Evaluate any mergers & acquisitions your firm has made and the overall M&A pattern in your firm’s industry.

Abstract:
This analytical paper focuses on United Technologies Corporation (UTC) and its subsidiaries, UTC Aerospace Systems, Pratt & Whitney, Sikorsky, UTC Climate Controls, & Security, and Otis.
Do a thorough environmental scan, such as a PEST analysis, for your firm. Using this analysis and any other information you believe to be relevant, do a scenario analysis for your firm along the lines of the one we did in class on Day #2. Identify 4 mutually exclusive scenarios based on two variables, explain why you chose these particular variables, and then explain the major strategic choices your firm would face in each of these 4 different scenarios.

PEST Analysis:
United Technologies Aerospace Systems, formerly known as Hamilton Sundstrand, is a global aerospace company which offers a wide range of technologically advanced aerospace and industrial products and aftermarket services to its customers. It is a relatively young but rapidly developing company that plays a very important role in the modern space engineering and aviation market. The company was created in 2012 when UTC merged its subsidiary, Hamilton Sundstrand with the newly acquired Goodrich Corporation. The company’s product portfolio includes electric power generating, distribution, management and control systems, fuel and special fluid pumps and engine control systems. These products are used in various systems including actuation systems, air management systems, auxiliary power systems, electric systems, engine and control systems, propeller systems, and space systems. The company serves both commercial and military customers. Some of the company’s top commercial customers include Airbus, Boeing, and Rolls Royce, to name a few. This PEST analysis is an environmental scan of UTC Aerospace Systems and the aerospace industry.

Political:
The aerospace industry is a highly regulated industry, especially for companies such as UTC Aerospace Systems who conduct business with the Federal government. UTC Aerospace Systems provides services to the Department of Defense Intelligence Community, Department of Homeland Security, and Department of State, among others. Due to its status as a contractor to the U.S. government, the company’s business is strictly regulated by several domestic and international laws. Some of the laws that regulate UTAS’s business with the government include the Truth in Negotiation Act; Federal Acquisition Regulations; and False Claims Act and the International Traffic in Arm Regulation. Any amendments to these laws would directly impact the company’s business. In addition to the domestic laws mentioned above, the company’s business is also regulated by various foreign laws and regulations related to import-export control and the Foreign Corrupt Practices Act. Even though the Federal government’s business comprises a relatively small percentage (20%) of the company’s business, any failure to adhere to these regulations may result in fines, penalties, or suspension from receiving additional contracts.
Economic:
UTC Aerospace Systems is a provider of flight control systems, engine control systems and fire protection and detection systems for aircraft manufactures; thus, the company’s business is directly impacted by the airline industry. The company was adversely affected by the global economic slowdown when airline travel took a hit between 2008 and 2009. However, in recent years, the air transport industry has begun witnessing a positive impact on its operations. According to Airbus, the demand for new aircraft is expected to grow an average of 1,400 per year to reach 27,800 new aircrafts by 2030. It is likely that this prediction will have a positive impact on the demand for airframe and engine components as well as aerospace turbine engine repairs. As a provider of flight control systems and engine control systems, UTC Aerospace Systems has the potential to benefit from this positive long-term outlook of the air transport industry.
Social-Cultural-Demographic:
Due to the nature of the company’s business, it is not directly affected by social, cultural and demographic factors such as social stratification/mobility, race, religion, or health practices. However, education and technical skills are important to UTAS because it has to acquire, train, and retain employees with high education levels and technical skills. As a leader in the aerospace industry, UTC Aerospace is constantly striving to provide top quality products and services to its customers. In order to achieve this high standard, the company is committed to investing in recruiting and training top talent from around the world. The company also offers rewards and benefits in order to keep its employees satisfied and increase its retention rate.
Technology:
UTC Aerospace Systems operates in a highly competitive market that is subject to rapid technological changes. Due to this rapid pace, introduction of products using new technologies or adoption of new industry standards has the potential to make existing products obsolete or unmarketable. Thus, in order for UTC Aerospace Systems to continue to operate successfully and compete effectively in the aerospace industry, it has to continuously innovate and introduce new products that gain market acceptance. In addition, the company has to understand its customers’ requirements and adapt to emerging technologies in the market.

Scenario Analysis:
This scenario analysis is based on an increase in demand for commercial aircrafts and a decline in the United States Defense budget. I chose these two mutually exclusive variables because a change in demand for commercial aircrafts and the Federal defense budget will alter the company’s business strategy. Both variables pose very plausible scenarios due to the current state of the economy.
Reduction in U.S. Defense Spending
Yes No
Increase in demand for commercial aircrafts Yes
Market to commercial aircraft manufacturers and continue to develop innovative technology for space systems.

