Arming The Bug Hunt 2009

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Why the economics of the JDAM and the MRAP are changing customer demand, and how contractors can to adapt to succeed (January 2009)

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Arming The Bug Hunt 2009

  1. 1. ARMING THE BUG HUNT Why the economics of the JDAM and the MRAP are changing customer demand, and how contractors can to adapt to succeed Our view on military-industrial markets in 2009 Hasik Analytic LLC
  2. 2. ARMING THE BUG HUNT Our view on military-industrial markets in 2009 Summary There stands a widespread assertion that spending on existing military programs in the United States will remain constant for the next several years, perhaps trending downward only later on. We remain unconvinced by this conventional wisdom. Rather, we anticipate that financial constraints, conventional overmatch, and constabulary impulses may combine to significantly reorder military spending priorities throughout the western world. Robert Gatesʼ reappointment as defense secretary and his article in the January issue of Foreign Affairs signal that the shift in emphasis towards preparation for small wars will be ongoing. Appropriate procurements for these wars follow the economics of their decisive weapons—the Predator, the JDAM, and the MRAP. Revolutionary improvements will generally be sought only under what we term JDAM economics: where they are based on a small set of advances so inexpensive and compelling that they suppress old ideas about quality constraints. More common will be MRAP economics: evolutionary improvements that are both relatively inexpensive and essential, and based on the selective relaxation of old constraints. Many systems, like the Predator, will show hallmarks of both paradigms. Preparing for what could be a structural break with the industryʼs past requires at least three steps: an intense, practical analysis of the market; applied corporate development that tailors your corporate architecture to the emerging, dominant product architectures; and execution that demands mastery of the business on the order of the industryʼs mastery of its engineering. ABOUT THE AUTHOR James Hasik is a principal of Hasik Analytic, and a founder of the firm. He can be reached at jhasik@hasikanalytic.com ABOUT US Hasik Analytic LLC is a management consultancy dedicated to the success of the industrial organizations that supply the tools of global security Hasik Analytic LLC
  3. 3. Arming the Bug Hunt: our view on military-industrial markets in 2009 The start of 2009 might be viewed as a of neoconservatism emerged in this pe- time of relative relief for military contrac- riod as a convergence of political idealism tors. In the United States, the incoming and realism meant to expand the empire president has selected a team of top lieu- of free commerce and representative gov- tenants in national security widely de- ernment where possible. At the supposed scribed as “centrist”. Roughly two-thirds end of this era, stacks of reports are now of those named so far served with the flowing from think tanks on both sides of relatively centrist Bill Clinton, and the the Atlantic, calling for military reorienta- defense secretary himself will continue, tion upon the needs of collective security, for the time being, to be the Republican and therefore emphasizing force struc- Robert Gates. The pattern seems so un- tures and concepts for counterinsurgency avoidably clear that Barack Obama’s most and nation-building. If this is realism, it leftist benefactors are aghast and feeling is merely conservative idealism. People betrayed. At the same time, throughout suffering from socialism and kleptocracy the West, global recession has set in, but will still be rescued, but mostly when the has thus far led at worst to mere program chaos within their borders begins to leak delays. In a few cases, it has meant small out into the global commons. bursts of spending meant to fill immedi- ate battlefield needs. With a new US gov- Governments throughout the West want ernment supposedly more in tune politi- to know how to maintain meaningful cally with those of the rest of the indus- military capabilities on just 1.7 percent trialized world, many people are assum- of GDP—the NATO average. ing that the era of adventurous neocon- servative idealism is receding in favor of resumed internationalist realism. To date, larger firms in the arms industry have generally not been enthused about People suffering from socialism and military-political opportunism. Today, kleptocracy will still be rescued, but market planning for the crisis of the day mostly when the chaos within their is subject to far more uncertainty than borders begins to leak out into the was planning for continued cold war in, global commons. well, the Cold War. But if the unpredict- ability of the location and direction of the next war were not enough, worsening