Lockheed Martin takes flight in times of crisis.1 Introduction It’s a plane. It’s a helicopter. Actually, it’s the Lockheed Martin F-35 Lightning II, the most capable – and expensive – aircraft ever produced. Like a jet that can also hover, Lockheed’s versatility is its greatest strength in times of crisis. Along with the escalation of conflicts in the Middle East and increased support for defense spending, Lockheed Martin’s stock rose dramatically from a price per share of $31 in January 2001 to over $120 in mid-2008.2 However, as of the end of 2011 and coinciding with the drawdown in Iraq and Afghanistan, Lockheed’s stock dropped to $80.90. Nevertheless, Lockheed enjoyed an outstanding return on equity (ROE) of 112  percent in 2011. With four core business segments and a worldwide reputation for excellence, Lockheed appears well positioned to respond to changes in the market. However, fully 78  percent of Lockheed’s total sales are from military arms3 and 82 percent of total sales originate from within the United States. Simply put, Lockheed’s dependence on U.S. defense spending has the potential to threaten the firm’s longevity. Lockheed Martin alone receives over 7  percent of total U.S. defense spending – that’s one of every fourteen dollars paid by the Pentagon. Yet in times of economic crisis, this funding is threatened at all levels and has resulted in uneven cash flows and company-wide lay- offs. Recently, Lockheed downsized its workforce from 146,000 to 123,000,4 reflecting the termination of key projects and a forecasted reduction in demand for both existing and new products. The early termination of the F-22 Raptor project in 2008  illustrates the potentially devastating effects of government budget constraints on the survivability of Lockheed. The F-35 Joint Strike Fighter currently in development has the potential to be the largest weapons project ever, with an estimated $1.51 trillion final tally.5 However, production delays and the current political climate threaten to affect the scope of the project dramatically – a project at the core of Lockheed Martin’s fiscal security. Further, if Lockheed’s fortunes improve in times of global unrest, reason suggests that the company suffers in times of peace and stability. Lockheed’s challenge is delivering products with a 10- to 20-year development and production lead time that, ultimately, will be in uncertain demand (due to the impossible-to-predict state of flux in terms of world conflict) for customers with uncertain budgets. Lockheed’s recent exploration into renewable energy and healthcare solutions adds an interesting dimension to its portfolio, as both are new business segments and outside the usual scope of its core competencies. Taking Flight Lockheed started when two brothers, Allan and Malcolm Loughead (pronounced “lock-heed”), handcrafted their first wooden planes in southern California in early 1913, mainly for hobbyists ...

1. Lockheed Martin takes flight in times of crisis.1
Introduction
It’s a plane. It’s a helicopter. Actually, it’s the Lockheed
Martin F-35 Lightning II, the most capable – and
expensive – aircraft ever produced. Like a jet that can
also hover, Lockheed’s versatility is its greatest strength
in times of crisis. Along with the escalation of conflicts
in the Middle East and increased support for defense
spending, Lockheed Martin’s stock rose dramatically
from a price per share of $31 in January 2001 to over
$120 in mid-2008.2 However, as of the end of 2011 and
coinciding with the drawdown in Iraq and Afghanistan,
Lockheed’s stock dropped to $80.90. Nevertheless,
Lockheed enjoyed an outstanding return on equity
(ROE) of 112 percent in 2011. With four core business
segments and a worldwide reputation for excellence,
Lockheed appears well positioned to respond to changes
in the market. However, fully 78 percent of Lockheed’s
total sales are from military arms3 and 82 percent of total
sales originate from within the United States. Simply put,
Lockheed’s dependence on U.S. defense spending has the
potential to threaten the firm’s longevity.
Lockheed Martin alone receives over 7 percent of
total U.S. defense spending – that’s one of every fourteen
dollars paid by the Pentagon. Yet in times of economic
crisis, this funding is threatened at all levels and has
resulted in uneven cash flows and company-wide lay-
offs. Recently, Lockheed downsized its workforce from
146,000 to 123,000,4 reflecting the termination of key
projects and a forecasted reduction in demand for both

2. existing and new products. The early termination of the
F-22 Raptor project in 2008 illustrates the potentially
devastating effects of government budget constraints
on the survivability of Lockheed. The F-35 Joint Strike
Fighter currently in development has the potential to
be the largest weapons project ever, with an estimated
$1.51 trillion final tally.5 However, production delays
and the current political climate threaten to affect the
scope of the project dramatically – a project at the core
of Lockheed Martin’s fiscal security.
Further, if Lockheed’s fortunes improve in times of
global unrest, reason suggests that the company suffers
in times of peace and stability. Lockheed’s challenge is
delivering products with a 10- to 20-year development
and production lead time that, ultimately, will be in
uncertain demand (due to the impossible-to-predict
state of flux in terms of world conflict) for customers
with uncertain budgets. Lockheed’s recent exploration
into renewable energy and healthcare solutions adds an
interesting dimension to its portfolio, as both are new
business segments and outside the usual scope of its core
competencies.
Taking Flight
Lockheed started when two brothers, Allan and Malcolm
Loughead (pronounced “lock-heed”), handcrafted their
first wooden planes in southern California in early 1913,
mainly for hobbyists and as a military model. They were
successful until the end of WWI left their business with-
out a market and the company went bankrupt in 1921.
Allan Loughead continued alone, collaborating with
Fred Keeler to form the Lockheed Aircraft Company in
1926. Their first success was the Vega wooden mono-
plane, which made the first nonstop transcontinenal

