The Corporation: STRATEGIES
George David hates to lose. In a week of international sailboat racing off Key West, Fla., in January, his $1 million, custom-built, 45-foot 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 stodgy, inbred $21 billion conglomerate. Clocking more than 250,000 miles a year to meet with workers and managers from Manhattan to Moscow, David aims to whip his company'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.--what David calls the "Otis model." That means elevator people are moving into key positions in managing the proud old jet-engine business and other units.
It also means placing huge bets on such tricky markets as Russia, China, and Vietnam, even while David takes heat from unions for hollowing out UTC in Connecticut (page 136). 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 workers and is not repatriating any profit.
David and other top managers argue that they are doing what a ence 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."
NUMBERS MAN. David doesn't underestimate the challenge: "There's no overnight change. It changes a micro-inch a day." But the micro-changes have begun to add up. The company surprised Wall Street in 1994 with a 20% increase in earnings, to $585 million, on just a 1% rise in sales, to $21 billion. David expects another 20% earnings increase in 1995 as commercial business grows 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."
A fiercely competitive man, David, 53, walks around with 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. He developed his fondness for number-crunching while moving up at UTC. He joined Otis as a corporate planner in 1975, then oversaw jobs in Latin America and Asia before being named CEO in 1986. In 1992, he was named president and chief operating officer of UTC, becoming CEO in 1994.
For David, the "Otis model" is the key to boosting UTC's performance. The Otis mind-set is international, entrepreneurial, quick-moving, and customer-driven. UTC relies mostly on non-Americans to manage the company's sprawling global operations, while keeping oversight through advanced communications. Empowering operating managers is crucial, and headquarters staff in Hartford has been halved, to 500, since 1990. "I'm a rampant believer in decentralization," David says.
David learned some of these lessons in the 1970s, when he helped build up Otis' joint venture with Matsushita Electric Industrial Co., Nippon Otis. He asked Masaharu Matsushita, chairman of Japan's largest electronics conglomerate, for advice, and Matsushita suggested that Otis aim its all-out focus on quality and technology not just at purchasers but at elevator users, too. David organized a team to deal with the Japanese market. "Japanese consumer confidence in the quality of Nippon Otis elevators 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. 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. 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 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 revolution. When China opened up, David argued for plunging back in. His enthusiasm met with some misgivings among board members. But Otis bought 30% of the Tianjin Elevator Co. for $1.5 million in 1984 and later bought an additional 14%. Today, Otis sales in China exceed $250 million--10 times a decade ago and half of UTC's total sales there. Overall, UTC's annual operating profit in China is $60 million.
Now, David is extending the Otis model. He is pushing 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."
"CRAPSHOOT." Perhaps the ultimate test of his vision will be Russia. Though Otis and UTC are betting big on the former Soviet Union, it hasn't been smooth sailing so far. From 1990 to 1992, Otis launched four joint ventures to make and service elevators, while Pratt & Whitney is working with Perm Motors to improve engines for the Aeroflot fleet and with the aircraft maker Ilyushin to modernize its large passenger jets. Altogether, UTC has committed $250 million, of which about $100 million has been invested. But with the state-of-the-art plant Otis built in St. Petersburg operating at barely a quarter of capacity, profits will be some time in coming. "It's a very long crapshoot," David concedes.
Still, David is moving UTC even further afield. Otis opened a new elevator factory in Malaysia in 1993, and it moved to open offices in Vietnam the day President Clinton reopened commercial ties there in 1994. Chasing after Otis, Carrier is also pushing into Asia.
Internally, David's energies are focused on convincing managers that the "Otis model" is the key to UTC's future. The engineering mind-set, reflected by Pratt's dependence on big capital expenditures and long lead times, is still second nature to many UTC managers and workers. And though Carrier, Otis, and Sikorksy helicopters enjoy leading positions in their industries, complacency remains a problem at Pratt.
David wants products made more quickly, at less expense. In redoing its product line, Carrier designed simpler, more easily maintained air conditioners with fewer parts. Hamilton Standard has sped 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. 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. But 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 Karl J. Krapek, a David protege who was installed as president in late 1992. Since taking over, Krapek has led a massive restructuring. The workforce has been cut 40% and 600,000 square feet of manufacturing space idled. 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."
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 it. After spending $500 million on developing the PW4084 engine, Pratt was first with a new engine for Boeing Co.'s new 777 aircraft.
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 the plane had reached its peak and chose instead to develop an engine for the larger 757. That proved a miscue--and GE jumped in. The 737, ideal for the shorter routes that have evolved since airline deregulation, is now popular. "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 recent years. As Pratt gets fixed, David's 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. 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%.
Still, 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 seen a new, more cooperative spirit at Pratt.
But with competition still intense, there will be no rest for UTC's chief executive. 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