• Like
Expanding into Adjacent Markets (Cyber, Energy, Smart Power, Health IT) - Wharton Aerospace & Defense Conference
Upcoming SlideShare
Loading in...5

Thanks for flagging this SlideShare!

Oops! An error has occurred.

Expanding into Adjacent Markets (Cyber, Energy, Smart Power, Health IT) - Wharton Aerospace & Defense Conference


Diversification into attractive adjacent markets provides an opportunity for traditional aerospace & defense (A&D) firms to offset potential declines in their core business in the face of …

Diversification into attractive adjacent markets provides an opportunity for traditional aerospace & defense (A&D) firms to offset potential declines in their core business in the face of defense spending reductions and/or declines in the highly cyclical commercial aerospace market. This presentation—given by The Avascent Group at the Wharton Aerospace 2010 Conference—considers key strategic questions faced by A&D industry leaders as they evaluate various paths for expanding into several potential adjacent markets, including cyber-security, health care information technology, energy, and “smart” power.

  • Full Name Full Name Comment goes here.
    Are you sure you want to
    Your message goes here
    Be the first to comment
No Downloads


Total Views
On SlideShare
From Embeds
Number of Embeds



Embeds 0

No embeds

Report content

Flagged as inappropriate Flag as inappropriate
Flag as inappropriate

Select your reason for flagging this presentation as inappropriate.

