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GE: Corporate Strategy Gone Wrong
West Texas A&M University MGT-4315-01
Question 1:
General Electric (GE) is pursuing
unrelated diversification
, experiencing a diversification discount when the value of the stock price of diversified firms is less than the sum
of its units. GE’s capital units accounted for 50% of all profits and revenues for years. Thus, under CEO Jeffrey Immelt, he decided to spin out GE’s capital. It allowed its stock price to increase by 11% on the announcement day. Additionally, one of the primary sources of value creation is economies of scale, which allows GE to minimize the levels of diversification. The company focused on and leveraged core competency in industrial products and engineering, including aviation, power, oil and gas, and healthcare. Besides, GE can expand its customer segments and markets by accessing new technologies to gain and sustain competitive advantage to help it continue to develop.
Unrelated diversification
tends to fail to gain additional creation value. However, GE was able to maintain the diversification-performance trend for a long time due to the following factors:
Management and leadership approach: Under Jack Welch’s tenure from 1981 to 2001, the company pursued an aggressive strategy to grow markets and improve profitability.
Diverse portfolios: Expanding its industrial engineering sections, including aviation, healthcare, power, and energy.
Global expansion and emerging markets.
Changes in business strategies and technological advancements toward products.
Question 2:
GE has seen financial problems since Jack Welch was CEO. He laid off the bottom employees to improve profitability and focused most on investors’ benefits rather than the company’s valuation. Under Jeffrey Immelt, the company faced financial losses due to the 2008 financial crisis or economic downturn, resulting in a loss in AAA credit rating and demand for its
products and services. In addition, GE faced diversification challenges, which made the company
lose its valuation and underperform in its portfolios. Also, the company faced leadership and management issues. GE found out it overpaid on some acquisitions, such as Alstom.
Question 3:
Jeffrey Immelt’s statement regarding integrating GE capital financial services with the company’s industrial units. He stated that “it is a uniquely bad idea now.” This is because combining financial services and industrial companies might increase risks during financial crises. The company cannot generate enough money for investment and lending to compete with the needs of industrial businesses for innovation (Egan, 2017). Also, this strategy can lead to a decrease in the company’s valuation and lower investors’ trust because GE’s conglomerate structure can be seen as challenging to evaluate and impact shareholder benefits. Those are reasons why I agree with Immelt that it is not a good idea.
Question 4:
I agree with Collins’ hypothesis in “Good to Great” because the greatness of a leader is often known after the leader has departed. As we know, GE had significant and impressive growth during Jack Welch’s tenure from 1981 to 2001. The case illustrates that leadership impact, long-term strategic decisions, and company structure are critical factors leading to the company’s success. Also, the case of GE shares the importance of long-term strategic decisions, such as changes in its
product scope
. It was one of the largest manufacturers of light bulbs,
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