Jeff Immelt Company and General Electric Company - Assignment Example

Jeff Immelt Company Case Study Table of Contents Corporate Information of GE 3 Answer 3 Answer 2 7 Answer 3 11 References 15 Corporate Information of GE General Electric Company is a conglomerate that manufactures industrial equipments, offers licenses, and lends money. The company generated a net income of $4.5 billion, which reveals 18 percent increase compared to previous quarter. The earnings per share of the company were expected to be around 43 percent. The company is facing fiscal uncertainty due to slowdown; still Immelt anticipates growth in the fourth quarter. The study describes the strategic position of GE during the leadership of Immelt, specifically during 2009. Appropriate theories and approaches have been utilised to assess them. Answer 1 The capabilities and the resources which assist the firm in getting a competitive advantage over its competitors are known as its core competence. The core competencies differentiate the competitive advantage and also assist in reflecting the personality (Hoskisson, Hitt, and Ireland, 2008, p. 104). According to Prahalad and Hamel (1990), core competence of the firm might range from harmonizing the technology streams to delivering value. It depends on the industry the company is in and the products that it manufactures. For example, Sony core competence is to bring about miniaturization to the products that it is manufacturing. Core competence of the companies in case of communication, commitment, and involvement are also seen in companies. Core competence is also regarded as collective learning because it coordinates multiple technologies and miscellaneous skills of production. The core competencies of GE that supported the corporate success of the company up to 2009 are stated below: 1. Innovation and Technology: Immelt identified that the major drivers of future growth in the company is based on diffusion of innovative and eco-friendly technology, which would be possible through the research and development centers of GE. The budget for research and development was upgraded to $100 million, and new R&D centers have been developed at Munich, Rio de Janerio, etc. They also claim to have about 37,000 technologists for their research centers. Achieving six-sigma in product and value delivery is the mission of GE, but only through the delivery of good products. Immelt focused on few, big and long-term products to incorporate all the core competencies of GE in its projects. The company introduced a program called “Ecomagination” for launching the products and businesses in the year 2005, as a part of the company’s commitment to launch clean, green, and efficient products for its customers. In 2011 the company was successful in generating $21 billion through its new eco-friendly policies of production and product delivery. 2. Global Presence: The most significant capability of GE is its global presence. Immelt considered the success of GE in the international markets as the biggest payoffs for the company. The positioning strategies of GE to establish it internationally has been the supporting pillars for the company to compete in the highly competitive market. A major achievement of GE is its spectacular success in the Beijing Olympics in the year 2008. The company also entered into a multi-facet partnership with a commercial investing company in Abu Dhabi called Mubadala. It became one of the top investors of GE in the year 2009. The company also entered into a country to country strategy in order to take business initiatives in countries like Brazil, China, India, Nigeria, etc. 3. Focus on Customer Satisfaction through Integrated Solution: The next core competence of GE that Immelt considered was customer focused solutions of the company. He emphasized on spending time in knowing the customers, customer orientation, building strong relationships and identifying their problems to find effective solutions. The function of dealing with the customers, generating new products, manufacture, sells, enhance value, manage the finances, and controlling are all important levels that lead to the achievement of this competitive advantage. GE has been able to offer customized customer solutions through this process, such as developing new medical equipments for hospitals, lighting, etc. GE started creating highly noticeable marketing campaign, cross-business, etc. In order to understand the drivers of these competencies of GE, the value chain analysis can be done to understand the internal operational functions of the company. According to Prahalad and Hamel (1990), the products should be offered to the customers, when the core competencies of the company are included in the value chain of the products or services offer by the company. According to Porter (1980), value chain analyses the firm level competencies of the company which creates value. The value chain analysis would assist in identifying the impact on value and cost. The value chain analysis of GE would provide a clear outlook of the operational functions that increases the competencies of the company. The value chain of the company is segregated into primary and supporting activities Primary Activity The primary activities of the company are to take care of the development, sales and allotment of property through proper channels to the buyers. The value chain analysis is important to lay down the business level strategies. The core activities of GE are to offer capital assistance through GE Capital, manufacture industrial equipments and provide licenses for technologies innovated by them. Inbound and Outbound Logistics: GE maintains strong relationship with their customers and share strong partnership with their suppliers. The success in the logistics management can be judged through the operational efficiency and the reduction of the lifecycle cost that GE has achieved over the years. Operations: The operational functions of GE involved meeting the needs of the customer by offering them integrated solutions to their issues, developing innovative industrial equipments such as medical equipments, and offering loans or financial assistance to customers around the world through GE Capital. Apart from this, GE also has to perform logistics services and it also offers training facilities. Marketing and Sales: Marketing activities are delivered through efficient brand management, and attention is paid towards reducing the operational cost. The marketing functions of the company involves recruiting skilled and talented marketing executives, planning and