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
- Eras of aerospace and defense
- Why now?
- Business model coherence
- Putting it all together
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? New Deloitte research 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 report to learn which strategies have historically delivered the best results.
Eras of aerospace and defense
Deloitte analyzed the performance of the 100 largest companies in the A&D industry over the last 25 years. We found that companies who adapted their strategies and business models to fit changing market dynamics outperformed those that didn’t by up to seven times.1 Yet up to 50 percent of A&D companies could be classified as “staying the course.” These companies will have to adapt their strategies and business models to keep pace with their more adaptable peers.
Estimated contribution of financing activities during the last defense downturn
Why now? Shifts in demand trigger new eras
Why should A&D company executives who have traditionally “stayed the course” consider changing strategies and business models now? Because today’s convergence of disruptive factors will fundamentally change the way the A&D industry is structured, operates, and performs. Sticking with the status quo—or just making small adjustments—won’t be enough to maintain market leadership in the next era of A&D.
To outperform the industry, A&D company executives should take bold steps. In our experience, many companies hesitate to launch new strategies because they lack a systematic set of defined alternatives. This report outlines alternatives to consider, ranging from the most passive (e.g., stay the course) to the more active (e.g., restructure portfolio). Our findings suggest that companies choose a strategy that actively creates value.
Factors disrupting A&D industry
- Democratization of technology/speed of innovation
- Business ecosystems and globalization
- Industry 4.0/digitalization
- The role of organization and human capital
The importance of business model coherence
Choosing the right strategy is just one part of the performance equation. Without good execution, even the most brilliant strategy will fail. A primary driver of good execution is business model coherence. Our analysis of A&D company performance shows that companies with higher business model coherence outperform companies with low business model coherence by more than 4 times the operating total shareholder return (OpTSR).2
While the importance of business model coherence seems clear, it’s not always easy to accomplish. We found that nearly 60 percent of revenue for the largest A&D companies is generated by business units whose business models aren’t well aligned to market needs. The gap is largely due to the fact that markets are dynamic and have moved away from traditional business models. Meanwhile, those companies stuck to traditional business models.
Business model coherence is the deployment of a business model (cost structure, financial risk model, etc.) that enables the strategy and is consistent with the demands of the market.
Putting it all together
A company’s performance is dictated by the strategic choices it makes and how those choices are executed. To outperform the A&D industry over the coming years, companies will have to do the following or run the risk of being marginalized:
- Choose a strategy that actively creates value rather than simply staying the course, has shown the potential to demonstrably outperform other strategies, and takes into account the company’s degrees of freedom relative to the competition.
- Deploy a business model(s) that reflects the true needs of chosen markets today and is nimble enough to proactively adapt to evolving needs.
- Stop the death spiral of running faster just to keep up. Innovate new business and operating models that break the traditional constraints of the past and radically improve affordability for markets facing increasing competition and commoditization.
Strategy choice cascade
Time to outperform the industry
The bottom line is that the inevitable march of commoditization has finally arrived on portions of the A&D market’s doorstep. It’s changing the fundamental basis of competition in the industry and shaking the foundation on which many companies have based their strategies. Staying the course isn’t an option.
Companies that embrace the fundamental disruption in the market have an opportunity to gain market leadership. By rethinking their strategies and business models, they can improve financial performance and outperform the A&D industry over the next decade.
1Deloitte analysis of S&P Capital IQ, Compustat, DACIS, company annual reports, and public statements
2 Source: For OpTSR, Deloitte analysis of S&P Capital IQ data. For business model coherence, Deloitte analysis of current business model practices of the major business units of the largest A&D companies based on company public documents, public statements, and other industry analysis. Note: Correlation coefficients overall = 0.59; Commercial platform integrators = 0.77, Defense platform integrators = 0.85, Tiers and Propulsion = 0.62