October 3, 2014

Big defense contractors’ reactions to start-ups may be more proactive than we suppose.

 

In a speech at the Air Force Association (AFA) meeting in Maryland last month, Chris Chadwick, CEO of Boeing Defense & Space, spoke of his company’s enthusiasm for incorporating innovative ideas into old products. In effect, he endorsed—as a CEO from Boeing just might—Admiral Jonathan Greenert’s enthusiasm for payloads-over-platforms. What Chadwick added was a nuanced definition of innovation. “Rather than just relying on innovation alone,” he asked, "what if we had another way to get new value out of existing platforms? What if we could bring new leaps in capability, not just by spending more, but by thinking differently?”

 
In the talk for the AFA, Chadwick also expressed a conviction in the value of moving first in new markets. But this begs the question of who’s actually moving first—Big Boeing or these small robotics houses? If it’s the latter, then in Clay Christensen’s formulation, laid out in The Innovator’s Dilemma, doesn’t this doom the big contractor to irrelevance? Repurposing inexpensive tuna- and whale-chasing drones to find ships and submarines is arguably pretty disruptive. If the small firms are the essential innovators, then we might say that Boeing is merely assimilating their disruptive activities, without renewing its own creativity.
 
Across the industry, after all, the track record for new-and-different looks grim. Despite some announcements of plans to increase their spending, most American contractors have been investing very little in independent research and development for the past decade or more. There is some dispute about who should respond. Last month, Defense Secretary Hagel called on industry to "embrace a spirit of innovation". At last year’s AFA meeting, Northrop Grumman CEO Wes Bush complained that the Defense Department wasn’t sending industry enough money for that R&D. On the other hand, Finmeccanica USA CEO Bill Lynn, a former deputy secretary of defense, has been critical of his corporate colleagues’ standing strategy. In a meeting with Aviation Week editors this past April, he lamented how "if the R&D budgets of the top five U.S. defense contractors were combined, they still would not rank among the 20 biggest industrial R&D spenders worldwide."
 
But is this lack of explicit investment actually a problem? Let’s start with Christensen’s theory, which has endured lots of criticism in the past few months, starting with Jill Lepore’s screed in the New Yorker. More sober arguments have included Peter Klein’s short commentary at Organizations & MarketsLynne Kiesling’s on The Knowledge Problem, and Joshua Gans’ longer commentary (cited by Klein) at Digitopoly. The general sentiment in all of these is that Christiansen is an easy target. As Gans argues, "the focus on the doomed incumbent leads Christensen away from the obvious alternative. The incumbent should wait-and-see.” That is, disruptive technologies are often only identified well after they are developed. They are often brought to commercial fruition by entrepreneurial firms competing, and then being acquired by, larger competitors, as much as by start-ups growing as independent firms. As backing, Gans cites his recent paper with Matt Marx and David Hsu on how the speech recognition industry has functioned this way for decades.
 
Is it working that way today in defense? As Peter Dombrowksi and Eugene Gholz observe in Buying Military Transformation, defense is not so much an industry but a common set of customers, and some of the value created by the Boeings of the world springs from their deep understanding of military customers, from the administrative processes of all procurement bureaucracies to the battlefield needs of end-users. If resistance to the military-industrial complex is futile, mergers and acquisitions will be the economically efficient course—for both entrepreneurs and systems integrators. As Mark Revor and I wrote in a recent brief for the Atlantic Council, much of today’s information-driven technological progress are matters of open innovation, so constantly surveying the state of the art for new capabilities is an essential strategic function of a large defense contractors. In this sense, defense contractors like Boeing may be soundly offboarding some of their R&D. In effect, M&A has become their R&D.
 
James Hasík is a senior fellow at the Brent Scowcroft Center on International Security.

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