    No notes for slide


  • 1. January 2010 Adjacent Market Strategy Development & Execution Prepared for
  • 2. This breakout session on adjacent markets will focus on the following…  Key questions A&D leaders are asking about adjacent markets today  Overview of a variety of adjacent market strategies that have been employed previously by A&D firms  Methodology for maximizing success when entering adjacent markets  Analysis of several high visibility adjacent markets of interest to the A&D community – Cyber – Health IT – Energy & Environmental – Smart power THE AVASCENT GROUP | 2
  • 3. We are the leading independent management consulting firm serving companies dedicated to meeting the most demanding government challenges 20+ Years of experience (formerly DFI Corporate Services) Experienced, cross-functional team of over 50 professionals Worldwide network of subject and regional experts We bring: Pragmatic Growth Solutions Informed Strategic Insight Sophisticated Fact-Based Analysis Fact- To help our clients conceive, develop and execute Business Growth Strategies to address Complex Public Sector Needs THE AVASCENT GROUP | 3
  • 4. The slowdown in the defense spending growth cycle naturally raises cause for concern and scrutiny at senior levels throughout the A&D industry National Security Macrotrend Budgetary Risk Analysis DoD Budget, 1948-2010 Key Market Issues Including Supplementals, Real $ 800 • OPTEMPO in Iraq and Afghanistan has driven 700 defense spending to unprecedented levels 600 • Total topline DoD $B spending is expected to 500 decline in the next few years, but historical 400 peacetime funding will still be substantial 300 • Many of the cuts have already been made in the 200 procurement arena, targeting under 100 performing and non- strategic programs 0 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 1948 1950 1952 1954 1956 1958 1960 1962 1964 1966 1968 1970 1972 1974 • R&D remains steady as well as a variety of support service functions RDT&E Military Personnel Other Procurement Operations & Maintenance (particularly white collar) Source: DoD Greenbook, Avascent Analysis THE AVASCENT GROUP | 4
  • 5. When recent historic corporate growth objectives become increasingly difficult to attain, adjacent markets gain greater visibility Paths to Growth Corporate Objective 8-10% growth* Organic Inorganic Growth Growth Gain share from Grow new Fill gaps or gain customer Purchase new competitors capabilities access capabilities Core Adjacent New Markets Markets Markets * Assumption based on recent past performance THE AVASCENT GROUP | 5
  • 6. As a result, these types of questions about adjacent markets are being heard frequently by Boards, C level leaders, and heads of strategy and corporate development Key Questions “My core market is projected to be stagnant or declining in the near to medium term after years of robust growth… should my company enter new markets or try to compete more aggressively in the core?” “If my company enters an adjacent market, how can adjacent markets be compared?” “How can a company leverage its capabilities and customers into new markets – and can it be done organically or through acquisition?” “Will a major play into an adjacent market be positive in the near to medium term for creating shareholder value given current growth and margin expectations?” “What types of partners and/or acquisition targets should my company be familiar with as we look to enter these new markets?” “Does my company need to hire people with non-traditional backgrounds and expertise in these new markets in order to be successful?” “My competitor just stood up a (cyber, smart power, health IT, energy) organization, should I be concerned and should I stand one up as well?” THE AVASCENT GROUP | 6
  • 7. Aerospace & Defense companies large and small have had the entire gamut of results when entering adjacent markets over the last decade Company Adjacent Market Strategy Results Lesson Learned Fortune 100 Launch of telecom business unit during $1.5B and exit from market Anticipated market Defense and period of rapid growth in IT/Telecom demand did not Aerospace markets by building on deep IT expertise materialize Company Fortune 100 Launch of high-speed Internet service Exited market due to lack Anticipated market for travelers worldwide by leveraging of demand demand did not Defense and ground and data stations materialize Aerospace Company Developed strategy to improve oil Sold capability to oil & gas Challenge to monetize Fortune 100 exploration using its own deep defense industry leader non-core business Defense and technology expertise and through a Aerospace partner’s capabilities Company Expanded into energy market to service Stand-alone business Near term results in Multi- Multi-billion oil & gas firms by using market leading dedicated to Energy adjacent markets may manufacturing capabilities markets under-perform even when Dollar Aerospace long term strategy sound company Paid significant multiple to acquire cyber Formed the core of the Short-commute adjacency Fortune 100 company’s market leading expansions are lower risk business that had leading edge Defense and technology and intelligence community cyber business Aerospace relationships Company Expansion into security marketplace via Multi-billion dollar Understanding core Fortune 50 multiple acquisitions with the goal of business today and a core competencies leads to Defense & corporate business entry into optimal establishing market leadership Industrial adjacencies Company THE AVASCENT GROUP | 7
