General Electric Case Analysis
GE used to prefer acquisitions or Greenfield ventures as an entry mode rather than joint ventures. Why do you think this was the case? According to our textbook, a firm can establish a wholly owned subsidiary in a country by building a subsidiary from the ground up, the so-called Greenfield strategy, or by acquiring an enterprise in the target market. Acquisitions have three major points in their favor. First, they are quick to execute. By acquiring an established enterprise, a firm can rapidly build its presence in the target foreign market.
Second, in many cases firms make acquisitions to preempt their competitors. Third, managers may believe acquisitions to be less risky than Greenfield ventures. When a firm makes an acquisition, it buys a set of assets that are producing a known revenue and profit stream. On the other hand, the big advantage of establishing a Greenfield venture in a foreign country is that it gives the firm a much greater ability to build the kind of subsidiary company that it wants. For example, it is much easier to build an organization culture from scratch than it is to change the culture of an acquired unit.
General Electric Case Analysis Essay Example
Why do you think that GE has come to prefer joint ventures in recent years? Do you think that the global economic crisis of 2008–2009 might have affected this preference in any way? If so, how? GE now sees joint ventures as a great way to dip its toe into foreign markets where it lacks local knowledge. Also, in certain nations, China being an example, economic, political, legal, and cultural considerations make joint ventures an easier option than either acquisitions or greenfield ventures.
GE believes it can often benefit from the political contacts, local expertise, and business relationships that the local partner brings to the table, to say nothing of the fact that in certain sectors of the Chinese economy and some others, local laws prohibit other entry modes. GE also sees joint ventures as a good way to share the risk of building a business in a nation where it lacks local knowledge. Finally, under the leadership of CEO Jeffrey Immelt, GE has adopted aggressive growth goals, and it feels that entering via joint ventures into nations where it lacks a presence is the only way of attaining these goals.
Fueled by its large number of joint ventures, GE has rapidly expanded its international presence over the past decade. For the first time, in 2007 the company derived the majority of its revenue from foreign operations. A joint venture entails establishing a firm that is jointly owned by two or more otherwise independent firms. Joint ventures have a number of advantages. First, a firm benefits from a local partner’s knowledge of the host country’s competitive conditions, culture, language, political systems, and business systems.
Second, when the development costs and/or risks of opening a foreign market are high, a firm might gain by sharing these costs and or risks with a local partner. Third, in many countries, political considerations make joint ventures the only feasible entry mode. I do think that the global economic crisis of 2008-2009 might gave affected this preference. In 2009, only 22% of all FDI inflows had been in the form of mergers and acquisitions which were reflected of the global economic crisis, which depresses equity values worldwide and made cross-border mergers and acquisitions less attractive as an entry mode.
In the midst of the global economic crisis, the fact that joint ventures risks are shared among the partners is one factor that made joint ventures a preference. 3. What are the risks that GE must assume when it enters into a joint venture? Is there any way for GE to reduce these risks? First, as with licensing, a firm that enters into a joint venture risks giving control of its technology to its partner. However, joint-venture agreements can be constructed to minimize this risk. One option is to hold majority ownership in the venture.
This allows the dominant partner to exercise greater control over its technology. But it can be difficult to find a foreign partner who is willing to settle for minority ownership and GE’s agreements normally give even the minority partner in a joint venture veto power over major strategic decisions, and control issues can scuttle some ventures. However, another option is to “wall off” from a partner technology that is central to the core competence of the firm, while sharing other technology. 4.
The case mentions that GE has a well-earned reputation for being a good partner. What are the likely benefits of this reputation to GE? If GE were to tarnish its reputation by, for example, opportunistically taking advantage of a partner, how might this impact the company going forward? According to the text, GE is well known for its innovative management techniques and excellent management development programs. Many partners are only too happy to team up with GE to get access to this know-how.
The likely benefits of this reputation to GE is that the company builds trust in the market, and looking like an attractive partner which GE can then access knowledge about local markets, driving profits up. If GE were to tarnish its reputation, the company would not look attractive to partners, therefore the company would have a hard time finding other businesses to enter into a joint venture. Also, the value of GE would deteriorate with the lack of trust from other businesses, which could lead to lack of trust of consumers.