This view is ambitious and optimistic, for governmental finances could make things the alternative to idealism is not so much truly ugly. By 2011, the Keynesian pump- realism, but opportunism. The longed-for priming promised in the United States foreign policy of Bill Clinton was pro- will have failed, as our rational expecta- foundly opportunistic, cheerfully taking tions should dictate. At that point, the on those enemies—the Serb Republic in federal government will have added an- Bosnia and Federal Yugoslavia—that al- other trillion dollars to its debt, and miles lied forces could easily handle without too of inefficiently nice roads across the much trouble and expense. The reaction country (thanks to that shovel-ready list). © Hasik Analytic LLC 1 9 January 2009
  4. 4. Arming the Bug Hunt: our view on military-industrial markets in 2009 Money in the United States may be get- overseas operation. In the United King- ting short; Mr. Obama’s government may dom, £700 million of new protected vehi- thus also be getting short, leading to fre- cles, bound for Afghanistan, are being fi- netic searches for economy. Spending nanced from the indefinite postponement could turn down sharply, forcing some of the utility vehicle of the Future Rapid serious tradeoffs. The rest of the alliance Effects System, which was not bound for is already there. Governments throughout Afghanistan. Spanish Defense Minister the West, squeezed between the largesse Carme Chacon (who opposed the cam- of their entitlements and electoral resis- paign in Iraq!) is asking her cabinet to tance to further taxes, want to know how increase the limit on foreign deployments to maintain meaningful military capabili- from 3000 to 7700 troops, the limit of ties on just 1.7 percent of GDP—the Spain’s logistical capacity—for now. NATO average. “Afghanistan is Franceʼs real defense What is not difficult to see is where the white paper.” tradeoffs will be found. Despite prattling to the contrary, the conventional over- match of the allies is absolute. The con- Recent European history, and geography, centration of forty-five percent of all are indeed instructive. Denmark feels not global military spending in the United at all threatened by Russia; Sweden States alone must assuredly suffice to buy slightly more; Finland a bit more yet all the modern weapons needed to repel (though relations have never been better, any plausible conventional threat. As Mr. they insist in Helsinki). Georgia rather Gates puts it in the January 2009 issue of regrets focusing its army so intently on Foreign Affairs, counterinsurgency, but as Robbin Laird told Defense News recently, “Afghanistan It is true that the United States would be is France’s real defense white paper.” So, hard-pressed to fight a major conven- if the past seems ex ante unpredictable, tional ground war elsewhere on short the future is inherently unknowable. As notice, but as I have asked before, where Gates’ asserted, “the defining principle” on earth would we do that? U.S. air and of military preparedness should be bal- sea forces have ample untapped striking ance between large war and small war ca- power should the need arise to deter or pabilities, but balance within a realistic punish aggression—whether on the Ko- assessment of the relative threats that rean Peninsula, in the Persian Gulf, or they each pose. The problem, as he put it, across the Taiwan Strait. is that Rather, throughout the alliance, it is the the Department of Defense's conven- constabulary impulse that has taken hold. tional modernization programs seek a Insurgencies, especially those in re- 99 percent solution over a period of stricted terrain, are widely seen as the years. Stability and counterinsurgency main problem. The Danish government’s missions require 75 percent solutions recent white paper on defense asserts that over a period of months. [The question] there is no near-term territorial threat to is whether these two different paradigms Denmark, and as a result, Danish regular can be made to coexist in the U.S. mili- forces should be configured entirely for tary's mindset and bureaucracy. © Hasik Analytic LLC 2 9 January 2009
  5. 5. Arming the Bug Hunt: our view on military-industrial markets in 2009 Perhaps they cannot. If they cannot, then gunmen into sauve qui peut, and allowing the one that will not is the 99 percent ap- the greatly outnumbered Northern Alli- proach—and its constraining mindset and ance and US forces to capture all the ma- enabling bureaucracy. For as we all re- jor cities in the country. As mounting member former US Army Chief of Staff casualties from insurgent bomb attacks in Eric Shinseki saying back in 2000, “if you Iraq made the mission seem not-so- don’t like change, you’re going to like ir- accomplished, a host of companies began relevance a lot less.” Despite the general’s providing thousands of blast-hardened admonishment, getting the US ground armored