Student Name
Course Name
University Name
27th-March-2014
[ACQUISITION & DIVESTMENT SECTION GOES HERE]
Groups will also need to understand the mechanisms – acquisition and divestments – used to change the portfolio and the approach GE takes to managing its diverse activities and extracting synergies to provide shareholder value.
III. ASSESSING VALUE TO SHAREHOLDERS
General Electric has been in the business for large period of time and this is the reason why it has leadership position in most of the business it operates. However the company assess creating shareholder value as its prime objective. This is the reason when we assess the shareholder value that the company is creating then we need to keep in mind few things. The share price of the company has appreciated for period of time which has created value for the investor. Then there is dividend which the company has been regularly which also acts as return for the investors.
(i). General Electric vs. S&P 500 and Dow Jones
Figure 3.1, below, illustrates the performance of GE relative to market indexes during the five-year period 2005-2009. During the period January 7, 2005 to December 18, 2009, General Electric (-57.28%) underperformed against both the S&P 500 (-9.02%) and the Dow Jones (-4.20%). This reflects the impact of the global financial crisis. The downside of Dow Jones has been huge compared to General electric which has taken the hit but still have survived from the huge fall. Here the investors need to understand the fact that recession took its toll on majority of the companies and since GE caters to diverse business requirements it has still been hit by the downturn in the business cycle.
Source: Google Finance, March 25, 2014
GE experienced a dramatic drop in profit as a result of the economic crisis, with a dramatic drop throughout 2008 and signs of recovery in 2009. As a conglomerate, composed of unique business segments, reductions in profit were caused by impacts to specific segments. These are identified below.
(ii). Segment Profits
Figure 3.2, below illustrates that GE segments related to the financial sector experienced sharp drops in profits, resulting in the sharp drop in GE share value during the period 2008 to early 2009 illustrated in figure 3.1. It is interesting to see that infrastructure segment of the company has taken care of the downturn and survived the same.
Source: Compiled from GE 2009 Annual Report
The majority of GE segments experienced decline during the period 2005 to 2009 owing to the financial crisis:
- GE Commercial Finance (- 72.14%)
- GE Healthcare (- 20.80%) (2007-2009)
- GE Money (- 61.17%) (2007-2009)
- NBC Universal (- 26.78%)
The following segments experienced growth:
- GE Infrastructure (+112.35%)
- GE Industrial (+21.02%)
The Commercial Finance and Money segments combined represented 46.70% of GE profits in 2007 during the pre-financial crisis environment. The heavy reliance of GE on profits from its finance segments to deliver value to shareholders meant that the impact of the credit crisis that came into force in 2008 dealt a blow to the value of the company and in turn to shareholders.
Of note as well is the reduction in profit to NBC Universal, which is essentially stand-alone segment that is not related to GE’s other business segments.
In order to distinguish between the value of individual segments to GE, a Boston Consulting Group (BCG) matrix is presented in the next section with the purpose of illustrating the value of segments relative to growth rate and relative market share.
(iii). General Electric Boston Consulting Group Matrix
The BCG Matrix is a tool that allows business segments to be visually plotted to help determine what a company should keep, invest more resources in or sell (Investopedia, 2014). Figure 3.3, below, illustrates that GE has only one segment that should be seriously considered for divestment, namely GE Healthcare. The vast majority of segments are considered cash cows, with one star segment, GE Infrastructure (Energy). Its status means that Infrastructure (Energy) is a segment that GE should hold and continue to invest in. What is notable about GE’s BCG matrix is the strong presence of cash cows.
Please see Annex A for a description of the methodology behind the preparation of the BCG matrix for this assignment.
The dominance of GE’s portfolio by Cash Cows signals danger ahead. Cash Cows can transform into Dogs over time, as they cede market share to competitors and lack market growth. Although companies often hold on to Cash Cows, their dominance in the GE portfolio suggests that they need to further diversify by adding additional portfolios and growing them into stars. The company could use the opportunity to divest some of its Cash Cows to provide cash to grow additional segments.
