The defense industry has been through major strategic changes through the years – from its days driving technology innovation through U.S. government funding, to a focus on equipping wars and conflicts when they arise, to peacetime consolidation, to the emergence of new upstarts, and then to more consolidation. There have always been some strategic issues the industry controls, some which it anticipates, and some it never sees coming. I’m reminded of Secretary Rumsfeld’s comments about known knowns, known unknowns, and unknown unknowns.
For almost 15 years I have been working with clients trying to identify those the strategic, operational, and tactical issues they will or could face, and help them navigate to position to win in the marketplace over the next ridge-line. As we all attempt to look over that next ridge-line, there are some clear and common issues that must be adjudicated by defense firms—today’s known knowns and known unknowns. These are listed in no order of importance, and I encourage my clients and friends in industry to add to and revise the list given issues and challenges your firm faces:
- Evolving national security policy under a new administration and ever-evolving threat dynamics from state and non-state actors.
- Continued pressure on the U.S. Defense Department’s budget. This includes downward pressure on the top line from entitlement programs and internal upward pressure from people costs (healthcare, retirement, etc.), which the Pentagon faces just like every other employer.
- Growing divergence within “the customer” – R&D, requirements writers, acquisition authorities, and the war-fighter community.
- Silliness in U.S. export policy and decisions made about systems, sub-systems, and components that lack consistency.
- Recruiting the best and brightest engineering talent to replace a current work-force that is getting older.
- Threats from technology companies, start-ups, and other new market entrants.
Strategic issues one through four above are out of the control of defense firms. They can prepare for different outcomes and prepare to react quickly and appropriately by generating good insights on the customers, running disciplined scenario analysis and war-gaming exercises, and developing well-vetted and studied strategies to prepare for potential future states in advance.
What is in control of defense firms is the study, vetting, and adoption of alternate recruiting and business models (i.e., strategic issues five and six).
Addressing the recruiting challenge means overcoming the loss of institutional knowledge and know how as the current workforce retires, as well as the challenge of recruiting millennials into the defense industry. Defense firms have so far been unable to crack the code on recruitment given millennials’ overwhelming desire to “do good,” their tendency to change jobs frequently, and—most significantly—the challenge of competing with compensation packages in the technology industry. Both the defense world and other manufacturing industries are at a disadvantage, but one that can be overcome with new talent strategies.
The threat from technology companies and start-ups comes specifically from their willingness to use disruptive business models. The traditional defense industry is challenged by innovative business models that circumvent government R&D investments and solution sets, use different program payment methods, and reduce overall cost and timing. Many defense firms have struggled significantly with understanding and executing these more commercial business models. The reasons behind this are varied ranging from traditionally low risk tolerance to the embedded development and manufacturing costs the defense industry bears because of FAR compliance. This burden creates an opportunity for new market entrants to create a competitive advantage, which we are already seeing in markets ranging from UAVs to space platforms, sensors, communications, and other mission systems, to services.
The market will continue to evolve, and items on this list will come and go, but success in the future will go to those firms with the best vision of how to compete, in a disciplined way, in the future state of this industry. The marketplace in the next ten to twenty years will look very different than it does today with companies that have solved the recruiting and business model challenge on top.