Expanding into Adjacent Markets (Cyber, Energy, Smart Power, Health IT) - Wharton Aerospace & Defense Conference

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


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


0

100

200

300

400

19

48

19

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19

52

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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*


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


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


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


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


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?


• 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


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)


FY10-14 CAGR 8%

Phase 2: Outside-In – General Market Attractiveness Evaluation


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


FY10-14 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


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


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


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


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


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


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


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


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


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?

Documents

Expanding into Adjacent Markets (Cyber, Energy, Smart Power, Health IT) - Wharton Aerospace & Defense Conference