Collectively, GE’s finance related segments – GE Commercial Finance and GE Money – are sizable proportions of their overall portfolio and indeed hold significant proportions of their respective markets. These segments have proved to be remarkably resilient through the financial crisis as significant competitors have collapsed. GE draws upon synergies between these segments [more on this here].
Given the resilience of these segments during what was perhaps the most turbulent period in the history of the financial industry, GE is in a position to capture greater market share following the financial crisis as competitors fall. The synergies between the finance related segments suggest that GE is able to draw upon economies of scale and expertise to continue to be a strong player in this market and make a move to Star status through increased market share. As a result of these favourable positioning elements of the financial segments, GE should hold these segments to use them to build further value for its shareholders.
The Industrial segment (Technology) is another segment that brings a significant proportion of revenue to GE, and like its Money segment is in close proximity to Star Status. However, the BCG does not provide contextual information to make decisions on the lifecycle of the segment, nor the state of the industry. Decision-making for both the Industrial segment and the Healthcare segment – the latter falls in the Dog segment – are informed but not enabled using this analytical tool. Industry attractiveness becomes a factor in making a decision as to whether to remain in these segments or divest. As a result, the GE/McKinsey Matrix must be employed to support this decision-making.
(iv) GE/McKinsey Matrix for GE
General electric is the leader in most of the business under which the company operates. Since the brand value and recognition of the company is very high if one places it on GE-Mckinsey matrix the company will fall in high market attractiveness zone and the core business of consumer finance which augments for 47% of the revenue will fall under high business unit strength. None of the business for the company falls under low category of business unit strength. This is the main power of the company as most of the core business of the company is able to generate good business strength and also have high market acceptability. The markets all over the world have done extremely well to realize it and this is the reason competitors of the company do not try to focus on the business strength part but leave it market positioning in middle segment in GE matrix. The bubble size here is reflection of the business size which is derived from the segment.
Recommendation:
GE is a diverse company and this is the reason why it survived the business cycle downturn in the proper manner. Although companies often hold on to Cash Cows, their dominance in the GE portfolio suggests that they need to further diversify by adding additional portfolios and growing them into stars. The company could use the opportunity to divest some of its Cash Cows to provide cash to grow additional segments. The Commercial Finance and Money segments combined represented 46.70% of GE profits in 2007 during the pre-financial crisis environment. The heavy reliance of GE on profits from its finance segments to deliver value to shareholders meant that the impact of the credit crisis that came into force in 2008 dealt a blow to the value of the company and in turn to shareholders.
References:
- O’Boyle, T. F. (2011). At any cost: Jack Welch, General Electric, and the pursuit of profit. Random House LLC.
- Ren, J., Ge, H., Wu, X., Wang, G., Wang, W., & Liao, S. (2013, October). Effective Sentiment Analysis of Corporate Financial Reports. In Thirty Fourth International Conference on Information Systems, Milan.
- Dechow, P. M., Ge, W., Larson, C. R., & Sloan, R. G. (2011). Predicting Material Accounting Misstatements*. Contemporary accounting research, 28(1), 17-82.
Annex A: Methodology to Create the BCG Matrix
As per class instructions to use reasonable proxy data were necessary to construct a BCG matrix, this report uses GE figures from the earliest year possible as proxies for Largest Competitor’s Sales figures in order to calculate the Relative Market Share (2007 for Healthcare and Money segments, and 2005 for all other business segments). As a result, the majority of Relative Market Share figures are greater than 1. Ideally, actual relative market share figures would have been used.
