Arming the Bug Hunt

ARMING THE BUG HUNT

Why the economics of the JDAM and the MRAP are changing customer demand, and how contractors can to adapt to succeed

Our view on military-industrial markets in 2009

Hasik Analytic LLC

ARMING THE BUG HUNTOur view on military-industrial markets in 2009

Summary

There stands a widespread assertion that spending on existing military programs in the United States will remain constant for the next several years, perhaps trending downward only later on. We remain unconvinced by this conventional wisdom. Rather, we anticipate that financial constraints, conventional overmatch, and constabulary impulses may combine to significantly reorder military spending priorities throughout the western world. Robert Gatesʼ reappointment as defense secretary and his article in the January issue of Foreign Affairs signal that the shift in emphasis towards preparation for small wars will be ongoing.

Appropriate procurements for these wars follow the economics of their decisive weapons—the Predator, the JDAM, and the MRAP. Revolutionary improvements will generally be sought only under what we term JDAM economics: where they are based on a small set of advances so inexpensive and compelling that they suppress old ideas about quality constraints. More common will be MRAP economics: evolutionary improvements that are both relatively inexpensive and essential, and based on the selective relaxation of old constraints. Many systems, like the Predator, will show hallmarks of both paradigms.

Preparing for what could be a structural break with the industryʼs past requires at least three steps: an intense, practical analysis of the market; applied corporate development that tailors your corporate architecture to the emerging, dominant product architectures; and execution that demands mastery of the business on the order of the industryʼs mastery of its engineering.

ABOUT THE AUTHORJames Hasik is a principal of Hasik Analytic, and a founder of the firm. He can be reached at [email protected]

ABOUT USHasik Analytic LLC is a management consultancy dedicated to the success of the industrial organizations that supply the tools of global security

Hasik Analytic LLC

mailto:[email protected]

mailto:[email protected]

Arming the Bug Hunt: our view on military-industrial markets in 2009

The start of 2009 might be viewed as a time of relative relief for military contrac-tors. In the United States, the incoming president has selected a team of top lieu-tenants in national security widely de-scribed as “centrist”. Roughly two-thirds of those named so far served with the relatively centrist Bill Clinton, and the defense secretary himself will continue, for the time being, to be the Republican Robert Gates. The pattern seems so un-avoidably clear that Barack Obama’s most leftist benefactors are aghast and feeling betrayed. At the same time, throughout the West, global recession has set in, but has thus far led at worst to mere program delays. In a few cases, it has meant small bursts of spending meant to fill immedi-ate battlefield needs. With a new US gov-ernment supposedly more in tune politi-cally with those of the rest of the indus-trialized world, many people are assum-ing that the era of adventurous neocon-servative idealism is receding in favor of resumed internationalist realism.

People suffering from socialism and kleptocracy will still be rescued, but mostly when the chaos within their borders begins to leak out into the global commons.

This view is ambitious and optimistic, for the alternative to idealism is not so much realism, but opportunism. The longed-for foreign policy of Bill Clinton was pro-foundly opportunistic, cheerfully taking on those enemies—the Serb Republic in Bosnia and Federal Yugoslavia—that al-lied forces could easily handle without too much trouble and expense. The reaction

of neoconservatism emerged in this pe-riod as a convergence of political idealism and realism meant to expand the empire of free commerce and representative gov-ernment where possible. At the supposed end of this era, stacks of reports are now flowing from think tanks on both sides of the Atlantic, calling for military reorienta-tion upon the needs of collective security, and therefore emphasizing force struc-tures and concepts for counterinsurgency and nation-building. If this is realism, it is merely conservative idealism. People suffering from socialism and kleptocracy will still be rescued, but mostly when the chaos within their borders begins to leak out into the global commons.

Governments throughout the West want to know how to maintain meaningful military capabilities on just 1.7 percent of GDP—the NATO average.

