A current critical strategic analysis of ONE Business Unit within General Electric PDF

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A current critical strategic analysis of ONE Business Unit within General Electric

Part fulfilment for MBA Module: Strategic Analysis; Tools and Techniques (ST4S38-V1)

University of South Wales

Tutor: Jason Anagnostopoulos

Prepared By: Jewel Collier-Swan Student Number: R1507D914985

Date: 14th October 2018

September 15, 2018

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Table of Contents

1.Introduction …………………………………………………………………………….. …………………………………..…………..3 2.Strategic position of the company………………………………………………………………………………..……………3 2.1 Product development, Market Penetration and Diversification through Differentiation 3.A critical evaluation of the resources and value systems of the company………………………………… 5 3.1

Tangible Resources -------------------------------------------------------------------------------------------5

3.1.1. Financial Resource…………………………………………………………………………………………………………..5 3.1.2 Physical Resources…………………………………………………………………………………………………………..5 3.2

Intangible Resources ……………………………………………………………………………………………………….6

3.2.1 Technology, Reputation, Culture……………………………………………………………………………………….6 3.3 Human Resources………………………………………………………………………………………………………………..7 3.3.2. Inbound logistics …………………………………………………………………………………………………………….8 3.3.3 Operations ………………………………………………………………………………………………………………………8 3.3.4 Outbound Logistics ………………………………………………………………………………………………………....8 3.3.5 Marketing & Sale…………………………………………………………………………………………………………..…8 3.3.6 Service …………………………………………………………………………………………………………………………....8 4. A critical evaluation of the product/portfolio mix within the SBU……………………………………………..…9 5. A critical analysis and evaluation of KEY future directions for strategic growth…………………………12 6. Recommendations/Conclusion …………………………………………………………………………………………………13 7. References………………………………………………………………………………………………………………………………..15

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1. Introduction General Electric (GE) is known as the world’s more diverse and technologically advanced and diverse. The company adopted a differentiation strategy through the provision of a wide range of corelated products and services such as gas power, steam power, reciprocating gas engines, nuclear power, hybrid power, healthcare, software and applications that are tailored to the needs of various industries. GE’s diversity makes it difficult for any company to compete. This paper will provide a critically analysis of the differentiation strategy and the various strategic actions utilized by Oil and Gas business unit in its operations. The paper concludes with a synopsis of the findings and recommendations on future directors for the company’s strategic development.

2. Strategic position of the company The decisions that a company make about its value position and how that value will differentiate them from their competitors is indicative of its strategic position. The Chartered Institute of Management Accountants (CIMA) highlights three main aspects of a company’s strategic position that influences its strategy: the external environment, strategic capability (resources and competences), culture and ethical values of the company and stakeholders (CIMA, 2015). The strategic outlook of Jeffrey Immelt, former CEO of General Electric, was to ‘repost GE to be the world’s best infrastructure and technology company, with a smaller financial services division.’ He wanted the company to ‘focus is on driving infrastructure leadership, investing in innovation and achieving a culture of simplification to better serve customers around the world.’ His goal was to align GE’s growth with industrial earnings in order to reduce the capital size of the company. In that regard, we can conclude that Michael Porter’s differentiation strategy, along with a combination of related strategic actions were used by GE to facilitate growth, resilience and maintain relevance to withstand diverse economic conditions within the oil and gas industry.

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2.1 Product development, Market Penetration and Diversification through Differentiation Using Porter’s differentiation strategy, GE targeted specific customer bases and provided products and services that are tailored to suit their needs through the following actions: -

Strong Research and development (R&D) processes which enabled the company to constantly innovate and generate competitive products and services. BHGE unmatched digital capabilities which produces upstream oil at the lowest cost per barrel. GE is among the top companies that owns patents produced in the USA. (Thompson, 2017)

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Increasing customer based in existing markets by adding new customers on current accounts. (Thompson, 2017).

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GE offers diverse products and services in multiple industries such as aviation, healthcare, energy, oil, gas, transportation, and aerospace. The company’s products are sold to specific market segments within the various industries, which allows the company to maximize sales within a wider customer base.

