CEO OF THE YEAR 1998

You have spoken. Chief Executive readers have nominated and a selection committee of peers have confirmed AlliedSignal’s Lawrence A. Bossidy as 1998 Chief Executive of the Year. Why? “Larry’s leadership is evident in so many places-shareholder value, revenue growth, productivity, and the fact that AlliedSignal now ranks among the most admired and best companies to work for,” says NYSE CEO Dick Grasso. “His transformation of AlliedSignal has been outstanding in every measurable dimension,” comments Rockwell chairman and fellow committee member Don Beall. “He has demonstrated what a high performing business can achieve and simultaneously satisfy the need of customers, employees and shareholders,” adds Arthur D. Little CEO Charlie LaMantia.

The competition for the top honor was no cakewalk. A number of formidable contenders such as Michael Dell have unmatched financial returns to shareholders and EPS growth. But Bossidy is viewed by many not only as someone who has transformed a stodgy underachiever into a world class generator of shareholder value, but someone who in EDS chairman Les Alberthal’s mind, “has prepared it for success in the next century.” In most turnarounds, many units are rationalized or shed and new ones are added, “but Bossidy continues well beyond this by taking firm charge, building a new management team, devising and implementing an effective strategy, and then driving the company to sustained growth in both revenue and profits.” says longtime committee member Bob Lear, an executive in residence at. Columbia’s. Business School.

The nature of the improvement is worth noting: AlliedSignal’s market capitalization was $4 billion when Bossidy took over and is almost $25 billion today. Its stock price increase during the same period is 429 percent with a five-year  EPS growth rate of 17 percent. At the end of the day, performance depends upon people, and it is here where the judges were most persuaded. “He’s developed a deep management bench,” observes Alberthal. “I think of him as a CEO’s CEO,” adds  TransAmerica Chairman Frank Herringer. Perhaps last year’s Chief Executive of the Year, Intel’s Andy Grove best summed it up: “I have enormous respect for a solid, no nonsense, down-to-earth leader who takes an unglamorous job and does spectacular things.”

Chief Executive salutes Larry Bossidy, 1998 Chief Executive of the Year

Alighting from the Sikorsky helicopter a little after 6:30 one Monday morning, Larry Bossidy. 63, trots across the tarmac, a briefcase in each hand, toward two waiting dark vehicles parked nearby. He waves off the driver of the town car, indicating that he will drive his own car the remaining distance to AlliedSignal’s Mor­ristown, NJ, headquarters. Motioning to a guest tagging along for the journey to shoot around to the Seville’s passenger side door, he slips his six-foot-one-inch frame behind the wheel. No sooner are the doors shut than Bossidy has the STS in gear, peeling toward Columbia Road.

The former Colgate grad and university world series pitcher is a man in a hurry. Impatient to start his workday, he’s already gone through several briefcases over the weekend and made numerous phone calls that morning. On the 10-minute chopper hop from Ridgefield, CT, where lie lives, he devours Tbe Wall Sreet Journal and Me New York Times busi­ness section, scans USA Today, and debates his guest on the top issues of the day-the implications of India’s recent nuclear testing (worrisome but not catastrophic) and the gov­ernment’s intent to bring Microsoft to heel (a bad idea in his view). A man of strong opinions, he nonetheless invites other points of view, his direct gaze creating an impression that he’s hanging on every word of the other person’s conversation.

Upon entering the company’s sylvan headquarters campus, he suddenly inter­rupts his own conversation. “I want to show you something special we have here,” he says, swinging the STS in front of a two-story building that once served as a research lab. Its the company’s Learning Center “where everyone gets 40 hours min­imum training and education.” Everybody? “Yeah, everybody,” he says, “from the operator on the factory floor to me.” Mandatory training and education is typical Bossidy. He sees the center, which has attracted the best practice attention of Deere, PepsiCo, Mars, Merrill Lynch, and Bank of Montreal, as his legacy to AlliedSignal. Fostering a culture where people are interested in learning creates in his mind a true competitive advantage. No business succeeds merely by buying and selling different units. Process is important, but it’s people who deliver results.

Daniel Burnham, the former AlliedSignal vice chairman who recently left the com­pany to become president and COO of Raytheon Corp., remembers the stretch tar­gets Bossidy set for his aerospace unit early in the turnaround. “I remember citing numerous objections as to why these goals were unrealistic,” Burnham recalls, “when Larry reached out, looked me straight in the eye, put his hand on my shoulder, and said, ‘Dan, I have confidence in you; I know you can do it!’