To date, larger firms in the arms industry have generally not been enthused about military-political opportunism. Today, market planning for the crisis of the day is subject to far more uncertainty than was planning for continued cold war in, well, the Cold War. But if the unpredict-ability of the location and direction of the next war were not enough, worsening governmental finances could make things truly ugly. By 2011, the Keynesian pump-priming promised in the United States will have failed, as our rational expecta-tions should dictate. At that point, the federal government will have added an-other trillion dollars to its debt, and miles of inefficiently nice roads across the country (thanks to that shovel-ready list).

© Hasik Analytic LLC 1 9 January 2009

Money in the United States may be get-ting short; Mr. Obama’s government may thus also be getting short, leading to fre-netic searches for economy. Spending could turn down sharply, forcing some serious tradeoffs. The rest of the alliance is already there. Governments throughout the West, squeezed between the largesse of their entitlements and electoral resis-tance to further taxes, want to know how to maintain meaningful military capabili-ties on just 1.7 percent of GDP—the NATO average.

What is not difficult to see is where the tradeoffs will be found. Despite prattling to the contrary, the conventional over-match of the allies is absolute. The con-centration of forty-five percent of all global military spending in the United States alone must assuredly suffice to buy all the modern weapons needed to repel any plausible conventional threat. As Mr. Gates puts it in the January 2009 issue of Foreign Affairs,

It is true that the United States would be hard-pressed to fight a major conven-tional ground war elsewhere on short notice, but as I have asked before, where on earth would we do that? U.S. air and sea forces have ample untapped striking power should the need arise to deter or punish aggression—whether on the Ko-rean Peninsula, in the Persian Gulf, or across the Taiwan Strait.

Rather, throughout the alliance, it is the constabulary impulse that has taken hold. Insurgencies, especially those in re-stricted terrain, are widely seen as the main problem. The Danish government’s recent white paper on defense asserts that there is no near-term territorial threat to Denmark, and as a result, Danish regular forces should be configured entirely for

overseas operation. In the United King-dom, £700 million of new protected vehi-cles, bound for Afghanistan, are being fi-nanced from the indefinite postponement of the utility vehicle of the Future Rapid Effects System, which was not bound for Afghanistan. Spanish Defense Minister Carme Chacon (who opposed the cam-paign in Iraq!) is asking her cabinet to increase the limit on foreign deployments from 3000 to 7700 troops, the limit of Spain’s logistical capacity—for now.

“Afghanistan is Franceʼs real defense white paper.”

Recent European history, and geography, are indeed instructive. Denmark feels not at all threatened by Russia; Sweden slightly more; Finland a bit more yet (though relations have never been better, they insist in Helsinki). Georgia rather regrets focusing its army so intently on counterinsurgency, but as Robbin Laird told Defense News recently, “Afghanistan is France’s real defense white paper.” So, if the past seems ex ante unpredictable, the future is inherently unknowable. As Gates’ asserted, “the defining principle” of military preparedness should be bal-ance between large war and small war ca-pabilities, but balance within a realistic assessment of the relative threats that they each pose. The problem, as he put it, is that

the Department of Defense's conven-tional modernization programs seek a 99 percent solution over a period of years. Stability and counterinsurgency missions require 75 percent solutions over a period of months. [The question] is whether these two different paradigms can be made to coexist in the U.S. mili-tary's mindset and bureaucracy.



Perhaps they cannot. If they cannot, then the one that will not is the 99 percent ap-proach—and its constraining mindset and enabling bureaucracy. For as we all re-member former US Army Chief of Staff Eric Shinseki saying back in 2000, “if you don’t like change, you’re going to like ir-relevance a lot less.” Despite the general’s admonishment, getting the US ground forces ready to fight insurgencies in Af-ghanistan and Iraq took unacceptably long. As French parliamentarian Yves Fromion put it recently, “a crash program that takes six months is not a crash pro-gram.” Specifically, as Senator Joe Bi-den’s indictment of slow uptake in the Mine-Resistant Ambush-Protected (MRAP) vehicle program made clear, ex-cuses about phantasmal industrial con-straints will no longer suffice. Mr. Biden was subsequently proven correct in his assertion that if you show them money, the contractors will come. And shortly, he will be vice president in the United States. This may matter for something.