The data used to construct the BCG matrix is as follows:
| SEGMENT | MARKET GROWTH (2008-2009) | RELATIVE MARKET SHARE* | CONTRIBUTION BUBBLES |
| Commercial Finance | -72.85% | 1.03 | 10.18% |
| Healthcare | -15.12% | 0.94 | 10.51% |
| Infrastructure (Energy) | +12.53% | 1.69 | 29.72% |
| Industrial (Technology) | -8.13% | 1.23 | 32.53% |
| Money | -54.86% | 0.77 | 7.22% |
| NBC Universal | -27.69% | 1.05 | 9.83% |
* Proxy used as described above
——————————–@@@@@———–
Student Name
Course Name
University Name
27th-March-2014
[ACQUISITION & DIVESTMENT SECTION GOES HERE]
Groups will also need to understand the mechanisms – acquisition and divestments – used to change the portfolio and the approach GE takes to managing its diverse activities and extracting synergies to provide shareholder value.
III. ASSESSING VALUE TO SHAREHOLDERS
General Electric has been in the business for large period of time and this is the reason why it has leadership position in most of the business it operates. However the company assess creating shareholder value as its prime objective. This is the reason when we assess the shareholder value that the company is creating then we need to keep in mind few things. The share price of the company has appreciated for period of time which has created value for the investor. Then there is dividend which the company has been regularly which also acts as return for the investors.
(i). General Electric vs. S&P 500 and Dow Jones
Figure 3.1, below, illustrates the performance of GE relative to market indexes during the five-year period 2005-2009. During the period January 7, 2005 to December 18, 2009, General Electric (-57.28%) underperformed against both the S&P 500 (-9.02%) and the Dow Jones (-4.20%). This reflects the impact of the global financial crisis. The downside of Dow Jones has been huge compared to General electric which has taken the hit but still have survived from the huge fall. Here the investors need to understand the fact that recession took its toll on majority of the companies and since GE caters to diverse business requirements it has still been hit by the downturn in the business cycle.
Source: Google Finance, March 25, 2014
GE experienced a dramatic drop in profit as a result of the economic crisis, with a dramatic drop throughout 2008 and signs of recovery in 2009. As a conglomerate, composed of unique business segments, reductions in profit were caused by impacts to specific segments. These are identified below.
(ii). Segment Profits
Figure 3.2, below illustrates that GE segments related to the financial sector experienced sharp drops in profits, resulting in the sharp drop in GE share value during the period 2008 to early 2009 illustrated in figure 3.1. It is interesting to see that infrastructure segment of the company has taken care of the downturn and survived the same.
Source: Compiled from GE 2009 Annual Report
The majority of GE segments experienced decline during the period 2005 to 2009 owing to the financial crisis:
- GE Commercial Finance (- 72.14%)
- GE Healthcare (- 20.80%) (2007-2009)
- GE Money (- 61.17%) (2007-2009)
- NBC Universal (- 26.78%)
The following segments experienced growth:
- GE Infrastructure (+112.35%)
- GE Industrial (+21.02%)
The Commercial Finance and Money segments combined represented 46.70% of GE profits in 2007 during the pre-financial crisis environment. The heavy reliance of GE on profits from its finance segments to deliver value to shareholders meant that the impact of the credit crisis that came into force in 2008 dealt a blow to the value of the company and in turn to shareholders.
Of note as well is the reduction in profit to NBC Universal, which is essentially stand-alone segment that is not related to GE’s other business segments.
In order to distinguish between the value of individual segments to GE, a Boston Consulting Group (BCG) matrix is presented in the next section with the purpose of illustrating the value of segments relative to growth rate and relative market share.
(iii). General Electric Boston Consulting Group Matrix
The BCG Matrix is a tool that allows business segments to be visually plotted to help determine what a company should keep, invest more resources in or sell (Investopedia, 2014). Figure 3.3, below, illustrates that GE has only one segment that should be seriously considered for divestment, namely GE Healthcare. The vast majority of segments are considered cash cows, with one star segment, GE Infrastructure (Energy). Its status means that Infrastructure (Energy) is a segment that GE should hold and continue to invest in. What is notable about GE’s BCG matrix is the strong presence of cash cows.
Please see Annex A for a description of the methodology behind the preparation of the BCG matrix for this assignment.