Bossidy’s tough guy reputation notwith­standing, president and COO Fred Poses, a 30-year AlliedSignal veteran, thinks the most accurate description of the man is summed up in one word – one a dozen or more executives from within and outside the company uncannily use-“impatient.” “It’s a question of expectations,” Poses says. “He can be relentless, but he also gives us a burning desire to win.”

As one who ought to know, jack Welch recognizes the type. “Larry is a quick hanker, who energizes others around him. When he gets behind an idea, he lights up a room,” says the GE CEO, who got to know Bossidy 30 years ago when Bossily came to audit GE’s plastics division where Welch worked at the time. “He has both the mental toughness as well as the broad perspective that is necessary to lead and deliver results.”

The parallels between the two CEOs don’t stop there. Welch and Bossidy were born and raised in working middle-class communities in Massachusetts, albeit at opposite ends of the state. Both had close relationships with their mothers, who believed absolutely in their sons’ capabili­ties. Growing up in Pittsfield, Bossidy worked at the family shoe store and had dreams of being a big league baseball pitcher. His mother, who once barred a Detroit Tigers scout from the family house, had other ideas and insisted he finish his studies at Colgate, after which he joined GE as a finance trainee.

Dennis Dammerman, GE’s CFO, remem­bers working for Bossily at GE Credit, the predecessor of GE Capital. “He could be boisterous and a little unsettling to the insecure. He challenged everything. If you couldn’t back up what you said, look out. But he also challenges himself,’ he says.

After a 34-year tenure, Bossidy left the No. 2 spot at GE in June of 1991 for a new challenge. After persuading AlliedSignal’s board to compel outgoing CEO Ed Hen­nessy to step down early so Bossidy could take over immediately, he set about pulling AlliedSignal, then a motley collection of 52 businesses pretending to be one company, from its drift.

The inevitable rationalization reduced its workforce by 28 percent down to 70,500 today, but operating margins jumped from 4.7 percent to 11.4 percent and its stock price increased by 429 percent compared with 161 percent for the S&P 500 since the transformation. A $14.5 billion diversified company, AlliedSignal produces aerospace components (engines, avionics, landing systems) for commercial and military mar­kets; auto parts (turbochargers, brakes, spark plugs, oil and fuel filters); and engi­neered materials.

According to Stern Stewart, AlliedSignal’s economic value added (EVA)-the overall after tax net operating profit minus the cost of capital-went from a -$424 million in 1991 to $160 million in 1996. During the same period, the company’s market value added (MVA)-the difference between a company’s total market value and the amount investors contributed to produce that value-jumped from $933 million to $10.4 billion – 91 percent or $9.5 billion of which was created on Bossidy’s watch.

Early on, Wall Street, viewing him ini­tially as an operational executive and something of a cost-cutter, fell in love with the stock-although to this day the com­pany’s diverse businesses defy easy cate­gorization for most analysts. Bossidy’s implementation of TQM, Six Sigma, and “black belt” manufacturing have paid off. With annual productivity increases of 6 percent for the past two years, the com­pany is setting a stretch goal of 7 percent for 1998. Since 1991, AlliedSignal has boosted Six Sigma, defined as 3.4 defects per million parts, from 2.3 to 4 Sigma with a target of 4.5 Sigma in manufacturing in two years-significantly above the S&P company average of 2.2 Sigma.

Although Motorola is widely credited with adopting this process of measuring improvement, Bossily was an early pio­neer and quickly imbedded it throughout AlliedSignal. In fact, it was Bossidy’s urging that led his friend Jack Welch to embrace it as the new mantra for GE.

While productivity improvements will continue to play a critical role, the firm is redoubling its efforts to achieve 12 percent annual revenue growth to reach $19 billion in annual revenue by the year 2000, and EPS growth of 13 to 17 percent for the next two years. Four percent of this growth is expected to come from acquisitions, with particular emphasis on aerospace aftermar­ket, engineered materials, and specialty chemicals, Bossidv has set an internal growth rate target of 8 percent, and hopes to have all 11 businesses achieve operating profit margins of at least 15 percent by 2000. To date, 70 percent of sales reflect units with operating margins of at least 14 percent, up from 52 percent five years ago.

