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GE vs Siemens - A Strategic Analysis

Technical Report · November 2016

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 FACULTY OF ECONOMICS AND BUSINESS

GE vs Siemens
A Strategic Analysis

Robert Haafst

FACULTY OF ECONOMICS AND BUSINESS

CAMPUS CAROLUS ANTWERP
KORTE NIEUWSTRAAT 33
2000 ANTWERP
Robert.Haafst@student.kuleuven.be
Contents

Abstract ............................................................................................................................. A
1 Introduction ............................................................................................................. 1
2 Industry Drivers ....................................................................................................... 2
2.1 SCP ................................................................................................................. 2

2.2 Five Forces Framework .................................................................................. 5

2.2.1 General Electric .................................................................................... 6

2.2.2 Siemens ................................................................................................ 7

2.2.3 GE & Siemens BU Level ...................................................................... 7

2.3 Three generic strategies ................................................................................. 8

2.3.1 General Electric .................................................................................... 9

2.3.2 Siemens .............................................................................................. 10

3 Resources & Capabilities ..................................................................................... 11

3.1 GE ................................................................................................................. 12

3.2 Siemens ........................................................................................................ 14

4 Institutional Drivers .............................................................................................. 16

5 Knowledge Drivers ................................................................................................ 18
6 Conclusion ............................................................................................................. 21
7 Reference List ....................................................................................................... 23
Abstract

GE and Siemens are both conglomerates operating everywhere in the world in selected markets. This report
analyses various theoretical models and applies them to the context of GE and Siemens. It can be seen that
both are striving for market leadership. Amongst others, the 5 forces, 3 generic strategies of the industry
are analysed, then the focus shifts to the resources and capabilities. As third item the institutional drivers
are selected, before moving to the final part, the knowledge drivers. Moreover, although thought differently,
in the end their strategy appears to be very similar.

A
1 Introduction

“The essence of strategy is choosing what not to do”

(Porter, 1996)

Today, there are many views on strategy, which can be explained through multiple angles.

Be it from a cultural point of view, an economical or business view, a political view, or a

psychological view. However, all those views, and all different methods and theories one

can choose from today, they all have one thing in common, as stated in simple sentence

quoted above.

This report will analyse the strategy at business unit level of two companies: General

Electric (GE), and Siemens AG. Both highly diversified companies, with several

divisions competing in the same industry. Even so it will become clear, that strategies

pursued are structurally likewise.

Mythical stories concerning the CEOs put aside, this report will focus on the strategy

processes and performances of both companies, with the question in mind: ‘Is the

diversified strategy indeed successful?’

Consequently, various strategic theories, concepts and analytical tools will be applied to

both companies in chapter 2 through 5. Chapter 6 will conclude the report by discussing

what both companies can learn from each other, and several strategical actions will be

proposed in order to improve the competitive advantage of both companies.

1
2 Industry Drivers

General Electric (GE) is considered one of the most diversified, and, at the same time,

one of the most successful companies in existence. Almost every single year, profitability

was above par, mainly as a result of continuous growth (Grant, 2005b). As GE is such a

diversified conglomerate, it is not easy to select a comparable company. According to

(Narrative Science, 2012), Siemens is the main industrial competitor. Siemens is alike

GE an industrial conglomerate, originating from Germany. Next, the external view, i.e.

the industrial drivers will be examined.

2.1 SCP

Developed and discussed originally by (Bain, 1959), and numerously developed

thereafter, it took until 1990 before (Scherer and Ross, 1990) made a model that was

significant enough to be quoted and used throughout the world. SCP Stands for Structure

– Conduct – Performance, and the basic idea is that the strategy of a company depends

on the market.

A derivation of which is made into a model, which can be seen in figure 1, where in any

particular market there are certain basic conditions, which influences the market

structure. Then, the market structure influences not only conduct, but has an effect on the

basic conditions as well. Furthermore, along the line, it can be seen that conduct has an

effect back both to the conditions and the structure. In a way, these concepts are vicious

circles. As a side effect, public policy affects both the structure and conduct. These circles

influence in the end the performance through conduct (Scherer and Ross, 1990).