Differentiate itself from competition on compliance and superior quality

No Invest more in R&D for space systems
Establish partnerships with space companies such as Space X

Achieve 100% compliance with government regulations
Scenario 1:
Demand for additional aircrafts is likely to soar in the near future primarily due to the predicted positive outlook on air travel across the globe. Airbus has predicted that the aircraft market is expected to reach approximately $3.5 billion by 2030. On the other hand, the Federal government is expected to reduce its defense budget in upcoming years for various reasons including, the decision to withdrawal troops from Afghanistan and Iraq as well as reduction in weapons procurement. If this scenario were to occur, there would be a significant drop in new contracts being awarded to defense contractors including UTC Aerospace Systems. This scenario would have an impact on the company’s revenue however; it would not be a detrimental impact. Since the company procures a majority of its parts for commercial customers, it would not have to drastically alter its business strategy.
Scenario 2:
Under this scenario, there would be an increase in demand for commercial aircrafts and no decline in the Federal defense budget. If this scenario were to occur, UTC Aerospace Systems would have to strive to maintain its status as an industry leader and differentiate itself from competitors by continuing to provide superior quality products and services to both its commercial and military customers. The company could achieve this on the military side by being 100 percent compliant with all government regulations in order to continue to win government contracts. On the commercial side, it would have to provide top quality products and services at competitive rates.
Scenario 3:
This scenario presents a decrease in commercial aircrafts and a decline in the U.S. Defense budget. In this scenario, the company would have to focus on establishing strong partnerships with NASA and space companies such as Space X and Virgin Galactic. Since the idea of commercializing space travel has been gaining traction lately, UTC Aerospace Systems could capitalize on this opportunity and strengthen its Space Systems program.

Scenario 4:
Under this scenario, UTC Aerospace Systems would have to rely primarily on its defense contracts due to the decrease in commercial aircrafts. In order to gain more military contracts from the government, the company would have to ensure 100 percent compliance with all relevant government regulations. This would be a challenge especially since the company was recently found deficient in complying with certain regulations.

Do a thorough application of the competitor analysis framework on your company’s main competitors; see articles and slides for February 19. Discuss what the key points would be if one of your main competitors applied the same framework to your company.

There are a lot of companies in the world that share the aviation and aerospace market with UTC Aerospace Systems, but only few have a similar influence and market power. This competitor analysis framework focuses on three of the company’s major competitors, Boeing, Lockheed Martin, and Northrop Grumman. These three companies serve an interesting role because they are both competitors and customers of UTAS.
Boeing:
As one of the largest manufacturer of commercial and military aircrafts, Boeing, along with its subsidiaries, designs, develops, manufactures, sells, services, and supports commercial and military aircrafts, satellites, missiles, missile defense, and launch systems. The company is divided into five main divisions: Commercial Airplanes, Boeing Military Aircraft, Global Services and Support, Boeing Capital Corporation, and Network and Space Systems. Boeing strives to maintain its position as an industry leader through the creation of new and innovative airplanes to meet its customers’ needs. Some of Boeing’s key strengths include strong financial performance, diversified aerospace and defense business, and leading market position. Its weaknesses include pending litigations, and debt & contractual commitments.
Lockheed Martin:
Lockheed Martin is a leader in research, design, development, manufacturing, and integration of technological systems. The company operates in four divisions: Electronic Systems, Information Systems and Global Services, Aeronautics, and Space Systems. Unlike its other counterparts, a majority of Lockheed’s business is derived from the Federal government. The company’s main goal is to continually improve global security for its customers. One of Lockheed’s key strengths include its position as a global leader in providing tactical and transport aircraft, missile defense, maritime surveillance, and space-based systems. On the other hand, one of its weaknesses, similar to other competitors is legal proceedings. The company has been involved in a lengthy legal battle which may possibly result in fines and penalties.
Northrop Grumman:
Similar to Lockheed, Northrop considers itself as a leader in global security. The company creates products, services, and solutions for aerospace, electronics, and information systems. Northrop’s five main business sectors are: Aerospace Systems, Electronic Systems, Information Systems, Shipbuilding, and Technical Service. The company has differentiated itself from its competitors by extending its technology to assist in building ships for the U.S. Military. Some of Northrop’s strengths include, its wide business operations, strong focus on research and development, and improved profitability. One of its biggest weaknesses is the decline in sales volume, Northrop was significantly impacted by lower sales volume in 2011 and 2012.

In order for UTC Aerospace Systems to maintain its position in the industry, it has to focus on enhancing its strengths and work on improving its areas of opportunities. The company’s strengths are in its long lasting business growth, which is more than eighty years by now.

