Ellen Lord, CEO of Textron Systems, yesterday gave the third address of our Captains of Industry series here at the Atlantic Council, speaking on her “View of Defense from Inside a Multi-Industrial Company”. In the aftermath of the Cold War, the US defense industry largely restructured around large-scale specialists in government contracting. The biggest companies are functionally diversified—in some cases building aircraft, warships, armored vehicles, electronic systems, and space satellites—but they are wholly focused on a single customer. From Lord’s vantage point, both the industry and its US government customer are organized for long-duration, high-volume programs of exquisite technical complexity. But today, she argued, tightening financial constraints have rendered this model inviable.
According to Lord, the answer—and what those large contracting conglomerates lack—is Textron’s multi-industrial experiences. The difference is subtle but essential: cross-pollinating new ideas amongst multiple lines of business is much more valuable when their customers vary too. Companies like Boeing, General Electric, Honeywell, and United Technologies clearly participate in both military and commercial markets, but too often build high walls between those two sides of their operations. Textron’s approach is different, and Lord is in a position to know: she spent the first eleven years of her career in Textron’s commercial automotive parts business. Best practices are just best practices: any company should want produce goods that are fit for purpose, with the fewest parts, in repeatable processes. The trouble, she argued, is that some of the biggest military contracting specialists lag their commercial counterparts in doing those things cost-effectively.
Lord’s recommendations for a better world in defense contracting contained some usual suspects. She called upon the US government to speed up foreign military sales cases for matching foreign competitors’ time-to-market, to loosen requirements to allow more technical creativity, and to solicit more commercial off-the-shelf components for lower costs and faster development. But perhaps unusually for the leader of a defense contractor, Lord expressed enthusiasm for more fixed-price contracting. She and her corporate colleagues are ready to wager on the company’s ability to meet budgets and deadlines stems from the parent company’s commercial ethos. In the latest and best-known example of Textron’s industrial initiative, she cited the rapid development of the Cessna-derived Scorpion attack jet. She also cited the recently announced acquisition of Beechcraft as evidence of the company’s drive for affordable products that span commercial and military applications.
This audacious position did evoke questions in the audience. Is this model of integrating commercial and military experience generalizable beyond Textron’s specific portfolio? Is the narrative appealing to the income investors who seem to crave defense contractors’ stable earnings? Does the US government’s drive to acquire contractors’ intellectual property threaten Textron’s returns from innovation?
We in particular wonder what this means for restructuring. If Lord’s thesis is generalizable, do firms like General Electric and United Technologies have under appreciated opportunities to increase sales in defense markets? Do they offer unrecognized synergies in the acquisition of defense companies? Is Airbus’s apparent rebalancing away from defense missing an opportunity? Should Boeing rethink its record of diversification in the 2000s, and ask how it might better integrate its civil and defense sides?
In short, we found Lord’s answers succinct and well-argued, but more importantly, we found her ‘view from inside’ to offer sober optimism about the future trajectory of the industry.
James Hasik is a senior fellow in the Brent Scowcroft Center on International Security.