mainline, while at the same time reducing emissions to meet increasingly rigorous Chinese environmental requirements," said Tim Schweikert, President of GE Transportation China. "The locomotive they will receive will meet and exceed those requirements" (GE Transportation 2008). Determinants . GE is not a charity. The company is not in the business of entering new markets simply because it is possible to do so. Rather, it needs to determine whether the determinants for profit exist, including whether the products in question can be produced and delivered at a cost that makes it worth the company’s while. Also, countries in Eastern Europe are at the beginning stage of their development, meaning that GE could have a long-standing relationship with them should the company succeed in meeting expectations. Likewise, China is at the early stages of a massive boom that will continue for decades, meaning that any investment the company makes in these early days is certain to be recovered over time within the market in question, whether Eastern Europe or China. Production The heart of GE’s excellence in producing goods that answer to the needs of their clients is the GE Global Research Center headquartered in Niskayuna, New York State. Researchers in the center in the United States along with their counterparts around the world, work to answer to the real challenges facing businesses and governments around the world. This practical edge to the research also means that the company ensures not only that the technology that comes out of the laboratories of GE are sound but also that they are cost effective. As noted on the company’s website, “GE Global Research has been the cornerstone of GE technology for more than 100 years. We are one of the world’s largest and most diverse industrial research labs with a presence that spans the globe. We have close to 2,800 of the best and brightest researchers spread out at four multi-disciplinary facilities around the world. Headquartered in Niskayuna, New York, we also have facilities in Bangalore, India; Shanghai, China; and Munich, Germany. We’re delivering the innovations and breakthroughs that are driving growth for GE’s businesses and revolutionizing markets. We believe “what we imagine, we can make happen” (GE Global Research Centre). It might seem baffling that GE is able to handle such a wide range of businesses and to maintain the kind of excellence that has reflected in the company’s long standing profitability. But more than just having the ability to produce products at the right price for clients, GE invests in research and development but the company does not maintain an ivory tower mentality. Rather, As Edelheit (2004) reports, “Business and economic realities have driven GE's R&D for 111 years. Its funding model has been an important driver of these realities, most recently with research focused on helping businesses to win market share with next-generation products. … Game-changing technology is a primary goal, as is the striving for the proper balance for corporate R&D between being an insider and an outsider in all technologies. And driving all of this are the passions of the lab's leaders” (Edelheit 2004). The company has been driven by technology in more than 100 years of its existence and has more than 15,000 people in research and development. Not surprisingly, the company registered 1400 patents (Edelheit 2004). Even though the company is over a hundred years old, management like to think of it as a high-tech growth company. This means that the company realizes the need to move products to the marketplace at an ever increasing pace even as it needs to be aware of the “pressures of cost reduction, competition and globalization…Twenty years ago, technology was performance: How do you get an extra thousand pounds of thrust from a jet engine? How do you get an extra 0.5 mm of resolution out of a CAT scanner? How do you get another few degrees performance from a plastic? That's what research labs did. That's what GE's lab did” (Overheit 2004). In recent years, as the need for speed has become equally as paramount as performance (along with competitive pricing and superb quality), the company has changed the focus of its research from primary research and Nobel prize oriented research and dependence on government grants to a model in which businesses fund the laboratory researches. At the most basic, this means that the laboratories need to produce the kind of products that would turn a profit if they want to survive themselves. As such, “What happened instead was that every scientist became a salesman. He went out into the divisions to try to find a contract here and there. In this way, the lab managed to survive through the 1980s, although not very strategically” (Edelheit 2004). While the 1980s model was a good start, it needed to evolve and indeed, it became much more focused and strategic. The new questions R & D needed to ask were: “How do you help the businesses? How do you become vital to the businesses with next-generation products that will win market share?” (Edelheit 2004). To find the kind of products that would become game-changers and get GE at the forefront of the market, “You are better off [with] your current product lines, either extensions or cannibalization, or something closely related, so that you can get the scale you need to grow from, say, $20 million to several hundred million quickly, which a venture capital model doesn't necessarily require” (Edelheit 2004). Because of the solid research that encompasses product quality, cost, and other factors, GE has come to be a trusted leader and partner with foreign businesses and governments alike. Market Structure On the surface, GE, which owns National Broadcasting Corporation in the United States, seems to have a dizzying number of businesses, making the issue of segmentation potentially confusing. At the heart of GE’s business, however, is the company’s roots, which is in electricity. The company has leveraged this connection to electricity to take an interest in innovating in any area that could be somewhat connected to electricity. As noted by Wright’s Report, General Electric’s main area of business activity includes the development and manufacture of a large number of products “for the generation, transmission, distribution, control and utilization of electricity. The Group's operating segments are Infrastructure, Commercial Finance, GE Money, Healthcare, NBC Universal and Industrial. Its