GE Learns Its Lesson the Hard Way
Jack Welch transformed GE’s portfolio of businesses by concentrating on businesses that were number one or two in their markets. Businesses that were positioned to get to number one or two also qualified. He did this because statistics show that those with significant market share are usually more profitable. But is this always the case? This strategy does not work when you buy market share to get there. If you lower your price to gain share, you may find yourself with a dominant market share and no profits.
For years GE used market share to decide to invest or divest.
In addition, it exited businesses that may have a good market position, but the business was no longer attractive. For instance, when its plastics business no longer had a competitive advantage, GE sold the business to SABIC, ideally using the proceeds to invest in business segments that had not been pushed into the commodity space.
More recently, what happened to GE’s core Power Business Segment?
When business conditions declined (people moved away from fossil fuel), the power sector took on contracts with low margins. Apparently, the leaders of the power sector chased market share without regard to the profitability of the business. Now the power sector has a significant backlog of low or no margin contracts that will need to work their way through the system over the next couple of years. The new CEO, Larry Culp has changed salesperson incentives to reward on margins rather than sales.
What Can We Learn about gaining market share?
While high market share typically indicates good profitability, it is important to understand the pitfalls and exceptions to this general rule. As you develop plans to gain market share, be sure you look at the implications of your strategy on your profitability.
If you have questions about strategy development, please contact Denise at: firstname.lastname@example.org or call her at 910-763-5194. Furthermore, if you’d like to try a proven process, consider holding a one-day workshop on Simplified Strategic Planning.
Denise Harrison is a senior consultant for the Center for Simplified Strategic Planning, Inc. She can be reached at email@example.com.
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