This document discusses the changing landscape of the aerospace and defense industry and the need for 21st century organizations to adapt. It notes that consolidation is increasing in the industry as larger companies acquire smaller ones. It also argues that the term "military-industrial complex" is outdated and no longer accurately describes today's more distributed and globalized industry. The document emphasizes the major trends of globalization, the rising economic power of countries like China and India, and the need to leverage the innovative potential of billions of minds worldwide.

1. Differentiated Global Value Chain Architecture:
The 21st Century A&D Organization
Sandeep “Sandy” Muju
KPMG LLP
Session: New Business Opportunities for Aerospace
SAE 2011 AeroTech Congress and Exhibition
October 18-21, 2011
Toulouse, France
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2. Differentiated Global Value Chain Architecture:
The 21st Century A&D Organization
UTC talks to buy Goodrich accelerate
Shares in Goodrich, the aerospace company, jumped about 15 per cent on Monday,
as negotiations continued with United Technologies Corporation about a deal
worth as much as $15bn.
Financial Times, London
September 19, 2011
Defense-industry consolidation is expected, experts say
Defense-industry executives are expecting merger mania to hit, with United
Technologies' interest in Goodrich possibly the start of a consolidation wave.
Insiders are expecting acquisitions of second- and third-tier defense firms, but
changes are also possible in the top tier.
AIA
September 21, 2011
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independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. 2
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3. Differentiated Global Value Chain Architecture:
The 21st Century A&D Organization
"Military-industrial complex" is outdated term, Blakey says
President Dwight Eisenhower warned half a century ago that the U.S. must guard
against the "military-industrial complex," but AIA President Marion Blakey says
the term is outdated as the reality has changed. "The word 'complex' implies a
larger and [more] interwoven industry than you have today," Blakey said.
"In a sense it's an old-fashioned term that's outmoded.
It is more historical than a real-life term."
September 12, 2011
AIA
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independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. 3
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4. Differentiated Global Value Chain Architecture:
The 21st Century A&D Organization
 Nature of the firm ….
◦ YoY Shareholder value creation …
◦ YoY growth …
◦ YoY profitability
◦ YoY Share price increase …
 Increasing success tends to reduce risk taking appetite …
 Nobel Laureate Coase, argues that the size of a firm is a result of
finding an optimal balance between the competing tendencies of
growth (internal costs) and suppliers/partnerships (transaction
costs outside the firm).
Balancing Risk exposure and YoY Shareholder value creation …
© 2011 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of
independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. 4
All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks
of KPMG International. 51836SFO PAPER # 11ATC-0020

5. Differentiated Global Value Chain Architecture:
The 21st Century A&D Organization
 Flattening and Boundaryless global market ….
 Exchange of ideas, information and resources is
becoming easier ….
 Over 6 Billion global minds which for most part are
“free” to create ideas ….
 Financial resources are no longer exclusive to “mega”
monolithic corporations ….
These slowly evolving tectonic shifts have been in play for years …
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independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. 5
All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks
of KPMG International. 51836SFO PAPER # 11ATC-0020

6. Differentiated Global Value Chain Architecture:
The 21st Century A&D Organization
 Emergence of Asian giants - China and India
 Combined Population: ~2.5 Billion (~37% of World)
 Combined GDP: >$8 trillion (~50% of EU or USA)
 Average GDP growth: >8% YoY (~3X that in USA or EU)
In <10 years “China+India” is projected to have greater
purchasing power than either EU or USA …
Civilian as well as Defense industry implications are tremendous …
© 2011 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of
independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. 6
All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks
of KPMG International. 51836SFO PAPER # 11ATC-0020

