Capabilitiesdriven strategy
for defense
Asserting your
right to win in an
evolving market
Contacts
DC
Florham Park, NJ
Los Angeles
Marty Bollinger
Senior Executive Advisor
+1-703-682-5750
marty.bollinger
@strategyand.pwc.com
Randy Starr
Partner
+1-973-410-7604
randy.starr
@strategyand.pwc.com
Joseph Martin
Partner
+1-424-294-3745
joseph.martin
@strategyand.pwc.com
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Strategy&
About the authors
Marty Bollinger is a senior executive advisor with Strategy& based in
Washington, D.C. He works with the world’s leading aerospace and
defense companies as well as major industrial and service companies on
such issues as business strategy, organizational effectiveness, and
operating improvements.
Randy Starr is a partner with Strategy& based in Florham Park, N.J. He
specializes in developing growth strategies and strategy-based
transformation for the aerospace and defense sector.
Jono Anderson is a principal with Strategy& based in Los Angeles. He
specializes in corporate portfolio, growth, and competitive strategies,
developing and implementing innovative approaches for aerospace,
defense, and transportation companies.
Andrew Straus was formerly a senior associate with Strategy&.
This report was originally published by Booz & Company in 2011.
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Executive summary
A declining defense budget in the United States and a shift in
acquisition philosophy by the Pentagon — along with the emergence of
nontraditional providers that are delivering less expensive or more
innovative solutions that can be developed and fielded quickly — have
fundamentally altered the competitive landscape for the defense industry.
We see four prominent strategic models today, two well established and
two relatively new. The former are program-centric exquisite systems
providers, which build and integrate complex weapon systems, and
process-centric scale-driven standard suppliers, which rely on
operational excellence to provide lower cost products and services. The
latter include product-centric agile smart customizers such as Navistar,
which built a $4 billion military truck business in five years by quickly
tailoring existing product lines to meet unique customer requirements,
and problem-centric disruptive specialists such as General Atomics, a
first mover in unmanned aerial vehicles (UAVs) that was able to scout
and rapidly prototype technology solutions to fill undefined or
unarticulated needs.
A company can assert its “right to win” in the evolving defense market
using any of these (or other, as yet undiscovered) models in its major
businesses, but this requires focusing its intellectual, organizational,
and operational resources on a chosen “way to play” to achieve the
premiums associated with strategic coherence. This is the basis for a
capabilities-driven strategy (CDS).
CDS aligns a company’s differentiating capabilities with its value
proposition, develops a product and service portfolio that outpaces
competitors, and defines an operating model that enables the enterprise
to focus on what it does best. It also provides a useful framework for
management to determine which parts of the business can safely be
scaled back when spending decreases, and which require continued
spending even as revenues stagnate or fall. CDS creates the strategic
coherence that companies need to assert their right to win in the
evolving defense market.
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The shift in defense
The wartime buildup has passed its peak, but the ongoing need for
defense products and services that can both satisfy immediate needs
and counter “near-peer” threats won’t subside. The challenge for
defense contractors is to continue fulfilling this demand, but to do so
more affordably, in the face of deeper cuts in military investment
accounts. This challenge is compounded by a dynamic threat
environment in which the resourcefulness of adversaries requires a
more agile industrial base to rapidly develop and field new solutions.
In the United States, the defense industry is likely to face a 30 to 40
percent reduction in total investment spending from the 2008 peak.
Funding for defense equipment has already fallen more than US$50
billion between 2008 and 2012, and further cuts in investment are
likely, perhaps on the order of an additional $50 billion by 2015 under
some scenarios. Responding to budget pressures, U.S. Secretary of
Defense Robert Gates issued new guidance in September 2010
establishing a cost-conscious acquisition system that favors “affordable”
solutions. “We have a continuing responsibility to procure the critical
goods and services our forces need in the years ahead, but we will not
have ever-increasing budgets to pay for them,” Under Secretary of
Defense for Acquisition, Technology, and Logistics Ashton Carter said in
a September 14, 2010, memo announcing the new guidance. “We must
… do more without more.”