Thompson, etal stated in their book, Crafting and Executing Strategy: Concepts and Readings, two distinct characteristics that demonstrate differentiation: 1. ‘the existence of a buyer segment that is looking for special product attributes…’1 or 2. ‘a firm’s ability to stand apart from rivals competing in the same target market niche’2. Within the Oil and Gas SBU, GE clearly stands apart from its competitors because of the diverse nature of it oil and gas company. The acquision of Baker Hughes expanded GE’s portfolio. BHGE’s innovation and research operations drove the company’s oil and gas revenue up to $18.2billion in 2017, a 34% increase from 2016. The company is known to be ‘the world’s first and only full stream provider of integrated oilfield products, services and digital solutions’ 3. Similarly, with the GE Renewable Energy SBU, the company recorded $10.28 billion in revenue in 2017. This success was accredited to the company’s efforts in providing sustainable, efficient and diverse solutions for varying market segments such as hydro, wind and solar power for

1 Gamble, J.E., Peteraf, M.A., Strickland III, A.J. and Thompson, A.A., 2016. Crafting and executing strategy: Concepts and readings. 20th Edition. VLElibrary [Online]. Available at: https://unicaf.vitalsource.com/#/books/9781307106244/cfi/1!/4/2@100:0.00 (Accessed on 1st October, 2018) p 27 2 Ibid, p27. 3 Baker Hughes a GE company Available at: https://www.bhge.com/our-company (Accessed 10 October 2018).

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environmentally conscience markets and gas and oil products and services for industrial markets.

3. A critical evaluation of the resources and value systems of the company Lehmberg et. Al, (2009) opinioned that GE’s diverse capability has been the principal reason for the company’s sustained competitive advantage. An audit of the company’s tangible, intangible and human resources capabilities will provide insight into the key resources and the value system of the company 3.1 Tangible Resources 3.1.1. Financial Resources - The merger between GE oil and gas and Baker Hughes projected a cost savings of $1.2B by 2020 and $400m revenue serge (Ward, 2017). With a current annual revenue of $22B and adjusted operating income of $1B, BHGE gained the reputation of the second largest oil services company in the world. GE is known for its ability to advance capital credit to its SBUs in order to invest and grow their brand in business areas relevant to the company’s ambitions. Using their own SBUs, GE Capital, also called Synchrony Bank, GE provides financial services to customers and markets that are aligned to their industries. GE Oil and Gas.

3.1.2 Physical Resources – After GE acquired Nuovo Pignone in 1994, an Italian oil giant, it acquired resources to produce gas turbines, compression pumps and other equipment necessary for oil and gas production.

It served as a petrochemical and pipelines

processing plant. Over the years GE invested in new technology and soon became a $20billon business focused on turbomachinery, subsea production, drilling and surface pressure control. BHGE, the new company merger, produces oil and gas at the lowest cost per barrel while maintaining the quality and reliability. In this way, the company utilizes its physical resources to pursue a focused differentiation strategy. Oil is perhaps one of the most diverse companies with a wide range of physical resources designed for drilling, oil field production, oil refining, transportation, digital solutions, power generation etc. In that regard, GE engineered the

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Smallworld Physical Resource Assignment solution which links the company’s physical resources to the needs of customers. (Cronin, 2011). This model networks the products and services and assigns the relevant physical resource to a service request.

3.2 Intangible Resources 3.2.1 Technology, Reputation, Culture - Over the past 20 years, GE oil transitioned into ‘a global provider of advanced engineering, software and financing solutions to help oil and gas companies make smart infrastructure management decisions and drive industrial growth and innovation.’4 The company no longer focuses solely on product development and sales but included operational support services. This diversification adds value to BHGE as an all in one products and services company. “Through a number of successful acquisitions and technology advancements, GE Oil & Gas today offers customers an unparalleled portfolio of advanced technology across all oil and gas segments,” said GE Oil & Gas CEO Lorenzo Simonelli. “Our portfolio now goes beyond equipment. Through our advanced technology, including hardware and software solutions and services, we help our customers manage their operations in a costefficient manner driving capital efficiency.”5 As of June 2018, GE recorded US$102, 191 million in intangible assets. This accomplishment was had because of the research, innovation, and creativity strategies employed by GE in the oil and gas sector. Furthermore, GE uses a platform to leverage their resources by scale, intellect, global reach, marketability and speed. Therefore, an integral value of the SBU’s work is to find solutions that will improve client or customer relations for their products and services. Another key intangible resource for GE is their ability to provide high quality services and products and remain competitive within diverse niche markets.

