Sustainability & Corporate Social Responsibility at GE \"GE should be commended for a bold approach to climate issues. However, the company has a long way to go before it can legitimately claim to be an environmentally progressive company.\" Jeff Jones, Communications Director, Environmental Advocates of New York, in 2009. Green Can Be Green! On June 24, 2009, US-based technology giant General Electric Company (GE), surpassed its target of investing US$5 billion in research and development in its environmental initiative, Ecomagination. GE had earlier set 2010 as the target for achieving this goal but reached it a year ahead of schedule. The company planned to invest an additional US$10 billion in R&D by 2015. It was also on its way to achieving the US$20 billion mark in revenues from Ecomagination products, having generated US$18 billion in 2009, an increase of 6%. GE expected the Ecomagination revenue to grow at twice the rate of the total company revenue by 2015, which would give Ecomagination an even larger share of the total company sales. According to Steve M. Fludder (Fludder), vice president, Ecomagination, \"We have grown Ecomagination revenue and research and development every year, even in challenging economic times. Given our success, we are committing to do more. The vision of a cleaner, affordable, secure, and globally accessible energy infrastructure inspires and motivates us.\" Established in 1892, GE is a diversified conglomerate with products and services ranging from aircraft engines and power generation to business and consumer financial services, healthcare, and television programming. Started in 2005, Ecomagination embodied GE's commitment to building innovative clean energy technologies and meeting customers' demands for more energy-efficient products and bringing reliable growth for the company. The main objectives of this green initiative were to reduce greenhouse gas (GHG) emissions, increase energy efficiency of GE operations, improve water use, double the investment in R&D for cleaner technologies, and keep the public informed about its Ecomagination efforts. Through Ecomagination, GE developed products and services with lower environmental impact, such as energy-efficient engines, appliances, locomotives, and wind turbines. According to some analysts, Ecomagination was a business opportunity for GE to increase revenues by introducing energy-efficient products to customers. However, some critics felt that Ecomagination was just a business savvy move by the company, aimed at resurrecting its image as an environment friendly company. Behind the faade of environmental sustainability and green technologies was GE's corporate goal of increasing profits, they alleged. Critics felt that the initiative was over-hyped and that GE was pursuing profits in the name of clean technologies. According to Kavita Prakash Mani, vice president of SustainAbility, \"GE has invested billions of dollars in Ecomagination, but it hasn't really changed the rest of its business. It's made out to be bigger than it actually is.\" Executives from GE, however, maintained that Ecomagination was not a brand building exercise; it was a good business opportunity for GE to make money while at the same time contributing to environmental sustainability. \"It's not an advertising ploy or marketing gimmick. GE wants to do this because it is right, but also we plan to make money while we do so,\" said Peter O'Toole (O'Toole), director of public relations at GE. Page 1 of 15 About GE GE was formed in 1892 by the merger of the Edison General Electric Company (EGEC) and the Thomas-Houston Electric Company (TEC). By the 1950s, GE had grown into a large industrial conglomerate with interests in diverse businesses. In the late 1960s, GE had 46 Strategic Business Units (SBUs) within the company and also diversified into other new businesses like computers, nuclear power, and aircraft engines. In 1977, GE's earnings crossed the US$1 billion mark. In 1981, an important phase began in GE's history when Jack Welch (Welch) was appointed as CEO. One of Welch's core strategies was the Number One Number Two strategy. In 1995, GE's market value exceeded US$100 billion. In 1996, GE completed 100 years on the Dow Jones Industrial Average, the only company remaining from the original list of 12 stocks, first published on May 26, 1896. In mid-2001, Jeffrey R. Immelt (Immelt) succeeded Welch as the Chairman and CEO of GE. Within days of his taking over, the September 11, 2001 terrorist attacks occurred. As a result, GE too was affected by the changes in the business environment. Immelt then brought in several changes at the company in order to win investor confidence. The company was listed on the Dow Jones Sustainability Index in late 2004. In the fiscal year ended December 2005, GE posted revenues of more than US$149 billion. In 2009, Forbes ranked GE as the world's largest company with over 300,000 employees in its various business units. At the end of 2009, GE had six core business units and was the biggest manufacturer of power plants, jet engines, locomotives, and medical equipment worldwide (Refer Exhibit I). GE Global Research consisted of more than 3,000 employees working in four state-of-the-art facilities at Niskayuna (New York), Bangalore (India), Shanghai (China), and Munich (Germany). In 2009, despite the tough economic climate, GE reported earnings of US$11.2 billion (Refer Exhibit II and III). In 2010, GE was ranked among Fortune's 'Most Admired Companies in the World' for the 5th consecutive year. In the second quarter ended June 2010, the company's revenues fell by 4% to US$37.4 billion. Industrial sales were US$24.4 billion, down 6% compared to corresponding period of the previous year. Winds of Change at GE According to some analysts, GE had not been known over the years as a particularly environment friendly company. In fact, it was considered for a long time as one of the biggest corporate polluters in the US. Though the company delivered outstanding returns to shareholders, it lagged behind on the social responsibility front. GE was criticized on several occasions for its lack of social responsibility. However, the company chose to ignore its critics and gave precedence to profitability and financial goals rather than social and environmental objectives, added experts. During the 1980s and 1990s, GE stonewalled and delayed most of its environmental initiatives, and this led to significant negative equity among many in the environmental community. One of the biggest environmental controversies involving GE was related to the pollution of the Hudson and Housatonic rivers in the US. In the early-1980s, GE was indicted for dumping several million of pounds of polychlorinated biphenyls (PCBs) into stretches of the two rivers from its factories located along their banks. In 1977, after the US Congress passed the Clean Water Act, the US Environment Protection Agency (EPA) banned the production of PCB. Since most of GE's PCB dumping had been done before 1972, when the substance was not banned by law, the company argued that it was not responsible for the sediments already Page 2 of 15 present in the rivers. But environmentalists argued that the dangerous nature of PCBs had been well known even before the law had been passed, and that GE had acted irresponsibly in dumping the chemicals in the rivers. Between 1991 and 1996, EPA charged GE with 23 violations when toxic releases from its plants went unreported. In March 1992, the Nuclear Regulatory Commission (NRC) slapped a fine of US$20,000 on GE for violating regulations at its fuel fabrication plant in Wilmington, North Carolina. It was reported that workers at the plant had accidentally moved about 320 pounds of uranium to a waste treatment tank, which could have led to a nuclear accident. Later, the NRC found that the mistake had been made because of lax safety controls at the plant. Again in March 1998, GE was fined US$92,000 for violations of environmental reporting requirements for toxic releases at its silicone manufacturing plant in Waterford, New York. Though GE gave more