Some defense contractors may stabilize during the upcoming downturn by spanning defense and commercial applications while others may become more viable in areas where there is only one competitor per segment, according to new analysis from strategy consulting firm Booz & Co.
Booz & Co. said in its report, 2013 Defense Industry Perspective, the current iteration of the defense industry is likely unsustainable, the “major transformation” currently underway in the defense industry is the kind of correction that happens once “every 20 or 30 years” and that dire predictions are not just hyperbole.
“It is hard to overstate the extent of the downturn,” the report said.
The analysis was first reported by POLITICO Pro, which posted a copy of the report.
Booz & Co. gave a number of specific challenges the defense sector faces, such as a steep decline in federal spending, evolving customer requirements, the rise of new non-traditional competitors, Wall Street skepticism and attracting and retaining the most talented employees.
Booz & Co. also highlighted Boeing’s [BA] investment in commercial solutions as a way of surviving the defense sector correction. Booz & Co. said Boeing realized investing in commercial capabilities like fixed-price development, product-line management and value-based pricing could help the company address evolving customer requirements like the demand for increasing the speed of development and fielding of products.
Booz & Co. said becayse Boeing sells modified versions of commercial aircraft to the Defense Department and has invested in companies that make disruptive systems like unmanned aerial vehicles (UAV), Boeing is more flexible in adjusting to market forces. Boeing sells its 767-based aerial refueling tanker to the Air Force and the 737-based P-8 Poseidon to the Navy for anti-submarine warfare.
“Collectively, these actions have enabled Boeing to compete in the defense sector more affordably and nimbly than some of its competitors,” the report said.
Booz & Co. said it expects large, strategic moves predicated by the attempted BAE Systems-European Aeronautic Defense and Space Co. (EADS) merger to begin again in 2013. Booz & Co. said companies need to “choose and choose quickly” one value creation strategy and focus the company and investment community in this direction. The report gave two successful examples in companies like Northrop Grumman [NOC] and Lockheed Martin [LMT] (or their forebears) consolidating excess capacity and General Dynamics [GD] creating value by recycling assets across company segments.
Booz & Co. also said the downturn requires more centralized decision making because difficult decisions will be required and “self-amputation” is an unnatural act. The report said while moving decisions to the front line where managers have the most direct contact with day-to-day needs of customers works in good times, hard decisions need to be made and made efficiently to help attack costs and change personnel who are not suited to managing through a downturn.
View the report here: http://bit.ly/ZoDkdZ