Strategic Analysis of General Electric Oil and Gas Business Unit

GE Oil and Gas business unit of the company deals in services such as equipment for generating industrial power, turboexpanders, high-pressure, compressors, turbines, floating equipment production, and sub-sea drilling. The company has its headquarters in London and operates in East Africa, America, Europe, and Asia (Albany Business Review 2016). Among other stock markets where GE Oil and Gas is listed are Euronext, New York Stock Exchange (NYSE), and London Stock Exchange. GE Company has many business units including electricity, renewable energy, capital, energy resources, power generation, oil and gas distribution, aviation and healthcare, among others. Companies such as Schlumberger Omnes, Hughes Incorporated and Archrock Inc. are the major competitors of GE Oil and Gas (NASDAQ.com 2016).

This paper chooses GE Oil and Gas business unit for strategic analysis. GE Oil and Gas offers advanced technology to all the industry in oil and gas for the exploration and extraction of natural resources from downstream. The company manufactures equipment needed to drill, process the oil and gas which are widely required over the world. Since strategic analysis focuses on the company’s strengths, weakness, opportunities, and threats, it is imperative that the company’s data is used in the discussion. The GE Oil and Gas business unit has undergone drastic growth in the recent years both through organic growth and acquisitions. The company is among the largest global suppliers of oil and gas equipment.

Strategic Analysis

As stated by Dibrell, Craig, and Neubaum (2014), strategic analysis involves the assessment of the current and future structures of an organization and their functions by investigating the extent to which the firm aligns its activities to ensure it meets its goals and objectives. Strategic analysis is aimed at ensuring that the departments’ of an organization coordinates financing to ensure concerted effort and attainment of investment objectives. The generic competitive advantage that GE Oil and Gas has created in the global market together with its clear growth strategy ensures the unit a force in the industry.

Porter Five Force Analysis of GE Oil and Gas Subsidiary

The Oil and Gas unit of GE exerts its status as a dominant industry influencer and leader through formulating and implementing strategies that establish and maintain its competitiveness and growth. These strategies are as a result of the firm’s responses to the external business environmental factors such as those identified using the Five Forces Model. An analysis model is a tool used to evaluate and understand a businesses’ external conditions. Apart from evaluating the external factors, the analysis also examines the intensity and influence the GE Oil and Gas unit. In this case, the various environmental factors affecting the business unit. External factors of a global business conglomerate like GE require an in-depth understanding of strategic management to address fierce competition, cultural and economic factors effectively. The GE business unit can enhance its competitive advantage through the vast networks it has built over the years.

Formulating strategies based on the findings of the Potter’s Five Forces analysis allows the management to account for issues that are most relevant to the organization. Therefore, GE Oil and Gas management approached need to consider the external elements arrived at by utilizing tools such as Porter’s Five Forces Analysis. As a result, the managers ensure long-term competitiveness by aligning goals and objectives with the intensities of the external factors.

Aiming to attract particular customers in the oil and gas industry, GE Company relies on differentiating their products as the main strategy for gaining competitive advantage. As Teeratansirikool, Siengthai, Badir, and Charoenngam (2013) write, the business world is growing very competitive and unpredictable, and the only way that a business can survive is by practicing product differentiation. To this end, the company is dedicated to conducting continuous research to enable it to have a competitive edge over its competitors. According to the C.E.O of GE Oil and Gas, Lorenzo Simonelli, the analysis of the company’s annual report reaffirms the business’ pole position to achieve its long-term sustainability goals (GE.com). To Mr. Simoneli, the GE Company’s integration of technology and innovation supports the growth oil and gas business unit (GE.com). GE is among the companies in the global arena listed as having patent-ownership which enables it to widen its customer base. The generic strategy adopted by GE has affected the marketing mix tactics in other units of the company.

Summary and Recommendations based on Five Forces Analysis

Summary

The results obtained from the Porter’s Five Forces analysis indicate the essence of competition in influencing GE and the surrounding business environment. As competition is the outside elements with the highest intensity, it should assume priority in the firm’s strategic decisions and plans. Besides, based on this analysis, other forces also play significant roles company’s operations despite the relatively low degrees they present. For instance, the supplier bargaining power is relatively moderate therefore requiring the GE Oil and Gas unit to take into perspective this force while formulating strategies that touch on the supply chain of the company. In summary, the Porter’s Five Forces analysis of GE Oil and Gas unit show external parameter in the oil and gas industry exhibit the intensities as shown below.

