Mantra for Corporate Success That is Not Taught in B-School from Dave Cote

For all one cares it could be the corporate equivalent of the proverbial story of the hare and tortoise. A business model focused on culture, process and portfolio, predicated on a slow, steady and sure-footed approach to Great Positions in Good Industries is the secret sauce that Honeywell Executive Chairman Dave Cote used to put the company back on track and almost on par with arch rival GE which had sought to acquire it (Honeywell) in 2001. And this success did not necessarily call for an MBA from a reputed business School, averred Cote who was in Hyderabad to address the NASSCOM India Leadership Summit (ILS) 2018 on Monday.

Edited excerpts of the conversation between Tech Mahindra chief C P Gurnani and the audience, with the Honeywell Chairman who will be retiring in April this year after a successful tenure that saw the company go from just $20 billion in market cap when he took over in 2002 to $115 billion today.

On the need for an MBA

I have always felt that where you went to school to get your MBA really was an indication of what your first job would be. After that it did not really matter that much. All that matters is how well you did at your last job. In my experience a mediocre performer put in a job with great potential is still a mediocre performer.  

In my experience a mediocre performer put in a job with great potential is still a mediocre performer.  

On putting Honeywell back on track and on the top with a $120 billion market cap

When I took over as the CEO at Honeywell in 2002 its market cap was $20 billion. GE was $350 billion almost 17 times that of Honeywell. Today, Honeywell’s market cap is around $115 billion. GE is around $130 billion. So, Honeywell today is almost as valuable as GE. We are quite proud of that. 

If I go back in time, 2002 was just miserable. If it looked terrible externally, I can promise you, it was worse internally. We were to be acquired by United Technologies, and then the acquisition by GE did not work out, we missed our earning consistently, we had write-offs for four years consecutively, I couldn’t trust my board, I couldn’t trust my staff, and I must admit, I felt pretty vulnerable for quite some time. For every dollar of income, we made, we spent 69 cents of cash.

So how did we change all that? We did that by putting in place what we called our business model and focused on on three things – culture, portfolio and process. And I thought like the first thing I had to address was culture. And as I was having early discussions to formulate our 12 behaviors and five initiatives, I was asked by business leaders why are we focusing on all this stuff things when we had all the strategic issues to focus on. My response was that we could have all the strategy in place but if nobody does that then it did not matter how many strategies I had. I chose culture to bind the three warring businesses by talking about the behaviors and initiatives consistently. That is where sustainability of results came from. 

On the second one, on portfolio, I am a big believer in what I call Great Positions, in Good Industries. If you don’t have it, you don’t have competitive advantage and it will very difficult to grow. So, put in place an M&A process that resulted in over 100 acquisitions and over 50 divestments. The total value of the transactions was over $36 billion on what had been a $22 billion company. We put in place a very vigorous process that ensured that every deal we did, paid off.

The third important leg was process. I am very big believer that you should continuously improve everything. Every business is just a collection of processes. To the extent that you make your processes better, they become that much more efficient and become more effective to put you in a position to become successful in the future. To give you an example we had something we called Functional Transformation which was to improve the process for IT, HR, Finance. Over 15 years we grew the company from $ 22 billion in sales to $40 billion in sales. We reduced the cost of those functions by $1 billion, not inflation adjusted, not as a percentage of sales, actual reduction because of continuous focus on process.

On the strategy for changing portfolio and convincing the board for it

Convincing the board was not that difficult as it was not a massive change. It was all in small pieces of investments and divestitures as it minimises the risk. And the portfolio that I wanted was to include a diversity of opportunity. There was never any one big thing that would make the company, but at the same time there was never any one big thing that would kill the company either. So, it was kind of a slow, steady transformation just like a process. 

