Strategic management of GE Industrial Solutions division

GE Industrial Solutions is a producer, primarily, of power and electrical systems and is part of the General Electric conglomerate. Major competitors are Emerson (USA), Siemens (Germany), ABB (Switzerland) and Toshiba (Japan). The industry conditions are favorable, which is born out in the financials for GE, which indicate stable revenue growth and strong profitability. The company competes as either a differentiated player on a best cost player, depending on the product. Firms are all strong, and they compete for customers by offering a comprehensive slate of product and service solutions -- many customer use two or more competitors to encourage competition among the industry players.

GE has tremendous resources, but in general so do the company's competitors. As an American company, GE has the best domestic national market, a fact that has helped it to become bigger that its competitors, though they are all household names within the industry. GE has enhanced R&D capabilities, strong leadership and bargaining power advantages that it can use to extend its market leadership. GE IS currently a well-performing division, and the structure of the division has been built to support the current strategy. Therefore, it is recommended that GE maintains the current strategy, but continue to invest in R&D as maintaining technological competitive advantage will be critical to long-run success.

Background

GE Industrial Solutions, a division of the General Electric conglomerate, manufactures and markets products pertaining to power and electrical systems. It has three main product subdivisions -- Critical Power, Drives & Controls, and Electrical Distribution. IS a B2C company, and defines its markets by customer type. The major customer types that it delineates are commercial, data center, health care, industrial, mining, oil & gas, and telecom (GE IS, 2014). It is often the case that one customer will need products from more than one of the product subdivisions, something that has to be reflected in the marketing strategy.

GE IS trades with a differentiated strategy. The company seeks to differentiate itself in a couple of different ways, and relies on innovation and new products as a means of maintaining a strong market position. This generic strategy reflects the technical nature of the company's products, and the need for performance, therefore the external preconditions exist for the pursuit of a product leadership strategy (Murray, 1986). This paper will examine the strategic management of GE Industrial Solutions, including external environment analysis and an explanation of the strategic planning methodology.

Strategic Planning Methodology

Miles and Snow (1978) elaborated the idea that strategy comes before structure in companies. Strategy is developed on the basis of external environmental analysis, and a desire to find ways to exploit opportunities or to counter the threats that have been identified. There are contrary views to this, the most important being that of Hall and Saias (1980) who countered that structure is a constraint on strategy. While this latter point is true, in particular given that IS operates within the broader structure of General Electric, it is also well-known that of all firms, General Electric is one of the more willing and capable when it comes to dramatic re-organization. Therefore, the constraints that structure put on strategy are minimal. The basic strategic management methodology will thus be followed, with constraints such as organizational structure given due consideration, but not driving the process.

Thus, the first step is to conduct the internal and external analysis of the business. This analysis will provide insight into what the company is capable of, and what strategies it might wish to pursue in the marketplace. It is assumed, but not written in stone, that the current strategy of product leadership is most likely going forward, as it fits within GE's broader strategy and is closely aligned with the current capabilities of the organization.

Internal Analysis

There are several methodologies for conducting an internal analysis. First is an analysis of the dominant economic features of the industry. The customer base provides insight into this. The customer base is diverse. A typical B2C company with a diverse customer base will see its income correlated with the broader economic environment, but subject to individual industry fluctuations. As an example, mining is historically a cyclical business. Right now, mining is expected to be in a down cycle, because key demand drivers like Japan and China are experiencing manufacturing slowdowns and mining giant Australia is beginning to move away from policies that encouraged a mining-centric economy (Mather, Masanao & Bowe, 2014). Thus, IS susceptible to prevailing global economic conditions, but its diversification acts as hedge against demand volatility.

IS retains competency in innovation, as measured by new product launches. The company has been able to launch several new products in the past year, and most of these are subject to patent protection. IS has a large number of patents, and routinely uses IP protections as a means of maintaining competitive advantage and pricing power associated with monopolistic competition. The GE brand and senior management can also act as a strength, because IS can tap those resources if need be. GE famously has an excellent leadership pipeline, which should give IS better leadership than many of its competitors, plus GE benefits like a lower cost of capita and preferential market access. IS also dealing from a position of financial strength. The unit contributes a substantial portion of GE's revenues and profits (2013 GE Annual Report), which means not only does it have significant internal financial resources but it is likely to get preferential access to leadership and other corporate resources.

There are several theoretical models for understanding the external environment in which a company operates. One is the Five Forces model (Porter, 2008), which describes the favorability of an industry from a profit perspective. The bargaining power of suppliers is relatively low. Suppliers in this industry tend to be raw materials and generic components suppliers. The value of their products is considerably lower than the value of the finished goods that GE has designed and made, and thus they have limited bargaining power, especially since GE and its competitors are often very large companies with strong scale advantages. The bargaining power of buyers is relatively low as well. GE is larger than many of its customers, and patents give it a measure of protection for its products. There are competing products, but they are often imprecise substitutes. GE's quality reputation also lends it additional bargaining power even when there are direct competitors.

The threat of new entrants is relatively low. There are high capital costs to enter this industry. There are several multi-billion dollar companies in the industry, most of which started in the 19th century in either the U.S., Japan or Europe. Even major economies like Canada, South Korea or France have struggled to get a foothold in this market. It is possible that a Chinese company could emerge, especially if afforded infant industry protections by its government, but otherwise there is very little threat of new entrants, as the last major one was Toshiba in the 1950s.