2
Figure 1: SCP Model1

As the SCP Model contains mostly drivers explaining the market or industry, GE and

Siemens will be analysed together, for the renewables industry. Both GE and Siemens

supply Wind turbines, Hydro plants, and Solar Panels. GE provides additionally Tidal

Energy, and Siemens provides additionally Biomass power (GE, 2016b; Siemens, 2016).

First, the basic conditions. Most raw materials are widely available, however, the in-

house technology of both companies is quite high. This creates a high product durability

1 Derived from: Scherer, F. M., & Ross, D. R. (1990). Industrial Market Structure and Economic
Performance. (p. 5). Houghton Mifflin Company

3
of roughly 25 years (Staffell and Green, 2014). On the demand side, it has been calculated

by (W.E.T.F., 2008) that demand for renewable energy is near inelastic. This implies that

demand for renewable energy supply mechanisms would be inelastic as well, laying a

strong(er) focus on quality, durability, and productivity. Within the market, there are

substitutes, as mentioned before, and outside the market, the largest substitute is

obviously fossil energy. Due to the hefty price tag, and the nature of the market, buyers

are mainly governments, institutions and institutional investors, and large (energy)

companies. As a result, the method of buying is mainly through tenders. Lastly, the

renewable energy market is a typical growth market.

Then the market itself. There is a small pool of suppliers (roughly 17), and a relative small

pool of buyers (<1000). The products are mostly generic, difference being the MW

produced, and use of materials. Due to the nature of the market, barriers to entry are quite

high. First, there is a high capital requirement, secondly, as it is a tech industry, highly

proficient personnel must be sought, and lastly, a profound network with governments is

necessary (UKEssays, 2015b; GE, 2016b; Siemens, 2016).

Then there is public policy, which is in the case of the renewable energy market, quite

positive. Governments are subsidizing the market, and everywhere around the globe,

green initiatives are being started (Frankfurt School-UNEP Centre/BNEF, 2016).

All of the above influences the conduct of a company. Both Siemens and GE are not

focusing on cost, but rather, applicability, quality, and service. Where they differ is the

product portfolio differentiation. GE is more focused on natural forces with the tidal

range, while Siemens is more focused on reusing mass, through the biomass power.

Therefore, landlocked countries would shift their interest possibly to Siemens, while other

countries may shift their focus to GE (GE, 2016b; Siemens, 2016).

4
Then finally, performance. GE slightly outperforms Siemens, which possibly is due to

moderate investment climate in the home country of GE: USA. Still, neither one of them

is market leader, as will become clear in the next section.

2.2 Five Forces Framework

Adapted from the SCP model, (Porter, 1979) suggested that there are certain forces that

affect the industry and the strategy of a company.

Figure 2: Five Forces (Porter, 1979)

As can be seen from figure 2, these forces are: Bargaining power of suppliers and

customers, threat of new entrants of substitute products, and rivalry within the industry.

All these factors drive the industry in a way. Later, (Brandenburger and Nalebuff, 1995)

discussed that a sixth force should be added: the ‘complementers’ already in the industry.

Various other scholars tried to add a 6th or a 7th factor to the model. However, (Porter,

2008) argued that all other notions, other than the five he mentioned are not forces on its

own, rather, they affect either one of the basic five forces. Furthermore, (Porter, 2008)

5
noted that it is not advisable for conglomerates to analyse their firm with the five forces.

Rather, the conglomerate should do a separate analysis for every single business unit.

Hence it has been decided to analyse GE and Siemens broadly, and to choose one BU

from both Siemens and GE which is in the same industry.

2.2.1 General Electric

Semi-annually the directors of business units provide a key document comprising several

elements of their industry. In this document they answer the following five questions:

1. What are your market dynamics globally today and where are they going over
the next several years?
2. What actions have your competitors taken in the last three years to upset those
global dynamics?
3. What have you done in the last three years to affect these dynamics
4. What are the most dangerous things your competitor could do in the next three
days to upset those dynamics?
5. What are the most effective things you could do to bring your desired impact on
those dynamics?
(Grant, 2005b)

These five questions show perfectly how and what the strategy is of GE, as most decisions

are based upon these questions (Grant, 2005b; Cambien et al., 2016). Question 1

represents basically a broad overview of all the forces at once. The market dynamics refer

to demand and supply, but also to rivalry within the industry. Question 2 refers to both

the internal rivalry and the threat of substitution products. One could think of vertical

integration of a competitor which would upset the market. Question 3 revolves around

reducing the power of the forces, while question 4 is again about the internal rivalry and

substitution products. If a manager must think of anything possible what a competitor can

do, then it is easier to answer question 5. Question 5 means that the managers must find

internally ways and methods to sustain advantages (Grant, 2005b; Porter, 2008; Cambien

et al., 2016).

