A business model for defense ascquisition under the modular open systems approach

Defense AR Journal, Feb, 2007 by Eugene Gholz

This article briefly describes a business model that companies may apply to develop, produce, and sell avionics to the Department of Defense under a Modular Open Systems Approach (MOSA). Recent acquisition reforms have encouraged the use of MOSA, and the defense industry will need to adapt to the new style of acquisition. A business model summarizes the way a firm earns profits sufficient to remain in business: it describes core competencies, principal activities, cost structure, and expected revenue stream. The model proposed here suggests that firms can succeed under the new framework, but that MOSA entails some drawbacks for both industry and the government that may limit its applicability to a relatively small subset of programs.

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Over the past several years, the Department of Defense (DoD), the military services, and the defense industry have sponsored a good deal of research about the technical aspects of a Modular Open Systems Approach (MOSA) to the acquisition of avionics. (1) The results have shown that while some technical hurdles still remain, business issues may be bigger barriers than technical ones to the implementation of MOSA. (2) Advocates of MOSA must show that the new approach will solve some problems for the defense industry as well as for its military customers and that the companies can be at least as profitable under MOSA as under traditional acquisition strategies. Firms in the defense industry are relatively comfortable with their traditional business model, and they require business analysis to give them an incentive to aggressively pursue change. They are generally quite ready to cooperate with their customers' initiatives--in fact, responsiveness to the unique military customer is a hallmark of successful defense companies (Gholz & Sapolsky, 1999-2000)--but the customers need to put their request for such cooperation in the business language of company decision makers.

This article briefly describes a business model that companies may apply to develop, produce, and sell avionics to the DoD under MOSA. A business model summarizes the way a firm earns profits sufficient to remain in business: it describes core competencies, principal activities, cost structure, and expected revenue stream. Defense firms organized for "business as usual" will find a transition to MOSA difficult, and they may prefer to create new MOSA-oriented divisions rather then attempting to transform the culture of established organizations (Christensen & Raynor, 2003). Even if the military adopts MOSA for many acquisition projects, the traditional approach will remain in force for many high-value projects to which MOSA is not well suited; defense firms should maintain their existing structures to pursue non-MOSA acquisitions. But defense firms also stand a reasonable chance to do profitable business on some avionics projects under a MOSA business model. In a capitalist economy, a reasonable chance of profitable business, and not a guarantee, is exactly what investors and CEOs hope to find.

THE TRADITIONAL DEFENSE INDUSTRY MODEL

During the post-World War II era, the American defense industry developed a specialized business model, especially for prime contractors (Gansler, 1995; McNaugher, 1989). Generally speaking, today's defense companies closely follow directives from their military customers, developing customized products with attributes specified in advance by the buyer. The buyer pays the development costs up front or in stages during the development process. Because defense firms primarily invest the customer's money rather than their own in research and development, the firms have a limited role in choosing the technological trajectory that they will pursue (Dombrowski & Gholz, 2006). Consequently, they have relatively less skill in technology management than companies in other industries that emphasize innovation to a comparable extent. The most responsive defense companies tend to be the most successful: executives and managers constantly reassure their customers that the customers' interests are the firm's top priority and adapt the firm's business processes to remain relatively efficient while following complex and intrusive acquisition regulations.

In the traditional defense business model, firms (especially prime contractors) are rewarded with a relatively stable income stream. Their close relationship to the military customer gives them a relatively low level of risk, comparable to the steady, low-risk business of a regulated public utility (Gholz & Sapolsky, 1999-2000).

MOSA AND ITS GOALS

As the American military increasingly relies on information technology in its new weapon and support systems, the traditional business model seems less appropriate than it used to. Advocates have proposed MOSA for avionics acquisition to adapt to the military's plans for network-centric warfare, to take advantage of technological opportunities that have developed in the commercial information technology business, and to improve the sustainability of military equipment as the product cycle for avionics has raced ahead of the long life cycle of the military's platforms. They also hope that MOSA can exploit the advantages of competition to control the soaring costs of systems acquisition.