Degree of rivalry – Strong force

Customer bargaining power – Moderate force

Supplier bargaining power – Moderate force

Threats posed by substitutes – Weak force

Threats posed by new entrants – Weak force

Recommendations

Considering that the degree of competition plays an utmost significance of General Electric’s oil and gas industry environment, the primary recommendation is to bolster the competitive edge of the business unit. One activity the company can undertake to improve its competitiveness is to transform its brand image positively. Besides, the firm can also improve its research and development abilities to focus on increased competency level.

Further, by considering other external elements derived from the Porter’s Five Forces analysis, another recommendation would be to formulate and implement strategies focused on increasing brand loyalty. Public relations efforts the business unit plays an integral role in achieving the objective of increasing customer loyalty on GE products. Such strategies should focus on addressing the customer bargaining power. The company can also address supplier bargaining power by implementing a supplier diversification program that aims at minimizing the firm’s overdependence on a single or a few oil and gas suppliers globally. Such activity should account for a possible change in the company’s supply chain management and overall operational management. However, despite their low degrees as determined by the Potter’s Five Forces Analysis, the threats posed by substitutes and new entrants refer to issues that should fall within the unit’s management consideration during the strategy formulation phase. In summary, all the business and corporate level strategies should align with the company’s generic and intensive growth approaches while remaining within the boundaries of the gas and oil industry.

GE Oil and Gas Competitive Analysis

Other oil and gas distributing firms such as those from the Middle East and the countries under OPEC (Oil Producing and Exporting Countries) pose competition to GE Oil and Gas. Despite the competition, innovativeness of GE Oil and Gas and its intellectual assets makes it a unique player in the industry (Dibrell, Craig, and Neubaum 2014). An example of the company’s innovativeness is its newly integrated technologies for oil and gas supply that has increased the strength of the company in its competition with other oil and gas distributors.

GE Oil and Gas Market Analysis

The productivity of the company depends on many factors such as the emergence of developing nations, purchasing power parity increase, and the increasing costs of labor. The oil and gas market is becoming overcrowded with many companies joining the industry, reducing GE Oil and Gas’ market share. In addition, regulations of governments of different countries in which the company operates also affect the performance of the firm (Financial Times 2016).

Target Customer Analysis

The target customers of GE Oil and Gas include oil and gas resellers, government agencies, corporates, and distributors. The segment distributes gas and oil to various regions of the world to meet the expectations of the customers.

SWOT Analysis

GE continues to bolster its capabilities with the aim of improving its strengths while overcoming its weakness. Besides, the division directs its efforts to take advantage of any emerging opportunities and thwart any external threats within the oil industry. A SWOT analysis of the gas and oil division of GE evaluates how the business unit stands in regards to its innate attributes and external influences. The SWOT matrix model isolates and evaluates internal strategic factors-that is the weaknesses and strengths-relevant to managing the oil and gas business unit of GE. The firm is a major global conglomerate. Therefore, it must steadily transform to ensure its threats are developed to sufficiently address its internal weaknesses in addition to the opportunities and threats presented by the external environment.

A SWOT analysis of GE oil and gas division provides the management with crucial data on its external and internal factors thus playing an integral role in the formulation, implementation, and evaluation of corporate and business strategies.

Strengths

Weaknesses

Diversification-the various supportive services that GE Oil and Gas offers have contributed to the company’s high revenues (Hitesh 2018).

Research and development-the strong research arm of the GE Oil and Gas business unit and its utilization of technology for different functions allows the firm to minimize the losses by enabling the monitoring of gas and oil distribution.

High borrowings- the profitability of GE Oil and Gas is largely affected by the high borrowings from financial institutions.

Lawsuits- the company has experienced many legal suits which have increased the operating costs of the firm.

Dependence on raw material-the nature of the company’s business relies on raw material, and occurrences of disruptions in the Middle East reduces the company’s profit through cutting the supply of gas and oil from the region (Hitesh 2018).

