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Profitable Growth

Aerospace and Defense

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1 | Profitable Growth

Let’s face it: the dynamics of the U.S. A&D marketplace have fundamentally changed.

Profitable Growth | 2

Looking for profitable growthWith few buyers, and facing massive cost pressures, most Aerospace and Defense (A&D) organizations are now looking for new opportunities to grow their revenue. Not surprisingly, many are looking outside of their traditional markets.

Some are seeking to establish a strong and profitable presence in new markets; others are adapting their current product and service lines to meet the demands of adjacent industry sectors.

Yet many organizations are quickly starting to find that achieving profitable growth in new sectors and new markets can be much more complicated than expected.

Indeed, success in new markets and sectors requires A&D leaders to develop new strategies and new ways of conducting business. They will need to understand new customer expectations and – often – new regulation and offset requirements. And they will need to create new value propositions and value-added services.

There is no “silver bullet” for catalyzing profitable growth in the A&D sector. But, there are opportunities. At KPMG, we know how to help you find them.

Long-term budget uncertainty, a growing emphasis on affordability, shifting defense priorities, and troop draw-downs in conflict zones are all putting immense pressure on defense contractors and pointing towards flattened growth prospects in the U.S. market.

But low – or worse, negative – growth is not an option in today’s competitive marketplace. A new path to profitable growth must be found, if not at home, then in new markets and sectors where existing products and services can be adapted to suit new customers.

Many are finding that moving products and services into new international markets and adjacent sectors is proving to be much more complicated than it seems.

At KPMG LLP (KPMG), we understand the pressure to achieve profitable growth and know what it takes to identify the right markets and the right entry strategies to grow profitably.


Our approachAt KPMG, we know that your objective is to grow your profits, not just your footprint. That is why we focus on helping our A&D clients grow in a very systematic and thoughtful way that prioritizes profitable growth and increases their opportunities. And in doing so, we help them make faster and smarter decisions through a holistic viewpoint that balances profitability against risk.

Our A&D clients choose us because we team with them to bring together deep strategy, process, governance, risk, and compliance tools to help them truly understand the risks and rewards of their operational decisions. And once their strategy is defined, we go beyond implementation to provide an on-going “strategy as a service” capability that helps ensure they remain on top of key market developments and tactical considerations that may impact their growth and profitability.

For our clients, this can mean better margins, lower risk, and faster time to market. In other words, more profitable growth.

Asking the right questionsAchieving profitable growth in new sectors and new markets can be much more complicated than expected. At KPMG, we understand the complexity of entering new markets and know what questions to ask to help ensure that your organization is making the right strategic growth choices – based on the right information – to increase profits and manage risk.

StrategicGrowth Choices

What is our Growth Ambition?

What Markets should we focus on (and not)?

What are the Enabling Capabilities that will deliver the growth ambition?

What are the Key Inhibitors that must be overcome?

What Capabilities should we prioritize (and not)?

What is our target portfolio of Products and Services?

Making ItHappen

What Target Operating Model is required?

What are the priority initiatives to deliver the growth?

How will we mobilize the organization to execute these initiatives?

How will we track performance and inform our strategy choices?

What Operational Infrastructure and Technology is required?

What Org.Structure, Governance, Compli-ance and Risk Controls are required?

What choices do we need to make around Partnering or Teaming to fill the white space?

What Measures and Incentives are required?

Are you ready to win in new markets? Before investing time and resources into new markets, A&D executives should consider the potential impact of the following five factors:

1. Pricing and distribution models – Commercial market customers often expect different pricing models such as licensing, leasing, or franchising.

2. System and hardware maintenance – New operation and maintenance models may also be needed to help ensure that technology solutions are sustainable and profitable over the long term.

3. Regulation – Leveraging existing products into new sectors like healthcare or financial services may require new capabilities around compliance and reporting.

4. Robust and reliable global supply chains – Ensuring that suppliers have the capacity, capability, and cost structures in the required geographies to help drive and sustain profitable growth in targeted markets.

– Supply chain visibility: Expanding supply chains into new markets will require A&D organizations to improve visibility into their supplier networks.

5. Innovation – Creating valuable products and services for adjacent markets requires incremental innovation and deep insight into new markets.


The right strategy, capabilities, and model to winWhile there may be no “silver bullets” for catalyzing profitable growth in the A&D sector, there are certainly significant opportunities. But with no two opportunities being exactly alike, A&D executives will need to continuously focus on adapting their market strategies, capabilities, and operating models in order to remain flexible and strategic in a constantly shifting marketplace.

