Marillyn Hewson became Lockheed's CEO this year, just as her biggest client, the U.S. Department of Defense, became subject to forced budget cuts.
Photograph by Wesley Mann
By Beth Kowitt
May 6, 2013

This story is from the May 20, 2013 issue of Fortune.

Marillyn Hewson probably does not fit your notion of what a defense company CEO is like. The Lockheed Martin chief is so self-effacing that for years Mike Hardin, dean of the University of Alabama’s business school, didn’t know exactly what Hewson did for a living, even though she sits on his school’s Board of Visitors. If you go to see her at her Bethesda, Md., office, chances are good she’ll greet you with a warm smile, hand you a bottle of water, and, if it happens to be a Monday morning in the fall, offer a lively recap of the previous Saturday’s University of Alabama football game. (She earned an undergraduate degree in business and a master’s degree in economics from the school.)

Hewson’s good nature belies a toughness developed during the course of a 30-year career at Lockheed Martin (No. 59 on the Fortune 500). “Don’t ever underestimate or think that she doesn’t have a backbone or position because she does,” says Bruce Tanner, chief financial officer of Lockheed. The daughter of a longtime civilian employee of the Army, she worked in four of the company’s five business units. Hewson, ranked No. 19 on Fortune’s 2012 Most Powerful Women list, was tapped to become chief operating officer of the company, a gig she expected to be her last at Lockheed. Then the company’s CEO-in-waiting, Christopher Kubasik, was forced to resign amid revelations that he’d had an inappropriate relationship with a subordinate. The company immediately elevated Hewson to the COO job, and less than 60 days later she became CEO, her 20th job at Lockheed. “Nineteen was a quick turn,” she jokes.

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Hewson will surely draw on her broad set of experiences (and her sense of humor) as she leads Lockheed through a period of uncertainty and potential volatility. Her biggest client, the U.S. government, can’t get its finances together. Even if it does, Washington won’t be sending nearly as much business to defense contractors now that operations in Iraq and Afghanistan have wound down. Lockheed Martin, which has returned 6.5% year to date, has lagged the S&P 500’s 11.4%. And the outlook won’t improve anytime soon: Analysts expect the company’s revenue to fall in 2013 and 2014.

Industry experts and insiders agree that to weather this tough period ahead Lockheed is going to have to fight a battle on two fronts. It must continue to grab as much revenue as possible from existing weapons programs, which make up the bulk of Lockheed’s $47 billion in annual revenue. The company also is looking to expand in fast-growing businesses such as unmanned systems, including drones, and cybersecurity services while moving into new areas such as energy and health care. The transformation calls for a CEO with strong ties to the U.S. government, credibility with employees to make the culture nimbler and more flexible, and the operating skills to make it all happen. In other words, it’s a job tailor-made for Hewson.

Retooling Lockheed won’t be easy. Previous attempts to sell to nongovernment customers have bombed (remember Lockheed’s failed push into telecom with the purchase, and subsequent sale, of Comsat?). Indeed, everything about Lockheed, from its culture to the way it is organized, is set up to serve the military. Many visitors may need some level of security clearance, and communiqués are treated as classified information, which can confuse or even turn off prospective “civilian” clients. Hewson and her fellow executives are mindful of a famous line attributed to former Lockheed CEO Norman Augustine: “When it comes to diversification, the defense industry’s record is unblemished by success.”

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The Lockheed Martin of today looks very different from the company Hewson joined in 1983, when aeronautics dominated its business. An industry down cycle in the 1990s transformed the sector, forcing companies to combine to survive. Lockheed and Martin Marietta merged in 1995 to become Lockheed Martin, one of a handful of industry giants remaining. Today various strings of acquisitions have rounded out Lockheed’s portfolio to include — along with the legacy aeronautics business — ships, space systems, missiles, ground vehicles, and information technology. The company processes census forms, handles $600 billion annually in Social Security Administration benefits, and manages more than half the world’s air traffic.

Lockheed’s client base, however, is exceedingly narrow. In 2012, 82% of its revenue came from the U.S. government, and 61% from the Defense Department. RBC Capital Markets analyst Robert Stallard laid out the issue in a recent report: Defense is the largest area of discretionary spending and is therefore in the “cross hairs of fiscal austerity measures.” The Budget Control Act of 2011, a result of the debt-ceiling crisis, reduced projected defense spending over 10 years by $487 billion. The sequester, the automatic spending cuts that went into effect on March 1, lop off another $500 billion over a decade.

