A Portfolio Analysis of Conglomerate Diversification - Case Study Example

General Electric Business Model Canvas General Electric Business Model Canvas Introduction Managers who want to improve the effectiveness of their business model and organization, as well as to increase their own ability to manage, use diagnostics/assessments to determine the reality of business effectiveness in comparison to what they originally envisioned. Good feedback contributes to the development of plans to improve business/organizational effectiveness and management performance. To better assess how the firm creates and delivers value to its clients and customer one can use business models. A familiar business model that is used by managers is the business model canvas that evaluates organizations based on their value proposition, customer segments, channels, key activities, key partners, customer relations, revenue streams, cost structure and key resources. Osterwalder (2004) describes a business model as describing the rationale of how an individual firm creates captures and delivers value. This paper provides an evaluation of the business model of General Electric based on the building blocks in the business model canvas. As such, the paper will look at the value proposition in terms of the products that it offers to its customers and how the company creates value to the customers who then are convinced to make repeat purchases. It will also asses the key activities that General Electric engages in to offer value to its customers, the resources it needs to perform these activities; their key partners customer segments and the sources of income. Body General Electric is widely known for its products that are sold to consumers globally. The company has highly diversified its products to cover several areas including consumer products, energy, infrastructure and products in the industrial segment. The company, has grown over time to be one of the most successful and largest producers of goods in the world and their business model is worth a study. The company’s business model is characterized by the diversification of their line of products to cover a wide range of products in a variety of fields including health and aviation industries. This should reasonably protect the company against the risks associated with a down turn in any of the industries (Gondzwaard, 1976). In what some scholars have noted to be an American culture oriented business environment, General Electric encourages competition both internally and externally and regards individual effort more than collective effort. The company also encourages and rewards continuous learning. In what can be called their value proposition, General Electric offers its customers value in various segments such as power and water, oil, gas, home and business solutions, transportation, health care, and financial services. The firm prides itself on its ability to develop innovative products to meet the changing consumer needs. The General Electric power and water segment proposes to offer generation and distribution of power, renewable energy and water technologies. Some of the products in this segment include the digital wind farm that targets those individuals who need renewable energy sources and live in windy areas (Arnott, 2010). On the other hand, the General Electric home and business solutions produces appliances and lighting platforms which are a necessity in most homes. The products offered in this category vary widely from lighting equipment to general household equipment. Also, the company has a division in the aviation industry and is one of the leading producers of aircraft engines. Some of their main products in this line include turbo funs and vehicle propulsions. The company particularly focuses on helicopters and the manufacture of their spare parts. The company further has investments in the transportation industry providing equipment for rail road products such as electric locomotives, rail road repairs, rail road signaling equipment, mining and marine drilling. The health division offers transformative medical technologies and services including information technologies, patient monitoring systems medical diagnostics and imaging. Some of their key competitors in this segment include Toshiba medical systems and Siemens health care. The general oil and gas segment deals in services such as gas storage, fuel dispensers, and LNG solutions. In this segment the company supplies oil and gas containers and also refills them for their customers. Besides investing in the machinery and energy industry, General Electric also has investments in the financial sector offering such financial services such as commercial lending and underwriting loans and leases. With these products the company targets small and medium companies which require such financing to meet their expansion demands and their increasing customer demands. General Electric has carefully chosen the industries in which they operate ensuring less competition since only a few firms could raise enough capital to invest in the same fields. The company also prides itself in investing in areas of expertise to ensure that the products they offer in the market are of high quality. Beside this, investing in an area of expertise reduces the production costs given the relatively lower time and effort spent in production and provision of services to customers. The key activities that the company has to engage in to meet its consumers’ needs are vast given the high level of diversification. In the capital and financing segment, the company offers underwriting services, Installment loans and consumer financing amongst other products. Under consumer financing, the company offers credit cards and lending solutions for the consumers enabling them to buy goods or products that they would not otherwise be able to purchase in time to meet their needs. The company also offers installment