Dr. George Gafencu, DBA, PMP, DTM
The current presentation contains an implementation of a strategic analysis conducted on Harris Corporation before its merger with L-3 Technologies, the second of a three-part analysis. The first part concerned an analysis of L-3 Technologies, seeking the compelling argument for which the corporation sought a merger with a peer. The previous analysis revealed that L-3 Technologies too much depended on the US government at a time where the government cut spending. The corporation did not spend enough on R & D, falling behind its competitors in innovating new products, did not seek strategic alliances, and made expensive company acquisitions attempting to start disruptive innovation in its markets. All these aspects led L-3 Technologies to seek a merger with a peer. The analysis on Harris Corporation revealed that, although the company had better operations management that L-3 technologies (reflected by a higher net profit margin, number of patents and similar net profit), Harris Corporation had a similar outlook as L3-technologies. The merger between L-3 Technologies and Harris Corporation was an association of similar companies. A subsequent strategic analysis will address the newly created corporation to assess its market strength.
Harris Corporation Analysis
Harris Corporation (NYSE: HRS, Fortune 500: #363) was a multinational corporation (MNC) operating in the Aerospace & Defense industry. Harris Corporation (2018) showed three subsidiaries (Communication Systems, Electronic Systems, and Space and Intelligence Systems). For the FY2018, Harris Corporation (named herein Harris) had revenue of $6,182m, against $5,900 in 2017, and $5,992m in 2016. The operating margin was 19.2% (same as in FY2017), and a net profit of $718m ( higher than $553m in FY2017 and $324m in FY2016). A conclusion after looking at the financial data is that Harris corporation had significantly lower revenue than L-3 Communications. Harris enjoyed a better operating margin, the net profit being close to one of L-3 Communications for the same period.
Harris Corporation (2018) showed that the US is the most significant geographical market (77% in FY2018 against 95.5% in 2017). Harris Corporation (2018) presented that Communication Systems contributed to the MNC sales 30.78%, while Electronic Systems added 38.38%, and Space and Intelligence Systems supplied 31.07%. Marketline (2019) showed that the company was vulnerable to technological changes, fixed-price contracts risk, and sequestration threats, and as a weakness too much dependence on the US government customers. Marketline (2019) added more information to the competitive landscape of the company, mentioning that the company relied in 2016 on 75% sales to the US government. The company outlook, outside the financials, is very similar to the outlook noted for L-3 Technologies.
The first element of analysis is the fact that the MNC was not diversified in various industries, focusing on Aerospace & Defense. The corporation depended heavily on one geographical market (US) and government spending, making the company extremely vulnerable to shifting political climate and defense spending patterns. The analysis will look next to the growth strategy pattern.
Harris Corporation (2018) showed that the business strategy focused on innovation, acquiring, and divesting businesses. Harris did not acquire any new business in FY 2018 (Marketline, 2019), and made one $350m business divestiture. The company announced a strategic alliance with Kratos to exploit a Kratos product with Harris technology. Harris Corporation (2018) showed that the MNC invested $311m R & D expenses in 2018 (similar to FY2017 and FY2016), very similar to the amount of R & D spent by L-3 technologies ($278m spent in FY2017). The 10K report mentioned that the company has currently about 7,900 engineers involved in R & D activities, again similar to L-3 Technologies. Harris generated 305 innovation patents between 2015 and 2017, against 119 generated by L-3 Technologies (“United States Patent,” 2019). After looking at the growth strategy pattern of the organization, the first observation is that Harris did not spend on R & D expenses as much as its competitors Honeywell Aerospace and United Technologies Corp, but the efficiency of its R & D expense is high, given the number of patents filed. At the same time, the organization did not invest enough in mergers and acquisitions or attempt to start disruptive innovation (Christensen, Raynor, & McDonald, 2015), unlike the counterpart L-3 Technologies.
The lack of strategic alliances and partnerships, combined with low US government spending, lack of efficient acquisitions, and low R & D expenditure placed Harris in an awkward position in its markets. The consequence was the company needed to seek a merger with a peer or facing the risk to become a target of acquisition to a larger competitor, such as United Technologies Corporation. The company looked to consolidate its position on the market by merging with a peer, L-3 Technologies. One of the notes retained during the analysis is that Harris seems to have much better resource management in place than its counterpart, L-3 Technologies, shown by higher net profit margin, similar net profit, and higher innovation, in conditions of lesser revenue.
The merger of Harris and L-3 Technologies is a merger of peers. However, the newly created entity, while it saved in combined operational cost, had at inception the same weakness as the independent companies (too much dependency on US and US government sales, little expense in R & D, lack of attempts to start efficient disruptive innovation, lack of significant strategic alliances and partnerships, an apparent lack of M & A expenditure, outside the merger between the companies). The last part of the analysis will look at the strategic outlook of L-3 Harris Corporation, the newly merged company.
Christensen, C. M., Raynor, M., & McDonald, R. (2015). What is disruptive innovation? Harvard Business Review, 93, 44-53.
Harris Corporation. (2018). SEC form 10-K for the year ended June 29, 2018. Retrieved from https://www.harris.com/sites/default/files/2017-harris-annual-report.pdf
Marketline. (2019, July 19). Company profile: Harris Corporation. Retrieved from Business Source Complete database
United States patent and trademark office. (2019). Retrieved from http://patft.uspto.gov/netahtml/PTO/index.html