This means AlliedSignal will need to make additional acquisitions to reach these ambitious goals at a time when the M&A market is pricey. It will also pressure top managers to integrate these additions while squeezing more productivity and internal growth from existing units. Raising the ante, Bossidy wants to increase the share of revenue from global markets – now at 39 percent – to half by 2000. Bossidy’s “burning platform,” his favorite metaphor of an oil rig at sea, for creating urgency for change, promises to get even hotter.

Are the company’s top managers reach­ing for their asbestos suits? Considering that Wall Street gave the stock a black eye last year when it missed its third quarter earnings estimate by a penny a share, are the goals credible? The fear, of course, is that AlliedSignal will morph from a “GE” to an “Eastman Kodak” type stock. After all, the company is involved in notoriously cyclical businesses, none that are glam­orous or have Internet-like sex appeal. Sensing that Bossidy “no longer walked on water” last December, Barron’s considered delivering an editorial coup de wace. In gathering research, it had second thoughts, reckoning Mat the firm had merely hit an air pocket. It also learned Bossidy was not Captain Ahab.

“He’s a big physical guy who can be overpowering, so it takes some fortitude to disagree with him,” observes Don Redlinger, AlliedSignal’s SVP of human resources, “but Larry can change his mind if he thinks you know your stuff.” Paul Schindler, a former ICI executive who runs the company’s international business, says, “compared to European companies, this place is open to a lot of give and take, pro­vided you are credible.”

GE’s Dammerman says, “The guys at AlliedSignal may not agree, but I think Lar­ry’s mellowed over the years, becoming more reflective and in many ways a better leader.” Former Prudential insurance Chairman and CEO Bob Winters, an AlliedSignal board director who served on its selection committee in 1991, appreciates the openness with which Bossidy deals with the board, a critical element during times when corporations are under pres­sure to perform. “He’s one of the better lis­teners I’ve come across,” Winters says. “If I had to come back to work for someone, I would love to work for him because I learn so much from him.” Russ Palmer, a former Touche Ross CEO and ex-dean of Wharton who now runs his own investment group and is AlliedSignal’s second-longest serving board member, dubs Bossidy a textbook leader. “It proves what one person can do,” he says.

To be sure, Bossidy isn’t warm and fuzzy at his 7 AM meetings with key reports, but those who work with him say the “take-no­-prisoners” style attributed to him isn’t the full measure of the man. One executive recalls an incident where an AlliedSignal executive gave a less than stellar presenta­tion. Afterwards Bossidy thanked him but said nothing. “We were astonished, and wondered why Larry didn’t rip it apart,” he said. “This man is on his way out,” Bossidy is said to have replied, “but he has the abil­ity to be successful in another position; the last thing I want to do is to undermine his self-confidence.”

“What more do you need to know about the guy?” says Jack Welch about his favorite golfing partner at Nantucket’s Sankaty Club. After a pause, Welch, who is not known to be short on commentary says, “he’s got nine terrific kids, three of them work for us, and all of them turned out great. What does that tell you?…I trust him with my life; he’s a true friend.” – J.F.Donlon€’

ALLIED AGAIN

The reality of global business today is over-capacity, extreme difficulty in raising prices and emerging pro­ducers in less developed markets who are content with smaller margins, What do these forces portend for AlliedSignal?

The easy – and incorrect – commentary is to say that the markets we’re in are just as competitive as you inferred and we’re not getting any price increase. But overcapac­ity is the reason inflation rates are as low as they are in this country. It’s the reason interest rates are down. So it brings as much good as it does concern. In the absence of price increases in this country, in the industrial businesses and maybe even on a wider scope, you have had to pay more attention to productivity, which has improved the way you run your com­pany. So it’s a good thing.

And it’s going to increase. As the Far East nations recover, they’re already looking to exports be the lead dog in that parade. So the trade balance is going crazy. Maybe we’ll have a $300 billion trade deficit in 1998. But, as long as they’re not dumping product in this country, the more U.S. com­panies have to hustle to protect their posi­tion and continue to improve, the healthier it will he.

What markets are important to AlliedSig­nal’s future?

China and India are where the people will he, so to the extent that you can bring new product as opposed to commodity product into these places, you’ve got a chance to get interesting share and ultimately grow your company. China is doing very well. They’ll have downturns from time to time like any other growing economy. But over the longer term, China is going to be a remarkable place to be.

