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How Lockheed Martin plans to compete against Google and Amazon

Aug. 5, 2014 - 06:00AM   |  
By VAGO MURADIAN   |   Comments
Marillyn Hewson is chairman, president and CEO of Lockheed Martin.
Marillyn Hewson is chairman, president and CEO of Lockheed Martin. (Defense News files)

Since taking the reins at Lockheed Martin 18 months ago, Marillyn Hewson has stamped her mark on the company where she’s worked for 30 years. She’s reorganized the giant and diversified its portfolio with more commercial projects. Hewson’s top priorities include improving its customer relationships, growing its international business, leaning her operation, and keeping the F-35 Joint Strike Fighter program on track and winning the US Air Force long-range bomber that Lockheed is pursing with Boeing.

Q. Budget cuts are not as bad as expected. What is your budget forecast and how is it shaping your strategy?

A. Sequestration has not gone away. We are happy that we at least got some stability with the Ryan-Murray deal, to be able to do some near-term planning. We are still concerned about sequestration, as are our customers. I spend a lot of time on the Hill, talking to our members of Congress about that. I think they need to address sequestration. It is a law today, but it is not good public policy to have an across the board cut like that and those kinds of spending cuts, that do not line up with our national security strategy.

In the meantime, any business has to deal with the environment they operate in. We have been taking some very proactive actions within our business to be able to address the affordability challenges that our customers have. We are investing in products and capabilities to drive costs down. I am sure you have heard about the Blueprint for Affordability. We are also looking at our overhead and our cost structure. How do we reduce our footprint? We have to make some pretty tough decisions about reducing head count at times. We are going to continue to do those things that keep our costs in line with the business base.

We are going to continue to look at how we can grow the company. We are driving to grow our international business. It is now 18 percent of our sales and we are driving to get that to over 20 percent in the next few years.

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We stood up Lockheed International to take an enterprise view and bring the breadth of our full portfolio to our customers.

Q. Some say the era of the big defense contractor is ending. Non-traditional guys like Amazon and the Google are winning government business. A traditional contractor like Textron has developed the Scorpion light jet to change the market. SpaceX is a disruptive player that’s won business at your expense. Is this a new era?

A. We are a broad and deep company, from our space systems to our aeronautical systems to mission systems, missiles and fire control, all the way to the information and technology solutions. We have breadth and scale. I think those are strengths that allows us to bring to our customers broader total solutions for their needs. It allows us to invest in our business, to bring them new technology and new capability. We are always looking out well beyond today for of innovation and technology.

We welcome competition. There is always competition. We disrupt our own sales, frankly. We often have things going on in our technology labs and our advanced technologies that, over time, bring new capability. We are always integrating it into our current product lines to keep them relevant, and coming up with new capabilities -- whether directed energy or hypersonics or the advanced materials like nanotechnology or advanced manufacturing and 3-D printing. We are investing to stay current and bring to our customers that innovation that they look for in Lockheed Martin.

Q. Contractors like Lockheed are seen as more bureaucratic and less agile than new competitors. How do you incentivize agility?

A. We are always keeping our focus on a culture of innovation. It is something that is the lifeblood of our company. As I said, we have a lot of advanced technology labs that are integrated throughout our business. We work on how we create an environment where people can do their best work. We encourage them to bring forward their ideas.

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People come to Lockheed Martin because they want to be a part of that. They want to be part of the high technology company that is doing exciting advanced technology work and creating new capabilities to help make people’s lives better. They also want to be part of the company that is helping our men and women in uniform.We work very hard on creating an environment where that sense of innovation and ideas, being able to create, is what we are about. It is what attracts the best and the brightest to our company.

Q. There’s concern you’re so focused on stock price growth that you are underinvesting in research and development. Your view?

A. If you look at our company, it has a very balanced cash deployment strategy. Yes, we made a commitment many years ago to our shareholders that we would return at least 50 percent of our free cash flow to the shareholders. Our board looks at what our dividends should be each year. We have been opportunistic in the way we do our share repurchase.

As I said, we are continually investing in our business, investing for growth, investing in our portfolio. This will be the third consecutive year that we have increased our R&D expenditures, for independent R&D. We also have cooperative research and development activities with customers, with universities and with a range of labs and others. We have purchased a number of companies already this year. We will continue to look.

Q. What metrics do you use to deploy those R&D dollars most effectively?

A. The way we look at it is around our portfolio, and determine where we want to grow. What are the key areas? We prioritize at an enterprise level and within the business areas to determine where we want to invest. We are also looking beyond today at what we call strategic threads. They are areas we think we need to be investing in now, that may not come to full fruition in our portfolio for a number of years.

Hypersonics would be a great example. We have been investing in that for a number of years. We have been investing in nanotechnology for six or seven years. We are investing in renewable energy capabilities, from ocean thermal energy conversion to wave technology to tidal to microgrids.

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Q. How do you beat guys like SpaceX?

A. We stay abreast of what is happening in our environment all the time. It is not a new development to have new entrants in our marketplace. Our job is to continually remain competitive. We do that not just through cost, but through our investing for growth and in new areas. I would agree that volume brings with it an opportunity to reduce unit cost. In fact, you just look at the rollout of the F-35A Blueprint for Affordability. We are going to invest $170 million up front, and team with the US government in driving down the unit cost of the aircraft. That is coupled with a ramp-up in production.

That is a good example of a case where we are going to continue to invest in the business, invest in how we can drive our costs down and continue to be competitive. We welcome competition. It makes us better. I am sure it makes them better to compete with Lockheed Martin.

Q.You’re credited with improving Lockheed’s strained relationship with DoD. What have you done to change that?

A. We believe the customer needs to be at the center of everything we do. We are focused on listening to our customers, understanding what their requirements and challenges are, how we can help them, and then we respond to that. I think what is most important in a relationship like that is that it is open and transparent communication. That is what allows us to work better together, to partner together, to achieve what our common objectives. It is having that focus on customers as are our top priority. That is what my team and I am front and center with.

Q. Raytheon beat you and others to win two strategic Navy awards: the Air and Missile Defense Radar and a new airborne electronic warfare system. Did those losses drive your more robust internal research and development approach?

A. We have been continuously investing in IRAD. It is not all of a sudden that we decided we needed to change our game. We have increased our investment in IRAD over the past three years. Last year, we increased it 13 percent over $700 million. We are going to increase it again another 5 percent this year.

Q. Do you see more M&A on your commercial side or defense?

A. I think you will see that we are doing both. We are going to be opportunistic when we do an expense for us. We just announced an acquisition this month, Zeta Associates, which is very much in our core business in the defense and intel side. We are going to look at what helps us to broaden our capabilities or open up new markets for us that truly line up with our core business.

Q. Having been a leading consolidator during the last M&A cycle, what do you think this next cycle will look like?

A. It is hard to read. Generally, what happens in any cycle is a matter of supply and demand. I think we will just have to see what happens with defense budgets for the long term, as to how it impacts the overall industry and the supply chain. I have already seen some consolidation happening at the lower tiers in the business. ■

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