Productivity and Leadership Insights from George David, CEO and Chairman of United Technologies

What brought about the transformational change and growth that United Technologies (UTX) has experienced under the leadership watch of George David? Since 1992 the Company has produced total shareholder returns of 338%, international revenue grew from 25% to 60%, market capitalization grew from $6B to over $72B, operating income margin grew from 5% to 14%, and EPS grew over 105% in the last five years.

In a recent speech as a guest of the MIT Dean's Innovative Leader Series, George provided insights and shared how the company has been able to sustain productivity improvements between 5-7% per year. He remarked that "there is no force more powerful in business than productivity, and it is the reason why UTX and the stock market in general have done so well..."

Some clear examples of world class productivity improvement at UTX include:

• The Carrier business unit production of air conditioning units grew from 3 million to 11 million in the last 12 years with a workforce increase of only 9%.



• Otis Elevator experienced a threefold increase in the number of elevator installations, and associated maintenance services agreements doubled in the last 12 years with a workforce increase of only 25%.



• At Pratt and Whitney airplane turbines were built in batches in dirty plants in the 1990s. Today sequential manufacturing reminiscent of mass production days has been replaced by lean manufacturing where work is done in spotless plants in single cells. This eliminates hand offs, inventory between adjacent steps, and quality inspection is moved upstream instead of inefficient end of line processes.



• In 1968 Mean Time between Failures (MTBF) for 747 aircraft turbines was 2,500 hours at Pratt and Whitney. Airplanes flew an average of 5,000 hours a year, so the planes were designed with four engines. Today MTBF for a 777 turbine is 170,000 hours, and the planes are designed with two turbines only. MTBF went from 6 months to 34 years. Yes, you read it right!



• In the area of energy consumption, UTX has more than doubled in size in the last nine years, yet its energy use is 18% less.

At the core of the productivity transformation is the operating system of United Technologies known as Achieve Competitive Excellence (ACE). The main thrust of ACE is built around the belief that every person should be involved with continuous improvement, from top executives down to the most junior of workers. It is also required that managers lead by example and that everyone is committed to the ACE philosophy. Part of the ACE operation system is a philosophy that concentrates not only on process improvement but places equal emphasis on the human element. Such methodology appears to be a customized version of TQM, ISO 9001, and Lean Six Sigma that has apparently worked exceptionally well for UTX.

George offered a strong opinion on how to solve the Global Warming crisis and dependence on Middle East oil. He commented that energy conservation is the best near term solution, since promising technologies like the hydrogen economy are two or three decades away. Capturing energy that goes up the stack of central power plants, and implementing proven energy management measures can have significant near term impact on the carbon footprint of all commercial, industrial, and residential applications.

In the area of leadership George stressed that he won't be writing a book any time soon, but had figured out what works after thirty years plus of practice. Here are some of his leadership beliefs:

• If you have more ambition than energy you are doomed.



• Relentless constancy of purpose is fundamental (quoting Deming).



• Education is a force that changes lives and makes people better.



• Bring solutions with your problems to your leaders.



• Work downward not upward. Give your leader the courtesy to judge your work without your help.



• Principled people are predictable. Unprincipled people are unpredictable.



• Intergalactic forces are at work. Belief that circumstances and luck do play a role sometimes, and that he was the beneficiary of such forces in his career.

In building an excellent brand the market and customers notice what is great about the products and services offered. Typically customers won't give you and edge on pricing, but they will give you a last look. United Technologies under George David has received and unfair share of last looks and the Company projects operating income margins to grow from the current 14% to 18% or better in the next few years. Is it time to buy some UTX stock on a momentum strategy?