6
2.2.2 Siemens

Siemens, alike GE is active in industries where the power of buyers is relatively high. Not

many competitors alike Siemens, but rather a large pool of customers, e.g. governments

and other large companies. Contrarily, the bargaining power of suppliers is low. There

are numerous raw material and semi-finished product suppliers, who all compete for a

small pool of competitors and Siemens. Furthermore, As the technologies are

sophisticated, and the capital requirements for most industries is rather high, the barriers

to entry is high as well. Internal rivalry in most industries is very high as well, as

competition is much limited to a handful of companies. Lastly, the threat of substitutes is

moderate on average. Several industries, such as energy, the threat of substitutes is high,

as at the moment various initiatives are being discovered evolving green energy. Other

industries, such as healthcare, the threat of substitutes are fairly low. This has to do with

long term contracts for the equipment (Chandresh, 2014; Siemens, 2015a, 2015b;

UKEssays, 2015a).

2.2.3 GE & Siemens BU Level

An industry in which both GE and Siemens are main players is the renewable energy

industry, which is a growing > USD 280 billion industry (Bayar, 2011), and consists of

Hydro, Wind, Solar, and Biomass energy.

First, the rivalry among competitors is analysed. In this particular industry roughly 17

companies are of importance, of which GE is 3rd in terms of installations, and Siemens

5th. Vesta, a Danish company takes 1st place, and Chinese firms takes 2nd and 4th place.

The size of companies differs a lot. The top five recorded profits within the 9 to 6 billion

range, and from the 6th place onwards, revenues drop steeply. Most competitors of GE

and Siemens offer a specific segment of the renewables, such as Vestas only focusses on

7
wind energy. Siemens and GE supply all segments. Due to huge capital investments, the

exit barriers are quite high (Bayar, 2011; Siemens, 2015b, 2016; GE, 2016b).

Secondly, the threat of entry. The threat of entry is moderate. At the one hand, companies

need tremendous capital to enter the market. On the other hand, huge profits lure

companies into the market. On top of that, governments subsidize the renewables market,

ensuring that it becomes an interesting market to invest in (Brower et al., 2016).

Thirdly, the bargaining power of suppliers, which is very low. There are a substantial

amount of suppliers of raw materials and semi-finished goods. On the other hand, there

is only a limited number of firms in the renewables market. Next to that, both Siemens

and GE are known to integrate when possible both vertically and horizontally. Next to

the bargaining power of suppliers, there is the bargaining power of clients, which is

moderate to high. Customers are generally speaking governments and large institutions.

As there are only a few companies supplying them, it is easier to exercise power (Siemens,

2015a; Brower et al., 2016; GE, 2016a).

Lastly, there is the concept of substitutes, and the threat thereof, which is low to moderate.

There are traditional substitutes in the sense of oil, coal, steam, and nuclear power. Which

actually constitutes a moderate to high threat. However, due to government policies on

renewables, the threat is lowered to low to moderate (Siemens, 2015a; GE, 2016a).

2.3 Three generic strategies

As noted in the introduction, there are numerous other models and analysis which could

done in order to analyse the industry drivers. It has been decided to analyse the three

generic strategies additionally. (Porter, 1979) described that a company could pursue two

8
different strategies in order to achieve a competitive advantage. These are either to pursue

differentiation or lower costs, as can be seen in figure 3.

Figure 3: Three Generic Strategies (Porter, 1990)

Then, the company must choose if it targets the whole industry, or only parts (segments)

of it, which completes the quadrants. Porter (1979) also noted that companies who do not

follow a specific strategy, are floating around, and named them: ‘Stuck-in-the-middle’.

