A bright and vibrant 13-year-old competitive gymnast faced a difficult decision. An injury from a bad fall left her significantly behind her competitors and teammates.
In a dramatic move, she switched sports and reinvested her energies into swimming. Two years later, she was a multiple-event state champion swimmer. Personal agility enabled her to retrench, refocus, reinvest, grow and succeed.
In March, Congress avoided a federal government shutdown by agreeing to a continuing resolution, effectively a stop-gap measure to fund federal agencies through Sept. 30, with sequester cuts still in place. While the US Defense Department has received some flexibility with its funding, defense contractors will continue to be affected by the end of operations in Iraq and Afghanistan, budget pressures compounded by sequestration, the Better Buying Power Initiative introduced in 2010, and increased compliance issues, among other pressures.
This situation has led to reduced business certainty, lower profit margins and a more demanding customer for defense contractors.
The environment for contractors is reminiscent of the challenges that confronted the defense industry after the collapse of the Soviet Union at the end of the Cold War in 1991, when US defense budgets were slashed.
At that time, General Dynamics (GD), after decades of acquisitions, was one of the country’s largest military conglomerates, producing arms for the sea, air and land. In an initial response to the shrinking market, GD embarked on a strategy of divestitures. Within three years, after selling various divisions to other contractors, it had reduced itself to two main divisions, submarines and armored vehicles.
But in 1995, GD once again became intensely acquisitive and quickly grew into an industry giant. Like the 13-year-old gymnast, agility, but on a corporate scale, enabled GD to retrench, refocus, reinvest, and then grow and succeed.
While GD embraced the changing environment and took advantage of divestment and acquisition opportunities, many other companies disappeared from the roll of defense contractors.
Today, America is emerging from more than a decade of wars in Iraq and Afghanistan, but the threat of violent extremism persists and continues to emanate from rogue states and ungoverned spaces.
There the US also faces an array of other security challenges, such as the proliferation of dangerous weapons and materials; the increased availability of advanced military technologies in the hands of state and nonstate actors; the risk of regional conflicts that could draw in the United States; and cyberattacks, which barely registered as a threat a decade ago.
While these times are challenging for defense contractors, the overall geopolitical and economic environment and continued national security threats create opportunities for the company willing to be agile. Corporate agility, at its core, is cultural; however, there is an approach that may imitate the cultural dynamic. The approach is similar to the process that both the gymnast and GD followed when they faced similar critical junctures.
■Perform a skills and capabilities assessment: Embark on a critical assessment to evaluate the true skill set and experience required for changing conditions to see if strengths can complement new and different applications.
■Establish growth opportunity initiatives: Look aggressively outside the defense budget for new opportunities, especially in government programs that have not been affected by sequestration, and inside the defense budget for new spending priorities that may be capitalized upon, as well as potential complementary commercial applications of their services.
■Retrench operations: Scale operations for the new realities and strategically divest, including even core operations.
■Strategically reinvest: Use the proceeds from the divestitures to reinvest in growth opportunities. This includes being willing to endure some “small failures” that can serve as learning experiences and leveraged on larger-scale opportunities.
■Maintain strict compliance and business systems discipline while being flexible: Critical during this time of increased scrutiny is compliance and continual improvement of business systems. However, flexibility also is essential as new enterprises are either created or moved into the current operations.
This may be a once-in-a-generation opportunity for management to retrench operations through strategic divestitures and debt reduction, refocus business plans, and reinvest in new businesses to take advantage of the growth in certain subsectors in defense and nondefense markets.
The company willing to follow the lead of a 13-year-old on the one hand, and an industry giant on the other, might become the next success story.
Timothy Dragelin, a senior managing director in FTI Consulting’s Corporate Finance/ Restructuring Practice, Charlotte, N.C. These views are the author’s.