L3 Communications' innovation strategy and organizational leadership

¶ … Communications

Innovation at L3 Communications

Company Background

Innovation Strategy

Planning for Innovation

Management Systems and Innovation Metrics

Rewards and Incentives

Organizational Learning

Leadership's Commitment to Innovation

Leadership's Innovation Strategy Involvement

Ethics in Innovation

Company Background

L-3 is a prime contractor in Command, Control, Communications, Intelligence, Surveillance and Reconnaissance (C3ISR) systems, platform and logistics solutions, and national security solutions; L-3 is also a leading provider of a broad range of electronic systems used on military and commercial platforms (L-3, N.d.). The company's client base includes an array of different organizations such as the U.S. Department of Defense and its prime contractors, U.S. government intelligence agencies, the U.S. Department of Homeland Security, U.S. Department of State, U.S. Department of Justice, allied foreign governments, domestic and foreign commercial customers and select other U.S. federal, state and local government agencies.

The L-3 concept was developed along three different central components that constitute the organization's high level objectives (L-3, N.d.):

Agility: L-3's ability to respond and adapt quickly to the needs of our customers and the environment.

Innovation: L-3's drive for developing new technologies, new ideas, and new ways of thinking to deliver the best solutions for our customers.

Commitment: L-3's continual focus on quality, service and performance to meet and exceed our customers' expectations.

L-3 defines its success by being flexible and responsive in their ability to meet our customers' needs. The company claims that every part of our business is focused on quick and agile response, innovative thinking and a relentless commitment to getting the job done. The company is currently a top ten defense contractor and has delivered government solutions to the U.S. defense organizations for over a decade.

L-3 Communications Holdings, Inc. was founded in 1997 and is based in New York, New York (Roge, 2012). L-3 Communications Holdings, Inc., through its subsidiary, L-3 Communications Corporation, provides command, control, communications, intelligence, surveillance, and reconnaissance (C3ISR) systems; aircraft modernization and maintenance; and government services in the United States and internationally. Its C3ISR segment offers fleet management sustainment and support. The company's Government Services segment provides communication software support, information technology services, and various engineering development services and integration support (Roge, 2012).

It's Aircraft Modernization and Maintenance segment offers modernization and refurbishments, upgrades and sustainment, maintenance, and logistics support services, as well as turnkey aviation life cycle management services for military and various government and commercial customers. The company's Electronic Systems segment provides components, products, subsystems, systems, and related services across various business areasL-3 Communications, with $15.5 billion in estimated 2011 revenues, is an historically acquisitive maker of military and homeland security electronics, and conducts business through four operating segments. The company's primary end-markets consist of the U.S. DoD (76% of 2010 revenue), international customers (13%), other U.S. government agencies (7%), and domestic commercial customers (4%). Sales to the DoD were distributed among the armed services as follows: Army 25% of sales, U.S. Air Force 25%, Navy and Marines 16%, and all other defense customers 10% (Roge, 2012).

The demand for company's military weapons systems is driven primarily by growth in the U.S. defense budget. With the last decade, the procurement and R&D budgets within the U.S. defense budget grew at 9.0% and 7.6% compound annual growth rates (CAGRs), respectively which represents a strong growth market for the company; however, Standard & Poor's expects growth in the U.S. defense budget to flatten out or decline going forward, due to pressure resulting from high U.S. budget deficits and this level of growth may no longer be sustainable indefinitely (Roge, 2012).

Innovation Strategy

L-3's innovation strategy is centered on a concept that they refer to as situational awareness (L-3, 2012). The company defines this innovation strategy as:

Situational awareness has always been critical to our customers, and L-3's ability to adapt is integral to everything we do. Our strategy is defined by our focus on the evolving geopolitical, economic and market forces that create the landscape in which we operate. This is L-3's strength -- the ability to deliver in every environment (L-3, 2012).

The idea is that the company monitors the environment and develops solutions to help their client's tackle obstacles when they arise. The company proactively tries to integrate with its clients and be responsive to whatever situation arises in the world.

The company promotes innovation through a variety of different routes and even through external partnerships with strategic partners. Recently, MEMS manufacturer Innovative Micro Technology (IMT) announced that it has secured a $5 million equity investment from L-3 Communications (L-3) of New York City, New York, a leading defense company (IMT, N.d.). The two firms will collaborate on defense-related projects involving micro-electromechanical systems (MEMS), including but not limited to weapons guidance systems and communications technologies. IMT will partner with L-3 in a variety of areas but remain diversified with ongoing projects in microfluidics, communications, microwave, biomedical, biotechnology, and other applications for new and existing customers (IMT, N.d.). This strategy has allowed L-3 to innovate through the technical synergies that it created with a leader in a developing technology.