Industrial products of this type tends to be a concentrated industry. There are smaller, more specialized players, but in general GE has the ability to combine R&D with economies of scale, and most firms in the industry -- such a Phillips -- have similar capabilities and can compete as such. There are few threats of substitutions, because of the specialized nature of the equipment. Both of these factors serve to enhance the pricing power within the industry. There is, however, some intensity of rivalry. The firms in the industry are large, and exit costs are high -- even if GE divested a division that division would continue to exist in the industry, just under different ownership. Thus, firms compete intensely for customer relationships and major contracts. In many cases, companies seek to offer comprehensive solutions in order to win business. This competition is one of the only factors that contains prices in the industry. But in general, this is a favorable industry in which to operate. The financials support that assessment -- the net margins are high, for example power & water (20.2%) and oil & gas (12.8%).

General Electric is strongly positioned. A few other major competitors like Phillips and Siemens are equally strong in their positioning. These company all have similar strategies, and all are capable of executing on these strategies. Within any given product category, there is likely to be a discount competitor and a niche market player as well. Positional mapping is a technique that helps companies to better understand their strategic positioning. This mapping is done for every product or business, and typically involves understanding the trade-off, from the perspective of the customer, of price and a significant product attribute. Normally, a company wants to be in the upper right (high quality, high price) quadrant, or the lower left (low price, low quality). A position in the upper left is usually good for penetrating markets, but also means the company is leaving profit on the table. A position in the lower right (high price, low quality) implies that the company is simply not capable of being competitive (D'Aveni, 2007). General Electric in general, and IS specifically, aim for the upper right quadrant where they offer superior products at premium prices. As a rule -- and there may be individual products that stand as exceptions -- GE is effective in this strategy. The company has a tendency to divest business where it cannot occupy a dominant position in this quadrant (Sun, 2014).

Competitive Position and Resources

General Electric Industrial Solutions has a strong competitive position. GE has strength in terms of its brand, which has an estimated value of $45 billion, which ranks it 6th in the world. This is higher than its major rivals, which are ranked 42nd (Phillips) and 49th (Siemens) (Interbrand, 2014). This illustrates the strength of GE's brand, and its positioning within the marketplace. However, at these levels there is not necessary a lot of incremental value over its major competitors, all of whom have very strong brand power within the industry. GE does have effective positioning over other companies that are not major brands in the business. Niche products have to demonstrate inherent superiority over GE products in order to win share. It is not entirely known the degree to which customers view discounted products (in the lower left quadrant of the industry positioning map) as viable substitutes -- surely some do but more do not, given how strong the sales of the major differentiated players are. Many companies cannot afford to use low-cost competitors for things like power systems.

General Electric and its competitors are all equipped with considerable resources, which for the most part negate the inherent scale advantages of GE. All companies can, if they choose, divert considerable resources into research and development, as a means of improving their competitive positioning within this industry. All companies have access to low cost capital, given their access to strong domestic banking systems, their inherent financial strength and diversified revenue streams. Because the major competitor tend to be located in different countries, each has a strong home market on which to draw -- the largest industrial markets in the world -- and each also has access to top level talent in their countries by virtue of their size, prominent and respective reputations for managerial excellent. GE might outcompete other American companies like Emerson for things like leadership, but Siemens and Toyota have domestic leadership pipelines of equivalent quality. Among these heavyweight, everyone has a lot of punching power.

The major advantage that GE gets from its size is that it has some economies of both scale and distribution that its competitors might not have. All can compete for any project, but GE will have a slightly better brand and better bargaining power, even over giants like Siemens and Toyota. Each also has a slight disadvantage when seeking business in the growing Chinese market, in that they are all outside firms, thus disadvantaged over domestic competitors. Internationally, Chinese competitors have little pull, but in their own country the playing field is more level.

Strategy Formulation

It is recommended that General Electric maintain its current strategy of being a best-cost provider, or just a straight differentiated provider, depending on the product. GE should utilize the differentiated strategy on newer products and those where it has some degree of patent protection. When a product is commoditized or subject to more intense competition, it only makes sense that a best cost strategy be adopted, because in that situation customer are apt to become more price sensitive, and GE will need to respond to that.

But in general, the evidence shows that GE's positioning strategy is working. All firms in the industry -- at least the ones making billions -- have adopted this strategy, where brand name, innovation and the ability to meet comprehensive sets of customer needs are all critical success factors. Moreover, as noted earlier, GE's structure has been built along the pursuit of the differentiated strategy, and to change that strategy would force GE to restructure the organization. At present, with healthy margins and favorable industry conditions going forward, there is no real reason for GE to change course. Furthermore, the overarching strategy for General Electric is to only operate either in industries with persistently high margins or in industries that are growing. This is basically an adoption of the BCG Matrix of investing only in cash cows and stars, and making a point to cut question marks and dogs (Stern & Stak, 2014). Right now, IS a cash cow, but still has some growth left in it, especially if GE can win market share from its many competitors. It is the market leader, which implies that it can, with its brand and slight scale advantage, continue to gradually win share in this business.

Implementation and Evaluation

The implementation strategy is easy -- keep doing what it's doing and GE will be fine. This is a situation where if it is not broken, it should not be fixed. GE has implemented a structure that is providing this division with the human and financial resources that it needs to be the market leader, and should continue to do so.

The evaluation of the strategy is a different matter. Even when the strategy is to maintain course, the company needs to have a sense of what it wants to accomplish with that strategy and therefore should also evaluate on the basis of existing metrics -- revenue, profit, market share, number of customers, revenue per customer, revenue breakdowns by industry and geographic markets, margin measures and new patent approvals. These measures will ensure that the company remains on course, and can provide insight into when industry conditions are starting to turn. The company will want to anticipate and drive these changes, which means it must in particular pay attention to technological development, and GE will want to be a leader among its peers in new patents and new product introductions in order to maintain its competitive positioning that is so favorable right now.