Raytheon Continues To Demonstrate Diversification Is A Key

(MoneyWatch)  The big five hardware defense contractors in the United States generate a great deal of revenue. In general much of this come from several large contracts or business areas. Generally Boeing and Lockheed Martin make aircraft, General Dynamics and Northrop Grumman submarines and ships and Raytheon radars and missiles.

The five companies though due to their resources also provide broad ranges of products and services. Partof this is because they are able to make what the Government needs as well as having the resources to support smaller, more discrete efforts. The companies also have merged and acquired their way for the last twenty years as the U.S. defense industry has contracted that they have a role in all aspects of defense and government contracting.

This diversification also provides a cushion if a large contract is lost or a major business area ends. Lockheed lost a multi-billion helicopter contract and yes they did lose some workers and revenue but in the grand scheme of things for the company it was not as bad as when Bell Helicopter lost the Armed Reconnaissance Helicopter (ARH) program. They also have the ability to sell all around the globe which provides yet another cushion something a smaller, more focused company cannot do.

For example Raytheon received a $5.5 million contract from the Defense Advanced Research Projects Agency (DARPA) for research into new integrated circuits. This is to look at what is called Self-HEALing mixed-signal Integrated Circuits (HEALICS). These integrated circuits have the ability to detect if there are problems with the circuits and reroute them automatically to fix them. The military applications of this kind of technology is clear.

While this is a small contract the company is large enough to absorb problems with it or support the work even without making a profit. A smaller or new company doing the same work may have financial issues or not be able to cost it competitively. Some argue that the big companies cannot necessarily competitively price with other smaller contractors but their size does offer some advantages. It is especially helpful that they have a great deal of experience working with the military in contracting and engineering which might help them solve issues more quickly.

A contract worth $5.5 million initially with a possible growth to $11 million doesn't seem like much to a company that had $23.2 billion in revenue in 2008 but it could lead to a product that will generate millions over time. It also is a product that might eventually make up for losing other, more traditional work such as building a radar in Europe for missile defense.

This diversification across product and service lines allow the companies to adjust to the changing market more easily then the smaller, discrete companies. Some of these are dependent on one or two contracts that without they cannot keep going. The U.S. laws and regulations on over seas sales also limit the ability of smaller companies to get that business as they may not have the necessary experience to navigate those challenges.

There are benefits to being larger as long as it leads to diverse and innovative business areas.