Strategic position and financial challenges of Huntington Ingalls Industries

¶ … strategic management of Huntington Ingalls Industries, Inc., and analysis of the company strategic position reveals that the company provides the strategic product and services for the U.S. government. The report uses STEEPL analysis to determine the external factors affecting the company performance. The report has been able to reveal that the U.S. government is the only major customer of Huntington Ingalls and the state of the U.S. economy has affected the financial performance of the company. Based on the current recession facing the United States, the company suffered the financial loss at the end of the fiscal year 2011. The Porter 5 forces reveals that the company has high bargaining power as a sole supplier of shipbuilding as well as the only company to have competent to build war ship for the U.S. government. This strength will make the company to enjoy long-term relationship with the U.S. government. The report argues that Huntington Ingalls may suffer financial loss till 2015 because the U.S. government has decided to slash expenditure on defense. The report recommends that Huntington Ingalls needs to diversify its portfolio to improve its financial positions.

Introduction

Huntington Ingalls Industries, Inc. (HII) is an engineering company that specializes in the shipbuilding business. The company designs, builds and maintains both nuclear and non-nuclear ships for the U.S. Navy, and U.S. Coast Guard. The company also builds and designs aircraft carriers, submarine ships, and non-nuclear ships, which include expeditionary warfare, surface combatant, national security cutters and costal defense surface ships. More importantly, the company provides range of maintenance and support services such as fabrication, equipment, technical and equipment services. The company also offers product sales to the energy and petrochemical industry. (Huntington Ingalls Annual Report 2011).

Moreover, Huntington Ingalls provides additional services such as after market services for military ships globally. For more than 100 years, the company has built more ships than any other military shipbuilding companies in the United States has. Its primary business division is Ingalls Shipbuilding and Newport Shipbuilding. Huntington Ingalls is the sole company in the United States that designs, builds and refuels the nuclear power aircraft and expeditionary warfare ships for the U.S. Navy. The company primary area of business includes designing, repairing and constructing as well as proving maintenance for the nuclear-powered ship. The company also designs, and builds other type of ships such as surface combatants ship, amphibious assault and expeditionary warfare. The company also operates under other ship building subsidiaries such as Newport News, Louisiana, Avondale, Pascagoula Virginia,, and Mississippi. Major customer of Huntington Ingalls Industries is the U.S. government and the company conducts sustainable business with the U.S. Department of Defense (DoD). As a prime principal contractor to the U.S. government, the company participates in many high programs with the U.S. Department of Defense.

Huntington Ingalls employs more than 30,000 employees in Virginia, Louisiana, Mississippi and California. The company workforce consists of engineers, craftsmen and designers. In 2011, the company employed 975 Master ship builders, 5,100 engineers. Since the formation of the company, Huntington Ingalls has been able to record a success in its business operations and the company market capitalization is $1.89 Billion. Incorporated in 2010 in Delaware, the substantial company revenue comes from the U.S. government. In 2011, the company generated the 97% of its total revenues from the U.S. Navy and other 3% of the company revenue was realized from the U.S. Coast Guard. Typically, the company total assets increased from $5.2 billion in 2010 to $6 billion in 2011. Despite the increase in the company total assets, Huntington has not been able to increase the net income in the last 2 years. In 2010, the company recorded the net income of $135 million; however, at the end of the 2011 fiscal year, the company recorded a loss of $94 million. (Huntington Ingalls Annual Report 2011).

Mission and Vision

Hunington Ingalls motto is based on "Quality People Providing Quality Service." The company mission and vision are provided below.

Vision Statement

The Hunington Ingalls Industries "vision is to be a trusted, respected, and dynamic technical services provider sought out by customers, partners, and employees." (AMSEC, 2012 P. 1).

Mission Statement

The Hunington Ingalls Industries mission

"is to understand and provide Maintenance, Modernization, Logistics, Engineering, it, and Training solutions for the U.S. Navy and evolving government and maritime markets. Our expert team members take personal responsibility in providing quality services and solutions to maximize value for customers, partners, and employees." ( AMSEC, 2012 P. 2).