loans for which the customers pay back in installments. To meet their competitors in this sector, the banks, General Electric offers more attractive terms as an alternative to those who do not wish to take up credit cards. The company also finances the inventory of other small and medium size funds and offers them guidance on efficient inventory management models and tools to minimize inventory costs (Henderson & Evans, 2000). General Electric also helps monitor the performance of the businesses through aiding them in preparing accurate reports and analyses. In the aviation sector the company engages in the production and supply of aircraft engines and spare parts. It also offers aviation consulting and trading in aircraft inventory. The aviation consultancy focuses on airline planning and offering airport solutions. The company also buys aircrafts and their engines and sells to other investors globally to expand their profit margins. Besides this, General Electric also offers leasing and lending solutions to for aircrafts. The company also offers secured loans for the aircrafts and the spare parts. In the energy sector, General Electric offers renewable energy, oil and gas and thermal power. The company has heavily invested in the generation and distribution of power and has invested in projects with capacities to produce 30 gigawatts of power (De Vries, 2009). The company has also invested in solar power and wind driven power generation methods (Hopkins, 2012). General Electric also taps into the oil industry and drills the oil and gas reserves. In the health industry, the company specializes in medical device manufacturing and healthcare practices while still financing the healthcare industry through providing equipment rentals and leasing and offering term loans to health facilities. The company also offers capital to the various operators in the industry to infuse liquidity in their cash flows. To the consumers, General Electric offers credit card programs to meet the cost of health care expenses not covered by insurance services such as hearing care, vision correction, dentistry and cosmetic treatments (Manchester & Dupree-Cammer, 2005). The company also offers mortgages and sale leasebacks to healthcare providers. To invest in the various lines of products as General Electric has requires massive capital and operating investments. It then goes without saying that General Electric must have invested vast resources to thrive in the various industries. Henderson and Evans (2000) state that apart from the financial resources, the company invests in its managers and in management innovations enabling it to deal with setbacks and to turn around poorly performing segments. The managerial abilities of this company are obviously high to meet the competition they face in every line and to make a breakthrough in the consumer markets which is highly competitive and in product innovation. The firm has invested heavily in machinery and equipment so as to be able to produce the vast products they offer to their customers and in innovators to ensure that they can continually offer products that meet the consumers changing needs. In the finance segment, the company largely focusses on underwriting and this requires accumulated expertise in risk analysis to ensure that such services are not given to high risk individuals. The company has moreover invested in a distribution network to ensure that its products reach the intended consumers in time. One of the ways through which they do this is having strategically located warehouses to lower the amount of inventory and transportation costs and to encourage on time delivery to customers. The company has a wide range of delivery options for the lines of products delivering some of them in truckload quantities and others in smaller lots. The company has also invested on a real time order tracking system that ensures that all the orders made are met. To enable the purchasers to make orders online and to choose their own packages, the Company has an online platform that ensures that orders are more accurately processed and less time is spent placing orders. Such a system offers the customer’s flexibility and reduces their ordering costs (Ocasio & Joseph, 2008). In offering services to its customers, General Electric partners with various stakeholders key amongst them being the customers themselves, other manufacturers, innovators and small and medium companies that require financing (Osterwalder & Pigneur, 2010). One of their key partners in the aviation and commercial engine is the Boeing which specializes in production of aircrafts. The General Electric for instance supplied the GE90 engine that powers Boeing’s 777 aircraft. In ensuring that the engines meet the needs of the aircraft the two companies collectively design, combining the best technologies from previous models and coming up with new innovations to ensure that the aircrafts meet the advancing technologies. Another company that partners with General Electric is the P.C Richard and son .The Richard and Son Company is a privately owned electronics and appliances retailer. To meet their customers’ demands for a wider variety to select from and greater services in an affordable way, the company partners with the General Electric for inventory financing and capital consumer financing. This is particularly important for Richard and son companies given the highly competitive business environment requiring the continual adaptation to customer needs ((Ocasio & Joseph, 2008). The financing offered by General Electric also enables it to take care of seasonal variations in purchases and revenue flow. General Electric furthermore helps the retailer to raise its sale volume by offering their customers the financing they require to make larger purchases. This helps drive up the purchases from Richards ensuring more sales revenue to them and leading to expansion of their distribution