Hbs Lockheed Case Study

I. Recommendation

I recommend shifting the target of Lockheed Corporation’s L-1011 planes to different consumers such as the military or import/export companies because it will focus on a new market whose potential for profitability will be greater than the commercial airline market which has several tough competitors: DC-10 trijet and A-300B Airbus. Under the current business plan, the Company is losing cash as exhibited by a NPV of -$418 and PI of 0.56. These values reflect the most optimal market situations therefore a transfer of focus will offer quick capture of an untapped market.

II. Rationale

Due to the low probability of profits from the current course of action, the direction and future of L-1011 planes should be reconsidered to reflect a more secure decision. By targeting a new niche, the risk level may still be high however, the threat of direct competitors is reduced.

III. Problem Defined

The Company was facing tough competition head-on with a highly optimistic 10% industry growth rate. Only in the case that air travel did increase to such high levels, would Lockheed be able to reach their breakeven point. Complete dependence on market movement placed the Company in an extremely risky financial situation.

IV. Discussion & Analysis

As seen in Exhibit 1: Schedule of Costs and Payments, the Company will not be able to see any positive cash flows until year 6 (1970) of the program. Even then, the net cash flow will still be negative. Even after all payments have been collected for the planes, Lockheed will still be $480 million short of profits. Therefore, competition in this market can been seen as futile. If this path is continuously pursued, the Company’s future may resemble the downfall of supersonic aircrafts. In this example, the supersonic aircrafts were suitable to the needs of the public however the production costs exceeded the profits from civilian consumers. Lockheed’s advanced skill and precision of their engineers and...