Tom Kennedy began in Raytheon's radar development unit in 1983, rising through the ranks to become CEO in March 2014 and chairman seven months later. With a doctorate in engineering, the former US Air Force captain is positioning the giant for growth by continuing to invest in technology and cyber. Investment allowed Raytheon to win contracts like the US Navy's Air and Missile Defense Radar and Next Generation Jammer, and the Air Force's 3D Expeditionary Long-Range Radar, which at presstime was under protest.

Q. What's your cyber strategy?

A. Since 2007, we have purchased fourteen cyber-related companies. We pulled key products from those companies into Raytheon Cyber Products, and have been selling to the government via the GSA list; growing about 20 percent year over year.

In September 2013 we decided to get into the commercial cyber business to unlock the value of our cyber investment. But we knew we needed channels into that marketplace and looked for properties we could acquire to provide us those market channels. We also needed a state-of-the-art platform onto which we could plug our defense-grade cyber products to accelerate our move. We've done that with Websense, which is a joint venture with Vista Equity Partners, a private equity company that sold us Websense. They will own 19.7 percent and provide their market expertise to grow this new business, which we will be reported as a separate business unit.

Q. How are you increasing agility?

A. You must have differentiators and discriminators to win in the marketplace. And you have to tie that back to the IRAD (independent research & development) investments you're making, sometimes 10 years in the past, to be ready when these new capability needs come to fruition.

That happened with the investments we made on gallium nitride about 10 years ago. There were a lot of problems with GaN in the beginning: a lot of power in a very small area for a device creates a lot of heat. There were a problems with circuitry fatigue due to the heat and a lot of folks abandoned it ten years ago for something called high voltage gas. We stayed with it, and like Thomas Edison we had a thousand failures before we had success. We had a vision, we felt we could achieve it. It was a big bet, and we got there.

That's kind of like Silicon Valley, right? People making a lot of bets and sometimes having a lot of failures. You have to allow for failure. We knew whoever figured it out would essentially be king of the hill, at least for a short duration. And frankly, I think we proved that out. We had the highest-powered devices and highest efficiencies. GaN gave us a discriminator in key competitions like Next Generation Jammer, Air and Missile Defense Radar, and the 3D Expeditionary Long-Range Radar, which is still in protest.

Q. Is success about a more distributed decision-making culture?

A. I think it's the focus on growth. Our three focus areas are global growth, competitive advantage and enterprise collaboration. We made a distinct push into the international marketplace – we felt that 25 percent of our business being international was a glass ceiling. We got away from a regional model to a country-based strategic model. Last year, international sales were close to 29 percent, and with the recent Saudi Patriot award about 43 percent of our backlog is now international.

Domestically, growth is about being more competitive and having the differentiators and discriminators to win.

We were focused and made sure the programs had the right support across the company; to approach the marketplace as one company. It's not easy to get the whole company to act as one. When you can make that happen, the elephant does dance.

Now, everybody is stepping forward and thinking about growth. You know, think about it, since the Budget Control Act of 2011, everybody's thinking decline. So how do you get 61,000 employees to think growth? How do you get folks to think really creatively and not feel they've got to hunker down and batten down the hatches. That was a culture challenge: not to hunker down but move forward. We had to set the tone at the top — we increased our IRAD spend and we built our cyber center right around when the Budget Control Act happened. We made those investment to improve our capabilities.

During this period, we increased our IRAD, year over year, by 24 percent. We sent a direct message to our employees that we're not just going to sit back and ride out the storm; we're going to be proactive. It's the results that count. If we didn't win those big awards, then I would say we weren't effective.

At the same time, we consolidated from six to four businesses. We took out millions of square feet. We took out cost wherever we could. We introduced our strategic sourcing capability. The company is now on one material resource planning system, which allows us to do data analytics across our whole supply chain. We know what we're spending at any supplier at any given time, and we leverage that spend for the best affordability and capabilities.

Q. How do you balance short-term investor needs like dividends and stock buybacks with long-term investment?

A. We've taken a balanced capital deployment approach. We just announced the eleventh consecutive increase to our annual dividend, so I think we're definitely giving money back and we have been buying back shares. But we've also been looking for opportunities to add value to the shareholders in other ways. Instead of putting all our eggs in one basket,we believe there are opportunities to add value by winning programs like AMDR. You know how our industry works. Each one of these franchises is going to create value for fifteen, twenty or more years.

We could've given all that money back, but then we wouldn't have won those programs and we would've missed out on four franchises that will last decades. If we had lost because we didn't invest, I should've been fired.

Q. Do CEOs have to educate investors?

A. That's the job of a CEO. There are three camps. There's the camp that says, "we just want you to return all your cash directly to shareholders via share buyback and dividends." Some of them don't want the dividends, they want all share buyback.

The second camp says, "we want a balanced capital deployment strategy. That you should be thinking about how you're going to invest in yourself to maintain and grow your business."

The third group is saying, "wait and see." If we're going to make these investments, they're going to want to see the results. And by the way, I agree with that. And to date, we have been showing results. And I think as long as we can continue to show those results to the investor community, they will support us.

Q. Has the budget hit bottom?

A. Some said it was last year, but we think this year is the trough year. We expect growth in '16 and beyond. It's going to be initially low, single digit, but we're starting to see it.

If sequester ends and budgets significantly increase, then I think it could jump-start things a little bit faster. Bottom line is that the threat's significantly increased around the world, not just in one location. And the threat has many different faces so that makes it more sophisticated and harder to deal with.

Q. Has declining oil revenues changed your Middle East sales outlook?

A. The words I hear when I'm in the region is: a strong defense is a strong deterrence. Nations want to protect their sovereignty and revenue-generating resources.

Q. What will Raytheon look like 10 years from now? Will it be more commercial markets?

A. We're making the major push into cybersecurity because it will pervade everything that we sell. There will be a requirement that cybersecurity be embedded in all solution sets, otherwise systems will be defeated.

So you're going to have cyber security engineers that are involved in the design and development, integration and test and production of these systems. I think you're going to see that as a major change to the industry.

Our brand is growing internationally and allowing us to expand into areas that we haven't been in before. Commercial cyber is just one example.

Q. How do you interpret Defense Secretary Ash Carter's Silicon Valley speech?

A. I think we do need to innovate faster. There is a concern by folks in industry that with sequestration in place, there aren't new things coming along. Secretary Carter is providing direction and as the industry sees where he is taking the department and the opportunities there, I think they'll react in a positive way.

Q. Better Buying Power 3.0?

A. I support it. I like competition. Any way that DoD can figure out how to stretch its dollars is important to the industry. We just need to make sure that as we proceed that they continue to allow industry to innovate and give us the opportunity to try to be a defense Silicon Valley.

Q. How do you attract and retain top cyber talent?

A. You've got to provide all employees an environment where they feel that they're adding value. That they're getting results and the results are meaningful. That's noble work.

Q. Are you comfortable with Frank Kendall's new IRAD rules?

A. It's always good to be connected with the customer and to ensure that what you're developing has some military utility. So I think that connection makes a lot of sense. We don't want to be off developing IRAD that's meaningless to those in the field.

The question is how it's implemented. If it's seamless and leverages the benefit of getting some insights into the capability needs of the military, then I think that works.

More In Interviews