As Senator Joe Bidenʼs indictment of slow uptake in the MRAP vehicle program made clear, excuses about phantasmal industrial constraints will no longer suffice.

So, perhaps fearing irrelevance—or a house-cleaning on the order of that at the Central Intelligence Agency after 2003—those bureaucracies are belatedly catch-ing up. While the F-22 stealth fighter has still seen no gainful employment over Af-ghanistan or Iraq, a small set of iconic, almost decisive weapons has captured public imagination in those two cam-paigns. In late 2001, hundreds of Boeing’s Joint Direct Attack Munitions (JDAM) blasted wide gaps in the Taliban’s trench lines in the Panjshir Valley, sending its

gunmen into sauve qui peut, and allowing the greatly outnumbered Northern Alli-ance and US forces to capture all the ma-jor cities in the country. As mounting casualties from insurgent bomb attacks in Iraq made the mission seem not-so-accomplished, a host of companies began providing thousands of blast-hardened armored vehicles in the effort that even-tually became known as MRAP. And since the Bosnian campaign of 1995, a consis-tently growing number of General Atomics’ Predator reconnaissance-strike drones and derivatives have provided air-power that has been stealthy, surgical, sudden, and even cost-effective.

It is patently clear that well-run armed forces can at once prepare for wars both big and small.

All three of these systems, or close substi-tutes, have been purchased by modern military forces throughout the world. But this shift in priorities has drawn com-plaint from commentators disinterested in this ‘empire of democracy’. It is not so much, they claim, that such spending draws resources from programs that were meant for blue water, open skies, and something resembling the Fulda Gap. Rather, and now citing the Georgian ex-ample, they claim that the widespread fo-cus on insurgency cripples preparation for conventional conflict. Unfortunately for the argument, it is patently clear that well-run armed forces can at once pre-pare for wars both big and small. The British Army and the Royal Marines have been doing so reasonably successfully for decades, if not centuries, and this capac-ity was not lost on the colonists. As Gates noted,



The ability to fight and adapt to a di-verse range of conflicts, sometimes si-multaneously, fits squarely within the long history and the finest traditions of the American practice of arms. In the Revolutionary War, tight formations drilled by Baron Friedrich von Steuben fought redcoats in the North while guer-rillas led by Francis Marion harassed them in the South. During the 1920s and 1930s, the Marine Corps conducted what would now be called stability operations in the Caribbean, wrote the Small Wars Manual, and at the same time developed the amphibious landing techniques that would help liberate Europe and the Pa-cific in the following decade.

Fast forward to 2008, and note that Dep-uty Defense Secretary Gordon England recently approved a major policy directive that elevates preparation for irregular warfare to an equal footing with that for more conventional combat. This might be less important with the pending change in government if Mr. Gates, Mr. Eng-land’s immediate boss, were not staying on. As his press secretary put it in De-cember, Gates may have punted a few de-cisions to his presumed successor, but “now he is going to be the recipient of those punts, and he won't be calling a fair catch. He is prepared to deal with them head-on.”

It is just possible that this new team could show the courage to skip that generation of weapons of which Texas Governor George W. Bush spoke at the Citadel in September 1999.

Retaining Mr. Gates may indeed prove great cover for Mr. Obama: if people are indeed policy, this single decision may foreshadow, and then facilitate, a Nixon-

goes-to-China reordering of military pri-orities. Pressed by financial restraints, and still short a near-peer competitor, but unshaken in their enthusiasm for global order, Mr. Gates’ and his band of sup-posed centrists may put into force a wholly new outlook on military spending priorities in another two or three years. It is just possible that this new team could show the courage to skip that generation of weapons of which Texas Governor George W. Bush spoke at the Citadel in September 1999.

