What Transformational Leaders Do

David Cote’s Steps to M&A Success
Why David Cote?

Wearing faded blue jeans and a sport shirt, David M. Cote thrusts his right hand forward to give a firm, welcoming handshake. If it weren’t for the corporate trappings at Honeywell’s Morristown, New Jersey, headquarters (soon to relocate in nearby Morris Plains), one might never guess that Cote is the CEO of a $38 billion diversified technology and manufacturing leader. With his left hand, he takes a deep gulp from a can of Mountain Dew, motioning visitors to pick their way through the clutter of personal memorabilia that has overflowed from a nearby bookshelf onto the floor, and to find a seat. Among other trophies, the collection includes an autographed baseball from former Red Sox manager Bobby Valentine, various jewel-encrusted ceremonial daggers from Tashkent and Afghanistan and a pair of Vietnamese beverage decanters, each containing a cobra with a scorpion in its mouth.

The product of a modest upbringing in the New Hampshire mill town of Suncook, a French-Canadian community, Cote worked his way through UNH pulling night shifts as an hourly employee at a nearby GE jet engine plant. Upon graduation, he briefly tried his hand at cod fishing before joining the corporate world at GE.

There, he progressed through a series of top positions over the ensuing two decades. In fact, Cote was once considered a dark horse candidate to succeed Jack Welch. When that didn’t happen, he landed at the helm of the $16 billion auto, aerospace and IT industry supplier TRW—which he steered until Honeywell recruited him as CEO in July 2002.

He knew he had his work cut out for him. GE’s bid to acquire Honeywell had recently collapsed and company was rife with factionalism, struggling to reap rewards from a rash of M&A activity, particularly its 1999 merger with AlliedSignal. The old Honeywell was noted for its innovations and savvy marketing, but it tended to overpromise and underdeliver. The former Allied-Signal, which had merged with Honeywell in 1999, was a proven by-the-numbers execution leader but often starved investment in new products and ideas. The acquisition of Pittway, a home security and surveillance firm, in 2000 also presented cultural problems. The company resisted the parent culture at every step, stubbornly keeping its own methods and worsening the culture clash.

Instead of relying on values, which can be slippery and hard to measure, Cote sought to unify the company around 12 behaviors that he wanted to see throughout the firm. These include customer focus, self-awareness and championing change. (See sidebar, p. 32, for the full list.) This ultimately became the basis of the Honeywell Operating System (HOS), more colloquially known as One Honeywell (One Hon). The system also expects everyone from the hourly worker on up to come up with two implementable ideas. The aim is to identify improvements and opportunities as part of its “continuous improvement” behavior.

David Cote’s Steps to M&A Success
Why David Cote?

Since taking the job, Cote has made 80 acquisitions and more than 50 divestitures, significantly changing the conglomerate’s portfolio into four business groups: Aerospace and aviation, automation and controls, performance materials and technologies and transportation systems. Today the company is more global than ever with more than 60 percent of its revenue coming from outside the U.S. In the face of a weak economy in 2012, Honeywell grew sales by 3 percent, EPS by 11 percent to $4.48, while generating $3 billion in free cash flow. The company employs 132,000 people in over 100 countries, including more than 20,000 engineers and scientists. “We’ve secured great positions in good industries,” Cote says. “And we’ve managed to do this in a challenging environment.”

Most CEOs coming into a company from the outside tend to eviscerate the top brass and bring in their own teams. Cote chose to work with the existing top talent, signaling a commitment to internal leadership development. Tim Mahoney, president and CEO of Phoenix-based Honeywell Aerospace and a 16-year veteran at Honeywell, recalls a tense moment during the company’s negotiations to purchase EMS Technologies in 2011. Having read a book about the building of the Panama Canal, where the lead engineer cites a former math teacher who used to tell him: “If you have five minutes to solve a problem, spend the first three minutes thinking about how you’re going to do it,” asked Mahoney if he had taken his “three minutes”—a question he frequently put to direct reports.

“I promised him I would call him back with a considered answer,” Mahoney recounts. “The following morning, I told him: ‘I’m confident I can deliver on this one and I’m willing to risk the Aerospace reputation on it.’” Six months later, Mahoney recalls calling Cote and telling him, “We just landed a $2.8 billion order for EMS Technologies that none of us had counted on; $2.8 billion on something that only cost us $491 million!”