Granted, the declines are coming off a high. U.S. defense spending climbed 89% from the trough in fiscal year 1998 to a peak in 2010, notes Stallard. According to the Congressional Budget Office, cuts from the Budget Control Act and the sequester would bring the defense budget’s 2013 base spending back down to 2007 levels. President Obama’s proposed budget effectively ignores the sequester, says Stallard, replacing it with a plan that reduces military spending by $150 billion over 10 years rather than the half-trillion-dollar decline that went into effect March 1.

Read More: Lockheed Martin’s Marillyn Hewson: One of the biggest lessons she learned this year

Lockheed executives are quick to point out that many of the proposed cuts won’t affect the company immediately. Its 2012 backlog of business under contract is $82.3 billion, a company record. Tanner, Lockheed’s CFO, knows the F-35 fighter jet—the company’s biggest program — isn’t bullet-proofed from the sequester. But even if funding is cut off today, he says, Lockheed won’t feel the impact for several fiscal years. In addition, the company is developing the F-35 for several non-U.S. customers, including Italy and Turkey.

The F-35 has an image problem. The jet is over budget and seven years behind schedule, and it has been plagued by technical issues stemming from the government’s desire to have the jet do everything. It was designed for use by all three branches of the military, with modifications for each. Projections for the price tag vary, but the Office of the Secretary of Defense 2012 Selected Acquisition Report estimated it will cost $1.5 trillion to operate the F-35 jets over the 55-year life of the program. In September, Lt. Gen. Christopher Bogdan, the government’s then-incoming F-35 program manager, told reporters that the relationship between Lockheed and the program office was the worst he had ever seen. Industry consultant Loren Thompson, who counts Lockheed Martin as a client, says Lockheed aeronautics executives have historically taken an “in-your-face” approach to dealings with customers. “That makes relations tenser than they need to be,” he says.

Hewson, Thompson says, is not a product of that combative style of customer relations, which should ease negotiations. Despite her long tenure at Lockheed, she’s seen as a breath of fresh air, while Kubasik, the would-be CEO, was considered an “old-style Lockheed Martin guy,” says Thomas Donnelly, a defense analyst with the American Enterprise Institute. “She reflects change.” Even her relative lack of experience with Wall Street, normally a liability, may be an asset. “She’s far more of an execution person,” says Richard Aboulafia of industry research and consulting firm Teal Group. “It changes the game when the customer is accusing you of being too money-focused.” There are signs that Lockheed has made progress. President Obama’s proposed budget fully funds the F-35 program.

Read More: Lockheed Could “Fail to Deliver” F-35 Capabilities on Time, Says Pentagon Tester

Hewson loves a challenge. Throughout her career, her name always surfaced when a tough assignment came up. “I exploited that fully, asking her to take on over the years a variety of, I’d say, highly diversified, quite varied, and very demanding assignments,” says her predecessor, CEO Bob Stevens, who remains at the company as executive chairman. Her combination of determination, focus, and intuition gave her an edge.

Hewson credits her work ethic for much of her success. “I do work hard, but I have a passion for work,” she says. “That’s just who I am.” Her parents were the first to set an example. Hewson’s father grew up on a farm and started as a messenger in the mailroom at Fort Riley, Kans., working his way up to the highest civilian role at the base: civilian personnel officer. He assumed the top civilian role for the Army in Alaska and was set to be transferred to the Pentagon. He never made it to Washington. Hewson’s father died of a heart attack at age 41 when Marillyn was 9, and her mother, a nurse during World War II, was left to raise five children alone. As the middle child, Hewson helped care for her two younger sisters. Her mother, now 94, kept a note a young Marillyn wrote the year her father died, asking him to wake her up at 6 a.m. because she had a lot to do that day. (She spelled “Marillyn” with a double “l” because she wanted her daughter to be different.)

Hewson worked at a Dairy Queen in high school and put herself through the University of Alabama, working as a nighttime switchboard operator. She earned a business degree and a master’s in economics, which led to a job as an economist at the Bureau of Labor Statistics. Hewson and her husband, James, who met during college, decided they wanted to move back to the Southeast, so she found an opening for a senior industrial engineer at Lockheed in Marietta, Ga. Her skills matched the position, and she was hired, even though she had no classical engineering training. She realized then that her willingness to learn would help her tackle any role, no matter what the job looked like on paper. Hewson also kept up with economics, teaching at a local college at night. Two years in, Lockheed put Hewson on the general-manager development program and moved her around the company. She settled in as an industrial engineering manager, went on maternity leave (the Hewsons have two children), and came back to find herself in a bigger job after her department and another merged.