The dominance of GE’s portfolio by Cash Cows signals danger ahead. Cash Cows can transform into Dogs over time, as they cede market share to competitors and lack market growth. Although companies often hold on to Cash Cows, their dominance in the GE portfolio suggests that they need to further diversify by adding additional portfolios and growing them into stars. The company could use the opportunity to divest some of its Cash Cows to provide cash to grow additional segments.
Collectively, GE’s finance related segments – GE Commercial Finance and GE Money – are sizable proportions of their overall portfolio and indeed hold significant proportions of their respective markets. These segments have proved to be remarkably resilient through the financial crisis as significant competitors have collapsed. GE draws upon synergies between these segments [more on this here].
Given the resilience of these segments during what was perhaps the most turbulent period in the history of the financial industry, GE is in a position to capture greater market share following the financial crisis as competitors fall. The synergies between the finance related segments suggest that GE is able to draw upon economies of scale and expertise to continue to be a strong player in this market and make a move to Star status through increased market share. As a result of these favourable positioning elements of the financial segments, GE should hold these segments to use them to build further value for its shareholders.
The Industrial segment (Technology) is another segment that brings a significant proportion of revenue to GE, and like its Money segment is in close proximity to Star Status. However, the BCG does not provide contextual information to make decisions on the lifecycle of the segment, nor the state of the industry. Decision-making for both the Industrial segment and the Healthcare segment – the latter falls in the Dog segment – are informed but not enabled using this analytical tool. Industry attractiveness becomes a factor in making a decision as to whether to remain in these segments or divest. As a result, the GE/McKinsey Matrix must be employed to support this decision-making.
(iv) GE/McKinsey Matrix for GE
General electric is the leader in most of the business under which the company operates. Since the brand value and recognition of the company is very high if one places it on GE-Mckinsey matrix the company will fall in high market attractiveness zone and the core business of consumer finance which augments for 47% of the revenue will fall under high business unit strength. None of the business for the company falls under low category of business unit strength. This is the main power of the company as most of the core business of the company is able to generate good business strength and also have high market acceptability. The markets all over the world have done extremely well to realize it and this is the reason competitors of the company do not try to focus on the business strength part but leave it market positioning in middle segment in GE matrix. The bubble size here is reflection of the business size which is derived from the segment.
Recommendation:
GE is a diverse company and this is the reason why it survived the business cycle downturn in the proper manner. Although companies often hold on to Cash Cows, their dominance in the GE portfolio suggests that they need to further diversify by adding additional portfolios and growing them into stars. The company could use the opportunity to divest some of its Cash Cows to provide cash to grow additional segments. The Commercial Finance and Money segments combined represented 46.70% of GE profits in 2007 during the pre-financial crisis environment. The heavy reliance of GE on profits from its finance segments to deliver value to shareholders meant that the impact of the credit crisis that came into force in 2008 dealt a blow to the value of the company and in turn to shareholders.
References:
- O’Boyle, T. F. (2011). At any cost: Jack Welch, General Electric, and the pursuit of profit. Random House LLC.
- Ren, J., Ge, H., Wu, X., Wang, G., Wang, W., & Liao, S. (2013, October). Effective Sentiment Analysis of Corporate Financial Reports. In Thirty Fourth International Conference on Information Systems, Milan.
- Dechow, P. M., Ge, W., Larson, C. R., & Sloan, R. G. (2011). Predicting Material Accounting Misstatements*. Contemporary accounting research, 28(1), 17-82.
Annex A: Methodology to Create the BCG Matrix
As per class instructions to use reasonable proxy data were necessary to construct a BCG matrix, this report uses GE figures from the earliest year possible as proxies for Largest Competitor’s Sales figures in order to calculate the Relative Market Share (2007 for Healthcare and Money segments, and 2005 for all other business segments). As a result, the majority of Relative Market Share figures are greater than 1. Ideally, actual relative market share figures would have been used.
