ldr 6140 second case study analysis--united technologies

Second Case Study Analysis—United Technologies Diversification Strategies

Second Case Study Analysis—United Technologies Diversification Strategies

Ardavan A. Shahroodi

Northeastern University

LDR 6140—Developing the Strategic Leader

Professor W. Joseph Condon

Saturday, November 15, 2014

United Technologies Diversification Strategies

Introduction

In the first section of this Case Study Analysis, United Technologies Corporation’s

history, development, growth, mission and financials are discussed. The next section of this

paper is devoted to the strategic analysis of United Technologies that includes a review of the

company’s performance with respect to Michael Porter’s Five Forces Model framework. In the

last section of this Case Study Analysis attention is focused on analyzing United Technologies’

unrelated diversification strategy. The final section also includes an appraisal of the company’s

operating system titled Achieving Competitive Excellence (ACE). This Case Study Analysis has

reached the conclusion that United Technologies is a highly efficient corporate entity that

methodically leverages its superior innovative technology and process efficiencies in order to

create sustainable value and thereby gain and preserve competitive advantage in the marketplace.

In this light, United Technologies relentlessly brings unity of purpose and common standards

across its many divisions through a faithful and systematic implementation of its ACE operating

system. The recommendation of this Case Study Analysis is for United Technologies to

continue improving its ACE operating systems in order to withstand future competitive

challenges.

United Technologies Corporation’s History, Development, Growth, Mission and Financials

United Technologies Corporation (UTC) (UTX) has a long history that has evolved under

different names and formations from as early as 1925. In that year, Fred Rentschler started the

Pratt & Whitney Aircraft Company “as one of the first companies to specialize in the

manufacture of engines, or power plants for airframe builders” (United Technologies

Corporation, History, Business Insights: Essentials, Gale Resources). Pratt & Whitney and its

two major customers Boeing and Vought eventually merged in 1929 in order to create a new


corporation called the “United Aircraft and Transportation Company” (History, Business

Insights: Essentials). In time, this new company came to include Sikorsky, Northrop, Hamilton,

Standard and other entities such as “Boeing’s airline companies” (History, Business Insights:

Essentials). Nevertheless, in 1934, the U.S. government due to concerns that the composition of

the United Aircraft and Transportation Company lends it to be a monopoly and therefore “anti-

competitive” (Roth, 2010, p. 3) ordered its separation into a number of distinct businesses.

In the resulting corporate arrangements, all the “manufacturing interests west of the

Mississippi went to Boeing Airplane in Seattle, everything east of the river went to Rentschler’s

United Aircraft in Hartford, and the transport services became a third independent company

under the name of United Air Lines, which was based in Chicago” (History, Business Insights:

Essentials). In the ensuing years, United Aircraft Company which included Pratt & Whitney,

Sikorsky and a number of other units contributed significantly to the U.S. campaign in WWII

with its Pratt & Whitney division producing “several hundred thousand engines for airplanes

built by Boeing, Lockheed, McDonnell Douglas, Grumman and Vought” (History, Business

Insights: Essentials). Here, Pratt & Whitney actually built “over half the engines in American

planes” in service during WWII (History, Business Insights: Essentials). After the war and into

the 1950s, Pratt & Whitney competed with General electric and Westinghouse in the design and

construction of jet engines. In the 1960s, the parent company, United Aircraft “continued to

manufacture engines and a variety of other aircraft accessories” (History, Business Insights:

Essentials) with a large quantity of work being performed for Boeing that “had several Pentagon

contracts and whose 700-series jets were capturing 60 percent of the commercial airline market”

(History, Business Insights: Essentials).


United Aircraft Company’s main business operations involved “aerospace and defense

industries until the mid-1970s” (Roth, 2010, p. 3) when it purchased Otis Elevator in 1975 and

changed its name during the same year to United Technologies Corporation in order to “

emphasize the diversification of the company’s business” (History, Business Insights:

Essentials). Here, in the early 1970s, United Aircraft had experienced lower profits due to the

poor “performance of the Pratt & Whitney division” (History, Business Insights: Essentials) and

consequently the new president, Harry Gray “sought to reduce United Aircraft’s dependence on

the Pentagon and began a purchasing program in an effort to diversify the business” (History,

Business Insights: Essentials). In this light, Gray who was shortly named the CEO and the

chairman facilitated the purchasing of a number of other companies including the Carrier

Corporation in 1983 and continued in diversifying the company “away from aerospace and

defense” (History, Business Insights: Essentials). Gray’s rein proved to be very successful for

United technologies with sales that “amounted to $2 Billion” (History, Business Insights:

Essentials) at the time of his appointment being raised to “$16 Billion” (History, Business

Insights: Essentials) in 1986.

In the 1980s, United Technologies held “four principal divisions: Power Products,

including aircraft engines…Flight Systems, which manufactured helicopters…Building Systems,

encompassing the businesses of Otis and Carrier…Industrial Products, which produced various

automotive parts” (History, Business Insights: Essentials). In the late 1980s and early 1990s,

with the collapse of the Soviet Union, “public pressure to cut domestic defense budgets”

(History, Business Insights: Essentials) and a “downturn in the commercial airline industry,

intense global competition, and a worldwide recession” (History, Business Insights: Essentials),

United Technologies faced poor financial performance. In addition, this period also witnessed a


“saturation of the commercial real estate market” (History, Business Insights: Essentials) that

lowered the demand for the products of “UTC’s Otis and Carrier subsidiaries” (History, Business

Insights: Essentials).

In this poor performance environment, the new CEO, Robert Danieli brought George

David “who had been instrumental in the revival of both the Otis and Carrier units, on board as

UTC president” (History, Business Insights: Essentials). David who also eventually became the

CEO in 1994, instituted a number of downsizing actions and reforms that “focused on

manufacturing, with the goals of shortening lead times, reducing capacity, and expediting

processes” (History, Business Insights: Essentials). David’s actions did bore fruit and United

Technologies “quadrupled… [its] earnings per share, and in the first 6 months of 1994 profit

grew by 25% to $1.4 Billion, while sales increased by 26% to $18.3 Billion” (Hill & Jones,

2012, p. 198). United Technologies also sold its “automotive parts unit in the light of growing

price pressure from automakers” (History, Business Insights: Essentials) and continued with

other acquisitions such as Chubb “ranked as a leading supplier of electronic security and fire

protection products” (History, Business Insights: Essentials).