2.3.1 General Electric

Every CEO of GE had his own idea of strategy. Before the tenure of Jack Welch 1981-

2001, the strategy was alike most, if not all, conglomerates: be in as much markets as

possible. Welch started to break down this idea, and Immelt, the current CEO, perfected

it (Grant, 2005b). Nowadays, GE actually is only active in 9 industries, possibly 10 if GE

Capital is counted as well (GE, 2016a). In these industries, GE pursues being the market

leader, through differentiation. Differentiation can be seen through various points. First

of all, GE uses GE Capital to help finance other businesses to buy from other GE business

units. Secondly, GE invents and uses apps, and systems to make the life of their clients

more convenient (Grant, 2005b; Cambien et al., 2016; GE, 2016a). Thirdly, GE is

innovating continuously. One of the more recent innovations and actually a new market

9
creation is ecomagination. Ge was one of the first moving into the multibillion

environmental industry, while maintaining high profits (Weebly, 2014).

So why did GE transform from a conglomerate with more than 26 divisions to a

diversified company with only 10 business units? The answer is focus. Both Welch and

Immelt sold business units who were not performing above par. The remaining industries

where GE is in, are resulting in a profitability which is higher than industry standards.

Hence the generic strategy of GE could be best classified as ‘Focus Differentiation’

(Grant, 2005a; Narrative Science, 2012; GE, 2016a).

2.3.2 Siemens

Although less diversified as GE, Siemens could still be counted as a diversified company,

with having presence in 5 main industries, being: Energy, Industry, Healthcare, Consumer

products, and Infrastructure & cities. Next to these five main pillars, Siemens is active in

7 less important industries. According to the annual report (Siemens, 2015b), Siemens

wants to create a broad portfolio as much as possible, in order to satisfy every customer

along the spectrum. As they state it: “We meet the needs of people with different interests,

from different cultures, and with different aims and requirements” (Siemens, 2015a,

2015b). Therefore, it must be seen as a purely differentiation company.

10
3 Resources & Capabilities

Now that the external, or industry view is analysed, the internal view can be studied

through the resources and capabilities. The resources and capabilities of a firm are coined

first by (Penrose, 1959), however it was only broadly accepted after a paper by

(Wernerfelt, 1984). Parallel to the IO hype, Wernerfelt thought that the internal factors of

a firm are vastly overlooked. Initially to support IO models, Wernerfelt described

resources of a company as its assets, both tangible and intangible, and capabilities as the

blend of skills and human assets in the use of resources, such as through technology,

brands and knowhow (Dondjio and Haafst, 2017).

Although heavily critiqued over the years, most notably due to being a static and a self-

fulfilling method (R. L. Priem and Butler, 2001; Richard L. Priem and Butler, 2001), it

still can give some insights the business (Barney, 2001). Moreover, as (Makadok et al.,

2001) states, RBV can be easily transformed into a dynamical model, using exogenous

values. Lastly, as (Hawawini, Subramanian and Verdin, 2003) point out, the deviation

between the profit of a firm and the average of the industry can be attributed to its

competitive advantage based on resources & capabilities.

Consequently, where roughly 10%-20% of profit variation can be explained through

industry factors, internal factors account as much as 30%-45% of the same variation. As

those studies all point out, the resource based view is a good starting point, however more

research has to be done, in order to develop a vastly sound theorem, which is of practical

use at the same time.

Broadening the resource based view, (Barney and Hesterly, 2014) designed the ‘VRIO

Framework’. This framework shows the strategic conclusion after analysing the

11
variables: ‘Valuable, Rarity, Imitability, and Organizational’. Finally, (Teece, 2007)

showed that resources and capabilities, and thus their adjacent value, may decay over

time. He proposed several methods on how to keep the upper hand with the pool of

resources and capabilities.

3.1 GE

Transforming the theory into practice with GE in mind, GE has several resources and

capabilities. (Grant, 2005b) argued that the most important capability of GE is: “the

global recruiting and nurturing of the world’s best people…” This competency can create

a competitive advantage, and thus proves to be very powerful. Hence, one could argue

that that the culture at GE is not easily to be copied by competitors (Grant, 2005b;

Cambien et al., 2016).

A second capability closely linked is the managerial brilliance (Lehmberg et al., 2009).

Welch started to go down a certain road, and Immelt continued to reshape the

management culture of “imagination at work”, which can be seen as inimitable (Prahalad

and Hamel, 1990; Grant, 2005b).