CAPABILITIES

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Capabilities

Operating Model

Supply Chain

Market Strategy• Where will growth come from?

• What is my growth ambition?

• Who are my target customers, and what are their needs and wants?

• What capabilities do I need to have to win?

• What capability gaps do I have to support those wins?

• What capability gaps do I expect overseas?

• Who should I buy or team with to fill these gaps?

• Which processes will be leveraged in the United States or shared services and which ones do I need to take overseas?

• How should I organize my governance, risk, and compliance for overseas?

• What technology am I going to use to support data and reporting?

• How will I control and segregate customer and operational data (ITAR compliance framework)?

• How will I support enabling applications in technology overseas?

Adjacent Markets/ Partnerships• Which markets should

I participate in? Which countries?

• What are the capabilities in each country and each platform participate in?

• Who to partner with or buy? Who are some nontraditional partners to work with?

Go-To-Market• What is my GTM strategy? How does

that vary?

• What is the sequencing? What do you need to take now to say ”go full throttle on priority growth markets?”

• Do suppliers have the necessary technology, capacity, regulatory approvals, and robust cost structures to support growth?

• Does the industry trend of consolidation across diminishing global supply bases impede targeted growth?

• Does the industry trend in tier 1 and tier 2 suppliers toward revenue diversification outside of A&D impact product pricing or flows needed to sustain growth?

• How will increasing transparency requirements to and from suppliers be met to keep growth-related inventory and cost of goods sold levels under control?


Key considerations when entering new markets

Focus on regulation and offset requirements

Regulation will be a major barrier, particularly for those seeking to leverage their existing products and capabilities into other highly regulated industry sectors like healthcare or financial services. Much work will be required at the front-end to understand the compliance requirements; new capabilities may be needed to manage reporting.

A&D organizations moving into new markets may also experience increasing pressure to enhance their supply chain visibility as they struggle to balance new offset requirements against the need to help ensure high standards within new markets.

Focus on risk reduction

Entering into new markets and creating more collaborative business models often carries a host of new risks for A&D organizations to manage – everything from the security of your people on the ground through to the security of power supplies, uninterrupted material supply, talent, and resources. Those hoping to develop sustainable businesses in new markets will need to carefully consider the operating, regulatory, infrastructure, and legal environment of their target markets prior to putting boots on the ground or investments into the market.

To achieve sustainable and profitable growth, A&D organizations must continue their expansion into international markets. But if they are to succeed, they will need to put much more focus on creating and implementing a robust risk management strategy first.

Cutting through the complexity

The pace of change in today’s global A&D marketplace is unprecedented. To achieve sustainable and profitable growth in this environment, A&D executives must be able to cut through the complexity to identify opportunities in areas such as:

• Business and operating structures, portfolio shaping and improved operational performance

• Emerging market growth and the associated risks and rewards

• New partnership opportunities, joint ventures and inorganic growth

• Adjacent market opportunities and product consumerization

• New after-market profitability models and structures


With their traditional markets in the United States coming under increasing pressure, this global A&D major knew they needed to expand into new markets in order to maintain growth. Understanding which markets and which entry strategies would prove most profitable and sustainable in the long term would be key.

Leveraging KPMG’s extensive global member firm network and deep insight into new market strategies, the organization relied on KPMG’s member firm

professionals to help them not only select and prioritize potential new markets for growth, but also to identify the right capabilities and proper sequencing to make their plans successful and sustainable.

Ultimately, this global A&D major adopted KPMG’s strategy for phased entry into six new markets and re-engaged the firm to develop a similar strategy for their broader portfolio of products and services.

Focus on partnering and collaboration

Collaboration is going to be a vital enabler of growth for the A&D sector, particularly as companies start to adapt their existing product lines to take advantage of market adjacencies and enter into new, higher-growth geographies. A&D organizations are increasingly looking to partner with their suppliers to not only share risks and development costs, but also to drive incremental innovation and product enhancements that meet the needs of adjacent industry sectors.

However, to successfully partner in new markets, A&D executives will need to carefully consider not only which organizations they choose to work with, but also which models and arrangements to enter into. The reality is that not all players in foreign markets are on the “up and up” and A&D executives will therefore need to carefully review their agreements and assess their partners against a range of potential risks such as bribery and corruption charges, inclusion on sanctions lists, political affiliations, or criminal records.