Huntington Ingalls Industries is to design, build, and maintain ships for the United States Navy and the U.S. Coastal Guard. The company expert team members takes personal responsibility in providing the quality services to maximizing the customer value, employee and partner. The company mission statement is also to "actively work to protect the health and safety of our employees, our environment and community while providing quality products and services in support of America's energy security and national defense-partnering with our workforce, customers and key alliances." (Newport News Industrial Corporation 2012 P1).

The company competitive strengths lie on its financial capabilities and its technical expertise, and the company total assets is $5.4 billion. The company competitive strengths also lies on its pool of its workforce who are able to design, and produce high quality ships for the U.S. Navy and U.S. Costal Guard. As part of the strategy to enhance competitive advantages, Huntington Ingalls Industries implements corporate social responsibility and protect the environment that the company is operating. The company protects the environment by following the environmental laws, and the company accrues costs to protect the environment. More importantly, the company focuses on the health and safety of stakeholders by ensuring that employee works in a safe and healthy environment.

Major stakeholders of Huntington Ingalls are employee, customers and the communities in which the company is operating. The company vision is to implement ethical principles with stakeholders. (Rebentisch, Crawley, Loureiro, et al. 2010).

The company also aspires is to ensure that employees works in a safety environment to minimize the occurrence of accident within the working environment. The company has also been providing value to customers by delivering high quality service and products. More importantly, the company tries to protect people from harm especially in the community, which it operates. By observing the environmental regulations, the company has been able to protect community from danger that might have occurred from its operations.

External Environment affecting the Operations of Huntington Ingalls

This section uses STEEPL model to analyze the external environments that the company is operating. STEEPL abbreviation refers to Socio-cultural, Technological, Environmental Factors, Economical, Political and Legal. Major operation of Huntington Ingalls is conducted in the United States and the Economical, Political and Legal and the Socio-cultural aspects of the country affect the operation of the company.

Socio-cultural:

Socio-cultural of the United States is one of external factors that affect the business operations of Ingalls. Data from the U.S. Census Bureau (2011) reveal the U.S. population reached approximately 312 million in 2011. Despite the country large population, the country is experiencing rapid aging population. The data from the U.S. census reveals that half of the U.S. population was more than 35.3 years old in the year 2000, which ultimately increased to 36.7% in 2009. Thus, the issue may translate to the slower economic growth and labor shortage in the United States. Since Huntington Ingalls depends on the highly skilled and experience workforce for shipbuilding, the increase in the number of people reaching the old age may affect the company ability to source for the required skilled personnel. Moreover, the United States continues to face student underperformance despite the country impressive educational system. Half of 120 million workers in the U.S. do not have post-secondary educational certificates, which may affect the country economic growth. Thus, Huntington Ingalls may face the problem of labor shortage in the future, if the attitude of Americans towards post-secondary education does not improve.

The government finance is also increasingly under pressure with increase in the number of people relying on social security payments. The issue may lead the government to decline the expenditure on shipbuilding and this may have impact on the revenue of Huntington Ingalls.

Technological analysis

Huntington Ingalls operates in the economy where there is high technological superiority. Innovation and Technology is the cornerstone of the U.S. economic development because the United States homes one-third of global world engineers and scientists. The country continues to focus on R&D and expenditures on R&D is approximately one-third of the global R&D expenditures. Typically, continuous investment on R&D has assisted the United States to retain its technological superiority. The country technological superiority has assisted Huntington Ingalls to design and build high quality and superior ships for the U.S. government. The company also uses ICT (Information Communication Technology) as a driving force in shipbuilding. The company uses ICT to design high quality ship that could satisfy customer unique requirements.

More importantly, the technological environment that the company is operating inspires the Huntington Ingalls to focus on R&D to deliver high quality products for its customer. The company fosters on innovative product development through research and development. Since the core operations of Huntington Ingalls is to design and develop the U.S. Navy nuclear aircraft carriers, the company conducts R&D as part of the business operations and the company has been able to use technological innovation to enhance competitive advantages.

In 2011, the company spent approximately $24 million on R&D. Typically, the company is aware that application of new technologies is the focal point of ship building, thus, the company facilitates R&D efforts in relation to the government program. The company has conducted extensive research to conduct on-site warfare system testing, laboratory and training research. The current challenges that the company may face in the future is the problem of acute shortage of scientist and technologists to form the pool of its competent workforce. Report from Datamonitor (2011) reveals that there has been a gradual decline in the number of students enrolling for mathematics and physical sciences in all the colleges and universities in the United States. Since mathematics and physical sciences is the cornerstone of technological development, Huntington Ingalls may face challenges in recruiting competent engineers to build high quality ships for the U.S. government.

