expanding into adjacent markets (cyber, energy, smart power, health it) - wharton aerospace &...
DESCRIPTION
Diversification into attractive adjacent markets provides an opportunity for traditional aerospace & defense (A&D) firms to offset potential declines in their core business in the face of defense spending reductions and/or declines in the highly cyclical commercial aerospace market. This presentation—given by The Avascent Group at the Wharton Aerospace 2010 Conference—considers key strategic questions faced by A&D industry leaders as they evaluate various paths for expanding into several potential adjacent markets, including cyber-security, health care information technology, energy, and “smart” power.TRANSCRIPT
Adjacent Market StrategyDevelopment & Execution
January 2010January 2010
Development & Execution
Prepared for
This breakout session on adjacent markets will focus on the following…
Key questions A&D leaders are asking about adjacent markets today
Overview of a variety of adjacent market strategies that have been employedpreviously by A&D firms
Methodology for maximizing success when entering adjacent markets
Analysis of several high visibility adjacent markets of interest to the A&D
THE AVASCENT GROUP | 2
Analysis of several high visibility adjacent markets of interest to the A&Dcommunity
– Cyber
– Health IT
– Energy & Environmental
– Smart power
We are the leading independent management consulting firm serving
companies dedicated to meeting the most demanding government challenges
20+ Years of experience (formerly DFI Corporate Services)
Experienced, cross-functional team of over 50 professionals
Worldwide network of subject and regional experts
THE AVASCENT GROUP | 3
To help our clients conceive, develop and execute
Business Growth Strategiesto address
Complex Public Sector Needs
SophisticatedSophisticatedFactFact--Based AnalysisBased Analysis
InformedInformedStrategic InsightStrategic Insight
Pragmatic GrowthPragmatic GrowthSolutionsSolutions
We bring:
500
600
700
800
The slowdown in the defense spending growth cycle naturally raises cause for concern andscrutiny at senior levels throughout the A&D industry
National Security Macrotrend Budgetary Risk AnalysisNational Security Macrotrend Budgetary Risk Analysis
• OPTEMPO in Iraq andAfghanistan has drivendefense spending tounprecedented levels
• Total topline DoDspending is expected todecline in the next fewyears, but historical
Key Market IssuesKey Market IssuesDoD Budget, 1948-2010
Including Supplementals, Real $
$B
THE AVASCENT GROUP | 4
0
100
200
300
400
19
48
19
50
19
52
19
54
19
56
19
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19
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19
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20
00
20
02
20
04
20
06
20
08
20
10
RDT&E Military Personnel Other Procurement Operations & Maintenance
years, but historicalpeacetime funding will stillbe substantial
• Many of the cuts havealready been made in theprocurement arena,targeting underperforming and non-strategic programs
• R&D remains steady aswell as a variety ofsupport service functions(particularly white collar)
Source: DoD Greenbook, Avascent Analysis
Paths to Growth
When recent historic corporate growth objectives become increasingly difficult to attain,adjacent markets gain greater visibility
OrganicOrganicGrowthGrowth
InorganicInorganicGrowthGrowth
CorporateCorporateObjectiveObjective
88--10% growth*10% growth*
THE AVASCENT GROUP | 5
CoreCoreMarketsMarkets
AdjacentAdjacentMarketsMarkets
NewNewMarketsMarkets
Gain share fromcompetitors
Grow newcapabilities
Fill gaps or gain customeraccess
Purchase newcapabilities
* Assumption based on recent past performance
As a result, these types of questions about adjacent markets are being heard frequently byBoards, C level leaders, and heads of strategy and corporate development
“My core market is projected to be stagnant or declining in the near to medium termafter years of robust growth… should my company enter new markets or try tocompete more aggressively in the core?”
“If my company enters an adjacent market, how can adjacent markets be compared?”
“How can a company leverage its capabilities and customers into new markets – andcan it be done organically or through acquisition?”
Key Questions
THE AVASCENT GROUP | 6
can it be done organically or through acquisition?”
“Will a major play into an adjacent market be positive in the near to medium term forcreating shareholder value given current growth and margin expectations?”
“What types of partners and/or acquisition targets should my company be familiar withas we look to enter these new markets?”
