The naval shipbuilding operations that Northrop Grumman owned for the last ten years began life yesterday as an independent company called Huntington Ingalls Industries. Northrop Grumman CEO Wes Bush decided shortly after assuming the helm of the parent company last year that shipbuilding was a poor cultural fit with his company’s aerospace and electronics competencies, and therefore elected to spin off the three shipyards in a transaction completed last night.
The headquarters of the new enterprise will be located at the most capable shipyard in the Western Hemisphere, the sprawling Newport News Shipbuilding complex founded in Virginia’s tidewater region 125 years ago by railroad magnate Collis P. Huntington. Huntington Ingalls will also operate two other yards on the Gulf Coast, one of which — Ingalls Shipbuilding in Pascagoula, Mississippi — is the biggest conventional shipbuilding facility in the U.S. (Newport News builds mainly nuclear-powered vessels).
Some observers may view Northrop Grumman’s retreat from shipbuilding as a defeat, but it is really the triumph of common sense for a company that backed into naval shipbuilding while trying to construct a very different kind of enterprise. Bush had the good sense to see that a strategy of conglomeration doesn’t work any better in defense than it does in commercial markets, and that companies need to focus on the core competencies where they have a true competitive advantage. His peers in the defense sector have made similar determinations in recent years, which is why Lockheed Martin sold off its Pacific Architects & Engineers unit involved in battlefield logistics and Raytheon got rid of a former E-Systems unit engaged in building classified aircraft. Like Huntington Ingalls, the properties Lockheed and Raytheon divested were sound enterprises, they just weren’t a good fit for the companies that had acquired them.
The Huntington Ingalls yards should be the most successful naval shipbuilders in the nation, because they have greater capacity, better locations and more favorable regulatory environments than their General Dynamics counterparts in California and New England. The fact that GD’s yards are more highly regarded by the Navy customer speaks volumes about why heavy, metal-bending industries shouldn’t be run by managers with a background in aerospace engineering.
Wes Bush may be the smartest CEO in the defense sector, but he has watched Northrop’s management team try everything over the past ten years to get shipbuilding results on a par with those of the company’s other business units, and each effort failed. It’s not that shipbuilding was losing money, it’s just that low margins and uneven performance were dragging down the results for more lucrative lines like aerospace, electronics and information technology. The company found itself constantly at loggerheads with its Navy customer while other parts of the company such as military space were winning nearly 100 percent of award fees and the praise of equally demanding federal customers. So shipbuilding had to be separated from the rest of the enterprise for the sake of shareholders, stakeholders and customers.
The irony of the spinoff is that once free of each other, the two companies will both perform better. Northrop Grumman will be focused in areas where no other company in the world can surpass its capabilities, and Huntington Ingalls will be able to bring the full weight of its remarkable skills, impressive facilities and broad political support to bear on the shipbuilding enterprise. In other words, the companies will be able to focus on what they do best rather than trying to reconcile conflicting cultures.
Huntington Ingalls begins its life as an independent company knowing the Navy customer can’t live without it — that it is the only supplier of aircraft carriers and amphibious assault ships to the Navy Department, an essential part of the submarine construction process, and capable of building every other type of warship in the fleet. So when newly-minted Huntington Ingalls CEO Mike Petters finally gets a handle on problems like skill retention in the Gulf yards, he will find himself sitting atop a money machine. As for Wes Bush, he now gets to run a company in which all the pieces are performing well and performing predictably — which is what he needed to meet the ambitious expectations of a very demanding board of directors.
The spinoff looks like a win-win situation for all involved, and a case study in why analysis always trumps sentimentality in the business world.
Originally published by Loren B. Thompson, Ph.D., the Lexington Istitute