Change will not be endemic to the United States. Consider the predicament of the Ministry of Defence in the United King-dom. The British National Audit Office’s annual review of military programs this year highlights four that are particularly overbudget and behind schedule: the A400M airlifter, the Meteor beyond-visual-range air-to-air missile, the Nim-rod MRA4 maritime reconnaissance air-craft, and the Terrier armored engineer-ing vehicle. All are national or European programs; none offer performance im-provements that can be described as revolutionary. What should be particu-larly distressing to EADS, MBDA, and BAE Systems is that there are off-the-shelf or soon-to-be-ready alternatives to all of these, such as Boeing’s C-17 Globe-master III, Raytheon’s AIM-120 AM-RAAM, Boeing’s P-8 Poseidon, and what can only be called a host of perfectly ac-ceptable combat bulldozers.

Needless to say, this sort of change may dramatically affect business; it may even portend a structural break, a discontinu-ity with past practices that remakes the industry. For astute, capable, and fast-moving enterprises, this is opportunity. As UCLA management professor Richard Rumelt stressed recently,



a structural break is the very best time to be a strategist, for at the moment of change old sources of competitive advan-tage weaken and new sources appear. Afterward, upstarts can leap ahead of seemingly entrenched players.

Governments throughout the West will be on the hunt for economies, but paradigm-breaking combinations of price and per-formance will be all the better. As the economics laureate Herbert Simon put it, bounded rationality and uncertainty about the future lead people to satisficing solutions. With today’s military technolo-gies, this means modular, scalable, and reconfigurable systems that are adaptable to a range of threats. These factors will be all the more important because the threat of obsolescence has in some ways in-creased since the end of the Cold War. This is not just because the opponents are evolving rapidly technologically (the So-viets were truly economically backwards), but because it is so difficult to predict who those opponents will be.

Government customers throughout the West will be on the hunt for economies, but paradigm-breaking combinations of price and performance will be all the better.

Australian economist Henry Ergas has observed that the response to obsoles-cence increases the extent to which weapons systems are evolving products that cannot be well specified in advance. The inconstancy of today’s rivals con-founds efforts to plan for specific techno-logical breakthroughs, as their relevance may no longer be obvious a few years into a lengthly development. And so, while the F-22 relies on Intel i960MX multiproces-

sors that went out of production in 1997, Chinese air defense commanders are communicating amongst themselves with late-model Lenovo laptops, Blackberries, and VOIP telephone connections.

JDAM economics:revolutionary improvements based on a small set of advances so inexpensive and compelling that they suppress old ideas about quality constraints

In this environment, breakthrough per-formance will be sought, but more often within what we may term JDAM econom-ics: where the revolutionary is based on a small set of advances, and where it is so inexpensive and compelling that it sup-presses old ideas about quality con-straints. Boeing’s design was so dominant that it subsequently sucked the oxygen out of the precision weapons market—as it did from many a cave in Tora Bora. The JDAM later morphed into the entirely analogous Small Diameter Bomb (SDB), which RAND termed the single most marginally valuable line item in the entire US military budget. Stealthy attack air-craft with small bomb bays can now en-gage half a dozen targets on single sorties, and with fire-and-forget weapons. Be-cause GPS accuracy is independent of range, they can do so by lofting bombs from the safe standoff of scores of miles. What’s more, all this comes at roughly the price of a pickup truck, because the GPS itself is installed, separately paid for, and available to an unlimited number of us-ers. Laser, infrared, and pattern-matching seekers still make interesting additions to weapons with GPS-plus-inertial guidance, but they have become much less expensive given the proximity to the target into which they will be deliv-ered. Even the specifications for the iner-



tial guidance systems themselves have been relaxed, given the short times of flight in which they might need to per-form independent of GPS.