developing framework for offering customized solutions to customers. Increasing the co-ordination with the customers and offering them a range of financial, technical services and customer services. Services: The services include the customer assistance and the services related to technical and financial assistance to the customers around the world. The after sales services are provided to customers buying technical equipments from the company. Supporting Activity Support activities involves support assistance require for the primary activities. Procurement: The Company has a good capital base and is well expanded around the world, so GE has access to various resources such as cheap raw materials, skilled workforce, cheap labor, extensive distribution channel, etc. Technology development: Technology being one of the greatest competencies of GE is obviously the biggest supporting factor for the company. Technology used by the company is sophisticated and advanced, to ensure that the equipments developed would be safe and of high quality. Advanced equipments help to not only speed up the work process but also save resources for the company. Human Resource Management: The communication within the department and also with the top management is regular in GE. Employees are rewarded for their good performances. The management at GE develops several programmes to improve the performance level of the employees. Moreover, GE is an equal opportunity employer. Infrastructure: The Company possesses a considerably well-equipped office for its workforce consisting of 301,000 employees around the world. GE has well established offices around the world in almost every country. Answer 2 In spite of increasing share prices and financial stability of GE, the future prospects of the company did not seem to be hopeful in the year 2009. This was mainly because of the strategies that were developed by Immelt, which included shrinking the GE. Though the intention was to represent it as the major part of the assets of the company for the future, but actually it would be minimized. This forecasted a risky situation for GE, and due to this reason the company also lost its AAA credit ratings. However, the fact was that the growth engine of GE was not really the innovative products but was GE capital. The economic condition of the global market also has a strong effect on the company because GE was strongly depended on GE capital which offered huge loans. During such situations of uncertainty and prevailing risk, several other approaches, such as real option, or Luehrman model, can be evaluated to increase the exposure of GE towards increasing opportunities, rather than towards credit risks. Apart from the external misbalances, GE was also going through internal troubles too. The flexible boundary within GE ignited risk of conflict between the business units and divisions in terms of resources and between individuals too. In the process of creating integrated GE, Immelt transformed the relationship between the business and the corporate headquarters of the company. (Grant, 2010). Real option approach is the right and not the obligation to take business decisions or actions based on the degree of uncertainties that might evolve in future (Amram and Kulatilaka, 1999). The premise in real options is that the future is uncertain, and altering strategy based on situation increases substantial cost, but implementing flexible strategies which adapts the changing situation, and making late decision creates value, in comparison to strategic decisions. The value drivers that are considered in case of real options are uncertainty of probable cash flows, present value of the fixed cost, which has to free of any risk, rate of interest, dividend or money lost due to the competitors in the market, time, expected cash flows, etc. Real options assist in identifying the brighter side of uncertainty, this means uncertainty can assist in generating high value if the managers can utilize flexibility to unfold event. Immelt took all the decisions at once, which means neither was the strategic decision flexible enough to handle the upcoming credit crunch or financial crisis (Kang, 2009). Moreover, with the motive of reducing the number of departments in GE, Immelt restructured the organization, but the new structure was much more complex. Real option approach would in this case assist in formulating flexible strategies so that they can adapt the external changes and utilize uncertainties in a positive manner. The managers in GE can plan differently than the competitors in uncertain market situation with the help of the flexible strategies, so that the serotype approaches of competitors can be outrun, and advantage can be gained in crisis situations too (Kemper, 2009). Further a discussion on different types of real options would reveal how to value them by utilizing the valuation ideas. The different types of real options are stated below: Delay: It describes the stoppage of capital outlay for irrevocable investment projects that involves uncertainty related to certain influencing factors. This case describes the uncertainties that GE was expecting because the company was involved institutional instrument such as providing licenses for technology , developing industrial equipments, provide assistance from competitive action, such as natural resources, extraction, etc. Expansion or Contraction: It explains the ability of the company to amplify or reduce the production capacity of the initial investment in comparison to the capital outlay. Immelt’s decision to minimize GE Capital can be analyzed under this type of real option. Moreover, Immelt’s decision to increase the product segment than capital segment is a critical decision-making aspect under this typology. Abandon: Abandoning a project is done after analyzing the useful life of the venture by selling it off in secondary market and comprehending its salvage value. Immelt can utilize this typology in making decisions regarding GE Capital, which is a capital intensive segment with a reasonably resourceful secondary market. Switching: Switching identifies the possibility of the company to switch between segments, departments, products, or services based on the cost. In GE Immelt is trying to minimize the size of GE Capital and increase the product and service segment of GE. He wants to switch the competency of GE from Capital to Products, so several elements along with cost need to be considered for such a decision, such as processes, operations, output, revenue, etc. Compound Options: Compound options are the mixture of