These acquisitions brought United Technologies “phenomenal revenue growth, pushing

annual revenues from $24 Billion in 1999 to nearly $59 Billion a decade later” (History,

Business Insights: Essentials). During David’s first ten years as the CEO, United Technologies

improved its,

“market capitalization from $8.6 Billion to more than $50 Billion, a massive increase that

coincided with stock returns of approximately 650 percent during the period…ended 2004 with

net income of $2.79 Billion, an 18 percent increase from the previous year’s total, and revenues


of $37.45 Billion, a 21 percent increase over the same period” (History, Business Insights:

Essentials).

In 2006, United Technologies’ chief operating officer, Louis R. Chenevert assumed the

role of CEO from George David. Currently, the company is described as a “diversified company

engaged in providing technology products and services to the building systems and aerospace

industries worldwide” (Company Profile United Technologies, MarketLine, August 2014, p. 3).

In this manner, United Technologies “provides elevators and escalators, aircraft engines,

helicopters, aircraft controls and sensing systems, and heating, air conditioning and refrigeration

systems” (MarketLine, August 2014, p. 3). The company’s geographical fields of operations are

“across Latin America, Europe, North America, Asia Pacific, Africa and the Middle East”

(United Technologies Corporation—Financial and Strategic Analysis Review, GlobalData, July

2014, p. 1).

In its Website, United Technologies describes itself as providing “high technology

products and solutions for the aerospace and commercial building industries, making modern life

possible” (At a Glance, Our Businesses, United Technologies Website, n. d.). Here, United

Technologies Building and Industrial Systems composed of Otis, Carrier, Chubb and other

entities employs 120,786 employees generating $29.3 Billion in net sales in 2013 (At a Glance,

Our Businesses, United Technologies Website, n. d.). Next, the company’s Propulsion &

Aerospace Systems is divided into two sections with one headed by Pratt & Whitney division

and other units that employs 31,700 employees and generated $14.5 Billion in net sales in 2013

(At a Glance, Our Businesses, United Technologies Website, n. d.). A further section called the

Aerospace Systems division employs 41,738 employees and generated $13.3 Billion in net sales

in 2013 (At a Glance, Our Businesses, United Technologies Website, n. d.). In addition, the


Sikorsky division employs 16,542 employees and generated 6.3 Billion in net sales in 2013 (At a

Glance, Our Businesses, United Technologies Website, n. d.). In 2014, United Technologies had

212,400 employees (Key Facts, Our Company, United Technology Web Site, n. d.).

United Technologies defines its mission and vision as “our operating system” (Our

Operating System, Our Company, United Technologies Website, n. d.) that,

“fosters a culture of continuous improvement…We use our ACE operating system to

achieve the highest levels of performance in everything we do, from developing new products to

finding better ways to serve our customers” (Our Operating System, Our Company, United

Technologies Website, n. d.).

United Technologies Operating System which is called Achieving Competitive

Excellence (ACE) concentrates on the “drivers of competitive excellence…people and…work

processes” (Our Operating System, Our Company, United Technologies Website, n. d.). Here,

the company states “leadership and empowered employees work together to implement ACE

practices in all of our activities across every UTC business to benefit our customers and

shareholders” (Our Operating System, Our Company, United Technologies Website, n. d.). ACE

has,

“three elements: culture, tools and competency…The daily interaction of each element is

what makes it an operating system…Results focus on perfect quality, on-time delivery, highly

engaged employees working in a safe environment, and best-in-class financial returns” (Our

Operating System, Our Company, United Technologies Website, n. d.).

Hill & Jones (2012) describe ACE as 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” (p. 197). Here the ultimate aim is to “find ways to improve quality and reliability, to

lower 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” (Hill

& Jones, 2012, p. 197). In this spirit, George David intended to make,

“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” (Hill & Jones,

2012, p. 197).

As a result of these actions for enhancing performance, between the years 2000 and 2010,

United Technologies’ revenue “more than doubled as manufacturing square footage…declined”

(Roth, 2010, p. 3), expenditures were controlled and “significant productivity gains” (p. 3) were

actualized. As George David stated in 2007, “operating margins for UTC’s businesses were 5%

in the early 1990s, [in 2007] they’re 14% and headed to 17 or 18%” (Roth, 2010, p. 4). ACE

facilitated UTC’s “organic growth of 7 to 9% from 2004 to 2007 (about twice U.S. GDP

growth), 5% in 2008, and a free cash flow that equaled or exceeded net income attributable to

common shareowners” (Roth, 2010, p. 5).

In 2014, United Technologies had evolved into the “19th largest U.S. manufacturer”

(Industry Week), the “45th largest U.S. Corporation” (Fortune), the “65th largest publicly held

manufacturer in the world” (Industry Week), the “90th largest company in the world” (Forbes

Global 2000), the “151st largest global corporation” (Fortune Global 500), “61st on the list of

world’s greenest companies” (Newsweek), “2nd most admired aerospace and defense company”

(Fortune) and “ranked among Barron’s list of world’s most respected companies” (Barron) (all

the aforementioned rankings have been retrieved from: Key Facts, Our Company, United


Technologies Web Site, n. d.). In addition, United Technology was also selected by Thomson

Reuters as in the “top 100 global innovators” (Recognition, Shareowner Letter, 2013 Annual

Report, Our Company, United Technology Web Site, n. d.) list.

In 2013, United Technologies Corporation earned revenues of US$62,626 million which

was an “increase of 8.5% over FY2012” (GlobalData, 2014, p. 1). In FY2013, United

Technologies’ “operating margin was 14.7% compared to an operating margin of 13.3% in

FY2012” (GlobalData, 2014, p. 1). In FY2013, “the company recorded a net margin of 9.1%,

compared to a net margin of 8.9% in FY2012” (GlobalData, 2014, p. 1). In actual numbers, the

operating profit of United Technologies in FY2013 was $9,209 million, “an increase of 19.8%

over FY2012” (MarketLine, 2014, p. 3). The net profit of United Technologies in FY2013 was

$5,721 million, “an increase of 11.5% over FY2012” (MarketLine, 2014, p. 3). Here, United

Technologies Corporation’s revenues in 2009 stood at $52,425 million and its net income at

$3,829.0 while as mentioned in 2013 those figures had climbed to $62,626 million and 5,721.0

million respectively.

