Organization Strategy for GE Inc
Introduction
GE was founded from the 1892 merger that saw Thomas Edison’s Electric Light Company and
Thomas Houston Company merge to form the GE (General Electric) company. Its core business
involved electricity generation and its distribution networks, manufacture of light bulbs and
electric motors.
Using appropriate academic models and concepts identify GEs core competences and
capabilities and discuss their effectiveness in supporting the corporate success up to 2009.
GE strategic financial planning and organization management begun in mid 1960s through the
leadership of Fred Borch. His strategic business management system was based on strategic
business units and evaluated by portfolio analysis which was an ideal business management
model for most corporations at that time. Reg Jones, who headed GE between the years 1973 and
1981, successfully linked GEs techniques of strategic planning to its business strategic financial
management systems. For two decades, Jack Welch, who succeeded Reg Jones as the head of
GE, perfected what his predecessors had started. He presided over the most comprehensive
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strategic and management organizational upheavals in entire GEs history. He reformulated and
remodeled GEs business portfolio by introducing and expanding financial services while
gradually exiting the extractive and manufacturing business that was slowly becoming a liability.
By the time he was retiring, the GE capital, that’s the branch that was dealing in financial
services, was generating nearly 50% of GEs entire revenues together with its fixed and capital
assets. Jack Welch concentrated on the creation and implementation of the performance culture
that was founded on comprehensive systems that supported the setting and performance
monitoring and the achievement of targets, objective, and goals of the company. Jack Welch
ensured that the system was backed by a powerful reward and remuneration system for all the
hard working employees who were motivated to work even much harder after achieving their
target. Welch officiated a direct, personal and almost confrontational management style. He
destroyed the bureaucratic and highly hierarchical GE management systems and replaced it with
a short tier system that allowed the grassroots ideas to be evaluated and encouraged new
initiatives to improve their product and service quality and reliability. Managers and their
subordinates were encouraged to be ambitious and extreme pressure was mounted for them to
deliver. Welch reorganized every aspect of GE management system; he redesigned the whole
management system, from strategic planning and financial management to the human resource
management and capacity building.
The core competencies model starts the strategy action or process by thinking about core
strengths of an organization, in these case GE whose core competence were in technological
innovation and capital financing. The core competence starts in the long-run and derives its
competitiveness from its ability at a cost lower than its competitors and spawns products that are
no expected by its rivals these is achieved by the company’s ability to consolidate wide
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technologies and enhanced production skills driven by competence and empowered employees.
To identify a core competence that it provides a potential to access a wide variety of markets, it
makes a significant benefit to the end user and it’s very difficult to imitate. Core competence is
built on a continuous process that’s improved gradually.
The four indicators of the potential of a company to generate a constant and sustained
competitive advantage as contained in the Barney’s VRIN concept i.e. valuable, Rare,
Imperfectly Imitable, Non substitutability are applicable where It’s clear that the sustained
competitive advantage can be earned from strategies that are effective and efficient i.e. they are
valuable and where the resources the company is depending on are not readily available to other
competitors that’s they are rare. The conditions prevailing are unique i.e. either historically,
social complexity or even casually ambiguous in short they are imperfectly imitable. The
resources are not strategically equivalent i.e. they cannot be substituted.
To identify GEs core competence before the year 2009, we can use the Mckinsey 7S
framework. Mckinsey 7S are made of three strong and hard elements i.e. Strategy, Structure and
Systems while the other three are Shared values, Skills, Style and Staff. The hard elements can
be identified and defined easily and which can be directly influenced by the company’s
management. These are statements made strategically, and define, IT systems, reporting lines in
an organization chart and formal processes. The soft elements are slightly difficult to describe,
less tangible, and are affected by culture. These 7S are interconnected in a web that each can’t do
without the other; a change in one affects the other.
The first step in the McKinsey 7S strategy is to designed, developed, maintain and build a better
and competitive advantage over the competitors. The structure is organized i.e. who reports to
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who to whom. The organization system i.e. the procedures and the daily activities of the
employees are defined. The shared values are the core values of the firm as evidenced in the
work culture and the corporate culture. The style of leadership is then adopted and the
employees, their skills and capabilities are evaluated as they make up the company staff.