vehicles in the effort that even- forces ready to fight insurgencies in Af- tually became known as MRAP. And since ghanistan and Iraq took unacceptably the Bosnian campaign of 1995, a consis- long. As French parliamentarian Yves tently growing number of General Fromion put it recently, “a crash program Atomics’ Predator reconnaissance-strike that takes six months is not a crash pro- drones and derivatives have provided air- gram.” Specifically, as Senator Joe Bi- power that has been stealthy, surgical, den’s indictment of slow uptake in the sudden, and even cost-effective. Mine-Resistant Ambush-Protected (MRAP) vehicle program made clear, ex- It is patently clear that well-run armed cuses about phantasmal industrial con- forces can at once prepare for wars both straints will no longer suffice. Mr. Biden big and small. was subsequently proven correct in his assertion that if you show them money, the contractors will come. And shortly, he All three of these systems, or close substi- will be vice president in the United States. tutes, have been purchased by modern This may matter for something. military forces throughout the world. But this shift in priorities has drawn com- As Senator Joe Bidenʼs indictment of plaint from commentators disinterested slow uptake in the MRAP vehicle in this ‘empire of democracy’. It is not so program made clear, excuses about much, they claim, that such spending phantasmal industrial constraints will no draws resources from programs that were longer suffice. meant for blue water, open skies, and something resembling the Fulda Gap. Rather, and now citing the Georgian ex- So, perhaps fearing irrelevance—or a ample, they claim that the widespread fo- house-cleaning on the order of that at the cus on insurgency cripples preparation Central Intelligence Agency after 2003— for conventional conflict. Unfortunately those bureaucracies are belatedly catch- for the argument, it is patently clear that ing up. While the F-22 stealth fighter has well-run armed forces can at once pre- still seen no gainful employment over Af- pare for wars both big and small. The ghanistan or Iraq, a small set of iconic, British Army and the Royal Marines have almost decisive weapons has captured been doing so reasonably successfully for public imagination in those two cam- decades, if not centuries, and this capac- paigns. In late 2001, hundreds of Boeing’s ity was not lost on the colonists. As Gates Joint Direct Attack Munitions (JDAM) noted, blasted wide gaps in the Taliban’s trench lines in the Panjshir Valley, sending its © Hasik Analytic LLC 3 9 January 2009
  6. 6. Arming the Bug Hunt: our view on military-industrial markets in 2009 The ability to fight and adapt to a di- goes-to-China reordering of military pri- verse range of conflicts, sometimes si- orities. Pressed by financial restraints, multaneously, fits squarely within the and still short a near-peer competitor, but long history and the finest traditions of unshaken in their enthusiasm for global the American practice of arms. In the order, Mr. Gates’ and his band of sup- Revolutionary War, tight formations posed centrists may put into force a drilled by Baron Friedrich von Steuben wholly new outlook on military spending fought redcoats in the North while guer- priorities in another two or three years. It rillas led by Francis Marion harassed is just possible that this new team could them in the South. During the 1920s and show the courage to skip that generation 1930s, the Marine Corps conducted what of weapons of which Texas Governor would now be called stability operations George W. Bush spoke at the Citadel in in the Caribbean, wrote the Small Wars September 1999. Manual, and at the same time developed the amphibious landing techniques that Change will not be endemic to the United would help liberate Europe and the Pa- States. Consider the predicament of the cific in the following decade. Ministry of Defence in the United King- dom. The British National Audit Office’s Fast forward to 2008, and note that Dep- annual review of military programs this uty Defense Secretary Gordon England year highlights four that are particularly recently approved a major policy directive overbudget and behind schedule: the that elevates preparation for irregular A400M airlifter, the Meteor beyond- warfare to an equal footing with that for visual-range air-to-air missile, the Nim- more conventional combat. This might be rod MRA4 maritime reconnaissance air- less important with the pending change craft, and the Terrier armored engineer- in government if Mr. Gates, Mr. Eng- ing vehicle. All are national or European land’s immediate boss, were not staying programs; none offer performance im- on. As his press secretary put it in De- provements that can be described as cember, Gates may have punted a few de- revolutionary. What should be particu- cisions to his presumed successor, but larly distressing to EADS, MBDA, and “now he is