Gregory Stevens

Charles McCall

Litton Industries

In 1953 a man named Charles Thornton nicknamed Tex, bought out a small vacuum tube

manufacturer located in California named Litton Industries. Charles alongside his partners Roy Ash and

Hugh Jamieson were already rising entrepreneurs of a small electronics company named Electro

Dynamics Corp. The electronics industry was on the rise in the later 1950’s and early 1960’s and was

highly concentrated and many companies faced difficult entry barriers. Charles Thornton with the start

of the cold war and technological revolution and battle between the U.S and Russia, saw an opportunity

for room for another leader in the industry. It was said “He correctly believed that the U.S Department

of Defense would soon be seeking increasingly sophisticated weapons and that there would be room in

the defense industry for another large electronics company” (Company-Histories.com).

At the time the electronics industry and defense industry was heavily concentrated and ruled by

General Dynamics. One aspect that made this industry highly concentrated at the time was the

importance of technological advances. General Dynamics was at the forefront of creating new

technological innovations and used economies of scale to operate at low costs and also drove costs

down with their developments of super computers and other electronics. Another aspect is that lack of

buyers in the industry. At the time most of the sales in this industry were being bought by the US

government and US military. In this case the government and military have specific monopsony power

that they can use on the producers of this industry. One power they use is the use of contracting and

negotiations with manufacturers of the industries. As a whole the US military has very specific needs

and demands that they face that are unique to them and not too many other buyers. In this case the US

military will have contracts with specific industries that can make up the heavy demand that they are
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looking for. Here when looking at the defense sector “In general although the defense sector contains

elements of an oligopolistic structure… there are strong elements of competitiveness among large and

small firms for the diverse and highly changeable requirements associated with alterations in the

military force structure and space program”( Beckler, 41). This shows the special relation between the

US military and the suppliers in the industry where even though the military mostly deals with the

biggest and most innovative suppliers there is competition between companies due to the ever

changing demand of the defense sector.

With this unique market in play at the time Charles Thornton had visions of joining the ever

changing and advancing industry. In terms of innovation Charles had knowledge in the industry with his

history of being a notable “Whiz Kid” with the Air Force during World War 2 and his employment with

Ford and Hughes Aircraft Company. The next step was getting the scale of the industry. He knew to

compete he would have to grow and his small business into something much bigger. At the time as well

many small electronics companies like this were usually bought out by their larger competitors. So along

with buying Litton Industries at the time he also bought out other small electronic companies with high

growth potential at the time in order to have the capacity to meet the demands for any request of

advanced technology.

With his plan intact Litton Industries was ready to take on the market. Litton was very

methodical on what products to make and stayed away from products that were either overcrowded or

that were on a decline. They manufactured electronical parts like guidance systems for aircrafts,

potentiometers, and duplexers for radio and radar systems. By 1959 Litton Industries was gaining power

having $120 million dollars in sales and stuck to their model of emphasizing sales to the US government

with having almost half of their business going to them.

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Going into the 1960’s Litton Industries was becoming one of the fastest growing companies.

Litton was first able to gain this power with the continued success buying out small electronics

companies in order to expand. Employees of these small companies were drawn to Litton as they

encouraged freedom within the company and allowed them to operate as they were and what made

them successful in the first place. Alongside the purchasing of the electronic companies they also got

involved in a product extension merger with Ingalls Shipbuilding Corporation which at the time was the

third largest private shipbuilder. The reason for the purchase was to start also working with submarines

with the increase demand for their technology was on a rise with the US Navy.

Litton road along with the idea of synergy and economies of scope/scale when dealing with

these mergers. The two types of synergy they were able use was Operational and Financial synergy.

When looking at the purchasing of these smaller electronic firms they were able to use economies of

scope by the size of their company and expedite there the research and development process with

having more people working on which in return would increase technological advances. But besides

looking at just the increase of the company the allowance of the companies to work as they were also

helped with innovation. It was said that “Litton relied heavily on other companies’ research and

development of new products” (Company-Histories.com). This explains the importance that Litton

Industries had with the purchases of other companies.

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When examining the graph on page three Litton industries was able to increase output due to

the purchasing of the 23 firms. So in there early years they were able to move from Q to Q2 along the

long run average curve graph. When going from Q to Q2 is where they took advantage of economies of

scale forcing costs down from C to C1. But as stated before Litton industries was also involved in merger

like the one with Ingalls Shipyard which allowed them to be more knowledgeable of the construction of

submarines and other types of vessels. This allowed them to also experience some learning economies

that would then shift the long run average cost curve down. But here both Litton and Ingall experienced

economies of scope. At the time Ingall was experiencing heavy losses and was operating in the red and

below economic profit. Here with the merger the cost of each producing submarines and other vessels

separately is more than after the merger when they both started to produce it together. In 1966 the

company reached revenue of 1 billion dollars and seemed to be on a continued rise. But from the

remainder of the sixties the company would start to experience a downward trend and soon found

themselves a decline in earnings of $11 million dollars and started to experience loss in profit. In 1972

the company experienced there first annual deficit of $2.3 million dollars. It was reported by Business

week “To help solve these problems, Litton's top management is doing as other conglomerates have

done and is now concentrating much more on operations than making acquisitions.” (Business Week).