“Does my company need to hire people with non-traditional backgrounds andexpertise in these new markets in order to be successful?”
“My competitor just stood up a (cyber, smart power, health IT, energy) organization,should I be concerned and should I stand one up as well?”
Aerospace & Defense companies large and small have had the entire gamut of results whenentering adjacent markets over the last decade
CompanyCompany Adjacent Market StrategyAdjacent Market Strategy ResultsResults
Fortune 100Fortune 100Defense andDefense and
Developed strategy to improve oilexploration using its own deep defense
Sold capability to oil & gasindustry leader
Fortune 100Fortune 100Defense andDefense andAerospaceAerospaceCompanyCompany
Fortune 100Fortune 100Defense andDefense andAerospaceAerospaceCompanyCompany
Launch of telecom business unit duringperiod of rapid growth in IT/Telecommarkets by building on deep IT expertise
$1.5B and exit from market
Launch of high-speed Internet servicefor travelers worldwide by leveragingground and data stations
Exited market due to lackof demand
Lesson LearnedLesson Learned
Challenge to monetizenon-core business
Anticipated marketdemand did notmaterialize
Anticipated marketdemand did notmaterialize
THE AVASCENT GROUP | 7
MultiMulti--billionbillionDollar AerospaceDollar Aerospace
companycompany
Expanded into energy market to serviceoil & gas firms by using market leadingmanufacturing capabilities
Stand-alone businessdedicated to Energymarkets
Fortune 50Fortune 50Defense &Defense &IndustrialIndustrialCompanyCompany
Paid significant multiple to acquire cyberbusiness that had leading edgetechnology and intelligence communityrelationships
Multi-billion dollarbusiness today and a corecorporate business
Fortune 100Fortune 100Defense andDefense andAerospaceAerospaceCompanyCompany
Expansion into security marketplace viamultiple acquisitions with the goal ofestablishing market leadership
Formed the core of thecompany’s market leadingcyber business
Defense andDefense andAerospaceAerospaceCompanyCompany
exploration using its own deep defensetechnology expertise and through apartner’s capabilities
industry leader
Near term results inadjacent markets mayunder-perform even whenlong term strategy sound
Understanding corecompetencies leads toentry into optimaladjacencies
Short-commute adjacencyexpansions are lower risk
non-core business
Given this uncertainty around entering adjacent markets, companies can reduce risk andmaximize opportunity through a phased market targeting process
General MarketAttractiveness - Outside-In
Targeted AdjacencyAssessment
Identifying Adjacent MarketsIdentifying Adjacent Markets
Competency / CustomerMatch – Inside-Out
Phase 1Phase 1
• Screen of adjacent • Screen based on overall • Final set of targeted
Phase 2Phase 2 Phase 3Phase 3
Can a company leverage itscore competencies andcustomer relationships?
How attractive is themarket?
What are the entry pointsand opportunities for a
company in the market?
THE AVASCENT GROUP | 8
• Screen of adjacenthorizontal and verticalmarkets based on acompany’s corecompetencies andcustomers
• Examination would include:
• Customer relationships
• Technical/manufacturingcapabilities
• Culture
~ 20 Markets
• Screen based on overallmarket attractiveness
• Examination of market toinclude:
• Customer
• Competitor
• Supplier
• Market growth
• Market size
~ 20 Markets
• Final set of targetedadjacencies for a company
• Representative marketscould include:
• Cyber
• Health
• Energy
• Smart Power
• Assessment of optimalmarket entry points
Phase 1: Inside-Out - When looking to expand into adjacent markets, “short commutes” byeither customer or capability but not both simultaneously tend to be easier to achieve
Growth MapGrowth Map
NEW
CU
STO
MER
S
Extend Big Bang
Maintain
– Maintain existing customer base andtechnology focus
– Organic Focus
Extend: New Capability, Current Customer
– Expanding service offerings to existingcustomer groups offers growth path
– Organic or Inorganic