going to be the recipient of BAE Systems is that there are off-the- those punts, and he won't be calling a fair shelf or soon-to-be-ready alternatives to catch. He is prepared to deal with them all of these, such as Boeing’s C-17 Globe- head-on.” master III, Raytheon’s AIM-120 AM- RAAM, Boeing’s P-8 Poseidon, and what can only be called a host of perfectly ac- It is just possible that this new team ceptable combat bulldozers. could show the courage to skip that generation of weapons of which Texas Needless to say, this sort of change may Governor George W. Bush spoke at the dramatically affect business; it may even Citadel in September 1999. portend a structural break, a discontinu- ity with past practices that remakes the Retaining Mr. Gates may indeed prove industry. For astute, capable, and fast- great cover for Mr. Obama: if people are moving enterprises, this is opportunity. indeed policy, this single decision may As UCLA management professor Richard foreshadow, and then facilitate, a Nixon- Rumelt stressed recently, © Hasik Analytic LLC 4 9 January 2009
  7. 7. Arming the Bug Hunt: our view on military-industrial markets in 2009 sors that went out of production in 1997, a structural break is the very best time to Chinese air defense commanders are be a strategist, for at the moment of communicating amongst themselves with change old sources of competitive advan- late-model Lenovo laptops, Blackberries, tage weaken and new sources appear. and VOIP telephone connections. Afterward, upstarts can leap ahead of seemingly entrenched players. JDAM economics: revolutionary improvements based on a Governments throughout the West will be small set of advances so inexpensive on the hunt for economies, but paradigm- and compelling that they suppress old breaking combinations of price and per- ideas about quality constraints formance will be all the better. As the economics laureate Herbert Simon put it, bounded rationality and uncertainty In this environment, breakthrough per- about the future lead people to satisficing formance will be sought, but more often solutions. With today’s military technolo- within what we may term JDAM econom- gies, this means modular, scalable, and ics: where the revolutionary is based on a reconfigurable systems that are adaptable small set of advances, and where it is so to a range of threats. These factors will be inexpensive and compelling that it sup- all the more important because the threat presses old ideas about quality con- of obsolescence has in some ways in- straints. Boeing’s design was so dominant creased since the end of the Cold War. that it subsequently sucked the oxygen This is not just because the opponents are out of the precision weapons market—as evolving rapidly technologically (the So- it did from many a cave in Tora Bora. The viets were truly economically backwards), JDAM later morphed into the entirely but because it is so difficult to predict analogous Small Diameter Bomb (SDB), who those opponents will be. which RAND termed the single most marginally valuable line item in the entire Government customers throughout the US military budget. Stealthy attack air- West will be on the hunt for economies, craft with small bomb bays can now en- but paradigm-breaking combinations of gage half a dozen targets on single sorties, price and performance will be all the and with fire-and-forget weapons. Be- better. cause GPS accuracy is independent of range, they can do so by lofting bombs from the safe standoff of scores of miles. Australian economist Henry Ergas has What’s more, all this comes at roughly the observed that the response to obsoles- price of a pickup truck, because the GPS cence increases the extent to which itself is installed, separately paid for, and weapons systems are evolving products available to an unlimited number of us- that cannot be well specified in advance. ers. Laser, infrared, and pattern- The inconstancy of today’s rivals con- matching seekers still make interesting founds efforts to plan for specific techno- additions to weapons with GPS-plus- logical breakthroughs, as their relevance inertial guidance, but they have become may no longer be obvious a few years into much less expensive given the proximity a lengthly development. And so, while the to the target into which they will be deliv- F-22 relies on Intel i960MX multiproces- ered. Even the specifications for the iner- © Hasik Analytic LLC 5 9 January 2009
