Advice from the Top: At Johnson Controls, growth is good

The goal is to grow. That can prove difficult to companies already in the mega club of the Fortune 100. For Johnson Controls jci to grow 10% means adding $3.5 billion in revenue this year, which is like adding a company the size of Wendy's, MasterCard or Del Monte Foods.

But Johnson Controls, maker of automotive interiors and auto batteries and an expert on making buildings energy efficient, intends to do that and more. It plans 50,000 more employees the next three to four years, says new CEO Stephen Roell, 57, who offered advice to USA TODAY corporate management reporter Del Jones on how mature members of the mega club can stay aggressive and avoid growth pitfalls. Following are excerpts edited for clarity and space.

Q: If growth were easy, every company would be Google. What makes it so difficult?

A: The biggest obstacle is the depth of management, to have managers who can operate globally in foreign and emerging markets.

Q: The U.S. economy has turned dicey. We may be in a recession. Time to play it safe?

A: We're a little contrarian. I still believe that this is purely a correction in what was an overheated residential housing market. There is no reason to believe that the non-residential market will fall in a typical recession. We're seeing growth in health care, education, even office buildings and airports. A slowdown seems to be the concern of people in our stock. But we see double-digit growth opportunities across a wide spectrum. A lot of companies are enjoying international growth, and that is going to allow them to get through this cycle. There is always opportunity.

Q: We're deep into the political season. Are you seeing anything from presidential candidates that might threaten long-term growth and job creation?

A: I'm watching for any unique positions on energy, but I'm not seeing anything that alarms me. It's probably not a topic they think they can differentiate their platform on. They've decided to focus on the economy or the war. I'm looking to see the candidates' view of isolation and their willingness to work across the world. I'm looking for free trade, open markets. (He declined to say whether he endorses a particular candidate.)

Q: How can you grow from $35 billion in 2007 revenue to more than $50 billion in five years?

A: Our earnings growth has been double digit for the last five years, and we're forecasting that for 2008. Last year was our 61st-consecutive year of sales growth, which is a record few companies can match. In our automotive interior business, we're fortunate to have a backlog of almost $4 billion over the next three years. In the building efficiency group, international expansion will be key. Finally, we're in the battery business, which we call power solutions, and there our growth will come from the Asian markets.

Q: How can any company hire 34 people every day, seven days a week, to add 50,000 in four years and maintain quality employees?

A: Some will come from acquisitions. In the last five years, we've gone from 110,000 to 140,000 employees, 23,000 of those came from the York International transaction (in 2005). These numbers don't include close to 7,500 employees we've added in China in joint ventures.

We still have very aggressive plans to hire. Certainly, China is a challenge, and we've put a lot of extremely talented human resources professionals to help us grow there.

Q: Will your new employees be mostly foreign?

A: A fair amount of it will be international. We want to grow our electronics and automotive business in North America. Despite much of our growth coming from emerging markets, my first reaction is that our acquisitions could well be in North America. The challenge is service technicians in heating, ventilation and air conditioning in the U.S. and around the world. We work with technical schools. We hire from the military. We put a lot of resources to recruit and train people.

Q: What do you recommend when companies expand to international markets?

A: Get established when you first go into a country. Do you know the landscape, your partners, your customers well enough? We expand where our customers need our help. The reason we go into Russia is that we're invited by Ford and Toyota. There are probably some markets that we would not enter because of the political risks, but they are small markets today. The overall international environment is very good.

Q: You mentioned that investors are concerned over your stock. It's down 23% since the end of October. What can you say to other optimistic, aggressive companies that have a struggling stock?

A: All you can do is continue delivering the message, be patient and consistent. Don't get focused on the short term. There is going to be a tendency for companies to cut back on investments. That impairs long-term strategies. A lot of companies decide to buy back stock to improve their stock price.

We believe in deploying that cash for our shareholders by acquiring companies. We had a nice run-up from $85 to $130 (before a 3-for-1 split) in seven months. We haven't changed our projections, we've stayed strong with our outlook. We still expect earnings growth to be 18%.

Q: Are stock buybacks a mistake?

A: If you don't have a better idea how to grow the business, it's probably your best alternative. I just hope that when companies make that decision, they aren't forgoing the long-term investments they need to grow.

Q: Your strategy seems to ride on acquisitions.

A: Our primary focus is on organic growth. Having said that, we have a strong balance sheet. Our cash flow gives us access to financing without having to go to the markets.

Q: Still, you can't buy everything. How do you know when to acquire and when to take a pass?

A: A rough thumbnail is if a transaction is going to generate a 15%-16% return after tax by the third or fourth year. If we can't identify a means of doing that, we take a pass.

Q: How can you make something grow that much faster than those who sell it to you?

A: We leverage our distribution channel, customer relationships, technology. York gave us a platform to international markets we didn't have.

Q: Jack Welch once insisted that each business at General Electric be No. 1 or No. 2 in the market, or he would sell it.

A: We're not a holding company, so we don't go in and out of businesses. We exited the plastic container business in the mid-1990s, but that is highly unusual.

Q: Why not just sell a troubled business?

A: If you go back 13 years, we were in the position of divesting our battery division. We had just lost the Sears contract. But that business got back on its feet quickly, and we were able to take what we learned and cut our costs across all plants worldwide. Collectively, we identified a $2 billion gap between our best-performing locations and the rest of our businesses. Every year, we try to lop off a third of that. Sometimes, when you have a business that is in a crisis mode, you can learn from that experience and share it.

Q: Deep down, you must fear making a bad acquisition that ranks up there with AOL-Time Warner. How can you be sure that never happens?

A: (Laughs.) A lot depends on the size. If it's something $3 billion to $4 billion, we feel good about our ability to incorporate that given the size of our business. As you get into something more significant, you worry about the market moving or some assumption you've made being derailed. We feel pretty good about our capabilities.

Q: What, then, keeps you awake at night?

A: Most of my worries are going to be around competition and technology. If you look at what would ever derail us long term, it will be something in that area, where a new competitor, new technology, a disruptive technology comes into our market. I remember the shift into the digital world caught the company by surprise, but that was 20 years ago.

Q: What do you think are the most common mistakes companies make that stunt growth?

A: They're looking at what they need to do to improve efficiency. Those things are valid, but you get hung up and forget to focus on what the customer is looking for. Also, the reward system for the management team. If you've got one that only drives the stock price, that can stunt growth because they might forget about the life cycle value of having a customer relationship. If quality begins to erode, you know something is wrong. If there are issues with safety in a plant, you're going to get sensitive.