The Aerospace Defense market now has seen contraction for over six years. Companies have seen revenues steadily decline and all have taken measures to bolster margins and profits through artificial means: stock buy-backs, taking operational efficiencies, partnering, outsourcing and cutting overhead costs. During this time frame continuous improvements in operational effectiveness was absolutely necessary to keep and sustain superior profitability. At the same time the Federal Government sought ways to cut their acquisition costs and quickly migrated to the low-price-technically-acceptable (LPTA) procurements. This has created a market condition that had companies readjusting their portfolios to better position themselves for reasonable profit offerings, albeit while revenues continued to shrink.
Having a front row seat to all of this I keep thinking that we are seeing the things that Michael Porter addressed in his brilliant paper “What is Strategy?” subtitled “Operational Effectiveness is Not Strategy: (Porter, Michael E.., Harvard Business Review, Nov/Dec96, Vol. 74 Issue 6, p61, 18p). All the moves that the major Tier 1 and Tier 2 A&D competitors are taking are classic operational effectiveness (OE) moves, not strategy. Operational effectiveness is essential to stay in business, however when nearly the entire industry is doing the same, as Porter puts it “it leads to relative improvement for no one”. The second effect of everyone running sustained OE campaigns is what Porter calls “Competitive Convergence” where the more everyone benchmarks the competition, the more the look the same. I am seeing us all look the same in both structure and portfolio alignment.
So where can you find all the unique activities that represents a real strategy? Who has stepped out to take the next step and provide a unique offering and mix of value? I think some are thinking about strategy, because you can only take OE so far before you run out of options. Without mentioning specific companies, I have observed some activities that I think are beginning to indicate a strategy in the formation and not just following the pack. So what are these activities? First, you have to look at the customers, what is it they value most right now? In the A&D space its innovation. Commercial technology is rapidly challenging the traditional A&D high tech offerings allowing our adversaries to erode the technology gap. Technology used use to be a force multiplier. Those that can offer innovation at reasonably affordable prices (USDA Frank Kendall still says “Price is a significant factor in source selection”) then you now have something no one else has.
So what are the indicators of real strategy in the A&D market? In my opinion it is the companies that are ramping-up R&D, the ones buying unique, niche capabilities, the ones that are partnering with agile and innovative tech start-ups and the ones that are bundling capabilities to offer one-of-a kind capabilities. In short, the ones investing and not divesting. Don’t get me wrong, I don’t think there is much you can do in the low-wage services business to offer innovation at this time. Low margin services are commodities and the companies shedding their low margin services groups are probably doing so to concentrate on core activities. That’s another necessary OE move. The ones that take the next step and offer innovative products and services will be the ones that have moved beyond OE and into strategy. So now is the time to watch the early indications and warnings of the innovation companies as they could very possibly break up this stalemate of OE one-upmanship and start offering innovative solutions, and even possibly substitutes! Now wouldn’t that be fun!