This surprisingly simple question can help you think more clearly about your business and how to improve its performance.
Do you know that not many UK insurance companies make a profit on their insurance premiums? They provide insurance services sure enough, but profits come from related services, like referrals to car hire companies and lawyers. I guess it’s a sort of accessory pricing, used on things like printer cartridges. Whilst HP may not make much profit on its printers it sure does on its ink cartridges. But does adapting this pricing model say anything about the lead products, insurance and printers? It sure does, it says that they have both been somewhat commoditised and competition for these core products is very much all about price. But doesn’t everyone say that competing on price is a mugs game? Yes, but many people still appear to do it and look for profit elsewhere by adopting indirect margin models like these.
One way of looking at these businesses is to think of them as printing consumables and accident services businesses, respectively, as that is where they make the most money. In both cases, they don’t have to compete on price for these additional products/services, as they have created a strong competitive advantage by directing customers towards their own, effectively proprietary, products with high margins. In both cases, customer profitability is a lifecycle game; the longer they stay clients the more chance they have of making a good margin on them.
For the time being though neither printer manufactures, nor insurance companies, sell these supplementary services separately. They are both still fundamentally in the insurance and printer business. But what about GE, the vast US conglomerate that is, amongst many other things, the world’s leading manufacturer of aircraft engines and medical-imaging gadgetry? Whilst the idea of a predominantly industrial business providing customer financing could be construed as akin to the ancillary service model mentioned above, GE Capital now only does 5% of its business with group customers. Although fundamentally a quite separate activity, this enormous financing business is now not only the most profitably part of the GE group but it delivers about 50% of its profits.
In my first two examples, the core benefits delivered to the end client are still pretty aligned with the positioning of the business; they are still very much in the insurance and printing businesses, at least in part. In contrast, GE Capital has become a large and very successful bank in its own right that arguably now has nothing whatsoever to do with the rest of the GE group. Apparently, if it were a stand alone bank it would the US’s fifth largest by assets. Well, it does have a very effective role within the group; it provides half of its profits, a lot of cash, and an economic shield for GE’s “core” activities; but what exactly are the benefits to shareholders of these two very different businesses being managed by the same man?
Mr Immelt, GE’s CEO, says that calls for the separation of GE Capital, from the rest of the group, are “not practical”, but what exactly does that mean? My simplistic mind says that surely the skills and expertise needed to run a bank are somewhat different from an industrial conglomerate. Isn’t GE Capital shielding the under performance of the rest of the group, to some extent at least, and is that really in shareholders’ best interests? A bit of a political hot potato for sure, but GE is in two very different businesses and I can’t see that both benefit equally from the synergies of scale, or scope. GE is something of a rarefied business undertaking for many reasons and perhaps I just don’t see why all this is still a good idea, but for most of us the issues are much more straight-forward. If you ask yourself the deceptively simple question “what business am I in?” and get two answers, just like GE, it is perhaps time for you to focus on just one of them.
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