Mexico is next to the U.S; it’s a big mar­ket, and I think it’s going to be a solid mar­ket. The speed of its recovery was surpris­ing to almost everybody. And Eastern Europe is coming on strong. We’ve got some fledgling operations in the Czech Republic, Poland, and East Germany. It’s a part of the world that’s of interest to me.

Now do you see the opportunities in West­ern Europe and the effect of the euro?

 We would put a lot more Money in those countries if social costs were lower and if there was a structure in place to see that they weren’t going to recur at a higher level. We have a lot of investment in Europe but we like to keep it specialty chemical-oriented. I would never put a big factory in Germany. Maybe I would on the outskirts of France, but certainly not central France.

The euro will have an enormously favorable effect in the long term. It unites countries that need to have a wider and broader economic base than they have now. It can be the basis of a powerful economic force. It will have its ups and downs, but while there are a lot of stories about how you’re not going to change the cultures of all these countries, nobody wants to change the cul­tures. It’s a very positive step.

What do the kinds of mergers going on today-Chrysler and Daimler-Benz, Citibank and Travelers-mean for AlliedSignal? How big is big enough?

Just because you’re big does not make it a safe assumption that you’re going to be great. Strategically, the Chrysler-Daimler­Benz combination is compelling. Bur culturally it’s going to be difficult. Whether they can get over that or not remains to be seen. Maybe they will, and they’ll have a wonderful company. If they don’t, the going will get rougher.

What does it mean for us? If our com­petitors begin to amalgamate and get a lot bigger, that has a much different impact on us than if they don’t. So far they haven’t.

You will need to make acquisitions in order to meet growth targets. What new sectors would you like to enter?

There are a number of areas in which we can achieve growth-either through acqui­sitions or internal investment. In specialty chemicals, I want to get into pharmaceuti­cal compounding. I’d like to get into chip packaging. I’d like to see an airline services business – maybe providing airlines with technical manuals. Those are some areas that we’re going to focus on and invest in and we’re all confident that we can put those on higher growth tracks.

How did Six Sigma originate and what did you accomplish with it?

I was frustrated with our manufacturing activity, and 1 talked to Rich Schroeder, who was then with ABB and now has a Six Sigma academy in Arizona. I was skeptical. I don’t want to bring in things that take up a lot of people’s time with no evidence that they brought any improvement. He con­vinced me that this had merit. So then we sent some people to Six Sigma academy. It’s a fairly demanding curriculum best described as kind of advanced statistics. We measure it in terms of two things: pro­ductivity and customer satisfaction. 1 was impressed with it. Then Jack called me up when he was recovering from surgery and asked me in to talk about quality and I said, “This is something GE can use.” I went over 25 or 30 charts with his team, and then he came back and adopted it, and they’ve done it very well.

What does it enable you to do that you couldn’t have done?

It takes guesswork out. I’d go to factories and they’d say we have an 85 percent throughput rate. In other words, 85 percent of the product goes through the factory right the first time. If you subject it to the disciplines of Six Sigma, that 85 was 65. You get at things that you never got at before just by analysis.

Right now we’re between four and five. There’s a ques­tion as to whether the cost to get to six justifies it or not. I sure want to get to five. I want to make sure I understand what it takes to get to six. Then 1 want to look and see what’s the cost-and-reward benefit and decide whether we go to the next step or not.

What is your definition of a premier com­pany and does AlliedSignai fit that defini­tion today?

It means achieving excellence. There’s a different definition by function. In manu­facturing, it’s Six Sigma, trying to get as defect-free as we can. In legal, I like to pre­vent litigation as opposed to win litigation. In finance, it’s interpretation of results as opposed to scorekeeping. But in total, it’s trying to set yourself up as somebody oth­ers want to compare themselves with.

Every company, or most companies, do a lot of the same things. The difference is the intensity in which you do them. When I came to AlliedSignal, the most glaring concern was a lack of confidence. People were downtrodden, disillusioned, and dis­appointed. So the essential thing was to try to lift all boats, to communicate things that we could specifically do.

Then I put the processes in place as intensely as I could. First the people process-the hiring, the development, the reward, the motivation for people. Then the strategic planning process which specifics as to what we wanted to do, the obstacles in our way, and how we were going to eliminate them. And then the operating plan, as well as lots of contin­gencies because the world doesn’t unfold the way you think