  • 8. Given this uncertainty around entering adjacent markets, companies can reduce risk and maximize opportunity through a phased market targeting process Identifying Adjacent Markets Phase 1 Phase 2 Phase 3 Competency / Customer General Market Targeted Adjacency Match – Inside-Out Attractiveness - Outside-In Assessment Can a company leverage its How attractive is the What are the entry points core competencies and market? and opportunities for a customer relationships? company in the market? • Screen of adjacent • Screen based on overall • Final set of targeted horizontal and vertical market attractiveness adjacencies for a company markets based on a • Representative markets company’s core ~ 20 Markets could include: competencies and • Examination of market to customers include: • Cyber • Examination would include: • Health • Customer • Customer relationships • Energy • Competitor • Smart Power • Technical/ • Supplier ~ 20 Markets manufacturing capabilities • Market growth • Assessment of optimal • Culture • Market size market entry points THE AVASCENT GROUP | 8
  • 9. Phase 1: Inside-Out - When looking to expand into adjacent markets, “short commutes” by either customer or capability but not both simultaneously tend to be easier to achieve  Maintain – Maintain existing customer base and Growth Map technology focus – Organic Focus NEW  Extend: New Capability, Current Customer Extend Big Bang – Expanding service offerings to existing CUSTOMERS customer groups offers growth path – Organic or Inorganic  Extend: Current Capability, New Customer – Likewise, offering current capabilities to CURRENT new customer groups is a logical adjacency- if existing technology supports Maintain Extend easy transfer – Organic or Inorganic CURRENT NEW  “Big Bang”: New Capability, New Customer CAPABILITIES – Expanding both capabilities offered and customers served would indicate a significant change of direction - likely driven by inorganic growth – Inorganic Focus THE AVASCENT GROUP | 9
  • 10. Phase 2: Outside-In – General Market Attractiveness Evaluation Market Potential Relevant Customers Analysis Strategic Implications  Aggressive funding and  Many companies are more  Intelligence stakeholder battle creates focused on general network IT Cyber FY10 Market Size Community near-term opportunities development and $12B  DHS  Ill-defined programs implementation and rebranded as Cyber FY10-14 CAGR 8%  DOD outside of IC create challenges  Customer positioning key to long-term viability (NSA)  Focus on EHR, network  New focus, but not new  Military Health Healthcare FY10 Market Size modernization, and market; many firms have System application development Information $10B already placed bets, with Technology  VA are critical remaining targets often, FY10-14 CAGR 5%  HHS  Contract vehicle less value-additive positioning is key for future  Contract vehicle  Social Security success positioning is critical Administration  Near-term ARRA funding  Defining the addressable Energy and  Dept of Energy creates gap fill market and relative FY08 Market Size Environment  NOAA  Better funded market sub- positioning is key $7B - $50B  GSA segments are evolutionary,  Firms with flexible e.g. green buildings and business models may offer FY10-14 CAGR 5%  State and Local green IT, & device energy greatest upside mgmt  High growth, large market  Some ‘reputational’ Smart Power FY10 Market Size  Department of with increasing policy disadvantage to defense $10B State significance contractors  DOD  Emerging market of strategic  Challenging business FY10-14 CAGR 15%  USAID import with limited business models as groups emerge sophistication from not-for-profit mentality  NGOs THE AVASCENT GROUP | 10
  • 11. The Cyber market is often ill-defined to include many traditional IT functions, but nevertheless is a $12B market that is projected to grow at more than 8 percent Cyber Adjacent Market Profile Cyber Investments Competitive Environment Integrators have generally employed inorganic growth strategies to build deep portfolios of cyber offerings IT RF Services Electronic Warfighting Integrated Solutions Warfare Systems IT Security Command & Network Control Information Operations Niche Technology Providers Configuration RF Network Collection Operations Computer Centers Network Attack OCI Issues ISR Computer Identity Network Management Defense Computer Network Exploitation Foreign Opportunity Areas Access Signals Controls Intelligence  The Comprehensive National Cyber Security Collection Geospatial (CNCI) introduced $17B in new cyber Information development funding over FY09-13 Systems  $6.6B DIA Solution for the Information National Intelligence Technology (SITE) IDIQ is likely to have a large Systems cyber component THE AVASCENT GROUP | 11