More common, however, will be solutions within what we may term MRAP econom-ics: evolutionary improvements that are both relatively inexpensive and essential, and based on the selective relaxation of old constraints. The MRAP vehicle pro-gram acknowledged that today’s battle-fields feature only three key threats: the Kalashnikov, the rocket-propelled gre-nade (RPG), and the improvised mine. Vehicles like BAE Systems’ RG-31 and Force Protection’s Cougar do not resist cannon shells or wire-guided missiles well, but guerrillas don’t carry the former, and almost nothing stops the latter any-way. Within vehicles with spall liners, penetrating RPGs can generally only pro-duce single fatalities. By designing for ballistic resistance to nothing heavier than a machine gun rounds, MRAP mak-ers could concentrate on the critical at-tribute: blast resistance. The v-shaped steel hulls could then serve as anything from a bomb disposal vehicle to a mortar carrier to an armored ambulance—and have.

MRAP economics:evolutionary improvements that are both relatively inexpensive and essential, and based on the selective relaxation of old constraints

The MRAP paradigm further, and neces-sarily, depends on globally-sourced com-ponents. Note that the designs of most of the more prominent vehicles on the mar-ket originated in South Africa. In what Michael Porter of Harvard Business School might term a selective factor dis-

advantage, long experience with guerrilla war provided an excellent live-fire labora-tory, and long distances between Cape Town and northern Namibia forced a re-liance on wheeled (and thus highly mar-ketable) designs. If the hulls held under stress, no one could claim to care where the welders worked.

Note also that both military-industrial paradigms are founded on efficient, less-is-more relaxation of constraints once thought obvious, but which have proven all-too-obviously constraining. In the case of the MRAP, selectively relaxing the quality constraints was essential to suc-cess of the design; in that of the JDAM, the technological advance itself pushed back the constraints, and cost-effectively at that. Coming to terms with this dy-namic requires some systems thinking, for design constraints influence the range of possible product qualities, while per-formance levels themselves define the constraints. Indeed, it is often not obvi-ous whether a particular attribute is a fea-ture or a frailty: the market for drone air-craft did not take off, so to speak, until pilots in cockpits were understood to sometimes be the latter.

The military-industrial paradigms of both the JDAM and the MRAP are founded on efficient, less-is-more relaxation of constraints once thought obvious, but which proved all-too-obviously constraining.

General Atomics’ Predator, and many competing aircraft, show aspects of both economic models: the midcourse guid-ance and operator workload problem re-quired the breakthrough of GPS, but sub-sequently, development has been mostly evolutionary. Moving the pilot from the



plane to a cubicle outside Las Vegas low-ered both expectations of and require-ments for survivability, which permitted a more cost-effective and longer-loitering design. In the process, General Atomics’ business grew from a staff of a dozen to thousands. Today, drones are truly, fi-nally achieving prevalence and accep-tance. The year 2009 may come to be seen eventually as a watershed: the first in which the US Air Force requested more unmanned than manned aircraft in its budget. To be fair, the amount of money requested for the latter greatly exceeds that for the former, but this is quite the point. The US Air Force and Army could have 500 Predators, Reapers, and Sky Warriors, and battlefield commanders would want still more. What’s different is that at current prices, they could actually afford them.

The year 2009 may come to be seen eventually as a watershed: the first in which the US Air Force requested more unmanned than manned aircraft in its budget.

In both paradigms, JDAM and MRAP, customers benefit from modularity, scal-ability, reconfigurability, and thus associ-ated cost containment. To understand what this may mean commercially, con-sider how JDAM concepts may soon ex-tend into other military markets that heretofore seemed neither adjacent nor reasonably threatened. Armored howit-zers and major caliber naval guns earn steady returns for a handful of firms worldwide, but the need for them will soon be far from obvious should Ray-theon and Lockheed Martin succeed with their inexpensive, modular, and autono-mous Netfires. That box-of-rockets (with their GPS-plus-inertial guidance and the

punch of a 155 mm shell) will be joining the artillery battalions of the US Army’s infantry brigades in 2011, and the decks of the US Navy’s littoral combat ships soon thereafter. If the experience is posi-tive, it may upset a few more markets than its conceptual cousin the JDAM has so far.