Extend: Current Capability, New Customer
THE AVASCENT GROUP | 9
CURRENT NEW
CU
RR
ENT
CU
STO
MER
S
CAPABILITIES
Maintain Extend
Extend: Current Capability, New Customer
– Likewise, offering current capabilities tonew customer groups is a logicaladjacency- if existing technology supportseasy transfer
– Organic or Inorganic
“Big Bang”: New Capability, New Customer
– Expanding both capabilities offered andcustomers served would indicate asignificant change of direction - likelydriven by inorganic growth
– Inorganic Focus
Cyber
Market Potential
IntelligenceCommunity
DHS
DOD
Relevant Customers
Aggressive funding andstakeholder battle createsnear-term opportunities
Ill-defined programsoutside of IC createchallenges
Analysis
HealthcareInformationTechnology
Military HealthSystem
VA
HHS
Social Security
Focus on EHR, networkmodernization, andapplication developmentare critical
Contract vehiclepositioning is key for future
FY10 Market Size$10B
FY10-14 CAGR 5%
New focus, but not newmarket; many firms havealready placed bets, withremaining targets often,less value-additive
Contract vehicle
Strategic Implications
Many companies are morefocused on general network ITdevelopment andimplementation and rebrandedas Cyber
Customer positioning key tolong-term viability (NSA)
FY10 Market Size$12B
FY10-14 CAGR 8%
Phase 2: Outside-In – General Market Attractiveness Evaluation
THE AVASCENT GROUP | 10
Social SecurityAdministration
positioning is key for futuresuccess
Energy andEnvironment
Dept of Energy
NOAA
GSA
State and Local
Near-term ARRA fundingcreates gap fill
Better funded market sub-segments are evolutionary,e.g. green buildings andgreen IT, & device energymgmt
FY08 Market Size$7B - $50B
FY10-14 CAGR 5%
Contract vehiclepositioning is critical
Defining the addressablemarket and relativepositioning is key
Firms with flexiblebusiness models may offergreatest upside
Smart Power Department ofState
DOD
USAID
NGOs
Some ‘reputational’disadvantage to defensecontractors
Challenging businessmodels as groups emergefrom not-for-profit mentality
FY10 Market Size$10B
FY10-14 CAGR 15%
High growth, large marketwith increasing policysignificance
Emerging market of strategicimport with limited businesssophistication
The Cyber market is often ill-defined to include many traditional IT functions, butnevertheless is a $12B market that is projected to grow at more than 8 percent
Integrators have generally employed inorganic growthstrategies to build deep portfolios of cyber offerings
Integrated SolutionsIntegrated Solutions
Niche Technology ProvidersNiche Technology Providers
Competitive EnvironmentCompetitive EnvironmentCyber InvestmentsCyber Investments
ITServices
RFWarfightingSystems
ElectronicWarfare
RF
InformationOperations
Command &Control
IT Security
NetworkConfiguration
Cyber Adjacent Market Profile
THE AVASCENT GROUP | 11
Opportunity AreasOpportunity Areas
The Comprehensive National Cyber Security(CNCI) introduced $17B in new cyberdevelopment funding over FY09-13
$6.6B DIA Solution for the InformationTechnology (SITE) IDIQ is likely to have a largecyber component
NationalIntelligenceSystems
Collection
ISR
ForeignSignalsIntelligenceCollection
GeospatialInformationSystems
ComputerNetworkExploitation
ComputerNetworkAttack
ComputerNetworkDefense
NetworkOperationsCenters
IdentityManagement
AccessControls
OCI IssuesOCI Issues
DoD:$1,040M
HHS:$1,557M
Veterans Affairs:$916M
Commercial, S&L(e.g. Hospitals, Labs)
• Quality Assurance• Program Management
• Program Management& Research Support –Life Sciences
• Logistics & SupplyChain
• Program Management
• Patient Management –Clinical & Non-Clinical
• Business Solutions• IT Infrastructure
Health ITHealth ITPublic HealthPublic Health
Life SciencesLife SciencesPharmaPharma
Health ITHealth ITPublic HealthPublic Health
Life SciencesLife SciencesPharmaPharma
Cap
ab
ilit
ies
Cap
ab
ilit
ies
Cu
sto
mers
Cu
sto
mers
Market DetailsMarket Details
Healthcare IT Adjacent Market Profile