Although there will always be a place for highly complex, long-lead
systems that push the envelope of technological sophistication, the
Department of Defense is shifting spending toward less elaborate, more
affordable solutions that take advantage of proven technologies,
innovation capabilities, and efficient processes to control costs and get
the job done quicker. Pentagon officials also plan to streamline the
process for requirements definition by adopting multiple procurement
tracks — near-term/urgent, midterm, and long-term — to better align
acquisition processes and time lines to specific needs.
In the U.S., the
defense industry
is likely to face a
30 to 40 percent
reduction in
total investment
spending from
the 2008 peak.
This shift in procurement philosophy has further stimulated ongoing
competitive challenges from nontraditional providers of defense
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products, which bring new capabilities and business models to the
defense market. For example, the last two major U.S. Army tactical
vehicle programs were awarded to a commercial truck manufacturer,
Oshkosh Corporation. The last three military training aircraft have also
been foreign designs. The Air Force MC-12W Liberty, a more affordable
airborne intelligence, surveillance, and reconnaissance solution, was
derived from a civil aircraft platform. And military ground forces now
employ commercial-based Harris and Thales tactical radios in place of
the more expensive, purpose-built systems originally envisioned. All of
these programs found success in an environment that rewards
affordable solutions that can be quickly developed and fielded. In
contrast, longer-lead exquisite systems, which rely on long-established,
traditional defense suppliers as the prime contractors, have been
struggling.
Some observers believe that the new acquisition philosophy will be
quietly set aside after the current defense leadership is replaced. After
all, there have been reductions in investment spending before, most
recently when the collapse of the Soviet Union triggered across-theboard cuts. But today’s situation differs in several important ways. First,
today’s military continues to face real and persistent threats that cannot
be ignored, and military leaders are shifting force structure
requirements in response to the “long war” against terrorists and other
asymmetrical threats. In addition, nearly 10 years of war have placed
considerable stress on both warfighters and weapons, demanding that
priority be given to operations, and management and personnel
budgets. And unlike during the 1990s, the budgetary pressure created
by a deep recession, a slow recovery, and the ballooning of the national
deficit limits the alternatives for any defense secretary.
Even as the global economy turns around, the fundamental need for
affordable programs that better meet today’s national security
challenges will remain. Consequently, both traditional and
nontraditional companies that compete in the defense market have
already begun to reassess their operating models and market
positioning in light of the Pentagon’s evolving acquisition approach.
Those that take a wait-and-see stance risk being left behind.
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A capabilities-driven strategy
How, then, should defense companies reassess and realign their current
strategies? Our experience shows that both traditional and
nontraditional competitors earn the right to win in the new market
environment by pursuing coherence. They align and focus the three
basic components of their corporate strategies: how they compete (their
way to play); the handful of essential, distinctive, and mutually
supporting capabilities that enable them to execute their strategies and
prosper in the marketplace; and their differentiated product and service
portfolios. The specifics of these three elements will vary among
individual companies, but the elements themselves are always the same
(see Exhibit 1).
Exhibit 1
The elements of a coherent strategy
Coherence
Way to play
(competitive archetype)
How are we going to create value for our customers?
The competitive approach for how a company creates value for its customers in a
given market
Capability system
(right to win)
What do we need to do well to deliver that value proposition?
The system of capabilities consistent with this direction delivering a differentiated
value proposition and ensuring the right to win
Product and service portfolio
(fit with capabilities)
What are we going to sell in this market and to whom?
The products and services that thrive within that system to reliably and sustainably
outpace competitors
Source: Strategy&
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In a coherent company, the right product and service portfolio naturally
thrives within a capability system consciously chosen and implemented
to support a deliberate way to play within a defined market (and to
minimize spending in areas not deemed essential). Often, companies
facing significant market changes or competition will examine only one
of these elements, perhaps sharpening their internal capabilities or
reevaluating their portfolios. But companies that align and focus all
three elements in what we call a capabilities-driven strategy can gain a
sustainable advantage over their competitors.
1. Way to play
To create such a strategy, it is important for a company to assess how it
creates value for its customers. At least four approaches — ways to play
— have evolved in the defense market (see Exhibit 2, next page).
