Bus-421 Strategic Management
Given the likelihood of huge cuts in the procurement of military equipment by the U.S. government over the next 10 years, recommend to the CEO of Lockheed Martin how the company should prepare for the loss of its most important customer.
The following is a summary of the challenges and issues facing Lockheed Martin Corporation as the company and Marillyn Hewson, the CEO, face cuts to their revenue by the United States Department of Defense, which accounts for 83% of their total revenue. Their challenge is to maintain the profitability and integrity of the company. This report will discuss the three key issues facing Lockheed Martin, which are; the U.S government makes up too much of their revenue. 2) They have to find other avenues of revenue to offset the decline from the US government. 3) They have to maintain their competitive advantage through superior customer service to all their clients. The report will also perform a SWOT analysis as well as look at key ratios and make recommendations on steps the company can take to stay profitable.
Lockheed Martin Corporation was founded in 1909 and has its headquarters in Bethesda, Maryland. Lockheed Martin provides advanced technology systems, products and services to the United States government and many international governments. Lockheed Martin is also a security and aerospace company, which develops research, designs, manufactures products for defense, civil, and commercial applications. It also provides management, engineering, technical, scientific, logistic, and information services to governments all over the globe. With a global workforce of over 146,000 employees and sales of over $47 Billion, Lockheed Martin is the largest defense manufacturer in the world. (Argus 2012) All of the services that this company provides are related in some way to defense contracting. Some of the specific services they provide are listed below. The company’s Aeronautics segment provides military aircraft, including combat and air mobility aircraft, unmanned air vehicles, and related technologies. Its programs comprise F-35 Lightning II joint strike fighter; F-16 Fighting Falcon, a multi-role fighter; F-22 Raptor, an air dominance and multi-mission stealth fighter; C-130 Hercules, a tactical airlifter; and C-5M Super Galaxy, a strategic airlifter.
Its Information Systems & Global Solutions segment offers management services, integrated information technology solutions, and advanced technology solutions for civil, defense, intelligence, and other government customers around the world. The company’s Missiles and Fire Control segment provides air and missile defense systems; tactical missiles and air-to-ground precision strike weapon systems; fire control systems and many other support functions. Its Mission Systems and Training segment provides surface ship and submarine combat systems; sea and land-based missile defense systems; radar systems; mission systems and sensors for rotary and fixed-wing aircraft. The Space Systems segment provides satellites, strategic and defensive missile systems, and space transportation systems. Business and Growth Strategies
As Lockheed Martin looks forward to continued growth they are committed to the ongoing improvement of their brand. “They made capital expenditures of $942 million, bolstering property, plant and equipment and improving our technology and production infrastructure.” (Lockheed Martin 2012 Annual Report) They are also committed to providing excellent customer service as stated in the Annual Report. “Robust financial performance begins with exceptional operational performance. In 2012, we tracked 70 significant “Mission Success” events, representing our toughest, most complex, and most critical performance milestones for our customers. We’re proud to report that we delivered on 100 percent of those commitments.” (Lockheed Martin 2012 Annual Report) Lockheed Martin is also working to improve on their ethical universalism, “that common understandings across multiple cultures and countries about what constitutes right and wrong give rise to universal ethical standards that apply to members of all societies”(Thompson 2012), through efforts to institute sustainability in three key areas: environmental responsibility, corporate citizenship and workforce development. Their strategies for growth and continuing to improve on customer service will position the company for a further competitive advantage in the industry. One way to analyze and get a better understanding of how these U.S government defense cuts would impact Lockheed Martin’s bottom line, is to look at what systems are working and what are the challenges they face. A SWOT analysis will allow us to do this.
A good business relationship with the United States Department of Defense Consistent financial performance
Recent contracts with foreign governments
Many contracts are effective for years, ensuring future revenue Employee retention programs
High Research and Development budgets to maintain competitive edge They are a well known and respected company
Majority of revenue is from global governments
U.S government is 83% of total revenue
Rising defense spending worldwide because of growing threat from terrorism
Decreased U.S government spending
Competition from other leading manufacturers
Subject to changes in U.S regulations
The three key issues facing Lockheed Martin are:
The U.S government makes up too much of their revenue.