When American admirals disclaim interest in suppressing piracy for a lack of ships, it is clear that quantity, not quality, is the limiting factor.

If that is not enough, consider how MRAP concepts might be extended—say, into the mess that the warship market has become in some countries. Years ago in the United Kingdom, for no reason that can be apparent today, the Ministry of De-fence chose yet one more national devel-opment program for air defense ships. For its trouble, it will get just six phe-nomenally expensive Daring-class de-stroyers. In the United States, the Navy cannot make a convincing case for con-tinued production of either the Zumwalts (new DDG-1000s) or Burkes (more DDG-51s). With over seventy Aegis ships in the fleet or on the way, one might ask why it does not end production of both. As Mr. Gates points out, the US Navy is as pow-erful as the next thirteen navies put to-gether—and eleven of those belong to friendly countries. When American admi-rals disclaim interest in suppressing pi-racy for a lack of ships, it is clear that quantity, not quality, is the limiting fac-tor. Robert Clifford, the chief executive of catamaran-builder Incat, once asserted that the US Navy and Army could come to buy 100 Joint High Speed Vessels—and with the trouble off Somalia, that number no longer seems fanciful. Fellow Austra-lian shipbuilder Austal is now making



those and the littoral combat ships in Mobile, and Alabama, after all, has as many senators as Maine. Faced with the possibility of this kind of turmoil, investors and managers ought to be asking themselves how their enter-prises can thrive in an industry driven by JDAM and MRAP economics, which may even be contracting sharply in size. Echo-ing Rumelt’s thoughts, Tom Nicholas of Harvard Business School recently noted that

although deep downturns are destruc-tive, they can also have an upside. The Depression-era economist Joseph Schumpeter emphasized the positive con-sequences of downturns: the destruction of underperforming companies, the re-lease of capital from dying sectors to new industries, and the movement of high-quality, skilled workers toward stronger employers. For companies with cash and ideas, history shows that downturns can provide enormous stra-tegic opportunities.

The good news is that much of the indus-try is awash with cash after seven years of hefty spending by the United States gov-ernment. The problem is that this virtual embarrassment of riches can be easily misallocated as long as companies re-main, in the short term, reasonably prof-itable. As we can imagine, the long term may be less forgiving.

The first step, then, is an intense, practi-cal analysis of the market, considering how the economic realities and military requirements facing your customers will affect their patterns of demand. For even if we understand the model for corporate success, we must find the specific areas for growth, as well as those for retrench-

ment. This means identifying the product qualities and quantities that will be de-manded under the scenarios that you can imagine. It also means defining catego-ries of assets in which inventories look long or goals look remote. More systems than just the JDAM, MRAP, and Predator came from nowhere in the past decade or so to earn strong returns for their pro-ducers, and many hint at what may be the next big thing in armaments.

If someone brings you a single sand chart of what he calls the most likely scenario, and nothing else, throw him out of your office.

Figuring out what that will be means identifying which constraints will be re-laxed under which scenarios, and under which generalities that extend across sce-narios. It means determining who will be relatively advantaged under which com-binations of demanded product qualiti-es—which upstream suppliers, which downstream manufacturers, and even which governmental customers. This kind of work requires serious scenario analysis and stochastic forecasting. It also re-quires critical oversight: if someone brings you a single sand chart of what he calls the most likely scenario, and nothing else, throw him out of your office. In this uncertain world, he will have provided you nothing probative.