  8. 8. Arming the Bug Hunt: our view on military-industrial markets in 2009 tial guidance systems themselves have advantage, long experience with guerrilla been relaxed, given the short times of war provided an excellent live-fire labora- flight in which they might need to per- tory, and long distances between Cape form independent of GPS. Town and northern Namibia forced a re- liance on wheeled (and thus highly mar- More common, however, will be solutions ketable) designs. If the hulls held under within what we may term MRAP econom- stress, no one could claim to care where ics: evolutionary improvements that are the welders worked. both relatively inexpensive and essential, and based on the selective relaxation of Note also that both military-industrial old constraints. The MRAP vehicle pro- paradigms are founded on efficient, less- gram acknowledged that today’s battle- is-more relaxation of constraints once fields feature only three key threats: the thought obvious, but which have proven Kalashnikov, the rocket-propelled gre- all-too-obviously constraining. In the case nade (RPG), and the improvised mine. of the MRAP, selectively relaxing the Vehicles like BAE Systems’ RG-31 and quality constraints was essential to suc- Force Protection’s Cougar do not resist cess of the design; in that of the JDAM, cannon shells or wire-guided missiles the technological advance itself pushed well, but guerrillas don’t carry the former, back the constraints, and cost-effectively and almost nothing stops the latter any- at that. Coming to terms with this dy- way. Within vehicles with spall liners, namic requires some systems thinking, penetrating RPGs can generally only pro- for design constraints influence the range duce single fatalities. By designing for of possible product qualities, while per- ballistic resistance to nothing heavier formance levels themselves define the than a machine gun rounds, MRAP mak- constraints. Indeed, it is often not obvi- ers could concentrate on the critical at- ous whether a particular attribute is a fea- tribute: blast resistance. The v-shaped ture or a frailty: the market for drone air- steel hulls could then serve as anything craft did not take off, so to speak, until from a bomb disposal vehicle to a mortar pilots in cockpits were understood to carrier to an armored ambulance—and sometimes be the latter. have. The military-industrial paradigms of both MRAP economics: the JDAM and the MRAP are founded evolutionary improvements that are both on efficient, less-is-more relaxation of relatively inexpensive and essential, and constraints once thought obvious, but based on the selective relaxation of old which proved all-too-obviously constraints constraining. The MRAP paradigm further, and neces- General Atomics’ Predator, and many sarily, depends on globally-sourced com- competing aircraft, show aspects of both ponents. Note that the designs of most of economic models: the midcourse guid- the more prominent vehicles on the mar- ance and operator workload problem re- ket originated in South Africa. In what quired the breakthrough of GPS, but sub- Michael Porter of Harvard Business sequently, development has been mostly School might term a selective factor dis- evolutionary. Moving the pilot from the © Hasik Analytic LLC 6 9 January 2009
  9. 9. Arming the Bug Hunt: our view on military-industrial markets in 2009 plane to a cubicle outside Las Vegas low- punch of a 155 mm shell) will be joining ered both expectations of and require- the artillery battalions of the US Army’s ments for survivability, which permitted a infantry brigades in 2011, and the decks more cost-effective and longer-loitering of the US Navy’s littoral combat ships design. In the process, General Atomics’ soon thereafter. If the experience is posi- business grew from a staff of a dozen to tive, it may upset a few more markets thousands. Today, drones are truly, fi- than its conceptual cousin the JDAM has nally achieving prevalence and accep- so far. tance. The year 2009 may come to be seen eventually as a watershed: the first When American admirals disclaim in which the US Air Force requested more interest in suppressing piracy for a lack unmanned than manned aircraft in its of ships, it is clear that quantity, not budget. To be fair, the amount of money quality, is the limiting factor. requested for the latter greatly exceeds that for the former, but this is quite the point. The US Air Force and Army could If that is not enough, consider how MRAP have 500 Predators, Reapers, and Sky concepts might be extended—say, into the Warriors, and battlefield commanders mess that the warship market has become would want still more. What’s different is in some countries. Years ago in the that at current prices, they could actually United Kingdom, for no reason that can afford them. be apparent today, the Ministry of De- fence chose yet one more national devel- The year 2009 may come to be seen opment program for air defense ships. eventually as a watershed: the first in For its trouble, it will get just six phe- which the US Air Force requested more nomenally expensive Daring-class de- unmanned than manned aircraft in its stroyers. In the United States, the Navy budget. cannot make a convincing case for con- tinued production of either the Zumwalts (new DDG-1000s) or Burkes (more DDG- In both paradigms, JDAM and MRAP, 51s). With over seventy Aegis ships in the customers benefit from