significance to profitability than to social responsibility, the business environment prevailing in the early-2000s made companies look beyond financial goals. Sustainability became critical for business success as climate change, water scarcity, and poverty were seen as profound challenges for the global economy. During this time, the Kyoto Protocol was a much discussed subject, and at global forums like the G8 and WTO meetings, environmental sustainability became a hot topic. Moreover, as consumers and investors became more environmentally conscious than before, it became more important for companies to consider environmental sustainability in their operations. In 2001, when Immelt succeeded Welch, the company started to focus more on addressing environmental challenges. Immelt felt that sustainability was a profitable business opportunity rather than a cost and hence seized on the idea of greening GE's technology and turning it into a corporate-wide strategy for growth. He felt that with creativity and imagination, it was possible to solve some of the world's most difficult environmental problems and make money while doing it. Immelt's new slogan was \"green is green,\" meaning that green business equaled green money. Immelt wanted GE to support climate change and invest in creating new markets for cleaner fuels and technologies as they offered opportunities for product innovation. He consulted executives from other companies who had launched environmental programs such as DuPont Chairman and CEO, Charles Holliday Jr. They advised him to solve the company's earlier environmental problems and then go ahead with green product ideas. In 2002, a large team of executives from GE attended a training session on CSR at Crotonville. As part of the training, the executives visited several companies that dealt with social and environmental issues such as IBM, Eli Lilly, BP, and Nike. They also interacted with regulators, activists, and investors, who had an interest in CSR. During the course of their training, the executives found that though GE was well known for its management quality and operations, it ranked low on the social responsibility aspect. They felt that for GE to maintain its position in the global economy, immediate steps had to be taken to build its image as an environmentally friendly company. In 2002, Christine Todd Whitman, the then EPA Administrator, issued a ruling related to the Hudson river clean-up that gave GE two optionsto agree to an out of court settlement, or pay fines of up to US$2 billion. In 2005, GE entered into an agreement with the EPA and the US Department of Justice to carry out a two stage clean-up of the Hudson River at an estimated cost of around US$750 million. In the early 2000s, GE launched several global initiatives in Page 3 of 15 order to make the company more socially responsible. For instance, it started conducting audits on its suppliers to ensure that they were complying with globally accepted labor, environmental, health, and safety standards in their operations. In 2002, Immelt appointed Bob Corcoran, a long-time GE employee, as the company's first vice president for corporate citizenship. Immelt also restructured GE's business portfolio to include more companies operating in emerging industries and acquired companies such as Enron Wind Corp., Ionics Inc., Osmonics Inc., and AstroPower Inc. The company began to invest in new technologies. For instance, in 2004, GE invested in a new coal technology called Integrated Gasification Combined-Cycle (IGCC), which filtered out GHG and pollutants when coal was burned for energy. As part of the green drive, Immelt began delegating preliminary tasks to various teams within the company like researching greenhouse legislation, formulating metrics, conducting customer surveys, prototyping new products, formulating cross-company guidelines, etc. The company's marketing team identified a B2B market opportunity for green products and outlined the monetary benefits of these products to its customers. In late 2004, a senior-level brainstorming session at GE set the stage for the company wide environmental initiative, Ecomagination. The initiative was initially greeted with skepticism by a majority of the senior level management as they felt that it would require huge investments. Senior executives posed questions such as \"Do we want to attract attention?\" and \"Will this create problems around the Hudson River [issue]?\" during internal discussions. Instead of stepping back, Immelt drew on the trust and support he had earned from his team and went ahead with the proposal. Since GE comprised many businesses, convincing the heads of each business unit was one of the toughest parts of the execution process. According to O'Toole, \"Ecomagination had to enable our business leaders to work better with their customers. It couldn't be an 'unfunded mandate' from corporate. So there had to be give-andtake with our top leaders to ensure we were helping our customers.\" Some environmentalists too supported the initiative as it addressed environmental challenges such as global warming and climate change. According to Eileen Claussen, president of the Pew Center for Climate Change, \"We are still quite politically polarized on the issue of climate change in this country. The fact that a company that size wants to take a very public position to talk about their products in terms of climate change and then, most important of all, to say they want to be part of the policy dialogue, which is very difficult in the United States at this moment, is an act of courage.\" The Launch of Ecomagination On May 9, 2005, Immelt announced the launch of the US$ 150 billion environmental initiative. According to GE's Ecomagination Website, Ecomagination is \"a business initiative to help meet customers' demand for cleaner and more energy-efficient products and to drive reliable growth for GE.\" Commenting on the initiative, Immelt said, \"It's no longer a zero-sum game, things that are good for the environment are also good for business. We are launching Ecomagination not because it is trendy or moral, but because it will accelerate our growth and make us more competitive.\" The name 'Ecomagination', which was derived from GE's \"Imagination at Work\" slogan, addressed challenges such as the need for cleaner and more efficient sources of energy, reduced emissions, and new sources of clean water. Through Ecomagination, GE aimed to focus on its Page 4 of 15 energy, technology, manufacturing, and infrastructure capabilities to develop new sustainable solutions and invest in technologies such as solar energy, hybrid locomotives, wind power generation, fuel cells, lower emission aircraft engines, efficient lighting, and water purification technologies and appliances. Through Ecomagination, GE planned to invest in technologies such as biomimicry, nanotechnology, and other emerging clean technologies. Experts were of the view that at a time when most other companies were cutting back on R&D funding for projects that lacked clear market application with customers, GE, through the initiative, had created options to develop radical technologies which would take longer to develop but deliver results with large payoffs. According to Lorraine Bolsinger (Bolsinger), president and CEO of GE Aviation Systems LLC, \"Ecomagination is for us, above everything else, a growth strategy. It is a business strategy based on the idea that by investing in technologies to help customers solve these big megatrends that we're seeing, to help them grow sustainably in this worldwhere there is more regulation, more scarcity, higher energy coststhat we can grow sustainably as well.