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International -- Cover Story
GLOBAL MISSION (int'l edition)
George David hates to lose. In a week of international sailboat racing off Key West, Fla., in January, his $1 million, custom-built, 14-meter craft missed first place by a mere 40 seconds. The United Technologies Corp. chief executive, who captained the boat himself, now dreams of adding a laser range finder like those used in America's Cup races to give his boat an edge. In sailboat racing, David explains, "you win with preparation and teamwork." Business, he adds, "is sailboat racing on a larger scale."
From headquarters in Hartford to operations scattered in 183 countries, employees of United Technologies are beginning to grasp that message. Since taking over as CEO a year ago, David has been spreading his sense of competition throughout the $21 billion conglomerate. Clocking more than 400,000 kilometers a year on overseas trips, meeting with workers and managers from Manhattan to Moscow, he is demanding nothing less than a cultural transformation of the stodgy, inbred company. David's goal is to whip his conglomerate's six units--Pratt & Whitney engines, Otis elevators, Carrier air conditioners, Hamilton Standard aviation systems, Sikorsky helicopters, and UT automotive systems--into shape.
It is a painful process, fraught with risk. Old-school managers, among others, are paying a huge price. No more can the hierarchical, inflexible style of its long-dominant Pratt & Whitney engine unit drive the company, David says. Now, UTC must adopt the commercially driven, internationally oriented approach of its Otis Elevator Co. business--what David calls the "Otis model," which he learned while rising through the ranks at Otis. That means elevator people are moving into key positions in managing the proud old jet-engine business and other units. "There's more of a sense of urgency now," says Robert A. Wolfe, the newly promoted head of Pratt's commercial engine business.
While placing huge bets on such tricky markets as Russia, China, and Vietnam, David has taken heat from labor unions for hollowing out UTC in Connecticut, where the workforce is now just 62% of its size five years ago (page 43). Workers have even picketed his house. And though the company gets a hefty 60% of its sales outside the U.S., profits can be elusive. In the former Soviet Union, UTC has 15,000 employees and isn't repatriating a dollar in profit (page 40).
But David and other top managers argue that they are simply doing what a once U.S.-dependent defense giant must do to survive. Says Otis President Jean-Pierre van Rooy: "It's a very clear strategy--recalibrating the company not only toward international but toward more commercial business."
OBSESSED. David doesn't underestimate the challenge. "There's no overnight change. It changes a micro-inch a day," he admits. But the micro-changes have begun to add up. The company surprised Wall Street in 1994 by announcing a 20% increase in earnings, to $585 million, on a decidedly modest 1% rise in sales, to $21 billion. David says he's on target for another 20% earnings increase in 1995 as the commercial business continues to grow and cost-cutting at Pratt flows to the bottom line. "David is doing the right thing," says Lehman Brothers Inc. analyst Joseph F. Campbell. "The next few years should be pretty good."
The fiercely competitive CEO seems driven to meet those higher expectations. An engineer with a Harvard University undergraduate degree in physical sciences and a University of Virginia MBA, David, 53, is obsessed with numbers and facts. He walks around the company carrying blue-ring binders that lay out just where UTC stands by different measures: percent of sales from international operations, return on assets, return on equity, operating income, cash flow.
David developed his fondness for number-crunching while moving up at UTC. After joining the company in 1975 as a corporate planner for Otis Elevator, his career path included responsibilities for Latin America and Asia. Then he became executive vice-president and ultimately CEO of Otis in 1986. From there, he rose to senior posts at UTC and became president and chief operating officer in 1992, acting at then CEO Robert F. Daniell's behest to restructure the company. He was appointed CEO in 1994.
He--and other UTC executives--are acutely aware of the competition from Connecticut's other big conglomerate, General Electric Co., and its globally oriented chairman and chief executive, John F. Welch Jr. Few conversations with top UTC execs do not involve a passing reference to GE--and its high performance standards. While UTC's return on sales in 1994 was 7.4%, up from about 6% in 1993, it pales beside the 15% that Welch demands from his lieutenants. UTC makes just one-eighth of GE's profits on a third of GE's sales.
For David, the "Otis model" is the key to boosting his company's performance. The Otis mind-set is international, entrepreneurial, quick-moving, and customer-driven. As a result, UTC relies on mostly non-Americans to manage the company's sprawling global operations, while keeping oversight through advanced communications. "Empowering" managers down the line is crucial, and headquarters staff in Hartford has been halved, to 500, since 1990. "I'm a rampant believer in decentralization," David says, as long as there's a "competent team, everybody is reading from the same hymnbook, and there's a good information system."
NEW FOCUS. David learned some of these lessons in the 1970s, when he helped build up Otis' joint venture with Matsushita Electric Industrial Co., Nippon Otis. Back then, recalls Masaharu Matsushita, chairman of Japan's largest electronics conglomerate, "[David] asked for my opinion of Otis' business in Japan."