They have to find other avenues of revenue to offset the decline from the US government. They have to maintain their competitive advantage through superior customer service to all their clients.
Industry and Competitors
Lockheed Martin Corporation operates in the aerospace defense industry. According to the Standards and Poor’s Stock report, the outlook on the industry is cautiously optimist. “We continue to see improving commercial air traffic, driven by recovering global economic trends, as driving strong commercial aerospace results. However, we also see continued pressure on the defense budgets going forward, as politicians seek to rein in large federal budget deficits.” (Standards and Poor’s Stock report, July 2013)
Their Key Rivals include, Boeing, Northrop Grumman, Raytheon and General Dynamics Corp, however they have a competitive advantage over these companies because of their cash flow, product offerings and reputation for reliability.
Lockheed Martin is operating with a Focused Differentiation Strategy, “aimed at securing a competitive advantage with a product offering carefully designed to appeal to the unique preferences and needs of a narrow, well-defined group of buyers.”(Thompson 2012) This strategy allows them to cater to global governments and meet their defense product needs. This is a successful strategy for Lockheed Martin because it is designed to appeal to the unique preferences of the world governments. These governments are willing to pay a premium for the products and services offered by Lockheed Martin. Operating with a Focused Differentiation Strategy also allows them to remain the industry leader in defense contracting, with proven superior customer service. They are committed to constant improvement of this strategy.
It is also important to analyze the financial data of Lockheed Martin to evaluate how the cuts may affect their profitability.
July 23, 2013 – Lockheed Martin posts $2.64 vs. $2.38 Second Quarter Earnings Per Share despite 4.2% sales drop. Capital IQ consensus forecast was $2.20.
Lockheed Martin rises $8.80-$9.10 2013 Earnings Per Share forecast to $9.20-$9.50, with sales of $44.5-$46 Billion.
Key Ratio and Financial Information
Earnings per share $8.36
Dividend Yield 3.86%
Revenue $47.18 Billion
Net Profit Margin 6.3%
Gross Profit Margin 8.9%
Price to Earnings Ratio 12.6%
Debt/Capital Ratio 99.4%
Return on Equity 414.4%
Payout Ratio .50
Current Ratio 1.14
Market Capitalization $38.17 Billion
After Tax Income $2.92 Billion
Dividend Rate $4.15
Based on these financial numbers, Lockheed Martin is in a strong financial position with strong cash flow and strong cash reserves. They are in a great position to withstand the downturn in revenue from the loss of the U.S government contracts for at least a 1-3 year term, while a strategy for growth is implemented.
I recommend that the company increase their revenue by offering more products and services to foreign governments. Currently foreign governments account for 17% of total revenue; by increasing this amount to 25%, Lockheed Martin could offset the losses of the U.S Defense cuts. According to their 2012 Annual Report, Lockheed Martin is in position to increase their foreign government revenue. They will enter into contracts with Denmark, Australia, Taiwan, UAE, Qatar, Kuwait, Iraq and Omen. This activity will increase
revenue from their foreign operations, better positioning the company to stay competitive in the defense industry. I think they should continue with this course of action. I would also recommend pursuing aerospace contracts with vendors outside of global governments, such as commercial airlines or package delivery companies. Offering their services while introducing a new Broad Differentiation Strategy in addition to the Focused Differentiation Strategy will help them “to offer unique product attributes that a wide range of buyers find appealing and worth paying for. This strategy addition is another way to help offset the losses. Following these recommendations would help to minimize the revenue losses from cuts by the U.S government.
Argus Stock Report July 2012
Lockheed Martin Corporation Annual Report 2012
Standard and Poor’s Capital IQ Stock Report July 2012
Thompson, Peteraf, Gamble, Strickland, Crafting and Executing Strategy 18th edition 2012
Bus-421 Strategic Management