Red flags raised on defense industry future.

• Author: Erwin, Sandra I.
• Position: Defense Watch

* It is now an article of faith that the Trump administration will be beneficial to the defense industry.

Even before any meaningful details are revealed on the incoming president's future defense plans, the market is operating on several key assumptions. Among them is that the congressional spending caps will soon be gone, the Pentagon will see bigger budgets and contractor regulations will be rolled back. If this happens, industry will inherit a business landscape that it has not seen in almost a decade.

Amid the happy talk, though, is a more subdued but no less salient discussion in corporate boardrooms about market forces that loom large for the defense industry regardless of how much money goes the Pentagon's way.

Every industry fears disruption and the defense sector, particularly, tends to resist change. During every military spending downturn, the industry has been content with hunkering down and weathering the storm. In the most recent down cycle, the top defense contractors deployed their cash reserves to bolster shareholders and they have been handsomely rewarded for that.

Pentagon leaders have scolded the industry for its risk-averse behavior, to which executives have responded by vowing to step up investments in defense technology, if and when they get more clarity on funding projections..

Against this backdrop comes new research by industry consultants that sheds light on the behavior of defense and aerospace companies and raises questions about their chances of continuing success in the coming years.

By most accounts, defense is a thriving industry, says Erich Fischer, U.S. aerospace and defense analyst at Deloitte Consulting. But there are storm clouds looming, he warns. Executives "really need to rethink company strategies as well as how the business is executed."

It's easy to become complacent now that defense budgets are headed upward, unleashing a renewed confidence in the defense sector, Fischer observes. The reality is that segments of the industry could soon be threatened by competitors that are more willing to take risks.

Over the past 25 years, many aerospace and defense companies have stuck to strategies and business models that more or less "stayed the course" despite significant changes in the landscape, Fischer says. His data shows that these companies exhibited poorer performance than those that adapted their strategies and business models to changing environments and market needs. The companies that adjusted...