networks. General Electric has also partnered with triumph since 1993 when Triumph sought their help in expanding its international networks. The greatest challenge for Triumph at the time was how to meet their customers growing demand for their products. General Electric continues to provide it with inventory management services and financing to ensure that they concentrate on their core business function of manufacturing motorcycles. The two companies continue to partner to gain an understanding of the industry trends and to come up with more innovative means of meeting the changes in the marketing environment. Another key partner and customer of General Electric is the Ethiopian airlines based in Addis Ababa. To meet its expansion needs the Ethiopian airline, one of the largest Cargo networks in Africa partnered with General Electric in acquiring the additional aircrafts it so needed to realize its goals of increasing their capacity. Additionally, General Electric partners with Yamaha providing them with inventory financing. The company also does spot financing to Yamahas customers who may wish to acquire Yamaha products on credit. This enables Yamaha to increase its sales by capturing the customers who go out on a test drive and wishes to make purchases on the spot. To maintain a proper relationship with its customers and partners, General Electric keeps communicating with them constantly ensuring retention and repeat sales to the company and resulting in stable revenue earnings to them ((Ocasio & Joseph, 2008). The General Electric engages them and helps in the analysis of their business environment to help them come up with new ways of meeting the challenges that they face and to deal with competition. The company therefore places a lot of significance and emphasis on their customer satisfaction, providing support to them in various ways. This can be seen in how they help out their customers in designing better management tools for inventory and more detailed reporting. The company also helps its customers grow and to realize their full potential making it an attractive partner to most of the smaller partners and customers. The end result is that the customers are loyal to them and will always approach them with business opportunities. In terms of their revenue streams, the company has one of the highest turnovers globally. In the fiscal year 2012, it reported total revenues of about $147 billion; a larger percentage of about 34% was realized from the energy segment. 31% was realized from capital segment 13% from Aviation segment, 12% from healthcare and the rest from the other divisions of the business. Based on historical information most of the earnings of General Electric are derived from the energy segment which consistently gives out proportionately higher returns. This could be due to the fact that energy is needed in every industry and by private consumers hence the higher turnover realized from the sector. The company also raises much of its earnings from its financing activities in the capital segment. Combined the earnings of General Electric are some of the highest globally for conglomerates. The huge earnings can be accredited to its vast investments in various sectors and to the large customer base that it manages to reach out to globally. In its Financing line of business alone, General Electric serves 5000 franchises in more than 22000 properties providing loans and leases to provide financing solutions to Franchise and to raise income in interests. Some of the most important costs that General Electric incurs are in the form of production costs, distribution costs and staff costs (Ocasio & Joseph, 2008). The company has investments in manufacturing equipment that require huge capital outlay and their distribution is also costly. To manage the highly diversified segments, General Electric also hires highly skilled leaders who are paid more to retain them in the company. The company also employs many employees to work in the various industries in which it has invested and hence incurs high staff cost. Conclusion Looking at the business model of general electric, it’s clear that it is unique in its approach. The company is a highly diversified conglomerate investing in totally unrelated fields and still managing to thrive. While the strategy of diversifying in both related and unrelated fields may offer protection against risk of loss, many firms have found it easier to focus in fewer closely related lines of business given the managerial problems that arise with wider diversification and the increase in investment and logistics costs (Shreiner, 1969). Therefore, while there are various areas in which the company can improve on, other companies have a lot to learn from General Electric and the concept around which it is built. References Arnott, S. (2010, December 20). "GE to build £99m UK wind turbine plant". The Independent. De Vries, E. (2009). Wind Technology Trends: Why Small Steps Matter. Renewable Energy World Magazine. Gondzwaard, R. H. (March 1976). Perfomance of Conglomerate Firms: A Portfolio Approach. Journal of Finance, 39. Henderson, K. M., & Evans, J. R. (2000). Successful implementation of six sigma: benchmarking General Electric Company. Benchmarking: An International Journal, 7(4), 260-282. Hopkins, M. (2012). The Makings of a Champion or, Wind Innovation for Sale: The Wind Industry in the United States 1980-2011. Airnet working paper. Available online at http://www. theairnet. org/files/research/Hopkins/Hopkins_ Wind_20120421. pdf (accessed 28January 2013). Manchester, J., & Dupree-Cammer, M. (2005). U.S. Patent No. 6,915,277. Washington, DC: U.S. Patent and Trademark Office. Ocasio, W., & Joseph, J. (2008). Rise and fall-or transformation?: The evolution of strategic planning at the General Electric Company, 1940–2006. Long range planning, 41(3), 248-272. Osterwalder, A. (2004). 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