modularity, scal- fleet or on the way, one might ask why it ability, reconfigurability, and thus associ- does not end production of both. As Mr. ated cost containment. To understand Gates points out, the US Navy is as pow- what this may mean commercially, con- erful as the next thirteen navies put to- sider how JDAM concepts may soon ex- gether—and eleven of those belong to tend into other military markets that friendly countries. When American admi- heretofore seemed neither adjacent nor rals disclaim interest in suppressing pi- reasonably threatened. Armored howit- racy for a lack of ships, it is clear that zers and major caliber naval guns earn quantity, not quality, is the limiting fac- steady returns for a handful of firms tor. Robert Clifford, the chief executive of worldwide, but the need for them will catamaran-builder Incat, once asserted soon be far from obvious should Ray- that the US Navy and Army could come to theon and Lockheed Martin succeed with buy 100 Joint High Speed Vessels—and their inexpensive, modular, and autono- with the trouble off Somalia, that number mous Netfires. That box-of-rockets (with no longer seems fanciful. Fellow Austra- their GPS-plus-inertial guidance and the lian shipbuilder Austal is now making © Hasik Analytic LLC 7 9 January 2009
  10. 10. Arming the Bug Hunt: our view on military-industrial markets in 2009 those and the littoral combat ships in ment. This means identifying the product Mobile, and Alabama, after all, has as qualities and quantities that will be de- many senators as Maine. manded under the scenarios that you can imagine. It also means defining catego- Faced with the possibility of this kind of ries of assets in which inventories look turmoil, investors and managers ought to long or goals look remote. More systems be asking themselves how their enter- than just the JDAM, MRAP, and Predator prises can thrive in an industry driven by came from nowhere in the past decade or JDAM and MRAP economics, which may so to earn strong returns for their pro- even be contracting sharply in size. Echo- ducers, and many hint at what may be the ing Rumelt’s thoughts, Tom Nicholas of next big thing in armaments. Harvard Business School recently noted that If someone brings you a single sand chart of what he calls the most likely although deep downturns are destruc- scenario, and nothing else, throw him tive, they can also have an upside. The out of your office. Depression-era economist Joseph Schumpeter emphasized the positive con- sequences of downturns: the destruction Figuring out what that will be means of underperforming companies, the re- identifying which constraints will be re- lease of capital from dying sectors to laxed under which scenarios, and under new industries, and the movement of which generalities that extend across sce- high-quality, skilled workers toward narios. It means determining who will be stronger employers. For companies with relatively advantaged under which com- cash and ideas, history shows that binations of demanded product qualiti- downturns can provide enormous stra- es—which upstream suppliers, which tegic opportunities. downstream manufacturers, and even which governmental customers. This kind The good news is that much of the indus- of work requires serious scenario analysis try is awash with cash after seven years of and stochastic forecasting. It also re- hefty spending by the United States gov- quires critical oversight: if someone ernment. The problem is that this virtual brings you a single sand chart of what he embarrassment of riches can be easily calls the most likely scenario, and nothing misallocated as long as companies re- else, throw him out of your office. In this main, in the short term, reasonably prof- uncertain world, he will have provided itable. As we can imagine, the long term you nothing probative. may be less forgiving. The second step is a matter of applied The first step, then, is an intense, practi- corporate development: tailoring your cal analysis of the market, considering corporate architecture to the emerging, how the economic realities and military dominant product architectures. As the requirements facing your customers will Dutch business researcher Ard-Pieter de affect their patterns of demand. For even Man has written, your business will be if we understand the model for corporate operating within networks of innovation, success, we must find the specific areas integration, standardization, and supply; for growth, as well as those for retrench- each requires attention. In markets de- © Hasik Analytic LLC 8 9 January 2009