The second step is a matter of applied corporate development: tailoring your corporate architecture to the emerging, dominant product architectures. As the Dutch business researcher Ard-Pieter de Man has written, your business will be operating within networks of innovation, integration, standardization, and supply; each requires attention. In markets de-



manding products with modular and scaleable architectures, products are most efficiently and profitably delivered by networks, with each company focusing on the part of the architecture at which it ex-cels. As the German researcher Florian Steiner has argued, each company must choose whether to try to succeed as the dominant entrepreneur, shaping the net-work around itself, or to follow fast, adapting with complementary products to the networks that others establish. The choice should not be obvious: the mer-chant’s role is valuable, as second and third-tier suppliers in this business fre-quently earn better margins than prime contractors.

There is no single, most appropriate model of corporate development that fits neatly on a single briefing slide.

This demands some serious thinking about the real value of vertical and hori-zontal integration. Simply agglomerating revenues that are “accretive” to paper earnings without attention to the cost of capital is a losing strategy. To the con-trary, adapting to this sort of world means figuring out how to obtain the par-ticular capabilities needed to build the right qualities into the products and ca-pabilities that you deliver to military cus-tomers. It is important to recognize that there is no single, most appropriate model that fits neatly on a briefing slide. General Atomics is a famously vertically integrated firm, but Boeing fabricates al-most nothing that fits into a JDAM kit. MRAP builder Force Protection has been famously vertically de-integrated, but BAE Systems’ production of the Caiman, and the FMTV truck on which it is based, has become gradually more vertically in-tegrated over time. Clearly, the right

sources can be internal or external, but they should be chosen for their ability to deliver with the right balance of innova-tion, flexibility, and of course, long-term discounted cash flow.

There are many ways to do this, and the preferred method varies with the particu-lar details of industry structure. As we have argued, military contracting will be subject for some time to turbulence in customers’ objectives, and thus in the business processes needed to produce the kit customers need. The mix of modular and integrated technologies needed for waging war will demand a degree of leakiness of knowledge throughout your networks. The persistence of heritage platforms and technologies suggests a continuing role for specific production assets—those that are useful only for par-ticular product lines. This, in turn, sug-gests a moderate-but-not-overwhelming ability to shake down your supply chain partners for the full value of extractable profits. As our recent research (Arms and Innovation: Entrepreneurship and Alli-ances in the Twenty-first Century De-fense Industry, University of Chicago Press, 2008) has indicated, these are the conditions under which corporate alli-ances are best launched. Not all ways to pursue corporate development start with “M” and “A”.

Above all, this demands flexible employ-ment of capital. Your assets in research, development, production, and through-life support can be co-specific to particu-lar networks of innovation, in which you work with allied firms to advance whole categories, such as blast-protection, autonomous navigation, or precision strike. They should not, however, be too specific to individual programs, lest the market move out from under you. This



means making investments that secure options to enter new market segments cost-effectively, and to scale back or shut down unprofitable activities when neces-sary. Analytically speaking, in this uncer-tain world, simple discounted cash-flow analysis is inadequate to the task. Real options analysis, even in its simplified decision-tree form, is necessary to cap-ture the real value of managerial flexibil-ity. As a manager, you know you have it: your analysis should give you credit for it.

Managers have the flexibility of real options. Your analysis should give you credit for it.

Third, and most importantly, comes exe-cution. The MRAP saga shows how com-panies with brilliant technical ideas but uneven business skills can struggle for profitability, even in a booming market. While General Atomics is a private and rather secretive firm, the Aeronautical Systems unit is widely assumed to be very profitable. That does not mean that its experience with the rapid growth of its business has been trouble free. No one should expect otherwise: drones were surging before the surge, and are surging still. On the other hand, the JDAM story is an excellent example of how smart design-for-manufacturabilty, supply chain management, customer manage-ment, and labor relations can combine to make an excellent program for all con-cerned.

