General Electric Diversification and Business Strategy Analysis

Introduction to GE's Conglomerate Structure

General Electric has long operated within a conglomerate structure that gives it a significant level of diversification. The company breaks down its diversification in its annual reports. GE earned $148.6 billion in 2014, spread across several major business segments, the largest of which is GE Capital — itself a highly diversified operation.

Diversification Strategy

GE's diversification approach is generally strong. First, GE has pursued this model for decades and is therefore more familiar with running a conglomerate than most companies, giving it a historical competitive advantage. As one of the first major conglomerates, GE has always been an attractive destination for the world's best executives, and it continues to draw top-level talent for that reason.

Furthermore, GE is fairly ruthless about which businesses it chooses to remain in. The company explicitly states that it only wants to operate in businesses where it believes it can win (GE 2014 Annual Report). It divests businesses that are no longer high-growth or strong cash generators, and it enters new ones. So GE is not merely diversified — it is diversified in a way that ensures all of its businesses are strong performers.

There are general downsides to a diversification approach, primarily that managing so many businesses effectively is difficult. However, this is a weakness of the model that GE has consistently overcome for many decades. The ability to manage a conglomerate is itself one of the draws for top executives, and GE has proven that it is among only a handful of American companies capable of doing this successfully. While there are limited opportunities to transfer technologies or pursue integration across divisions, there are economies of scale to be had in management and financing. One of the reasons GE Capital grew so large is that the company borrows at very low rates, allowing it to be a competitive provider of finance. Access to capital and managerial expertise give GE ample opportunity to enter new businesses with relative ease — and to exit them just as quickly when competitive or economic conditions become unfavorable.

Competitive Landscape

GE operates in so many businesses across so many countries that producing an exhaustive list of its competitors would be impossible. Nevertheless, several observations can be made. GE generally makes products that are scalable globally — such as medical equipment, oil and gas exploration equipment, locomotives, and engines. Its competitors operate in the same global markets, meaning the number of countries involved is less important than the nature of the industries themselves, since local competitors rarely exist for what GE produces.

Each industry has different competitors, and most seek to carve out their own niches rather than competing directly with GE across the board. For example, GE and Bombardier both have locomotive businesses, but GE focuses on freight while Bombardier emphasizes public transportation. Both companies produce rolling stock, but they occupy different niches and only occasionally enter into direct competition. Similarly, GE and Rolls Royce both manufacture aircraft engines, turbines, and parts, but do not always compete head-to-head — in fact, their products can sometimes complement one another.

It is in GE's largest business — finance — where its products are least differentiated. Financial products are inherently difficult to distinguish, and GE competes against both other industrial companies and major banks for this business. Across every industry, GE faces a handful of major competitors, whether conglomerates or field specialists, drawn from all major nations and competing on a wide range of strengths. There is no meaningful way to generalize about the full range of firms against which General Electric competes.

Conclusion

GE has pursued a diversification strategy for decades, but the strategy is not just about diversification — it is about finding strong, growing businesses where GE can achieve high, sustained growth rates over time. GE enters and exits businesses with considerable frequency in order to sustain this strategy. It also makes use of joint ventures when there are benefits in sharing expertise, knowledge, or market access. GE is open to whatever business form or approach will achieve its desired growth outcomes, and this flexibility in implementing strategy has proven to be one of its most durable competitive advantages.

References

Business Wire. (2015). Wells Fargo to acquire GE Capital's commercial distribution finance and vendor finance businesses. Business Wire. Retrieved November 17, 2015 from

Chee, F. (2015). GE clears final hurdle to $14 billion Alstom deal. Reuters. Retrieved November 17, 2015 from http://www.reuters.com/article/2015/09/08/us-alstom-m-a-general-electric-eu-idUSKCN0R81QR20150908

GE Aviation. (2015). GE Aviation and Woodward combine fuel systems expertise for new joint venture. GE Aviation. Retrieved November 17, 2015 from

General Electric. (2014). 2014 Annual Report. Retrieved November 17, 2015 from

Thompson, S., MacDonald, A., & Moullakis, J. (2015). Sankaty caps stellar run with $1.9 billion GE acquisition. Financial Review. Retrieved November 17, 2015 from http://www.afr.com/street-talk/sankaty-caps-stellar-run-with-19b-ge-acquisition-20151108-gku0nj