Lockheed's lessons in differentiation

Lockheed Martin Chairman and CEO Marillyn Hewson never used the word differentiation when she talked about divesting the bulk of the company’s IT business, but to me that was the subtext under what she was saying.

She emphasized that the IT business has performed well. She called the IT businesses “premier assets.”

The challenge, though, is that Lockheed has struggled to grow the IT and increase profits in a market segment so focused on price.

Price is the differentiator and Lockheed’s business model isn’t built around that kind of differentiation.

“It is increasingly difficult for us to be competitive under our standard business model,” Hewson said.

By divesting the IT businesses either through a sale or spinoff, Lockheed officials said they believe the businesses will be freed to be more cost-effective.

Here’s the hard, sad lesson – For most of the IT market, government customers don’t see any differentiator other than price. Too many contractors are interchangeable.

When we surveyed government executives last year for one of our WT Insider Reports, they sent that message loud and clear.

Nearly half (49 percent) said they couldn’t name a single best contractor. That tells me that a large portion of government decision makers see little difference between their contractors. Contractors are just this bland, vanilla group.

For many government customers, other than price, nothing really distinguishes one bidder from the next.

Now, I’m not saying that Lockheed’s IT business is plain vanilla, but that’s the atmosphere of today’s market. Hewson herself said: “We may be performing at the top of the heap, but if someone comes in at a lower price, our customer will move.”

So Lockheed is voting with its feet. It is buying Sikorsky and walking away from most of its IT work because it wants to be in markets where innovation and technology is readily rewarded. Where customers are more willing to pay a premium for a better solution.

The IT business Lockheed is divesting will either find a buyer or will be spun-out as a standalone company. But the challenges they face, namely the pricing pressures of recent years, will continue. The market will continue to be very competitive.

A new business model, as Hewson said, should serve them well. But this will be no walk in the park.

The key will be hanging on to the technology and innovation that come from its Lockheed culture with the emphasis on affordability.

Finding the right balance between the two and communicating the value of being affordable and innovative should serve as a key differentiator for any company.