Thirdly, the organizational structure is unseen for such a conglomerate. GE is the only

conglomerate with only 3 layers between CEO and factory worker (Grant, 2005b). As a

side effect, the span of control is wider. The plus side, is that GE can react fast to market

changes.

Fourthly, innovation is a huge deal at GE. The statement is that they want to create the

need of tomorrow (Bucifal, 2009), where other companies are occupied with the need of

today. This results in a sustained competitive advantage, as GE creates markets, and thus

12
has the first mover advantage (Grant, 2005b; Lehmberg et al., 2009; Barney and Hesterly,

2014; GE, 2016a).

Fifthly, a great competence, and sort of a mix between a capability and a resource is the

diversified portfolio, and the knowledge build-up within. At first glance, the business

units have hardly anything in common. However, GE uses smart up and cross selling,

such as an energy contract together with a windmill (Prahalad and Hamel, 1990;

Lehmberg et al., 2009).

Lastly, GE has as a great resource, its own bank, named: GE Capital (GE, 2016a). Not

many companies can use their own bank to finance their own needs, but also the needs of

their suppliers, and their buyers (Prahalad and Hamel, 1990; Grant, 2005a, 2005b;

Bucifal, 2009; Lehmberg et al., 2009; GE, 2016a). The VRIO table, combined all above

would be as table 1:

13
Table 1: VRIO GE
Resource/Capability Valuable Rare Inimitability Organized Result

Culture Yes Yes Yes Yes Sustained

competitive
advantage

Managerial Yes Yes Yes No Temp.

Brilliance Competitive
Advantage

Structure Yes No No Yes Competitive

Parity

Innovation Yes Yes Yes Yes Sustained

competitive
advantage

Knowledge Yes No No Yes Competitive

Parity

Bank Yes Yes No Yes Temporary

competitive
advantage

3.2 Siemens

Siemens’ first capability is that the company is known for the German ‘gründlichkeit’.

Especially for the expensive products, like turbines, buyers are still anxious to buy a

Chinese turbine.

A resource of Siemens is that they spend a huge amount on R&D (UKEssays, 2015a). A

linked capability, is that Siemens turns this R&D budget in innovative products for

growth markets.

14
Siemens’ Brand Management is very well kept, and has the reputation of being a

dominant and global company. Using Management Information Systems alongside other

systems and values, ensures that the world thinks of quality when hearing the name

Siemens. On top of that, Siemens continuously improves procedures in order to stay on

top of the market (Siemens, 2015b).

Moreover, if Siemens would face an economic downturn, it can generate cash through a

sell and leaseback construction as they own all buildings and land (StudyMoose, 2016).

The VRIO table, combining all of the above would be as table 2.

Table 2: VRIO Siemens

Resource/Capability Valuable Rare Inimitability Organized Result

Grundlichkeit Yes No No No Competitive

parity

R&D Yes Yes Yes Yes Sustained

Competitive

Advantage

Landowners Yes Yes No Yes Temporary

competitive

advantage

Brand Management Yes Yes/No Yes Yes/No Temporary /

unexploited

competitive

advantage

15
4 Institutional Drivers

Next to the internal and industry factors of previous chapters, one can also analyse the

institutional environment of the company. The first well-known analysis is the iron cage

model, and isomorphic forces, as noted down by (DiMaggio and Powell, 1983).

Isomorphism assumes that every company faces certain constraints or pressure. In

institutional theory, three pressure points on organizations are known: Coercive, Mimetic,

and Normative, as seen in figure 4.

Figure 4: Isomorphic Forces (Ibama, 2000)

Coercive refers to entities, both institutions and organizations, on which the company

depend on because of the resources. Then, mimetic isomorphism is when a company is

uncertain what to do, and therefore tries to imitate or copy successful companies in the

industry. Finally, normative forces are the professional standards and practices in the

16
industry, which are established through professional networks, movement of knowledge,

and education/training (DiMaggio and Powell, 1983; Peng, 2009; Meyer and Peng, 2016).

