A Model for Strategic Decision Making : General Electric 2020 Sale of BioPharma Unit
In 2022, I came across an interesting research paper by authors Rahman and De Feis from 2009 proposing a decision-making model through the perspectives of Time Pressure and Complexity. While I help clients working on different strategies and the selection or omission of alternative strategies, the model proves super handy.
Let’s investigate an applied case – when General Electric Healthcare sold its Biopharma Unit back in 2020.
Background of GE Sale of BioPharma Unit
On February 25th, 2019 General Electric announced its intent to sell a significant unit of its Healthcare division, the BioPharma business, to Danaher Corporation for $21.4 billion. Out of this amount, $21billion would be in cash. GE Healthcare CEO Lawrence Culp highlighted the two drivers behind the decision as (1) reduction of leverage and (2) improvement to GE’s balance sheet. The new company will be a stand-alone business as part of Danaher existing Life Sciences division. In 2018, the BioPharma business generated around $3 billion out of $19.7 billion which was GE Healthcare annual revenue. Danaher’s 2019 revenue was $17.9 billion; GE expected this sale to close in Q4, 2019.
To give background about the BioPharma unit, the activities within its business model focused on the manufacturing of both equipment and resins used by other pharmaceutical companies in the processes of exploring and mass production of specific biopharmaceuticals that fight autoimmune diseases including rheumatoid arthritis, psoriasis and others. The same unit helps vaccine developers and researchers to explore immunotherapy. GE Healthcare would still, by then, keep the Pharmaceutical Diagnostics business which develops contrast media used by radiologists in medical imaging technologies; GE marketed that its contrast media products were used globally in more than 90 million patient procedures per year.
Difficulties around the deal
The deal faced hurdles in different geographies.
1. South Korea’s antitrust watchdog approved the acquisition in February 2020 after specific conditions were met to avoid monopoly practices.
2. The European Union took different rounds of discussion until it was approved by December 2019.
3. The US Federal Trade Commission (FTC) demanded both companies to sell ten of their products to Sartorius AG, a German company.
Deal Conclusion
On March 31, 2020, Danaher announced the completion of the acquisition; the net proceeds to GE were about $20 billion. Larry Culp re-confirmed that the deal, part of GE multi-year transformation, would reduce its balance sheet risks and improve the company’s tough financial position. Two weeks later, GE announced that it used part of the $20 billion to cut debt by paying $6 billion of its intercompany loan to GE Capital.
The table below shows the drop in GE stock price over the last three years prior to the deal.
Strategic Decision-Making Model Rahman & De Feis Framework – in the Face of Complexity and Time Pressure
The Rahman & De Feis framework provides decision-makers with a 2 x 2 matrix to evaluate decisions based on the dimensions of complexity and time pressure. The greater the number of variables involved, the higher the complexity; similarly, increased urgency means higher time pressure. Decision-makers must conduct a thorough situational assessment prior to making their decisions to ensure effective mapping.
Here is how strategic decision-making relates to this model:
· When both time pressure and complexity are low, utilize the RATIONAL MODEL. In this scenario, decision-makers have complete information, enabling them to identify objectives, develop plausible alternatives, evaluate them, and select the best option. This ideal situation is not that common at the strategic level in today’s world.
· When time pressure is low and complexity is high, employ the INCREMENTAL MODEL. This approach reduces complex decisions into simpler components. Decision-makers can visualize the implementation path of these simpler decisions, provided that the overall decision can indeed be broken down effectively. Simply, one decision at a time.
· When time pressure is high and complexity is low, adopt the BOUNDEDLY RATIONAL MODEL. This model recognizes the limitations of decision-makers’ cognitive abilities and the imperfection of available information. The goal is not an optimized outcome but rather a combination of satisfactory and acceptable results. This model can also involve specialists handling different parts of the decision based on their expertise, with outcomes integrated into a cohesive strategy eventually.
· When both time pressure and complexity are high, apply the GARBAGE CAN MODEL. Although sub-optimal, this model is used in highly volatile and dynamic environments. Decision-makers select a strategic option and proceed, hoping for minimal adverse effects. The model lacks structure and organized processes for finding solutions, sometimes resulting in the implementation of irrelevant solutions.
Decision Making Model’s Relevance to GE’s Decision to Sell BioPharma Unit
GE’s business transaction operated under significant time pressure and medium-to-low complexity. This is supported by three points:
- From a time pressure perspective, there was an urgent need for sizeable cash inflows by the end of 2019 due to the acceleration of GE’s cash flow deterioration and its debt situation.
- Additionally, the size and specific nature of the biopharma industry meant that there were few candidates capable of acquiring the entire business, reducing the complexity in selecting the bidder.
- Finally, although competition and anti-trust regulations posed some complexity in certain countries, the healthcare unit’s distinct nature compared to the rest of GE’s technologies lowered the overall complexity to a medium-low level.
The framework indicates that the appropriate model is the boundedly rational model. This model aims for satisfactory outcomes rather than optimized ones and involves subject matter experts from various disciplines to consolidate their opinions through an iterative ranking of possible solutions. It acknowledges cognitive limitations and leverages group expertise to address these constraints.
In GE’s case, a confidential committee should have studied the decision and outlined potential outcomes, leveraging expertise in mergers and acquisitions as well as industry-specific knowledge to understand the complexities and risks involved in spinning off the business to Danaher. The boundedly rational model involves contributions from different-sized groups without exclusion, with rounds of ranking until the final preferred solution is selected. This method aligns with the low complexity and high time pressure classification for GE’s 2019 situation.
The decision to sell the BioPharma unit could have been the only viable strategic option to secure essential cash flow for GE’s survival. However, considering GE lost annual revenue of $3 billion, the long-term soundness of this decision remains debatable with subsequent changes and spin-offs at GE from 2022 to 2024, including the spin-off of the entire GE Healthcare unit. This scenario exemplifies paradox and competing demands, where the company urgently needed cash flow but had to divest a profitable business.
Final Thoughts
Different factors contribute to increasing complexity in the business environment. Paradoxes pose additional challenges for business leaders who already face competing demands for resources. The models discussed earlier aim to facilitate the selection process of strategic decisions. However, it is crucial to achieve early clarity about the context and situational assessment. The analytical framework begins with a context clarification step focusing on complexity and time pressure.
Another critical dimension in decision-making is the time factor. The COVID-19 pandemic highlighted the need for adaptable models that can expedite decision-making during crises characterized by uncertainty. Models must incorporate agility to make swift decisions while practically addressing ambiguity, risks, and complexity.
Reference: Rahman, N., & De Feis, G. L. (2009). Strategic Decision-Making: Models and Methods in the Face of Complexity and Time Pressure. Journal of General Management, 35(2), 43–59.
