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Andrew C. Inkpen

General Electric’s Corporate Strategy

Teaching Note
This case provides a vehicle for examining the strategic rationale behind GE’s corporate strategy and complex
diversification. The core arguments for and against unrelated diversification can be linked to the GE strategy.
For many years, GE has been held up as the exception to two arguments: (1) that related diversification strategies
outperform unrelated diversification strategies, and (2) that conglomerates are no longer a viable organizational
form in an era of outsourcing, focus, and shareholder value maximization. Whereas many formerly diversified
firms have become narrower and more focused with their corporate strategies, GE continues to buy and sell
businesses, and operates an extremely complex set of businesses.

Assignment Questions
1. Describe GE’s corporate strategy. Is there a strategic logic in the diverse set of businesses?
2. What role do culture and values play in the strategy?
3. Is GE’s corporate strategy viable for the future?
4. Why is GE proposing to sell its light bulb and appliances divisions?
5. What are the threats to the corporate strategy?
6. Should GE be held up as a model of how to execute a corporate strategy, or as an exceptional case that has
limited generalizability to other firms?

Suggested Teaching Approach

Begin the case discussion by asking students to look at Exhibit 1, which shows a summary of GE businesses in
2008. Ask if they can determine a logic, or connection, between the various business segments and individual
businesses. Depending on the group, include a mini-lecture on related versus unrelated diversification. Next,
turn to a discussion of GE culture and values. Ask if there is a common culture across all businesses, and if the
culture can be easily transferred to new businesses. If the culture is transferable, is it not conceivable that GE could
invest in any business or industry? Next, discuss the rationale for putting the light bulb and appliance businesses
up for sale. Finally, discuss the 2009 events: the plummeting stock price, the reduction in GE’s debt rating, and
the renewed calls for breaking up GE. In summary, tie the GE strategy back to the fundamental arguments that
unrelated diversification must involve process-based synergies, or it will fail to create a better-off result.

Instructors may also want to show a YouTube clip with David Letterman talking about GE’s acqui-
sition of NBC in 1986. Letterman visited GE headquarters and had a less-than-welcoming experience.
The clip is a good setup for a discussion of unrelated growth via M&A. (David Letterman visits the GE
building (1986) http://www.youtube.com/watch?v=_8xk360kzcc)

Copyright © 2009 Thunderbird School of Global Management. All rights reserved. This teaching note was prepared by Professor
Andrew C. Inkpen for the sole purpose of aiding instructors in the classroom use of the case “General Electric’s Corporate Strategy.”
It should not be used in any way that would prejudice future use of this case.
Analysis
1. What is GE’s corporate strategy?

In 2008, GE competed in six business segments. Within each segment there was tremendous diversity, and
each segment was large enough to be a stand-alone company. Is it logical for one company to compete in
aircraft engines, medical equipment, Hollywood movies, financial services of all types, and many different
manufacturing and service businesses? For most companies, the answer would be no. Through the 1970s
and 1980s, many of the largest conglomerates were broken up. Through the same period, GE prospered and
Jack Welch became a household name.

So what makes GE work and how did it happen? It happened over time, as Exhibit 2 shows. GE has been
buying and selling businesses for a century. For many years, the strategy was closely tied to manufacturing.
The manufacturing logic has disappeared because the company’s largest business is now financial services
(GE Commercial Finance and GE Money). GE’s entry into finance goes back to its early days of financing
electrical equipment purchases and, later, in consumer lending to finance the purchase of its appliances dur-
ing the Great Depression. Founded in 1932 as General Electric Contracts Corporation to provide
financing that supported the group’s industrial businesses, the finance business has grown far beyond
its original links to the basic industrial businesses. In recent years, half of the company’s profits have often
come from GE Capital.

Clearly, this is a case of unrelated horizontal diversification. Consider the quote below from Jeff Immelt (from
the case) in which he argues that the key to the strategy is the development of strong leaders who “safeguard
the culture.” We return to the culture argument a bit later.
Investors often ask how we can execute in a company with such diverse businesses. We do it by run-
ning the Company with common initiatives around growth and financial discipline…. I want investors
to see that GE is truly more than the “sum of the parts.” The strength of GE is in the “totality.” It is
the ability to deliver in good times and bad. We do this because we invest and deliver. We are winning
in the essential themes; we have built leadership businesses; we are a high-performance company;
and we develop great leaders.

We have always believed that building strong leaders is a strategic imperative. When times are easy,
leadership can be taken for granted. When the world is turbulent, you appreciate great people. Ulti-
mately, we want to develop people who are guardians of GE’s culture, champions of our legacy, and
protectors of our reputation. They must perform with integrity, be disciplined and aggressive—and,
at the same time, able to solve problems with global ingenuity.

2. Why does GE do so many acquisitions?

The quote from Jack Welch should be discussed:
Every acquisition GE makes has a perfect plan, but we know 20 or 30 percent will blow up in our face.
A small company can only afford to make one or two bets or they go out of business. But we can afford
to make lots more mistakes, and, in fact, we have to throw more things at the walls. The big companies
that get into trouble are those that try to manage their size instead of experiment with it.1

A few comments/questions that should be pursued:

• If GE truly is successful with 30 percent of its acquisitions, that is better than the norm for industry in
general.
• “Throw things at the walls”: Is that a good way to run a business? It sounds like a high-risk fishing
expedition.
• Can GE really afford to make more mistakes?

1
R. Foster, “Manager’s Journal: The Welch Legacy: Creative Destruction,” Wall Street Journal, September 10, 2001,
p. A.18.

