Behm-chessor Ge Paper[3]

The General Electric Company

Strategic Management MGT 6063 12/8/09

Written By: Randy Behm Chuck Chessor

R. Behm/C. Chessor-GE

Table of Contents Section Page I – Company Background

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II - Globalization and Strategic Issues in the Industry

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1)

What are the major trends in the industry and the competitive issues facing the companies in this industry? 4 2) What are the opportunities and threats for this industry, in different regions and countries?

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What are the key issues faced by this particular industry in the globalization movement?

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What are the key success factors for a company in this industry to compete globally?

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III – Financial Performance

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IV – Corporate Timeline and Major Events

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V – Imperatives

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VI – Strategic Assessment

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VII - References

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Tables Table 1 - Consolidated Revenues

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Table 2 - Receivables

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Table 3 - General Electric Timeline

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R. Behm/C. Chessor-GE

Section I - Company Background “At GE, we consider our culture to be among our innovations. Over decades our leaders have built GE’s culture into what it is today – a place for creating and bringing big ideas to life. Today, that culture is the unifying force for our many business units around the world.” 1 The General Electric Company or GE is a multinational American technology and services conglomerate that has produced innovative products for over a century. They are one of the most recognized brands in the world and worth almost $49 billion. GE offers a variety of diverse products in areas including power, aviation, healthcare, entertainment, finance, and consumer electronics. In 1889, inventor Thomas Edison had consolidated all of his companies and business interests under the name of the Edison General Electric Company. The General Electric Company was formed in an 1892 merger of the Edison General Electric and ThomsonHouston Company. General Electric has evolved and expanded over the last one hundred years with the constant being ingenuity and innovation. Jeffrey Immelt is the current chairman of the board and CEO at GE. He was selected by GE's Board of Directors in 2000 to replace Jack Welch following his retirement. GE has seen great growth and expansion through the last 30 years by streamlining operations, acquiring new businesses, and dealing with the new globalization. Recorded revenues at GE have grown from roughly $28.8 billion in 2000 to over $182 billion today making it one of the most valuable and largest international companies with over 323,000 employees around 1

www.ge.com

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R. Behm/C. Chessor-GE the world.2

General Electric’s current competitors in the industry include Siemens based in

Germany and Philips based in The Netherlands. GE's current divisions include GE Capital (which includes GE Commercial Finance and GE Money and Consumer Finance), GE Technology Infrastructure (which includes GE Aviation and GE Healthcare), GE Energy Infrastructure (which includes GE Energy Financial Services), GE Fanuc and their entertainment company, NBC Universal. Section II - Globalization and Strategic Issues in the Industry 1) What are the major trends in the industry and the competitive issues facing the companies in this industry? There are many new trends and competitive issues facing General Electric in their industry. Jeffrey Immelt, CEO of General Electric, sees three trends to be of importance in the next 15 to 20 years.3 Globalization, volatility, and the intersection of government and business will all play major roles for General Electric. The business environment has changed since Jack Welch took over GE in the 1980s. Most of GE’s competitors are now increasingly non-American and the international business world has become more and more interconnected and globalized. Globalization is the new reality and most of the important opportunities for GE and any others in their industry are now in international markets. While GE and other companies in their industry have made tremendous progress in making their companies a global powerhouse, there is still much more to be done. Jack Welch expects the majority of GE’s revenue to come from overseas and believes that securing this goal is one of the best ways to ensure GE’s survival in the new millennium.4 2

www.wikipedia.org/wiki/General_Electric www.mccombs.utexas.edu/news/pressreleases/immelt06.asp 4 Slater, Robert (1999) Jack Welch and the GE Way McGraw-Hill p. 201 3

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R. Behm/C. Chessor-GE Between 1985 and 1995, revenues from overseas operations at GE increased from 20 percent to 38 percent of GE’s total revenues.5 In 2008, overseas revenues ($97.2 billion) accounted for over 50 percent of GE’s total revenues.6 Companies are outsourcing work in order to achieve lower production costs, make better use of available resources, or to focus energy on the core competencies of a particular business. The industry must make sure that they maintain this trend and remain globally focused in order to benefit and continue their rapid growth. Another trend that GE and the industry must deal with is the volatility of the market in recent years. In this case, volatility can be defined as the sharp fluctuations of demand in their industry. GE has experienced considerable volatility in recent years connected to the economy and the cyclical nature of supply and demand in their industry. The industry will continue to be unpredictable until a favorable supply and demand balance can bring back consistent earnings and the global economy takes a turn for the better. The intersection of government and business will play a major role for GE and their industry as they go continue to go global. Government rules and regulations that vary country to country and region to region have made it difficult for many businesses to remain compliant and to develop and grow. In a voluntary reaction to the perceived inequalities of global commerce, governments have put restrictions on aspects of their international trade.7 Many governments are now using tariffs or quotas against imported goods in order to protect their developing economies and restrict trade as well as generate revenue. Quotas used to

