The CEO's CEO.

Larry Bossidy may not have the creative genuis of Bill Gates, the charismatic charm of Jack Welch, nor Roberto Goizueta's administrative evangelism. Yet he took a ragtag bag of businesses in disarray and turned them around - from a starting point far lower than what Welch began with at GE - by working harder, broader, and deeper than most CEOs do or can. In this, the leadership qualities he demonstrates are not only equal to those of more prominent CEOs - but far more imitable.

A lighting 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 he lives, he devours The Wall Sreet Journal and The 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. It's 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 thinker, 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 Bossidy 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 Bossidy 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, Bossidy 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. Bossidy 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 grace. In gathering research, it had second thoughts, reckoning that 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.P. 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 be.

What markets are important to AllledSignal's future?

China and India are where the people will be, 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.

How 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-Daimler-Benz combination is compelling. But 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 I 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. I 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 I 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 AlliedSignal 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 with 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 it will and I like to have pre-considered options about which way to go if one of three or four things happen in the course of the following year. And finally, the focus on customers, because it was a place that was caught up in itself to the exclusion of what was happening in the marketplace.

We've made astonishing improvement, but I'm not sure we'll ever reach my definition of premier. We have plenty of room to get better.

Where did you start?

I talked to as many people as I could. People who work in a company know what's wrong with it. They were very forthright in terms of their comments. And customers were equally forthright. You use that as a backdrop to make some changes. And once we set some targets and achieved them, you could see the confidence coming back in people.

What was the reason for organizing the portfolio the way you did?

With the blur that goes on in business these days in terms of speed of change, you've always got to be looking at your portfolio and asking the question, is this going to survive in the new millennium? And if the pragmatic answer is no, you'd better do something about it.

When I came, we had three sectors - materials, automotive, and aerospace - that worked well for us. In the engineer materials business, we've tried to upgrade the portfolio. It became apparent that the automotive business was not going to be a place for us to concentrate. The OE automotive business is a difficult battlefield to operate in if you don't differentiate yourself with a product. So we sold a braking business and a safety restraint business. We're not quite where we want to be in automotive, but we're a long way away from the OE business, with far more attractive concentrations on an aftermarket.

Is your core competence being a diversified manufacturer?

We're very different businesses in different markets. We're bound together by some things that are common. The management resource reviews and productivity initiatives are the same across the company. We have expertise in the markets in which we operate. Our chances of success are heightened by the fact that we're good in those businesses and that if we can make niche acquisitions and stay within the same relative field, then our chances of success are going to be greater.

I don't think we're victimized by hubris in getting to businesses we don't understand. Therefore, when we buy in those segments, we assimilate them in an effective way. Whereas if we bought one outside of those patterns we'd almost have to leave it alone because we wouldn't have the inate understanding of the markets.

We're not going to be good buying Seagrams, for example, or a furniture outlet. I'm asked every week about getting into the financial services business, because that's where I came from. It's a wonderful business, but it takes a lot of equity. And it's not a business for this structure. So the answer has always been no. But we do a lot of portfolio shifting, trying to change the tire when the car's running rather than waiting until we get beaten.

STREET TALK

Last October, after missing earnings estimates by a mere penny a share, your stock got hammered. What do you take away from that experience?

When you don't have a pure play company - and we don't - you have to have consistent earnings. People know the computer industry and other one-product industries. But when you're a multi-product company that level of understanding doesn't occur, and you're expected to have consistent earnings.

For the third quarter of 1997, we looked at the quarter, and I didn't think we had an 18 percent quarter. Could we have gotten an extra penny? Of course. But I thought it sent the wrong signal across the organization. Here was an organization trying to get better which, frankly, had some disappointing performance in the quarter. So I decided not to do it. I wasn't surprised at the response. It was a wonderful way to give birth to a new renaissance. It was a wonderful chance to reinflate Six Sigma with more intensity, to get closer to our customer again. All these initiatives need to continue to get reinflated. Even though we got pummeled, I wouldn't do it any different. If your stock is going to get pummeled, it's going to happen anyway. It's just a question of time. We precipitated, arguably, but it was the right thing to do.

Is this part of your burning-platform theory of change?

It's a lot easier to be able to get change when people see there's a burning platform. I always have sympathy with companies going along swimmingly because arrogance sets in and the wrong kind of mentality begins to proliferate, and that's hard. So, any time I can establish a burning platform I do. It rivets people's attention. You need it sometimes.

You see the CEO job as a that of a coach. How do you get people to perform better?

I try to make it clear what's expected. If we have an MRR review, I'll sign a letter that summarizes what that review is all about and sets forth an expectation on what's to be done. People want to perform better. An organization that's vague or instructions that somehow get interpreted 15 ways gives rise to frustration on the part of people and relatively poor performance.