“One of the aspects of David’s style that tends to go unobserved, at least from the outside, is the extent to which he is willing to go to develop people and their ability to think for themselves,” says Roger Fradin, president and CEO of Honeywell’s automation and controls unit, who joined Honeywell when it acquired the burglar alarm company Pittway. “He likes to pose questions, such as, ‘If this were true, why wouldn’t that be true?’ instead of telling people what to do.”

Whether booming along New Jersey’s back roads on his Harley Davidson or pheasant shooting near his farm in Dutchess County, New York, Cote doesn’t take himself too seriously—but he is very serious about his causes. Foremost among those are America’s global competiveness and the Fix the Debt campaign, a non-partisan group headed by Erskine Bowles and Alan Simpson. In 2011, he signed a letter with 450 other business leaders urging the president to compromise for the good of the economy. He tirelessly travels to Washington, buttonholing congressmen, administration officials and anyone willing to listen to him about debt reduction. “We are on a path to be spending $1 trillion annually in interest in 10 years,” he notes. “To put $1 trillion in perspective, if you had spent $1 million a day since Jesus Christ was born, you would not have spent $1 trillion by now. That would be our annual interest bill.”

The fact that he hasn’t given up speaks to his determination about most things he faces. Recently Chief Executive spoke to Cote at the company’s Morristown, New Jersey headquarters.

When coming from outside a company, one often discovers a reality different from one’s expectations. When you came to Honeywell in 2002, did you arrive with a transformation plan fully formed in your mind or did you anticipate making incremental changes to see what might work?

One of the first things I did was just get out a lot. I did town halls all over the place so that people could see and hear me directly and also so I could hear their questions and get their perspectives on what they thought about things. I probably touched about 10,000 people in the first couple of months, both here and in Europe. Asia came later.

Initially I thought I was going to do a lot of cheerleading, but morale wasn’t that bad. It was more a case of, “Geez, would you just give us some leadership, so we have some direction because we just don’t know where we’re going.” In terms of formulating a plan, I already had a strong sense that our overall portfolio was right but that there were changes that needed to be made. That was one of the reasons that I got into each of the businesses: to get a sense for what’s performing well and what wasn’t. Do we have a good position? Do we make good money?

The warring factions within the company were not obvious from the beginning and that’s where going out and doing these town halls proved helpful because when someone asked whether I consider myself “red” or “blue,” at first I thought this referred to my being a University of Louisville or a University of Kentucky fan, since that’s what it [would have meant] in Kentucky, where I spent a lot of time. What they meant was whether I was philosophically inclined to the traditional Honeywell (red) way of doing things or to Allied Signal (blue) [approach]. That’s when I thought, wow, okay, I’ve got to pay a bit more attention to this and figure out how to bring everybody together.

So you faced a culture divided against itself?

I soon learned that there was a third culture—the Pittway acquisition. They had their own view of things and their people just disregarded everything else. The legacy Honeywell culture focused on customer delight, new technology and the next great thing that’s coming down the line. But because of their customer delight focus, they would commit to all kinds of things, whether they could do them or not. Execution tended to be weak, as a result. In the end, this [ineffectiveness] just annoyed customers.

AlliedSignal’s culture, on the other hand, was focused on productivity and making your numbers this quarter. But as a result, they hadn’t really invested in the product pipeline in terms of what was coming next and how we were going to keep it going. The focus was too short-term.

The Pittway culture focused on competition—how do you have the best new products and how do you make money doing this? Their view was, whether you’re legacy Allied or legacy Honeywell, you’re both big companies, which by definition means you don’t know what you’re doing, so we’re not listening to anybody. They just acted like they did before the acquisition, when they were an independent company. If they didn’t want to participate, they didn’t. If they didn’t want to show up for something, they didn’t. If somebody told them to do something they disagreed with, they wouldn’t do it. There were three very different cultures to try to bring together.

David Cote’s Steps to M&A Success
Why David Cote?

How did you go about reconciling them?

We started focusing on five customer-centered initiatives to provide some direction. The 12 behaviors—a concept that underlies our big process initiatives, such as the Honeywell Operating System (HOS), Velocity Product Development (VPD) and Functional Transformation (FT)—took time to evolve and required a lot of staff input about how we should behave as a company.

Was there resistance to this?

One guy asked me, “Why are we wasting time on stuff like behaviors when we need to be making decisions here?” I replied, “I can make all the strategic decisions you want; but if nobody does them, it doesn’t matter. We must create a culture where we’re going to get things done so that, when we agree on something, it actually happens.”

