A defense contractor’s ability to compete in commercial sectors is now vital, according to a Booz & Company whitepaper that outlines defense industry challenges and prescriptions.
The global management consulting firm Booz & Company, summarizes the current and future situation for many defense contractors this way:
"Today’s declining budgets and changing customer requirements, and the increasing success of nontraditional competitors such as Cisco, Eurocopter, and even Boeing Commercial Airplanes signal that the industry’s status quo is likely untenable. Some portions of the sector may become more stable by spanning defense and commercial applications.
"The recipe for success in this type of environment can be distilled into a single imperative: manage the company as a business rather than as a collection of programs."
Booz outlines five key challenges facing the defense sector:
1) Steep Declines in Federal Spending – For defense contractors, creating shareholder value in the past was facilitated by an ever-expanding market. That is no longer the case: "creating value will require alternative methods, some of which will be understandably unfamiliar to current management teams…"
2) Evolving Customer Requirements – While many defense contractors are still developing solutions like they did in the Cold War, today many threats are less predictable and evolve more quickly. As a result, "Defense companies need faster development and fielding cycles to remain relevant for large portions of their core markets."
3) The Rise of New Competitors - Nontraditional companies like Accenture, Apple, Cisco and Dell have become increasingly successful in the defense sector. Excluding Cold War-era systems, these companies account for 40 percent of major hardware program acquisitions. "Traditional defense companies, which are sometimes slower to deliver and more expensive, have had difficulties competing against these new competitors, even in traditional ‘core’ markets. These traditional companies will need to determine whether they can compete in their core markets without development of commercial-like capabilities and, if not, how commercial-like capabilities can coexist with traditional defense capabilities."
4) Shareholder Suspicion Regarding Strategic Investment – Many investors are treating the defense sector like it is in irreversible decline and are urging defense contractors to ignore growth and focus on maximizing dividends.
5) Talent – Some of the skills necessary to compete in the current and future defense sector are vastly different from what defense contractors currently have.
So what can defense contractors do in this once-in-a-lifetime market upheaval? Booz makes five recommendations for defense sector survival:
Focus Your Value-Creation Strategy – Don’t batten down the hatches and wait for DoD to come roaring back and tell you what to do. Additionally, don’t lose focus and go in several new directions all at once. "It is best not to dilute effort by trying to execute too many strategies and business models, and don’t hunker down to wait for the customer to steer you in the right direction. In the last downturn, companies that hunkered down fared worst, and usually ended up exiting the sector."
Don’t Miss the Opportunity to Invest in Things That Matter – In chaotic times like these that also represent opportunities, don’t try to do everything, but rather focus on those few things that truly differentiate you.
Consolidate Dramatically and Invest for Future Growth – "The defense sector is undergoing the kind of correction that happens once every 20 or 30 years. It is hard to overstate the extent of the downturn. At some defense companies, however, wishful thinking persists. Some believe they will find the fast-moving stream in this otherwise stagnant water. But there is no fast-moving stream. The market is already down by a third in terms of acquisition dollars, even before a possible sequestration. Costs must be cut."
Lead from the Top and with Decisiveness – "In a downturn, though, decision-making needs to be more centralized and more direct, in part because difficult decisions will be required and ‘self-amputation’ is an unnatural act."
Develop and Reward the "General Manager" – Since the 1980s, the pentagon has acquired a portfolio of programs rather than products. Consequently, much of defense industry management has come up through the program management ranks rather than from general managers. "The same leadership skills that have characterized success over the past decade or two will not necessarily apply during a downturn. In a period of industry contraction, business leadership skills are at least as important as—if not more important than—program management skills."
As defense contractors diversify into commercial markets, the need to market their companies has become much more important. In the past, defense contractors could be satisfied with just responding to RFPs.
Now with fewer DoD opportunities and new competition from the non-defense companies, defense contractors are fighting a business war on two fronts.
To many defense contractors, the word "marketing" conjures up trade shows, direct mail, brochures and PowerPoint presentations. But those things are only a small but visible subset of marketing.
One of the most popular marketing paradigms is that of the "Four Ps" – price, product, promotion, and place (or distribution). Marketing involves developing a product, its pricing strategy and how (or where) it will be distributed. Only once those three elements of the marketing mix are in place should promotion come into play.