7. Differentiated Global Value Chain Architecture:
The 21st Century A&D Organization
Boeing targets half of new aircraft orders from China, exec says
Ihssane Mounir, an executive at Boeing, said the firm is striving to earn at least
half of the orders for new aircraft in China over the next couple of decades.
China is expected to order about 5,000 new planes over the next 20 years
September 21, 2011
AIA
Indian carrier IndiGo orders a record 180 planes from Airbus
Airbus said Wednesday it has received "the biggest order in aviation history"
from Indian low-cost carrier IndiGo for its hugely successful new fuel-efficient
A320neo jets.
June 22, 2011
USA Today
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independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. 7
All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks
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8. Differentiated Global Value Chain Architecture:
The 21st Century A&D Organization
 Increasing purchasing power brings economic prosperity
….
 Basic necessities (food, clothing, shelter) are fulfilled …
 Minds are free to “think” and “create” ….
2.5 Billion Minds – for most part, free to Innovate ….
© 2011 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of
independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. 8
All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks
of KPMG International. 51836SFO PAPER # 11ATC-0020

9. Differentiated Global Value Chain Architecture:
The 21st Century A&D Organization
COMAC
Microsoft 2008
?
1975 EV
Globalization is a fairly recent phenomenon, AeroVironment 1970s-
historically speaking … IAI UAVs 1971 First UAVs 2000s
1970s ~1960-90
Airbus Internet
Boeing 1960s 1970-90s
1916 “Berlin Wall”
IBM
Telegraph 1989
1911
Marconi, 1909
First Manned Flight
Wright Bro, 1903
Automobile
Benz 1886
Steam Locomotive Innovation is was a slow process ….
Battery Trevithick, 1804 It is “Revolutionary” when it happens ..
Volta, ~1800
Steam Engine It is “Evolutionary” in the meantime ..
Savery, 1698
© 2011 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of
independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. 9
All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks
of KPMG International. 51836SFO PAPER # 11ATC-0020

10. Differentiated Global Value Chain Architecture:
The 21st Century A&D Organization
“In the natural world, species evolve – that is, they
change to meet new challenges – or they die. The same
genetic imperative operates in business”.
Charles Fine, Clockspeed
A company is its chain of continually evolving capabilities
– that is, its own capabilities plus the capabilities of
everyone it does business with.
© 2011 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of
independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. 10
All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks
of KPMG International. 51836SFO PAPER # 11ATC-0020

11. Differentiated Global Value Chain Architecture:
The 21st Century A&D Organization
Value Chain:
Michael Porter, HBR
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independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. 11
All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks
of KPMG International. 51836SFO PAPER # 11ATC-0020

12. Differentiated Global Value Chain Architecture:
The 21st Century A&D Organization
Innovation … Who is supposed to do “that”?
Should internal teams of engineers, product marketers, and R&D personnel
Be charged to develop new ideas for technology product and/or service
and
supply chain (“procurement”) to source resulting commodities at the cheapest cost?
Or
M&A and Strategy folks should acquire “innovative products/services” from outside?
… and Why?
© 2011 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of
independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. 12
All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks
of KPMG International. 51836SFO PAPER # 11ATC-0020

13. Differentiated Global Value Chain Architecture:
The 21st Century A&D Organization
Innovation is Multi-dimensional,
and …
the resulting Value Chain Architecture ……
© 2011 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of
independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. 13
All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks
of KPMG International. 51836SFO PAPER # 11ATC-0020

14. Differentiated Global Value Chain Architecture:
The 21st Century A&D Organization
Speed of Innovation has been increasing ….
With lower entry barriers globally, new entrants are emerging ….
Tremendous possibilities for new ideas and creation ….
Purchasing power is rapidly increasing in the “Developing” world …
Ability to bring idea to reality increasing with increasing global financing …
Opportunities as well as Wake-up call
for well established businesses to re-invent business models ….
© 2011 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of
independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. 14
All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks
of KPMG International. 51836SFO PAPER # 11ATC-0020

15. Differentiated Global Value Chain Architecture:
The 21st Century A&D Organization
Contact:
Sandeep “Sandy” Muju, PhD
KPMG LLP
355 S. Grand Avenue, Suite 2000
Los Angeles, CA 90071
Phone: (213)500-0551
Email: smuju@kpmg.com
© 2011 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of
independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. 15
All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks
of KPMG International. 51836SFO PAPER # 11ATC-0020