Transforming four business segments into a cohesive company required changing the company’s DNA , says CEO Lewis Campbell.

Some might THINK it’s time to relax. After six years of hard work surrounding what Chairman, President and CEO Lewis Campbell refers to as “The Transformation,” 2007 was the most successful year in history for Textron Inc. (TXT ). The Providence, R.I.-based company recorded a 52.5 percent one-year net income gain to $917 million. But for Campbell, who at 61 has been likened to William Holden and looks the classic bespectacled CEO part, the process remains far from complete. “We have not squeezed out anywhere close to the embedded waste that exists in any company,” says Campbell unequivocally.

Still, Textron and its four business segments — which include Cessna Aircraft Co., Bell Helicopter, Industrial and Financial services — have come a long way. Citigroup Inc. (C) analyst Jeffrey Sprague* calls Textron “a better company today than it was over the last 15 years.”

“When we started the transformation in 2002, we didn’t have a lot of supporters,” admits Campbell, referring to doubters within the company and on Wall Street. And for the first couple of years after the transformation plan was announced, he says, Textron’s financial outlook didn’t improve much, “so it took a lot of perseverance not to blink, so to speak.”

“Lewis never wavered,” says Jack Pelton, chairman, president and CEO of Cessna, Textron’s largest business unit. “There’s been ruthless consistency.” Pelton, along with 19 other company executives, also serves on Textron’s Transformation Leadership Team.

Post 9/11 Fallout

Textron began in 1923 as Boston textile company Special Yarns Corp. Its first foray into the defense business came during World War II when it made parachutes for the U.S. Army. By 1944 the company adopted the Textron moniker to reflect its use of synthetics in its textiles. In the 1960s, the company started a 40-year acquisition spree, integrating more than 80 substantial purchases (and many smaller ones), including Bell, aerospace financial services company Avco Corp., and Cessna. “We would buy and sell companies,” says Camp­bell, a 24-year General Motors Corp.(GM) alum who joined Textron as chief operating officer in 1992. “If a company didn’t do so well, we sold it, or if it was doing fine, we kept it.”

Campbell says that by the time he became CEO in 1998, it was apparent that Textron’s earnings-per-share focus wasn’t working. And it got worse from there, he admits. Company linchpin Cessna was already struggling amid the collapse of the businessjet market, but “post-9/11, the bottom just fell out,” recalls Pelton. “No one knew what general aviation would look like after that.”

Luckily, company executives had been examining turnaround strategies, and five months after the terrorist attacks, in February 2002, Campbell announced a program that he promised would point Textron in the right direction. Instead of viewing the holding company as a mere caretaker, he told workers, each unit would become part of a networked enterprise. No longer could a subsidiary rely on other units to pull the company through economic hills and valleys, he stressed. “And instead of focusing on earnings per share,” adds Campbell today, “we would be about driving strong returns on invested capital.”

For starters, “we looked at the things we do every day,” says the CEO. He explains that most of Textron’s subsidiaries were classic vertically integrated units, and proud of it. But the plan, Campbell told his divisions, was to leverage the company’s size and begin enforcing rigorous consistency; from that point on the divisions would share services. “We had 88 data centers; we now have three. We had 154 U.S.-based nonbargained benefits plans; we now have one that provides three options,” he notes. “It looked like a lot of low-hanging fruit,” says Campbell, “but everyone wanted to control his or her own systems.” So changing the mindset meant instilling faith in executives throughout the company.

“Lewis stepped out into a dangerous place and did it with his eyes wide open,” recalls Pelton. “After that meeting, about 60 percent of the people were saying ‘yes,’ but about 20 percent were unsure, and another 20 percent were saying ‘no way.’”

Further, Campbell told managers to concentrate on growth instead of profits, citing plans to double the value of each division every five years. Clearly, not all the businesses in Textron’s portfolio would be able to meet such a goal. And, indeed, during the next five years Textron divested itself of 38 businesses, culminating in the August 2006 $630 million sale of what had been one of its most well-known divisions, Textron Fastening Systems.

The most important tool in Textron’s new arsenal, according to Campbell, was a corporatewide adoption of Six Sigma, the much-heralded method of quantifying every step in a process to isolate its components, enhance its speed and eliminate waste and mistakes. Campbell credits Six Sigma with Cessna’s ability to shave 17 percent of the labor hours involved in producing its single-piston aircraft. Although typically thought of as applying to manufacturing — a large part of what Textron does — Six Sigma can also measure business processes. Textron Financial Corp. once took 300 hours to collect interest from customers, notes Campbell; the process now takes just 56 hours. He adds that the lessons learned from its finance practices have been applied to other subsidiaries and to Textron corporate.

“Adopting Six Sigma was part of changing the company’s DNA ,” says Campbell, “which was a little frightening.” Some business units objected to the training necessary to learn Six Sigma methods, but all executives had to learn the system “so that we all speak the same language. If you exhibit any doubts, those below you will see right through you,” says Campbell, who personally logged more than 40 hours of instruction to earn his green belt. Conse­quently, Campbell puts his green-belt Six Sigma accreditation on his business cards. “If I couldn’t be CEO of Textron, I’d want to be permanent vice president of Six Sigma,” he says.

Today more than 11 percent of Textron’s workforce holds either a green or a black belt. Textron University, an in-house organization the company established to train employees in its brand of Six Sigma, among other key development areas, focuses on developing critical skills and capabilities needed “to be a high-performing, well-managed enterprise in fiercely competitive, global markets,” says Camp­bell. The University currently offers three green- and two black-belt training tracks multiple times throughout the year. 

Campbell’s ability to recognize mistakes and learn new methods is something colleagues say was intrinsic to the transformation’s success. “I’ve worked with lots of CEOs [before coming to Textron] who concluded that they had learned what they needed to learn,” says Stuart Grief, the company’s vice president of strategy and business development. “But Lewis has the balance of knowing when to rely on experience and when there’s something new to learn.”

