United States: Innovation in Challenging Markets

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<ul><li> 1. May 31, 2012United States: Driving Growth andInnovation in Challenging MarketsBy Jon BarneyPartner, AvascentPrepared for:Aerospace Forum</li></ul> <p> 2. Avascent is the leading strategy and management consulting firm advising clientsglobally in government-driven markets Avascent Client Industries &amp; SectorsAviation &amp; Defense SystemsGlobal DevelopmentHealthcareIntelligenceAerospace Logistics, EngineeringSecurity &amp; Public Information SpaceOutsourced Services &amp; Operations SafetyTechnology Representative corporate and financial clients Offices: Washington, Paris 25 years experience andover 3000 assignments Core Capabilities: Strategy and growth M&amp;A Avascent International 050 Data Product Organizational Capture Support Global network inAsia, MENA, LatAm | AVASCENT | 2 3. A new realitybroader fiscal challenges, political gridlock, and drawdown of forces in Iraqand Afghanistan lead to a declining defense budget going forwardU.S. Defense Budget Forecast through 2017$800$700$600$500 Actual$400 FY11 Presidents Budget Source: Avascent Analysis FY12 Presidents Budget$300 FY13 Presidents Budget BCA Sequestration Reductions$200 20002001 20022003 20042005 20062007 20082009 20102011 20122013 20142015 20162017 Source: Avascent Analysis Conclusions: New period of uncertainty caused by: 2012 elections, sequestration, political gridlock, geopolitical events Budget declines, but is above early 2000s levels There will be segments of growth | AVASCENT | 3 4. In response to this changing environment, five key drivers of the U.S. defense markethave emerged with important implications for future investments and technologies U.S. Defense Market Drivers Cost Focus Due to budget, under-performing and/or high cost programs cancelled, delayed, reduced Implication: Focus on effeciencies, cost savings, and low cost solutions Asia Pivot As Iraq and Afghanistan wind down, shift of resources from Middle East &amp; Europe to Asia Implication: Shift $$$ away from ground forces to maritime, bombers, missiles, and ISR (Intelligence, Surveillance, Reconaissance) Changing Force Structure Terrorist and irregular threats remain but will be addressed by a smaller and more agile force with reduction in Army and Marine Corps - Force 2020 Implication: Investment in Special Operations, unmanned systems, and ISR Cyber Priorities Elevation of cyber by White House, Defense, Space, and Intelligence community Implication: a significant area of growth, commercial/govt approaches, big data analysis Globalization U.S. companies seeking more growth abroad; new competitors from outside U.S. Implication: More complex operating environment presents large opportunities but risks| AVASCENT | 4 5. Innovation case study #1 Cyber: U.S. spending on cyber will reach about $25B by2015, growing at nearly 10 percent annually with some sub-segments growing muchfaster Cyber Market Overview Federal Cyber Market Budget OverviewAnalysis25 Includes: Internet, telecom $ Billions networks, computer systems, and embedded20 controllers in critical industries15 DoD: 15K networks; 7M computing devices10 5 Commercial market &gt; $200B in 2010 0 White House , DoD and Intel: cyber is priority 2010 20112012 2013 2014 2015Source: Avascent Analysis Large area for M&amp;A 70 deals in 5 yearsLarge SystemsCOTS Providers that Pure-play Security Company TypeServices Firms IT Service Providers Integrators Offer Services Product CompaniesFocus on high volume Thought leaders withLeverage broaderIT focused trying toMarket Commercial andIT security products; trusted brands relationships withexpand into Approach government leaders prefer sales throughanalytical services government governmentprimes Leading Firms| AVASCENT | 5 6. Innovation case study #2 Unmanned Vehicles and ISR: Due to operationaleffectiveness, cost savings, and Asia pivot, investment in UAV/UAS and ISR capabilities willcontinue Systems and ISR Market Overview Unmanned Market Trends Service Trends Has been dominated by platform manufacturers Army #1 small UAV user; Op-tempo impact but new opportunities in multiple mission areas: Navy expanding requirements; larger ISR cargo, longer endurance, ISR, training, payloads, civilmissions and Broad Area Maritime Surveillance Growth despite cancellation of Global Hawk Block 30 Air Force largest UAV customer and willcontinue to drive broad innovation 50% lifecycle cost savings for unmanned airborne ISR missions (aircraft, personnel, training) - CSBA study Marines modest users of UAV; Army modelFlight Control Ground ControlMarket SegmentAir Platforms Payloads Communications SystemsSystemsHigh altitude/long Strong platformPush forCrowded market withenduranceDoD demand forpresence; important standardization sophisticatedTrends (HALE), cargo, combamore capable ISR if migration to civilacross platforms and technology and hight are areas ofsystemsspace services barriersinnovationSmall UAV - RavenTactical- Shadow Leading FirmsTactical - PredatorHALE Global Hawk | AVASCENT | 6 7. How to move forward a rapidly changing landscape requires a new approach 2001 - 20112012 and going forward Operating EnvironmentOperating Environment Heavy ground footprint with emphasis Lighter ground footprint with more on Army and Marine Corps emphasis on maritime and unmanned Middle East Iraq, Afghanistan, GWOT Asia pivot Buy new, dont re-use Extend service life where possible Deliver whatever the customer wants Identify the most efficient solution to strategy the customers needsStrategic ImplicationsStrategic Implications A&amp;D Sector everyone is a winner A&amp;D sector winners but also losers No underperforming markets limited Underperforming markets but alsoneed to identify new growth markets asgrowth markets growth was universalcyber, ISR, missiles, missile defense, lowcost solutions Follow the herd as most companiessucceed Differentiate and innovate in a morecompetitive market Company portfolios expand beyond core Company portfolios evaluated for best fit The era we are leaving: The last ten percent performance generates one third of the cost and two thirds of the problems. Norm Augustine, former CEO, Lockheed | AVASCENT | 7 8. Jon BarneyAvascentPartner 1615 L Street, NWjbarney@avascent.comTwelfth FloorWashington, DC 200361 (202) 280-6812 (office) tel: (202) 452-69901 (202) 615-2497 (mobile) www.avascent.com | AVASCENT | 8 </p>