The biggest loses came from the investors where shares and stocks were dropping to all-time lows of

$1.30 per share. Many people looked to Litton’s management notably Roy Ash who many blamed for

the abundance of acquisitions rather than working with the operations they already have set in place.

Looking back at the long run average cost curve from before and starting at point Q2 which they were

running at. They continued to produce past Q2 and ran along to the right of the curve. In doing so

Average cost began to increase and essentially were experiencing diseconomies of scale.
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In 1973 with the departure of Roy Ash Litton Industries turned to a new president in Fred O

Green who was an engineer with Ingalls Shipbuilding and could help with some of the failings that Ingalls

reported in 1972. With delays to expanding in shipping containers Litton industries faced a total of

$5million dollars in fees and penalties. They also had a decline in there contract with the US Navy on a

number of ships when they failed to produce the right amount in the time given. As stated before

Thornton wanted to focus more on the profitable departments within their company and separate

themselves from the less profitable ones. So in 1974 “Litton reported $77 million in write-offs in the

business systems division, which had lost money for two consecutive years” (Business Week). Divisions

like its Triumph-Adler typewriter that was less advanced compared to its competitors and in a dying

industry like the typewriter business. Along with cleaning house on some of the less profitable

departments they were also to figure which departments to focus on and continue to expand on. Litton

industries were able to cash in on the 1970’s oil crisis. One of their more innovative and rising products

was in “seismic exploration” that was being ruled and maintained by Western Geophysical that “had

compiled over 200,000 miles of logs charting seismic activity and these logs were a priceless source of

information for oil drillers to pinpoint sources for oil” (Company-Histories.com). These seismic waves

and navigating devices/ships allowed for oil drillers to have accurate readings in finding oil and have the

best chance of setting up oil rigs. With the use of their 30 ships they became one of the biggest players

in the field of Seismic exploration.

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With the 1970 oil crisis gas was at a shortage for a product that was high in demand and that

was considerably inelastic at the time. With this shortage in play the demand for the information of the

seismic radars and these offshore logistics were also in high demand and were inelastic. As the shortage

went on the demand increased and shifted from D1 to D2. Quantity then increased from Q1 to Q2 but

with a relatively inelastic curve price is heavily affected and were able to increase price significantly from

P1 to P2. The industry of offshore logistics as a whole was on a rise and was quickly netting revenue.

The newspaper clipping above shows the increase in revenue and earnings in the offshore logistics

industry that came with the 1970 oil crisis.

Even though there was a stress on focusing more with the profitable industries within the

company and their own operations compared to expanding operations. But Litton Industries knew that

the success and importance of this company still comes from the innovation and improvements of their

own products. One of their continued profitable operations was in guidance and controls systems that

were used in airplanes to run on autopilot and stay set in a designated route. With the increase

production and innovations they were able to create and sign a 1.6 billion dollar contract with the Saudi

Arabian Air Force. One of their less profitable products was the microwave oven. But throughout the

70’s demand quickly rose for the microwaves ovens and more and more manufacturers began to join

the thriving market. But in such a competitive market of 30 manufacturers it was seen that only a few

leaders would survive. “Litton expects to be a leader among them and will maximize cost
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competitiveness under any circumstances. Reduced premium freight, improved data communications,

and modified packaging are among one department's responses to the increasing competition” (Farrell,

pg53). Here product innovation wasn’t much at play as structural and managerial improvements and

innovation was on the rise. They were able to increase and use more effective distribution methods to

lower costs on their side of the product that competitors weren’t able to match.

Even though the 70’s weren’t the most successful times for Litton they were able to regain

market power and increase profit by working on the structure of their company. By segregating the

company away from less profitable operations they were able to lower costs and raise revenue by

allocating there input market elsewhere and focusing on more profitable industries. Going into the

1980’s Litton industry had a clear goal in mind of worrying more about the structure of their own

company and sticking with profitable industries. The company was focused on it products in both the

defense sector and dealing with the US military. But also with the public sector and dealing with goods

like business and medical products as well as their popular microwaves. With the 70’s oil crisis going

away they took a step back and focused more on Ingalls Shipbuilding that struggled in the 70’s due to

breaches in contracts. Already owning most of the stock in the company, Litton Industries bought out

Core Laboratories, which was involved in the petroleum and mineral industry (New York Times). This

being a substitute with the already in place seismic ships with Western Geophysical was able to help

drive revenue in the petroleum industry. The success of the 1980’s was due in large part of the constant

innovation of the company but also the stress on dealing with internal operations and staying away from

unrelated products in there industry.

