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strategy and business
Published: August 27, 2013
 / Autumn 2013 / Issue 72

 
 

An Uncommonly Cohesive Conglomerate

The Stretch Goals

Results related to ACE were impressive enough that in 2004, George David began discussing them in quarterly analyst updates and corporate annual reports. ACE became known within the company as UTC’s “business operating system”—or simply as “the UTC Way.”

In March 2007, then chief operating officer Louis Chênevert (slated to succeed George David as CEO) took UTC’s commitment to ACE a step further. Chênevert had been a major supporter of ACE since its inception; at Pratt & Whitney (as operations vice president and president) and at UTC (as chief operating officer), he had promoted and helped develop the program. Now, at a quarterly update meeting for financial analysts, he promised a significant leap in margins, profitability, and cash flow, based solely on the plan to expand ACE. At the time, only 18 percent of the UTC plant sites were ACE gold or silver certified. Chênevert said that number would rise to 70 percent by the end of 2009. The ACE Council’s tracking showed that when sites progressed from bronze to gold certification, they averaged a 35 percent increase in sales, 60 percent improvement in inventory turnover, 24 percent improvement in on-time delivery, and 35 percent increase in customer satisfaction scores.

However, when the people leading ACE in the divisions heard about this UTC promise, they were nonplussed. Some wondered if Chênevert had misspoken. To meet that 70 percent goal, 500 UTC sites would have two and a half years to make the progress that it had taken the first 180 sites nine years to achieve. Becoming an ACE gold- or silver-certified site involved far more than incremental improvement; the sites had to demonstrate performance levels benchmarked to industry leaders. The message was clear: UTC’s executives were behind ACE, and all of UTC’s managers were going to be behind it too. “This was a game changer,” recalls UTC ACE director John Papadopoulos. “The pull, commitment, and desire to get to ACE gold increased dramatically.”

The ACE Council had to rapidly mobilize specific people to meet this commitment. Site assessors needed to be certified; more than 1,000 assessments would be required. Demand for ACE skill training, teaching people to lead improvements, spiked. In 2006, 1,000 people were enrolled in ACE skills certification programs, which mixed course work with on-the-job experience. By the end of 2008, 20,000 UTC associates were enrolled. This increase in training and assessment scale was feasible only because of the ACE Council’s existing experience base. There were enough people qualified in using the methods to teach them to others.

But another issue loomed—when sites fell short, the reasons were still often related to supplier performance. Suppliers, on average, accounted for 75 percent of UTC’s product costs. UTC, therefore, took another step in building better sourcing relationships. Launched in 2007, building on the earlier supplier improvement program, was UTC’s Supplier Gold program, which brought ACE training and similar assessment criteria to suppliers. The program was voluntary, but 1,500 suppliers, representing half of UTC’s annual spending, were identified as critical, and were proactively approached. Through the metrics used in its own site certification process initiatives, UTC had already collected data on quality, delivery, lean maturity, and customer satisfaction on its key suppliers. It now provided this information to the suppliers themselves on performance scorecards. By the end of 2007, 22 percent of its key suppliers were at “gold” or “performing” levels (roughly equivalent to standards used in ACE gold and silver site certification).

Once again, confident in UTC’s abilities, leadership raised the stakes. In February 2009, CEO Chênevert, having conferred and again gained consensus with division presidents, announced the goal that 70 percent of UTC’s suppliers would achieve “supplier gold” or “supplier performing” status (the two highest ratings) by the end of 2011. These were stretch goals for suppliers, but they were needed for UTC to achieve its site goals at the end of 2009. UTC achieved both its site and its supplier goals on time, a significant accomplishment for a $75 billion company.

 
 
 
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Resources

  1. Ann Graham, “Too Good to Fail,” s+b, Spring 2010: Profile of India’s Tata Group, another successful conglomerate with a very different strategic orientation.
  2. George Roth, “United Technologies Corporation: Achieving Competitive Excellence (ACE) Operating System Case Study,” (PDF) LAI Case Study (Nov. 30, 2010, released Mar. 7, 2011): The in-depth case study, representing three years of observation and interviews, on which this article is based.
  3. Robert E. Spekman, “United Technologies Corporation: Supplier Development Initiative,” Darden School of Business, July 19, 2001: More detail on the supplier initiative, capstone to the ACE program.
  4. James P. Womack and Daniel T. Jones, Lean Thinking (Simon & Schuster, 1996): Describes many of the threads of theory and method underlying UTC’s quality work. Chapter 8 discusses Pratt & Whitney’s advances in the early 1990s.
  5. For more thought leadership on this topic, see the s+b website at: strategy-business.com/strategy_and_leadership.