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Slater, Robert (1999) Jack Welch and the GE Way McGraw-Hill p. 194 www.wikinvest.com/stock/General_Electric_Company_(GE)/Data/Revenue_Breakdown?ref=topnav 7 Bovee, Courtland (2007) Excellence in Business Prentice Hall p.103 6

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R. Behm/C. Chessor-GE limit trade and protect local industries are also being issued by governments to limit the amount of goods that can be imported during a given period. In an effort to ensure equitable trade practices, governments around the world have established a number of trade agreements and organizations (GATT/NAFTA/WTO) that address trading issues. These organizations have been used to regulate trade and resolve intellectual property issues that are so prevalent in many developing countries. General Electric and the competitors in their industry must navigate all these complex rules and regulations as they become more global. Political and regulatory decisions have become a big factor in company success and government policies can affect their strategic planning. 2) What are the opportunities and threats for this industry, in different regions and countries? The global economy has created many new opportunities and threats to General Electric and their competitors. Running a large corporation is difficult and challenging in today’s volatile environment as the recent economic slowdown has affected the entire industry since revenue at these companies is tied up worldwide. Russia, China, and India are three developing economies that present many opportunities and threats to these industries. India has emerged as an economic power with vast human and natural resources along with a large knowledge base that presents many opportunities and threats for GE and their industry. India’s infrastructure remains behind many developing markets in basic infrastructure, including road works and electrification. There are many opportunities for the industry’s transportation, infrastructure and energy divisions that could be used to develop India’s infrastructure. India also has a growing middle class which is an opportunity for the industry’s consumer goods division to market to.

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R. Behm/C. Chessor-GE There are also many threats to the industry succeeding in India. In many rural areas, India lacks the basics such as water, and sanitation with much of the population not having their basic needs met much less needing consumer goods. GE and their competitors will also have to deal with the regulation, protection, and restrictions that the Indian government has put in place as a barrier to entry for outside company’s trying to enter the market. Although economic growth has recently slumped to 9%, China has been used to double digit growth since 2001.8 As a result, China has a rapidly expanding middle class that the industry can market their consumer goods to. There are also many opportunities to bring in electricity and power to the millions of rural citizens still without power. China also offers many low-cost outsourced manufacturing capabilities where production is cheap and efficient. Some threats that China presents to GE and their competitors include the regulations and policies that make it hard for non-Chinese companies to make money. Industry will also have to deal with corruption at county and provincial levels. Finally, the lack of protection of intellectual property will make it risky for industry to bring in technology that could be copied and produced by other internal companies.

China has signed treaties, passed

legislation to safeguard IP rights, but counterfeiting and IP theft is on the rise, according to the PricewaterhouseCoopers report. In the past couple year, Russia growing economy has finally achieved some economic stability after years of stress from switching to a free market economy. There are many opportunities in Russia for GE and their competitors.

Russia’s industrial sector is

technologically outmoded and is ripe for an upgrade from the industry’s technology, 8

www.cnn.com/2009/WORLD/asiapcf/01/21/china.economy/

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R. Behm/C. Chessor-GE infrastructure, healthcare or capital divisions. The rising commodity prices can also be defined as an opportunity because of the natural resources within Russia. The capital raised from these resources should trickle down the economy and free up money that can be spent on infrastructure as well as consumer goods. Bribery and corruption are a couple threats that the industry will have to deal with when trying to enter the market in Russia. In addition, rapidly changing laws and unclear limits on foreign investments make business unpredictable, and contract negotiations can be arduous and complex. 3) What are the key issues faced by this particular industry in the globalization movement? Former CEO of GE Jack Welch once said “Ideally you’d have every plant you own on a barge” meaning that the plant could move at any time if any government tried to impose restrictions on the operations or if workers demanded better wages and working conditions. 9 This statement illustrates one of the key issues facing this industry in the globalization movement. GE and the much of the rest of its’ industry has globalized its operations by shifting production to low wage countries. Many feel that free trade makes it too easy for corporations to exploit workers around the world by pitting them against each other in a “race to the bottom” in which production moves to the country which has the lowest wages and the fewest restriction regarding worker safety and environmental protections.10 This complaint has been at the core of protests over globalization and free trade. Another issue in this industry’s globalization is the growing protectionism movement being revived by the recent global economic slowdown. Much of the growth in many 9

www.motherjones.com/politics/2000/05/general-electrics-global-assault Bovee, Courtland (2007) Excellence in Business Prentice Hall p.103

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R. Behm/C. Chessor-GE developing countries has come at the expense of jobs in the home countries.