Do a comprehensive analysis of your company’s business model, including both the revenues and costs framework from “Note on Business Model Analysis for the Entrepreneur” and the choices and consequences causal loop framework from the “Competing through Business Models” reading.

Revenues and cost
Business model can be defined as a design for the successful operation of a business, identifying revenue sources, customer base, products, and details. A business model analysis looks at both revenue drivers and key expenses. Some of the key factors that influence total revenue are revenue streams, revenue models/sources, and relative size and importance. On the other hand, the main components of key expenses include, cost drivers, cost structures, and cost centers. Below is an analysis of United Technologies Aerospace Systems’ business model.

Revenue Drivers:
UTC Aerospace is a world leading supplier of integrated aerospace solutions. The company employs over 42,000 employees worldwide. In 2014, the company generated over $ 14 billion dollars in net sales with over $2 billion in operating profit. UTC Aerospace Systems is a multiple revenue stream company. The revenue streams are categorized under aerospace and industrial. The main facets of the company’s aerospace category include designing, developing, manufacturing, and marketing of a wide range of systems and products for commercial and military aircrafts, homeland security, and space applications. Some of the company’s product offerings include gearboxes, primary and secondary flight controls and actuation systems, torpedo propulsion systems, launch vehicle hydraulic power units, and fire protection products for military vehicles and civilian and military aircrafts.
Under the industrial category, UTC Aerospace Systems provide specialty pumps and metering, rotary screw air and gas compressors, pneumatic tools and high-speed centrifugal pumps, to name a few. These products are also used in chemical processing, water and waste treatment, and oil and gas production.
Another revenue stream from UTC Aerospace Systems is aftermarket services. The company provides spare parts, overhaul and repair support, military customer support and logistics, business aircraft support, worldwide repair services, and engineering and technical support and fleet and management solutions. All these products and services comprise of the UTC Aerospace Systems revenue stream. Due to the nature of the business, the company’s revenue source is volume/unit-based. UTC Aerospace Systems has participated in a variety of development programs including the Airbus 380 program, Boeing 787 program, and NASA’s International Space Systems. In terms of relative size and importance, there are various challenges in the industry which can impede revenue growth. Some of these challenges include stringent government regulations and Intellectual Property laws.
Costs/Expenses:
Cost drivers are comprised of fixed, semi-variable, variable, and non-recurring costs. A significant percentage of the company’s costs are restructuring costs from the acquisition of Goodrich Corporation. Other costs include foreign currency translation linked to transactions with foreign customers and suppliers; and acquisitions and divestitures. Production costs also make up a significant portion on the company’s expenses. Due to the volatility of prices of raw materials such as cobalt, chromium steel, cooper, aluminum, and nickel that are used in some of the products, the company is subject to increasing production costs. In terms of cost structures, inventory, and payroll also contribute to the company’s key expenses.
Choices and Consequences
A company’s choice includes policies, assets, and governance. For UTC Aerospace Systems, its fundamental vision is to lead in providing quality products and services. One of the policies that drive the company’s vision is the ACE operating system which stands for Achieving Competitive Excellence. This system is focused on the drivers of competitive excellence — company’s employees and its work processes. Such technique of empowered employee’s work and leadership operation together is aimed to create better conditions for business operation in each UTC Aerospace Systems’ branch across the globe. This brings benefits to its shareholders and customers.
In terms of assets, UTC Aerospace Systems owns the intellectual property for many of the parts that it produces. Furthermore, the recent acquisition of Goodrich also contributed to the company’s resources. Decision-making rights in the company rest primarily with top executives at the corporate level.

If your company is a multi-business firm, explain the logic behind its corporate strategy and diversification. Analyze this diversification using concepts from relevant course readings (articles from April 23), including specifically both relatedness and the better off and ownership tests. Compare your firm’s diversification to that of other firms in your company’s industries.
Diversification:

A diversified firm is a company with business units competing in different industries. UTC is considered as one of the leading providers of high technology products and services to the aerospace industries and building systems. The company operates primarily through five business segments, Otis, UTC Climate, Controls & Security, Pratt & Whitney, UTC Aerospace, and Sikorsky. The five business segments are further categorized into two groups: aerospace (Pratt, UTC Aerospace Systems, and Sikorsky) and commercial businesses (Otis, UTC Climate, and Controls and Security). With business operations in over 180 countries across the globe, the company’s product offerings range from elevators, air conditioning systems, fire and security systems to helicopters and aerospace systems products. For the 2014 fiscal year, Otis and UTC Climate, the building and industrial systems segment, brought in a total of $29.8 billion in net sales. Pratt & Whitney brought in $14.5 billion with UTC Aerospace Systems following closely behind with $14.2 billion and Sikorsky with $7.5 billion in net sales. UTC’s diversified portfolio is considered as one of its core strengths.
The logic behind corporate diversification is centered on corporate goals. There are four concepts of corporate diversification logic: concept of fit; concept of corporate management of business units; concept of assembly of the portfolio; and generic functional policies. All the UTC business units operate independently under separate management however; there are some generic functional policies that are applicable across all business segments. One of these policies is the Achieving Competitive Excellence (ACE) operational system discussed above. The company’s strategy has been and continues to be to maintain a balanced and diversified portfolio of businesses. To this end, UTC aims to achieve earnings from new product development and product improvements, structural cost reductions, operational improvements, and incremental earnings from investments in acquisitions.

