CHAPTER 7

Closing Case: United Technologies Has an “ACE in Its Pocket”

United Technologies Corporation (UTC), based in Hartford, Connecticut, is a conglomerate, a company that owns a wide variety of other companies that operate in different businesses and industries. Some of the companies in UTC’s portfolio are more well known than UTC itself, such as Sikorsky Aircraft Corporation; Pratt & Whitney, the aircraft engine and component maker; Otis Elevator Company; Carrier air conditioning; and Chubb, the security and lock maker that UTC acquired in 2003. Today, investors frown upon companies like UTC that own and operate companies in widely different industries. There is a growing perception that managers can better manage a company’s business model when the company operates as an independent or stand-alone entity. How can UTC justify holding all these companies together in a conglomerate? Why would this lead to a greater increase in their long-term profitability than if they operated as separate companies? In the last decade the boards of directors and CEOs of many conglomerates, such as Greyhound-Dial, ITT Industries, and Textron, have realized that by holding diverse companies together they were reducing, not increasing, the profitability of their companies. As a result, many conglomerates have been broken up and their companies spun off to allow them to operate as separate, independent entities.

UTC’s CEO George David claims that he has created a unique and sophisticated multibusiness model that adds value across UTC’s diverse businesses. David joined Otis Elevator as an assistant to its CEO in 1975, but within one year Otis was acquired by UTC, during a decade when “bigger is better” ruled corporate America and mergers and acquisitions, of whatever kind, were seen as the best way to grow profits. UTC sent David to manage its South American operations and later gave him responsibility for its Japanese operations. Otis had formed an alliance with Matsushita to develop an elevator for the Japanese market, and the resulting “Elevonic 401,” after being installed widely in Japanese buildings, proved to be a disaster. It broke down much more often than elevators made by other Japanese companies, and customers were concerned about its reliability and safety.

Matsushita was extremely embarrassed about the elevator’s failure and assigned one of its leading total quality management (TQM) experts, Yuzuru Ito, to head a team of Otis engineers to find out why it performed so poorly. Under Ito’s direction all the employees—managers, designers, and production workers—who had produced the elevator analyzed why the elevators were malfunctioning. This intensive study led to a total redesign of the elevator, and when their new and improved elevator was launched worldwide, it met with great success. Otis’s share of the global elevator market increased dramatically, and one result was that David was named president of UTC in 1992. He was given the responsibility to cut costs across the entire corporation, including its important Pratt & Whitney division, and his success in reducing UTC’s cost structure and increasing its ROIC led to his appointment as CEO in 1994.

Now responsible for all of UTC’s diverse companies, David decided that the best way to increase UTC’s profitability, which had been falling, was to find ways to improve efficiency and quality in all its constituent companies. He convinced Ito to move to Hartford and take responsibility for championing the kinds of improvements that had by now transformed the Otis division, and Ito began to develop UTC’s TQM system, which is known as Achieving Competitive Excellence, or ACE.

ACE is a set of tasks and procedures that are used by employees from the shop floor to top managers to analyze all aspects of the way a product is made. The goal is to find ways to improve quality and reliability, to lower the costs of making the product, and especially to find ways to make the next generation of a particular product perform better—in other words, to encourage technological innovation. David makes every employee in every function and at every level take responsibility for achieving the incremental, step-by-step gains that can result in innovative and efficient products that enable a company to dominate its industry—to push back the value creation frontier.

David calls these techniques “process disciplines,” and he has used them to increase the performance of all UTC companies. Through these techniques he has created the extra value for UTC that justifies it owning and operating such a diverse set of businesses. David’s success can be seen in the performance that his company has achieved in the decade since he took control: he has quadrupled UTC’s earnings per share, and in the first six months of 1994 profit grew by 25% to $1.4 billion, while sales increased by 26% to $18.3 billion. UTC has been in the top three performers of the companies that make up the Dow Jones industrial average for the last three years, and the company has consistently outperformed GE, another huge conglomerate, in its returns to investors.

David and his managers believe that the gains that can be achieved from UTC’s process disciplines are never-ending because its own R&D—in which it invests over $2.5 billion a year—is constantly producing product innovations that can help all its businesses. Indeed, recognizing that its skills in creating process improvements are specific to manufacturing companies, UTC’s strategy is to only acquire companies that make products that can benefit from the use of its ACE program—hence its Chubb acquisition. At the same time, David only invests in companies that have the potential to remain leading companies in their industries and so can charge above-average prices. His acquisitions strengthen the competencies of UTC’s existing businesses. For example, he acquired a company called Sunderstrand, a leading aerospace and industrial systems company, and combined it with UTC’s Hamilton aerospace division to create Hamilton Sunderstrand, which is now a major supplier to Boeing and makes products that command premium prices.

Case Discussion Questions

  1. In what ways does UTC’s corporate-level strategy of unrelated diversification create value?
  2. What are the dangers and disadvantages of this strategy?
  3. Collect some recent information on UTC from sources like Yahoo! Finance. How successful has it been in pursuing its strategy?