Placing the shared values at the center of the model puts more emphasizes on the need of
these values as critical elements. The structure of the company, the strategy, systems, staff, skills
and style are part of the organization as it stands out.
Mckinsey 7S theory is based on the theory that for a firm to do well, all the 7 elements need to be
set and reinforced for the model to help identify and align and improve the performance. To
come up with the company’s core competence, the following questions have been answered.
What is the company strategy? How is the company organized or divided. What are the major
systems that manage the organization and what are its core values, culture and how strong are
they. How effective and efficient is the leadership. What positions still need to be filled? How
are the employees skills monitored and evaluated?
Mckinsey 7S interconnectivity and dependency
Structure
Strategy systems
Skills Shared values Style
Staff
SWOT analysis will be of significant assistance. SWOT is the acronym for the
word Strength, Weaknesses, Opportunities and Threats facing an organization. SWOT analysis
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compares the trends and ratios with those of rival companies or those in similar industry so as to
identify the areas of weaknesses and strength. It also compares the general performances in
different sections of the business. (Simmonds, 1981)
From the trends of GE past performance, as reflected on the charts below, it’s clear that
GE concentrated on building its asset base and expanded its trading activities by reducing its
market capitalization and concentrating on its core businesses which included investing heavily
on its financial services and industrial services that saw it acquire a series of other related
companies to expand and enter in to new markets. This strategy of acquisition enabled it to
increase its profitability and also to scale up its entire business operations. Though the trading
results were not as good for the entire period as would have been expected considering the heavy
investment made, there were positive signs that revenues were generally improving.
General Electric: Performance Indicators, 2001 and 2011
050100150200250300350400450
Sales ($bn)
Net income ($bn)
Return on Equity (%)
Return on capital employed (%)
Market capitalization($bn)
No. of employees (‘000)
% of non US employees
2001
2011
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The net income for the year 2011 is relatively the same as the year 2001 which in normal
circumstances would have reflected a very negative image of stunted growth but in these case the
market capitalization was slashed by almost 50% and given the similar circumstances it has
produced the same results even with half of the market capitalization of the year 2001, its
actually a commendable achievement.
Between the years 2006 – 2009, the average return on capital for GE electric was
gradually decreasing from 19.6% in the year 2006 to 11.6% in 2009. Net earnings also decreased
from 20.7 billion in the year 2006 to 11 billion in 2009 while the total assets increased from
697.3 billion to 781.8 billion for the same period.
General Electric performance, 2006 – 2009
0100200300400500600700800900
Revenues
Net earnings
Cash from operating activities
Return on average Equity
Total assets
Long term borrowing
2009
2008
2007
2006
Other strategies that may assist like the value chain which involves nine elements, each with its
own operating costs and which are allocated to asset driven by real cost drivers. Some of these
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cost drivers or centers may be controlled. The support activities are company’s infrastructure,
human resources, technology and innovations and procurement. Others are marketing and sales,
in and out logistics and operations.
Draft a briefing report to Jeff Immelt that advances an argument for the use of the real options
approach to strategic planning as GE attempts to address the problems that engulfed the
corporate in 2009. Once again, you should make specific reference to key authors and concepts
within the real options domain.
Mr. Jeff Immelt,
CEO,
General Electric Company,
Dear Sir,
Re: Real option Approach as a Supplement to Strategic organization management.
Real options have had a major contribution to the management of risk scenario by
bringing in the real potential upside in the risk to offset the entire hand wringing resulting from
the downside. Real option is seen as the bridge between that connects the corporate finance and
the planned corporate strategy. (McDonald and Siegel, 2002)
Real option approach is aimed at getting the best way to assess the value of all the risky
assets with an objective of maximizing the value of the firm while strategic management is
focused on getting the best source or alternative of the most competitive advantage with the best
market potential. The real option approach presents an opportunity to bring the benefits of
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financial analysis and evaluation to corporate and business strategic analysis and provide a
connection or link with the value creation and maximization. Real option approach also reveals
the real value of maintaining flexibility and growth in both the operating as well as the financial
management decisions.