\" As part of the initiative, GE committed itself to doubling its annual research investment in cleaner technologies, from US$700 million in 2004 to US$1.5 billion in 2010.39 During the same period, GE aimed to double its revenue from Ecomagination products and services to US$20 billion annually and expected more than half of its product revenue to come from such products by 2015. GE set a target to reduce GHG emissions from its factory operations by 1% by 2012 from a 2004 baseline and to improve energy efficiency by 30% by the end of 2012. GE promoted Ecomagination widely through advertisements and other promotion campaigns, as part of its 'keeping the public informed' objective. It launched an integrated advertising campaign in the television, print, and online media to make consumers aware of the company's energy-efficient products available in the market. Besides advertisements, GE also launched an exclusive Website and several short online films. In October 2005, GE partnered with Dow Jones to launch a US$50,000 prize competition called \"ECOnomics: The Environmental Business Plan Challenge\" which invited entrepreneurs, executives, and students to submit ecofriendly business ideas. In September 2006, GE in association with MtvU41 rolled out the \"MtvU GE Ecomagination Challenge\" wherein college students across the US were asked to submit innovative ideas for projects that would make their institutions more environmentally responsible. In 2008, GE launched a comprehensive campaign to promote its Smart Grid technology. According to Jeff Renaud, Director of GE's Ecomagination program, \"Looking at GE's overall advertising and digital media efforts, it's clear that Ecomagination is a core element . . . We also believe that Ecomagination has had and will continue to have a positive impact on GE's overall brand value.\" Ecomagination at Work One of the vital components of GE's Ecomagination program was to build strategic partnerships with corporations and governments around the world, universities, and research institutions to solve energy needs. In 2005, GE Energy Financial Services entered into a partnership with AES Corporation to develop a venture called Greenhouse Gas Services in the US. The goal of the partnership was to offset the equivalent of an annual production volume of 10 million metric tons (MMT) of carbon dioxide gas by 2010 through the reduction of methane emissions from landfill gas, coal Page 5 of 15 mines, and agricultural waste. In 2008, Greenhouse Gas Services joined with Google, Inc. to co-develop a GHG reduction project at a landfill in Caldwell County, North Carolina. According to GE's 2005 Ecomagination Report, in 2004 and 2005, the company had undertaken nearly 500 global energy conservation projects which had led to substantial energy cost savings and a reduction of more than 250,000 tons of GHG emissions, equivalent to keeping nearly 50,000 cars off the road. Between 2005 and 2009, GE financed and invested in 247 megawatts of solar projects, including one of the world's largest, the 11-megawatt Serpa solar plant in Portugal. The company focused not only on individual projects but also invested capital in other companies that were developing solar power around the world. For instance, GE Oil & Gas Ecomagination technology played a vital role in the development of Asia's natural gas pipeline infrastructure to supply gas from Uzbekistan and Kazakhstan to China for meeting China's rising energy demands. In May 2006, GE launched Ecomagination in China followed by its launch in Australia five months later. According to GE, China Ecomagination products brought significant growth to GE's business in China. In the first three quarters of 2009, GE's Ecomagination revenues in China reached US$656 million, an increase of 50% compared to the previous year. In 2009, GE signed 20 memorandums of understanding (MOUs) with central and local government bodies and 10 MOUs with state-owned-enterprises and Chinese universities to develop energyefficient solutions in areas such as biogas solutions, wind power, clean coal technology, industrial emissions reduction, aircraft engines, locomotives, etc. In February 2007, GE Aviation signed an MOU with Air India, to make Air India's operations more sustainable by providing the airline's fleet with fuel-efficient engines. By using these engines, the airline was expected to save US$150 million over the next 15 years while establishing itself as an environmentally friendly service. In 2007, to combat severe potable water shortages in countries in Southeast Asia, Africa, and Latin America, GE provided solar energy modules and water filtration technologies to rural areas in these regions. In Africa, GE partnered with the Algerian government and the Algerian Energy Company to build the continent's largest desalination plant at Hamma. GE also collaborated with end users and external partners to identify energy-saving lighting projects. In 2007, Wal-Mart fitted refrigerated display cases with GE's light emitting diodes (LEDs) to reduce energy consumption in more than 500 of its retail stores. The same year, oil giant BP also formed a global alliance with GE to develop about 15 hydrogen power projects in order to cut GHG emissions from electricity generation. Besides big companies, GE also partnered with non-profit organizations such as the World Resources Institute52 and the Pew Center on Global Climate Change to check GHG emissions. According to Beth Comstock (Comstock), Chief Marketing Officer of GE, \"Ecomagination has been strengthened by input from a variety of partners . . . When you're teamed with a partner who shares a common vision and commitment and complementary capabilities, a new kind of energy is created.\" As part of the Ecomagination initiative, GE rolled out several energy efficient and renewable energy technologies at its facilities too, including products such as solar panels and advanced lighting systems which it manufactured itself. Within the company, GE began engaging employees to see where energy savings could be achieved. It implemented initiatives such as turning off the lights when a factory was idle, installing LED lights on factory floors, recycling water at nuclear facilities, etc. GE installed solar panels on many buildings, including its headquarters, and energy efficient light bulbs in many of its factories. \"Leading by example is Page 6 of 15 the essence of Ecomagination. If we are proposing that customers and enterprises around the world use GE solutions to reduce their emissions, then we should do the same,\" said Fludder. To reduce energy usage and GHG reductions, GE made use of the \"Energy Treasure Hunts\" developed by Toyota. GE carried out regular treasure hunt sessions from 2005 to identify energy-efficiency savings at a specific manufacturing site. For instance, at its, locomotive operations in Erie, Pennsylvania, GE switched to natural-gas fired power from oil, saving money and cutting emissions in the manufacture of locomotive engines. As of July 2010, GE had conducted 200 internal treasure hunts, which helped the company save more than US$130 million annually and contributed to reductions in excess of 250,000 metric tons of CO2. In 2007, GE Transportation partnered with Union Pacific, to launch hybrid locomotives capable of recycling thermal energy as stored power in on-board batteries. The energy stored in the batteries could reduce fuel consumption and emissions by as much as 10% compared to ordinary freight locomotives. In the automotive sector, GE Energy Financial Services59 invested in the battery company, A123 Systems Inc., to develop the next generation of battery technology for hybrid and plug-in hybrid electrics. For instance, GE made an investment to help A123Systems roll out batteries for Norwegian electric car manufacturer Think Global. Besides providing capital, GE, through GE Global Research, offered system design expertise and supported A123's power product development for electric grid applications, and designed battery system components for A123's automotive programs. In May 2007, GE's media arm, NBC Universal (NBCU), announced its \"Green is Universal\" initiative to bring about environmental awareness and educate consumers about environmental sustainability. NBCU aimed to reduce its GHG emissions at least 1% by 2012. As part of this effort, NBCU aired environmentally themed content through its on-air networks and online platforms during its Green Week (in November) and Earth Week (in April). In November 2009, NBCU's \"Make