Opportunities

Threats

Airline industry’s growing demand-the global airline industry is continually expanding all over the world calling for the more supply of oil and gas. GE Oil and Gas should take advantage of this expansion extending its sales to the new markets and increasing its revenues.

Exchange rates fluctuation-since GE Oil and Gas have a globalized distribution of oil and gas, currency variations affect the company’s profitability.

Legal barriers-the company operates in different countries whose laws and regulations regarding multinational companies differ. Complying with the varying regulations in different countries poses a challenge to GE Oil and Gas business (Hitesh 2018).

Intense competition-other oil and gas distributors of the Middle East pose competition to GE Oil and Gas for the market.

Summary of SWOT Analysis and Recommendations

Summary

The internal strategic aspects of GE Oil and Gas division identified reflect commercial capabilities able to support its long-term growth and development, given the current business climate. For instance, the unit’s strong R&D department is a vital strength responsible for its competitive advantage and market leadership. However, the firm’s weaknesses come in the form of barriers that inhibits its long-term market dominance. For example, the weak performance recorded by the Oil and Gas business segment compared to other GE commercial units presents a barrier for future investment in the sector. The large amounts of funds specifically borrowed to revive the business unit have also worsened the situation for the business segment. Thereby, leaving the unit with high loan repayment costs that significantly eat into the revenues of the company, thus, affecting profitability.

Similarly, the company has also faced a myriad of legal battles that do not only affect its operations through rising costs, but negatively affect its image. The company is also dependent on raw materials-crude oil from the Middle East-for its operations. Therefore, any disruption in the supply chain, for example, political instability from the oil-producing countries adversely affect its operations. Nonetheless, the company can reduce over-reliance on crude oil and diversify into renewable energy such as solar and wind power for energy production. Besides, the management should consider procuring oil from politically stable nations to avoid cases of interacting with terrorist groups or being seen as financing terrorist acts.

Through SWOT analysis, external strategic factors can as well establish conditions through which the firm can expand. For example, the airline industry is undergoing a sporadic development, more and more airline companies are increasingly buying new planes. Meaning, more demand in jet fuel and other accompanying lubricants. Therefore, the company should focus more on the airline industry. Hence, the management at GE’s Oil and Gas unit must strategically match the opportunities presented by the external environment to counteract the threats posed to the unit effectively.

Recommendations.

The weaknesses, strengths, opportunities, and threats in the case of GE Oil and Gas business unit emphasize the importance of a strategic approach in growing and expanding its operations in the face of the fast-evolving oil industry. The management of the business unit should focus on the stability and growth of the firm by capitalizing on the company’s opportunities and strengths as well as develop a measure that aims at protecting the unit from the effects that emanate from the external threats and weaknesses. Based on the finding of the SWOT analysis, the Oil and Gas division of GE should:

1. Expand into the renewable energy segment because in the next 20 years more homes, vehicles, and companies will rely on renewable energy for power, lighting, and heating.

2. Focus more on the airline market because of the unprecedented growth experienced in the sector, and

3. Adopt a healthy supply chain by only purchasing crude oil from politically stable nations.

GE Oil and Gas growth Strategy

Innovation and development

The company relies on product development as the main strategy for growth. GE Gas and Oil continually develops new products improving gas and oil distribution in distant as well as near markets. The company’s investment in research for developing new products has ensured its maintenance of higher productivity. For example, imaging and diagnostic techniques developed by the company helps increase the efficiency in the distribution of oil and gas (Timothy 2015). Gold and Heikkurinen (2013) points out that GE Oil and Gas has advanced efficient non-invasive methods of conducting pipeline inspections operating many feet below the service of the ocean. The innovation has put GE Oil and Gas ahead of its competitors as it helps in detecting wear and tears, corrosion and cracks that are microscopic.

Market development

Another intensive strategy adopted by GE Oil and Gas is marketing development. The strategy involves creating new applications, new markets, and curving market segments to benefit both current and future (Timothy 2015). An example of GE Oil and Gas utilization of this strategy is seen in its application of new technologies in the seas assisting in monitoring any tears and cracks that may develop. Such cracks and tears can thus be detected early and fixed relieving the company from huge maintenance costs (Timothy 2015). Such cost-reducing measures enable GE Oil and Gas to venture in overseas markets, further increasing its revenues.