In 2013, the market capitalization of United Technologies was estimated at “99.37B”

(UTX Competitors, United Technologies Corporation, Yahoo! Finance, n. d.) as opposed to its

major competitors, The Boeing Corporation with a market capitalization of “88.96B” (Yahoo!

Finance, n. d.) and General Electric Company with a market capitalization of “265.68B” (Yahoo!

Finance, n. d.). In 2013, The Boeing Company’s revenues were estimated to be at “90.08B”

(Yahoo! Finance, n. d.) and the General Electric Company’s revenues were recorded as

“146.64B” (Yahoo/Finance, n. d.). In addition, in 2013, The Boeing Company’s net income

stood at “5.21B” (Yahoo/Finance, n. d.) while the General Electric Company’s net income were

recorded at “15.04B” (Yahoo/Finance, n. d.).


Strategic Analysis

As a diversified company, UTC produces “technology products and services to the

building and aerospace industries worldwide” (MarketLine, 2014, p. 4). As mentioned earlier,

UTC benefits from a “strong market presence, diversified business portfolio and operational

efficiency” (GlobalData, 2014, p. 2) that have translated into a reduction of “business risks and

provide cross selling opportunities” (p. 2). Nevertheless, UTC faces strong competitive forces in

its business environment that places “continued pressure on the operations of the company,

which may result in price discounting thus adversely impacting UTC’s financial condition and

results of operations” (MarketLine, 2014, p. 4). In addition, UTC may also be negatively

impacted by “changing technological trends and increasing production cost” (MarketLine, 2014,

p. 2).

In performing a Michael Porter’s Five Forces Model analysis, the first evaluation will

take into consideration “the risk of entry by potential competitors” (Hill & Jones, 2012, p. 57).

Here, potential competitors are defined as “companies that are not currently competing in an

industry but have the capability to do so if they choose” (Hill & Jones, 2012, p. 58). Here,

potential competitors may face “barriers to entry” (Hill & Jones, 2012, p. 58) that may prove too

“costly for companies to enter an industry” (Hill & Jones, 2012, p. 58). In this respect, UTC is in

a very favorable position with respect to this first competitive force due to the extreme high cost

associated with entering the aerospace and building systems industries. UTC also enjoys a

formidable competitive edge in this area due to the utilization of a wide array of sophisticated

technologies that are implemented in the production of its diversified products.

As a manufacturing organization, UTC uniquely benefits from positive economies of

scale as opposed to its potential competitors that lead to “cost reductions gained through mass-


producing a standardized output…discounts on bulk purchases of raw material inputs and

component parts…advantages gained by spreading fixed production costs over a large

production volume…and the cost savings associated with spreading marketing and advertising

costs over a large volume of output” (Hill & Jones, 2012, p. 58).

UTC companies also enjoy strong brand loyalty mostly based on “product innovation

achieved through company research and development programs, an emphasis on high product

quality, and good after-sales service” (Hill & Jones, 2012, p. 58). Here, divisions such as Pratt &

Whitney is “one of the world’s leading suppliers of aircraft engines for the commercial, military,

business jet and general aviation markets” (MarketLine, 2014, p. 6), Sikorsky is one of the

“world’s largest helicopter companies” (MarketLine, 2014, p. 6), Chubb is the “leading brand in

fire safety and security solutions” (GlobalData, 2014, p. 2), Carrier Corporation is one of the

“world’s largest manufacturers and distributers of heating, ventilating and air conditioning

(HVAC) systems…a global leader in the commercial refrigeration and food service equipment

industry” (GlobalData, 2014, p. 2) and Otis is one of the “world’s largest elevator and escalator

manufacturing , installation and service companies” (MarketLine, 2014, p. 6).

UTC also benefits from an absolute cost advantages mostly related to its Achieving

Competitive Excellence (ACE) Total Quality Management (TQM) system exercised religiously

in all of its manufacturing and operational facilities. ACE is a process oriented series of

procedures and practices that are aimed at improving “quality…reliability” (Hill & Jones, 2012,

p. 197) cost savings and “technological innovation” (p. 197). Due to the very nature and

character of UTC’s products such as aircraft engines, helicopters, aviation systems,

elevators/escalators, HVAC systems or fire and security systems, the customer switching costs

are rather high and they are likely to be “locked in to the product offerings” (Hill & Jones, 2012,


p. 60) of the UTC. In addition, due to government regulation enforcing “automatic across-the-

board cuts” (MarketLine, 2014, p. 9), potential competitors may refrain from entering defense

oriented markets where UTC holds a competitive advantage.

In regards to Porter’s second competitive force labeled as “rivalry among established

companies” (Hill & Jones, 2014, p. 61), UTC is facing a number of parallel competitive

scenarios. First, UTC’s aerospace businesses are “subject to substantial competition from

domestic manufacturers, foreign manufacturers and other companies that obtain regulatory

agency approval to manufacture spare parts” (MarketLine, 2014, p. 9). Here, increasingly, the

“U.S. and global defense, space and aerospace industries” (MarketLine, 2014, p. 61) are

becoming “consolidated…dominated by a small number of large companies” (Hill & Jones,

2012, p. 61). This trend towards consolidation “intensifies competition as fewer players exist in

the market” (MarketLine, 2014, p. 62) placing pressure on UTC’s financial performance.

Nevertheless, the expansion of the global aircraft and airline markets in the next 20 years will

result in an expanding “industry demand” (Hill & Jones, 2012, p. 62) level thereby moderating

“competition by providing greater scope for companies to compete for customers” (p. 62).