As discussed above, the five business units are grouped into two segments, aerospace systems and building and industrial systems. The business units within the aerospace systems utilize similar sources, for example, suppliers and customers. Another resource that is shared among all the business units is research and development. UTC has a robust R&D team which focuses on developing new technology products and services to enhance and maintain its technological advantages.

Better off and ownership tests:
The “better off” test determines whether the presence of the corporation in a given market improve the competitive advantage of other business units over and above what they could achieve on their own. On the other hand, the ownership test asks whether ownership of the business unit produce a greater competitive advantage than an alternative arrangement would produce. A company is likely to pass both tests when it has some shared resources that (i) create competitive advantage for the business units, and (ii) is difficult to trade efficiently via the market.
UTC has a strong market presence; it has been consistently ranked among Fortune 50 companies for years. The company maintains a dominant position and achieves profitable growth, stellar performance and successful expansion of its offerings through the help of the success of its existing business units. In this sense, even though the individual business units could operate successfully on their own, together they have created a powerhouse of strong businesses. For example, UTC Fire & Security, which is part of the building and industrial systems business segment, is a leader in fire safety and security. Together with Otis and Carrier, they have a strong competitive advantage because they are able to capture a significant portion of the building and industrial systems market. General Electric (GE) is an example of a firm which has a similar diversification as UTC. Although GE’s diversification is wider than UTC’s, the company owns subsidiaries which operate within similar industries as some of UTC’s business units. One example of a GE subsidiary which competes with a UTC subsidiary is GE Aviation.

Evaluate any mergers & acquisitions your firm has made and the overall M&A pattern in your firm’s industry. Explain the motivations behind these M&A activities in terms of the M&A types discussed in course readings (including background articles) from April 23. Evaluate how successful they have been in terms of value creation (see same articles).

Mergers and acquisitions are fairly common among Fortune 500 companies and UTC is no exception. The motives behind mergers and acquisitions include: domain strengthening; domain extension; and domain exploration. As part of its business transformation strategy, UTC has acquired several higher-margin service businesses and formed joint ventures with other partners worldwide. UTC Aerospace Systems was formed in 2012 when UTC acquired Goodrich, a leading global supplier of systems and services to the aerospace and defense industry, and merged it with its subsidiary, Hamilton Sundstrand. The acquisition has provided the company with more integrated products and services for the next generation aircraft at a more competitive price. The motive behind this acquisition was to strengthen UTC’s position in the aerospace industry. Even though there have been some significant costs that have gone into the integration process, there have also be some significant benefits as well. For instance, in fiscal year 2011, Hamilton accounted for 10.5 percent of UTC’s total revenue however, in 2014, this number increased to nearly 16 percent.
Another example of UTC’s recent acquisition in the building and industrial systems segment is the acquisition of GE Security business. The business was integrated into UTC Fire & Security segment. This acquisition has positioned UTC Fire & Security to enhance its geographic diversity with a strong presence in the North American market as well as an opportunity to increase its product and technology offerings. UTC Fire & Security provides its products and services under brand names such as Chubb, and Kidde and sells them directly to consumers, aside from offering them through manufacturer representatives, distributors, dealers, and the US retail distribution. By participating in mergers and acquisitions, UTC continues to utilize strategic moves to help expand its product offerings and generate high revenues.

Works Cited
Annual Report and Proxy Statements United Technologies Corporation. http://www.utc.com/Investors/Pages/Annual-Reports-and-Proxy-Statements.aspx

United Technologies Corporation, Company Overview http://www.lexisnexis.com.ezproxy.lib.uconn.edu/hottopics/lnacademic/?shr=t&sfi=AC02NBCmpSrch

ICD Research. United Technologies Corporation, SWOT Analysis. http://www.lexisnexis.com.ezproxy.lib.uconn.edu/hottopics/lnacademic/?shr=t&sfi=AC02NBCmpSrch

Strategic Defense Intelligence – Business Analysis, Hamilton Sundstrand. http://www.lexisnexis.com.ezproxy.lib.uconn.edu/hottopics/lnacademic/?shr=t&sfi=AC02NBCmpSrch

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