Based on his own knowledge of Japanese industry, Matsushita suggested that Otis aim its all-out focus on quality and technology not just at purchasers but at elevator users, too. Upon his return to the U.S., David organized a special team to deal with the Japanese market. "Japanese consumer confidence in the quality of Nippon Otis elevator rose rapidly," says Matsushita. The union has been financially successful, too, with revenues in 1994 of $740 million--up 24 times from 1975.
Later, through his work in China, David learned how to play in emerging markets where the cultures often seem alien to Westerners. The idea is to get into a market early, commit enough resources for local partners to take you seriously, team up Western and local managers, and be patient, because sometimes it takes years to turn a profit. Says Bruno Grob, head of Otis' European operations: "We have a philosophy that when something opens up, we have to be there."
The strategy worked in China, where David himself negotiated joint ventures in the early 1980s. Otis had sold its first elevator in China at the turn of the century but was forced out after the 1949 Communist revolution. When China opened up, David argued for plunging back in immediately.
His enthusiasm met with some angst among board members. "There was a lot of debate and dispute about what a dopey thing this was to do," recalls David. He struck a deal for Otis to buy 30% of the Tianjin Elevator Co. for $1.5 million in 1984. Then it bought an additional 14%. Today, Otis sales in China exceed $250 million--10 times that of a decade ago. Overall, UTC's annual operating profit in China is $60 million, and the company is seeking new ventures in the aerospace and automotive markets.
Now, David is working overtime to extend the Otis model to other parts of the company and other parts of the world. An avid reader of biographies of adventurers such as Sir Richard Burton, a British explorer who translated the Kama Sutra, David is trying to take all six UTC companies into emerging markets, where demand should grow for airplane engines, car parts, and air-conditioning--as well as elevators. The Otis model means "we are endlessly patient," he tells his managers. "We wait forever."
Perhaps the ultimate test of his vision will be Russia. Otis and UTC are betting big on the former Soviet Union, and it hasn't been entirely clear sailing so far. From 1990 to 1992, Otis launched four joint ventures in Moscow, St. Petersburg, and Ukraine to make and service both Otis and Soviet-built elevators. Pratt & Whitney, meanwhile, is working with Perm Motors to improve engines for the Aeroflot fleet and with the Ilyushin aircraft maker to modernize its large passenger jets for international sales. Pratt is also working on a joint venture with the Russian rocket maker Energomash to develop a commercial space-launch vehicle.
"CRAPSHOOT." Altogether, UTC has committed $250 million, of which about $100 million has actually been invested. Profits, though, will be some time in coming. "It's a very long crapshoot," David concedes. In St. Petersburg, for example, Otis built a state-of-the-art factory that would look at home in America. The spotless plant--a far cry from the typical grimy, run-down Russian factory--cranks out Western-designed elevators. Japanese-style kaizen charts calling for steady, incremental improvement line the walls--and Russian workers and managers eye them eagerly.
The Otis "twin concept" of management, under which two executives co-manage a plant, has also made a difference in St. Petersburg. A Frenchman, Senior Director Pierre Laboisse, is working closely with Russian General Manager Alexander Tarasov, helping him to run an efficient plant. Laboisse dreamed up a technique for teaching the workers to respect their equipment. Tagging machinery with sales prices, in U.S. dollars, he told workers: "My friend, it's your tool--pay attention." A blunt manager, Laboisse also cracks the whip on quality control: "If I have one complaint from the field, it has to be fixed in 48 hours," he says.
But the beautiful St. Petersburg plant operates at barely a quarter of capacity. All those blue-ring-binder forecasts of elevator sales proved way too optimistic. With Russian industry deep in depression and many cities lacking funds for maintenance--not to mention construction--the market isn't expected to pick up until at least 1996. Meantime, Otis is getting by on its servicing of elevators, where operating margins run above 50%. Service kicked in about half of the operation's $13 million in revenues last year. "Without the service there, we would be broke," Grob says frankly.
For David, Russia and China aren't enough of a challenge. He's taking UTC into still other developing markets. Otis opened a new elevator factory in Penang, Malaysia, in 1993. And the day President Clinton reopened commercial ties with Vietnam in 1994, it moved to open offices in Hanoi and Ho Chi Minh City. Chasing after Otis, Carrier, which only recently completed a makeover of its product line, has set up four joint ventures in China and is pushing hard in the rest of Asia. Carrier sees the market tripling in Thailand alone, to $1.2 billion, within the next five years. Similar rates of growth are forecast for Indonesia and Malaysia.
To manage this sprawling empire, David works from a computerized calendar on which aides draw icons of airplanes to denote travel time--usually several days a month. In between, there are icons of the human brain--days on which just thinking is the activity du jour. Stretched out in the company's Gulfstream IV jet, attired in matching sweats with his boat's name, Idler, on them, David enjoys reading his biographies and munching on fresh-baked chocolate chip cookies.