In regards to cost conditions, UTC is competing in an industry and businesses with

extremely high rates of “fixed costs…that must be born before the firm makes a single sale” (Hill

& Jones, 2012, p. 62). In an environment “where demand is not growing fast enough and too

many companies are engaged in the same actions, cutting prices…in an attempt to cover fixed

costs, the results can be intense rivalry and lower profits” (Hill & Jones, 2012, p. 62). In this

light, as stated previously, UTC’s defense oriented businesses may experience increasing rivalry

and competition related to lowering demand while the civilian, passenger and freight oriented


aerospace services and products will face less rivalry and competition due to a growing aircraft

market.

UTC and all its competitors compete in industries and businesses where “exit barriers”

(Hill & Jones, 2012, p. 63) are extremely high mostly due to “investments in assets such as

specific machines, equipment, and operating facilities” (p. 63) and “the need to maintain

expensive collection of assets at or above some minimum level in order to participate effectively

in the industry” (p. 63). Here, with respect to the contracting defense oriented businesses, these

high exit barriers will result in an increasing level of rivalry whereas the growing civilian

aircraft and aerospace market will lessen the intensity of this rivalry in between UTC and its

competitors.

In relation to Porter’s third competitive force, the bargaining power of buyers, UTC is in

an unfavorable position primarily due to the fact that one customer namely the U.S. Government

comprised,

“21% and 24% of total…aerospace systems segment sales in 2013 and 2012,

respectively…Thus, a significant reduction in the purchase of the company’s products by

government agencies or contractors for government agencies could result in less number of

contracts, which in turn would adversely impact UTC’s revenues” (MarketLine, 2014, p. 9). As

Hill & Jones (2012) observe, in situations “when the buyers purchase in large quantities…buyers

can use their purchasing power as leverage to bargain for price reductions” (p. 64). On the other

hand, UTC’s advanced technology and process efficiencies allow the company to offer cutting

edge and high quality products that enhance its bargaining power with respect to all its buyers.


In relation to Porter’s fourth competitive force, the bargaining power of suppliers, UTC

“uses various raw materials such as cobalt, chromium steel, copper, aluminum, titanium and

nickel” (GlobalData, 2014, p. 4). Here, Hill & Jones (2012) observe that in situations when “the

product that suppliers sell has few substitutes and is vital to the companies in an industry”, the

bargaining power of suppliers is increased. However, UTC may partially balance this power

disparity with respect to its suppliers due to its favorable “economies of scope” (Hill & Jones,

2012, p. 189) characteristics and capabilities. With respect to Porter’s fifth competitive force,

the threat of substitute products, UTC is in an extremely favorable position due to its proprietary,

innovative and cutting technology that is manifested in its high quality products.

SWOT Analysis

Strengths

United Technologies (UTC) benefits from a “strategically Balanced” (MarketLine, 2014,

p. 4) array of product lines and “revenues streams” (p. 4) that lowers its “business risks” (p. 4)

and improves its “opportunities” (p. 4). The company’s different segments and divisions such as

Otis, Pratt & Whitney, UTC aerospace systems, Carrier, Sikorsky, UTC climate/controls/security

and others create a “strategically balanced portfolio [that] shields against unfavorable forces in a

specific market by dispersing its business risks” (MarketLine, 2014, p. 5) while offering it

“opportunities available across various industries” (p. 5).

UTC’s varied portfolio of companies and units allows for “research, development, and

manufacturing of high technology products in diverse sectors, including aircraft engines,

helicopters, HVAC, fuel cells, elevators and escalators, fire and security, building systems, and

industrial products, among others” (GlobalData, 2014, p. 2). UTC has also created a balanced


array of revenue streams with Otis in FY2013 holding “19.7% of the company’s total revenue,

followed by climate, controls & security with 26.5%, P & W with 22.9%, aerospace systems

with 21.1% and Sikorsky with 9.9% revenue” (GlobalData, 2014, p. 2). These well balanced

revenue platforms allow UTC to better withstand slowdowns and contractions in certain sectors

and segments while generating revenue in other businesses.

As indicated earlier, UTC also benefited from “strong growth in its operating

performance in FY2013” (GlobalData, 2014, p. 2) with revenues of $62,626 million that was “an

increase of 8.5% over the previous year” (p. 2). UTC’s operating income in FY2013 was $9,209

million that was “an increase of 19.85% over the previous” (GlobalData, 2014, p. 2) year. In

addition, in FY2013, UTC’s net income stood at $5,721 million that was “an increase of 11.5%

over the previous year” (GlobalData, 2014, p. 2). In relation to UTC’s operating expenses as a

percentage of sales in FY2013, they stood at “85.2%, as compared to 86.6% in the previous

year” (GlobalData, 2014, p. 2). In addition, UTC’s operating margin in FY2013 was “14.7%...as

compared to 13.3% in 2012” (GlobalData, 2014, p. 2). This particular important improvement

involving the operating margin indicates that UTC’s “revenue increased at a higher rate than that

of its expenses” (GlobalData, 2014, p. 2). The aforementioned positive financial data related to

FY2013 illustrates that UTC stands in a favorable position in order to secure “investor’s

confidence” (GlobalData, 2014, p. 2) in addition to projecting a “positive outlook for the future”

(p. 2).

A further strength of UTC is in the very dominance of its individual businesses such as

UTC fire & security, Sikorsky, Chubb, Carrier, Pratt & Whitney, Otis, UTC aerospace and others

in their respective fields that leads to garnering “profitable growth, stellar performance, and

successful expansion of its offerings” (GlobalData, 2014, p. 2). UTC’s brands hold “market


leadership” (GlobalData, 2014, p. 2) in their particular disciplines that allow the company to

“enjoy disproportional share of the industry’s overall profits” (p. 2). All this leads to UTC

benefiting from “strong recognition across varied categories [that] ensures its status as one of the

strongest players in the industry, which further enhance the brand of the company and gives it a

competitive advantage” (MarketLine, 2014, p. 6).

