Waves of change are coming to the defense industry

The messy withdrawal of US combat forces from Afghanistan heightens our attention to the milestone that is this month’s 20th anniversary of Al Qaeda’s attack on New York and Washington. September 11th, 2001 is a classic inflection point. The tectonics of international relations that the dissolution of the Soviet empire had activated in 1989 gained fresh impetus from the shocking success of that small band of terrorists from the opposite side of the world leveraging a common technology to devastating effect.

As befits a true inflection, the events of that day reshaped nearly every dimension of US national security posture, including the defense industry. An industrial sector poised to spearhead then-Secretary of Defense Donald Rumsfeld’s “transformation” to dissuade the rise of a peer competitor was, after 9/11, refocused onto counterinsurgency, homeland security, and nation-building. And while the end of Operation Iraqi Freedom in August 2010 might have allowed industry to slew its capabilities back to the agenda of peer competition, enactment in that very same month of the Budget Control Act of 2011 stunted for another decade the resources and managerial attention required to fully enact that strategy.

Whether the withdrawal of US forces from Afghanistan comes to mark the next inflection in US national security remains to be seen, though I am doubtful. However unsettling may be the scenes of military unpreparedness and personal desperation in Kabul this summer, I do not sense the tectonics of national security moving beneath our feet the way they did in November 1989 and September 2001.

That is not to say the milestone of September 2021 should go unremarked by defense-company strategists. While every milestone does not mark an inflection, they almost always provide a good vantage from which to take stock.

In so doing, the perspective on which corporate strategists should be trying to gain clarity is the wave of profound change building in the business of defense. As UCLA professor Richard Rumelt observes in his exquisite book, Good Strategy Bad Strategy, “The challenge is not forecasting but understanding [that] . . . [o]ut of the myriad shifts and adjustments that occur each year, some are clues to the presence of a substantial wave of change and, once assembled into a pattern, point to the fundamental forces at work. The evidence lies in plain sight, waiting for you to read its deeper meanings.”

But where to look for the evidence? Rumelt has a rubric for that, five guideposts for analyzing waves of industry-wide change. Indeed, my own conviction that change is coming to the defense sector arises from the resonance of at least three of Rumelt’s guideposts with some of the fundamental forces that I feel buffeting our industry today:

• Rising Fixed Costs. Rumelt contends that the simplest indicator of an imminent transition may be observed when fixed costs, especially product-development costs, begin rising rapidly. Among the examples Rumelt uses to illustrate how rising fixed costs can unleash an industry-wide transformation is the transition in aircraft propulsion from piston to jet engines, which in the late-1940s rapidly winnowed a multitude of players down to the three we know still today–GE, Pratt & Whitney, and Rolls-Royce. It’s a guidepost that came quick to my mind around the formation in 2020 of Raytheon Technologies, which I regard as a leading indicator that sustained competitive advantage in defense prime contracting now requires a super-sized balance sheet to keep up with the product-development bets being made by firms with more than $100B of enterprise value or deep-pocketed investors backing them.

• Government policy. Rumelt’s second guidepost calls out transitions instigated by changes in government policy. It’s an indicator he illustrates by reference to the deregulation of air transport beginning in the late-1970s, which brought intense price competition to an airline industry accustomed to differentiating on service. I think of Rumelt’s second guidepost of change when I observe Pentagon acquisition strategies that set out to separate development from production, which would fundamentally challenge the business model on which prime contracting is staked. The best known of these indicators is former Air Force acquisition executive Will Roper’s concept for developing and building a “century-series” generation of air dominance fighters. But no less an encrusted acquisition system than the Army’s has revamped its thrice-cancelled program to replace the Bradley M-2 with an acquisition strategy that envisions a fresh, open competition, rather than a downselect, at each phase of the program’s development.
• Attractor state. Rumelt’s most provocative guidepost concerns a concept he calls the attractor state, which “describes how the industry ‘should’ work . . . [to meet] the needs and demands of buyers as efficiently as possible.” To illustrate the power of an attractor state, Rumelt recounts the late-1990s rise of Cisco Systems to dominance in inter-networking by its response to customers’ demand for “IP-everywhere”, a standard which rendered incumbents’ proprietary networks obsolete. I think of Rumelt’s enthusiasm for the Cisco story often when listening to Vice Chairman of the Joint Chiefs of Staff General John Hyten explain the expectations he has for Joint All-Domain Command and Control—the articulation of an attractor state for battle-management networking if there ever was one.

While it is no particular indicator of change for the defense industry, this month’s Afghanistan milestone should serve as a timely reminder of how waves of change can suddenly culminate into an inflection that resets the foundation in which a strategic posture, of companies as well as nations, gets disrupted.