Huntington Ingalls Industries (Hii) Describes

Huntington Ingalls Industries (HII) describes its business as designing, building and maintaining nuclear and non-nuclear ships for the U.S. Navy and Coast Guard. The company also sells to other nations around the world. The two main divisions of the company are Newport News Shipbuilding and Ingalls Shipbuilding. The company is the only builder of aircraft carriers and also develops submarines and amphibious assault ships. The company has operations in Newport News, New Orleans, San Diego, Virginia Beach and Mississippi. There are around 38,000 employees in total (HII Fact Sheet, 2012).

Huntington Ingalls was spun off in 2008 from Northrop Grumman and has been in the shipbuilding industry for over 125 years at Newport News Shipbuilding (HII Fact Sheet, 2012). The company has over 800 ships that it has either designed, built or serviced, making it the most important shipbuilder for the U.S. Navy and the U.S. Coast Guard. Many of the ships in service today were built by HII or its forerunners. Since becoming an independent company, HII has continued with its strategic mission and its close relationship with Department of Defense subsidiaries.

Key Strategic Events

Huntington Ingalls operates in a mature business, characterized by long-range projects. There is a certainty to the firms revenues that derives from its competitive position as the leading producer of many of its product types, and the monopoly producer of some product types such as aircraft carriers. The key events in the company's history have tended to be conflicts, such as World War Two, that drive a spike in orders; and technological innovation, such as the development of nuclear ships and submarines. On an ongoing basis, major orders for the basis of key strategic developments, since these projects can take years from the planning stages to completion. For example, the company signed a contract for an amphibious transport dock LPD 26 (2011 Annual Report) worth $1.5 billion. The company's recent strategic ventures have included the delivery of ships Somerset and America and the company has received orders for destroyers in the 2011 fiscal year, orders that will characterize the direction of the company for the coming years.

Leadership

The leadership team of Huntington Ingalls has over 150 years of shipbuilding experience between them. This team has been in place since HII was spun off in 2008. The Chairman of the Board is retired Admiral Thomas Fargo and the CEO is C. Michael Petters. Petters came into the position in spring of 2011, after serving as the president of Northrop Grumman shipbuilding. Prior to this he was president of the Newport News operation and had joined the company in 1987 in the submarine construction division.

Most of the senior executive team has extensive experience with the company, joining in the 1980s and 1990s, working through progressive positions to their current roles. Many of educational backgrounds in engineering or physics. Of the eight members of the Board of Directors, two are internal and six are external. Two of the external members are retired admirals. Of the Board, only one, Karl von der Heyden, has financial experience, having served as CFO of Pepsi. This lack of financial expertise on the Board is cause for concern, since under Sarbanes-Oxley Boards should have multiple members with a high degree of financial competence to ensure adequate governance.

The leadership group can also be said to include the 1000 master shipbuilders within the company's ranks. These leaders from within help to set the tone for the organizational culture at HII, and ensure that the firm's high standards are maintained. That so many of the company's workers have other family members working in the company is also a source of leadership strength. To a large extent, employees of HII are able to maintain leadership from within, something that can help the company to transcend changes in organizational leadership, acquisitions and other transitional events.

Current Strategy and Objectives

From a Michael Porter point-of-view, Huntington Ingalls is a differentiated producer. Its main customers are the U.S. Navy and the U.S. Coast Guard. The current strategy is basically unchanged from the company's strategy for its entire existence, even dating to the Northrop Grumman days. HII is focused on the development, production, sales and marketing of military ocean-going vessels such as submarines, destroyers and aircraft carriers. The company works with its customers to develop the products according to their needs and specifications. The projects are substantial in size and carry with them long lead times, something that makes each project very important to the company. In order that HII retains its current size, without layoffs, the company needs to ensure that a steady supply of orders come through the pipeline. This means not only ensuring support from the Navy and Coast Guard, but from Congress and the White House as well, since they ultimately provide the funding to the armed forces that is used to purchase the vessels.

The company has a number of different objectives. These include bringing in more contracts in order to sustain the business. HII needs to continue to keep products in the pipeline. Its ability to do this is predicated on two things. The first is an ongoing strong relationship with key stakeholders in the defense industry and in government. This is facilitated by ensuring that former naval officers are on the Board of Directors to maintain those links, and ongoing lobbying efforts as well, to ensure that funding for key projects is approved.

The financial objectives are facilitated by these strategic objectives. Maintenance of the ongoing business allows revenues to either hold steady or increase slightly. In addition, the company has a financial objective of improving its margins (2011 Annual Report). This strategy is supported by efforts not only to become more efficient in production, but to cut costs and keep projects on budget. When projects to over budget, this reflects poorly on the company and often HII finds its margins squeezed when it cannot bring projects to completion on time and on budget. Therefore, cost control is a major objective of the firm, one that is directly related to its ongoing profitability.