Green Count\" campaign was launched. This campaign encouraged audiences to make one small green change to their daily lives such as turning the lights off or walking to work. Ecomagination Products To ensure that Ecomagination products and services improved environmental performance, GE employed a rigorous review and qualification procedure known as the Ecomagination Product Review (EPR) process to assess which products and services should be included in the Ecomagination portfolio. The EPR process was carried out by the Ecomagination team comprising environmental health and safety counsel product marketing teams from the GE business units and corporate legal counsel. The evaluation process was audited by a third party. Product characteristics considered during the EPR process included environmental factors such as energy consumption, GHG emissions, and water usage, in addition to the financial benefits of the product to customers. For products to be included in the Ecomagination portfolio they had to be better in terms of operating as well as environmental performance, support growth of new technologies, and drive a more sustainable form of development. Talking about the product verification process, Bolsinger said, \"If we got this great green technology, but it's totally unaffordable, we say no, that's not ready to be an ecoproduct. It has to be better, in terms of operating performance for the customer - to give them some economic return - as well as the environmental piece of it.\" Page 7 of 15 As part of the EPR process, GE analyzed the environmental attributes of its products relative to benchmarks such as competitors' products, regulatory standards, and historical performance. It ensured that all Ecomagination products met the required criteria and that the product marketing was clear and substantiated. To provide independent, quantitative environmental analysis and verification of GE's product claims, GE partnered with GreenOrder. The firm verified the product information and advised GE on the associated marketing claims of the products. For this purpose, GreenOrder developed a scorecard system for evaluating Ecomagination products and technologies. For each product, an extensive scorecard was created quantifying the product's environmental attributes, impact, and benefits relative to comparable products. The scorecards were then used to create product marketing claims. \"This process is flexible enough to cover incredibly diverse industries, since Ecomagination creates, compares, measures, and launches products as small as a light bulb or as big as a jet engine,\" said Comstock. As of June 2010, GE was marketing 90 Ecomagination certified products ranging from compact fluorescent lighting, smart grid components, and wind turbines, to smart appliances, aircraft engines, and water treatment technologies (Refer to Exhibit IV). Products developed under the Ecomagination umbrella were not limited to GE's manufacturing businesses alone but was also extended to the company's financial business. Once a product became a part of the Ecomagination portfolio it was reviewed regularly to ensure that performance claims were based on the latest relevant information and reflected any changes to the product itself or its market. R&D funding for Ecomagination products was provided by GE's four Global Research Centers and some major businesses of the company. Between 2002 and 2005, GE invested more than US$350 million to develop high efficiency appliance products and to meet the ENERGY STAR qualification for as many of its Consumer & Industrial products as possible. In 2005, GE invested more than US$60 million to develop 164 new ENERGY STAR qualified appliances. Again in 2007, the company invested approximately US$47 million to create 215 new ENERGY STAR qualified appliance models. In recognition of GE's commitment to developing high efficiency appliance products, the US Department of Energy and the EPA awarded GE the ENERGY STAR Partner of the Year \"Sustained Excellence\" award for three consecutive years (2006-2008). In May 2007, GE launched 11 new Ecomagination products and services including a hybrid locomotive and a carbon offset company. In July 2007, GE Money launched the first-ever US credit card with a reward program known as GE Money Earth Rewards. The program offered cardholders an easy way to offset their carbon impact and reduce carbon emissions by contributing up to 1% of their net spend to buy carbon offsets. On May 24, 2007, the GE and Masco Contractor Services71 (MCS) Environments for Living division announced the Ecomagination Homebuilder Program to help residential developers and builders design homes which were are not only comfortable, but also more efficient in their energy consumption and indoor water consumption. Homes built under this program resulted in at least 20% saving in household energy, water consumption, and emissions compared to industry accepted new homes. In 2008, for the first time, GE Healthcare products joined the Ecomagination portfolio. These products not only provided outstanding clinical performance, but also offered significant savings. In 2010, GE launched two new products in the Ecomagination portfolio - the WattStation electric vehicle charger and the Nucleus, a real-time home energy monitor. On July 13, 2010, GE launched a US$200 million global innovation challenge called the GE Ecomagination Challenge: Powering the Grid to create and adopt more efficient and Page 8 of 15 economically sustainable electric grid technologies. The challenge invited technologists, entrepreneurs, and startups to design innovative business models, technologies, and processes that would bring clean, usable energy to the market through renewable energy, power grid efficiency, and eco homes. Co-funded by four venture capital firms, the challenge aimed to leverage on GE's technical expertise and bring new ideas to market quickly. Until September 30, 2010, participants could submit proposals in three general categories - Renewable Energy, Grid Efficiency, and EcoBuildings/Homes. Each of the five innovation challenge award winners would receive US$100,000 in cash and bag a partnership deal with GE to develop and distribute the technology. Results According to analysts, Ecomagination was a turning point for the company, which had been grappling with the problem of an inconsistent green image. Since its launch in 2005, the initiative paid off in a big way as it helped GE to evolve as a sustainable enterprise and contributed to the rise in its brand value, they said. Talking about the success of the program, Immelt said, \"Ecomagination is one of the most successful cross-company business initiatives in our recent history. It is a clear amplifier of our strong reputation for innovation and execution, harnessing the strength of every GE business to maximize returns for GE investors while minimizing our own energy use and greenhouse gas emissions.