These are

difficult times and many people are looking for a scapegoat in this declining economy. Many blame the free trade for job losses and lowered wages.11 Finally, as the financial crisis has grown, governments have considered raising trade barriers to protect domestic industry.

The large conglomerates risk stifling domestically

grown industries as they are more likely to have the resources to outcompete the local ones. 12 4) What are the key success factors for a company in this industry to compete globally? There are a number key success factors for GE and their industry that need to be followed in order to compete globally. If the companies in the industry wish to succeed at an international level and have a real global presence, they’ll need to gain every edge possible and separate themselves from the competition. Jack Welch of GE believed that you had to decommoditize when thinking about a global strategy. This means making the products and services distinctive and includes innovation, technology, internal processes and whatever else it takes to be unique.13 One of the important factors in competing globally for any industry is being socially responsible in the regions or countries doing business with. The companies must embrace responsibility for their impact on the environment, consumers, employees and communities. Examples of this can include community-based development projects or by the giving of aid to local organizations and impoverished communities in developing countries doing business with.

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www.newsweek.com/id/177432 (12/31/2008) www.globalissues.org/article/43/deregulation-or-protectionism 13 Welch, Suzy (2005) Winning Harper Business p.171 12

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R. Behm/C. Chessor-GE Another factor is respecting and embracing the local population, culture, and laws and this can be accomplished in a number of ways. Companies need to hire personnel who can function internationally and understand and value diversity. They can either train and bring in from the outside or promote locals to senior management, as GE did as part of its global strategy.14 The ultimate goal for these companies is to create global teams and companies with no true country and culture so that they can function seamlessly internationally. Though the complexities in going global will be overwhelming, the opportunities for these industries will be practically limitless. The last factor to successfully competing globally is to fully understand the markets being entered. Countries or regions must be analyzed to determine if business conditions are favorable for success. Market factors in each country would include (but are not limited to): 1. Demographic and Geographic Factors (population/natural resources/etc.) 2. Political Factors (stable government/taxes/etc.) 3. Social Cultural Factors (education/cultural barriers/language/etc.) 4. Market Access Factors (quota/tariffs/intellectual property protection/etc.) 5. Distribution/Production Factors (labor skills & laws/transportation/etc.) Companies need to do their due diligence and research to understand that these market factors are required for success in any country an industry wishes to do business with.

Section III- Financial Performance

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Slater, Robert (1999) Jack Welch and the GE Way McGraw-Hill p. 197

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R. Behm/C. Chessor-GE Reviewing GE performance in over the recent ten years shows a growing company that competes well globally in the majority of the industry it operates. Yearly revenues continue to grow for this conglomerate; for the year ending December 31st 2008, revenues had reached $183 billion up from $152 billion on the same date in 2006.15 Table 1 - Consolidated Revenues

During this timeframe we also see an alarming trend of net income dropping from $20 billion in 2006 to $17 billion in 2008. The drop in income seems to be associated with larger operating costs and cost of goods and services sold. A large deal of GE’s revenues stem from financial services, in 2008 revenues reached $67 billion for this division of the company.15 At the same time, net earnings in financial services dropped $3.3 billion from the year before. Organic growth has been nonexistent, the weaker US dollar, lower investment income, and losses and write offs on financing receivables have all contributed to the poor performance.16 Table 2 shows some interesting data in regards to the financial sector performance, specifically the large loss on financing receivables. Between 2007 and 2008, there is a huge drop of approximately $24 billion in non-US residential mortgages and installation and revolving credit. 15 16

http://www.ge.com/ar2008/pdf/ge_ar_2008.pdf http://www.ge.com/ar2008/pdf/ge_ar_2008.pdf

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R. Behm/C. Chessor-GE Table 2 - Receivables