Although there are few pure plays among companies or lines of
business, these approaches basically characterize how most companies
play in this market:
• Exquisite systems providers: Program-centric players design, develop,
build, integrate, and maintain sophisticated platforms. They create
value by delivering high-quality, highly complex systems and
technology — the most advanced in the world. And they often
provide total life cycle support for their systems.
• Scale-driven standard suppliers: Process-centric suppliers rely on
operational excellence to provide off-the-shelf products and services,
often applying existing products to new applications or missions, and
using supply chain efficiency to drive down costs and improve
margins while expanding sales to new customers.
• Agile smart customizers: Product-centric companies leverage
commercial or global scale and scope to respond to their customers’
needs for rapid development and fielding of products and services.
They can provide tailored solutions, often based on existing product
lines, to deliver mission capability in a shorter time frame.
• Disruptive specialists: Problem-centric companies develop highly
innovative solutions to satisfy unmet and often unarticulated needs.
They seek to field disruptive products or services that satisfy a need
in a different way than competitors or to provide an entirely new
capability. Their innovative products may take several years to
mature but can change the game by influencing force structure or
concepts of operation.
The inherent characteristics and capabilities of these ways to play in
the defense market are all different. But regardless of their differences,
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Exhibit 2
Ways to play in defense
Exquisite
systems providers
Agile smart
customizers
Disruptive
specialists
Program-centric
Highly tuned to intricacies of
defense clients and a complex
acquisition system
Process-centric
Lean, productivity-focused,
centered around
operational excellence
Product-centric
Commercial product-line
focus and global
orientation
Problem-centric
Innovative environment;
highly entrepreneurial
workforce
Focused on exquisite platform
development and integration
for well-articulated needs
Customer- and supplier-driven;
incremental upgrades to stable
product lines
Rapid fulfillment of defined
needs through use of existing
product designs
Continuous and rapid innovation
to satisfy unmet or unarticulated
needs
Customer
engagement
Deep, focused marketing
in one country, targeting
acquisition workforce
Global market reach, with
standard offerings
Global market reach, with
tailoring for national needs
Ability to access selected key
decision makers in defense
organizations
Delivery
Razor-sharp focus on
affordability at low rate
Operational excellence for
low-cost production with high
schedule certainty
Cost-effective production
at moderate rates using
commercial specs
Lean, fast, responsive business
systems with low fixed costs
Program
& product
management
“Command and control”
leadership model with
program-functional matrix
Excellence in on-time, lowcost delivery and reliability
Product-line management
focus through product and
functional matrix
Solution-oriented focus; willingness
to independently invest in and
develop new solutions
Knowledge
Deep, specialized engineering
and domain expertise
Deep expertise in
operations and logistics
Commercial hardware/
software integration, supplieragnostic
Highly fungible skill sets; broad
awareness of defense and
commercial landscape
Hire and retain deep technical/
mission expertise; narrow
sourcing base
Attract functional practitioners;
build depth for maximum
leverage
Source best talent globally;
develop breadth for maximum
deployment
Rapid replenishment of talent
through broad sources; relatively
high turnover
Driven by unique Defense
Department requirements; very
high barriers to exit
Minimum and fit for purpose;
able to scale up and down
easily
Driven by competitive market
cost pressures; global
sourcing
Low structural and systemic cost
base; low barriers to exit
Description
Innovation
Capability elements
Scale-driven
standard suppliers
Talent
Infrastructure
Source: Strategy&
Strategy&
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the essential goal for all companies is the same: to closely align their
capability systems and their product and service portfolios with how
they compete. Adopting more than one way to play in a discrete
business creates conflicting goals and is very difficult to do well. The
challenge for many companies is choosing a single competitive
approach, either for the entire enterprise or for each major line of
business (if a one-size-fits-all approach is inappropriate), and developing
the capabilities needed to create value for customers and deliver a
differentiated value proposition.
2. Capability system
In conjunction with assessing how to create value for customers, a
coherent company determines how its distinctive capability system
— the most critical capabilities that set it apart from its rivals — will
enable it to deliver its customer value proposition. The capabilities in
the system should be difficult for competitors to replicate, and they
should work together to reinforce and strengthen one another —
becoming a unique source of sustainable advantage.