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3. Are there synergies across the businesses?

Students will usually identify synergies between financial services and argue that GE can, as mentioned
above, provide financing that supports the group’s industrial businesses. While that is true, given the growth
and breadth of GE’s financial services, it can be argued that the financial synergy is trivial and hardly the
rationale for having financial services in the same company as the infrastructure business. After some ad-
ditional discussion, it usually becomes clear that traditional value chain synergies do not exist and, if they
do, they are on the margin.

4. How do GE culture and values support the strategy?

Suggested questions to elicit discussion:

• What is it like to work at GE?

• What type of people succeed at GE?
• How are leaders evaluated?
• Can the GE individual growth traits in Table 3 be evaluated?
• What is the purpose of the various GE initiatives?

After establishing that GE has a unique and deeply rooted culture, ask if the culture and values can be
transferred successfully to any business. Historically focused on manufacturing, GE is now more service-
oriented. Push the students to think about entertainment. Can GE successfully transform Universal Pictures
by implementing Six Sigma and various other corporate initiatives? The initial response from students is
generally no. However, the case of NBC suggests otherwise. GE was able to transform NBC into the best-
run television network after its acquisition in 1986. It is too early to tell if the same result will occur for
Universal and the other entertainment businesses.

With respect to the financial services businesses, in 2009 a New York Times article said the following:

Another theme, stressed repeatedly, was that the finance business was not so different from GE’s trademark
industrial side. The GE management playbook, they said, applied to both. “We run this like a factory, just like
any other GE business,” said Ronald Pressman, who heads the commercial real estate finance business.2

If this is true, GE should be able to run just about any business. Recent performance of the financial services
business suggests that GE is not running the business “just like any other GE business.”

5. What is the role of the corporate center?

The corporate center is responsible for the corporate strategy. The center is responsible for supporting and
developing the culture. In GE’s case, this gets reflected in the various initiatives and processes like Session
C. These processes are managed rigorously across the entire organization.

Does the center add value? That is one of the enduring questions for any diversified firm. During Jack Welch’s
tenure, nobody questioned his value to the firm. With Jeff Immelt and the problems of recent years, there
are many questions about the value added by the center.

6. Should GE be broken up?

Like all so-called conglomerates, there will be regular calls for a breakup. The fundamental question that
must be analyzed involves the better-off test: are GE shareholders better off with this collection of businesses
owned by GE, or would the shareholders earn higher returns with some of these businesses competing outside
the GE family? A recent Economist article says:

2
Steve Lohr, “GE Makes the Case for Its Finance Unit,” New York Times, March 19, 2009.

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 The case for keeping the rest of GE together, at least for the time being, is based on three arguments.
For a start, the company’s leaders deserve more time to show that their R&D investments can pay
off as the economy recovers. Next, in a world in which governments will become bigger customers
for GE’s wares, thanks partly to huge fiscal stimulus packages, the company’s expertise in dealing
with public authorities should benefit all of its divisions. Given GE’s strength in areas such as clean
technology, energy, and transport, it stands to benefit from at least some of the public money that
will be up for grabs.
The third argument in favour of keeping GE’s industrial side intact is that it has learnt how to sell
its disparate wares to foreign governments in compelling combinations rather than one by one. Last
year, for example, GE signed a wide-ranging partnership with Mubadala, the commercial-investment
arm of Abu Dhabi, which included a joint venture in commercial finance, some renewable energy
projects, and a new GE training centre. The company also struck deals in China, connected to the
Beijing Olympic games, that generated $2 billion of revenue. At a time of rising protectionist senti-
ment, GE’s ability to assemble such packages could ease its path into new markets.3

The breakup question can be explored by considering the case of light bulbs and appliances. GE has an-
nounced that these businesses might be sold. Although there is no information in the case, students should
know enough about the two businesses to have some say on how they fit or don’t fit in GE’s future.

Summary Points
1. Multibusiness companies create value by influencing—or parenting—the businesses they own. The best
parent companies create more value than any of their rivals would if they owned the same businesses. Those
companies have what we call parenting advantage.

2. Whenever any firm does an acquisition, it must pass the better-off test if the acquisition is to be successful.
In the case of unrelated diversification, passing the better-off test will involve an alignment of organizational
processes across the various businesses. In GE’s case, the culture, values, and initiatives, supported by out-
standing leadership development, have been the core processes transferred across businesses. GE also has
extensive best-practice sharing supported by a vision that leaders must act in the best interests of GE and
not just their business.

3. A multidivisional firm destroys value by:

• Adding bureaucracy faster than synergies

• Becoming a collection of silos where nothing is shared (i.e., more like a holding company than an
integrated whole)
• Making acquisitions that cannot be integrated, that are too expensive, or that are too large
• Slowing down the decision-making at the operational level (i.e., slower than stand-alone competitors)
• Focusing more on M&As and less on innovation and strategy creation

4. GE’s recent performance raises many questions about the ability to transfer the culture and values to busi-
nesses such as finance and entertainment.

Update
In 2009, GE remains a huge industrial corporation with a very solid global strategy in the majority of its busi-
nesses. GE is also in trouble. GE has cut its dividend by two-thirds, lost its AAA credit rating on its
long-term debt, and seen its stock decline substantially, mainly because of concerns about the quality
of GE finance loans. It looked increasingly likely that GE would have to restructure or divest much of
its finance business over the next few years.

3
“Losing Its Magic Touch,” The Economist, March 21, 2009.

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