Environmental Factors

The United States implements strong policy and legislative framework for the environmental protection. Through well-established institutions, the government initiated different statutes for the preservation of biodiversity. The EPA (Environmental Protection Agency) is a leading agent that mandates the protection of environment. Different environmental legislations initiated by the U.S. government have affected the operations of Huntington Ingalls. Clean Air Act is one of the environmental legislations that the government uses to protect the environment. With various environmental legislation promulgated by the government, Huntington Ingalls is influenced by the unforeseen environmental costs that affect the company business operations. To abide by the environmental standard during its operations, the company incurs operating and capital costs to comply with the environmental laws and regulations. The nature of shipbuilding operations involves the use of various hazardous materials that could cause environmental pollution. Thus, the company needs to treat the discharge materials as being applicable to various regulations. Thus, the company will always need to comply with the environmental regulation to avoid fine, and compliance with various environmental regulations will place a cost burden on the company.

Economical:

The major operations of Huntington Ingalls are in the United States and the company major business operations are with the United States government. Thus, the states of the economy of the United States contribute to the level of business operations of Huntington Ingalls. Since the end of the Second World War, the United States has dominated the global economic affairs. The country economic supremacy has made the Unite States to be the largest economic in the world with GDP (Gross Domestic Product) reached $14.59 trillion in 2010. (the World Bank, 2012). Despite the economic boom that the country has enjoyed for several decades, the country recorded the decline in the growth rate in 2009 because of economic recession. During this period, the United States economy contracted by 2.6% making the government to introduce the stimulus package to revive the economy. In addition to the $188 billion stimulus package introduced by the Bush Administration, Obama administration also initiated a $787 billion stimulus package under the American Recovery and Reinvestment Act of 2009. The expansion recovery program made the economy to recover in 2010 with the growth rate of 2.8%.

Thus, the level of the U.S. economy affects the company financial performances. Based on the U.S. level of the economy, the sale growth of Huntington Ingalls declined by 1.7% in 2009 since this was the period the United States experienced recession. The improvement in country economy in 2010 led Huntington Ingalls to record 6.8% increase in the sales growth. Since the United Stated government is the major customer of the Huntington Ingalls, the state of the economy of the United States affects the company financial performances. For example, the company net income shrank from a gain of $135 million in 2010 to the loss of $94 million in 2011 despite the increase in the company revenue from 2009 to 2011.

Political/Legal

The government formulates different policies that affect the operations of business organizations in the United States. The government makes laws related to taxation and internal control laws, environmental laws and other laws that may affect the company operations. The government also makes policies on the military expenditures. Since the end of the Second World War, the United States government has increased the expenditure on the military armaments. Thus, Huntington Ingalls has been able to win several shipbuilding contracts from the U.S. Navy because of the increase in the government expenditures on defense. However, there has been recent public criticism on the U.S. government intervention on the internal affairs of other states making the government to consider reducing the expenditure on defense. Hynson, (2011) argues that the increased criticisms on the government military interventionism on other countries may force the government to cut its military spending. The issue will affect the business operations of Huntington Ingalls. For example, Obama proposes a plan to cut $400 billion on military spending.

The Porter's 5 Forces Model is used to enhance greater understanding on the competitive position of Huntington Ingalls within the industry.

Porter's Five Forces Model

Porter's 5 Forces Model is a powerful tool to analyze a company competitive position within the industry. Porter (2008) forces model is a framework by which businesses form strategy within the industry, and the model determines the attractiveness of a market, the overall industry profitability and competitive intensity within the industry. ( Porter, 1979). Thus, the report uses Porter's 5 Forces analysis to determine Huntington Ingalls competitive position within the industry.