A fundamental pillar of UTC’s success and prominence emanates from “a strong

emphasis on research and development…to deliver innovative products and technologies”

(MarketLine, 2014, p. 5). Here, UTC’s research and development (R&D) center in East

Hartford, Connecticut called the United Technologies Research Center concentrates on

“developing new technologies and upgrading existing technologies in the fields of aerospace

propulsion, building infrastructure and services, heating and air conditioning, fire and security

systems and power generation” (MarketLine, 2014, p. 5). UTC also runs three additional R&D

centers in China, Ireland and California while conducting “R&D work under contracts funded by

the U.S. government and other customers” (MarketLine, 2014, p. 5). A large portion of UTC’s

research budget is devoted to “aerospace businesses” (MarketLine, 2014, p. 5). The company’s

heavy emphasis on R&D facilitates adding “newer features to its existing range of products and

launch latest technologies in the varied areas” (MarketLine, 2014, p. 5) that eventually leads to

developing “proprietary products…and…an advantage over its competitors” (p. 6).

Weaknesses

UTC generates a large portion of its revenues in the U.S. that may negatively influence

its “growth prospects” (MarketLine, 2014, p. 6) in the event that “the economy and/or the

company’s sales in the U.S. do not grow as expected” (p. 6). UTC received “57.5%”

(MarketLine, 2014, p. 6) of its revenues in the U.S., its “largest geographical market…


accounting for $35,994 million” (p. 6). In addition, a considerable amount of UTC’s revenue is

“derived from contracts or subcontracts funded by the U.S. non-governmental customers”

(MarketLine, 2014, p. 6). This relatively high level of exposure may lead to UTC’s

vulnerability “if these customers fail to render business to the company as a result of

performance problems or financial difficulties” (MarketLine, 2014, p. 6). The important issue

here for UTC will be “overdependence on one region or customer for majority of…revenues

[that] could affect the growth prospects of the company” (MarketLine, 2014, p. 7).

UTC’s growth potential may also be negatively impacted by its “considerable debt

obligations” (MarketLine, 2014, p. 7) that in FY2013 and FY2012 stood at “$20,241” (p. 7) and

“$23,221” (p. 7) respectively. These high levels of debt have led to FY2013 and FY2012

interest payments of “$897 million and $773 million…respectively” (MarketLine, 2014, p. 7).

UTC’s elevated debt levels “could impact its ability to obtain additional financing to support its

expansion plans” (MarketLine, 2014, p. 7) in addition to diverting its “cash flows from

operations and expansion plans to service the fixed obligations” (p. 7). Furthermore, a failure on

the part of UTC to subsidize its debt from “cash flow from operations…would force the

company to reduce or delay capital expenditures, sell assets, seek additional capital or restructure

or refinance its indebtedness, which in turn would further impact its performance” (MarketLine,

2014, p. 7).

Opportunities

UTC will benefit from the improving aircraft maintenance, repair and overhaul (MRO)

market as “most airlines are focusing to reduce costs and increase profits” (MarketLine, 2014, p.

7). Here, MRO will assist airlines to “lower their cost bases by optimizing the MRO structure

and maintenance schedules of the fleet” (MarketLine, 2014, p. 7) while MRO software may


bring “considerable money savings to differently structured providers as the number of aircraft

being used around the globe increases” (p. 7). This need for “efficient MRO systems and cutting

edge information technology” (MarketLine, 2014, p. 7) will translate into a “global aviation

MRO market” (p. 7) in the amount of “$57.5 billion in 2014 and grow to $86.5 billion by 2024”

(p. 7). In general, MRO may form “up to 20% of an airline’s operating costs” (MarketLine,

2014, p. 7).

All in all, the world-wide airline industry will grow significantly in the coming years and

UTC will benefit from this expansion. In this light, the passenger aircraft and freighter aircraft

market is “expected to reach US$4 trillion by 2031” (GlobalData, 2014, p. 3) and in between

“2012-2031, the demand for new passenger aircraft is expected to grow with an average rate of

3.80% per annum to per year to reach 32, 551” (p. 3). One estimate is projecting “27,347 new

passenger aircraft” (GlobalData, 2014, p. 3) and “900 freighter aircraft” (p. 3) will be ordered in

the next 20 years. This demand for new aircraft will be mostly received from “North America

(41.00%), Asia-Pacific (30.00%), Europe (16.00%)” (GlobalData, 2014, p. 3).

As a major producer of “spare parts for aircrafts” (GlobalData, 2014, p. 3), UTC will be a

major beneficiary of this expanding trend. In addition, UTC is a major supplier of “aircraft

engines for the commercial, military, business jet and general aviation markets” (MarketLine,

2014, p. 7) and as mentioned previously offers MRO services “including the sale of spare parts,

as well as fleet management services for large commercial engines” (p. 7). Furthermore, UTC is

in the business of providing “aftermarket helicopter and aircraft parts and services” (GlobalData,

2014, p. 7). The net result of this world-wide expansion of aviation in the coming years is the

creation of significant business opportunities for UTC.


An additional area of business growth opportunity for UTC is the acquiring of “a number

of strategic acquisitions in the recent past to boost its product portfolio and diversify

geographical presence” (MarketLine, 2014, p. 8). These “strategic business acquisitions”

(MarketLine, 2014, p. 8) will help UTC to expand its “global presence and revenues” (p. 8).

Furthermore, the world-wide market for HVAC equipment will expand significantly in the

coming years experiencing a rise of “approximately 6% per year through 2018 to approximately

$113 billion” (MarketLine, 2014, p. 8). This expansion is rooted in the increasing “building

construction activity worldwide and improved spending in developed areas” (MarketLine, 2014,

p. 8) in addition to “rising personal incomes that enable a wider array of individuals to purchase

comfort equipment” (p. 8).

UTC will also continue to benefit from a formidable “partnering network through

contracts” (GlobalData, 2014, p. 3) that will “enable the company to enhance its presence the

world over and capture larger market share” (p. 3). Here, as mentioned previously, UTC’s R&D

competencies will enable the company to “deploy innovative technology and deliver advance

products, and services that meet its customers’ critical needs” (GlobalData, 2014, p. 3). These

R&D competencies will “focus on improving the performance of products and developing new

technologies” (GlobalData, 2014, p. 3) in the “building systems and aerospace industries” (p. 3)

in addition to improving the company’s “technological advantages” (p. 3).