This is directly related to the global economic crisis of the past few years and we don’t see this as being unusual in these trying times. It does show a huge strain on GE corporate financial performance and it is quite impressive that they have continued to post positive earnings into 2009. Jeffrey Immelt, CEO of GE has said the company continues to target a third of revenues will come from the financial sector, but has acknowledged they will address high risk areas. The company had decided to exit $150 billion in insurance assets early in 2002 and that helped reduce the impact of the recent crisis.17 There is not a clear sign of where the company will address risk, but our research points us to believe that GE will look at commercial real estate and international mortgages. As for the current year of 2009, the unfortunate trends of 2008 have continued to be reported. Recently, GE released third quarter numbers and revenue was reported at $37.8 billion compared to the $47.2 in 2008. Net profit was also down to 2.49 billion from 4.31 billion the previous year.18 Section IV - Corporate Timeline and Major Events 17

http://www.ge.com/ar2008/pdf/ge_ar_2008.pdf

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http://online.wsj.com/article/SB10001424052748704322004574476741575786518.html

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R. Behm/C. Chessor-GE The corporation dates back over 100 years, so there are plenty of highlights to focus on over the history of the company. The Table 3 timeline will focus on the groundbreaking innovations or activities including acquisitions and divestitures.19 20 Reviewing Table 3, we see a history of innovation and groundbreaking achievements for GE. People around the world are living differently because of the products that GE has provided consumers. This innovative history shows the true spirit of the company and answers the question of what is the purpose of the company. GE does not have a vision or mission statement available to the public, but their values are posted everywhere…Imagine, solve, build and lead. The corporate culture pushes employees to develop creative products that change and improve people’s lives. The other occurrence that we see in Table 3 is GE’s willingness to acquire other companies and sell-off parts of their own. Not only does the company want to improve lives around the world, but it shows it wants to be one of the biggest and best corporations on the globe. GE is continually assessing their operations in terms of what they do well and where they struggle to compete. The recent sale of NBC Universal to Comcast is a prime example of this trend. GE never really seemed to fit in the entertainment business and even CEO, Jeffrey Immelt admitted this during recent interviews. NBC has been stuck in fourth place of the major broadcast networks and this doesn’t align with the successful performance of other divisions of GE.21 GE will still hold a 49% stake in NBC Universal, so it seems they believe the division can be successful if led by the right people or leadership team.

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http://en.wikipedia.org/wiki/General_Electric_timeline http://www.ge.com/innovation/timeline/index.html http://www.nytimes.com/2009/12/04/business/media/04nbc.html

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R. Behm/C. Chessor-GE Table 3 – GE Timeline 1890 1905 1906 1912 1917 1919 1927 1932 1940 1941 1957 1969 1970 1981 1981 1984 1986 1989 1993 1994 1996 1998 1999 1999 2000 2001 2001 2003 2004 2004 2004 2005 2005 2006 2006 2007 2007 2007 2008 2009

Edison General Electric formed Commercial finance operations begin First Radio Broadcast Vacuum Tube invented leading to the future of electronics Refrigeration discovered Radio Corporation of America (RCA) was formed by GE and AT&T 1st Television sold GE Credit helps consumers buy appliances Silicone discovered 1st Jet Engine 1st Nuclear Power Plant Opens GE helps put the man on the moon Computer division sold to Honeywell Jack Welch becomes CEO Fiber Optics are discovered Sells computer graphics products and services to Genigraphics RCA is re-acquired primarily for the NBC television network 1st CNBC broadcast GE Aerospace sold to Lockheed Martin 1st fortune 500 on the internet MSNBC is formed with partner Microsoft Innovations help with the Asian Credit Crisis Global Research begins with a location in India Montgomery Ward exits bankruptcy and becomes a subsidiary of GE Capital Montgomery Ward folded by GE Capital GE/Honeywell merger is blocked by the EU Jeffrey Immelt replaces Jack Welch as CEO GE acquires Telemundo, Instrumentarium, and Transamerican Finance NBC acquires the assets of Vivendi Universal and forms NBC Universal GE Capital acquires Dillard's credit card for $1.25 billion GE sells of life and mortgage insurance assets GE acquires the financial assets of Bombadier for $1.4 billion GE acquires IDX Systems for $1.2 billion GE Advanced Materials division is sold for $3.8 billion GE acquires Apollo Management and Zenon Environmental Systems GE acquires Smiths Aerospace, Microwave Data Systems, and Vetco Gray GE Plastics is sold for $11.7 billion Aviation Security devices that detect explosives and nuclear material 1st hybrid locomotive, large scale hauler, and airplane GE buys out remaining Vivendi stake in NBC Universal and gives control to Comcast

Section V – Imperatives There are few guarantees in the business world, but during these trying economic times all corporations are feeling the effects. Since the beginning of 2008, GE has seen their sales and profits drop like never before. This is a company with a history of success, but now 14

