Eaton Corp.

Dec. 21, 2004
An old giant takes a new path to compete in the communications economy.

It seems like a simple enough task. Take over the leadership reins at a $6 billion well-established industrial giant that has an enviable reputation for quality and whose customers rank among the world's largest industrial giants. But that's not the way Stephen R. Hardis saw it when he was asked nearly four years ago to become CEO and chairman of Eaton Corp., a maker of truck transmissions, engine components, automotive switches, electronic controls, and hydraulic products. "The soul-searching we did . . . led to a conclusion that [the board of directors and I] all shared," says Hardis, who became CEO in September 1995 and chairman four months later. "We felt that we had [been] on the defensive for the [last] 15 years, that we had narrowed our focus, thought in defensive terms, been too risk-averse and that we had not been proactive enough in undertaking growth initiatives." Hardis believed Eaton had to address two questions: How could it achieve annual sustainable earnings growth of 10% when the end markets where it sold its products had an average growth of 3% to 4%? How could it change in order to compete in a communications-driven economy that lets customers shop anywhere for the best package of value, design, quality, shipment, and price? His three-pronged solution: focus Eaton on growth, take a new approach to R&D, and stay only in markets where it can be a leader. "The only way you can make an acceptable return," argues Hardis, "is with the physical scale that comes with leadership in markets. Either be leaders or get out of the business." With that, Hardis turned Eaton into an almost $9 billion company focused on industrial controls, automotive components, and hydraulics. Under his leadership, Eaton has acquired more than 16 companies with combined sales of $3 billion and, when the engineered-fasteners and fluid-power divisions that now are for sale are divested, they will have sold five units with $1.8 billion of sales. Hardis' biggest moves:

  • Acquiring $2.1 billion Aeroquip-Vickers Inc. in April to create a $1.5 billion hydraulics business.
  • Swapping its gear and axle business -- on which Eaton's predecessor company was founded in 1911 by J.O. Eaton and two others -- for Dana Corp.'s clutch business in 1998.
Eaton is "better focused on businesses that have above-average prospects than it ever has been," says Richard Henderson, analyst at the Pershing division of Donaldson Lufkin & Jenrette in Jersey City, N.J. At the same time, Hardis has increased R&D spending by more than 50%. Eaton, he says, now is "looking where the really big opportunities are, as opposed to spending a little bit of money on a lot of projects. "Our analysis showed that . . . we had to spend more on new-product development and that we had to spend more on taking our strong North American businesses into those parts of the world that were beginning to industrialize," says Hardis. "Eaton had done an extraordinary job of defending its markets against overseas competition, but we hadn't grown the business well" in those markets. That has changed. Since Hardis took over, Eaton has started four joint ventures -- two in China, and one each in South Korea and Argentina, and built six non-U.S. plants -- two in Poland and one each in China, South Korea, Mexico, and Brazil. Importantly, Hardis understands better than any previous Eaton leader how electronics is changing Eaton's old-line markets. "Our most significant opportunity -- and, at the same time, our most significant challenge," he says, "will be our ability" to incorporate electronic logic in order to enhance the functionality of Eaton's products. Why? Not only does it give Eaton an opportunity to grow faster than its end markets, says Hardis, but it provides an opportunity to develop new market and product areas that "could become a very fertile path to sustainable earnings growth. It offers us the possibility in the next five or 10 years of really reshaping the kinds of products and services that we bring to market. We could become a very different company. "We approach [that task] with a great sense of urgency," says Hardis. "If we don't do that successfully, that market need will be met by someone who can threaten the market positions of someone like Eaton."

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