1. Company Background General Electric Company (GE) is a technology conglomerate that was originally started by electrical innovator Thomas Alva Edison in the 19th century. [i] Edison had been fascinated by electricity at an early age and was further inspired by the electrical exhibits at the Centennial Exposition in Philadelphia in 1876. [ii] That same year, Edison opened a laboratory in Menlo Park, New Jersey to research and conduct experiments to improve incandescent lighting[iii] and other electrical devices that he had seen in the Exposition.
[iv] After successfully inventing a sturdier and longer-lasting light bulb, the lab continued to make innovations in other technologies, including devices that generated, transmitted, and controlled electric power. That same year, Edison constructed the first dynamo (direct-current generator). In 1890, Thomas Edison brought several of his companies together under one name, forming Edison General Electric.
In 1892, Edison General Electric merged with its major competitor, Thomson-Houston Company (which held several patents for its development of arc lighting as well as methods for using alternating-current equipment allowing transmission of electricity over longer distances[v]), to form General Electric, which was a turning point in the electrification of the United States. The same year, GE’s stock began trading on the New York Stock Exchange. [vi] GE is the only company listed in the Dow Jones Industrial Index today that was also included in the original index in 1896.
[vii] By the turn of the century, GE was manufacturing generators to produce electricity, transmission equipment to carry power, industrial electric motors, electric light bulbs, and electric locomotives. GE was diverse from the beginning, though all initiatives dealt with electricity in some way. [viii] Between 1913 and 1924, GE began to expand its business by merging with several new companies and brought us new innovations such as the television in 1927, the electric washing machine in 1934, and moldable plastic.
GE introduced the line of credit in the late 1930s, the first television network, the first jet engine, and won a Nobel Prize for work in surface chemistry. Many of its discoveries have changed the world. [ix] Since the company’s inception, GE has grown to have a presence in over 100 countries and has arguably the most recognizable name and reputation. GE has continued to grow into an international company with a diverse portfolio of products ranging from jet engines, power generation equipment, financial services, plastics and medical imaging.
This diverse, conglomerate structure was popular in the 1960’s and 1970’s, where many companies bought businesses that were outside their core competency so that they could better protect themselves against changes in the economy. Over the next few decades, most conglomerates broke themselves up as companies switched to a more synergistic view, where businesses believed they should stick with their core competency and with businesses they knew well. GE, however, decided to maintain a conglomerate.
[x] GE has many divisions, which can be seen on the organization chart below, including: • Capital – including Commercial Finance, Money and Consumer Finance • Technology Infrastructure – including Aviation and Healthcare • Energy Infrastructure – including Energy Financial Services • NBC Universal – including Cable and Sports • Consumer & Industrial – including appliances, electrical distribution and lighting [pic] In addition to GE’s business diversity, it is also known for its commitment to research and innovation.
In 2008, GE invested $15 billion into research, which resulted in 2,537 global patent applications and intellectual property assets. GE has received numerous awards honoring its accomplishments, values and reputation: • In 2004, GE was named the number one company for employers and employees on the Forbes 500 Global Player list and ranked ninth on Fortune Magazine’s “50 Most Desirable MBA Employers” list. • In 2005, GE ranked first overall on the Fortune Magazine “Global Most Admired Companies” list.
• In 2006, GE ranked first overall on the Fortune Magazine “America’s Most Admired Companies” list. [xi] • In 2008, GE ranked fourth in Business Week’s “World’s Most Innovative Companies” for the 2nd year in a row[xii] and was named the Energy Star Partner of the Year for the 5th year in a row by the United States Environmental Protection Agency and Department of Energy. • In 2009, GE ranked among the top 10 in Fortune magazine’s listing of the 50 Most Admired Companies in the World, ranking ninth overall and first in the electronics industry.
Hulu. com and GE ranked among Fast Company’s annual list of the world’s 50 most innovative companies, with Hulu ranking third and GE ranking eleventh. GE ranked fourth overall in Business Week’s “100 Best Global Brands”, in which brand value is evaluated in the same way other corporate assets are valued – on the basis of how much it is likely to earn for the company in the future. [xiii] 2. SWOT Analysis The conglomerate arrangement that GE chooses to operate under is seen by some as a benefit, while others see it as a weakness.