\" In 2005, revenues from the sale of Ecomagination products and services reached US$10.1 billion compared to US$6.2 billion in 2004.76 Orders and commitments doubled to about US$17 billion. In 2006, revenues from the Ecomagination portfolio of products and services surged past US$12 billion, up 20% from 2005, while the order backlog increased to US$50 billion. In 2007, Ecomagination revenues crossed US$14 billion, an increase of 15% from 2006. For the first time, GE's investment in cleaner technology R&D crossed US$1 billion in 2007. In 2008, GE's revenues from Ecomagination grew by 21% to US$17 billion.79 The company increased its investment in R&D of clean tech solutions by 27% to US$ 1.4 billion, up from US$750 million in 2005. In 2008, GE reduced GHG intensity by 41%, surpassing its goal of reducing it by 30%. In the year 2009, which marked the fifth anniversary of the Ecomagination program, revenues from Ecomagination products and services grew by 6% to cross US$18 billion despite the global economic recession. In 2009, GE invested US$1.5 billion on Ecomagination R&D. In 2009 GE's GHG emissions were 22% below its 2004 baseline and water consumption reduced by 30% compared to a 2006 baseline, surpassing the original goal of 20% by 2012. According to GE statistics, since the inception of Ecomagination, the company had invested a total of US$5 billion in its R&D investment and generated a total of US$70 billion in revenues through the end of 2009. \"Ecomagination is one of our most successful cross-company business initiatives. If counted separately, 2009 Ecomagination revenues would equal that of a Fortune 130 company and Ecomagination revenue growth equals almost two times the company average,\" said Immelt. The Other View Despite the positive aspects of this green initiative, some experts felt that GE could not call itself an ecofriendly company because of its history of pollution, particularly the dumping of PCBs in the Hudson River and the delay in cleaning it up. Some analysts charged that despite Page 9 of 15 making tall claims about its products being environmental friendly, GE continued to sell coalfired steam turbines and was involved in oil and gas extraction. Some analysts accused GE of greenwashing as they felt that the Ecomagination initiative was meant to divert people's attention from the company's negligent stance toward environmental matters. Ecomagination was an attempt to cover up GE's poor environmental image and its continuing obsession with profit at the expense of the environment, they charged. According to Chris Ballantyn, director of the Hudson River Program, \"Actions speak louder than words. When you scratch beneath the public relations surface, I'm afraid they have unfinished business in terms of environmental protection.\" Moreover, GE's annual US$1 million investment in marketing Ecomagination was criticized as an expensive branding exercise which amounted to greenwashing. Some experts were of the view that Ecomagination did not address all of the company's environmental problems and was risky as companies were generally reluctant to play up their products' environmental benefits fearing that their green claims would not able to match the company's overall environmental footprint. They observed that sustainability as a corporate strategy worked only if it was made a company-wide initiative. If it remained restricted to a few products, its impact would be limited. \"Even at $20 billion, Ecomagination is only about 10 percent of GE. It's a very creative way to drive and differentiate the company, but it's not going to make, break, or save GE,\" said William Rothschild, a Consultant at Rothschild Strategies Unlimited. According to some experts, Ecomagination products and technologies focused on large scale, centralized solutions and were mostly capital-intensive applications based on existing business models. Little attention was paid to small-scale standalone applications that might address distinct market needs and customers, they said. Industry observers felt that Ecomagination products mostly served the needs of customers at the top of the economic pyramid and ignored the requirements of customers at the base of the pyramid who lacked reliable and affordable solutions related to energy, transportation, water, materials, and financial services. Commenting on the criticism related to the initiative, Bolsinger said, \"I think the skepticism piece was never a big deal for me because (Ecomagination) was never based on \"we're doing this for philanthropy\" or \"we're doing this to make the world safe.\" We're glad to be doing that as a result of making money. It's a different lens that informs your decisions about where to spend money and what resources you're going to invest.\" Looking Ahead According to GE, Ecomagination was not a short-term proposition and the company planned to make it a part of its identity and market the brand aggressively to the world. GE planned to increase revenues from Ecomagination products and services to at least US$25 billion by the end of 2010.88 GE committed itself to reducing its GHG emissions by 1% by 2012 and to improving energy efficiency by 30% by the end of 2012 compared to the 2004 baseline. GE aimed to achieve its commitment to double annual investment in clean tech R&D to US$ 1.5 billion by 2010.89 It also planned to invest an additional US$10 billion in Ecomagination R&D by 2015, particularly in the development of low-carbon products. The company committed itself to ensuring that by 2015, Ecomagination revenue would grow at twice the rate of total company revenue and planned to improve the energy intensity of its operations by 50% and reduce its absolute GHG emissions by 25%, both against the 2004 Page 10 of 15 baseline.90 The company also altered its goal of reducing freshwater consumption by 20% by 2012 from the 2006 baseline to 25% by 2015. As part of its public awareness, GE planned to increase its interactions with the public and revamp its Website to enable people to put forward their questions and queries. In the future, under the Ecomagination program, GE planned to build a massive battery plant in New York and a US$2 billion wind project in Oregon and to launch a series of high-end energy-efficient front-load washers and dryers. In June 2010, GE Energy Financial Services entered into an agreement with a Spanish renewable energy company Abengoa, to develop the largest cogeneration power plant in Mexico. The companies were to invest US$180 million in the project expected to be commercially operational by 2012. The 300 megawatt plant was to supply electricity and steam over the next 20 years and help the Mexican government meet its energy efficiency targets by reducing GHG emissions by 50% in comparison with 2002 by 2050. GE identified China and South Korea as countries where the company expected green technology to thrive in the future. GE said while it would continue to invest in products like energy efficient turbines, green locomotives, and sodium batteries in the future, it would also focus on bringing more intelligence and networking to its existing product categories. For instance, it planned to roll out software applications for monitoring flight paths, take-offs, and landings for airplanes in order to reduce the time that planes had to spend circling airports. This would help cut fuel consumption. \"It is a cost savings to the airlines and it is a huge comfort factor for customers. These are the kind of IT-enabled solutions we will invest in,\" said Fludder. According to industry observers, Ecomagination was a good platform for GE to make investments in new technologies while making money at the same time. They felt that the initiative had huge scope for expansion in the future as more green technologies would be able to address new problems, create new markets, and reach underserved customers. While there were some discordant notes as well, the company said it was committed to taking this initiative forward. According to Comstock, \"With Ecomagination, we've learned that sustainability is as much a changemanagement challenge as it is a business or scientific challenge . . . Change happens when others see opportunity - and change their behavior, join in, and make it their own. Ecomagination's mantra is no longer just GE's. And that's just fine with us.\" Page 11 of 15 Exhibits Exhibit I GE-Business Groups Source: http://www.ge.com/products_services/directory/by_business.html Page 12 of 15 Exhibit II General Electric Company-Consolidated Statement of Earnings For the years ended December 31 Dollar amounts and share amounts in millions; per-share amounts in dollars Source: GE 2009 Annual Report Page 13 of 15 Exhibit III Top 10 in Fortune's Ranking of America's Largest Corporations (2010) Adapted from http://money. cnn.com/magazines/fortune/fortune500/2010/full_list/ Page 14 of 15 Exhibit IV Ecomagination Statistics Page 15 of 15 Please Answer the following three questions from the case study attached the course is related to strategic management. 