MBA Capstone:
Strategic Analysis for Generac Holdings Inc. (GNRC)
MGMT 6800: Business Policy and Strategy
Professor Alan Seidman
Johnson & Wales University
Andrex Ibiza
MBA Candidate, College of Business, Johnson & Wales University
https://orcid.org/0000-0001-8046-7759
June 20, 2022
This paper was produced for educational purposes only and does not constitute professional financial advice. Please consult with an investment professional before making any investment decisions, which involve risk and the potential loss of funds invested.
Abstract
This paper conducts a strategic analysis for Generac Holdings Inc. (GNRC) with comparison to rivals Honda Motor Co., Ltd and Tesla, Inc. Beginning with industry and company background, this report details the firm’s general environment, internal conditions, and strategic choices. The report concludes with eight key result findings, explanation of decision criteria, and three recommendations of strategic changes to promote long-term global competitiveness.
Background
Industry
Generac Holdings Incorporated (hereby referred to as “Generac”) competes in the Motors and Generators industry (SIC code 3621), defined as “establishments primarily engaged in manufacturing electric motors (except engine starting motors) and power generators; motor generator sets; railway motors and control equipment; and motors, generators, and control equipment for gasoline, electric, and oil—electric buses and trucks” (NAICS Association, n.d.). The Home Standby (HSB) power market grew significantly during the COVID pandemic due to surging residential investment in home improvements and disruptions to utility power transmission caused by extreme weather events and rising demand (Ginesin, 2022). Although traditionally associated with generators fueled by liquid propane or natural gas, the scope of the industry has expanded due to continuous improvements in key clean energy technologies like solar cells and batteries. Traditional market participants (Kohler, Briggs & Stratton, and Cummins) continue to focus exclusively on generators. Generac, in contrast, transformed itself with capital from its 2010 initial public offering from a Wisconsin-based generator manufacturer into a global energy solutions and technology company with vast opportunities for growth.
Generac
In 1959, with just five employees in a barn in Wales, Wisconsin, founder Robert (“Bob”) Kern began manufacturing generators based on his own new designs. Generac created the first ever automatic home standby generator, creating a new market segment that the company still leads; 7 of every 10 home standby generators sold is a Generac (Generac, 2019). Generac is a leading energy technology solutions company that provides backup and prime power generation systems for residential and, commercial & industrial applications, solar + battery storage solutions, energy management devices and controls, advanced power grid software platforms & services, and engine- & battery-powered tools and equipment (Generac Holdings Inc., 2022). Generac engineered America’s first affordable home backup generators and the first engine developed specifically for the demands of generator use (Galgani, 2021). Based in Waukesha, Wisconsin, Generac leads the market for home backup generators, with total revenues of $2.49 billion in 2020 and $3.74 billion in 2021 (Galgani, 2021; Generac Holdings Inc., 2022). Generac does business in over 150 countries with 9,540 employees at the end of 2021 with 5,125 directly involved with manufacturing (Generac Holdings Inc., 2022). Generac offers the broadest range of products in the power generation marketplace, including residential, commercial, and industry standby generators and portable and mobile generators used in a variety of applications (Generac Holdings Inc., 2022). Since going public in 2010, the firm has grown annual revenues from $588 million in 2009 to $1.36 billion in 2021, mainly through organic sales growth, R&D, new product introductions, and continuous M&A activities financed with cash on hand (Generac Holdings Inc., 2022).
Strong demand for backup power generation—especially in California (wildfires, rolling blackouts) and on the Gulf Coast (hurricanes)—has empowered Generac to capture 75% market share in the home standby power market (Galgani, 2021). The markets for energy storage and renewable energy systems continues to develop rapidly, especially due to climate-related threats to power grid stability (Generac Holdings Inc., 2022). 40% of respondents to the UBS Evidence Lab Housing Intentions survey indicated plans to install a new major home appliance within the next 12 months (Galgani, 2021). In 2019, Generac purchased Pika Energy, allowing the development of a line of clean energy products marketed under the Generac brand using the name PWRcell (Generac, 2022). The first whole-home solar power solution on the market, this system includes a series of batteries, an inverter, photovoltaic optimizers, power electronic controls, and other components (Generac, 2020). Generac’s PWRcell competes directly with Tesla’s Powerwall and Solar Roof offerings, appealing to consumers desiring emissions-free home backup power (Tesla Inc., 2022a & 2022b). Tesla’s offering makes a great option for homeowners who also need full roof replacement; otherwise, PWRcell usually becomes a better deal for consumers.