By preserving and maintaining the flexibility to scale up investments during good
scenarios and abandon similar investment during incase of unfavorable scenario, these flexibility
enables firms to reinvent and turn bad investment into good one. The ideal value real options
approach is greatest when there is exclusitivity which dissipates very fast in a competitive
environment. It’s very useful to firms that have relative competitive advantages and can
comfortably act alone or with much ease that their competitors in response to new information.
Real option approach has been used widely in mining and commodity industries. The real option
approach adds an optimistic face to uncertainty. Uncertainty creates problems in future forecasts
and it’s not good for business but it can be exploited to give positive results and the information
gathered can be used to supplement and augment the upside and decrease the downside risks that
are common in investments. The conventional risk approaches and adjustments lack this facility
to capture flexibility and as such must adjust by providing premium to the risk adjusted.
Real option approach provides three ways of tackling its strategies, one option is to wait
and delay, where a company with exclusive rights to either invest or embark on another
investment has also the option of making a decision when to accept and take the investment or to
delay and wait before taking it. The other option is to expand and the company is willing to lose
the money on the initial investment hopping to expand on other markets or investments. The
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final option is to abandon the investment if the project is draining money without any signs of
picking up. It’s better to give up early and embark on another project.
While it’s sometimes clearly appropriate to attach real value to real options there are
cases where It’s definitely realistic like in patents, exclusive licenses and reserves of natural
resources, the argument for an additional option premium gets gradually weaker as one moves
away from the exclusivity that’s inherent in all these cases. A company that invest in an
upcoming market in a loss making organization on the basis that the market is large and is
potentially profitable could be making a critical mistake. There is a probability that the company
may be right but the absence of barriers may make it not earn the extra returns in that market or
keep out the competition. Not all the opportunities are valuable options nor all options have real
economic value. Thank you.
Yours,
Outline and discuss some strategic options (at least two) available to GE over the next five years
(2009+). Your answer should include an explanation as to how these options will be
implemented and evaluated (you should again make reference to appropriate academic models
and concepts).
Growth strategy. If General Electric Company wants to increase its level of performance it may
implement the growth strategy. This strategy will substantially broaden and expand the scope of
all its profitable units or portfolios in terms of customer grouping and functions together with
alternative innovations in technologies to improve the general performance. There are several
reasons why businesses grow, these reasons include making use and taking advantage of any
opportunity or advantage of a gap in the market, identifying and making use of competitive
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advantage against their competitors and increasing its market share. There are two major types of
business growth. Internal growth or External growth that involves merger and acquisition. The
internal growth strategy is generally gradual and can be financed internally by ploughing back
profits instead of paying out dividends or by asking for contribution from the shareholders. the
major disadvantage is that it takes time to organize the such financing as it involves a lot of
formalities meanwhile the competitors may be also strategizing and expanding and obtaining an
upper hand in the competition for a greater market share. Its advantage is that it’s a better way of
raising capital and maintains a better gearing position as there will be no debts to pay in future or
interest and also maintains a positive solvent growth. External growth is usually carried out by
obtaining external financing or by merger or acquisition. These two approaches depend on
external financing to fund the business expansion and these can have a negative impact on GE as
it can result in a deteriorated gearing position, for instance between the years 2002 and 2009,
General Electric was in such a predicament. Merging with another firm is a mutual arrangement
or agreement where two firms join together to form a single organization. A takeover happens
when one company acquires controlling interest in another. It involves acquiring more than 50%
of the other company’s shares. The target of the Growth strategy is its investments, turnover,
profit maximization and improvement of its distribution networks. In a competitive environment,
all the firms will be trying to grow making the competition very intense. According to the growth
strategy the key to growth is to stake out a position and establish a less vulnerable so as to launch
attack on the opponents from one head to head not minding whether they are new in the market
or old and to reduce erosion from the direction of either buyer’s, suppliers and any substitute
products. To establish a position like that may take many forms i.e. solidifying former
relationships with customers, product differentiation or rebranding, establishing technological
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changes in product development. Growth in a business needs investment in financial, innovation
skills, technical and human resources and the desire to grow. Generating and maintaining
liquidity i.e. maximizing total cash flow and minimizing any cash flow should be ideal direction
for growth of any firm.
The balance scorecard translates the organizations strategy into a set of performance
targets or measures that provides the general framework for implementing the adopted strategy.