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Lockheed regularly gave Hewson more responsibility. “I would kid with her, ‘Marillyn, it’s been a month or so — you have another promotion by now?’ ” says Mark Swartz, a family friend. “It seemed almost every time we were together she was afforded another opportunity.” Not all of it was rosy. When she ran systems integration in Owego, N.Y., the Pentagon abruptly terminated the division’s work on the presidential helicopter — a significant loss of business. Her poise as she handled the resulting layoffs impressed Stevens and led to another promotion, this time to head of Electronic Systems, the company’s largest division (it has since split in two).

She also took corporate staff positions that on the surface appeared less than thrilling, including a stint as company auditor. Hewson looked for ways that her group, with its vantage point across the entire corporation, could provide additional value beyond compliance. Her team started taking best practices from one part of the business and applying them to another to improve performance. She transformed corporate audit into a regular rotation for high-potential employees, giving them the opportunity to see the company more broadly. “When we have segments of our business call the executive office and ask if corporate audit can come to see them, I think you’ve really transformed that kind of function,” Stevens says.

Hewson always held aspirations to be CEO, but last April the board named Kubasik, then only 51, to be Stevens’ successor. Less than seven months later the company said Kubasik would be leaving Lockheed. An employee contacted the ethics department alleging a romance between Kubasik and a subordinate, and an independent investigation by an outside third party confirmed the relationship. He resigned, and at the start of this year, Hewson became the first woman to lead the 100-year-old enterprise.

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Lockheed Martin’s Center for Innovation, known as the Lighthouse, is the contractor’s version of a startup. Here, in Hampton Roads, Va., employees sit in an open-floor plan around a 40-foot replica of a lighthouse. Beach umbrellas and tropical plants are placed throughout. The Lighthouse is one of Hewson’s favorite places to take managers. Her hope is that the un-Lockheed-like environment will spur employees to think beyond government contracts. “We’re not sitting idly by,” she says. The first stop on the Lighthouse tour is a look at Steve “Moose” Laukaitis’s Distributed Air Warfare Training Range (DAWTR) project. Laukaitis, a former Navy pilot, started work on DAWTR two years ago as part of a broader company effort to help customers keep down costs. He and his team re-created a virtual scenario that mimics pilot training at the Naval Strike and Air Warfare Center in Fallon, Nev. It’s a lot like playing a videogame. Using Lockheed technology, pilots will be able to visualize their mission before they ever get off the ground. Every time a pilot trains live on the range, it costs $1.5 million and allows for roughly 30 minutes of flight time. “In days gone by, you would learn how to execute a mission like this from repetition,” Laukaitis says. “Those days are gone. The money’s not there.” Lockheed is paying for DAWTR’s development in the hope that the government will decide it is a must-have.

Much of the work at the Lighthouse focuses on applying Lockheed’s expertise to socioeconomic and technology trends. Take health care, an industry overflowing with data it struggles to manage. “We know how to take big data and make sense out of it,” says Tom Gross, a senior project manager who helps coordinate Lockheed’s health care initiatives. In cybersecurity, Lockheed is working on marketing its services to the Fortune 500. The company, which writes more lines of code every year than Microsoft, has been relatively quiet about its work in this area, despite already building cybercomponents into the entire life cycle of all its products. From a network security standpoint, Lockheed has been the No. 1 IT provider to the federal government for 18 years. (One big challenge to selling network security? Lockheed itself suffered a high-profile hacking in March 2011; the company says the attack failed.)

Lockheed executives understand they’re at a disadvantage when it comes to serving commercial customers because the defense contractor is structured to mirror the organizational charts of the armed forces. Rick Edwards, who heads up Missiles and Fire Control, says the company is selling first to companies with similar, regimented operations. His division now does control- and safety-systems work for nuclear power plants. It’s not that far off from running the control rooms for the nuclear Navy, which Lockheed has done for the past 50 years. Both require the same kind of rigor, he says.

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Hewson likes to talk about Lockheed as a global security enterprise. By design, it’s a term that can be defined loosely and covers the work Lockheed is doing in areas like energy, health care, and information technology. “We always have to be looking beyond today,” Hewson says. “That’s a lot of the value we bring to our customers.” But there’s one customer Lockheed can’t ever ignore, despite its efforts to serve power plants or hospitals. Amid the threat of a nuclear attack from North Korea, the Obama administration sent a message to the world, and especially to Pyongyang, by announcing in April plans to deploy Lockheed’s antimissile defense system, Terminal High Altitude Area Defense (THAAD), to Guam. Hewson may be moving her company to new lines of business, but for as long as she’s CEO it is likely that the U.S. government will keep pulling her back in.

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