Relevant Competition
Tesla, renown U.S. electric automaker led by Elon Musk, competes with Generac in the home standby power category. Tesla launched its Solar Roof in 2016, broadening the scope of the market in the home energy generation and storage category. A Generac LP/gas generator provides backup coverage in case primary power from the grid fails; Generac profits handsomely from unanticipated upticks in natural disaster frequency/intensity. Tesla’s offering takes the concept of home standby power one step further, replacing the power grid itself for household electricity in most circumstances. The two firms could become strong future rivals for this new home power generation and storage market.
Honda Motor Co. Ltd, based in Japan, manufactures motorcycles, automobiles and power products, and engages in financial services, earning 88% of 2021 global revenues in Asia. Although Honda does not currently compete with Generac in any significant way in the U.S. market, their dominance of the pan-Asian market explains why Generac’s global expansion focused primarily on North America and Europe. From the perspective of Porte’s (2008) five competitive forces, Honda presents an example of a firm presenting the threat of entry given this category’s low household penetration and high future growth potential.
External Environment Analysis
General Environment/PESTLE Analysis
Political
- Political stability in markets where it operates
- Tax policy
- Partisan political divisions in the United States
- Renewable energy mandates, CO2 emissions regulations, and clean energy subsidies
- Investment tax credits and other demand-creation subsidies
- Underinvestment in national infrastructure
Economic
- Exchange rates
- Interest rates
- Commodity costs
- Economic performance of the United States
- Global economic performance
- Trade barriers and tariffs
- Availability of core infrastructure
- Economic cycles
- Workforce skill levels and education
Social
- Income inequality
- Social justice movements
- Labor organization
- “Culture Wars”
- Climate change awareness
- Ageing workforce
- Home as Sanctuary
- Remote work trends
- Low birth rates
- Low net immigration
Technological
- The Internet of Things (IoT)
- New 5G telecommunications infrastructure
- Maturity of technology
- Intellectual property rights (IPR) and patent protection
- Empowerment of supply chain partners by a shortened product lifecycle
- Technology transfer and licensing issues
- Cybersecurity threats, including statesponsored activities, hacking, malware, corporate espionage, etc.
Legal
- Environmental regulations at the local, state, federal, foreign, and other levels.
- Examples include the U.S. Environmental Protection Agency (EPA) and the California Air Resources Board (CARB).
- Noise ordinances
- Employee Health and Safety laws (OSHA, state laws)
- Regulation of emissions to air and discharges to water (EPA, state laws)
- Regulation of the generation, handling, storage, transportation, treatment, and disposal of waste and other materials (EPA, state laws)
- Lawsuits relating to product liability and intellectual property disputes
- Evolving data privacy laws, especially within the European Union (EU).
- U.S. Foreign Corrupt Practices Act (FCPA) (Generac, 2022).
- Consumer Product Safety Commission (CPSC)
Environmental
- Extreme weather/climate change
- Increasing rates of power outages
- Customer and shareholder activism
- Renewable/carbon-neutral energy technologies
- In 2021, Generac began publishing an annual Environmental, Social, and Governance (ESG) report aligned with leading global sustainability disclosure standards (Generac, 2022).
- Climate change will accelerate these trends and drive growth at Generac.
Industry Environment (Porter's Five Forces Model)
Porter’s (2008) key insight into the nature of competition is that established corporate rivals represent only one of five total forces that determine the structure of a given industry, thus defining its competitive characteristics. The industry structure, in the long run, sets industry profitability in the medium and long term. The strongest competitive forces determine industry profitability, so understanding them is critical for strategy formulation (Porter, 2008). This analysis considers Porter’s five forces within the home standby power and home power generation & storage categories and offers basic recommendations to improve Generac’s strength relative to each competitive force.
Threat of New Entrants
The threat of new entrants is moderate in the generator category and high for home power generation & storage. Existing barriers to entry include supply-side economies of scale, high customer switching costs, high capital requirements, incumbency advantages (especially in favor of Generac), and unequal access to distribution channels. Inconsistent government policies regarding clean energy tax credits have challenged this market and likely deterred new entrants (SEIA, 2022). To deter new entrants, Generac should focus on:
- New product and service innovations with high speed to market
- Further development of economies of scope and scale
- Continue long-term investments/acquisitions focused on Research & Development (R&D)