Early in 2015, Forbes on behalf of KPMG International surveyed 68 aerospace and defence (A&D) manufacturing senior executives around the globe. The results provide an insight into where growth is expected to come from in a fast-changing world where disruption of existing business models is the new normal.
Almost half of all respondents to the survey say they believe increased R&D spend will deliver new growth and innovation, with over 40 percent of defence industry saying they will invest more than 6 percent of revenues on R&D.
Globally, defence industry is seeking a first-to-market advantage from this R&D investment with exactly half of all respondents identifying their primary innovation strategy as being focused on discovering new breakthroughs.
"What might Google's big data model do to Defence's lengthy vetting processes? What could an Airbnb-styled approach do for defence facilities' excess capacity? Could 'Uber thinking' impact defence transport and warehousing?"
Lead Partner, Defence Industry
But what is really interesting is that this focus on innovation connects with an ever greater emphasis on more collaborative business models. Seventy-two percent said that they expect partnerships, rather than in-house efforts, to characterise future innovation for their organisation. For a nation like Australia, with a traditionally low R&D spend, this should be of enormous interest to local business management and owners.
As highlighted by my colleagues in KPMG's 2015 Global Aerospace and Defence Outlook, it is easy to understand why.
For example, the low-cost commercial Unmanned Aerial Vehicle (UAV) market has already started to disrupt the business models and revenue streams of many of the world's biggest defence aerospace players. New innovative players are entering the cyber national security market, based on credentials gained from protecting banking, financial and health information. In space, agency-led and funded programs are being displaced by various private Low Earth Orbit programs.
These technologies or business models did not appear overnight. Defence industry has long been aware of their potential impact and implications. Yet few, if any, reinvented their own business models and approaches to product development in a way that defends the market while capitalising on their existing strengths.
Over the coming year, further significant consolidation in the sector is expected. In part, this trend will be driven by necessity, particularly for any small-to-medium sized organisations and suppliers that are not able to win major contracts. But it will also be driven by organisations looking to reshape their portfolios with new products, services and technologies.
Creating mutually beneficial partnerships is not easy. Australian defence industry has had a mixed history of success in partnering. In part, this is because most tend to focus on the commercial and strategic aspects of deal-making and often place too little attention on designing the right structure for sustainable success.
Partnering with non-traditional players and suppliers to drive innovation also creates some new considerations for A&D organisations, particularly regarding the ownership of intellectual property (IP) and technology transfer. Establishing new operations in foreign markets increases the challenge, with the need for the right in-house skills to properly assess, validate and execute the right strategies.
But this is perhaps where the greatest opportunities lie. What might Google's big data model do to Defence's lengthy vetting processes? What could an Airbnb-styled approach do for defence facilities' excess capacity? Could 'Uber thinking' impact defence transport and warehousing?
These questions aim to be provocative. Each will spike the traditional disruption counter-arguments – you don't understand, it does not work here, our market requires special regulation. Perhaps so.
In today's world, new threats and competitors are emerging every day. Successfully managing this challenge has less to do with forecasting new threats and more to do with how agile organisations react and adapt to them.