Interestingly, it was that same guy who, two months later, had gone through the teamwork exercise [of] getting all the facts and opinions to team participants who wasn’t, himself, following the behaviors. It became clear he wasn’t doing it. So, I was able to call and say, “Remember that discussion we had about how we were going to work together to establish the kind of culture we wanted? Well, could you explain to me then why we agreed on this and it’s not happening in your business?” Sessions like this soon moved the needle.

Tim Mahoney and Roger Fradin described the Honeywell Operating System as a “Honeywellization” of the Toyota Lean Production System, which you had your people study. What precisely is the Honeywell element?

The big difference is cultural. I always tell security analysts that a culture is a lot more important than they ever give it credit for. When I try to talk to them about it, they say, “Yeah, yeah, yeah, interesting, but what’s next year going to look like?” This is changing now that they recognize the significance it’s had for us.

I’d always admired Toyota’s manufacturing. It’s the best in the world. So, we sent 60 or 70 people to Georgetown, Kentucky for a few weeks. As happens with that sort of thing, they all came back infused with the Holy Spirit. They wanted to get started right away. But I asked them, has this system been successful in a plant that isn’t new? Yes, but only at Nummi [a joint venture with GM that has since been discontinued] in California. But it required a significant infusion of resources to do it. The answer was that when tried in existing plants, the failure rate was really high. The fundamental reason for this is legacy behaviors. An 80-year-old plant, where the average worker’s tenure is 26 years, is not fertile ground to tell an hourly employee that next week we’re doing the Honeywell operating system and everything is going to be different. It just doesn’t work.

We devised an acculturation process that we tested and piloted in 10 plants. After nine months, it worked in five, but [it] didn’t work in five others. We worked through what proved successful in the three or four where it succeeded very well. [Then,] we took it to some 20 others, where we over-resourced it to really understand what works.

The big trick for us—the Honeywellization factor—is how do you do this in an existing plant versus how do you do it in a new one? This is why I say it’s necessary to go slow to go fast. We could have gone really fast on implementation and we’d have had a mess. Instead, we’re creating a 20-year sustainable advantage because we’re bringing the culture along at the same time.

Many incoming CEOs from outside eliminate a huge swath of executives to bring in their own people. Why didn’t you do that?

What’s funny about your question is that was used as a knock on me by a number of analysts in the beginning. I’ve never been a huge fan of that approach. I can understand where you might need it in certain circumstances, but I felt if you’re trying to build something—not just fix it and move on—there’s a lot of resident knowledge in the people [that] you need to figure out how to build upon. Just because a business hasn’t done well doesn’t mean all the people are bad. It could very well be [that] they just haven’t had the right direction, the right leadership or the right initiatives.

During my first few years for, say, the top 600 executives, we were hiring something like 45 percent or 50 percent externally. From about three years into my tenure to today, about 10 percent or 15 percent of those positions come from outside. If you are trying to build a culture, you want to promote internally to the extent that you can. My Tom Brady story illustrates this.

Drew Bledsoe, who was a good quarterback for the Patriots is playing 500 ball until he gets injured, forcing New England to look around saying, What are we going to do? Oh, we have a backup quarterback, Tom Brady. They put Brady in the game; he starts winning from that point on. They win the Super Bowl that year. Bledsoe ends up in Dallas, where he again plays solid football. But he gets injured and the team looks around and decides to go with [its] own Tony Romo. The Cowboys put Tony Romo in and he takes them not to the Super Bowl, but a long way that year.

Rather than always looking outside for the best guy, look for your potential Tom Brady, who is already in the company. Promoting internally also creates an updraft that opens up three other jobs in the company. This creates momentum for the good people in the organization that further reinforces the behaviors you are seeking—instead of having to bring in an outsider that, in our case, has to be “Honeywellized.”

How would you assess the outcome of your work with the
Fix the Debt campaign?

Thank God, we did it. However, at the same time, especially, having a lot of CEOs involved, all of us hate seeing a bunch of mini steps taken when, as a business, you would take one big step and just get it done. If we hadn’t started Fix the Debt, I really worry what would have happened at year-end. As anemic as the solution was, it was a hell of a lot better than going off the cliff. I’m not happy that we couldn’t get the whole thing done, which I would have much preferred. That being said, this is politics. Things don’t always work that way.