The data used to construct the BCG matrix is as follows:
| SEGMENT | MARKET GROWTH (2008-2009) | RELATIVE MARKET SHARE* | CONTRIBUTION BUBBLES |
| Commercial Finance | -72.85% | 1.03 | 10.18% |
| Healthcare | -15.12% | 0.94 | 10.51% |
| Infrastructure (Energy) | +12.53% | 1.69 | 29.72% |
| Industrial (Technology) | -8.13% | 1.23 | 32.53% |
| Money | -54.86% | 0.77 | 7.22% |
| NBC Universal | -27.69% | 1.05 | 9.83% |
* Proxy used as described above
————————————@@@@@—————————-
Student Name
Course Name
University Name
27th-March-2014
[ACQUISITION & DIVESTMENT SECTION GOES HERE]
Groups will also need to understand the mechanisms – acquisition and divestments – used to change the portfolio and the approach GE takes to managing its diverse activities and extracting synergies to provide shareholder value.
III. ASSESSING VALUE TO SHAREHOLDERS
General Electric has been in the business for large period of time and this is the reason why it has leadership position in most of the business it operates. However the company assess creating shareholder value as its prime objective. This is the reason when we assess the shareholder value that the company is creating then we need to keep in mind few things. The share price of the company has appreciated for period of time which has created value for the investor. Then there is dividend which the company has been regularly which also acts as return for the investors.
(i). General Electric vs. S&P 500 and Dow Jones
Figure 3.1, below, illustrates the performance of GE relative to market indexes during the five-year period 2005-2009. During the period January 7, 2005 to December 18, 2009, General Electric (-57.28%) underperformed against both the S&P 500 (-9.02%) and the Dow Jones (-4.20%). This reflects the impact of the global financial crisis. The downside of Dow Jones has been huge compared to General electric which has taken the hit but still have survived from the huge fall. Here the investors need to understand the fact that recession took its toll on majority of the companies and since GE caters to diverse business requirements it has still been hit by the downturn in the business cycle.
Source: Google Finance, March 25, 2014
GE experienced a dramatic drop in profit as a result of the economic crisis, with a dramatic drop throughout 2008 and signs of recovery in 2009. As a conglomerate, composed of unique business segments, reductions in profit were caused by impacts to specific segments. These are identified below.
(ii). Segment Profits
Figure 3.2, below illustrates that GE segments related to the financial sector experienced sharp drops in profits, resulting in the sharp drop in GE share value during the period 2008 to early 2009 illustrated in figure 3.1. It is interesting to see that infrastructure segment of the company has taken care of the downturn and survived the same.
Source: Compiled from GE 2009 Annual Report
The majority of GE segments experienced decline during the period 2005 to 2009 owing to the financial crisis:
- GE Commercial Finance (- 72.14%)
- GE Healthcare (- 20.80%) (2007-2009)
- GE Money (- 61.17%) (2007-2009)
- NBC Universal (- 26.78%)
The following segments experienced growth:
- GE Infrastructure (+112.35%)
- GE Industrial (+21.02%)
The Commercial Finance and Money segments combined represented 46.70% of GE profits in 2007 during the pre-financial crisis environment. The heavy reliance of GE on profits from its finance segments to deliver value to shareholders meant that the impact of the credit crisis that came into force in 2008 dealt a blow to the value of the company and in turn to shareholders.
Of note as well is the reduction in profit to NBC Universal, which is essentially stand-alone segment that is not related to GE’s other business segments.
In order to distinguish between the value of individual segments to GE, a Boston Consulting Group (BCG) matrix is presented in the next section with the purpose of illustrating the value of segments relative to growth rate and relative market share.
(iii). General Electric Boston Consulting Group Matrix
The BCG Matrix is a tool that allows business segments to be visually plotted to help determine what a company should keep, invest more resources in or sell (Investopedia, 2014). Figure 3.3, below, illustrates that GE has only one segment that should be seriously considered for divestment, namely GE Healthcare. The vast majority of segments are considered cash cows, with one star segment, GE Infrastructure (Energy). Its status means that Infrastructure (Energy) is a segment that GE should hold and continue to invest in. What is notable about GE’s BCG matrix is the strong presence of cash cows.