Threat of New Entrants

Huntington Ingalls operates within the Aerospace and Defense Products & Services industry, and a new firm that aspires to enter the industry will have cross several barriers before it could enjoy market advantages. First, setting up the ship building business involves huge financial capital outlay and the financial capital outlay will involve several millions of dollars. Thus, it is very difficult to enter the industry based on the financial capital that a new firm will need for the establishment of the business. More importantly, government regulations are another barrier that a new entrant will need to adhere. To establish a shipbuilding and defense business, a new firm will need to get approval from the government, and a new business may use several months or several years to get approval due to the sensitivity of the business to the United States strategic position. With terrorist attacks on the United States on September 11, 2001, it may be impossible for a new firm to get approval to set up a shipbuilding and defense business. Based on several barriers that a new firm needs to cross before entering the market, Ingalls has been the sole builder of large deck assault ships for the U.S. Navy. Additionally, NNS (Newport News Shipbuilding) company, which is a subsidiary of the Huntington Ingalls, is the sole designer and builder of nuclear-powered aircraft carriers. (Huntington Ingalls Annual Report 2011).

Bargaining Power of Buyers

Huntington Ingalls is in attractive position within the industry since the company is the only shipbuilding company that has the technology and competence to build the nuclear-powered aircraft carriers, nuclear-powered submarines, and assaulted ship for the U.S. government. Thus, it will be difficult for the U.S. government to switch from the service of Huntington Ingalls because the company has signed a long-term contract with the U.S. government to provide maintenance service to the series of ships built for the government. Additionally, the high level of technology and competence involved in building a ship for the U.S. Navy will make it impossible for the U.S. government to switch to another shipbuilding company. Thus, the Huntington Ingalls has high bargaining of power with the U.S. government. Despite the competitive advantages being enjoyed by the Huntington Ingalls, it is essential to realize that the U.S. government is the sole buyer of the Ingalls product and service. Typically, the company realizes 100% of its revenue from the U.S. government, thus, the relationship of Huntington Ingalls with the U.S. government is still the win-win relationship where one party must not exploit the other party in order not to spoil the business relationships.

Bargaining Power of Suppliers

As a sole supplier of the nuclear-powered aircraft carriers, nuclear-powered submarines, and assaulted ship to the U.S. government, Huntington Ingalls has high bargaining of power. Apart from being the sole company that builds complex warships that serve the national purpose, the company also provides the logistics support and fleet maintenance for the U.S. warships around the world. Thus, switching to another company will be strategically risky for the U.S. government. Moreover, Huntington Ingalls provides a unique product and services for the U.S. government. Thus, there is a scarcity of the substitute for the services supplied by the company.

Threat of Substitute Products

There is a limited substitute for the product and service supplied by Huntington Ingalls. Thus, the switching costs will be very high if the U.S. government decides to switch to another company. Unlike the other products and services where there is a wide availability of substitutes in the market, the unique product and services supplied by Huntington Ingalls have limited substitutes. Thus, the company is not likely to face the threats of substitute within the market.

Company Rivalries

Huntington Ingalls faces competitions from other shipbuilding companies, and the major competitor of Huntington Ingalls is General Dynamics. There are also some smaller shipyard companies teaming up with a large defense contractor serving as competitors to Huntington Ingalls. Other competitors of Huntington Ingalls include Electric Boat Corporation, Bath Iron Works, National Steel and Shipbuilding Company. Despite the competitions that the company faces, Huntington Ingalls is the only shipbuilding company in the United States capable of refueling nuclear powered carriers. More importantly, Huntington Ingalls is "the only company currently capable of building, refueling and defueling the U.S. Navy's nuclear-powered aircraft carriers." (Huntington Ingalls Annual Report, 2011 P. 8).

Huntington Ingalls is also the only "builder of large deck amphibious assault and expeditionary warfare ships for the U.S. Navy, including LHAs and LPDs. The company is also the sole supplier of National Security Cutters for the U.S. Coast Guard, and is the one of only two companies currently designing and building nuclear-powered submarines for the U.S. Navy and one of only two companies that builds the U.S. Navy's current fleet of DDG-51 Arleigh Burke-class destroyers." (Huntington Ingalls Annual Report, 2011 P. 8)

Current Strategy

The company current strategy lies with the latest technology that it uses to design and build the ships for customers. Technology is the strategy that the company uses in leverage performances and creates value for customers. Inherently, the company focuses on the latest technology to exceed in performances and provide the quality and cost-effective ships for customers. The company also focuses on the survival, growth and profitability, and the company is able to realize these objectives by capturing new business and strengthening the market position. The company objective is to maintain the financial profitability and the latest technology assists the company to build complex warships that could serve a national purpose. The company also focuses on R&D to enhance competitive advantages. Through various R&D that the company has implemented, Huntington Ingalls has been the only shipbuilding company in the United States capable of supplying high quality products to satisfy customer requirements.