In the defense industry, such capabilities might include deep domain
knowledge of a customer’s mission requirements, achieving affordability
at low production rates, innovation agility to satisfy unanticipated
customer needs, and operational excellence to provide on-time, low-cost
delivery of products or services. For example, Eurocopter, which
primarily designs and builds commercial helicopters, exploited its
capabilities in terms of scale and core platform design to customize its
helicopters for military and government customers. As a result, most
helicopters purchased by the U.S. Department of Homeland Security
have been built by Eurocopter. And the U.S. Army’s latest light utility
helicopter is also built by the company.
The essential
goal for all
companies is
to closely align
their capability
systems and
their product
and service
portfolios
with how they
compete.
So how does a company develop or enhance the capability system it
needs to fulfill its value proposition? After identifying the select set of
capabilities needed, the company should examine and align its
operating model, including the tasks, processes, tools, and
organizational structure that enable it to bring the capabilities to bear
on the delivery of its distinctive offerings.
3. Product and service portfolio
Finally, CDS requires that a company decide what to sell and to whom.
Too often, companies develop (or acquire) and sell products and
services that are aligned with a particular market sector, but not
necessarily aligned to their ways to play or capability systems. A
fundamental objective of CDS is to ensure that a company’s offerings
are properly aligned with the other elements of its strategy — for
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example, that its capability system enables it to produce solutions that
outpace competitors on a consistent and sustained basis. If offerings
aren’t aligned, they may be candidates for divestment.
The process of developing a capabilities-driven strategy starts with a
thorough and measured look at what your company does really well, in
the context of what the market is rewarding. It is not, however, a stepby-step progression. Assessing and aligning the three strategic elements
is an iterative and dynamic process. Changes in one element often will
impact the others, and the overall process of fine-tuning the individual
elements will strengthen all three.
In a coherent company, all elements work together to create value,
positioning the company to take advantage of emerging market
opportunities that will reward its differentiating capabilities. CDS helps
a company focus on what it does best. Just as important, it helps a
company understand what it should not do, facilitating clear, costsaving choices and eliminating investments that are likely to produce
suboptimal returns. This yields potentially higher performance and
returns — a coherence premium.
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Achieving the coherence
premium
Can a capabilities-driven strategy help companies achieve a coherence
premium while also helping them adapt to the changing defense
market? We are convinced it can. In fact, we have seen companies
representing each of the major ways to play distinguish themselves with
CDS-like adaptations that enabled them to deliver affordable solutions
to current military requirements. Here are a few examples:
Exquisite systems providers
General Dynamics Electric Boat and Newport News Shipbuilding
applied a cost-cutting approach — called design for affordability (DFA)
— that reduced the cost of the Virginia-class SSN-774 nuclear-powered
submarine from $2.4 billion to $2 billion (in 2005 dollars). The DFA
approach enhanced two of the shipyards’ most important capabilities:
their ability to achieve market-based affordability at a low rate of
production, and their superior control processes for design and
construction. By tightening the capability system and the organizational
structure supporting these capabilities, the shipyards were able to
identify and make changes in the design, sourcing, materials,
construction, and other program elements needed to achieve the
targeted savings, while maintaining the submarine’s required
capabilities. This effort also enabled the Navy to increase the annual
construction rate from one to two submarines. The innovative DFA
approach is now being applied to other shipbuilding programs, helping
to reduce costs of even the most exquisite systems.
Companies
using each of
the ways to play
have made CDSlike adaptations
that enabled
them to deliver
affordable
solutions
to military
requirements.
Scale-driven standard suppliers
FLIR Systems provides defense customers with a standard line of
thermal imaging systems that are used on a wide variety of weapons
and platforms. But in recent years, the company has dramatically
diversified its customer base with an expanded range of commercial
applications, including camera systems and imaging devices for
building diagnosis and gas detection.
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Driving this expansion has been FLIR’s focus on operational excellence,
including process efficiencies and global reach, both critical elements of
its capability system. Sticking to what it does best — offering off-theshelf thermal imaging systems with little customization — FLIR
expanded beyond the defense market and into the industrial and
consumer sectors. As a result, the company was also able to serve its
defense customers better, by significantly reducing the price per unit
and providing a steady supply of affordable thermal imaging systems for
diverse military applications.
