Otisline number

Harvard Business School 9-186-304 Rev. July 15, 1990

Research Assistant Donna Stoddard prepared this case under the supervision on Professor Warren McFarlan as the basis for class discussion rather than to illustrate either effective or ineffective handling of an administrative situation. The names of Otis Elevator employess have been disguised.

Copyright © 1986 by the President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685 or write Harvard Business School Publishing, Boston, MA 02163. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of Harvard Business School.

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OTISLINE (A)

When elevators are running really well, people do not notice them. . . . Our objective is to go unnoticed.

Bob Smith Executive Vice President Chief Operating Officer Otis Elevator

In late November 1985, John Miller, director of information systems for Otis Elevator North American Operations, contemplated the future of OTISLINE,* a computer application developed to improve Otis Elevator's responsiveness to its service customers. The nationwide implementation of OTISLINE was under way, and the company was considering several other applications that could use the system's infrastructure.

Company Overview

Otis Elevator, a subsidiary of United Technologies Corporation, was the world leader in elevator sales and service (i.e., maintenance). Its 1984 revenue of $2 billion represented 13% of United Technologies' total revenue.1 Otis Elevator was organized into four geographic divisions: North American Operations, Latin American Operations, Pacific Area Operations, and European Transcontinental Operations.

Otis Elevator, named for the company's founder, Elisha Graves Otis, described its business as the design, manufacture, installation, and service of elevators and related products, including escalators and moving sidewalks. By the end of the nineteenth century, Otis's name was known worldwide and had become synonymous with one of the most useful and dramatic inventions of the

* “OtisLine” is a registered servicemark of Otis Elevator Company. 1 1984 Annual Report, United Technologies Corporation.

For the exclusive use of T. Tassin, 2020.

This document is authorized for use only by Tenika Tassin in Online MBA Second Fall 2020 taught by ANDREW SCHWARZ, Louisiana State University from Oct 2020 to Apr 2021.

186-304 OTISLINE(A)

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century, the passenger elevator.2 Exhibit 1, an excerpt from the company history, Going Up, describes the events leading up to the installation of the first passenger elevator.

The Otis name connoted technological leadership, reliability, and quality. Since Otis Elevator was perceived to be the best, customers were willing to pay a premium for its products. The company marketed three elevator lines: Otis Hydraulics for low-rise buildings (up to 6 stories), Otis Geared for mid-rise buildings (up to 24 stories), and Otis Gearless for high-rise buildings. Otis had been most successful in selling elevators for projects that were large, that required customized elevators (atrium elevators, for example), or that required state-of-the-art elevator technology. Otis Elevator's large, highly regarded service organization often led customers to prefer an Otis elevator over another manufacturer's product.

In the late 1970s, microprocessor technology transformed the design of elevators, replacing the outdated mechanical elevator control systems. Otis Elevator's Elevonic 401, with three microcomputer-based control units, was one of the most advanced elevator systems at this time.3

Exhibit 2 gives a description of the Elevonic 401. Microcomputer technology enabled Otis Elevator North American Operations (NAO) to increase its market share significantly between 1980 and 1984. Management believed that microcomputer technology would also help shape the future of the service business.

Elevator Industry Overview

By 1985, new equipment sales and service of elevators in North America represented approximately $1 billion and $2 billion markets, respectively. The industry was very competitive, with Otis, Westinghouse, Dover, Montgomery, Schindler, U.S. Elevator, and Fujitec the major manufacturers. Otis, however, was the leader in both sales and service. Because elevator sales were directly correlated to the building cycle, they were cyclical, but the elevator service market was very stable. Elevator manufacturers often accepted a low margin on the sale of an elevator in order to obtain the service contract since service accounted for a significantly higher portion of profits.

The service market attracted many participants because of its steady demand and high profitability. Consequently, thousands of elevator service companies existed, including both elevator manufacturers and many small companies devoted exclusively to elevator service. These companies could service elevators from almost any manufacturer since all elevators made prior to the introduction of microprocessor-based elevator control systems used similar electromechanical technology.

For a small building project, the elevator manufacturer was selected by the contractor, architect, or building owner. Larger projects often involved all three parties in the decision-making process. They selected a manufacturer on the basis of ability to satisfy the elevator performance specifications and architectural requirements, price, and reputation.

An elevator service company was selected on the basis of responsiveness, quality, and price. An elevator manufacturer was typically awarded 60% to 80% of the service contracts for its newly installed elevators. As a building aged and competition for tenants increased, the cost of service often became the major consideration, and the lowest bidder received the service contract. Since servicing elevators with microprocessor-based control systems often required the use of proprietary maintenance devices, the manufacturer was more likely to keep these service contracts. Many

2 Jean Gavois, Going Up (Hartford, Conn.: 1983), p. 74. 3 Elevonic is a registered trademark of Otis Elevator.

For the exclusive use of T. Tassin, 2020.

This document is authorized for use only by Tenika Tassin in Online MBA Second Fall 2020 taught by ANDREW SCHWARZ, Louisiana State University from Oct 2020 to Apr 2021.

OTISLINE(A) 186-304

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elevator manufacturers offered discounts for long-term service contracts in an effort to attract and maintain service customers.

North American Operations Overview

North American Operations, with 8,000 employees at the end of 1985, was the second-largest division of Otis Elevator. The scope of its business necessitated a large, geographically dispersed field organization. Exhibit 3 shows the NAO organization chart.

Branch offices and smaller field offices reported to district offices, which bore profit and loss responsibility. (Hereafter, district, branch, and smaller field offices will be referred to as “field” offices.) Field offices handled both sales and service and ranged in size from one or two people in outlying areas to as many as 100 people in large metropolitan areas. NAO's customer base was equally diverse; Otis installed elevators in buildings ranging from 2 stories to the 110-story World Trade Center in New York City.

NAO Information Services

NAO installed its first computer, an IBM 1401, in 1965 to automate maintenance billing. From 1965 until 1978, the computer was used for production control and accounting. From 1978 to 1981, on- line capabilities expanded its uses to include data entry and inquiry for inventory control and accounting.

In 1981, Otis implemented a companywide cost-reduction drive to improve NAO's profitability. Bob Smith, then president of NAO, asked John Miller to suspend all efforts in new systems development until a clear course of applications could be charted. Smith was concerned that the company was spending its applications development resources to automate old manual procedures rather than to establish new, helpful systems. Sixty percent of the programmers were laid off, no hardware upgrades were allowed, and no new applications were implemented. The work load was cut back as much as possible since the system in place (an IBM 370/158) was often running at 100%.

The year 1982 was one of transition for NAO's information services area. With the cost- reduction program completed, management began to assess the ability of information services to improve the quality of its maintenance service.