Federal Health IT represents a potential growth alternative as customers tackle newpolicies, data integration/sharing issues and EHR migration
THE AVASCENT GROUP | 12
Successful players in the Health IT domain have tended tocombine organic growth with targeted acquisitions andhave usually focused on just one or two customers
Competitive EnvironmentCompetitive EnvironmentCompetitive Environment
Northrop’s strategy has been primarilyacquisitive and targeted at MHS
SRA’s strategy has been organic growth ofits NIH account and an acquisition targetedat CDC and NIH
SAIC’s position is based on its long historywith massive programs at MHS and NCI
• Program Management& Research Support –Pharma
Life Sciences• Quality Assurance
& Research Support –Public Health
• IT Infrastructure• Logistics & Supply Chain
Cap
ab
ilit
ies
Cap
ab
ilit
ies
Opportunity AreasOpportunity AreasOpportunity Areas
IDIQ contract vehicle turnover in FY10-11
Modernization of IT infrastructure
Major system redesign
Data interoperability
Increasing EHR adoption
Some stimulus opportunities
*All budget numbers based on the FY08 OMB IT Budget
Energy Market Value Chain/Life CycleEnergy Market Value Chain/Life Cycle
ResourceExtraction
ResourceRefining
PowerGeneration
Distribution Storage ConsumersWasteDisposal &Remediation
Waste toEnergy
Energy ManagementMicro
Energy and Environment Adjacent Market Profile
Energy has become a focus for this administration; opportunities are likely to be splitbetween facilities modernization and device-focused energy enhancements
THE AVASCENT GROUP | 13
Energy management, a service area that cutsacross multiple segments of the energy value chain,offers the most opportunity
DOE SmartGrid: $4.3B in stimulus funding toimprove electric grid efficiency/reliability
Subcontract opportunities under DOE’s $80BEnergy Savings Performance Contract (ESPC) toimprove energy efficiency at federal facilities
Cyber security will rise in importance as energysystems adopt networked solutions
Raytheon made a strategic choice to exit the energybusiness and sold off its relevant intellectual property
Competitive EnvironmentCompetitive Environment Opportunity AreasOpportunity Areas
MicroMacro
HealthHealthHumanitarianHumanitarianAssistance/Assistance/DisasterDisasterReliefRelief
EducationEducationReconstructionReconstruction DemocratizationDemocratizationLawLawEnforcement/Enforcement/CounterCounter--NarcoticsNarcotics
MilitaryMilitaryAssistanceAssistance
Program ManagementProgram Management
Development & Humanitarian AidDevelopment & Humanitarian Aid
LogisticsLogistics
Po
licy
Pre
scri
pti
on
Operating EnvironmentOperating Environment
Instability Failing State Post-Conflict/Stabilization
Smart Power Adjacent Market Profile
Smart Power holds potential as the USG adopts policies that aim to boost US influenceabroad by employing means other than traditional military power
THE AVASCENT GROUP | 14
Competitive EnvironmentCompetitive Environment
• Department of State and USAID are the primaryfunders of smart power and account for nearly 70%of the total market (FY09 total $60B)
• Department of Defense dedicates nearly $10B(FY09) to smart power initiatives
• The Department of Treasury and Department ofAgriculture together make up nearly 4% of the total,with contributions in technical assistance, debtrestructuring, and education activities
Program ManagementProgram Management
Fu
ncti
on
al
Acti
vit
ies
Provision of Equipment &Provision of Equipment &AssetsAssets
International Organizations & NGO Support (including Peacekeeping)
TrainingTraining
Opportunity AreasOpportunity Areas
Bre
ad
tho
fC
yb
er
/IT
Cap
ab
ilit
ies
Phase 3 – Targeted Adjacency Assessment – The internal and external assessments inPhases 1 and 2 will yield an understanding of current adjacent market positioning and bestentry points – e.g. grow organically, partner, acquire and will help to define achievable goals
Hig
h
QinetiQ
ManTech
Integrators
NG
GDLM
SAIC
BAH
BAE
ITT
Raytheon
CACI
L-3
CSC
Cyber Market Case Study
Multi-ServiceProviders
• Where do you fit and where do you want to be?