SWOT Analysis

The report uses SWOT model to determine the strengths, weakness, opportunities and threats that the company is facing within the industry.

Strengths: The strength of Huntington Ingalls lies in the superior technology that the company uses to build a complex ship for the U.S. government. The company also uses its pool of talented workforce to design, build and manage its product for its customer. The financial strength coupled with skilled and experienced workforce are the major strength that the company is using to enhance competitive advantages.

Weaknesses: Major weakness of Huntington Ingalls is that the U.S. government is its only major customer, and based on the increased criticisms on the U.S. interventionism on the internal affairs of other country, the U.S. government is proposing to slash defense expenditure. Thus, the issue may affect the financial performances of the company.

Opportunities

Major opportunity of Huntington Ingalls is by having the United States government as the major customer. With the increase in the terrorist attacks all over the world, the U.S. government may reconsider its position and increase its expenditure on defense. Thus, the company may benefit from the U.S. government renewed position to boost its financial performances.

Threats

The company faces stiff competitions with other shipbuilding companies. Major competitors of Ingalls is General Dynamics and BAE Systems plc. These companies serve as direct competitors to Ingalls. (See Table 1). More threat the company is facing is that the U.S. government is its only major customer and a slash in the government defense expenditure may affect the financial performances of the company.

Table 1: Direct Competitor Comparison (U.S.$).

Direct Competitor Comparison

Huntington Ingalls

BAE Systems plc

General Dynamics Corp.

Industry

Market Capitalization

1.82B

13.76B

23.08B

31.21M

Employees:

38,000

87,000

95,100

Qtrly Revenue Growth

-6.90%

-16.40%

-2.80%

25.60%

Revenue

6.46B

27.51B

32.46B

84.67M

Gross Margin

15.79%

58.76%

18.25%

28.70%

EBITDA

3.34B

4.47B

6.29M

Operating Margin (

6.12%

8.93%

11.92%

8.59%

Net Income

-106.00M

1.93B

2.50B

N/a

EPS

-2.17

2.27

6.80

N/a

P/E

N/a

7.49

9.41

14.26

PEG:

1.11

-3.72

1.21

1.29

P/S (ttm):

0.28

0.49

0.71

0.90

Organizational Structure

The organizational structure of Huntington Ingalls is revealed in fig 1.

Fig 1: Huntington Ingalls Organizational Structure

Values

Huntington Ingalls beliefs, aspirations and values lies in investing in people and workforce. The company is the largest private employer of labor in Louisiana and Mississippi. The company is also largest employer of labor in the manufacturing activity in Alabama. Investing in workforce is the company priorities, and its belief is to bring value to employee. The company focuses on workforce development through the implementation of robust on-the-job training program as well as providing the critical financial support to enhance employee value, and aspirations. The company aspires to collaborate with workforce and provide healthy and safe work environment for employee. The company also intends to provide challenging work and provide professional development and personal work-life balance for all employees. The main intention is to improve the well-being of all employees. More importantly, the company aims to collaborate with customers and provide spirit of collaboration with customers. Typically, the company cornerstone is to maintain the quality, safety as well as meeting customer requirements in all projects that the company implements. Thus, the company aims to partners with key alliance because partnership is the key to the company future growth.

Recommendations

Huntington Ingalls needs to diversify its portfolio and explore other opportunities in other industry. Focusing on highly complex shipbuilding business may affect long-term effect on the company if the U.S. government continues to slash the defense expenditure. The issue may affect the financial position of the company. The company should embark on the acquisition of other companies in other industry, the strategy will assist the company to diversify its business portfolio and make the company acquire more customers.

Financial Projection

The company is likely to suffer a further financial loss because the U.S. government has decided to reduce defense expenditure to focus on domestic policies. If the company does not diversify its portfolio to secure more customers, the company is likely to suffer more financial loss until 2015.