LONG HISTORY. When not dealing with the vagaries of distant markets, David's energies are focused internally on convincing skeptical managers that the "Otis model" is the key to UTC's future. David is building on--and speeding up--a transformation that started long ago at UTC, when aerospace accounted for 72% of UTC's business and famed acquisitor Harry Gray began diversifying the company.
The engineering mind-set, reflected by Pratt & Whitney's dependence on big capital expenditures and long lead times, is still second nature to many UTC managers and workers. And complacency is a problem. Carrier, Otis, and Sikorksy helicopters are leaders in their industries, while Pratt runs neck and neck with General Electric. UTC's automotive business is a leading supplier of systems and parts, while Hamilton is a key provider of aviation controls.
But David wants more. He wants products made more quickly, at less expense, and with less interference from the top. In redoing its product line, Carrier designed simpler, more easily maintained air conditioners with fewer parts. Hamilton Standard has sped up its development time for new aviation products from four to two years. Meanwhile, David is relentlessly cost-cutting--especially at Pratt.
That long-dominant unit, in fact, is where resistance is highest to David's "Otis model." Privately, Pratt people question how you can build a jet engine the same way as an elevator. They ask how such a capital-intensive, high-tech business as jet engines can adopt the informal mode of an Otis.
David has no time for naysayers: "There are some things about business that Pratt needs to be alert to," he snaps. "The days of building engines in the U.S. and laying them on the heads of innocent foreigners are long over."
Leading the cultural revolution at Pratt & Whitney is a David protege--Karl J. Krapek, whom Daniell and David installed as Pratt president in late 1992. Workers and managers at the East Hartford factory immediately took note that the new boss came not from the aerospace side but from Carrier--and he had earlier worked at Otis.
Since taking over, Krapek has led a massive restructuring. The workforce has been cut 40% and 185,000 square meters of manufacturing space idled. Parts that once traveled three kilometers between jobs now move just six meters. Setups that took 45 minutes are done in seconds. Managers plan 7% annual cost reductions with no end in sight.
But it's a struggle. "Culture change in a monopoly comes hard," says Krapek. "The hourly people understand it, but the middle managers have a hard time. They were paid to do the wrong thing--to build inventory."
A BIG PUSH. After losing $570 million in 1991 and 1992, Pratt reversed gears and earned $536 million in 1993 and 1994. The worst may now be behind. After spending $500 million on developing the PW4084 engine, Pratt was first out of the box with a new engine for Boeing Co.'s new 777 aircraft. While GE is going with a bigger engine designed for more powerful versions of the 777 that are expected later, Pratt seems better positioned in the early rounds.
The unit is also pushing hard to improve reliability, after spending $260 million last year fixing faulty engines. If Pratt can cut that down, David says the unit can keep half of the amount saved for new-engine development. Pratt has also hired Japanese consultants who earlier worked with Otis on elevator reliability to boost quality.
Pratt's one glaring weakness is the lack of an engine for the latest model Boeing 737. Although Pratt was the exclusive engine supplier for early 737s, it believed that the plane had reached its peak and chose instead to develop an engine for the larger 757. That proved a deadly miscue--and GE jumped in. The 737, ideal for the short routes of the hub-and-spoke system that has evolved since airline deregulation, is now a popular plane. "The 737-100 and 737-200 were both powered exclusively by Pratt & Whitney engines," says Jim Eckes, managing director of Indoswiss Aviation, an aircraft-leasing company. "Now it's all going to GE. That was a stupid mistake."
Pratt's stumbles have cost UTC dearly in the past, but the unit has also brought riches--$1 billion in profit in 1990 alone. As Pratt gets fixed, David's challenge will be to keep it on an even keel without losing sight of the other operations. His goal is to get all the units working well at the same time, for the first time since UTC diversified.
But a stray wind can blow a sailboat off course, and David faces many uncertainties as he steers the new UTC. Apart from continuing to indoctrinate his team in the new competitive mentality, he will confront difficult choices in Russia about just how much to invest as that country wrestles its way to a free market. Already, his joint-venture partners are arguing for greater commitments. Then there is Carrier, which remains a laggard, with operating margins last year of just 5.7%--the lowest of any UTC unit. The pressure is on for Carrier to boost results as sales of its new products pick up.
The changes wrought so far by David and his team are beginning to gain notice. UTC shares are now trading close to 70--up from the low 40s in late 1993. Key customers, such as United Airlines Inc., say they have noticed a new, more cooperative spirit at Pratt. But competition remains intense. As quickly as Pratt announced it was seeking 7% annual productivity improvements, GE told its workers it must have 8% improvement.
So there will be no rest for UTC's chief executive. To come in range of GE's performance standards, David will have to sustain his frenetic remolding efforts for years, while still betting big on faraway markets where the only certainty is surprise. His ultimate success is still poised on the knife's edge. Kind of like a day spent racing sailboats.By Tim Smart in Moscow, with bureau reports