• Gov’t IT and C4I Generalists provide the broadest levelof competition with activities that span all Federalcustomer communities
• Commercially-focused firms offer needed technology,but full-commitment to Federal customers isquestionable
• Cyber specialists serve as technology incubators andhave historically represented key acquisition targets
THE AVASCENT GROUP | 15
IOactive
Bre
ad
tho
fC
yb
er
/IT
Cap
ab
ilit
ies
Low
Market Positioning ( % Government Focus)0% 100%
= <$50M
= $50M - $250M = >$1B
= Commercially-focused = Gov’t IT & C4I Generalists
= Cyber Specialists
(based on primary offerings)
Serco
TechUSA
MacAulay-Brown
ProObject
GAITS
Net Witness
DynTek
Smartronix
Core SecurityTechnologies
Entrust, Inc.
IntelligentDecisions
Cloudshield
= $250M - $1B
IBM
HP/EDS
SRA
CiscoMcAfee
Symantec
ComputerAssociates
SecureWorks
AllotArbor
Bivio
Endace
Npulse
Trusted Computer
NuBridges
TecSec
Boeing
Harris
Thales /Ncipher
Wyle
DeepNines
Global Velocity
Galois
NuParadigm
Blue CoatSafeNet
Syprus
SNIOmen
New World Apps
Core
NCI
Layer 7F5
WebSenseKCG
Final considerations
While the overall defense budges will be leveling-off, certain adjacent marketsrepresent real growth and scale
A phased market entry approach to adjacent markets maximizes opportunity andminimizes risk
Short-commutes to adjacent markets by customer or capability but not bothsimultaneously are typically easier to achieve
THE AVASCENT GROUP | 16
simultaneously are typically easier to achieve
Leading growth companies in these adjacent markets (e.g. cyber) have stronginterest from many suitors – acquiring at higher multiples can be expected
Corporate growth and margin targets can be at odds with the higher risk/rewardsprofile of entering adjacent markets – often there is a trade-off
There is a distinction between launching an initiative and brand awareness inadjacent markets vs. growing a business of scale – recognize which is the focus
NationalNationalSecuritySecurity
HomelandHomelandSecurity &Security &DisasterDisaster
ResponseResponse
Public SafetyPublic Safety& Law& Law
EnforcementEnforcement
SpaceSpaceExploration &Exploration &ExploitationExploitation
InfrastructureInfrastructure&&
TransportationTransportation
Public Mission ExpertisePublic Mission Expertise
Defense &Defense &IntelligenceIntelligenceAgenciesAgencies
FederalFederalCivilianCivilian
AgenciesAgencies
Ground, naval, airand joint militaryforces and
Border, port ,aviation, physicaland cyber security;
Military, civil andcommercial spaceoperations,
US Army, Navy,Air Force andjoint agencies
US federal civilagencies andprograms
Avascent assists corporate clients to chart paths to growth across the full spectrum ofgovernment missions and domains
Construction,engineering andoperations of
Government DomainsGovernment Domains
Law enforcementand public safetyequipment
THE AVASCENT GROUP | 17
GovernmentGovernmentBusinessBusinessSystemsSystems
Energy &Energy &EnvironmentEnvironment
GlobalGlobalDevelopmentDevelopment
& Stabilization& Stabilization
Aviation &Aviation &AerospaceAerospace
forces andintelligenceoperations
and cyber security;domestic andinternationaldisaster response
operations,systems andsupporting groundinfrastructure
Military, veteranand public healthsystems andservices and lifesciencesapplications
joint agenciesand intelligenceagencies
programs
State & LocalState & LocalGovernmentsGovernments
InternationalInternational
operations ofmajor facilities,and transportationinfrastructure
Aviationinfrastructure andcommercial sectorequipment andMRO services
US state and localgovernmententities
Governments,NGOs, and majormultinationalsserving publicsector needsaround the world
Generation,distribution andconservation;environmentalmonitoring &protection
equipmentsystems,programs andservices
Stabilization, aidand developmentsupport
Business supportsystems andprocesses acrossall levels ofgovernment
Health Care &Health Care &Life SciencesLife Sciences
Our role is to help companies successfully navigate a high stakes market characterized byconstant change, customer complexity, and stiff competition
Changing Mission Needs
Multitude of forces (political, budgetary,technological, bureaucratic, international)constantly shape and reshape demand
Long time horizons constantly buffeted bynear-term needs and forces
Complex Customer Requirements