That experience began when Campbell joined GM in 1968 after graduating from Duke University with a degree in mechanical engineering. His duties included work on the car company’s first air-bag system before eventually becoming general manager of GMC Trucks. An avid fly fisherman, Campbell has been married for 23 years and has three children. Outside interests include acting as lead independent director at Bristol-Myers Squibb Co.(BMY ).

Pelton describes the CEO as “transparent,” someone who makes his views known. Adds Grief: “Lewis is approachable and personable, which makes people feel comfortable.” The ability to create a comfort zone amid a climate of upheaval served Campbell well during the years of transformation, allowing managers to contribute and make their own suggestions, say his colleagues. “Lewis likes to say, ‘Dialogue is the oxygen of change,’” notes Grief, who joined Textron in 2004.

Conglomerate Transformed

Today Textron subsumes scores of businesses under four divisions: Cessna, which reports 53 percent of company profits; Bell, representing 21 percent of profits; industrial products, counting for 13 percent of profits; and finance, which fills in the remaining 13 percent. Wichita-based Cessna is described as the world’s largest manufacturer of general aviation aircraft, while Bell, based in Fort Worth, is said to be one of the world’s leading supplier of helicopters, tilt-rotor aircraft and helicopter-related spare parts and services.

The industrial products area contains the company’s broadest product array. Its most recognizable name is E-Z-GO, which designs and makes golf cars and off-road utility vehicles; a complementary brand, Jacobsen, sells professional turf-maintenance equipment and specialized turf-care vehicles. Also under this umbrella is Greenlee, a designer and manufacturer of professional electrical and telecommunications test equipment. Kautex builds plastic fuel systems and other blow-molded automotive parts.

Textron Financial Corp., which operates out of company headquarters in Rhode Island, indicates that it manages more than $11 billion in receivables for equipment related to commercial customers, including aircraft and golf finance.

The transformation appears to have gained traction, especially in Textron’s biggest areas, says Campbell. For example, according to the trade group General Aviation Manufacturers Asso­ciation, Cessna’s $1.2 billion fourth-quarter 2007 new aircraft sales were 25 percent above the same period the year before. What’s more, notes Citigroup’s Sprague, Cessna’s order backlog rose 48 percent over the previous year to $12.6 billion, which he calls “impressive.” Pelton points out that Cessna delivered a record 1,274 aircraft in 2007, including 387 business jets. He forecasts delivery of 470 jets in 2008. One commitment that Textron made during its transformation was to R&D funding, including development of Cessna’s Model 850 Citation Columbus, a $27 million wide-bodied plane expected to enter commercial service in 2014 (see “New Horizons,” previous page). “More and more customers say our business jets are a productivity tool,” says Pelton.

Further, Bell reports it is enjoying renewed demand for helicopters not only from the U.S. military but also from such industries as oil-and-gas exploration, mining and electric utilities. In an effort with The Boeing Co.(BA), Bell is developing the V-22 Osprey, a tilt-rotor aircraft described by analysts as “revolutionary.” Vertical takeoff and landing capabilities mean the Osprey can elevate like a helicopter but fly like a standard fixed-wing airplane. Citigroup estimates the Osprey may be worth close to $20 billion to Textron in the next two decades.

Doubling Textron

Citing plans to double the company’s growth rate in the next five years, Campbell is fond of reminding employees: “We’re still only on the 20-yard line.” Textron’s short-term aims are ambitious but practical, the CEO insists, noting that the company’s financial guidance regarding 2008 profits — of $3.75 to $3.95 per share on revenue of $15 billion — is 4 percent to 10 percent higher than 2007 results.

To move forward, however, don’t expect Textron to “ramp up its acquisition engine,” says Grief, noting that “there are not a lot of perfect targets.” He adds: “It takes work to find those needles in haystacks.” Last December, for example, Textron spent $1.1 billion for United Industrial Corp. Its subsidiary, AAI Corp., develops smart systems for unmanned aerospace and defense aircraft, as well as ground control stations and aircraft and satellite test equipment. Campbell says AAI ’s technologies and products nicely complement Textron Systems’ existing defense and government business, which includes smart weapons and intelligent battlefield systems. He notes another part of the deal was United Industrial’s McTurbine Inc. subsidiary, which became part of Bell. That division contracts with the U.S. Department of Defense and private companies to overhaul and repair helicopter engines and components.

As the transformation continues, Campbell says he is re-emphasizing capital efficiency and growth “and doing a better job galvanizing the 44,000 people we have around the world.” In fact, he calls employee engagement his top priority. For Campbell it means more than having compensation tied to the success of Textron as a whole rather than to the operations of individual subsidiaries; it means ensuring that all employees feel valued.

“You can’t just come down from on high and shake hands,” says the CEO. “What makes a difference is the personal relationship between a supervisor and the people he or she manages.” Employees need to feel they can express their opinions, he says, which can generate new ideas and improvements, as well as understand that they have opportunities within the Textron fold.

Indeed, Textron is now circulating job openings internally. While such an approach might make some managers nervous about poaching from other divisions, Textron’s sentiment is that it will encourage valuable employees to stay. Engaged employees are crucial, says Campbell, if the company hopes to continue to move forward. “The last thing you want to feel is that you’ve joined a calcified organization,” says Grief. “So we’re sort of transforming the transformation.”

“You can’t get continuous improvement by making one change,” concludes Campbell, noting that staying vital for the future is about continuing to make changes. “The world is not standing still.”

*Jeffrey Sprague, an analyst at Citigroup Inc., is not an officer, director or member of an advisory board at Textron. Neither he nor his company own positions in Textron securities.