1. How the GE maintained its success despite faced some social responsibility problems? (ecomagination and initiatives) (1.5 Page) 2. The different kind of partnerships between GE and other companies? At least 10 - Mention and describe each partnership. - Why GE decided to develop all of these partnerships? - What is the benefit of each partnership? (1.5 Page) 3. Strategic importance of ecomagination. (0.5 page) Please Answer the following three questions from the case study attached the course is related to strategic management. 1. How the GE maintained its success despite faced some social responsibility problems? (ecomagination and initiatives) (1.5 Page) 2. The different kind of partnerships between GE and other companies? At least 10 - Mention and describe each partnership. - Why GE decided to develop all of these partnerships? - What is the benefit of each partnership? (1.5 Page) 3. Strategic importance of ecomagination. (0.5 page) Chapter 6 Vertical Integration Copyright 2015 Pearson Education, Ltd. All rights reserved. 6-1 The Strategic Management Process Business-Level & Corporate-Level Strategies Business-level strategies are actions firms take to gain competitive advantage in a single market or industry (Cost Leadership & Product Differentiation). Corporate-level strategies are actions firms take to gain a competitive advantages by operating in multiple markets or industries simultaneously (Vertical Integration, Diversification, Strategic Alliances & Mergers and Acquisitions) Copyright 2015 Pearson Education, Ltd. All rights reserved. 6-2 The Strategic Management Process External Analysis Mission Strategic Choice Objectives Strategy Implementation Competitive Advantage Which Businesses to Enter? Internal Analysis Corporate Level Strategy Copyright 2015 Pearson Education, Ltd. All rights reserved. Vertical Integration 6-3 Logic of Corporate Level Strategy Corporate level strategy should create value: 1) such that the value of the corporate whole increases 2) such that businesses forming the corporate whole are worth more than they would be under independent ownership 3) that equity holders cannot create through portfolio investing A corporate level strategy should create synergies that are not available in equity markets. vertical integration = value chain economies Copyright 2015 Pearson Education, Ltd. All rights reserved. 6-4 Logic of Corporate Level Strategy Value Chain Economies: are those economies that are created by integrating a market transaction into the boundaries of the firm. For example, a firm that buys one of its suppliers may realize an economy by coordinating the production of the supply with the needs of the parent firm. A corporate level strategy should create synergies that are not available in equity markets vertical integration = value chain economies Copyright 2015 Pearson Education, Ltd. All rights reserved. 6-5 Value Chain Analysis The discussion of the value chain aims to show how the different value creation activities of a company fit together. A point strongly emphasized here is that each of the value chain activities whether primary or support is a potential source of value creation. One way to identify potentially valuable resources & capabilities controlled by a firm is to study that firm's value chain. A firm's value chain is the set of business activities in which it engages to develop (1), produce (2) and market (3) its products or services. Each step in a firm's value chain requires the application and integration of DIFFERENT RESOURCES & CAPABILITIES Copyright 2015 Pearson Education, Ltd. All rights reserved. 6-6 Value Chain Analysis A company's value chain is a sequence of interrelated activities for transforming inputs into outputs that customers value. The process consists of a number of primary activities and support activities, each of which can add value to the product. A.Primary activities include the design, creation, and delivery of the product, the product's marketing, and its support and after-sales service. There are four primary activities: Research & Development, Production, Marketing & Sales, and Customer Service. B.Support Activities of the value chain provide inputs that allow the primary activities to take place. There are four support activities: Procurement, HRM, Product & Technology Development and Company Infrastructure (administrative, finance infrastructure, organizational structure & culture, control systems) Copyright 2015 Pearson Education, Ltd. All rights reserved. 6-7 Value Chain Analysis Copyright 2015 Pearson Education, Ltd. All rights reserved. 6-8 Defining Vertical Integration, Forward Vertical Integration, and Backward Vertical Integration Vertical integration is a corporate strategy. i. A firm's level of vertical integration is simply the number of steps in this value chain that a firm accomplishes within its boundaries. More vertically integrated firms accomplish more stages of the value chain within their boundaries than less vertically integrated firms. Less vertically integrated firms accomplish fewer stages of the value chain within their boundaries than more vertically integrated firms. ii. A firm engages in backward vertical integration when it incorporates more stages of the value chain within its boundaries and those stages bring a firm closer to the beginning of the value chain, i.e., closer to gaining access to raw materials Copyright 2015 Pearson Education, Ltd. All rights reserved. 6-9 Defining Vertical Integration, Forward Vertical Integration, and Backward Vertical Integration iii. A firm engages in forward vertical integration when it incorporates more stages of the value chain within its boundaries and those stages bring a firm closer to the end of the value chain, i.e., closer to interacting directly with final customers. Copyright 2015 Pearson Education, Ltd. All rights reserved. 6-10 What Is Vertical Integration? Is the number of steps in a firm's value chain that accomplishes within its boundaries. OR Vertical integration is the merging together of two businesses that are at different stages of production Where your pizza comes from Dairy Farmers (milk) Seed Companies Pizza Chains (Alfalfa & Corn) Leprino Foods (Mozzarella Cheese) Crop Farmers End Consumer (Alfalfa & Corn) Food Distributors Copyright 2015 Pearson Education, Ltd. All rights reserved. 6-11 What Is Vertical Integration? Backward Integration is going back in the value chain (Leprino Foods buying a dairy producer) Dairy Farmers (milk) Pizza Chains Seed Companies (Alfalfa & Corn) Leprino Foods (Mozzarella Cheese) Crop Farmers End Consumer http://www.leprinofoods.com/ (Alfalfa & Corn) Food Distributors Copyright 2015 Pearson Education, Ltd. All rights reserved. Forward Integration is moving forward in the value chain (Leprino Foods getting into the business of food distribution). 6-12 How Vertical Integration Works (Example 2) Let's assume 'Golden Fries' Company, which manufactures frozen French fries, wants to vertically integrate. By purchasing a potato farm and a potato processing plant, 'Golden Fries' could engage in upstream integration (also known as backward integration) and control the quantity, cost, and quality of the product's raw materials. Likewise, 'Golden Fries' Company could engage in downstream integration (also known as forward integration) to control the distribution of the company's products by purchasing a packaging plant and a fleet of delivery trucks. Ultimately, 'Golden Fries' could also use balanced integration, which incorporates both upstream and downstream integration, to control the cost and quality of the entire production and distribution process. Copyright 2015 Pearson Education, Ltd. All rights reserved. 6-13 Value Chain Economies The Logic of Value Chain Economies Does it make sense for Leprino Foods to expand by owing dairy companies or by getting into food distribution? Copyright 2015 Pearson Education, Ltd. All rights reserved. 6-14 Value Chain Economies The Logic of Value Chain Economies Leprino Foods has to look at two metrics in making the decision: cost reduction and revenue enhancement. 