Scientists view the structure as beneficial to research since GE can use its expertise from one business unit to drive innovation and growth in its other business units. Analysts also believe the structure provides GE an edge since they can take older technologies and transfer them to new initiatives. [xiv] “A breakthrough in GE’s Medical Systems business, with relatively little modification, led to a method by which an aircraft engine can transmit continuous information about blade speed, engine heat and other relevant data about its in-flight performance well in advance of any possible safety situation.
This innovation, in turn, catalyzed an important new development with respect to a self-monitoring system for use with heart pacemakers. [xv]” Investors on the other hand find GE as one of the hardest companies to understand since it is involved in so many different businesses. They usually prefer to invest in companies that concentrate on one business. Furthermore, some investors can only see GE from the perspective of its worst performing business, no matter how successful the other business areas might be.
Investors are also deterred since they cannot invest in only one of GE’s businesses, but only in GE as a whole. [xvi] Whether this structure works or not should be judged by the company’s performance. GE earned $18 billion in 2008, its third highest year in history, which it contributes to repositioning its portfolio over the past eight years in order to enable growth. Its operating cash flow was also at over $19 billion. xii A recent threat towards GE’s earnings is its losses in the commercial property unit of the company.
“In 2008, the first full year of the recession, General Electric’s commercial real estate business made $1. 1 billion profit. Now, even with signs of the broader economy improving, analysts estimate it could be five years before the unit earns another cent. ”[xvii] Commercial real estate tends to be the last industry to lose money and the last to recover, with GE finding itself stuck with excess space, falling rents, and tighter credit. Even after the commercial real estate market recovers, losses will ensue due to vacant space that was locked in at recession-era rents.
Some analysts estimate GE’s properties could lose approximately $8 billion in value through 2012. On the brighter side, GE offset such threats with self-created opportunities such as global reverse innovation. GE developed small price, low cost health-care innovations for developing countries that couldn’t afford sophisticated health-care equipment. Two such examples are the $1,000 handheld electrocardiogram (ECG) device developed for rural Indian and the $15,000 portable, PC-based ultrasound machine developed for China.
Both are now sold in the United States due to their various applications and affordability in light of the economic recession. Reverse innovation is the opposite of the typical “glocalization” approach that many industrial-goods manufacturers in rich countries have employed for decades, where companies develop great products at home and then distribute them worldwide, with some adaptations to local conditions. Glocalization was successful in an era when rich countries accounted for the majority of the market and other countries didn’t offer much opportunity.
But those days are over – thanks to the rapid development of populous countries like China and India and the slowing growth of wealthy nations. By using the reverse innovation process, GE will remain a large competitor in the market where up-coming countries like China and India are projected to become strong players in the near future, assuming the development of these countries will follow the model of the United States. [xviii] GE sees another opportunity in bringing manufacturing jobs back to the U. S.
GE became known as a leader in offshoring manufacturing jobs, saying it was just too expensive to manufacture in the U. S. During a June 2009 speech, CEO Jeffrey Immelt stated “We should set a goal…to have manufacturing jobs be no less than 20% of total employment, about twice what it is today. ” The struggling economy has hit the U. S. manufacturing industry hard, losing approximately 2 million jobs since December 2007. The return of manufacturing jobs would boost the economy and offer a glimmer of hope in an otherwise bleak picture. The jobs that would return to the U. S.
are not expected to be low-skill manufacturing jobs. Immelt has plans to solve the clean energy challenge with these manufacturing jobs and is hoping this will create a broad economic opportunity in the U. S. This move will not only deter rising transportation costs and wages in developing countries like China, but will also speed up supply chains in many industries where GE competes. For example, GE has decided to manufacture its new hybrid water heaters in Louisville rather than China due to state and local incentives, as well as a temporary wage freeze negotiated with the unions.
[xix] GE’s focus on Research & Development (R&D) is not only a great strength for the company, but also offers huge opportunities, especially given the harsh economic times being faced by the U. S. and the world. In a press conference, CEO Immelt stated, “GE has never forgotten the importance of R&D. Each year, we put 6% of our industrial revenue back into technology – so much that more than half of the products we sell today didn’t even exist a decade ago. As a consequence, we are a huge exporter.