  • 12. Federal Health IT represents a potential growth alternative as customers tackle new policies, data integration/sharing issues and EHR migration Healthcare IT Adjacent Market Profile Market Details Customers DoD: Veterans Affairs: HHS: Commercial, S&L $1,040M $916M $1,557M (e.g. Hospitals, Labs) Health IT • Patient Management – Public Health Life Sciences Capabilities Clinical & Non-Clinical • Logistics & Supply Pharma • Business Solutions Chain • Program Management • Program Management & Research Support – • Quality Assurance • IT Infrastructure & Research Support – Life Sciences • Program Management • Logistics & Supply Chain Public Health • Quality Assurance & Research Support – Pharma Competitive Environment Opportunity Areas Successful players in the Health IT domain have tended to  IDIQ contract vehicle turnover in FY10-11 combine organic growth with targeted acquisitions and have usually focused on just one or two customers  Modernization of IT infrastructure Northrop’s strategy has been primarily  Major system redesign acquisitive and targeted at MHS  Data interoperability SAIC’s position is based on its long history with massive programs at MHS and NCI  Increasing EHR adoption SRA’s strategy has been organic growth of  Some stimulus opportunities its NIH account and an acquisition targeted at CDC and NIH *All budget numbers based on the FY08 OMB IT Budget THE AVASCENT GROUP | 12
  • 13. Energy has become a focus for this administration; opportunities are likely to be split between facilities modernization and device-focused energy enhancements Energy and Environment Adjacent Market Profile Energy Market Value Chain/Life Cycle Waste Resource Resource Power Waste to Distribution Storage Consumers Disposal & Extraction Refining Generation Energy Remediation Energy Management Micro Macro Competitive Environment Opportunity Areas  Energy management, a service area that cuts across multiple segments of the energy value chain, offers the most opportunity  DOE SmartGrid: $4.3B in stimulus funding to improve electric grid efficiency/reliability  Subcontract opportunities under DOE’s $80B Energy Savings Performance Contract (ESPC) to improve energy efficiency at federal facilities Raytheon made a strategic choice to exit the energy business and sold off its relevant intellectual property  Cyber security will rise in importance as energy systems adopt networked solutions THE AVASCENT GROUP | 13
  • 14. Smart Power holds potential as the USG adopts policies that aim to boost US influence abroad by employing means other than traditional military power Smart Power Adjacent Market Profile Operating Environment Instability Failing State Post-Conflict/Stabilization Prescription Military Law Humanitarian Health Reconstruction Education Democratization Assistance Enforcement/ Assistance/ Counter- Counter- Disaster Policy Narcotics Relief Development & Humanitarian Aid Logistics Program Management Functional Training Training Activities Provision of Equipment & Assets International Organizations & NGO Support (including Peacekeeping) Competitive Environment Opportunity Areas • Department of State and USAID are the primary funders of smart power and account for nearly 70% of the total market (FY09 total $60B) • Department of Defense dedicates nearly $10B (FY09) to smart power initiatives • The Department of Treasury and Department of Agriculture together make up nearly 4% of the total, with contributions in technical assistance, debt restructuring, and education activities THE AVASCENT GROUP | 14
  • 15. Phase 3 – Targeted Adjacency Assessment – The internal and external assessments in Phases 1 and 2 will yield an understanding of current adjacent market positioning and best entry points – e.g. grow organically, partner, acquire and will help to define achievable goals Cyber Market Case Study NG • Where do you fit and where do you want to be? Integrators High • Gov’t IT and C4I Generalists provide the broadest level Multi-Service GD LM Providers of competition with activities that span all Federal BAH Raytheon customer communities SAIC Breadth of Cyber / IT Capabilities • Commercially-focused firms offer needed technology, ManTech CACI but full-commitment to Federal customers is BAE questionable ITT • Cyber specialists serve as technology incubators and CSC L-3 have historically represented key acquisition targets QinetiQ Serco Boeing SRA HP/ EDS Thales / Computer IBM Ncipher Associates Harris Wyle Symantec MacAulay-Brown McAfee GAITS NCI Cisco Trusted Computer SafeNet Blue Coat Intelligent Endace DeepNines NuBridges Smartronix Decisions ProObject Low New World Apps Arbor Allot NuParadigm Global Velocity Core Security TechUSA Bivio TecSec Entrust, Inc. WebSense DynTek Technologies IOactive Npulse KCG Syprus Net Witness Galois SecureWorks Core Cloudshield F5 Layer 7 Omen SNI 0% 100% Market Positioning ( % Government Focus) = Commercially-focused = Gov’t IT & C4I Generalists = <$50M = $250M - $1B = Cyber Specialists = $50M - $250M = >$1B (based on primary offerings) THE AVASCENT GROUP | 15
  • 16. Final considerations  While the overall defense budges will be leveling-off, certain adjacent markets represent real growth and scale  A phased market entry approach to adjacent markets maximizes opportunity and minimizes risk  Short-commutes to adjacent markets by customer or capability but not both simultaneously are typically easier to achieve  Leading growth companies in these adjacent markets (e.g. cyber) have strong interest from many suitors – acquiring at higher multiples can be expected  Corporate growth and margin targets can be at odds with the higher risk/rewards profile of entering adjacent markets – often there is a trade-off  There is a distinction between launching an initiative and brand awareness in adjacent markets vs. growing a business of scale – recognize which is the focus THE AVASCENT GROUP | 16