I was always a big believer in software. I found that about one quarter of our engineers were already developing software. I found that was really a great way to add value. This was much before all this talk of internet of things and other stuff. I thought it could be a big differentiator for us in the market place. I was also intrigued that our Bangalore operation was already a CMMi Level 5 certified for six years by then. So, you put all that together and we ended up with a slow steady transformation of the company and today almost 50% of our engineers develop software. So, it was a slow, steady transformation into Great Positions in Good Industries, using our software capabilities as a big differentiator.

Focus on picking the right direction and motivating the entire company to move in that direction. 

Advise to entrepreneurs and business leaders

There are three important elements to leadership. The first is the ability to mobilise and motivate a large group of people. Interestingly, it is the most visible and the one which people measure CEOs by. But of the three, it is only five percent of the job. You can mobilise people by a great speech, by how you act. The second big one, is can you pick the right direction to take the company in? Even If you are a great speech-maker and can motivate people well but spend 40 years in the desert because you picked the wrong direction, you are not a good leader. The three element is that once you have picked that right direction, can you get the entire organization in that direction step-by-step. So, my advise to all the young leaders and entrepreneurs is to focus on picking the right direction and motivating the entire company to move in that direction.

Cultural values before and after the transformation

There were three separate cultures within the company – one was the legacy Honeywell culture that focused on customer delight and new products but really made any commitments. They were a great technology company but never delivered. Then there was the Allied Signal culture that was very focused on delivering numbers but did almost nothing to invest in the future. The legacy Pittway guys believed that whether you were from Honeywell or Allied you were from big companies and being from big companies you did not know anything, so they wouldn’t listen to anyone. And they didn’t. they would do things their own way. Our job was to bring all these cultures together. The way to do that was to first focus on the customer – there is this old axiom that if you want to bring cultures together, focus on some thing from the outside. And the customer was a good way to do that. And then we drove our 12 behaviours. We had our five initiatives. And the important thing was that over 15 years we changed nothing – we have the same behaviours and initiatives throughout. 

On having both things and internet

I often times say in our discussions at Honeywell that there are three different trends that we need to focus on as a company. The first is the economic growth of China. The way they progressed is phenomenal. There is a very good chance they will become the biggest economy in the next 20-25 years. That will create all kinds interesting dynamics.

The second is that world population will grow from seven billion people to 10 billion over the next 30-35 years. That means we need to feed them. Pollution of air, water and ground will become even more important. We will have to be thinking about how fast infectious disease will spread.

The third one is the changes that will occur in current technologies. We all want to talk about the digital side, but we should also be talking about biology. We ought to be looking at gene splicing, advances in biology and surgery. The changes here are going to remarkable. On the digital side we are pressed with the changes we are seeing but no one really know where it is headed. There are all kinds of futurists predicting all kinds of things. I say it is not necessary for futurists to be always right, it is necessary for them to be listened to. While nobody knows what is in store, what I do know is that it is going to get bigger, better and faster than it is today. The interplay between the physical and the digital will change the way we operate today. From the digital-to-digital world, we are now going to the digital-to-physical world. We will need the domain knowledge of the physical environment, we will need good sensor and the software that will be able to interpret the signal. And that interplay will lead to a huge amount of change. And as much change as we think has occurred today, with computing power doubling every two years, 10 years from we will have computing power that is 32 times of what we have now. And 20 years from now we will have 1000 times of computing power we have now. It is tough to imagine where it will go.

We have tried to position Honeywell extremely well in any of the segments where we are. We have the domain knowledge, we understand software, and it really helps we have sensors also. So, we really believer Honeywell will be a huge beneficiary of this development and we are prepared for it. My successor is a computer scientist who has on top of his mind to continue this evolution into the software-industrials for Honeywell. We think this is a trend that will go on for at least a century. The industrial revolution lasted for 150 years. We have only had the digital revolution for only 50 years. But this can go on for a very long time. But nobody will be able to predict how the world will look 50 years from now. All I can say is that it is going to be substantially different and all of us will have to keep evolving for it. 

This article first appeared on NewsPlus.