3. flight across the United States in 1928. This success
inspired the Detroit Aircraft Corporation (DAC) to
acquire the company in 1929. The new company thrived
Case 20
Lockheed Martin
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through WWII and produced multiple aviation legends
such as the P-38 Lightning Fighter, the U-2 spy plane,
and the SR-71 Blackbird. Lockheed also produced the
XP-80 Shooting Star, the first American jet fighter, in
only eight months.
In the 1960s, Lockheed attempted to enter the com-
mercial jumbo jet market to compete with Boeing’s then
new 747 and the McDonnell-Douglas DC-10. As a late
mover pitted against superior competition, Lockheed
conceded defeat in 1972. On the brink of bankruptcy,
Lockheed remained solvent through a $250 million loan
guarantee from the U.S. government.6 To add insult to
injury, Lockheed’s image was marred in the 1970s by a
major bribery scandal. This scandal led to tougher U.S.
anti-bribery laws and a new process called Total Package
Pricing that is designed to make bidding more trans-
parent and explicit.7 Lockheed came out of the 1970s to
prosper during the 1980s, winning new contracts for the
F-117 stealth fighter and acquiring the division of General
Dynamics responsible for producing the popular F-16.

5. Merger of Equals
The Martin Company was formed in 1917 by Glenn
Martin who built his first airplane in 1909 and later
merged with the Wright brothers. The company is nota-
ble for producing the first U.S.-constructed bomber,
the B-29, as well as commercial and military flying
boats.8 The company produced missiles, electronics,
and nuclear systems in the 1950s, and, in 1961, it merged
with American Marietta Company, a construction mate-
rials and chemical company. The newly named Martin
Marietta Corporation sold most of its businesses after
incurring excessive debts to defend a hostile takeover, but
in 1992, managed to purchase GE’s aerospace business.
In March 1995, the company merged with Lockheed to
form Lockheed Martin, the largest defense contractor in
the world. This so-called “merger of equals” was hailed
by investors and others as a “rare instance of corporate
synergy”9 as the two companies were competitors, yet
with minimal areas of overlap in specialties and capa-
bilities.
The newly formed Lockheed Martin continued its
expansion in 1996 by acquiring the Loral Corporation
and COMSAT Mobile Communications. Because of
low profits, the company then divested ten of its non-
core technology operations and acquired a 30 percent
stake in Asia Cellular Satellite to build its non-defense
business. Shortly thereafter in 2000, Lockheed Martin
was awarded a $3.97 billion contract by the Pentagon to
develop an anti-missile system as well as a contract to
supply 24 C-130J transports.10
Lockheed Martin continued to expand by acquir-
ing the government technology services business of
Affiliated Computer Services in 2003, and Sippican,
a naval electronics company, in 2004. In the same

6. year, it won a seven-year contract to provide infor-
mation technology services to the Social Security
Administration. The company had another suc-
cessful year in 2005 when it was selected alongside
Augusta Westland to build a new fleet of 23 presiden-
tial Marine One helicopters. It also acquired STASYS
Ltd., a U.K.-based network communications company,
and Systex Group, a provider of IT and technical sup-
port services to the U.S. government in the same year.
In 2006, it acquired several businesses including ISX
Corporation, Pacific Architects and Engineers, and
Savi Technology. The company’s Space Systems divi-
sion also won the coveted Orion manned lunar space-
ship contract from the National Aeronautics and Space
Administration (NASA) that year. In 2007, Lockheed
Martin combined its Information Technology and
Global Services division with its Integrated Systems
and
Solution
s division. Recognizing its limitations,
the company collaborated with rivals Northrop
Grumman and Alliant Techsystems to develop multi-
role weapons for Lockheed’s F-22 Raptor and F-35
Lightning II.11
Despite Lockheed’s efforts to build the capabili-
ties necessary to fulfill its contracts, the F-22 Raptor
was cancelled in late 2008 by the Secretary of Defense,

7. Robert Gates, due to budget constraints. The F-22
was originally developed to combat Cold War threats
by providing complete air superiority. At a cost of
$354 million per plane,12 however, this technology
and capability was no longer justifiable. In addition,
concerns about the acquisitions process as well as
issues with program development and high costs led
President Obama to cancel the VH-71 presidential
helicopter contract in early 2009. To add to its woes,
the future of the F-35 and Lockheed’s relationships
with eight partner countriesi remains in jeopardy due
to increasing costs and delays.
The Industry: Anything but Stable
Lockheed Martin has four business segments that pri-
marily cater to customers in the defense segment:
Aeronautics, Space Systems, Electronic Systems, and
Information Systems and Global