Both Siemens and GE are mostly in the same industries. Likely they both face the same

forces, with possibly a few exceptions. Starting with the coercive force, which can be

seen quite positive for both. For example: governments willing to invest in or subsidise

wind turbines is great for the energy business unit. The downside is, is when a government

has a strong focus for either one of the competitors. Secondly, the mimetic forces. Both

companies do not have the pressure of mimetic forces. More likely, is that other

companies try to copy them instead. Lastly, normative forces. Both companies claim they

have a highly professional workforce (Grant, 2005b; Chandresh, 2014). Moreover, they

both invest vastly in training and re-education. Next to that, there is a continuous influx

of graduates knocking on their door, ensuring a continuous supply of new ideas.

17
5 Knowledge Drivers

Knowledge management or knowledge drivers is coined by (Nonaka, 1991), and

discusses the sheer differences between a Western run company and a Japanese run

company, in the sense of knowledge. Basically, there are two types of knowledge, explicit

and tacit. Explicit refers to the knowledge which exists systematically, and can be

reproduced easily, much like an instruction manual. Tacit knowledge refers to the specific

knowledge acquired by first hand, or by learning-by-doing, such as a baker who knows

how to cook the perfect bread (Nonaka, 1991; Bruton, Dess and Janney, 2007).

Both Siemens and GE try to focus on both knowledge levels. Ge mentions that the

company evolves around the global knowledge exchange. All the different business units,

share their explicit knowledge through the ‘GE Store’ about technology, markets,

structure, and intellect. Their idea is that an idea in one business unit, might lead to a new

innovation in another unit (GE, 2016a). Moreover, by the learning by doing principle, and

constant talks with both cross-unit teams as well as within unit teams, GE ensures that

tacit knowledge becomes more widespread throughout the company (McCarthy and

Aronson, 2004; Grant, 2005b).

Siemens has done likewise, by creating a complete knowledge programme (Siemens,

2010). Through this programme, Siemens stores as much information as possible about

consumers, suppliers, markets, competitors, and employees. There is also a knowledge

department, which carries out various field studies, in order to get to know what other

people know. Via this way, Siemens tries to extend and map the explicit knowledge

(Siemens, 2010; KM Best Practices, 2016). Furthermore, Siemens tries to make tacit

knowledge explicit, by writing lengthy procedures and manuals. Moreover, by using

18
focus groups and brainstorm sessions, both in and outside the company, Siemens tries to

get to know important tacit knowledge from outside the company (Siemens, 2010).

19
6 Conclusion

Various models have been reported on, and although far for complete, it provides

generally a good insight in the companies Siemens and GE. As it appears, although being

from different continents, Siemens and GE are very much alike. Not only are they

operating in mostly the same industries, more often than not they follow the same sort of

strategy.

The industry analysed thoroughly through the SCP model and the Five forces, is the

renewable energy market. It can be said that the entry and exit barriers are quite high,

demand relatively inelastic, and a clear focus on quality rather than price. Therefore, both

pursue a differentiation strategy according to the three generic strategies, but where

Siemens is following a pure differentiation, GE is following a focus differentiation. The

difference lies in the number of industries they are in, and can be best explained by that

GE divests all industries where they are not #1 or #2, or where they have potential to be

#1.

The VRIO tables look quite similar for both, as both have a mix of parity, temporary, and

sustained advantage, meaning that internally the companies are well organized. The

Institutional forces are positive for both as well. Both having a vast network with

governments, a constant influx of graduates, and they don’t have to mimic other

companies, as they are already market leaders. Finally, both are fond of their knowledge

system, where the system of Siemens is little more sophisticated than that of GE.

However, there is always room for growth. GE can definitely learn from Siemens in the

sense of making tacit knowledge explicit. Moreover, Siemens handles much more

industries and sub segments, which GE possibly could also do. On the other hand,

21
Siemens can learn from GE as well. Siemens is in several industries which are not

profitable. Siemens could adapt a system like GE of divesting. Moreover, Siemens can

learn from the structure of GE.

GE would be advised to research the possibility to enter industries which are linked to

their existing industries, in order to create ‘bridges’, and a logical diversified portfolio.

Possibly by lowering the divesting strategy to #1 - #5. Next to that, it would be advised

to expand their knowledge base.

Siemens would be advised to investigate a divesting model, to get rid of unprofitable

industries. Next to that, it is advised that they widen the span of control, and flatten the

organization, in order to react faster to market changes, or to make business units more

autonomous.

22
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