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Honeywell: A Supplier Customer Focus

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By Kishore Chagamreddy, Peter Addy, Ian Jensen, Darrell Member, Bindu Malik, Misty Caruth and Maggie Gu

"Aerospace is a leading global supplier of aircraft engines, avionics, and related products and services for aircraft manufacturers, airlines, aircraft operators, military services, and defense and space contractors" (Honeywell 2009 Annual Report). This statement by Honeywell sounds like the same mumbo jumbo that customers and investors read from a company. All for-profit organizations strategize in some way to be the leader in their industry. What is Honeywell’s recipe?

A favorable attribute of the aerospace industry that benefits Honeywell is the high barriers to entry into the market. This area is a recognizable strength for Honeywell and the company uses it to maintain profitability.

Initiatives this past year have shown that Honeywell is winning in the marketplace. Their pursuits into a customer focused portfolio have created over $100B in OEM wins. Their selection by Commercial Aircraft Corporation of China, Ltd (COMAC), a huge win to be the fly-by-wire flight control provider for the new C919 single-aisle commercial, is an additional $11B for the company. They’ve managed to obtain over 90% of the airline aftermarket selections. And these are just the story board wins for Honeywell.

Operational efficiency at Honeywell is another area where they’ve proven themselves a leader. The laser like focus on lean initiatives, six sigma, change management, HOS (Honeywell’s version of the lean Toyota Management System which Toyota pioneered) is remarkable and has propelled them to excellence. Through their execution on initiatives, they’ve obtained a reduction of 20% in software cycle time and a 50% increase in distributed work.

This focus has led to ‘Best in Class’ customer recognition. Furthering their goal of excellence, Honeywell continues to build on differentiation as a value proposition. They expand existing products by tapping emerging global demand and are well-positioned to capture industry growth. Focusing on efficiencies through flawless execution of their development programs and capitalizing on these efficiencies continue to affirm their leadership position and build their competitive advantage.

Costs of doing business in a market or industry that involves high-end technology as a requirement, stretches organizations above and beyond most business norms (strategies, goals, ROI, etc.). Financially Honeywell has positive cash-flow with minimal liability ($7.36M for 2009). This positive monetary situation is essential for Honeywell to be able to have the capability to inject financial support into strategies it sets forth.

The company’s portfolio generates nearly 1200% more in aviation products compared to competitors. It is not rare to generate success in any business market if an organization has economic means or financial support. Luckily for Honeywell it has taken steps to maintain its leadership by adding maintenance specificities with its customers.

By maximizing the customer satisfaction of return buyers, Honeywell has maintained good profit based on existing service contracts and has engaged in newer technologies among products in order to offer more to its buyers (i.e. delivering technology for Boeing’s 787, Airbus’ A350 and Lockheed’s F-35). Its strength in maintenance contracts has helped them with the potential to expand to non-Honeywell aviation machinery.

Success in international emerging markets have also created great buzz for Honeywell (i.e. Eastern Europe, the Middle East and Asia).

OEM markets and aftermarkets are two areas that Honeywell is focusing on for future growth. The company has learned to become disciplined for smarter growth and profitability, a good example of which is seen in the case of the Comac C919 contract where Honeywell chose to bid on only 8 out of a possible 18 work packages to avoid risk and leverage its strengths. In spite of this “the aircraft platform will never be profitable” says Michael Palmgren, Director of Pricing Strategy at Honeywell Aerospace. This realization has taught Honeywell a valuable lesson. The company has learned that it is necessary to understand how customers will trade between price and performance before they design a solution.

According to Palmgren, the current strategy the company is following is to focus on the customer needs based mainly on the requirements of the product and not the preferences of the customer. The company’s basic assumptions are constantly being challenged in recent times but the realization of the non-linearity of value function has helped Honeywell present a solid case in product presentation.

Result? Identification of differentiators, minimum to compete and product offerings based on customers weight and ranking of specific needs.

To fine tune its customer driven approach, Honeywell has developed the Voice of the Customer program to provide better insight and guidance to the company for its overall product strategy. As a part of the program the company conducts more personal interviews, targeting the decision makers multiple functions to gain understanding and improve the customer’s business model. This helps the company understand how its customers make money and how they can help them make more. Ultimately, the strategy’s goal has succeeded in making their customers more profitable by partnering with them in their long term growth. The program has also helped Honeywell better understand budget and technical constraints, trade-offs for other elements of value, and organizational incentives of the customers.

At a recent pricing strategy presentation by Palmgren, he focused on how the company is differentiating itself from its rivals to get competitive advantage based solely on creating value for the customer and not necessarily providing different features of products. Avionics and GPS are two technologies the company is trying to gain competitive advantage by using aggressive pricing strategies. In the past two years, Honeywell’s GPS model, AV8OR has gained significant market share over Garmin, Lawrence and Jep. The company’s strategic position is a result of deep understanding of customer needs, buyer value matrix, economic value analysis of products and its proprietary value optimization matrix. The attempt here seems to be to gain larger market share from the existing competitors.

Benchmarking, Operational effectiveness and standards are driving the industry towards a productivity frontier and Honeywell realizes this that in the long run profit margins of the industry will decline.

While Honeywell’s focus on its core competencies and not taking up all the business coming its way, may be a wise and sound strategy, where is the blue ocean for Honeywell? The Comac project is a good example. As the company strives to bring the best value proposition to the customer, it also seeks to minimize risk which is good business sense, but the forces for a supplier are changing as the future progresses in overall cost of technology. As innovation brings about more cost-effective means and cheaper production costs, Honeywell Aerospace will have to find ways to not only maintain profitability as a supplier to its customers, but also drive the demand side of the supply/demand equation.

Today, Honeywell’s position as a powerful supplier with its strong customer satisfaction process has made it the linchpin of the industry. Tomorrow, however, Honeywell will do well to follow Gene Roddenberry’s words, ‘boldly go where no one has gone before’ and work to align its future strategies with driving demand.

This report was a group project for the Global Strategy class of Thunderbird School of Global Management Professor Nathan Washburn, Ph.D.