Case study: Moving into new and emerging markets


AMERICASIndustrial Manufacturing 3,900 Aerospace and Defense 700

A recognized A&D market leaderWhy choose KPMG?• We are uniquely positioned to understand our clients’

business, finance, and technology issues

• We help our clients focus on what matters most to their business and eliminate complexity

• Our “business-first” mindset helps define the business problem to be solved and then map it to the desired technology-enabled future state

• We work to help our clients achieve efficient, effective, and sustainable value

• Our action orientation creates a bridge from strategy to execution

• Our methodology and tools are proven and our people are experienced and objective

• We are independent of any one hardware or software providers, which enables us to develop the right approach to meet the unique needs of each client


Asia PacificIndustrial Manufacturing 2,800 Aerospace and Defense 150

EMEAIndustrial Manufacturing 6,800 Aerospace and Defense 750

Global network of KPMG International member firm professionals with local

experience actively doing business in 155 countries

• Business and Strategy Planning

• Business Consolidation/Transformation

• Cost Optimization and Alignment

• Enterprise Systems Planning and Implementation

• Industry Benchmark Database

• Program Cost/Schedule Performance

• Regulatory and Compliance

• Shared Services/Outsourcing

• Six Sigma Process Analysis

• Supply Chain and Sourcing Strategies

A full range of services to help A&D organizations achieve profitable growth

Case study: New partnerships to address new markets

Adapting existing products to suit new markets requires A&D organizations to not only think differently about their products, but also about their market entry strategies. When one of the world’s largest defense contractors wanted to pitch their command-and-control system to a major European metropolitan law enforcement agency, they partnered with KPMG to provide the necessary business change, transformation and training elements that would be required to successfully implement the solution. The partnership has since begun to explore other opportunities to leverage their experience in new markets.


Our thought leadership

2014 Global Aerospace & Defense Outlook

The 2014 Global A&D Outlook provides a detailed overview of the global A&D manufacturing sector, along with insights A&D manufacturers can leverage to help their businesses succeed.

Megatrends Research

This report analyzes ten key trends in Industrial Manufacturing and provides KPMG perspectives, approaches, solutions and related KPMG Services.

Aerospace & Defense On Your Agenda Series

On Your Agenda is a series of targeted mini-papers that address some of the key issues facing the U.S. A&D sector today and in the future.

© 2015 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Printed in the U.S.A. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International. NDPPS 311856

Contact us

Doug GatesGlobal Head, Aerospace & DefenseT: + 1 404-222-3609E: [email protected]

Tom MayorStrategy Practice Leader, Industrial ManufacturingKPMG in the U.S.T: +1 216 875 8061E: [email protected]

Ryan DonleyDirector, Aerospace & DefenseKPMG in the U.S.T: +1 703 286 8667E:[email protected]

Steve ClarkLead Partner, Defense & National Security SectorKPMG in AustraliaT: + 61 3 9288 6937E:[email protected]

Jarib B D FogacaAerospace & Defense Sector LeaderKPMG in BrazilT: + 551921298700E:[email protected]

Grant McDonaldAerospace & Defense Sector LeaderKPMG in CanadaT: + 613-212-3613E:[email protected]

Alex ShumIndustrial Manufacturing Sector LeaderKPMG in ChinaT: +862122122508E:[email protected]

Laurent Des PlacesPartner, Aerospace & Defense SectorKPMG in FranceT: +33155686877E:[email protected]

Jean-Luc GuiteraPartner, Aerospace & Defense SectorKPMG in FranceT: +33155686962E:[email protected]

Harald von HeynitzIndustrial Manufacturing Sector LeaderKPMG in Germany T: +49 89 9282-1201E:[email protected]

Ja Young JoAerospace & Defense Sector LeaderKPMG in Korea T: +82221120640E:[email protected]

Amber DubeyAerospace & Defense Sector LeaderKPMG in IndiaT: + 911243074146E:[email protected]

Tom WoodsAviation Finance & Leasing Sector LeaderKPMG in IrelandT: + 35314102589E:[email protected]

Renato NaschiAerospace & Defense Sector LeaderKPMG in ItalyT: +3906809611E:[email protected]

Luis Alejandro BravoAerospace & Defense Sector LeaderKPMG in MexicoT: + 525552468360E:[email protected]

Thore KleppenPartner, DefenseKPMG in NorwayT: +4740639515E:[email protected]

Shu Ping QuekAerospace & Defense Sector LeaderKPMG in SingaporeT: +6562132637E:[email protected]

Glynn BellamyAerospace & Defense Sector LeaderKPMG in the UKT: + 44-121-6096170E:[email protected]

Bernard BrownAerospace & Defense Sector LeaderKPMG in the UKT: + 44-20-73116605E:[email protected]

Avtar JalifAerospace & Defense Sector LeaderKPMG in the United Arab EmiratesT: +97124014860E:[email protected]

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