3.3 Human Resources 4 Edwards, L. R., (2014) ‘GE Oil & Gas Showcases Growth in Technology and Global Capabilities’, Business Wire 10 September [Online] Available at: https://www.businesswire.com/news/home/20140910005740/en/GE-Oil-GasShowcases-Growth-Technology-Global Accessed 10 October 2018). 5 Ibid

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GE oil and gas views their 64,000 employees, as their most valuable assets. ‘BHGE harnesses the passion and experience of its people to enhance productivity across the oil and gas value chain.’6 Former CEO, Immelt provided an enabling work environment which promoted innovation, imagination, and creativity. His leadership popularly, known as ‘Imagination at Work’ paved the way for employees to change the company’s organizational culture and differentiated GE from its competitors. (Grant, 2010). Immelt promoted emotional intelligence and facilitated open communication among employees at all levels as well as investors and external stakeholders. This, people centered leadership style is central among GE’s SBUs and thus was replicated by the new CEO Russel Stokes, when he took office in 2017 and by Lorenzo Simonelli, CEO of Baker Hughes. As a result, the company is known for successes in innovation and strong R&D results. GE’s model stimulates ideas and adds to the growth and diversification of the company.

Michael Porter (1985) Value Chain Model, shown below, can be used to analyses GE’s resources and capabilities.

Figure 3.3.1 Porter’s value chain

3.3.2. Inbound logistics - GE prides its oil and gas industry on deep rooted R&D expertise, a key component with their HR strategy. The Ventures and Growth team, in collaboration with the ECI

6 Baker Hughes a GE company Available at: https://www.bhge.com/our-company (Accessed 10 October 2018).

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‘functions as an accelerator and collaborator to technology, academic and investment partners’7. Generating data and new ideas of how to perfect their products and services is a high priority for the company. 3.3.3 Operations – From upstream, midstream to downstream production, BHGE’s operations are focused on products and services that completely cover the oil and gas value chain. The company also provides after sale services and is always innovating to cater for future market demands, which is in keeping with their strategic position. This allows them to remain distinct, differentiated and diverse in the industry. 3.3.4 Outbound Logistics – BHGE has two headquarters, one in London and the other in Houston operating in 120 countries. In that regard, efficiency in transportation and delivering products and services to the customer is of paramount importance, especially since the company caters for niche markets. The GE Logistics Execution Center supports the industry with outbound logistics and freight management. The usage of an Access to Oracle Transportation Management (OTM) tool allows ‘GE personnel to use the site to obtain shipment status and reports, as well as shipment status by project, turbine and purchase order.’8 3.3.5 Marketing & Sales - Segmentation, positioning and targeting are key marketing strategies utilized by GE in order to fulfil its objective in becoming the dominate industrial leader. The company ‘uses a mix of demographic, psychographic and geographic segmentations strategies to satisfy the changing needs & wants of the customers accordingly.’ 9 The two main strategies utilized by GE is digitizing its operations by ‘installing 200K machines globally connecting varied functions like Sourcing, processing, engineering, commercial and other functions’ and establishing strategic partnerships and acquisitions with companies like Barker Hughes. 3.3.6 Service – BHGE, provides excellent customer relationship management through their Oilfield Services team. The team ‘draws on industry expertise, advanced digital and analytical tools, and a leading portfolio of technology and services to maximize value across all assets.’ 10 7 Baker Hughes a GE company. Available at: https://www.bhge.com/our-company (Accessed 10 October 2018). 8 General Electric Available at: https://www.ge.com/power/about/suppliers/transportation-management (Accessed 10 October 2018). 9 Bhasin, H. (2018) Marketing91 Available at: https://www.marketing91.com/marketing-strategy-general-electric/ (Accessed on 11 October 2018) 10 Baker Hughes a GE company Available at: https://www.bhge.com/annualreport/oilfield-services.html (Accessed 11 October 2018).