Additive manufacturing

This strategy was first tested by GE Aviation, but it is GE Oil and Gas that developed the technology in Japan (Timothy 2015). The company also developed 3-D printers which allow it to make considerable improvements in its supply chain. The 3-D technology is currently used in Kariwa plant, Japan in controlling the valve opening and closing for various applications in the energy industry (Forbes 2014).

Strategic Focus on the Trends in the Oil and Gas Industry

Partnerships and acquisitions are the modern trends in the oil and gas industry as companies seek to increase their market share to benefit from economies of scale. GE Oil and Gas have also intensified the practice by expanding partnerships in various countries in different parts of the world. An example of such partnership is that with GE management that has led to the emergence of one of the biggest electric energy company (Forbes 2014). More recently, the unit has involved Baker Hughes for a possible partnership. The partnerships have enabled GE Oil and Gas business unit to lower their operating costs while increasing their competitive advantage thereby increasing its profitability.

Recommendation

The growth of General Electric’s oil and gas business unit is attributed to the strategic acquisition and the competitor’s lack of market awareness (Forbes 2014). With the technological advancements and globalization, however, the company should shun the numerous large-scale acquisitions as there are many risks associated with running many enterprises acquired. GE should instead focus on venturing into clean energy storage that has become the growing global trend.

BCG Growth-Share Matrix

A BCG matrix is a planning tool used at the corporate level to display how a company’s brand portfolio or the strategic business unit in a quadrant, the relative market share lying along the horizontal axis while the rate of market growth on the vertical axis (Dibrell, Craig and Neubaum 2014). In the case of GE, the oil and gas unit is among the many SBUs the conglomerate operates in different sectors. Therefore, using the BCG matrix, the management can make vital decisions in regards to investment levels. On the, on the other hand, the growth-share matrix utilizes the market shares and growth rates of the different service or product portfolios to evaluate their potential and shed light on future investment strategies.

The matrix is depicted as shown in table1 below

Question Marks

Stars

Poor Dogs

Cash Cows

Market share

The Stars represent those business units that have a large market share and high growth rate, therefore suitable to invest more in them. The question marks, on the other hand, are those units which have a small market share but have huge potential because of their high growth rate, in such cases the management can invest more on marketing and advertisement activities. The cash cow that unit with a large market share but no growth at all, in this case, the market is saturated, but it continues to make profits (Forbes 2014). It is not worthwhile to invest in a business in this segment because they do not provide any significant returns. However, they should not be done away with because of their steady income. Businesses in the dogs, however, should be done away with because they do not have any substantial market share or show any signs for growth. As such, investing in such a business is a waste of time.

In regards to GE’s oil and gas unit, it is imperative to note that the unit lies within the star segment because even though it has a relatively small market share, it has the potential for growth. The reason, new opportunities in the renewable energy and the sporadic growth in the airline industry making the demand for fuel increase. Therefore, GE should consider investing in the company.

Conclusion

The strategic analysis of General Electric’s Oil and Gas business unit reveals the strategies that the company has used in ensuring they become leaders in the market of oil and gas production and related services. These strategies have also ensured that GE’s oil and gas business unit becomes a leading global distributor of oil and gas. Through the analysis, it has been established that the GE Company has the potential of attaining operational efficiency and market competitiveness through diversification.

References

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Forbes. 2014. Can GE Continue To Grow Its Oil & Gas Business? Available at https://www.forbes.com/sites/greatspeculations/2014/09/30/can-ge-continue-to-grow-its-oil-gas-business/#3b0724ba3810. [Accessed on September 28, 2018].

Gold, S. and Heikkurinen, P., 2013. Corporate responsibility, supply chain management and strategy: In search of new perspectives for sustainable production. Journal of Global Responsibility, 4(2), pp.276-291.

Hitesh B. 2018. SWOT Analysis of General Electric. Available at: https://www.marketing91.com/swot-analysis-general-electric/. [Accessed on September 28, 2018].

http://GE.com

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Timothy C. 2015. How GE Oil & Gas Shops for the Future at the GE Store. Available at: https://www.ge.com/reports/give-take-ge-oil-gas-shops-future-ge-store/. [Accessed on September 28, 2018].