Demanding customers with stringentperformance, schedule, and cost requirements
Sophisticated FactSophisticated Fact--Based AnalysisBased Analysis
Anticipate government needs and defineAnticipate government needs and definethe emerging opportunity landscapethe emerging opportunity landscape
Isolate the best growth opportunities forIsolate the best growth opportunities foryour companyyour company
Strategic InsightStrategic Insight
Engineer innovative solutions that addressEngineer innovative solutions that addresscustomer needs and deliver businesscustomer needs and deliver business
Government Market Challenges How Avascent Can Help
SuperiorOpportunityDiscovery
NewBusiness
THE AVASCENT GROUP | 18
performance, schedule, and cost requirementsthat often require custom solutions
Complex and often opaque buying processeswith many participants and shifting criteria
Competitive, High Stakes Environment
Intense market driven by high stakes/high riskcompetitions and dominance of single buyers
Need to invest, partner, and innovate tosucceed and secure long-term revenue flows
customer needs and deliver businesscustomer needs and deliver businessresultsresults
Partnership strategies that secure aPartnership strategies that secure astrategic advantage over competitorsstrategic advantage over competitors
Pragmatic solutionsPragmatic solutions
FactFact--based business cases withbased business cases withcomprehensive risk/return evaluationcomprehensive risk/return evaluation
Contract capture supportContract capture support
OnOn--going support postgoing support post--capture to assurecapture to assurevalue is deliveredvalue is delivered
“The value I receive from Avascent is critical to my firm achieving our objectives. The
Avascent team is a true partner and allows me and my team to tackle complex problems and
produce meaningful and actionable results.”
Avascent Client Perspective:
BusinessRevenueStreams
InvestmentConfidence& Reduced
Risk
Anticipate OpportunitiesAnticipate OpportunitiesEngineer BusinessEngineer Business
StrategiesStrategiesCapture Business ValueCapture Business Value
Detect MissionDetect Mission& Value Shifts& Value Shifts
We help clients detect emerging opportunities then engineer winning growth strategies tocapture value for their business
Questions we help clients address
DefineDefineBusinessBusinessGrowthGrowth
OpportunitiesOpportunities
DesignDesignBusinessBusinessStrategyStrategy
Develop FactDevelop Fact--BasedBased
Business CaseBusiness Case
Execute ValueExecute ValueCaptureCaptureStrategyStrategy
DeliverDeliverBusinessBusinessResultsResults
Organic Growth ChallengesOrganic Growth ChallengesHow will changes inthe macroenvironment toreshape the public
What are theemerging orunexploitedopportunities in
Who are the targetcustomers? What
What is the upsideof capturing the
What are the mostimportant customer
How do we insureeffective
THE AVASCENT GROUP | 19
Inorganic Growth ChallengesInorganic Growth Challenges
How are emergingmissions drivingshifts in policypriorities & budgetresources?
reshape the publicsector priorities?
How will changesin regulations,technology orcustomer needsreshape the marketenvironment?
What risks, issues& opportunities dothese mission &value shifts create?
opportunities inmy current andadjacent markets?
Who are thecompetitors in thisspace? Can webuild a competitiveadvantage?
What capabilitiesand resources arerequired to addressopportunities?
How attractive arethe opportunities(risk/rewardprofile)? Are theyaligned with goals?
How might anacquisition bestposition us? Whichtargets should wepursue?
customers? Whatare their key needs/preferences?
Will the target fulfillexpectationsregarding growth,margin & strategicpositioning?
How should weintegrate target?What actions do weneed to capitalizeon acquisition?
How do we knowthat we arecapturing thesynergies weexpect?
What businessmodels should weconsider?
How do we positionfor success?Pricing? Offering?Operations?
of capturing theopportunity?
What riskscenarios do weneed to consider?
What investment,competencies,organizationalsystems do weneed?
important customerrequirements?
What riskscenarios do weneed to consider?
What investment,competencies,organizationalsystems do weneed?
effectiveexecution?
What are theappropriateperformancemilestones andmetrics?
What systems andprocesses need tobe put in place?