Agile smart customizers
In late 2008, the Pentagon issued a request for proposal for a
lightweight off-road vehicle that could protect a crew from improvised
explosive devices and similar threats directly beneath the truck. A
condition was that the vehicles had to be ready for production within
seven months. To meet the tight deadline, Oshkosh Corporation’s
defense business used modular parts from existing equipment; tested
the design as it was being produced, generating new iterations
frequently based on what was learned in the field in trial runs; and
conducted daily meetings among a core team of about 60 members
across numerous functions — design, engineering, manufacturing,
procurement — aimed at ironing out problems, assessing risk, and
fine-tuning the development plan.
Through the smart customization of existing designs, Oshkosh won a
contract valued so far at more than $2 billion for about 4,000 M-ATVs,
as these vehicles are known. The company was able to align its
capability system with its way to play. In particular, Oshkosh’s mutually
reinforcing capabilities in commercial scale and strong product-line
management expertise enabled it to rapidly fulfill the needs of defense
customers. “Never since World War II has a military acquisition program
gone from concept to full-scale production in less than a year,” Defense
Secretary Gates told Oshkosh workers during a plant visit in November
2009. “With every vehicle you complete, you are saving American lives.”
Disruptive specialists
General Atomics builds UAVs that the military has used for airborne
surveillance in place of manned aircraft since the 1990s. The company
developed this concept ahead of an articulated customer need. But once
it proved its value, it sold itself. The company’s Predator UAV, which also
has an air-to-ground strike capability, was used extensively in Iraq and
later in Afghanistan. The Predator changed the face of modern combat
operations, often replacing manned aircraft and ground troops in
surveillance and strike missions; it now plays an enduring role in the
military’s concept of operations. Many companies have developed UAVs
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since then, but General Atomics still retains a valuable first-mover
advantage and, in true disruptive fashion, continues to proactively focus
on solving problems with its electromagnetic aircraft landing systems
and other leading-edge technology-driven solutions.
iRobot Corp., a commercial robotics company that makes the floorcleaning Roomba, has recently been making inroads in the defense
market. iRobot initially began providing defense and security customers
with products used by bomb squads to investigate suspicious packages.
More recently, the company has been exploring the use of robots to
accompany ground combat troops in a reconnaissance or explosives
disposal role. Many experts envision that armed versions of these robots
could eventually accompany troops (or deploy in place of troops) in the
future. And unmanned ground vehicles could eventually see the same
surge in use that UAVs have seen in the last 10 years and could have an
equally transformative effect on tactics and force deployment.
iRobot Corp.,
which makes the
Roomba, has
been exploring
the use of robots
to accompany
ground troops in
a reconnaissance
or explosives
disposal role.
General Atomics and iRobot aligned the way they play with their
competitive advantage in at least two distinctive capabilities: They have
superior knowledge of customer needs in all their markets, and they can
use that knowledge to independently invest in and develop solutions
even before their defense customers recognize the need for them.
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Conclusion
The defense market is undergoing dramatic change. The Pentagon’s
emphasis on building affordable systems poses both opportunities and
challenges for established industry players. Exquisite systems providers
retain enormous advantages with their ability to deliver the world’s
most advanced defense technology, but they must adapt their operating
models to address unconventional as well as conventional threats and to
deliver solutions more quickly and at lower costs. For nontraditional
companies, such as the agile smart customizers and disruptive
specialists, the Pentagon’s new way of doing business could play to their
strengths. They likely will see more opportunities come their way, if
they position themselves wisely.
Regardless of the way these companies play, a CDS approach can help
them. CDS is not a deterministic concept, driving toward a fixed way to
succeed in the defense market. Rather, it provides a template to guide
enterprise strategy development, as well as restructuring and costcutting initiatives (including addressing areas previously considered out
of bounds), to generate true strategic choice. Similarly, CDS does not
confine companies to the customers they have. Rather, it helps them
find the customers that best fit their unique capabilities and how they
compete. Most important, CDS enables companies to identify their
underlying mechanism of value creation — what they do best — and the
opportunities for delivering that value to market. The strategic
coherence that results from these outcomes will give any company
serving defense customers an essential advantage — the right to win
— in the new environment.
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This report was originally published by Booz & Company in 2011.
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