Case Studies: General Dynamics/Bath Iron Works - Recapturing Market Leadership

Bath is a small coastal town in Maine with a long seafaring history and fewer than 10,000 people. For more than 100 years, Bath Iron Works (BIW) has shared in its proud and colorful legacy, building and launching massive ships into the deep waters of the Kennebec River. In the early 19th century, its skilled artisans crafted huge square riggers powered by sail and wind. In the 1920s, BIW designed J.P. Morgan's legendary yacht, Corsair, and in the 1930s, the America's Cup winner, Ranger. Since the 1980s, BIW has been one of two sole providers of state-of-the-art surface fighting vessels for the US Navy.

As Bath navigated through the 1990s, however, time and the tides of change began to threaten not just its continued success, but its very survival. Deep cutbacks in military spending were a key factor: The Department of Defense's (DoD) budget for new ship construction fell from a peak of $20 billion in 1988 to just over $5 billion by the late 1990s. Since 1990, defense dollars have supported the construction of only five ships per year — just 20 percent of available capacity of the six private shipyards still in operation. Some DoD projections estimate that only four of these shipyards will survive through the turn of the century.

With Booz Allen's help, BIW expects not only to beat the odds, but to stake its claim to market and technology leadership well into the 21st century. Today, BIW is a stronger, leaner and nimbler industry player than ever before. It has transformed itself from a severely disadvantaged, also-ran defense contractor to the team partner of choice for exciting, next-generation products. The scope and pace of its turnaround have been recognized by competitors, customers and Wall Street analysts as well.

Reinventing Bath Iron Works and pointing it firmly toward the future challenged joint Booz Allen-BIW teams on many fronts: competitive market analysis, capability building, change management, cost reengineering, and information technology. It also required a skillful blending of the resources of two distinct companies b?? Electric Boat (EB) and Bath Iron Works b?? into General Dynamics (GD) Marine, a powerful entity created with the goal of offering seamless innovation capabilities.

When GD acquired Bath Iron Works in late 1995, BIW was struggling to overcome crippling disadvantages in production costs, technology capabilities and market positioning. Its wage rates were higher than average, its building methods were antiquated and its reputation as a premier contractor had sharply declined b?? putting BIW in a competitively disadvantaged position. Unchecked, rising costs seemed likely to sink BIW, especially in the face of DoD demands for more stringent cost controls.

Booz Allen was a natural choice for this ambitious, highly visible assignment. The firm has a long relationship with General Dynamics and had helped reengineer the cost structure and product innovation process at Electric Boat beginning in 1993. This prior work proved critical. As Michael Jones, a Booz Allen principal who oversaw the BIW engagement, points out: 'Our work on EB's financial restructuring served us well in getting BIW's sales and overhead costs under control quickly. This gave us time to focus on building BIW's capabilities in innovation, construction, technologies and management and control.'

The turnaround process involved a large, multifunctional Booz Allen team, as well as dozens of teams from both BIW and EB. Its success offers a prime example of Booz Allen's distinctive approach to post-merger value creation, which employs three key drivers to generate value: management vision and target setting, business stream redesign/consolidation, and market synergies. First, this approach focuses on best practices in cost management to improve rate performance. Second, it blueprints process redesign and capabilities building. Third, it identifies ways to build and leverage joint capabilities within an 'extended enterprise' framework. As this process unfolded at BIW, several exciting and far-reaching innovations emerged.

The Integrated Business Management Plan

Working closely with Booz Allen, BIW determined that it wanted to deliver product at costs significantly below its competitors. Using this baseline, joint BIW-Booz Allen teams translated every facet of design and production into actionable cost targets. To manage the entire change process, an Integrated Business Management Plan (IBMP) was instituted. Overseen by the firm's CEO and CFO with Booz Allen support, IBMP is a weekly executive agenda designed to plan and coordinate reengineering initiatives firmwide, including capital spending programs, productivity improvements, capability building and external market analysis. This ongoing agenda ensured maximum efficiency, impact and information sharing during the change process.

The Integrated Product Data Environment (IPDE)

Building and servicing a new US warship is a huge and extremely costly undertaking. Some 10 percent of all costs are incurred during the construction phase, while a staggering 90 percent are expended in operating and servicing a new ship after it's built and set afloat. In order to fund new construction in the face of deep budget cuts, DoD is currently focusing on reducing costs across the total life cycle of the ships it commissions.

Jones notes that the key to total life-cycle cost control is a 'robust, fully integrated product data environment that operates in parallel with the life of each newly built warship.' IPDE ensures that all the firms' collaborating on a vessel have access to a common 'data warehouse' that is updated in real time. Tightly linked to this shared data is a set of integrated business processes. Together, they can drive significant cost savings over a vessel's life span in areas such as R&D, purchasing and maintenance.

To successfully compete for next-generation warships, BIW needed to build a strong IPDE capability. Booz Allen quickly realized that BIW faced two very different paths. It could expend significant time and money to boost its technology capabilities on its own, or it could join forces with Electric Boat via GD Marine to create a common data environment b?? with the goal of building one seamless innovation stream.

Recognizing the powerful advantages if BIW and EB joined forces in this arena, Booz Allen focused on 'selling' the concept that building joint IPDE capabilities through GD Marine would benefit both EB and BIW, creating huge cost savings and allowing them to jointly capture a far bigger slice of the defense market than either firm could do alone. Booz Allen was instrumental in winning support for the integration process.

Identifying market synergies

In addition to building internal capabilities, Booz Allen focused outwardly as well. Using advanced simulation techniques, the team analyzed and valued the entire U.S. naval defense market over a 10- to 15-year time horizon, creating a road map to the future of the industry. Booz Allen's complex market analysis proved to be an extraordinarily powerful tool. It has been a key asset in evaluating acquisition targets, pinpointing opportunities and capability gaps, assessing competitive plays and planning long-term strategy.

The scale and speed of BIW's renewal drive is unprecedented in the defense industry. To date, General Dynamics has recouped a significant portion of its acquisition investment b?? an outstanding rate of return. BIW has cut its indirect spending as a percentage of direct spending significantly from its pre-acquisition levels to levels unheard of in the defense ship-building industry. The joint BIW-Booz Allen effort has already resulted in millions of dollars in cost reductions for existing projects, and many millions in additional savings should flow from future work. BIW's improved performance contributed significantly to GD's $2 billion growth in market capitalization since the acquisition in 1995.

Cost reductions have allowed BIW to upgrade its technology resources, modernize facilities, boost productivity and win exciting new work. Before its turnaround, BIW was unable to attract premier electronics firms or shipyards as team partners. Today, it is viewed as the leading-edge team partner of choice for building new surface-combat vessels. Its success is evidenced by a recent win on the first two phases of the Arsenal ship program, its lead role on another major new defense project, the U.S. Navy's DD-21 next-generation destroyer and its strong bid position on upcoming contracts.

According to Allan Cameron, President and CEO of BIW, 'With Booz Allen's support, we have improved our business performance greatly. This was truly a team effort. Booz Allen became part of our integrated management approach to reengineering across the enterprise. Our IBMP is deeply embedded in our approach and is underscored by our business principles of performance on the backlog, technology leadership and precise market knowledge. With our Booz Allen alliance, we are a more agile and responsive company positioned to capitalize on corporate synergies, and capable of shaping and leading innovative acquisition strategies. In short, we have put forward a compelling argument that we are the shipyard of choice, providing total solutions for a highly capable U.S. Navy for the long run.'