Planning for Innovation

The company is currently restructuring itself and spinning off one of its divisions to make the entire organization better positioned to maintain a competitive advantage. The new company will be publically traded and operate under the name Engility, which is a combination of the word engineering with the word agility. The new company is intended to be a leader in the acquisition and engineering services, training programs, and sustainment support for U.S. government operations around the globe. The new company is expected to create synergies for both organizations as well as free the new organization from various conflicts of interest that it faced under the L-3 umbrella.

Another move that L-3 has recently made is to acquire the Kollmorgen Electro-Optical (KEO) unit of Danaher Corporation. This acquisition will bring new customers and proprietary systems to L-3 that will broaden our capabilities, including submarine photonics systems and periscopes, ship fire control systems, and visual landing aids. KEO extends our base in the electro-optical/infrared (EO/IR) market with products that enhance L-3 content in high-priority areas such as Virginia-class submarines. This transaction exemplifies our disciplined, highly selective approach to acquisitions that enhance our core business mix at attractive prices (L-3, 2012).

L-3 Communications is constantly reorganizing its efforts and its structure to take advantage of developments in the external environment. Through these means it can position itself to be more responsive to the changes that are taking place in the related industries through both vertical and horizontal expansions. The industry is under a constant dynamic state as conflicts arise over a broad geopolitical spectrum and the military's and defense organizations adapt to new challenges. By positioning the company in the ideal organizational structure, the company can promote an environment that fosters innovation.

Management Systems and Innovation Metrics

The ultimate innovation metric is undoubtedly grounded in the financial aspects of the company. Innovation by itself will not satisfy stakeholder expectation. Therefore all innovation metrics must ultimately involve some financial metric. The performance of L-3 Communications over the last ten years has been strong in regards to the company's financial position.

Figure 1 - L-3 Ten-Year Performance (Wikiinvest, 2013)

The company earns net margins that range from roughly four to six percent on average. However, profitability fell some in the most recent quarter.

Figure 2-5Q Performance (Wikiinvest, 2013)

Rewards and Incentives

There are many different ways to motivate organizations and the type of strategy that is selected should be based on the individual and the organization. High level employees are commonly given a performance bonus for successful performance. Although styles of leadership have been shown to improve performance, it would be difficult to foster an environment of innovation without some financial compensation for creating solutions. The key is to keep learning and experimenting with different reward and incentive structures until you are able to find one that works. Furthermore, even after you find one it may not work indefinitely and therefore the organization might have to continually work on different strategies to keep the employees motivated. L-3 Communications currently has a reward structure in place to compensate performance. However, it is difficult to find much information about their practices and these practices likely vary on a case by case basis.

Leadership's Commitment to Innovation

The leadership's commitment to innovation is a critical component of an innovation strategy. When an employee has an innovative idea, this idea must be translated into action by the organizational members. This requires that the organization have a network of support that can capture these ideas when they occur. This requires a deep commitment to innovation from the leadership. In many cases, the activities that can lead to innovation are not necessarily the most productive. Therefore leadership has to be patient in many cases and entertain ideas in the innovative process.

Leadership's Innovation Strategy Involvement

Creating innovation in a volatile market requires high level strategy involvement from leadership. It also requires a cross-functional organizational effort that requires elements of marketing, product design, and manufacturing among other support functions to collaborate in order to bring a product to market. The market driven approach must also include an element of flexibility in order to be responsive to changes in the market place; especially under conditions of macro-economic uncertainty (Johnson, 2003). This level of flexibility requires the organization be competent in many job functions in order to align resources quickly to meet consumers constantly evolving demands. Furthermore, the resource-based view of the firm is not mutually exclusive from a marketing led approach (Srivastava, et al., 2001). As a consequence, many researchers have tried to develop frameworks that can combined the different viewpoints and create a more comprehensive and holistic model (Hooley, et al., 2010).

Ethics in Innovation

The modern globalized business environment presents many challenges in regards to operating a global supply chain for sourcing components. Companies may be oblivious to ethical violations that occur in their own supply chains because of the distance between the organizations as well all of the cultural and communication barriers. Even though a company like L-3 Communications isn't indirectly responsible for ethical violations or unethical environmental practices, new levels of integration and new scopes of principles are necessary to ensure sustainability. Companies such as L-3 Communications must now apply their ethical standards throughout the entire supply chain as well as maintain accountability and enforcement.

Recommendations

Based on the analysis conducted, it is recommended that L-3 Communications continue to develop a learning culture to support their innovation strategy. Much of the performance of the company is dictated by individual performances. It has been identified that a learning culture can foster informal learning which is also correlated with innovation. This represents a bottom up approach to innovation. By equipping the employees with the right learning skills then they can have ample room to experiment and improve processes as they see fit.

This must also be accompanied by a top down support network. The leadership at L-3 Communications must constantly support innovation and maintain that environment for the entire organization. Leadership must be actively engaged in the process and allow employees to have space to experiment. Furthermore, when innovation is identified, it must be captured and implemented in the company's operations which require executive support and approval. Therefore, when the top down and bottom up strategies work in harmony, then the company can be fully confident that they have created an platform for innovation.