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The team continuously enhances their operations ‘introducing new business models to expand our presence in key markets including North America and the Middle East, applying product innovations that embrace digital capabilities and partnerships, and emphasizing integrated commercial operations and cross-product-line solutions.’11 R&D for inbound logistics cannot be conducted in insolation, the operations and outbound logistics team are also linked to each of the other processes. OTM tool was originated from the R&D that was done by the inbound logistics team, while the operations team provided information about the company needs and the services that BHGE offers.

Additionally, sales and marketing are directly linked to the services that BHGE provides. The services are a crucial selling point for the marketing team. BHGE prides itself on the after sales services and support provided to their customers. This is a key factor that makes them a leading industrial player in the oil and gas sector.

4. A critical evaluation of the product/portfolio mix within the SBU BHGE serves various segments of the oil and gas industry, from upstream (drilling, evaluation, technology monitoring and sensing, completion, field operations and production) to Midstream (liquified natural gas solutions, pipeline integrated solutions, transportation and storage) to Downstream (refinery and petrochemical solutions).

The diagram below depicts the market performance of BHGE’s four segments

11 Ibid

Oilfield Services

Market Growth Rate 9|Page

Digital Solutions

TMS

Oilfield Equipment Market Share

Figure 4.1 GE Oil and Gas Primary Units BCG

Some technological innovations from the Aviation and Healthcare sectors were integrated into the oil and gas industry to improve performance and productivity particularly with the Turbomachinery Solutions (TMS) (upstream production), which produces equipment and services for mechanically driven compression and power generation operations within the oil and gas industry. Specifically, the Aeroderivative and Heavy-duty Gas Turbines is an example of the success of GE research and development in aviation which is now integrated into the oil and gas segment to produce competitive differentiated power solutions. BHGE’s 2017 financial report showed that there was decrease in revenues generated from TMS, -14% compared to 2016. This slow can be attributed to the high supply on the market and the increase in demand for petrochemicals and refinery utilization. In that regard, the diverse and segmented nature of GE’s oil and gas sector, and their provision of refinery and petrochemicals services, helped to absorb the effects of the TMS loss. The demand for Digital Solutions, particularly in the areas of controlled business lines and sensor-based measurement increased by 4% in 2017. In this segment, BHGE provides integrated services for oil and gas, as well as power generation, aerospace and transportation. ‘The offerings include sensor-based measurement; non-destructive testing and inspection, and turbine, generator and plant controls and condition monitoring, as well as pipeline integrity

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solutions.’12 According to Marco Cassavale, vice president of Onshore & Offshore Production, digitization is the solution to the TMS problem. “We’ve been able to customize our technology into a more integrated offering for more industry segments,”13 he explained. According to report, ‘The two main results of the digitalization trend are that turbomachinery providers are now able to improve how their own factories operate, but also help their customers achieve big gains in productivity.’14 Oilfield Equipment, specifically the subsea systems, have been struggling with low growth and pricing issues for some time. 2017 financials reported a decrease in revenue by -21 %. BHGE’s subsea systems and drillings (SS&D)’s portfolio includes ‘onshore and offshore drilling and production systems and equipment for floating production platforms and provides a range of services related to onshore and offshore drilling activities - Its Specific products include downhole tools for well integrity, dry trees and surface wellheads, electric submersible pumps, surface wellheads, wireline logging, artificial lift technologies, drilling pressure control equipment.’15 Oilfield Services, also referred to as Downstream Technology Solutions (DTS) segment recorded the most growth in 2017, at 10%. This segment of BHGE’s portfolio includes refining, petrochemical production, gas distribution and process control services. This segment allows the company to integrate with its only segments and other companies within the oil and gas sector, giving the company completive advantage on the market.

5. A critical analysis and evaluation of KEY future directions for strategic growth BHGE as a collective did not have a completely successful financial year in 2017. Oilfield equipment sales and TMS strug...