1. cost reduction 2. revenue enhancement Synergies may help in cost containment and the ability to capture above normal profits helps on the income side. The focal firm is able to capture above normal economic returns (avoid perfect competition). Copyright 2015 Pearson Education, Ltd. All rights reserved. Dairy Farmers (milk) Backward Vertical Integration Leprino Foods (Mozzarella Cheese) Food Distributors Forward Vertical Integration 6-15 Competitive Advantage A company's decision whether or not to vertically integrate must be based on sound logic. The VRIO Framework is once again helpful in this regard. If a vertical integration strategy meets the VRIO criteria... Is it Valuable? Is it Rare? Is it costly to Imitate? Is the firm Organized to exploit it? ...it may create competitive advantage. Copyright 2015 Pearson Education, Ltd. All rights reserved. 6-16 Value of Vertical Integration Market vs. Integrated Economic Exchange Markets and integrated hierarchies are \"forms\" in which economic exchange can take place. Economic exchange should be conducted in the form that maximizes value for the focal firm. Thus, firms assess which form is likely to generate more value. Integration makes sense when the focal firm can capture more value than a market exchange provides. Copyright 2015 Pearson Education, Ltd. All rights reserved. 6-17 When Vertical Integration can create value for a firm Vertical integration can create valuedecrease costs or increase revenuesin three situations: 1. to reduce the threat of opportunism 2. to leverage firm capabilities 3. to remain flexible (possible with vertical integration under certain conditions) Copyright 2015 Pearson Education, Ltd. All rights reserved. 6-18 Value of Vertical Integration 1. Threat of Opportunism Opportunism is when a firm is unfairly exploited in an exchange. In other words, one of the two firms in an exchange holds up the other to the financial benefit of the first firm. The hold up can occur with regard to price, delivery terms, quality, etc. For the firm that is being held up, the exchange creates an economic loss. To avoid this, the firm can vertically integrate. By bringing the activity in-house, the firm controls it and therefore removes the possibility of opportunistic behavior causing economic losses. The decision to vertically integrate, though, has to be made by comparing the costs of vertical integration with its benefits. If the cost of opportunism is less than the cost of vertical integration, then the decision should be to continue with market exchange. Copyright 2015 Pearson Education, Ltd. All rights reserved. 6-19 Value of Vertical Integration 2. Leverage Firm Capabilities Reducing the threat of opportunism can be seen as a defensive approach to vertical integration. Leveraging the focal firm's capabilities, on the other hand, is a proactive approach to vertical integration. The logic here is simple: a firm should vertically integrate into those business activities where they possess valuable, rare, and costly-to-imitate resources and capabilities. This also means that a firm should not vertically integrate into activities where they do not have the resources to get a competitive advantage. Copyright 2015 Pearson Education, Ltd. All rights reserved. 6-20 Value of Vertical Integration 3. Exploit Flexibility Flexibility pertains to the cost (and time) of changing the strategic and operational decisions of an organization. A flexible organization can change its strategic/operational choices quickly. In other words, such an organization can pivot on a dime! Less flexible organizations find this change difficult and costly. In general, vertical integration reduces a firm's flexibility. Why? A vertically integrated organization has expanded its bureaucracy to include multiple activities. It has changed its structure, control system, and compensation practices to reflect this increased bureaucracy. Changing these takes time. Flexibility is not always a virtue. It is important to be flexible when the future is uncertain. In such situations, alternatives to vertical integration, particularly strategic alliances, may be better options. Copyright 2015 Pearson Education, Ltd. All rights reserved. 6-21 When Vertical Integration can create value for a firm Three Value Considerations Leverage Capabilities firm capabilities may be sources of competitive advantage in other businesses if not, then don't integrate exchange Manage Opportunism opportunism may be checked by internalizing (TSI) internalizing must be less costly than opportunism Copyright 2015 Pearson Education, Ltd. All rights reserved. Exploit Flexibility internalizing is usually less flexible flexibility is prized when uncertainty is high 6-22 When Vertical Integration can create value for a firm We have to reiterate that the three arguments related to the vertical integration decision may conflict with each other and confuse decision-making. In other words, the opportunism argument may point to vertical integration, while the capabilities and the flexibility arguments may point to de-integration. In such cases, the firm has to look at the trade-offs involved and use cost versus benefits to make the decision. Copyright 2015 Pearson Education, Ltd. All rights reserved. 6-23 Rarity of Vertical Integration Rarity in vertical integration may be because of one of two things: a firm is rare in being able to operate its vertically integrated units very efficiently. Or, it could the one firm in the industry that is not vertically integrated while all others are. A firm may be able to create value (more than others in the industry) through vertical integration because of three reasons: 1. 2. 3. rare transaction-specific investments need to be made that prompts a firm to vertically integrate to leverage specific capabilities that would give it a competitive advantage ability to resolve uncertainty ahead of others in the industry Copyright 2015 Pearson Education, Ltd. All rights reserved. 6-24 Rarity of Vertical Integration 1. Rare transaction-specific investments need to be made that prompts a firm to vertically integrate In the first case, the firm has developed a special technology or a new approach to doing business, while others in the industry have not. Because this special technology/approach to doing business requires transaction-specific investment, the firm is vertically integrated, while others in the industry are nonintegrated. 2. to leverage specific capabilities that would give it a competitive advantage the firm has a valuable capability that allows it to benefit from vertical integration. Others do not have this capability and hence are not vertically integrated. Copyright 2015 Pearson Education, Ltd. All rights reserved. 6-25 Rarity of Vertical Integration 3. Ability to resolve uncertainty ahead of others in the industry the firm has the ability to resolve the uncertainty that all firms in the industry face. While others may be non-integrated because of this uncertainty, the focal firm may be vertically integrated. In all the cases above, the focal firm decides to vertically integrate while others in the industry do not. But, there may also be a case where others are vertically integrated while the focal firm benefits from being de-integrated. It creates value for itself by being able to manage these market economic exchanges efficiently. Copyright 2015 Pearson Education, Ltd. All rights reserved. 6-26 Imitability of Vertical Integration Form vs. Function The ability to create value through vertical integration (or by deintegration) may not be rare for too long if it can be imitated. Imitation can be through direct duplication or through substitution. Direct duplication of a firm's vertical integration involves two things: copying the form and copying the value creation potential. The value-producing function of integration may be costly to imitate, if: the integrated firm possesses resource combinations that are the result of: historical uniqueness causal ambiguity social complexity Copyright 2015 Pearson Education, Ltd. All rights reserved. 6-27 Imitability of Vertical Integration Form vs. Function Copyright 2015 Pearson Education, Ltd. All rights reserved. 