Lockheed Martin Porter Five Forces Industry Analysis

Overview of Lockheed Martin and the Porter Five Forces Framework

Lockheed Martin (NYSE: LMT) is one of the global leaders in the research, development, design, sourcing, manufacturing, and integration of advanced technology-based systems and services. The company competes in four divisions: Aeronautics, Electronic Systems, Information Systems & Global Services, and Space Systems. Revenue is broadly distributed across these divisions according to the company's fiscal year (FY) 2008 financial results reported as of December 31, 2008. Space Systems generated 19% of revenues, Aeronautics 27%, Electronic Systems 27%, and Information Systems & Global Services 27%, for a combined total of $42,731 million in revenue. In terms of operating income, Electronic Systems generated 30%, Aeronautics 29%, Information Systems & Global Services 22%, and Space Systems 19%.

Using the Porter Five Forces Model (Porter, 2008), Lockheed Martin's position in the global military aerospace products manufacturing industry is analyzed in this paper. The five forces — Threat of New Entry, Competitive Rivalry, Supplier Power, Buyer Power, and Threat of Substitution — comprise the framework. This model has also been described as a tool for identifying the Determinants of Competitive Advantage (Porter, 1985), as it has been successfully used to determine how productivity within industries reshapes buyer, supplier, and competitive rivalries.

The four divisions of the company compete in the global military aerospace products manufacturing industry by designing, manufacturing, and servicing military aircraft, high-tech flight systems for missiles, and completing extensive defense-related projects. As a result of this product and services focus, the company takes a portfolio-based approach to managing products and projects (Gurgur & Morley, 2008). The three core markets of defense and intelligence, homeland security, and systems and information technology form the foundation of the company's revenue streams (Gurgur & Morley, 2008). With just over 3,000 active programs as of 2009 — the most well-known being the F-22 (King & Driessnack, 2007) — Lockheed Martin has a culture heavily influenced by project-based values, including Quality Management techniques such as Six Sigma for continuous quality improvement (Prybutok & Ramasesh, 2005) and business process re-engineering (BPR) (Schiff, 2004).

Assessing Supplier Power

As project-based business models are heavily dependent on supplier collaboration and close supply chain relationships, Lockheed Martin continues to be one of the leaders in aerospace supply chain management and optimization (Myers & Cheung, 2008). Suppliers are often required to create customized components, assemblies, and modules for use in prototypes that Lockheed Martin uses to test new products. This process workflow — streamlining product configuration and customization requirements across divisions with a common market focus — is also a competitive advantage relative to more formally structured European competitors, including the European Aeronautic Defence and Space Company (EADS) (Johansen, Comstock, & Winroth, 2005). All of these factors combined give Lockheed Martin a unique position in the global military aerospace products manufacturing industry.

In the global military aerospace products manufacturing industry, suppliers and manufacturers share a tight, symbiotic relationship. This dependency is based on the highly customized nature of Lockheed's products and programs on one hand, and the stringent quality management requirements suppliers must meet — including military standard (MIL-STD) specifications — on the other (Prybutok & Ramasesh, 2005). This relationship is further strengthened by the tight timeframes and project management requirements that Lockheed's customers impose. Taken together, these requirements compel the company to focus on lean manufacturing and Six Sigma-based project management techniques to ensure compliance with customer needs (Browning & Heath, 2009).

Suppliers to aerospace manufacturers are actually at a disadvantage relative to Lockheed Martin and other aerospace manufacturers in the industry. Because suppliers depend on highly customized prototypes and final production-level assemblies, components, and modules for the majority of their profits, the supply chain's viability is highly dependent on R&D by aerospace manufacturers. For new project and product development revenue, there is significant competition in the form of competitive bidding and technology-based demonstrations among suppliers vying for additional contracts. The integration of lean manufacturing concepts — including engineer-to-order workflows and supplier quality management standards — has allowed manufacturers to define quality benchmarks and standards even before actual production begins (Browning & Heath, 2009).

Since compliance and quality management are crucial for suppliers to maintain their position in aerospace manufacturing (Prybutok & Ramasesh, 2005), manufacturers increasingly conduct quarterly reviews of supplier quality management practices. These reviews are also audited by the U.S. Department of Defense to ensure oversight of sourcing and procurement practices and to verify the quality of delivered products. High-profile ethics violations in the industry — such as Boeing's attempt to hire a senior U.S. Air Force officer who controlled the decision on the Air Fuel Tanker Project (Swartz, 2003) — led to regular oversight and auditing by the U.S. Department of Defense. Suppliers must provide evidence of compliance with internal audit standards, compliance management systems, Corrective Action/Preventative Action (CAPA) workflows, and Non-Compliance/Corrective Action (NC/CA) processes as they relate to both prototype and production-level products. The net effect has been to give manufacturers like Lockheed greater leverage over suppliers than has historically been the case (Browning & Heath, 2009).

Threat of Substitution

For Lockheed and its competitive positions across the three core markets of defense and intelligence, homeland security, and systems and information technology, the threat of substitution is low. This is attributable to the designed-in selection process that major customers — including the U.S. Department of Defense, foreign defense departments and ministries, and space agencies — undertake when choosing a supplier. These customers often invest years in supplier selection and then integrate products and systems deeply into their organizations. The selection of a fighter jet by the U.S. Navy, for example, can take over a year. Once Lockheed has been chosen, it is nearly impossible to replace them competitively.

First, there are the many supply chain issues that must be resolved when standardizing on a given aircraft type. Second, the area of Maintenance, Repair and Overhaul (MRO) — encompassing the systems, processes, and procedures for managing spare parts — must also be considered (Camelier, Lourenco, & Lourenco da Saude, 2008). Beyond these factors, adoption of a given aerospace product also has implications for how it is operated on Navy ships including aircraft carriers, as well as the training of pilots, support crews, and repair mechanics. In short, an entire ecosystem of support emerges from the adoption of a given aerospace product, and MRO plays a critical role in sustaining that product throughout its operational life (Camelier, Lourenco, & Lourenco da Saude, 2008).

When these factors are considered, it is clear that the threat of substitution is very low for Lockheed on projects where it has achieved design-in wins. The only substitution threat the company faces over time comes from aftermarket parts suppliers who attempt to replace Lockheed-produced components with their own. Companies such as Parker Aerospace have been successful in this strategy in commercial aviation — specifically by targeting Airbus and Boeing jetliner replacement parts markets (Camelier, Lourenco, & Lourenco da Saude, 2008).