” The Obama administration’s stimulus plan has earned praise from GE for increasing “the basic research funding for the first time in recent memory” and asserted that the U. S. needs to “significantly increase investment in R&D from an all-time low of 2% of the GDP. ” Even during the economic hard times being faced globally, GE has not cut the R&D budget. Research conducted by Industrial Research Institute (IRI) supports the notion that R&D is a critical ingredient for economic recovery.
A study published in 1995 in the IR journal Research Technology Management found that companies investing more than 5% of sales into R&D during the recessions of 1981–1982 and 1990–1991 fared better when the recessions ended compared with companies that invested less than 3% of sales in R&D. Economic recessions are innovation stimulators. Companies are forced during hard economic times to innovate systems to save money and to gain a competitive advantage in order to stay alive in the industry. [xx] Another opportunity is the U. S. government strongly supporting the idea of “going green.
” Everyone from the company owner to the common home owner has reduction of carbon footprints and the effects of actions on the environment on the forefront of their decision making. “Ecomagination” is GE’s business platform to design products and services that benefit the environment, as well as reduce its own carbon footprint. “Many companies talk about things they hope to do in 10 to 20 years. We are offering a lot of solutions to tough environmental challenges today,” said Judy Hu, global executive director of advertising and branding at GE. [xxi] GE has launched this business platform across various business units to a great success.
From home appliances to windmills and turbines, going green is a very common theme across all business units at GE and this effort has put the company at the front of the green movement. The U. S. Department of Defense has awarded GE $2 million in federal stimulus funding for a smart microgrid demonstration project at Twentynine Palms Base, California. GE will provide an enhanced suite of microgrid control system technologies that will enable a military base to more effectively manage its local energy resources and interaction with the larger electrical grid network.
[xxii] 3. Current Non-Financial Performance/Activities As stated earlier, the concept of global warming and “going green” has generated a significant buzz across the country at many different levels. Individuals are urged to reduce their carbon footprint through recycling efforts, carpooling, etc. The government has developed several environmental regulations through the Environmental Protection Agency (EPA) in order to drive companies to reduce greenhouse gases; which are believed to contribute to global warming.
Through these regulations (some which have passed and some which the government is considering to pass) large corporations are urged to evaluate their business, products and processes. GE’s Ecomagination business strategy is a company wide movement (started in 2005) across all of its businesses to drive innovation and growth of profitable environmental solutions while engaging stakeholders. [xxiii] GE identified several areas in each of its businesses where it can make technological improvements so it can offer more energy-efficient products to its customers.
These areas include improvements to its products and processes as well as programs for its employees so they can take part as individuals. GE has also been involved with government groups to support various environmental regulations. Under its Energy Infrastructure business, GE has developed and continues to develop methods of utilizing renewable energy as well as alternate ways to use fossil fuels (specifically coal). GE is one of the world leading suppliers of wind turbines. GE has supplied over 11,600 wind turbines worldwide generating over 18,000 MW of capacity.
[xxiv] A wind turbine utilizes the natural supply of blowing wind to turn its blades for electric generation. Utilizing the renewable source of energy GE is able to capture the energy of the naturally developed wind knowing that it will be naturally replenished. [xxv] This replaces the use of fossil fuels, such as coal or natural gas, which are considered to be depleting in supply. Additionally, wind turbines generate no gas emissions thus improving and saving the environment. Every 100 MW of wind power generated over the course of 20 years is the equivalent of burning 2. 9 million tons of coal or 62 billion cubic feet of natural gas.
ii Replacing a fossil fuel plant of comparable size with a 20-wind turbine farm is the equivalent of removing 27,000 cars off the road in the US. Globally, GE is a major supplier of wind turbines in China and is committed to providing 10GW (10,000MW) of installed wind energy by 2010. [xxvi] GE is involved in USCAP (United States Climate Action Partnership) to urge government to develop and enact CO2 emissions legislation. [xxvii] The current US legislature is in the process of considering passing CO2 emissions legislation, which could seriously impact the way the U. S. develops energy across the country.