  11. 11. Arming the Bug Hunt: our view on military-industrial markets in 2009 manding products with modular and sources can be internal or external, but scaleable architectures, products are most they should be chosen for their ability to efficiently and profitably delivered by deliver with the right balance of innova- networks, with each company focusing on tion, flexibility, and of course, long-term the part of the architecture at which it ex- discounted cash flow. cels. As the German researcher Florian Steiner has argued, each company must There are many ways to do this, and the choose whether to try to succeed as the preferred method varies with the particu- dominant entrepreneur, shaping the net- lar details of industry structure. As we work around itself, or to follow fast, have argued, military contracting will be adapting with complementary products to subject for some time to turbulence in the networks that others establish. The customers’ objectives, and thus in the choice should not be obvious: the mer- business processes needed to produce the chant’s role is valuable, as second and kit customers need. The mix of modular third-tier suppliers in this business fre- and integrated technologies needed for quently earn better margins than prime waging war will demand a degree of contractors. leakiness of knowledge throughout your networks. The persistence of heritage platforms and technologies suggests a There is no single, most appropriate continuing role for specific production model of corporate development that fits assets—those that are useful only for par- neatly on a single briefing slide. ticular product lines. This, in turn, sug- gests a moderate-but-not-overwhelming This demands some serious thinking ability to shake down your supply chain about the real value of vertical and hori- partners for the full value of extractable zontal integration. Simply agglomerating profits. As our recent research (Arms and revenues that are “accretive” to paper Innovation: Entrepreneurship and Alli- earnings without attention to the cost of ances in the Twenty-first Century De- capital is a losing strategy. To the con- fense Industry, University of Chicago trary, adapting to this sort of world Press, 2008) has indicated, these are the means figuring out how to obtain the par- conditions under which corporate alli- ticular capabilities needed to build the ances are best launched. Not all ways to right qualities into the products and ca- pursue corporate development start with pabilities that you deliver to military cus- “M” and “A”. tomers. It is important to recognize that there is no single, most appropriate Above all, this demands flexible employ- model that fits neatly on a briefing slide. ment of capital. Your assets in research, General Atomics is a famously vertically development, production, and through- integrated firm, but Boeing fabricates al- life support can be co-specific to particu- most nothing that fits into a JDAM kit. lar networks of innovation, in which you MRAP builder Force Protection has been work with allied firms to advance whole famously vertically de-integrated, but categories, such as blast-protection, BAE Systems’ production of the Caiman, autonomous navigation, or precision and the FMTV truck on which it is based, strike. They should not, however, be too has become gradually more vertically in- specific to individual programs, lest the tegrated over time. Clearly, the right market move out from under you. This © Hasik Analytic LLC 9 9 January 2009
  12. 12. Arming the Bug Hunt: our view on military-industrial markets in 2009 means making investments that secure Texas, a failure to manage the customer’s options to enter new market segments propensity for ex post tinkering with re- cost-effectively, and to scale back or shut quirements, and the customer’s own in- down unprofitable activities when neces- ability to manage its culture in a substan- sary. Analytically speaking, in this uncer- tially commercial procurement. The dis- tain world, simple discounted cash-flow astrous attempt to stretch the Island- analysis is inadequate to the task. Real class cutters in the US Coast Guard’s options analysis, even in its simplified Deepwater program clouded the ship- decision-tree form, is necessary to cap- building reputations of Bollinger, VT Hal- ture the real value of managerial flexibil- ter, Lockheed Martin, and Northrop ity. As a manager, you know you have it: Grumman. Time was, one might have your analysis should give you credit for it. shrugged off these debacles as par for the industry. As the impact of the recent con- tract terminations indicates, the game Managers have the flexibility of real may have changed, and on-time, on- options. Your analysis should give you budget program management could ap- credit for it. proach the importance it has with civil customers. It’s just possible. Third, and most importantly, comes exe- cution. The MRAP saga shows how com- That said, to paraphrase the apostle Paul, panies with brilliant technical ideas but we all look not just for wisdom, but signs uneven business skills can struggle for as well. In the United States, sometime in profitability, even in a booming market. the next few months, the Defense De- While General Atomics is a private and