186 Part 2: Strategic Actions: Strategy Formulation
GE and United Technology Are Firms that Have Pursued Internal Capital
Allocation and Restructuring Strategies
GE competes in many different industries ranging from appli-
ances, aviation, and consumer electronics to energy, financial
services, health care, oil, and wind turbines. Historically, GE has
done an exceptionally good job of allocating capital across its
many businesses, although it has suffered a discount to other
diversified competitors of late. Even though GE is a related
linked firm, it differentially allocates capital across its major
strategic business units. Even though GE Capital (GE’s financial
services business unit) produced high returns for GE over the
last few decades, it received a healthy amount of capital from
internal allocations. However, GE has been balancing its finan-
cial services portfolio over the last few years.
In particular, GE committed to shrinking its financial oper-
ation because Jeff Immelt, GE’s CEO, has been under pressure
by investors to make GE a more focused industrial company,
primarily because its stock price has stayed below $30 since
the financial crisis. Ultimately, the goal is to scale back GE
Capital from 42 percent of the profit in 2014 to 25 percent of
GE’s profit in 2016. Before the financial crisis, almost 50 percent
of profits were derived from GE Capital. Regulation has forced
GE to keep more capital in its financial arm, and thus it can
no longer pull as much cash out “to help pay dividends, buy
back shares, and help finance GE’s industrial operations.” It also
prevents other restructuring efforts. For example, GE wanted to
sell its appliance business, but had to hold on to it for several
years during the crisis because the price it could get would be
too low. Immelt added, “make no mistake, the ultimate size of
GE Capital will be based on competitiveness, returns, and the
impact of regulation on the entire company.” However, since
the financial crisis, GE realized the risks of have so much capital
invested in GE Capital which almost toppled GE.
GE is also under pressure because it had built up its oil and
gas service operations through acquisitions. However, since the
drop in oil prices, this unit has come under pressure. When these
assets were purchased, crude oil was selling for $100 per barrel,
but crude oil has been recently selling for near $50 per barrel.
Also, United Technologies, an unrelated firm, has allocated
resources internally according to their best and most efficient
use. Similar to GE, it often bought, restructured, and oper-
ated the businesses until it made sense to sell them. United
Technologies owns Otis Elevator, building fires and security
system brands Chubb and Kidde, Pratt & Whitney jet engines,
Carrier air conditioners, and Sikorsky Aircraft. Sikorsky is best
known for its Black Hawk helicopters, and it is one of the largest
helicopter makers in the world. United Technologies’ new CEO,
Gregory J. Hayes, told analysts that it was evaluating its portfolio.
The Sikorsky division has come under pressure amidst softer
military spending and weakness in demand for oil services
companies which utilize helicopters to fly employees to platforms
offshore as well as onshore. Although Hayes had considered a tax
free spinoff, he ultimately contracted to sell the Sikorsky business
unit to Lockheed Martin, a big defense contractor. Interestingly,
he is also hunting for a large acquisition to purchase, restructure,
and include in United Technologies portfolio.
Both GE and United Technology have used internal cap-
ital allocate resources among their diversified business units
efficiently. Also, both businesses have used the restructuring
strategy to make their operations more efficient and, when
appropriate, sold them on the open market, either through
selloff to another acquirer or through spinoffs where two stock
prices are created, one for the legacy business and one for the
spinoff firm (the variety of restructuring strategies will be
developed and compared more fully in Chapter 7).Sources: D. Cameron, 2015, Lockheed Martin to buy Sikorsky for $9 billion, Wall Street
Journal, http://www.wsj.com, July 21; R. Clough, 2015, A crude awakening for GE, Bloomberg
Businessweek, March 16, 19; C. Dillow, 2015, What happens if United Technologies
unloads Sikorsky?, Fortune, http://www.fortune.com, March 23; C. Grant, 2015, GE’s capital
control isn’t a cure; selling its Asian lending unit won’t be enough to revive its stock,
Wall Street Journal, http://www.wsj.com, March 16; T. Mann, 2015, GE weighs deeper cuts
in bank unit, Wall Street Journal, March 12, B1, B2; D. Mattioli & D. Cimilluca, 2015,
Sikorsky spin-off considered, Wall Street Journal, March 12, B3; G. Smith, 2015, Siemens’
long-feared slimdown isn’t as drastic as feared, Fortune, http://www.fortune,com, February
23; J. Bogaisky, 2014, Is Bouygues crying uncle on Alstom?, GE said in talks for $13b
acquisition. Forbes, April 23, 19; T. Mann, 2014, United Technologies CEO hunting for
major acquisition, Wall Street Journal, http://www.wsj.com, December 12.Simon Dawson/Bloomberg/Getty Images
Although GE is seeking to pare back its financial business, GE
Capital, with the downturn in oil and gas commodity prices,
its Oil and Gas service unit has also experienced difficulties.Strategic Focus