GE is supporting the movement to regulate this fuel emission and in doing so offers a technology, Integrated Gasification Combined Cycle (IGCC), which can be used to capture CO2 and meet the desired emissions limits. IGCC is a method of separating coal into two streams of carbon monoxide (CO) and hydrogen (H2) prior to combustion. [xxviii] The CO is converted to CO2 for capture and storage and the H2 is used for electricity generation in a combustion turbine. GE is a leader in this type of technology for electricity generation. [xxix] GE faces a few problems with these alternate sources of energy.
These technologies are fairly new and as they develop the costs passed to the customer for such technologies are fairly high (compared to those of existing technologies). Additionally, since there is limited experience with some of these technologies, specifically IGCC, there remains a high level of uncertainty in using this technology as a reliable source of energy. Through the use of innovation and dedication GE continues to find ways of improving its Energy Infrastructure to develop these technologies and provide a better, more efficient product that is environmentally friendly.
Through its Technology Infrastructure, GE is developing fuel-efficient products and technologies that are already being used in the aviation and transportation businesses. GE is a global supplier of airplane engines and continues to develop its products to meet the growing demand of energy efficiency and emissions reduction. GE offers an engine, GE90-115B, which has been designed as a highly fuel-efficient engine. As compared to similarly sized engine this line offers more power while improving its fuel efficiency, which results in less fuel usage and lower emissions.
[xxx] The GE90 is designed to emit 389,000 fewer metric tons of carbon dioxide per year than its competitor engine, which is the equivalent of removing 74,000 cars from the road in the US. The fuel consumption reduction per year, per Boeing 777-300ER which will be equipped with this engine, is 1. 35 million gallons. This equates to $3. 4 million in savings per jet (assuming $2. 50 per gallon fuel cost). [xxxi] The GENX line of engines is designed using the latest innovations in advanced materials and design processes. In doing so this line of engines will deliver 15% better fuel consumption than the engines it will replace.
The emissions generated by this engine is 95% below the current regulated requirement suggesting that this engine will continue to be used even as regulations become more stringent on emissions levels. [xxxii] While performing these individual improvements to its line of jet engines, GE has formed an alliance with one of its competitors, Pratt & Whitney. This alliance (know as Engine Alliance) was formed in 1996 between GE and Pratt & Whitney to develop, manufacture, sell, and support a family of modern technology engines for new high capacity, long-range aircraft.
This alliance was formed in response to the forecast developed by each company suggesting the worldwide demand for jet engines was going to increase and the cost to develop a new engine would be over $1 billion dollars. [xxxiii] This alliance allows the two companies to share both the costs of developing their engines and the rewards of the sale of these engines. In the transportation sector, GE is developing Hybrid locomotives. These locomotives use a diesel-powered engine to generate power to move the locomotive and energize the cars.
The Hybrid technology comes into play when the engines capture the energy created during the braking process (typically lost as heat) and stores it in a battery for use on demand. This is expected to reduce fuel consumption by up to 15% and emissions by 50% compared to most freight locomotives being used today. [xxxiv] GE has also been developing fuel saving technologies to be used on these locomotives. The Auto Engine Start Stop (AESS) is a system which automatically shuts down the engine during idle times to save fuel however it leaves the locomotive in its operating state for a quick start up.
[xxxv] The Accufuel Monitoring system provides real time fuel information (such as usage rate, levels, etc) to on staff crew and management. [xxxvi] It provides self-diagnostics of the fuel consumption to allow the crew to make changes to improve the locomotives efficiency. The use of a Variable Speed Blower allows for adjustments to motor blower speed between the on and off settings to reduce fuel consumption and energy use during operation. [xxxvii] GE is also a major leader in the innovation of energy efficient appliances.
These energy efficient appliances not only lower the average electric and water bill, they decrease carbon dioxide emissions and lower the amount of water use that was previously required with older appliances. GE was not only awarded the Energy Star Award in 2009, but they were also awarded the 2009 Sustained Excellence Award by the U. S. Department of Energy and Environmental Protection Agency. The Sustained Excellence Award shows that GE has continued year after year to produce and develop new energy efficient appliances.
