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GD, Lockheed: Different strategies to success

Both weathered downturns well

Sep. 22, 2013 - 02:47PM   |  
By ANAND DATLA   |   Comments

The announcement that General Dynamics and Lockheed Martin were profitable in the second quarter of fiscal 2013 suggests success at beating the odds. The secret to their success lies in their corporate strategies. Reviewing the legacy of these strategies offers insight into why they were profitable and what future challenges might lie ahead.

In the early 1990s, under the leadership of William Anders (The Terminator), General Dynamics divested assets following the fall of the Berlin Wall. Their divestures followed Jack Welch’s (or to some extent, Les Aspin’s) motto, “Be either number one or two in an industry or leave.”

Any sector unattached to tanks or submarines was held suspect. Over the next couple of years, a significant number of sectors were sold, including: Atlas Missiles to Martin Marietta, F-16 manufacturing facilities to Lockheed, and an electronics division to Carlyle group. The proceeds provided cash, giving General Dynamics a unique position against its competition.

After Nicholas Chabraja took over, General Dynamics’ corporate strategy shifted to acquisitions. They bolstered their shipbuilding portfolio by acquiring Bath Iron Works for a record low of $300 million. Similarly, they acquired Teledyne vehicle systems for $55 million to support their tank business.

They ventured outside the defense market with a Gulfstream acquisition, adding a new line of business. By the end of the decade, with cash reserves and a set of appealing acquisitions, General Dynamics was seen as an investment option of choice in the defense marketplace.

Lockheed took a different approach to deal with the downturn in the 1990s. Lockheed CEO Dan Tellep promoted their diverse business lines to attract investors. This included non-defense sector work managing airport and toll collection stations, and providing space launch technology to NASA (whose budget was slated to grow in the 1990s). Their approach offset defense cuts and kept investors content.

By late 1995, Lockheed shifted to merger. Their top candidate was Martin Marietta Corp. Martin Marietta shared Lockheed’s belief in expanding their market space to deal with the downturn.

Under the leadership of Norman Augustine, Martin Marietta pursued high-profile acquisitions, including: GE Aerospace for $3 billion and General Dynamics Space Systems Division for $208 million. After Martin Marietta’s bid for Grumman Corp. failed, the idea of merging with Lockheed became more appealing.

After a year of talks, the companies merged, creating the largest defense company in the world, with $23 billion a year revenue and more than 175,000 employees. Investors couldn’t help but be impressed by Lockheed’s large defense footprint and $40 billion-plus in contracts in the pipeline.

The desire to find another way to impress investors did not end there. The newly merged Lockheed Martin acquired Loral for $9.1 billion.

However, the corporate strategy found itself challenged when the government declined to support a merger between Lockheed and Northrop Grumman during the later part of the 1990s. Despite this disappointment, the new Lockheed Martin was still large enough to bring in considerable profits from its diverse business lines. Even today, Lockheed continues to benefit from a large pipeline that was created by its accumulated mergers over past decades.

The contrasting corporate strategies of General Dynamics and Lockheed Martin show two different ways to survive market downturns. General Dynamics’ focused corporate strategy on contracts from sectors outside the defense market, and a pipeline of ships ordered by the U.S. Navy helped in the fiscal 2013 second quarter.

Lockheed Martin’s pricier diverse contracts and large consolidated aerospace footprint warded off the effects of the latest defense market shift. The government announcement that the F-35 would be shielded from sequestration helped boost confidence in Lockheed during fiscal 2013’s second quarter.

Today, both corporations are challenged to adapt their corporate strategies if the defense market shrinks. In the fiscal quarters to come, these well-worn corporate strategies will likely find themselves put to the test.

Anand Datla is a consultant and former Defense Department civilian who worked on strategic planning, policy and operations. He also served as a professional staff member of the House Armed Services Committee.

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