  • 17. Avascent assists corporate clients to chart paths to growth across the full spectrum of government missions and domains Public Mission Expertise Government Domains Homeland Space Public Safety Infrastructure Defense & Federal National Security & Exploration & & Law & Intelligence Civilian Security Disaster Exploitation Enforcement Transportation Agencies Agencies Response Ground, naval, air Border, port , Military, civil and Law enforcement Construction, US Army, Navy, US federal civil and joint military aviation, physical commercial space and public safety engineering and Air Force and agencies and forces and and cyber security; operations, equipment operations of joint agencies programs intelligence domestic and systems and systems, major facilities, and intelligence operations international supporting ground programs and and transportation agencies disaster response infrastructure services infrastructure Global Government Aviation & Health Care & Energy & State & Local Development Business International Aerospace Life Sciences Environment Governments & Stabilization Systems Aviation Military, veteran Generation, Stabilization, aid Business support US state and local Governments, infrastructure and and public health distribution and and development systems and government NGOs, and major commercial sector systems and conservation; support processes across entities multinationals equipment and services and life environmental all levels of serving public MRO services sciences monitoring & government sector needs applications protection around the world THE AVASCENT GROUP | 17
  • 18. Our role is to help companies successfully navigate a high stakes market characterized by constant change, customer complexity, and stiff competition Government Market Challenges How Avascent Can Help Changing Mission Needs Sophisticated Fact-Based Analysis Fact-  Multitude of forces (political, budgetary, Superior  Anticipate government needs and define technological, bureaucratic, international) the emerging opportunity landscape constantly shape and reshape demand Opportunity  Isolate the best growth opportunities for  Long time horizons constantly buffeted by Discovery your company near-term needs and forces Complex Customer Requirements Strategic Insight  Demanding customers with stringent New  Engineer innovative solutions that address performance, schedule, and cost requirements Business customer needs and deliver business that often require custom solutions results Revenue  Complex and often opaque buying processes  Partnership strategies that secure a with many participants and shifting criteria Streams strategic advantage over competitors Competitive, High Stakes Environment Pragmatic solutions  Intense market driven by high stakes/high risk Investment  Fact-based business cases with Fact- competitions and dominance of single buyers Confidence comprehensive risk/return evaluation  Need to invest, partner, and innovate to & Reduced  Contract capture support succeed and secure long-term revenue flows  On-going support post-capture to assure Risk On- post- value is delivered Avascent Client Perspective: “The value I receive from Avascent is critical to my firm achieving our objectives. The Avascent team is a true partner and allows me and my team to tackle complex problems and produce meaningful and actionable results.” THE AVASCENT GROUP | 18
  • 19. We help clients detect emerging opportunities then engineer winning growth strategies to capture value for their business Questions we help clients address Engineer Business Anticipate Opportunities Capture Business Value Strategies Define Design Develop Fact- Fact- Execute Value Deliver Detect Mission Business Business Based Capture Business & Value Shifts Growth Strategy Business Case Strategy Results Opportunities How will changes in What are the Organic Growth Challenges the macro emerging or environment to unexploited Who are the target What is the upside What are the most How do we insure reshape the public opportunities in customers? What of capturing the important customer effective sector priorities? my current and are their key needs/ opportunity? requirements? execution? adjacent markets? preferences? How are emerging What risk What risk What are the missions driving Who are the What business scenarios do we scenarios do we appropriate shifts in policy competitors in this models should we need to consider? need to consider? performance priorities & budget space? Can we consider? milestones and resources? build a competitive What investment, What investment, metrics? advantage? How do we position competencies, competencies, How will changes for success? organizational organizational What systems and in regulations, What capabilities Pricing? Offering? systems do we systems do we processes need to technology or and resources are Operations? need? need? be put in place? customer needs required to address reshape the market opportunities? Inorganic Growth Challenges environment? How attractive are How might an Will the target fulfill How should we How do we know What risks, issues the opportunities acquisition best expectations integrate target? that we are & opportunities do (risk/reward position us? Which regarding growth, What actions do we capturing the these mission & profile)? Are they targets should we margin & strategic need to capitalize synergies we value shifts create? aligned with goals? pursue? positioning? on acquisition? expect? THE AVASCENT GROUP | 19