GE refrigerators that have earned the Energy Star rating are 20% more energy efficient than refrigerators that do not qualify for the Energy Star, and 40% more energy efficient than conventional refrigerators sold in 2001. [xxxviii] A GE Energy Star refrigerator will emit 2200 lbs. less of carbon dioxide over a 13-year period than the average conventional refrigerator. In an effort to increase energy efficiency, local utility companies have started offering rebates to consumers that are purchasing Energy Star rated appliances.
GE Energy Star washers use less energy and less water than the conventional washer. GE frontload washers exceed US Department of Energy standards by up to 77%, and 2009 Energy Star guidelines by up to 23%. [xxxix] The GE Harmony top-loading washer exceeds US Department of Energy standards by 57% and 2009 Energy Star guidelines by 10%. [xl] GE washers, on average, save 60% in energy consumption and 51% in water usage as compared to other non Energy Star rated washers. This savings can pay for the initial cost of the washer over its life.
All GE dishwashers that are Energy Star rated are at least 41% more energy efficient than the current 2007 Federal Standard. [xli] This will save the consumer approximately $120 over the lifetime of the product by choosing an Energy Star rated dishwasher over a non-Energy Star rated dishwasher. GE also produces Energy Efficient room air conditioners, dehumidifiers, water heaters and water dispensers. GE continued its innovative approach to energy efficiency in its residential and commercial lighting industry.
GE’s compact fluorescent (CFL) bulbs use 75% less energy than incandescent bulbs and last 10 times longer as well. By switching from incandescent bulbs to CFLs, the average savings is $272 dollars per year for a house with 25 60-watt bulbs and 10 100-watt bulbs. That equates to savings of $1,492 over the life of the bulbs. [xlii] The CFL comes in 23 different styles and was awarded the Energy Star award for energy efficiency. GE Lumination’s LED Traffic Signals are in the process of replacing the standard incandescent pedestrian control signals around the world.
GE is producing full ball, arrow, pedestrian, GT2 European and transit signals. All of these signals are LED, have an energy savings of 90% and require less maintenance. The average life-span for the LED signal is over 50,000 hours, which will drastically reduce maintenance and bulb replacement costs. GE LED signals are designed and tested to handle conditions such as sun phantom, light uniformity and color washout, which incandescent signals struggle to perform against. [xliii] Aside from producing Energy Efficient products, GE is pushing for NBC, its employees and local schools to “Green Up.
” NBC, which is owned by GE, has started an environmentally friendly campaign called “Green is Universal. ” Through this initiative, they have developed “Green” contests, created innovative ways to deal with corporate trash and supported programs to get its employees involved in cleaning up the environment. The “Green Your School” contest is offering a $5,000 prize to the high school that creates the most innovative conservation service project that helps improve, restore, conserve and/or beautify the school’s environment.
According to the Environmental Protection Agency, each month over 100,000 pounds of CD and DVD cases become obsolete in the U. S. , with a majority headed for the landfill. [xliv] NBC has figured out a way to cut that number down and deal with the paper waste from 30 Rockefeller Plaza at the same time. They are using an innovative closed loop recycling process to create 100 percent post consumer recycled paper CD and DVD cases from the 30 Rockefeller Plaza office trash. [xlv] NBC has cut down on the number of lights, production takes and hours in the studio to help conserve energy.
Employees of NBC are also encouraged to volunteer their time during earth week to local projects, which help clean up the environment. 4. Current Financial Performance/Activities The severe financial crisis and challenging recession have been problematic for the majority of the corporate world and GE is no exception. In February of 2009, GE lowered its dividend for the first time since the Great Depression[xlvi]. A month later, while this conglomerate’s stock price just grazed $5. 73 per share, which was an 83% departure from its price a year ago, it was relieved of its vaunted AAA credit rating and was issued a new rating of AA+.
[xlvii], 48 Despite the overwhelming investor pessimism that has destroyed the stock prices of many fundamentally strong companies, there have been chutes of economic progress within the 3rd quarter. The credit markets have been steadily improving, and pricing on new lending is becoming more favorable. As of now, loan delinquencies are leveling off, despite high unemployment. Emerging markets are also showing signs of strength. [xlviii] This 3rd quarter, GE’s stock price has rebounded 39% from $11. 78 to $16. 42. GE had outperformed the analyst earnings estimate of $0.