Please see Annex A for a description of the methodology behind the preparation of the BCG matrix for this assignment.
The dominance of GE’s portfolio by Cash Cows signals danger ahead. Cash Cows can transform into Dogs over time, as they cede market share to competitors and lack market growth. Although companies often hold on to Cash Cows, their dominance in the GE portfolio suggests that they need to further diversify by adding additional portfolios and growing them into stars. The company could use the opportunity to divest some of its Cash Cows to provide cash to grow additional segments.
Collectively, GE’s finance related segments – GE Commercial Finance and GE Money – are sizable proportions of their overall portfolio and indeed hold significant proportions of their respective markets. These segments have proved to be remarkably resilient through the financial crisis as significant competitors have collapsed. GE draws upon synergies between these segments [more on this here].
Given the resilience of these segments during what was perhaps the most turbulent period in the history of the financial industry, GE is in a position to capture greater market share following the financial crisis as competitors fall. The synergies between the finance related segments suggest that GE is able to draw upon economies of scale and expertise to continue to be a strong player in this market and make a move to Star status through increased market share. As a result of these favourable positioning elements of the financial segments, GE should hold these segments to use them to build further value for its shareholders.
The Industrial segment (Technology) is another segment that brings a significant proportion of revenue to GE, and like its Money segment is in close proximity to Star Status. However, the BCG does not provide contextual information to make decisions on the lifecycle of the segment, nor the state of the industry. Decision-making for both the Industrial segment and the Healthcare segment – the latter falls in the Dog segment – are informed but not enabled using this analytical tool. Industry attractiveness becomes a factor in making a decision as to whether to remain in these segments or divest. As a result, the GE/McKinsey Matrix must be employed to support this decision-making.
(iv) GE/McKinsey Matrix for GE
Recommendation:
GE is a diverse company and this is the reason why it survived the business cycle downturn in the proper manner. Although companies often hold on to Cash Cows, their dominance in the GE portfolio suggests that they need to further diversify by adding additional portfolios and growing them into stars. The company could use the opportunity to divest some of its Cash Cows to provide cash to grow additional segments. The Commercial Finance and Money segments combined represented 46.70% of GE profits in 2007 during the pre-financial crisis environment. The heavy reliance of GE on profits from its finance segments to deliver value to shareholders meant that the impact of the credit crisis that came into force in 2008 dealt a blow to the value of the company and in turn to shareholders.
References:
- O’Boyle, T. F. (2011). At any cost: Jack Welch, General Electric, and the pursuit of profit. Random House LLC.
- Ren, J., Ge, H., Wu, X., Wang, G., Wang, W., & Liao, S. (2013, October). Effective Sentiment Analysis of Corporate Financial Reports. In Thirty Fourth International Conference on Information Systems, Milan.
- Dechow, P. M., Ge, W., Larson, C. R., & Sloan, R. G. (2011). Predicting Material Accounting Misstatements*. Contemporary accounting research, 28(1), 17-82.
Annex A: Methodology to Create the BCG Matrix
As per class instructions to use reasonable proxy data were necessary to construct a BCG matrix, this report uses GE figures from the earliest year possible as proxies for Largest Competitor’s Sales figures in order to calculate the Relative Market Share (2007 for Healthcare and Money segments, and 2005 for all other business segments). As a result, the majority of Relative Market Share figures are greater than 1. Ideally, actual relative market share figures would have been used.
The data used to construct the BCG matrix is as follows:
| SEGMENT | MARKET GROWTH (2008-2009) | RELATIVE MARKET SHARE* | CONTRIBUTION BUBBLES |
| Commercial Finance | -72.85% | 1.03 | 10.18% |
| Healthcare | -15.12% | 0.94 | 10.51% |
| Infrastructure (Energy) | +12.53% | 1.69 | 29.72% |
| Industrial (Technology) | -8.13% | 1.23 | 32.53% |
| Money | -54.86% | 0.77 | 7.22% |
| NBC Universal | -27.69% | 1.05 | 9.83% |
* Proxy used as described above