The strategic elements are congruent with the company and its business. The company has one major customer in the United States government. The U.S. Navy represents 97% of its revenues and the Coast Guard the other 3%. HII might not even be able to sell to other nations, at best only the friendliest handful, so it has adapted its strategy to survive in an environment characterized by a single customer. HII does not have a monopoly in all of its businesses, but it does in some, and faced duopoly or oligopoly conditions in others. With these industry structures, the company does not need to compete in the way that a firm that operates in an industry characterized by monopolistic competition does. HII can be assured that there will be ongoing business from the U.S. Navy, so therefore it just needs to ensure that this business is enough to allow the firm to sustain its current level of business with enough left over for both profit and innovation. After that, HII earns profits by controlling its costs. Its margins are generally slim. It lost money in FY2011, for example, after facing a $290 million writedown. With relatively stable revenues, cost control is one of the most important elements of strategy.

Its approach to competition is unique as well. Lobbying the federal government, and maintaining strong relationships with the U.S. Navy are the two most important elements of the company's approach to competition. The reason for this is that there is little direct competition for its products, but there is competition for budget dollars both within the Navy and with the federal government in general. Thus, HII needs to ensure that projects are approved and that the funding for those projects is also made available, as any other outcome would dramatically affect its business. If a ship contract is cancelled after the project has begun, that would be the worst possible outcome for the company, so its marketing efforts are strictly on its existing customers and stakeholders in order to ensure stability in the contracts and an ongoing source of revenue.

Mission and Vision

The company's motto is "hard stuff done right." The company does not have a stated mission or vision statement. The closest thing, based on what is found on the company's website, is

"Every day, employees at Newport News Shipbuilding, Ingalls Shipbuilding and all HII subsidiaries demonstrate an unwavering focus on safety, quality, cost and schedule to ensure HII builds the best military ships in the world for our nation. it's hard work, and it's done right."

A good mission statement should be broad in scope, which this statement is. It should be inspiring, identify the utility of the firm's products, and discuss the philosophy of the company in some way. It is not necessary that the mission statement discuss social and environmental responsibility unless those are actually a part of the company's mission. For HII, the key to the mission statement is "builds the best military ships in the world for our nation." This clause highlights the business the company is in, at the risk of stating the obvious, but it also highlights the close relationship that the company has with respect to national defense. While a word like "best" often means next to nothing, in this case when coupled with the national defense angle, it actually highlights that HII plays a role in differentiating the American military from others around the world.

The lack of vision statement is not necessarily a major blow to the strategy of the company. As a company that has one major industry, few competitors, and basically one major customer, there is an implicit clarity and sense of purpose for the organization. Mission and vision statements serve to define the organization and provide a sense of focus, but that already exists by virtue of the company's business. What it does, why it does it and how it does it are unequivocally understood. Indeed, many of the firm's workers are either ex-military or multigenerational workers whose families have been with the company for decades, so there is little need to create an artificial sense of purpose for many members of the organization.

Financial Analysis

Over the past four years, HII and the unit that would become HII have seen relatively stable revenues, ranging from $6.189 billion to $6.723 billion. The company's cash flow from operations has been relatively stable during that time as well. Thus, HII's financial situation can be characterized as stable in general. Total equity has diminished somewhat in the past couple of years, a function of writedowns. Otherwise, however, there has been stability on the company's balance sheet as well. HII has not taken out any new long-term debt in the past four years, for example, preferring to finance itself from ongoing operations. The company has also been able to maintain a healthy liquidity situation, a healthy amount of cash on the balance sheet, has not purchased any major new assets and has maintained relative stability in its sales, general and administrative expenses. Given the company's stability, it is reasonable to expect that it will continue to enjoy the same performance in the coming four years that it has in the past four years.

SWOT Analysis

The company's strengths include its expertise, its relationships with key external stakeholders, its employees and its physical infrastructure. Each of these strengths plays an important role in HII being able to meet its strategic objectives. The expertise allows it to compete at a differentiated player, something it can only do because it has the best shipbuilders on its team and is capable of exceptional innovation. Knowing how to work with the customer in order to ensure that the ships are built to spec is another asset of the company's expertise, one that comes from the employees. The employees contribute to strong organizational culture, high loyalty and high standards of performance. Again, all of these factors contribute to the ability of the company to produce the best warships on the planet. The physical infrastructure, having been used to build dozens of ships before, is also a valuable asset. The cost of setting up facilities of the size and nature of HII is exception, and combined with the expertise within the company provides a tremendous barrier to entry for any firm seeking to take some of the business away from HII.

That said, there are some inherent weaknesses within the company that are creating a drag on profits. The first is that the cost structure is high. The company recognizes this as a weakness and wants to take steps to address the problem. Another weakness is with cost control, as the company has struggled to remain just above the point of profitability, and as a result has taken losses in the twice in the past four years when unusual expenses (writedowns) have arisen. Another weakness is the reliance on the U.S. Navy as basically the sole customer. As pointed out, there may be something legal that prohibits this company from pursuing business from other friendly nations such as Canada or the UK, but it also does not pursue much business from the U.S. Coast Guard either. As a result, HII is entirely dependent on the Navy for its success. This in turn makes it dependent on the federal government, and its needs shift with the current geopolitical situation. Right now, aircraft carriers and naval warships are valuable in a number of instances, but addressing budget deficits will require cutting even the defense budget, and that could result in delayed or cancelled contracts for HII, and the company will not have other markets to turn to in order to make up for those losses.