partment will need to decide whether to rather secretive firm, the Aeronautical order another tranche of F-22 fighter air- Systems unit is widely assumed to be very craft. The F-22 is not the least appropri- profitable. That does not mean that its ate program for the US military. The experience with the rapid growth of its technology is impressive, and the rela- business has been trouble free. No one tively small fleet is more than worth keep- should expect otherwise: drones were ing. However, Mr. Gates’ criticism of its surging before the surge, and are surging absence from the wars of today is unmis- still. On the other hand, the JDAM story takable. Continuing the program will not is an excellent example of how smart necessarily signal business-as-usual, but design-for-manufacturabilty, supply ending it as planned will clearly signal chain management, customer manage- that a break has opened with the past. ment, and labor relations can combine to make an excellent program for all con- Such a decision could embolden reform- cerned. ers a level down in the bureaucracy, lead- ing to further offloading of redundant Indeed, as in the aforementioned British equipment in favor of more of those high- experience, there is fresh evidence that demand, low-density assets—that delight- execution matters. The reasons for the ful Pentagon obfuscation of we didn’t buy failure of the Armed Reconnaissance enough. For example, the US Army will Helicopter program at Bell Helicopter are emerge from the war in Iraq with a fully still unclear, but probably involve the rebuilt fleet of thousands of Abrams, switch in production site from Quebec to Bradleys, and Strykers. The generals may © Hasik Analytic LLC 10 9 January 2009
  13. 13. Arming the Bug Hunt: our view on military-industrial markets in 2009 then remember that Mr. Gates’ only kind (as in the great German tank firesale of word about the Future Combat System the past decade) will lead to a constant was how its most cost-effective technolo- cascade of durable, slightly obsolescent, gies—the Micro Air Vehicle, Fire Scout, upgradeable gear to middle-income coun- and Netfires—were spiraling into the in- tries—and a market to pursue in servicing fantry brigades. As one of our clients has it. This points to some promises that will put it, they may very well declare victory, be discarded, and some that will be ful- and shut the program down. After all, ef- filled. As Mark Cancian wrote in the fectively they are all infantry brigades Autumn 2008 issue of Parameters, bat- now, given the nature of the opposition. tlefield contracting is necessarily here to Rather, the Army and the Marine Corps stay, and outsourcing additional through- could focus on the MRAP-All Terrain Ve- life support will be important for cost re- hicle or Joint Light Tactical Vehicle pro- duction and service level improvement. gram, and procure a fleet of vehicles truly On the other hand, anyone working on useful in their likely scenarios. For soon, the Airborne Laser program might con- some entrepreneurial spirit will design a sider reviewing his resume, for one could wheeled vehicle that combines robust also accomplish aerial boost-phase de- blast protection with impressive off-road fense with a derivative of the AMRAAM, mobility—and subsequently capture a slung on existing fighters—or drones. As large share of tomorrow’s armored vehi- Michael Booen of Raytheon noted to cle market. Aviation Week & Space Technology last month, “the air forces of the world don’t want to dedicate platforms to a single There is reason to expect further mission.” A Boeing 747 is an awfully big offloading of redundant equipment in platform for a single mission. favor of more of those high-demand, low-density assets—that delightful Returning to the wisdom, and where we Pentagon obfuscation of we didnʼt buy began, it is that multiplicity of missions enough. that today drives the structure of solu- tions. Regardless of the wisdom of any Watch also for a backing down from plans particular mission, that breadth of expec- to increase force structure. As Secretary tations is widely held around the world. Gates has made clear, there is no point to As it is also economically and organiza- a US Army of 500,000 troops unless it is tionally feasible, it is to be anticipated. designed substantially for counterinsur- Demand for modular, scaleable, and re- gency. An increase in Army or Marine configurable solutions leads to the eco- Corps end-strength is thus pointless if the nomics of the JDAM and the MRAP. Our US government is truly resolved not to industry will do well to prepare for a undertake another campaign like that in market in which supply dynamically Iraq, and thus should not be counted as a meets demand on JDAM and MRAP certainty in any business plans. At the terms. same time, the aforementioned offloading © Hasik Analytic LLC 11 9 January 2009

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