You're famous for holding skip-level meetings at which executives are barred and employees can ask any question. What does that accomplish?

In this job you have to be careful not to get isolated and not to have people agree with you too much. If you speak to a random selection of people with no names in front of them and ask what's going on, you get a remarkably candid response. It influences decisions in the sense that I make decisions on the basis of what we are and not what I think we are or what people tell me we are.

How do you align compensation structure with goals?

As tightly as I can. We have three primary goals every year. I cascade those down to the operating plant to measure incentive compensation performance. That's a critical aspect of success. We try as ardently as possible to get everybody involved in the stock in one way or another so that if the tide rises, all boats rise. For the last four years we've given 500,000 options down below, and we have 40,000 people in our savings plan. So we have a lot of satisfied people in the savings plan. Our ideal is to keep as many people satisfied as we can. We pay fairly. We have reward and recognition programs. We're good corporate citizens. An AlliedSignal job is a valuable job.

The world is too competitive to allow you to do some things that might be responsive to the employee base but not to the needs of the corporation. You have to run these places as fairly and equitably as you can, while making sure you're responsive to the needs of an ever-more competitive marketplace every day.

There's no question that today there's not the same loyalty from the company and there's not the same loyalty from the employee. But it's solvable within the free market. If you don't have any skills, you are going to be burdened with a situation that you may not find satisfying. But if you do, then you're going to have the opportunity to get those fulfilled.

SCHOOL CRAZE

Why did you create the learning center, and does it represent some kind of secret advantage for AlliedSignal?

Because of the pace of change, one of the obligations you have is to keep your people as contemporary as you can. We have a rule around here that everybody gets 40 hours of training a year, including the operators on the floor. Forever learning has been the road away from darkness. And the more you can keep people in the state of the art, the better they feel about themselves and the better the company is. If we do it better than anybody else, that can be a competitive advantage.

                                             Return on average
                        Net Income           shareowners'
         Net Sales       (Loss) equity       (after-tax%)

1997       $14,472          1,170                27.5
1996       $13,971          1,020                26.6
1995       $14,346            875                26.7
1994       $12,817            411                30.6
1992       $12,042          (712)                26.4
1991       $11,831          (273)                (8.4)

SOURCE: Company Reports

With margin debt soaring and M&A activity exploding and IPOs inundating the market, there is concern that we're headed for a nasty correction. How will a market correction effect AlliedSignal?

I don't foresee any catastrophe. Will all these Internet companies be able to sustain those price earnings levels? Of course they won't. But somehow fluctuations will get digested. The excesses that used to concern me I don't see present this time. In the '80s, everybody was paying high multiples, but they had enormous debt on the balance sheet. Even these enormous combinations you see today, the resulting company is not burdened with debt, whereas in the '80s when the markets turned down they were out of business because there was no way they could generate the cash to pay down their debt. It's a much more sensible and sane expansion this time. I do think there will be corrections in this market. I don't believe the market goes to the sky. But we could be a beneficiary. Because instead of chasing 25-year-olds with delusions of grandeur, they're going to retreat to a safer situation, and we've got a better consistency story.

You've had a lot of opportunities; why the commitment to AlliedSignal?

When I came here, I had a history of being in one place for 34 years. I came with the thought that a lot of things had to be done here to get to this position of being premier. And leaving halfway through was a thought that appalled me. So at the end of the day I said, "I'm going to stay here until I retire." And I've never regretted that.

The obligation is to keep this place moving at a clip that assures its success in the future, and I work on that every day. I'm proud of what we've accomplished, and I'm mindful of how much more needs to be done given the environment that we're in. I'd like everybody to have that mindset here.

In your GE days, you were described as Jack Welch's jackhammer.

I never thought that the characterization the jackhammer was appropriate, but we're a lot alike in the sense of how we think about business. Working with Jack as long as I did, I know he helped me a lot. I hope I helped him a little. I can't make dramatic contrasts in our style. We're more similar than we're different.

You were a contender to succeed Reg Jones at GE. How did that experience color your own succession plans?

Those kinds of ran-offs foster cliques of people - a camp that supports this one and a camp that supports that one - and interrupt an organization. I want to avoid that at all costs. We're going to try to orchestrate the transition in a way that leaves the company strong. I think not having a political organization contributes to that. If you've got a beef with somebody here, you go talk to them and resolve it - you don't write long letters back and forth.

First we've got to get through the challenge of the year 2000 changeover. Then on April 1, 2000, I am retiring. I will not be on the board, because it's a lousy idea for a departing CEO to stay on the board. People have told me, "This place could collapse when you leave." But it can't. Because the management is so much better than it ever was before, I'm convinced that we can execute a seamless transition. What will be your legacy?

A self-confident company. A company with a lot better people. A company interested in learning. A very competitive, fast-moving company. And one striving for growth so they can re-create themselves in the years ahead.