R. Behm/C. Chessor-GE is faced with a decision on how to move forward. GE will have to ask itself if their sales will rebound soon or will the company be forced to reorganize in a significant fashion. The financial crisis and credit crunch is the biggest concern to GE because of the large amount of their operations focused within financial services. The global marketplace is the other major concern that GE will not be able to avoid in the future. Their products and services affect people around the global and they will continue to have to run their operations as a global company. Historically GE has done a great job of leading their business around the globe and there is no reason to believe this will change. They started research in India in 1999 and followed the with an R&D center in China in 2002. GE manufactures products in over 100 countries around the world and that brings in over half of the company profits.22 The last imperative we see for GE is being a socially conscious corporation and helping with topics such as global warming, pollution, and improving health throughout the world. For this topic, the company has shown their true colors in the products they sell. From hybrid engines and medical technology, GE is producing products that save energy, help diagnose disease earlier, and bring these products to people in every corner of the world.

Section VI – Strategic Assessment General Electric has been the leader in strategic planning for decades and this continues today. GE constantly reviews performance of their operations and this helps identify risk and areas that need to be addressed. GE made great decisions to leave the mortgage and life insurance industry in 2004 that helped eliminate an enormous amount of 22

http://www.ge.com/company/worldwide_activities/index.html

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R. Behm/C. Chessor-GE risk on the financial services side of the business. The recent NBC Universal transaction shows their focus on improving areas that are not performing up to GE standards. The recent economic problems around the world have hurt profits, but in no way have jeopardized the corporation. The decisions of the leadership team have made this possible and put the company in a position to turn around quicker than most. Looking five years into the future, we don’t believe you will see a great deal of change in the strategic planning of GE because of the success over the last 100 plus years. Corporate culture continues to push innovation and bringing new life changing products to the market. These innovative methods will continue to shape GE and direct them to the industry that their technology will direct them. We believe you will still see the mergers, acquisitions, and divestitures that have occurred quite frequently over the past ten years. This has helped GE create new opportunities, reduce risk and continue to adapt to the ever changing global marketplace. “In the end, our success is measured not only by our ability to think big, dazzling thoughts, but by our commitment to sweat the small stuff that brings ideas to life. It's a way - thinking and doing - that has been at the heart of GE for years.”23 Section VII - References Arango, Tim TA. (2009, December 3). G.E. makes it official: NBC will go to Comcast. New York Times, Retrieved from http://www.nytimes.com/2009/12/04/business/media/04nbc.html Bovee, Courtland (2007) Excellence in Business Prentice Hall Glader, Paul PG. (2009, October 19). GE points to recovery despite profit decline. Wall Street Journal, Retrieved from http://online.wsj.com/article/SB10001424052748704322004574476741575786518.html 23

http://manonamission.blogspot.com/2005/02/ges-ge-mission-statement.html

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General Electric 2008 annual report. (2008). Retrieved from http://www.ge.com/ar2008/pdf/ge_ar_2008.pdf General Electric web page. (2009, December 1). Retrieved from http://ge.com GE's Mission Statement. (2005). A Man on a Mission, Retrieved from http://manonamission.blogspot.com/2005/02/ges-ge-mission-statement.html Lamy, Pascal (2008, Dec.31) Retrieved Nov. 28 2009 from www.newsweek.com/id/177432 Laverge, Amy (2006, Mar 24). Retrieved Nov. 28 2009 from www.mccombs.utexas.edu/news/pressreleases/immelt06.asp Mokhibar, Russell (2000, May 25) Retrieved Nov. 29 2009 from www.motherjones.com/politics/2000/05/general-electrics-global-assault Retrieved Nov. 28 2009 from www.wikinvest.com/stock/General_Electric_Company_(GE)/Data/Revenue_Breakdown?ref=topnav Retrieved Dec. 1, 2009 from http://en.wikipedia.org/wiki/General_Electric_timeline Retrieved Dec. 2, 2009 from www.wikipedia.org/wiki/General_Electric Shah, Anup (2005, Aug. 4) Retrieved Nov. 27 2009 from www.globalissues.org/article/43/deregulation-or-protectionism Slater, Robert (1999) Jack Welch and the GE Way McGraw-Hill Welch, Suzy (2005) Winning Harper Business

Yoon, Eunice (2009, Jan 21) Retrieved Nov. 29 2009 from www.cnn.com/2009/WORLD/asiapcf/01/21/china.economy/

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