Threats

UTC’s aerospace businesses are “subject to substantial competition from domestic

manufacturers, foreign manufacturers and other companies that obtain regulatory agency

approval to manufacture spare parts” (MarketLine, 2014, p. 9). This high level of competition

involving “engines and components” (MarketLine, 2014, p. 9) will also effect “later sales of


parts and services” (p. 9). Furthermore, governmental procedures regarding the purchasing of

“parts from suppliers other than the original equipment manufacturer” (MarketLine, 2014, p. 9)

will also be a factor in this equation. Simultaneously, the “U.S. and global defense, space and

aerospace industries” (MarketLine, 2014, p. 9) are experiencing a period of consolidation that

will “intensify competition” (p. 9) and lower the “number of principal prime contractors in the

U.S.” (p. 9). The resulting competition will place “continued pressure on the operations of the

company, which may result in price discounting thus adversely impacting UTC’s financial

condition and results of operations” (MarketLine, 2014, p. 9).

An additional area of concern for UTC will be the “declining defense spending by the

U.S. government [that] could adversely impact revenues” (MarketLine, 2014, p. 9). Here

“automatic across-the-board cuts” (MarketLine, 2014, p. 9) will seriously impact the “company’s

business and industry” (p. 9). Here, a decrease in revenues generated from ‘the purchase of the

company’s products by government agencies or contractors for government agencies could result

in less number of contracts , which in turn would adversely impact UTC’s revenues”

(MarketLine, 2014, p. 9). Furthermore, UTC may experience a termination of its contracts with

the U.S. government “either for the convenience of the government or for default as a result of

failure to perform under the applicable contract” (GlobalData, 2014, p. 4).

The markets that host UTCs operations are subject to “rapid and significant changes due

to the introduction of innovative technologies” (GlobalData, 2014, p. 4). Consequently, UTC is

compelled to continually “design new, and update existing products and services and invest in

and develop new technologies in order to meet needs and requirements of the market”

(GlobalData, 2014, p. 4). The alteration or improvement in technology “requires a significant


commitment to research and development, which in return requires considerable financial

resources that may not always result in success” (GlobalData, 2014, p. 4).

UTC also depends on “various raw material such as cobalt, chromium steel, copper,

aluminum, titanium and nickel” (GlobalData, 2014, p. 4) whose prices form a major portion of

the “company’s total cost of goods sold” (p. 4). Here, an increase in the “commodity price, the

cost of raw materials and energy” (GlobalData, 2014, p. 4) will significantly affect the revenue

and income of the company. In addition, UTC relies on numerous “foreign sources for certain

raw materials requirements which could be affected by economic and political situations”

(GlobalData, 2014, p. 4).

Furthermore, as a major global company, UTC is vulnerable to “fluctuations in foreign

currency exchange rate [that] could adversely impact operations and financial results”

(MarketLine, 2014, p. 4). In this light, UTCs business is extremely sensitive to economic trends

and currency fluctuations that may “affect product demand and reported profits in the company’s

non-U.S. operations (primarily the commercial businesses), where transactions are generally

denominated in local currencies” (MarketLine, 2014, p. 10). These currency fluctuations also

impact “the prices the company pays its suppliers for materials used in its products”

(MarketLine, 2014, p. 10). Importantly, with respect to foreign transactions “a strengthening of

the U.S. Dollar against other major foreign currencies could adversely impact UTC’s results of

operations” (MarketLine, 2014, p. 10).

An Analysis of United Technologies Corporations’ Diversification Strategy

United Technologies Corporation (UTC) is an extremely efficient diversified company

whose roots may be traced to the beginning of the aviation age. UTC and its related companies


such as Pratt & Whitney have been instrumental in the service of this country most notably

during WWII. During its long history, UTC has also faced challenges when its core markets

related to the U.S. government’s expenditures on defense have contracted thereby necessitating

the creation of alternative strategies. Through time, UTC has adopted and implemented these

alternative strategies mostly by diversifying its business holdings and leveraging its

technological expertise, process efficiencies, “learning effects” (Hill & Jones, 2012, p. 94) and

“distinctive competencies” (119) to establish and preserve competitive advantage in many of its

operational markets.

In evaluating the general dangers and disadvantages involved in diversification, Hill &

Jones (2012) observe that “companies that spread their resources too thin, in order to compete in

several different product markets, run the risk of starving their fast-growing core business of the

resources needed to expand rapidly…The result is loss of competitive advantage in the core

business and-often-failure” (p. 174). In addition, Hill & Jones (2012) state that “many mature

companies that expand over time into too many different businesses and markets find our later

that they have stretched their resources too far and that their performance declines as a result” (p.

174).

An important point must be emphasized at this juncture that in evaluating UTC’s history,

acquisitions have been made in order to lessen the reliance of the company on one customer

(U.S. government/Pentagon) or one industry (defense industry). As stated previously, Harry

Gray, the CEO of UTC’s predecessor, United Aircraft “sought to reduce…dependence on the

Pentagon and began a purchasing program in an effort to diversify the business” (History,

Business Insights: Essentials). In this pursuit, a majority interest was purchased in Otis Elevator

in 1975 and Carrier Corporation was also bought in 1983. Similarly, in 1975 “United Aircraft


changed its name to United Technologies (UTC)…in order to emphasize the diversification of

the company’s business” (History, Business Insights: Essentials).

Here, it is essential to note that as the company during certain periods of its history has

implemented a strategy of “growth through acquisition” (History, Business Insights: Essentials),

it has also relentlessly attempted to create synergy among different units by implementing UTC’s

core/distinctive competencies mostly in relation to technology and process efficiencies.

Consequently, in light of the observations of Hill & Jones (2012) concerning the dangers and

disadvantages of diversification, it must be stated that UTC’s acquisitions have added value and

strength to the portfolio of the company due to the technological and process oriented

commonalities that have been adopted among all the acquired companies.

Hill & Jones (2012) describe diversification as the “process of entering one or more

industries that are distinct or different from a company’s core or original industry, in order to

find ways to use its distinctive competencies to increase the value of products in those industries

to consumers” (p. 187). In addition, Hill & Jones (2012) state that diversification “should enable

the company, or its individual business units, to perform one or more of the value chain functions

either at a lower cost or in way that results in higher differentiation and premium prices” (p.