20 by 10% with earnings of $2. 5B ($0. 22 per share), which is down 51% from last year’s 3rd quarter at $0. 45 per share. Year to date earnings per share is holding at $1. 12 but this fiscal year’s EPS is expected only to hit $1. 00. Analysts expect to see -10% growth in EPS in one year but 9. 75% growth within the next 5 years. Revenue was $37. 8B versus last year’s 47. 2B, which was a 20% decline. Profit fell 27% from $7B to $5. 1B. Gross margin slid a staggering 49% from its 5-year average of 42. 6% to 21. 35%. Free cash flow also fell 51. 7% to $8. 1B from $16.
8B last year. The quarterly dividend dropped 67% from $0. 31 per share to $0. 10 per share. This decrease will save the company approximately $9B on an annualized basis. The 2009 fiscal year is looking at a year-end total of $0. 61 in dividends versus last year’s dividends totaling $1. 24. Return on assets is at 1. 5%, return on equity is at 10. 2%, and return on capital is at 1. 8%. [xlix] GE Capital has had the most adverse effect on the company as a whole with $263M in profit, which is down 87% from the 3rd quarter in 2008, as well as a 30% decline in revenue at $12. 1B.
[l] These results were attributed to a few key factors including: the plan to shrink GE Capital by lowering its asset base, higher credit costs, and increasing the reserves of capital for potential losses on financial receivables due to the recession. 49, [li] In the effort to shrink the asset base, the company plans to reduce its assets to $400B by 2012. As of now, total assets were down 11% to $551B from a year ago. 49 Over the last 9 months, GE Capital has increased its reserve coverage by $2B to cover potential financing losses during this challenging economic environment bringing the total reserve coverage to $7.
3B. 47 Year to date losses and impairments topped $9. 3B, which is on track to come in lower than the federal base case presented in March to investors (the federal base case was a simulation of possible macroeconomic factors that could have an adverse effect on an organization’s ability to remain solvent). This quarter, GE Capital has underwritten $7B in commercial originations with a 3. 3% return on investment. 50 Of the companies within GE Capital, the Real Estate business was the only one to post a loss. This company lost $538M in contrast to the $244M they earned in 3rd quarter 2008.
Its total assets were down 6% to $84B. 49 Fortunately, these losses were offset by the profitability of the remaining capital companies. GE Consumer posted a $434M profit, which was down 45% from a year earlier due mainly to higher credit costs. 49, 50 Its assets were reduced 16% to $180B. 49 GE commercial lending and leasing profited $135M (down 65% from the previous year due to higher credit costs and lower core income), with assets also down 14% to $214B. 49, 50 GE commercial aviation services profited by $191M (down 33% from the previous year) with its assets holding steady at $50B (only 1% growth over last year).
GE energy financial services profited $41M (down 87% from last year) with assets growing 3% to $23B. 49 This quarter, NBC Universal’s performance continues to remain consistent with the industry. 47 GE sold off a third of its ownership of A&E for an after-tax profit of $283M. Losses included the write-down of NBC’s stake in NDTV (an Indian entertainment investment), an impairment on the value of the Weather Channel and some programming asset write-downs totaling $194M. 50 Overall, revenues were down 20% to 4. 1 B due to loss of revenue from the 2008 Olympics coupled with lower ad revenue, lower revenue in film, and higher impairment costs.
49 Third quarter 2009 brought an 11% earnings growth for GE’s energy infrastructure consisting of energy as well as oil & gas segments. 51 Energy infrastructure accounts for 21% of GE’s overall revenue.
This growth came even as revenues from the quarter were down 9% from the previous quarter. Third quarter energy equipment orders were down 25% to 6. 5B with the largest drop of 30% seen in the thermal sector. This decrease in new equipment orders was partially offset by an increase of product pricing and a 10% increase in the energy services sector. Oil and gas equipment orders were up 1% to $2.
1B with the bulk of this profit due to the 7% growth of equipment sales. A large portion of this increase can be attributed to the Gorgon LNG project in Australia. [lii] GE expects this sector to continue growth as there have are numerous LNG projects in the pla