The Outsiders: Eight Unconventional CEOs and Their Radically Rational Blueprint for Success

by William N. Thorndike Jr.

General Dynamics had been a pioneer in the defense industry. The company traced its roots back to the late nineteenth century and had a long history selling major weapons to the Pentagon, including aircraft (both the legendary B-29 bomber during WWII and the F-16 fighter plane, workhorse of the modern air force), ships (as the leading manufacturer of submarines), and land vehicles (as the leading supplier of tanks and other combat vehicles). Over the years, the company had diversified into missiles and space systems and a number of nondefense businesses, including Cessna commercial planes and building supplies.

Although he is the oldest CEO in this book and the only one to take the helm in his fifties, Anders had only ten years of private sector experience when he accepted the General Dynamics post, and his eyes were still very fresh.

His turnaround strategy for General Dynamics was rooted in a central strategic insight: the defense industry had significant excess capacity following the end of the Cold War. As a result, Anders believed industry players needed to move aggressively to either shrink their businesses or grow through acquisition. In this new environment, there would be consolidators and consolidatees, and companies needed to figure out quickly which camp they belonged in. Anders outlined his strategy in his initial annual and quarterly reports and proceeded to aggressively implement it. This strategy rested on three key tenets:

In operations, Anders and Mellor found a legacy of massive overinvestment in inventory, capital equipment, and research and development. Together, they moved quickly to wring the excesses out of the system. When they visited an F-16 factory, they looked around and counted huge numbers of expensive F-16 canopies (the clear glass covering for the cockpit) in a facility that made one plane a week—Mellor’s new rule: a two-canopy maximum.

The largest of these divestitures, the sale of the company’s dominant military aircraft business, presented an unexpected challenge to Anders’s strategic framework and is worth looking at in more detail. This transaction actually began as an attempt by Anders to acquire Lockheed’s smaller fighter plane division. When Lockheed’s CEO refused to sell and made an extravagant counteroffer for General Dynamics’ F-16 business, Anders faced a pivotal decision. It’s worth pausing here to make a more general point. Most of the CEOs in this book avoided detailed strategic plans, preferring to stay flexible and opportunistic. In contrast, Anders had a very clear and specific strategic vision that called not only for selling weaker divisions but for building up larger ones. After making early progress on the sales front, he turned his attention to acquisition, and the military aircraft unit, the company’s largest business, was a logical place to start. On top of the economic logic of growing this sizable business unit, Anders, a former fighter pilot and an aviation buff, loved it. So when Lockheed’s CEO surprised him by offering $1.5 billion, a mind-bogglingly high price for the division, Anders was faced with a moment of truth. What he did is very revealing—he agreed to sell the business on the spot without hesitation (although not without some regret). Anders made the rational business decision, the one that was consistent with growing per share value, even though it shrank his compa...

This abrupt series of dramatic actions stunned Wall Street and led to a meteoric rise in General Dynamics’ stock price. It also attracted Warren Buffett’s attention. Buffett saw that under Anders’s leadership, the company was divesting assets and focusing on an innovative, shareholder-friendly capital allocation strategy, and in 1992 he bought 16 percent of General Dynamics’ stock at an average price of $72 per share. Remarkably, he also gave Anders, whom he had only met once, the proxy to vote Berkshire’s shares, a position that aided Anders in implementing his strategy.

As one Wall Street analyst said, “The steps being taken at Northrop Grumman . . . are reminiscent of the changes taken by General Dynamics in the early 1990s . . . [and] are at odds with the typical behavior of defense companies, which have historically tended to overemphasize [revenue] growth . . . General Dynamics has dramatically outperformed other defense companies who continued to pursue scale . . . over the last 20 years.”