187). As a high performing diversified manufacturing company, UTC through the usage of its

sophisticated array of technologies and process efficiencies (Achieving Competitive

Excellence/ACE) has attempted to achieve differentiation and operational cost savings with

respect to its competitors thereby creating value for its consumers.

Hill & Jones (2012) hold that “diversification can help a company create greater value in

three main ways…by permitting superior internal governance…by transferring competencies

among businesses…by realizing economies of scope” (p. 187). In relation to facilitating


superior internal governance, “top managers…develop strategies that improve the competitive

positioning of its business units in the industries where they compete” (Hill & Jones, 2012, p.

187). Most importantly, in introducing an acquisition and restructuring strategy top managers

must search “out ways to improve the business unit’s efficiency, quality innovativeness, and

responsiveness to customers” (Hill & Jones, 2012, p. 188) in addition to establishing

“performance goals that cannot be met without significant improvements in operating efficiency”

(p. 188).

As illustrated in the case titled “United Technologies has an Ace in Its Pockets” (Hill &

Jones, 2012, p. 197) this is precisely what transpired under the leadership of George David,

through the introduction of Achieving Competitive Advantage (ACE) processes across UTC’s

numerous divisions and business units. David who was named UTC president in 1992 and

subsequently CEO in 1994 became a champion for, adopted, refined and implemented many of

the total quality management (TQM) oriented processes that were introduced in the Otis Elevator

successful turnaround by Yuzuru Ito. The ACE reforms which were adopted across UTC’s

many businesses were intended at “reducing…cost structure and increasing its ROIC” (Hill &

Jones, 2012, p. 197) while also improving “efficiency and quality” (p. 197). The major goals of

the ACE processes are to improve “quality and reliability, to lower the cost of making the

product…to encourage technological innovation” (Hill & Jones, 2012, p. 197).

In relation to creating value in diversification through transferring competencies among

businesses, Hill & Jones (2012) hold that “for a company to create value from diversification is

to transfer its existing distinctive competencies in one or more value creation functions (for

example, manufacturing, marketing, materials management, and R&D) to other industries” (p.

188). Here, UTC mainly utilizes its distinctive competencies in manufacturing, materials


management and R&D in order to create value across its divisions and entities. As mentioned

previously, at the most fundamental level, UTC,

“Conducts its R&D activities through United Technologies Research Center located in

East Hartford, Connecticut…The center is focused on developing new technologies and

upgrading existing technologies in the fields of aerospace propulsion, building infrastructure and

services, heating and air conditioning, fire and security systems and power generation”

(MarketLine, 2014, p. 5).

UTC’s research headquarters and three other R&D centers in China, Ireland and

California create a shared system wide foundation based on technological innovation and process

efficiencies such as ACE in order to introduce “newer features to its existing range of products

and launch latest technologies in the varied areas” (MarketLine, 2014, p. 5). This pattern for

adopting system wide standards is also implemented through UTC’s “business operating system”

(Roth, 2010, p. 6) which is defined as a,

“Way of managing…based on a broad approach and philosophy, using specific tools and

methods, supported by dedicated people, departments and training that are tied to overall

measurements, reporting and reward systems…Ace is used as UTC’s operating system because

managers at multiple levels have confidence in it, confidence that they have gained form their

experience using ACE” (p. 6).

The roots of ACE maybe traced to Toyota’s production standards and methodologies

such as the kaizen events which are,

“An intense, short-term project accomplished by rapidly implementing changes such as

new work cell organization, improved machine setup, or streamlined processes…consultants


[lead] work area groups in eliciting information about their current operation, brainstormed

improvement ideas, selected among options, and made immediate changes” (Roth, 2014, p. 20).

ACE is also related to the concepts of lean manufacturing that is defined as a,

“Production philosophy that seeks to supply exactly what the customer wants, when the

customer wants it…Furthermore, lean manufacturing aims at supplying those goods and services

with minimum waste, where waste in production is reduced through continuous improvements of

the production process…The core idea is that eliminating waste along value streams, creates

processes that need less capital, human resources, less production space, and reduces the time to

make products and services…if implemented effectively, reduce the cost of producing goods and

services, reduce the number of defect products and produce and deliver goods quickly to

customers” (What is lean Manufacturing?, Business Mate.Org, n. d.).

These concepts and processes were gradually adopted and reformed by UTC in its system

wide manufacturing operations in order to “institutionalize quality” (Roth, 2010, p. 26),

implement “mistake proofing” (p. 23) and promote “waste elimination” (p. 24). As an operating

system, eventually ACE came to be viewed as described by one UTC executive as a “strategic,

competitive” (Roth, 2010, p. 35) tool that, “engages and empowers all of our employees to

achieve world-class products and processes to delight our customers, shareholders, and

associates” (p. 35). Here, ACE has also been defined by UTC as “our individual and collective

daily management system to maximize the flow of value to our customers, employees, and

investors” (as cited in Roth, 2010, p. 52). The elements of ACE operating system are,

“Culture (focus on customer, valuing people, and common language), tools (defined

methods for process improvement, problem solving, and decision making), and the competency


in the culture to implement the tools (through education, sharing best practices, and quality

clinics)” (Roth, 2014, p. 52).

In relation to economies of scope, Hill & Jones (2012) state that “when two or more

business units can share resources or capabilities such as manufacturing facilities, distribution

channels, advertising campaigns, and R&D costs, total operating costs fall because of economies

of scope” (p. 189). Here economies of scope may be realized when “there is a real opportunity

for sharing the skills and services of one or more of the value creation functions between a

company’s existing and new business systems” (Hill & Jones, 2012, p. 191). This indeed is the

precise function of the previously mentioned United Technologies Research Center and the three

additional R&D operations in China, Ireland and California that accumulate, develop and

distribute technological innovation across UTC divisions and entities. These research centers are

financed and supported system wide through UTC’s R&D budget that for FY2013 amounted to

“$2.5 billion or 4% of total sales, as compared with $2.4 billion or 4.1% of total sales in

FY2012” (MarketLine, 2014, p. 5).

