G.E. Case Study

G.E. Case Study

Chris Scoggins

Athabasca University

G.E. Case Study – Week 4

Explain how a diversification strategy can help create competitive advantage and when it does not, reference GE and GE Capital

A diversification strategy can help to create a competitive advantage, however some points need to be met before any additional value can be created, and in the end “The critical question to ask when doing so is whether the individual businesses are worth more under the company’s management than if they were managed individually” (Rothaermel, 2016, p 279)

A diversification strategy that is going to work is going to depend on how similar the diversified business is to the core business. Too little diversification does not help a business perform, but by the same token exploration into a diversification that is unrelated can yield the same underwhelming results as too little diversification. A diversification strategy that creates competitive advantage needs to create economies of scope where “efficiencies are formed by variety, not by volume” (Investing answers, 2016). Amazon is an example of a business model that while taking advantage of economies of scale, also takes advantage of economies of scope where they can make a profit selling many singular items rather than many of the same item. They are able to make a profit selling singular items where if they were just selling one item, they would not profit. In any event, a firm needs to ensure that any gains from economies of scope offset any possible diversification discounts and hopefully drive a diversification premium.

In terms of G.E., Jeffrey Immelt made the decision to “spin off” G.E. Capital as its own business entity because G.E. was experiencing a diversification discount due to being involved in a business that was not considered “core” to G.E. and that was financial services. Very clearly spinning off G.E. capital was the correct decision to make for the stock holders as it generated an additional $28 billion in market capitalization and 11% to the value of G.E.’s stocks in one day.

Provide your position as to whether CEO Jeffrey Immelt made the correct decision with the spin out of GE Capital Please support your position

In my opinion Jeffrey Immelt absolutely made the correct decision to spin off G.E. capital into its own separate company. The jump in market capitalization alone of $28 billion is enough to justify it, however probably