realistic and simple options. GE has to identify two or more basis of uncertainties for designing flexible strategies for the business. According to Luehrman, business strategies are nothing but sequence of options that assist in production of succession of fixed cash flows. This strategy involves major decision-making, which can be better explained through the Luehrman model which describes the option space through a tomato garden (Kensinger, 2010). Figure 1: Luehrman Model Source: (Chowa, Reganb, Ranaiefara, and Arkhipovb, 2011) The black ring explains the regions where now or never scenario exists. That means either everything is uncertain or unknown or vice-versa. So in this, investment can be done if the value to cost is greater than one, or investment should not be done. The black circle explains the value to cost is more than one presently, but the time is not yet to invest because the line that segregates the black circle depicts the NPV of both. The NPV would be greater than 0 in the upper part, while in case of the lower part, it would be less than 0. The white ring seem to be less promising, and they have value to cost ratio less than one, so if improvement is not done in time, investment in this area is futile (Smit, and Trigeorgis, 2008). Immelt can utilise this model in GE to identify the right time to take decision, formulate strategies, make investments and acquire assets during the course of his operation. Based on the six segregated areas the investments decision should be made. Here the external business environment of GE and the offerings of the company has been discussed in accordance to Luehrman model. Both have to utilise keeping in mind the value to cost ratio. In order to implement flexible strategies in the organization based on the real option approach, Immelt also has to understand the environmental changes and gauge the strength of those strategies to cope with uncertainty. The Complexity Theory can be discussed in this context. The complexity theory would be assisting in treating GE as a collection of structures or strategies, which are complex. It can be helpful in identifying the constraints in GE’s strategies, agent interactions, which would in turn assist in formulating an evolutionary strategy (Rudich, 2004). Answer 3 In this section the strategic options would be discussed that Immelt could have adopted after 2009. The strategic options would have to be in accordance with the Rumelt’s criteria, so that real option approach can be utilized in GE’ strategic decision making process (McGregor, 2009). The strategic options available for GE have been explained below: 1. Commitment towards GE Capital should be retained: Immelt wanted to provide customized products and solutions to the customers, which would also be the core competency of GE. However, GE capital being the major revenue churner was neglected in such a framework because of the projection of loans turning bad due to economic crisis. Immelt should have to be committed to GE Capital even when it is dragging the earnings down because GE Capital can assist in grabbing market share from the competitors when the economic condition would improve. Immelt’s strategy to move away from financial business and focus on consumer products was not taken positively by the investors. 2. Maintain the liquidity position of GE: The Company lost its AAA credit rating in such a process. In this regard Immelt has to save cash for protecting the losses that the company incurred through GE Capital (Goldman, 2009). Small Acquisition can be made by the company, but for larger acquisition they have to wait for the economy to improve, as it has been explained in Luehrman model in Answer 2. Immelt’s decision of cutting cost by $5 billion (McGregor, 2009) and focusing on environmental friendly products and operations was appreciable, but he needs to set his strategies based on Rumelt’s Criteria. The Rumelt’s Criteria was designed by Richard Rumelt for evaluation of the strategies. The four criteria are: a) Consistency, b) Consonance, c) Feasibility, and d) Advantage. a) Consistency: The first criterion assists in analyzing the consistency between the external strategies and internal resources (Markides, 1995). For this Immelt and his team has to scrutinize the functional activities and internal strategies of the management that has been employed in the company, and compare them with the external business strategic options. b) Consonance: Second criterion is consonance, which reveals the parity of the external trend with the company’s own strategies. So the effect of external market trends on GE’s policies has to be assessed (Buckley, and Ghauri, 2002). c) Feasibility: Thirdly is the feasibility of the strategies related to capital, management, and time has to be apt. In case of GE Immelt tried to shift away from financial segment of GE, which was the major revenue generator, so this decision was not feasible. d) Advantage: Fourth criterion is the advantage, which means the strategies which are being formulated should provide competitive advantage to the company (Crouch, 2008). Immelt can also adopt severe risk control measure for GE by cutting the cost, limit his investments in companies which are not so significant for GE, and keep the business strong through generating more cash. Based on the situation of the global economy during and after 2009, this strategic option was not wrong. Balanced Scorecard model would be in this regard, because it would ascertain not only the day to day performance but also help in control and monitoring activities (Niven, 2005). Balanced Scorecard is a performance measurement tool, which the managers at GE can utilize to keep track of consequences that would arise from the implementation of the strategic options (Hannabarger, Buchman, and Economy, 2011). The Balanced Scorecard is based on four perspectives, namely financial, customers, business processes, and learning and growth. The financial perspective would assist in identification of financial measures that managers at GE can take in case of diminishing return of GE Capital, customers segment would be monitored according to Immelt’s previous decision, so as to generate cash from business, flexible marketing strategies would make the business processes lucid and smooth, while learning and growth would assist in product innovation through technology, which is yet another core competency of GE (Niven, 2011). References Amram, M., and Kulatilaka, N., 1999. Real Options: Managing Strategic Investment in an Uncertain World. 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