products and services ranges from aircraft engines, power generation, water processing, and security technology to medical imaging, business and consumer financing, media content and industrial products… It operates in North America, Europe, Asia and South America. In 2007, the Group acquired Whatman plc. and Vital Signs Inc., a supplier of medical products and technologies, Merrill Lynch Capital and CitiCapital” (Wright’s Reports 2009). GE is a quintessential American company but it is one that realized that the changes that had been taking place gradually around the globe in the form of better communication and easier transfers of wealth, people, and technology, could translate into business opportunities. In fact, “GE's 1990 acquisition of Hungarian lighting company Tungsram was the first big move by a Western company in Eastern Europe. Now, after buying Thorn EMI in Britain in 1991, GE has 18% of Europe's lighting market and is moving into Asia via a joint venture with Hitachi. As recently as 1988, GE Lighting got less than 20% of its sales from outside the U.S.” (Stewart 1993). This was in 1993. In 2009, GE is all over the map and with its research centers spanning different continents, the company is able to connect with the people and the markets that it aims to serve. Pricing General Electric has generally dealt in big-ticket items such as turbines and railroad systems, which involve building relationships with governments or businesses with solid financial backing. In recent years, however, the company has sought to balance this strategy with products that are not aimed towards the high end in terms of cost. One area in which GE is making this change in strategy is that of the health equipment and technology sector which is a $17 billion a year business. As Lohr (2009) points out, “The hospitals and clinics that buy such sophisticated and costly equipment are reducing capital spending in the downturn. In the first quarter, revenue for G.E.’s health care business fell 9 percent, to $3.55 billion, and its operating profit fell 22 percent, to $411 million” (Lohr 2009). This is not to say that the government is giving up on the high end of its business. The company aims, however, to be broader in “terms of price points and offerings” (Lohr 2009). . Factor Markets A factor market is defined as a market in which factors of production are bought and sold, for instance, the capital market or the labor market (Factor markets http://dictionary.bnet.com/definition/factor+market.html). GE is able to leverage the services of thousands of highly qualified individuals to bring to market the kind of leverage that is likely to put the company in good hands for some time to come. Government GE’ longstanding success does not mean that the company is exempt from normal government oversight and regulation. For example, in 2005, when GE sought to merge with Honeywell, the Court of First Instance of the European Communities voted against the company’s appeal to an earlier decision that practically blocked the deal, a deal that had been approved in the United States. The deal, worth $42 billion would have created the largest industrial company in the world. Two broad reasons for the rejection of the deal were those stemming from the potential vertical effects arising from the merger and the so-called conglomerate effects. Vertical effects (such as foreclosing competitors from the market) typically arise in mergers between companies that operate at different levels of the production or distribution chain (here, for instance, GE's engines and Honeywell's engine starters). Conglomerate effects may result from the aggregation of competitive strengths in different markets that are more or less closely related (typically portfolio power or the accumulation of technical advantages and of economic and financial strength in the merged entity) (GE appeal ruling raises bar for merger control. 2006). The potential conglomerate effects were based on those areas of the two companies that did not overlap and that would have meant that GE could become even stronger from support gained from Honeywell in particular in the financial and commercial fields. Conclusion General Motors has been affected by the downward turn in the economy but the company has a good, solid background that will help it bounce back. Also, the fact that the company is considering a wider range of price points means that it can cater to a wider range of companies; in addition, even though GE’s research and technological innovation may arise from solving a particular problem for a particular company, the company, which maintains a formidable roster of patents, is often able to extend the application of products from one area to another, thus creating benefits far in excess of what might have initially been anticipated. The company’s forays into innovations in energy continue to attract attention and it is likely that the company will play a major role in overcoming the dependence that America and the rest of the world have on oil. References Edelheit, Lewis S. Jan/Feb 2004. Perspective on GE Research & Development. Research Technology Management, vol. 47 no 1, p. 49. Factor markets http://dictionary.bnet.com/definition/factor+market.html [Retrieved June 1, 2009] Franke, Richard H. et al. (2007). General Electric Performance over a Half Century: Evaluation of Effects of Leadership and Other Strategic Factors by Quantitative Case Analysis. International Journal of Business, vol. 12 no 1, p 137. GE appeal ruling raises bar for merger control. Feb. 2006. International Financial Law Review, p. 1. General Electric: A Slipping Crown. (2009). The Economist, Mar 13th http://www.economist.com [Retrieved May 29, 2009] General Electric – Company Profile Structure. http://wrightreports.ecnext.com/coms2/reportdesc_COMPANY_369604103 [Retrieved June 1, 2009] GE Global Research Center. http://www.ge.com/research/　「Retrieved June 1, 2009」 GE Money: Feeling the GE Force. (Jan 2008). Euromoney, p.1. GE’s China Factor/Country Emerges as Major Market for Engines, Services. (2003). Cincinatti Post, Nov 15. GE Transportation: First of 300 GE China Mainline Locomotives to Arrive in China. . (2008). Life Science Weekly, Sep 2, p. 4074. Ihlwan. Moon. 2009. What GE Capital Learned in Korea.  Business Week., Apr 27, p. 46 Lohr, Steve. (2009). In Strategy Shift, G.E. Plans Lower-Cost Health Products. NY Times, May 8. Stewart, Thomas A. 1993. Welcome to the revolution. Fortune, vol. 128 no 15, p. 66. Read More