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Rank By Year

500

400

300

200

100

Rank Rank

The chart above illustrates the ranking in the Fortune 500 by revenue (in orange) and by profit

(in blue) of Litton Industries throughout its history. If you notice when comparing the later 1960’s into

the 1970’s with the 1980’s revenue Litton was ranked higher in its earlier years. But when looking at the

rankings for profit Litton had huge struggles in its early years compared to the more stable 1980’s. How

is it possible that during those years they were driving in more revenue but have profits that were

extremely low? This can be explained in the agenda and structure of the company in the two time

frames. In the earlier years president Roy Ash stressed the company’s actuations and entrance in non-

relatable products. In this sense Litton relied more on the profits of the companies that they acquired at

the time. This was great at first and in the short run but over time and in the long run this idea failed. As

the company bought into too much then they could actually handle they were forced to buy inputs for

all of the products. In the 1980’s the focused more on structure and more of an idea for long term goals.

The other idea was in the early years Litton was running with the Revenue Maximizing price where

MR=0. Here even though they could possibly be losing money they were still in the early years of their

company and needed money to pay for fixed capital and early accusations when they were first starting

up.
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Even though the 1980’s showed increased profits and long-term success in structure, Litton

industries still faced some legal problems. First was in 1986 when they were found guilty of “defrauding

the U.S. Air Force and Navy of $6.3 million by inflating prices for materials, charging the military twice

for the same parts and failing to disclose rebates from vendors” (Wall Street Journal). Litton Industries

were forced to pay $15 million in restitutions. They were also accused of passing regulations that were

considered to be antiunion in 1982.

One of the biggest changes and moves in the company’s history came in 1993. With the growth

of both there commercial lines and defense lines in the later 1980’s into the 1990’s Litton Industry

decided to break there company into two separate companies. Litton Industries would continue to

operate and deal with the weapons market while the separate company would deal with the

commercial lines. The problem at the time was that the electronic and defense market was on a decline

at the time. The split was good that the declining defense market won’t reflect poorly on the rising

commercial lines. But with Litton Industries staying with the weapons market there decline was

inevitable.
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The two graphs above show the decline and trend of the Aerospace and Defense industry.

Stating back from the beginning that the defense industry demand curve is derived by the demand of

the US military. Even though the air force was still a major player in the military, they were going in a

different direction then they were before. The air force became more reliant on drones and planes

controlled by computers. This goes back to the notion of the defense sector that has rapidly changing

demands and switched its demands to more weaponry with guided missiles, more modernized

helicopters and attack ships, night vision goggles, etc. With products being heavily reliant on electronics

also brought a lot of competition to the market. At the time Northrop Grumman was a major supplier to

the US military selling “The new company makes the B-2 bomber, the Global Hawk unmanned aerial

vehicle, small cruise ships, Navy ships, night-vision goggles and binoculars, air-traffic-control radar, and

the radar and electronic-warfare system on Air Force F-16 fighter jets” (Squeo). In 2001 Northrop

purchased Litton industries for $5.1 billion dollars.

To best explain the failures of Litton industries is a little full circle to the success of the company.

Litton found opportunity in a growing market that was heavily dependent on innovation. By acquiring

smaller firms they were able to strive in R&D and become a known leader in the industry. But towards

the end and after the split of the two companies Litton was left with the dying field of aerospace and
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defense. With a new crowded market coming into play Litton was unable to capture dominance through

innovation and did try to through late mergers in the 1990’s. But with the military demand going into a

different direction they decided to leave the industry. The commercial line of the industry Western Atlas

is currently still around but lost market power overtime.

 Work Cited

Beckler, Bernard S. “THE PRICING PROCESS IN DEFENSE PROCUREMENT.” THE PRICING

PROCESS IN DEFENSE PROCUREMENT, 1964, pp. 41–42., doi:10.1016/s1574-

0013(05)80014-6.

Anonymous. “Behind the Write-Offs at Litton Industries.” 23 Sept. 1972,

search.proquest.com/docview/1018699804/DD4FEDB5D0364B80PQ/1?accountid=37385.

“Company-Histories.com.” The J.M. Smucker Company -- Company History, www.company-

histories.com/Litton-Industries-Inc-Company-History.html.

Farrell, Jack W. “Distribution Dynamics at Work: Litton Microwave Division.” Traffic Managment,

vol. 19, no. 4, Apr. 1980, pp. 53–53.

Hetrick, Ron L. “Employment in High-Tech Defense Industries in a Post Cold War

Era.” Employment in High-Tech Defense Industries in a Post Cold War Era, vol. 119, no. 8,

Aug. 1996, pp. 57–63.

Schneider, Greg. “Northrop Completes Purchase of Litton.” The Washington Post, 4 Apr. 2001,

www.highbeam.com/doc/1P2-432041.html?refid=easy_hf.

White, Eileen. “Justice Department Widens Its Probe Of Litton Industries.” 23 July 1986,

search.proquest.com/docview/398008791/81548952544442D6PQ/1?accountid=37385.