In addition, the aforementioned UTC’s operating system namely the ACE practices and

methodologies are additional process oriented capabilities that are shared and implemented

throughout UTC’s divisions and businesses. Furthermore, as stated previously, UTC and its

companies purchase “raw materials such as cobalt, chromium steel, copper, aluminum, titanium

and nickel” (GLobalData, 2014, p. 4). These procurements provide UTC and its associated

entities purchasing power versus their suppliers due to the collective volume that is garnered

from these sources.

Hill & Jones (2012) describe an unrelated diversification as “diversification into a new

business or industry that has no obvious value chain connection with any of the businesses or


industries in which a company is currently operating” (p. 192). Such a company is referred to as

a conglomerate where the “unrelated company cannot create value by sharing resources and

transferring competencies” (p. 192). On the other hand, in a related diversification strategy

among two businesses, “some form of linkage or connection between one or more components

of each business unit’s value chain” (Hill & Jones, 2012, p. 192) are observed. In general “these

linkages are based on manufacturing, marketing, or technological connections or similarities”

(Hill & Jones, 2012, p. 192).

There are a number of potential dangers and disadvantages that are associated with an

unrelated diversification strategy. Here, potential companies

“might risk neglecting its core capabilities and become too diversified, where too many

different products supplied to different markets might have negative effects on products and

services, where…product quality or uniqueness might suffer due to the shift in focus on different

products and services” (What is a Diversification Strategy, Business Mate, n. d.).

Specifically, with respect to unrelated diversification or conglomerate diversification, the

potential disadvantage may be traced to the,

“Increase in administrative problems associated with operating unrelated businesses…

Managers from different divisions may have different backgrounds and may be unable to work

together effectively…Competition between strategic business units for resources may entail

shifting resources away from one division to another…Such a move may create rivalry and

administrative problems between the units” (Diversification Strategy, Reference for Business, n.

d.).


In addition, the danger of entering businesses where the “management team lacks

experience or skill” (Diversification Strategy, Reference for Business, n. d.) is the reality that,

“Without some knowledge of the new industry, a firm may be unable to accurately evaluate

the industry’s potential…Even if the new business is initially successful, problems will

eventually occur…Executives from the conglomerate will have to become involved in the

operations of the new enterprise at some point…Without adequate experience or skills…the new

business may become a poor performer” (Diversification Strategy, Reference for Business, n. d.).

Indeed, in the long run the total performance of the diversified company “may deteriorate

because of controls placed on the individual units by the parent conglomerate…Decision making

may become slower due to longer review periods and complicated reporting systems”

(Diversification Strategy, Reference for Business, n. d.).

However, UTC through the system wide implementation of its ACE operating system

and a relentless drive for technological innovation has been able to withstand and overcome the

aforementioned disadvantages of unrelated diversification such as poor quality, management

unfamiliarity or lack of experience, scarcity of resources due to system wide usage and process

inefficiencies. Here, UTC’s corporate-level strategy of unrelated diversification creates value

by continuously fulfilling the commitments that the company “promises to its customers,

employees, shareholders, and local communities” (Roth, 2010, p. 36). These commitments that

are repeatedly and consistently “shared across UTC” (Roth, 2010, p. 36) are as follows:

“1) Performance—customers have a choice so set ambitious goals and use customer

feedback to reset direction, 2) Innovation—commitment to research and development, sharing

ideas, and encouraging diversity of experience and opinion, 3) Opportunity—inspiration creates


opportunities, strive to continuously improve, pursue lifelong learning, take risks, cooperate and

learn, 4) Responsibility—maintain highest ethical, environmental, and safety standards

everywhere, and 5) Results—meet aggressive targets whatever the economic environment,

communicate honestly, and deliver what is promised” (Roth, 2010, p. 37).

Most importantly, UTC’s commitments are a collection of shared “goals” (Roth, 2010, p.

37) that all its organizational leaders are “expected to achieve…They are integral to the fabric of

the ACE culture” (Roth, 2010, p. 37). Here, specifically in relation to the relationship in-

between quality and productivity an ACE Council in UTC has observed that in operational

transformation,

“Productivity (flow) can’t happen until quality is in place first. UTC’s essential learning

is that quality and productivity reinforce one another. We have also learned that, from a teaching

point of view, employees grasp the significance of quality much faster when asked to try to

create flow first, than when asked to learn quality principles for the sake of quality” (Roth, 2010,

p. 38).

The aforementioned illustrations of UTC’s single minded focus on process oriented

competitive advantage has resulted in an organization that the former CEO George David

observes, “manufacturing productivity is at super high levels” (as cited in Roth, 2010, p. 4).

Indeed, through a disciplined and focused implementation of the ACE operating system and

leveraging its cutting edge technology, UTC has been extremely successful in pursuing its

unrelated diversification strategy. Here, in an analysis of the decade of 2000 by Reuters

(Mnyandu, January 4, 2010), UTC has ranked as the number one industrial company “providing

an increase in its valuation of 155.49%...UTC was closely followed by only caterpillar and 3M

with triple-digit percentage gains” (as cited in Roth, 2010, p. 49).


Furthermore, as illustrated earlier in this paper, UTC has been able to maintain similar

levels of financial performance in FY2012 and FY2013 in addition to receiving other

commendations from independent evaluating organizations. Here, UTCs “technological

innovations and performance improvements are the ultimate source of sustainable business

advantage and customer satisfaction” (Roth, 2010, p. 49). Ultimately, UTC may be referred to as

a diversified company utilizing an unrelated diversification strategy, however in reality, the

system wide implementation of ACE has resulted in a high degree of process oriented

commonality across the company’s various divisions and entities. This customer focused,

innovative and process efficient ACE standards and practices together with its cutting edge

technology are the engines that have sustained UTCs value creation efforts.

Conclusion

UTC is often labeled as a diversified company engaging in unrelated diversification. The

company owns and operates a number of world’s leading technologically oriented brands such as

Pratt & Whitney, Otis, Carrier, UTC aerospace systems, Chubb and others. Many of UTC’s

divisions are the most respected and highest performing companies in their particular operational

environment. What has made this high level of technological innovation, process efficiency and

financial performance possible is UTC’s legendary operating system titled Achieving

Competitive Advantage (ACE). ACE methodologies place a laser like focus on upholding

quality, productivity, efficiency and customer satisfaction thereby facilitating technological

innovation and competitive advantage for UTC.


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