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The next era of aerospace and defense
How to outperform amidst innovative disruption
Aerospace and defense industry analysis shows that “staying the course” with the same strategies and business models may not fly much longer.
- Strategy matters
- 2016 a better year, but the shadow of 2014 and 2015 lingers
- Active strategies still win
- Winning strategies and business model innovation
- 2016 Next era in aerospace and defense study
Why do so many aerospace and defense (A&D) companies “stay the course” when faced with disruption, sticking with strategies and business models designed for a different era? Deloitte’s latest research, an update of "The next era of aerospace and defense study," makes a compelling case for change. We found that A&D companies that adapted their strategies and business models significantly outperformed those that didn’t.
Read the latest study to learn which strategies have historically delivered the best results.
2016 a better year, but the shadow of 2014 and 2015 lingers
In many ways, 2016 was a better year for the A&D sector, with shareholder returns growing largely across the board. For the 85 companies analyzed, average annual TSR increased from negative territory to 8.5 percent, or 7.8 percent when excluding the contributions of dividend and share buybacks (OpTSR).1 All performance quartiles increased performance, with both the average per quartile increasing and variance decreasing.2
Significant performance churn
In 2016 significant churn between performance quartiles occurred. Almost 40 percent of companies fell out of the top quartile, while almost 40 percent of companies climbed out of the bottom quartile. In the middle two quartiles, almost 70 percent of companies changed position; of those changing position, more companies in the second quartile fell at least one quartile while more companies in the third quartile improved position.3
Active strategies still win
Perhaps most striking is the continued success of companies pursuing more “active” strategies, such as consolidation, relative to those pursuing more “passive” strategies such as staying the course. The 2016 next era report showed companies choosing active strategies and business models that better fit their target markets outperformed by up to seven times those with more passive strategies and business models that were less suited to their chosen markets.
This year, that trend continued. Companies pursuing more active strategies outperformed those with more passive strategies by up to almost five times.4
A series of factors within both the defense and commercial sectors are driving these results. These factors likely include:
- Some operational improvements underway; financial engineering still leading
- Limited core growth options
- Inability to transition research and development
- Business models are a drag
Winning strategies and business model innovation - How should management react?
It is clear, going forward, financial methods to boost shareholder return are not enough. Additionally, although the returns are on average less volatile, more conservative and staid strategies are the lowest returning strategies within the A&D industry. To adapt to these changing realities, aerospace executives should consider a series of themes to outperform, outlined in the study.
The bottom line
Making better strategy and business model choices demonstrably improves financial performance. But “running faster to keep up” may be a grossly insufficient strategy in the face of today’s fundamental market disruptions.
Rethinking the constraints that are the basis upon which strategy and business model decisions are made today will be the hallmark of those companies that are truly poised to outperform the A&D industry over the next decade.
2016 next era in aerospace and defense study
The 2016 study is the first in this series, examining the convergence of disruptive factors that will fundamentally change the way the A&D industry is structured, operates, and performs and stressing the importance of business model strategy.
1 S&P Dow Jones, Deloitte analysis
4 Deloitte analysis of S&P Capital IQ, Compustat, DACIS, public company reports
Commercial aerospace sector performance decelerates, while defense sector continues to expand
On a solid profitable growth path