They include Financial, Customer, internal business process and learning and growth. The score
card balances the need of financial and non financial corporate performance to analyze and
evaluate Short and long run performance on the same report. (Adams, 1999)
The financial perspective analyzes and evaluates the profitability of the strategy. It emphasizes
cost reduction in relation to competitors, sales and cost of sales, and the operating income.
General Electric performance, 2006 – 2011
0100200300400500600700800900
Revenues
Net earnings
Cash from operating activities
Return on average Equity
Total assets
Long term borrowing
2011
2010
2009
2008
2007
2006
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According to GE performance report as reflected in the chart below, the return on average equity
is decreasing so are net revenues while the total assets are also decreasing.
The balance score card for General Electric Company
Increased Shareholder value
Financial p/p Lower cost Revenue
growth
Customer p/p product offering service offering relationshi
ps
Brand image
Business
Proc
operation mgn
process
Customer relation Innovation Regulatory
Learn/Growt
h
Culture Skills Leadership Information
P/p – perspective
The customer perspective identifies the market segments that have been targeted and weighs the
success of the company. The number of new customers and their contentment is taken as a
measure of its success. The internal business process targets the customer’s perspective by
creating and maintaining value for the clients and also the shareholders. It’s evaluated by
benchmarking against the company’s main rivals. It’s made up of, the innovation process,
operations and the post sales service. Learning and growth perspective indentifies the means and
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capabilities of the organization to excel in order to achieve the maximum or optimum processes
that will create real value for the clients. These is evaluated by employees education and skills
attained. The information system is measured by the systems real time feed-back.
Activity based accounting is a process that involves the application of costs to the actual
activities that cause them. The components are;
Identification of the actual activities that cause the overhead costs to be incurred. These involves
the use of the concept of cost drivers which are defined as the activities which cause the costs
instead of the costs themselves. A distinction can be made among the processes that add value
and those that do not add value, the ones that do not should be removed and awarded to the
valuable sections. 1(Staubus and George, 1971)
ABC helps to distinguish and separates the fixed cost, variable cost and the overhead.
These split and separation of cost assists in identification of the cost drivers. Direct labor and the
relevant materials are mostly easy to identify and trace directly to the products. Where the
products use common or similar resources differently, then weighing may be necessary.
The cost driver is the main factor that establishes or drives the cost of each activity that has been
identified. For instance, the activity cost of bank tellers can be related and associated with each
product by taking the measurements of how long each transaction of particular products take
(cost driver) at the counter. For the activity of operating machinery, the driver will be machine
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operating hours. That’s the machine operating hours will also drive labor, maintenance and the
overall power cost during the machine’s operations and running activity.
Adjustment of the accounting system so as to allow costs to be collected by each activity
instead of the cost system and identification of the factors that cause each and every activity’s
cost to change. The allocation of short term variable cost using the volume associated cost
drivers like the direct labor hours, total machine hours, or direct material cost. Items like
electricity would be allocated and driven by machine hours and later apportioned in accordance
to the variability of the drivers. In the same way some items may differ with the value of the
materials used or with direct labor hours.
In terms of the additional support functions, it’s the nature of the transactions taken by
the support section which are related to the relevant cost drivers. For instance, the number of
purchase orders drives the purchases department. Similarly, the number of the total production
runs undertaken in a particular department drives several other costs such as inspection or the
production costs scheduled.
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References
Adams, R. (1999), Performance Indicators for Sustainable Development
Accounting & Business, March pp 16 – 19.
Bromwich M., Bhimani A. I., (1994), Management Accounting – Pathways to
Progress, London.
Simmonds K., (1981) The Fundamentals of Strategic Management Accounting, London.
Wilson R. M. S., (1995), Strategic Management Accounting, Ashton et al (eds),
Issues in Management Accounting, 2nd edition, PHI Englewood Cliffs (NJ).
McDonald, R. and Siegel, D. (2002) The value of waiting to invest, Quarterly Journal of
Economics, vol. 101, 707-728.
Gamba, A.(2002) Real Options Valuations: A Monte Carlo Approach, Working paper, SSRN
Staubus, George J.(1971) Activity Costing and Input-Output Accounting. Richard D. Irwin, Inc.