Indeed, as in the aforementioned British experience, there is fresh evidence that execution matters. The reasons for the failure of the Armed Reconnaissance Helicopter program at Bell Helicopter are still unclear, but probably involve the switch in production site from Quebec to

Texas, a failure to manage the customer’s propensity for ex post tinkering with re-quirements, and the customer’s own in-ability to manage its culture in a substan-tially commercial procurement. The dis-astrous attempt to stretch the Island-class cutters in the US Coast Guard’s Deepwater program clouded the ship-building reputations of Bollinger, VT Hal-ter, Lockheed Martin, and Northrop Grumman. Time was, one might have shrugged off these debacles as par for the industry. As the impact of the recent con-tract terminations indicates, the game may have changed, and on-time, on-budget program management could ap-proach the importance it has with civil customers. It’s just possible.

That said, to paraphrase the apostle Paul, we all look not just for wisdom, but signs as well. In the United States, sometime in the next few months, the Defense De-partment will need to decide whether to order another tranche of F-22 fighter air-craft. The F-22 is not the least appropri-ate program for the US military. The technology is impressive, and the rela-tively small fleet is more than worth keep-ing. However, Mr. Gates’ criticism of its absence from the wars of today is unmis-takable. Continuing the program will not necessarily signal business-as-usual, but ending it as planned will clearly signal that a break has opened with the past.

Such a decision could embolden reform-ers a level down in the bureaucracy, lead-ing to further offloading of redundant equipment in favor of more of those high-demand, low-density assets—that delight-ful Pentagon obfuscation of we didn’t buy enough. For example, the US Army will emerge from the war in Iraq with a fully rebuilt fleet of thousands of Abrams, Bradleys, and Strykers. The generals may



then remember that Mr. Gates’ only kind word about the Future Combat System was how its most cost-effective technolo-gies—the Micro Air Vehicle, Fire Scout, and Netfires—were spiraling into the in-fantry brigades. As one of our clients has put it, they may very well declare victory, and shut the program down. After all, ef-fectively they are all infantry brigades now, given the nature of the opposition. Rather, the Army and the Marine Corps could focus on the MRAP-All Terrain Ve-hicle or Joint Light Tactical Vehicle pro-gram, and procure a fleet of vehicles truly useful in their likely scenarios. For soon, some entrepreneurial spirit will design a wheeled vehicle that combines robust blast protection with impressive off-road mobility—and subsequently capture a large share of tomorrow’s armored vehi-cle market.

There is reason to expect further offloading of redundant equipment in favor of more of those high-demand, low-density assets—that delightful Pentagon obfuscation of we didnʼt buy enough.

Watch also for a backing down from plans to increase force structure. As Secretary Gates has made clear, there is no point to a US Army of 500,000 troops unless it is designed substantially for counterinsur-gency. An increase in Army or Marine Corps end-strength is thus pointless if the US government is truly resolved not to undertake another campaign like that in Iraq, and thus should not be counted as a certainty in any business plans. At the same time, the aforementioned offloading

(as in the great German tank firesale of the past decade) will lead to a constant cascade of durable, slightly obsolescent, upgradeable gear to middle-income coun-tries—and a market to pursue in servicing it. This points to some promises that will be discarded, and some that will be ful-filled. As Mark Cancian wrote in the Autumn 2008 issue of Parameters, bat-tlefield contracting is necessarily here to stay, and outsourcing additional through-life support will be important for cost re-duction and service level improvement. On the other hand, anyone working on the Airborne Laser program might con-sider reviewing his resume, for one could also accomplish aerial boost-phase de-fense with a derivative of the AMRAAM, slung on existing fighters—or drones. As Michael Booen of Raytheon noted to Aviation Week & Space Technology last month, “the air forces of the world don’t want to dedicate platforms to a single mission.” A Boeing 747 is an awfully big platform for a single mission.

Returning to the wisdom, and where we began, it is that multiplicity of missions that today drives the structure of solu-tions. Regardless of the wisdom of any particular mission, that breadth of expec-tations is widely held around the world. As it is also economically and organiza-tionally feasible, it is to be anticipated. Demand for modular, scaleable, and re-configurable solutions leads to the eco-nomics of the JDAM and the MRAP. Our industry will do well to prepare for a market in which supply dynamically meets demand on JDAM and MRAP terms.

