Productivity Improvement at United Technologies Corporation

In 2007, George David, the long-time CEO of United Technologies Corporation (UTC), retired. He could look back upon a very impressive15 years at the helm of a company, during which time revenues tripled while net profits went up tenfold. Today, UTC is a $60 billion per annum diversified manufacturing enterprise whose businesses include jet-engine maker Pratt & Whitney, airconditioning

business Carrier, and Otis Elevators.

A major source of the profit surge over the last15 years has been productivity improvements.

At the heart of these improvements is a program known as Achieve Competitive Excellence(ACE). This program was the result of a collaboration between George David and a Japanese quality consultant, Yuzuru Ito, who at one time was a quality expert at Matsushita, the Japanese consumer electronics giant. David recruited Ito in order to figure out why Otis’ elevators performed so poorly compared to those from rival Mitsubishi. Otis products required a building owner to call a mechanic an average of 40 times per year, while Mitsubishi's elevators required to service only 0.5times a year. What Ito uncovered was a range of problems including poor design, poor manufacturing practices, and a lack of quality control inside Otis factories. Ito explained to David how poor quality damaged employee productivity, because time was wasted building defective products. Poor quality also hurt demand because customers were less likely to buy products from a company with apoor reputation for quality.

The solution to these problems at Otis included:designing elevators so that they wereeasier to manufacture, which led to fewer errorsin the assembly process; reconfiguring the manufacturingprocess; and empowering factory-flooremployees to identify and fix quality problems.For example, by changing the placement of elevatorparts, and allowing assembly line workersto access them more easily, Otis took $300 offthe cost of each elevator, which led to worldwideannual savings of $27 million. In addition, theproduction processes were streamlined, requiringfewer steps, less reaching and movement forworkers, and easier access to parts—all of whichboosted productivity.

ACE evolved out of the experience at Otis and was subsequently rolled out company-wide. The main thrusts of ACE is built around the belief that every person should be involved with continuous improvement, from top executives to the most junior workers. ACE “pilots” are production line workers who learn a quality improvement process in just days and then are empowered to implement and lead their work groups through that process. They learn to pinpoint potential problems, ranging from fundamental design flaws in a product, such as misplaced bolts, to a co-worker’s fatigue from staying up with a newborn all night.As the program was implemented across the company, the results were impressive. At Carrier, the number of employees decreased by 10%, the square footage assigned to manufacturing was reduced by 50%, and, despite these decreases, production increased by 70%. At Pratt & Whitney, dramatic improvements in the quality of jet engines were registered. The average time between part-failurein a jet engine went from 2,500 hours to 170,000hours—a huge improvement resulting from betterdesign and manufacturing processes. Customersnoticed these quality improvements, and increased their purchases of United Technologies Corporation products, driving forward revenues and profits.

Case Discussion Questions

1. How did poor quality at United Technologies’ Otisunit damage the company’s financial performance and competitive position?
2. Why do you think the quality was so poor at Otis?
3. What did UTC learn by repairing the quality problems at Otis? How did it leverage this learning to improve the performance of the entire corporation?
4. What general principles about competitive advantage and strategy can be drawn from this case?