6-28 Imitability of Vertical Integration Modes of Entry Acquisition and internal development are alternative modes of entry into vertical integration. Thus, one firm may acquire a supplier while a competitor could imitate that strategy through internal development. In both cases, the boundaries of the firm would encompass the new business. Strategic alliances can be viewed as a substitute for vertical integrationwithout the costs of ownership. Copyright 2015 Pearson Education, Ltd. All rights reserved. 6-29 Organizing Vertical Integration How The Functional Organization Structure, Management Controls, and Compensation Policies Are Used To Implement Vertical Integration Organizing to implement a vertical integration strategy is the last step, the \"O\" in the VRIO Framework that looks at how vertical integration can create a sustained competitive advantage. appropriate infrastructureorganizational A firm must have the structure (1), management controls (2), and compensation policies (3) to successfully implement a vertical integration strategy. Copyright 2015 Pearson Education, Ltd. All rights reserved. 6-30 Organizing Vertical Integration Functional Structure (U-Form) CEO's Role Cooperation CEO's responsibilities usually become much more complex as a result of Accounting Finance Marketing HR Engineering vertical integration. The functions of the new business must be integrated Cooperation Conflict with the functions of the existing business. We have to point out that the Original Original Original Original Original achievement desired valueBusiness chain economies depends onBusiness the ability of Businessof theBusiness Business the CEO and other managers to integrate the functions of the new and New New existingNew New businesses. New Business Business Business Business Business Conflict Copyright 2015 Pearson Education, Ltd. All rights reserved. 6-31 Organizing Vertical Integration Management Controls What needs to be \"controlled\" in a vertically integrated firm? managers' efforts to achieve the desired value chain economies cooperation and competition among and between functions the integration of new businesses into the existing business time horizon of managers Copyright 2015 Pearson Education, Ltd. All rights reserved. 6-32 Organizing Vertical Integration Management Controls Board Committees Budgets separating strategic and operational budgets strategic: inputs and outputs operational: outputs provide oversight and direction to managers help ensure that strategic direction is maintained These mechanisms focus management attention on achieving value chain economies. Copyright 2015 Pearson Education, Ltd. All rights reserved. 6-33 Organizing Vertical Integration Compensation Salary Opportunism Integration Cash Bonus: Individual Stock Grants: Individual Leveraging Capabilities Exploiting Flexibility Cash Bonus: Group Cooperation Stock Grants: Group Stock Options: Individual Time Horizon Stock Options: Group Copyright 2015 Pearson Education, Ltd. All rights reserved. 6-34 Practically: When is a vertical integration a good strategy? A vertical integration will be a good strategy if two special conditions are met. 1. The first is a \"market failure\" that is hurting your business; the most common are supply risk, demand risk, and profit gouging. 2. The second is that you have the power or capabilities to fix and even exploit that market failure. Without market failure, vertical integration is just plain ole diversification. And without the power or capabilities to exploit a market failure, it's a very risky strategy. Copyright 2015 Pearson Education, Ltd. All rights reserved. 6-35 Summary Vertical Integration... makes sense when value chain economies can be created and captured may allow a firm to leverage capabilities may be a response to the threat of opportunism and uncertainty as a form of exchange per se, is not rare nor costly to imitate Copyright 2015 Pearson Education, Ltd. All rights reserved. 6-36 Summary Vertical Integration... is an important consideration in the decision to expand internationally (range of possibilities) makes sense when done for the right reasons, under the right circumstances can be a costly mistake if done wrong Ownership is costlyintegrate only when the benefits outweigh the costs of integration! Copyright 2015 Pearson Education, Ltd. All rights reserved. 6-37 All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise without the prior written permission of the publisher. Copyright 2015 Pearson Education, Ltd. All rights reserved. 6-38 Chapter 7 Corporate Diversification Copyright 2015 Pearson Education, Ltd. All rights reserved. 7-1 The Strategic Management Process External Analysis Mission Strategic Choice Objectives Strategy Implementation Competitive Advantage Which Businesses to Enter? Internal Analysis Corporate Level Strategy Copyright 2015 Pearson Education, Ltd. All rights reserved. Vertical Integration Diversification 7-2 Logic of Corporate Level Strategy Corporate level strategy should create value: 1) such that businesses forming the corporate whole are worth more than they would be under independent ownership 2) that equity holders cannot create through portfolio investing Therefore, a corporate level strategy must create synergies economies of scopediversification Copyright 2015 Pearson Education, Ltd. All rights reserved. 7-3 Integration and Diversification er to m ut io n C us al Fo c D is tri b Fi rm ie r Su pp l R aw M at er ia ls Integration Forward Backward Diversification Other Businesses No Links Other Businesses Current Businesses Unrelated Copyright 2015 Pearson Education, Ltd. All rights reserved. Related Many Links 7-4 Example: Beatrice Companies Since its founding as a regional dairy company in 1891, Beatrice Companies grew to be a $12.5 billion diversified producer of a variety of products - ranging from grocery products to chemicals - by 1985. A succession of CEOs had propelled the company through a series of acquisitions to diversify the company's activities. As a diversified company, previous leaders ran Beatrice as a decentralized operation and made no attempt to coordinate activities among the businesses. When James Dutt became CEO in 1979, he decided on an aggressive strategy of corporate marketing and attempted to create synergy among the business units. This proved to be an extremely difficult task and the company ran into financial problems. A leveraged buy out firm, Kohlberg Kravis Roberts (KKR) acquired Beatrice and sold it piece by piece. Diversification proved not to be a value creating strategy for Beatrice largely because the management was never able to exploit potential synergies between divisions. Copyright 2015 Pearson Education, Ltd. All rights reserved. 7-5 Types of Corporate Diversification At a general level... i. Product Diversification: operating in multiple industries simultaneously ii. Geographic Market Diversification: operating in multiple geographic markets simultaneously iii. Product-Market Diversification operating in multiple industries in multiple geographic markets simultaneously Copyright 2015 Pearson Education, Ltd. All rights reserved. 7-6 Types of Corporate Diversification Copyright 2015 Pearson Education, Ltd. All rights reserved. 7-7 Types of Corporate Diversification When a firm chooses to diversify, it faces a decision as to how related the new business(es) is(are) to the existing businesses of the firm Limited Diversification single business: > 95% of sales in single business dominant business: 70% to 95% in single business Related Diversification related-constrained: all businesses related on most dimensions related-linked: some businesses related on some dimensions Unrelated Diversification businesses are not related Copyright 2015 Pearson Education, Ltd. All rights reserved. 7-8 Types of Corporate Diversification Limited Diversification 1. single business: > 95% of sales in single business: A single-business firm is technically not diversified because it gets 95 percent or more of its total revenues from one business. Delta Airlines is an example of a single-business firm. Its 2008 annual report states that in each of the last four fiscal years, passenger revenues accounted for 92 percent of total revenues, while cargo revenues provided the rest 2. dominant business: 70% to 95% in single business: A d