The Diversification Strategy of General Electric

Diversification

General Electric has long worked within a conglomerate structure that gives it a significant amount of diversification. The company breaks down its diversification in its annual reports. GE earned $148.6 billion in 2014, coming in the following segments:

The largest group is GE Capital, which itself has a high level of diversification:

The company's diversification approach is generally strong. First, GE has done this for decades and is therefore more familiar with running a conglomerate than most companies. There is a historical competitive advantage that comes with this. As one of the first conglomerates, GE has always been attractive as a place for the world's best executives, and it continues to draw in top level executive talent on account of this. Further, GE is fairly ruthless with respect to what businesses it wants to be in. The company explicitly states that they only want to operate in businesses where they think they can win (2014 GE Annual Report). The divest businesses that no longer are either high growth businesses or cash cows, and enter new businesses. So GE is not just diversified but is diversified in a way that all of its businesses are good ones. There are general downsides to the diversification approach in that it is difficult to manage so many businesses effectively, but that is a weakness of the model that GE has been able to overcome consistently for many decades -- the ability to manage a conglomerate is one of the draws for top executives, and ultimately GE has proven that they are among only a handful of American companies that can do this successfully. There are not a lot of opportunities to transfer technologies or for integration, but there are economies of scale to be had in management and financing that help GE. One of the reasons GE Capital is so huge is that the company borrows at a very low rate, allowing it to be a competitive provider of finance. Access to capital and managerial expertise provide GE with ample opportunities -- they seem to enter new businesses fairly easily, and if they find competitive or economic threats too great, they exit businesses just as quickly.

Competition

GE has so many businesses in so many countries that it would be impossible to produce an exhaustive list of their competitors. However, there are some things that can be said about GEs competitors. First, GE generally makes products that are scalable globally, such as medical equipment, oil and gas exploration equipment, trains and engines. Their competitors are also competing in the same global markets -- so the number of countries is not all that important because in most cases there are no local competitors for what GE does. Each industry has different competitors, and for the most part competitors seek to carve out their own niches. For example, GE has a locomotive business, and so does Bombardier. But GE focuses on freight while Bombardier has an emphasis on public transportation -- both companies make rolling stock but they occupy different niches and only occasionally enter into direct competition. GE makes aircraft engines, turbines and parts; so does Rolls Royce. Again, however, they do not always enter into direct competition, and in fact their products might complement each other.

It is in the biggest GE business where its products are the least-differentiated -- finance. Financial products are more difficult to differentiate. GE competes against other industrial companies and it competes against major banks for this business. In every industry, GE has a handful of major competitors, be these competitors other conglomerates or specialists in their field. Furthermore, these competitors come from all major nations, and compete on the basis of a wide range of strengths. There is no meaningful way to generalize about the wide range of firms against which General Electric competes.

Strategy

Entering and exiting businesses is a hallmark of GE's strategy, and has been for decades. The company seeks to be not only in businesses that it can win, but in businesses that offer it the potential for sustained high levels of growth. As such, GE engages relatively frequently in the restructuring of its conglomerate. The 2014 Annual Report actually specifies one element of this plan going forward -- GE wants to make 75% of its business industrial, leaving 25% for finance. GE Capital presently is 28% of its total business, so this implies that GE will seek out one or two new acquisitions to bolster its current lineup.

The biggest recent acquisition was that of Alstom, wherein GE purchased its energy assets of the French company. The focal point of the acquisition was the turbine business, and this is an area where GE ran into some difficulty with European regulators, who feared that the turbine business in Europe would be an oligopoly between two major industrial conglomerates -- GE and Siemens (Chee, 2015). The Alstom deal increases the size of GE's energy management business, and provides GE with better global market access for its new HA turbine, which it views as a core product to spur growth going forward (2014 Annual Report).

Another large deal recently involved GE Capital selling its Australian commercial assets to a private capital firm, Sankaty Advisors. The deal was worth $1.9 billion (Thompson, 2015). This deal represents the other side of GE's strategy. The Australian commercial division of GE Capital is engaged in financing throughout the Asia-Australia region. Australia's commodity-based economy is in a slump of late, and China's economic slowdown will have repercussions across Asia, so GE felt that this business was insufficient in terms of future growth potential, and divested it. It was recently announced that GE Capital's commercial division in the U.S. is being sold to Wells Fargo, which indicates a broader trend of GE getting out of this commercial finance business (Business Wire, 2015).