Harvard Business Review Case Study: General Electric Medical Systems (2002)

Content

1. Introduction

2. GEMS Competitive Strategy
2.1 Resources Analysis
2.2 From Capabilities to Core Competences - Value Chain Analysis at General Electric Medical Systems
2.3 Cost leadership, differentiation or “hybrid” - General Electric Medical Systems Competitive Strategy drift

3. GEMS International Strategy
3.1 Evaluation of GEMS International Strategy
3.2 Has GEMS Strategy in China Transformed its Strategy from Global to a More Multidomestic Strategy?

Appendices

Classifying and Assessing GEMS Resources

The global value network

The Global Integration /Local Responsiveness Grid

Reference List

1. Introduction

General Electric Medical Systems (GEMS) is the world’s leading manufacturer of diagnostic imaging equipment and part of the Milwaukee, US-based General Electric. The following evaluation conducts a strategic analysis of its internal resource capability, how it shaped its competitive strategy and a profound evaluation of its international strategy.

2. GEMS Competitive Strategy

2.1 Resources Analysis

The resource^[1] basis of GEMS is tremendous as shown in Appendix1, but it is not only the resources themselves that makes the difference, it is the potential it offers to create competitive advantage. The financial resources are stunning, but more important is to what they enables GEMS and why it is able to earn a superior profit margin. The firm’s fantastic and long grown income stream lead to an excellent credit rating and this to a huge and low-priced borrowing capacity. GEMS is investing more than half a billion dollar every year in R&D and has a formidable global presence. The technological sophistication and flexibility of plants and equipment is great and builds the burden for a sufficient working supply chain. The excellent reputation makes it easy for GEMS to attract talents and bind them to the company for a long time.

This composition of resources offers a wide range of possibilities for GEMS. What the organisational capabilities are and how the resources are working together is shown next.

2.2 From Capabilities to Core Competences - Value Chain Analysis at General Electric Medical Systems.

The main^[2] critical activities, which sustain competitive advantage for General Electric Medical Systems are linkages of capabilities that can be summarized by three main subchains which we refer to as the core competences of GEMS:

1. Managing the value network and concentrating on the value creating activities of General Electric Medical Systems.
2. The learning organisation or how General Electric Medical Systems is keeping entrepreneurial spirit and being an innovative company.
3. Managing relationships or how General Electric Medical Systems is dealing with the global customer.

1. Managing the global value network and concentrating on value creating activities

“Because we buy so many things, the game for us is very much a supply chain game and not a manufacturing game”. Important part of the core competence in this case is the ability to focus on the activities which are your core competences and to look for outsourcing possibilities. In this case GEMS realised that basic manufacturing is not one of its value creating activities. The only manufacturing which GEMS is keeping “in-house” is the proprietary heart of the company’s product and the assembling process because it reflects the current technology leadership and the basis for future innovation through research and development. This manufacturing is centrally important for their own strategic capability and it retains direct control over this important capability. Overall the complex configuration of resources and capabilities within their value network makes integration and interdependencies necessary.

Components plants locations in Mexico, India and Israel and specialised engeneering plants in locations as Hungary, China and Korea. The company’s infrastructure is highly dispersed, specialised and interdependent. To manage such dimension and to focus on its value creating activities the proactive learning organisation and the managing of relationship is not easy to achieve and a true competitive advantage over competitors.

2. The learning organisation or how General Electric Medical Systems is keeping entrepreneurial spirit and being an innovative company.

The learning organisation is one of the key ability at GEMS which allows them to be proactive according to global trends. The company analyses and anticipates this way how future trends effecting its business and products. GEMS fantastic financial performance is due to their ongoing introduction of innovative products and further development of its existing product range. This continious readjusting of competences is the centre of the learning organisation. Supported by the intuition of GEMS human resources, the acceptence of conflicting ideas within the company and that experimentation becomes the norm. That’s one of the reasons why GEMS is able to gain a superior profit margin for such a long time with almost no fluctuations and constant grow. The proactive learning company which is focused on grow and new ways of growing in the future is the basis for GEMS success. Furthermore it has a superior position compared to competitors already, as all their modalities are number 1 or 2 in worldwide market share. The vital infrastructure, the qualified workforce and the ability to attract talents, several self developed management concepts and the ability to manage acquisitions, the excellent innovation reputation and the strong partnership with customers are supporting GEMS learning organisation approach. The “Six Sigma” initiative benchmarked from Motorola is one concept GE and thus GEMS is famous for. Another factor which is admired by others is its successful acquisition policy. The small innovative companies GEMS is acquiring from time to time and the innovation focused structure itself are adding a kind of entrepreneurial spirit to GEMS despite its company size. Despite this openess to ideas from anywhere and anybody the firm still follows a results-oriented approach. This spirit keeps the learning organisation alive and ahead of competitors.

3. Managing relationships or how General Electric Medical Systems is dealing with the global customer.

The several ways how GEMS is managing their worldwide relationships is a core competency which enables GEMS to stay ahead of competitors. The main focus is on customer relations which is the value creating factor, but besides there is a strong relationship between different levels and units within the company and to the supplier side as well. The way GEMS is organised in terms of infrastructure, human resources and technology absolutely benefits marketing, sales and service. It brings GEMS close to their customers and enables GEMS to segment the different world markets with their different needs. Products are perfectly tailored and priced to customer needs.

2.3 Cost leadership, differentiation or “hybrid” - General Electric Medical Systems Competitive Strategy drift

The original competitive strategy of GEMS was based on Differentiation. Achieved through image and reputation of GEMS, but mostly due to its additional services it offers to customers. The core competences as the learning organisation and the ability to manage relationships are fitting perfectly to differentiation as the choice of competitive strategy. However, environmental forces during the nineties forces GEMS to be more cost effective. Competitive pressure from rivals appeared, e.g. price pressure from German-based Siemens. Moreover there was ever present cost pressure from equipment purchasers , for example managed care organisations, government and employer payers in USA. Countries with government-sponsored universal insurance systems were introducing reforms to slow down growth of healthcare cost due to state budget restrictions. This development forced GEMS to react and it leads to the introduction of the “Global Product Company” approach in 1997 . This was the beginning of cost awareness and the starting point of GEMS “Hybrid Strategy”.

The movement of COE into low cost countries and the increasing use of suppliers out of low cost countries shows the increasing focus on cost reduction. The inputs purchased from vendors accounted for more than 86% of total variable cost for manufacturing. Economies of scale became an important factor, but the imaging equipment needs high adaption due to different worldwide customer profiles. The combination of cost effectiveness and local responsiveness became difficult, but GEMS was able to gain economies of scale through standardised components and parts delivered by vendors rather than economies of scale through an often adapted end product. The ongoing great success proved that GEMS is doing right with following the hybrid strategy approach. A future cost pressure is the increasing importance of biomedical sciences which GEMS is aware of, but margins and the product hit rate are significantly lower in this area.

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^[1] See Appendix1

^[2] See Appendix2