GE Capital Strategic Planning GE Capital Strategic

GE Capital Strategic Planning

GE Capital

Strategic planning

Geographic diversification

Sales and marketing

Theoretical foundation of GE Capital management

Between risk management and optimization

Expansion as a management philosophy

Capital funding model

Organizational learning and knowledge management at General Electric (GE) Capital

Knowledge management tools

GE Capital Strategic Planning

General Electric (GE) Capital is the subsidiary unit of General Electric (GE), USA. GE Capital is headquartered at Norwalk, Connecticut, United States and has five divisions within GE Capital i.e. GE Aviation Services, GE Money, GE Energy Financial Services, and GE Commercial Distribution Services. These five divisions of GE Capital enable smooth functioning into respective market segments. Michael A. Neal is currently the CEO and Chairman of the company. With worldwide operational footprint, GE Capital has more than 55000 employees across 55 countries (General Electric Capital Corporation, 2012). The main services that GE provides are the leasing and lending to commercial business sectors. Further, the company also offers tailored financial service to entertainment, media, and health care businesses. The company has effectively diversified, both by product offerings and geographical regions (GE Capital, 2012).

To obtain an overview of company operations, geographic reach of its services and diversification of services, following statistics help draw broader understanding of GE Capital operations. One of the major contributions of GE Capital has been the return of significant amount of cash to its parent company, General Electric (GE).

Company

General Electric (GE) Capital

Services

Financial services leasing and lending to commercial business sectors

2012 Earnings

$7.4 billion

12% increment compared to 2011 earnings

2012 Dividend passed on to GE

$6.4 billion

Employees

50000

Major restructuring

GE Capital assets reduced from $600 billion to $300-$400 billion

1- Strategic planning

The executive management of GE Capital has strategically planned the operations of the company by diversifying the service offering, both with respect to the service segment and geographical area being covered. The company effectively supports the industrial businesses of General Electric parent company and services other commercial consumers. Following is the brief of company strategy with respect to different functions.

Geographic diversification

The parent company of GE Capital earned revenues of approximately $54 billion in year 2011. This was considerably more than the previous year 2010, an overall increment of 9% as compared to FY 2010 (GE Annual Report, 2011). The respective markets that GE Capital had secured with respect to market share and sales were:

Latin America

China

Australia

Western Europe

The growth of GE Capital in these regions was as follows:

Australia 46% more growth as compared to 2010

Latin America 29% more growth as compared to 2010

China 28% more growth as compared to 2010

On the other hand, Western European market being services by GE Capital posted net growth of -12%. The statistics indicate that the company has effectively diversified its services geographically and does not rely on revenues from one particular geographical market. During post-financial crisis years, it was observed that Asian markets (except Japan that was an exports dependent country with exports mostly to the U.S. And Europe) were least hit by the recessionary trend and European as well as the U.S. markets drowned several billion dollars of investors, specifically in the case of financial services industry. The strong presence in Asian and Latin American markets allowed the company to offset the losses earned from the European and U.S. markets. Other financial services banks, specifically of U.S. origin, were hit hard due to being non-operational in the Asian markets. Australia was the markets that offered the most growth to the CE Capital along with Latin America and China. Thus, this approach of balanced diversification allowed GE Capital to mitigate the after effects of financial crisis (GE Annual Report 2012).

Sales and marketing

The functional departments of sales and marketing have also been run effectively. The strategic planning has helped GE Capital to offer services such as:

Aviation financial services

Real Estate Financing

Commercial sector lending & leasing services

Consumer financing in all regions

GE Energy Financial Services

The geographic sales of GE Capital also surpassed many of its domestic as well as foreign competitors. The company provided $104 billion of funds in new financing within the North American region. These funds were provided to secure customers, mainly the state municipalities and industrial infrastructure developers. Not only has the company effectively sold new financings to the commercial sectors organizations, the company also services more than 56 million U.S. consumers providing them with credit of $87 billion (GE Annual Report, 2011). With more than 19000 commercial customers and more than 37000 (Small and Medium Enterprises) SMEs as newly registered customers in 2011, the company was one of the few financial services company to grow its business such rapidly.

2- Theoretical foundation of GE Capital management

Despite the financial crisis that hit the company hard in 2008, the theoretical foundations of management upon which the company is run are sound and imitated by leading competitors of the company in infrastructure development and financial services. The financial crisis of 2008 slashed the company's dividend by two thirds (The Economist, 2009) in year following 2008 and the long-term credit rating of the company was also downgraded. It was also speculated that health of its financial services division was also not well. Part of the speculation was well based as GE Capital under the leadership of CEO Jack Welch, has made unprecedented growth since 1980s till early 2000s. This stretched GE Capital well beyond its core service area. The theoretical management foundation that had established GE Capital during the four to five decades of 20th century were significantly disregarded by the company management during last two decades of 20th century and first decade of 21st century. Of late, since early 1980s, the company has also used total quality management (TQM) and the six sigma methodology to upgrade the organizational performance by leveraging organizational infrastructure, human resources, and TQM tools (Henderson & Evans, 2000). As argued by Bowen, Ledford and Nathan (1991), companies such as GE hire employees to become organizational citizens, thus offering them lifelong employments

Between risk management and optimization

Anderson (2012) identifies the approach of GE Capital during decades prior to 1980s as being careful risk management of the company's exposure to capital markets and the excessive risk that GE Capital assumed in form of leases and credit lines was offset by keeping the collaterals. This was disregarded in since early 1980s and the management applied a 'lease optimization (Anderson, 2012; 170) approach to grow its business. Without having to acquire the full collateral amounting to the 70% of the leased credit line, the company processed the individual application through lease optimization and maximized the exposure of the company.

Expansion as a management philosophy

The company used expansion of business operations, both through backward as well as forward integration of business operations. GE Capital has used acquisitions as the business model to grow in local as well as foreign markets (Ashkenas, DeMonaco & Francis, 1997). It entered into lending businesses in which it was virtually financing GE own subsidiaries and individual customers. There were large number non-GE customers as well. The company expanded into insurance operations, credit card business, and property loans. The expansion of business operations and segments was used as a continuous model to grow within the U.S. market. This also hampered the company's consolidation phases in each business where the company, GE Capital was to increase the profitability and decrease the cost of operations and sales.

Capital funding model

The capital funding model that Jack Welch had built during his tenure at GE Capital was carried forward by his successor Jeffery Immelt. The capital funding model continued to finance the property sector, credit card sector, and sub-prime housing loans. The following graphs represent the management philosophy that GE Capital CEOs developed during 1980-2000s. This resulted in significant growth of the firm in several financial services sectors but exposure to capital funding sector was most notable. The figures at the following page displays how the management of GE Capital disproportionately allocated GE Finance a vast share in revenue

Fig 1 Assets of GE Capital compared with leading competitors

Source: (The Economist, 2009)

Source: (The Economist, 2009)

generation. Exposure to financial markets was used as a business model to enhance the profits and push growth in the market. The long-term debts that the company accumulated to grow significantly in the years prior to the financial crisis did not leave the company's financial health as being good. The result was a crisis when financial markets were faced with credit crunch and failure to recover the lending.

3- Organizational learning and knowledge management at General Electric (GE) Capital

Despite the disruption of management's failure of not letting the company faced with excessive exposure to financial markets, the company has gained its reputation well. The company used formal methods and technologies to gain knowledge of the customer as well as its own learning that occurs in the process of servicing the commercial and non-commercial clients.

Knowledge management tools