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Strategy in the age of technology disruption

15 April, 2021

Bill Lay
Principal, Aerospace and Defense, PwC US
Michael Goulet
Director, Aerospace and Defense, PwC US
Sarah Senyo
Director, Deals, PwC US

PwC Aerospace & Defense leaders recently sat down to discuss technology disruption as the driver of today’s aerospace & defense strategies, and the role M&A plays in propelling this disruption.

Q: You are proposing that strategy during an era of rapid technology advances is much different than in the past. Why and how so?

Bill Lay: We have been looking at this shift for the past six or seven years. Organizations were finding that they might have all the assets they needed to be a market leader and win new business – they had the right people, the advances in technology, all the assets. And yet they were being beaten.

It turns out that many companies have a very clear vision around market strategy and operational strategy. But they tend to look at technology strategy as strategy roadmaps versus evaluating what technologies are developing, what this means to the company’s future, where the company wants to be in terms of emerging technologies? If you apply market strategy to markets that don’t yet exist, you get some very unusual outputs. That’s where technology curves and technology chain strategy come in.

Sarah Senyo: If you look at M&A transactions in the last several years, many of them were predicated on advancing technology and innovation. The reason we see this is because developing advanced technology requires a great deal of investment or resources to create these capabilities, whereas an acquisition can provide the growth needed to fill the technology need in a shorter period of time. So, M&A actually plays a key role in achieving a technology strategy.

Q: PwC has been introducing the idea of a technology curve. Help us understand this.

Mike Goulet: People have increasingly said, “Look at all of these new, emerging technologies—all sorts of new sensors, data, analytics, AI, the cloud, and so on. Progress is really accelerating, right? How do we know what to bet on and plan around? So, we started looking at different technologies to understand how fast they’re progressing.

We’re all familiar with Moore’s Law—that processing performance doubles every 18 months or so. When we looked at different types of technologies, it turns out that almost every technology has a curve: communications, batteries, radars, aircraft operations, etc. And when you look at the fastest progressing technology curves it turns out that several are dual use and driving disruption across aerospace and defense.

In fact, many companies don’t understand the technology curves they are on or what the disruptions are that they face.

Think about it in terms of Covid-19 and vaccine development. The mRNA technology is actually competing on one of the fastest technology curves we’ve found— that is genomic sequencing. The mRNA candidates were basically designed over a weekend, creating an entirely new path to drug development. Meanwhile, traditional pharmaceutical companies were competing on that top curve. (See Graphic 1)

What you begin to see is that disruption occurs when two competing technology curves diverge exponentially. We call this “the jaws effect” and it highlights the disruption potential—or vulnerability—for both companies and entire industries.

Bill Lay: And there are many more examples across lots of industries. For example, the glass used on smartphones, which is increasing in strength at a predictable rate. What does that mean to another business that makes protective casings for cell phones?

Q: How does a company go about developing a technology strategy?

Bill Lay: Start thinking in terms of a technology chain, like a supply chain or value chain, where you begin thinking about business as a sequence of technologies that deliver something meaningful to customers. Thinking in terms of a product or market is important, but consider it through a technology lens. This would imply you need to own the specific control points within the technology chain that are driving advances and create strategic positions.

Mike Goulet: We can also understand how a given technology will progress based on four factors that drive performance improvement. The first is the research and development effect. For instance, if you are looking at electric vehicles and batteries you would look at the thinning out of cathodes and experimenting with different chemistries.

The next factor is scale. As volume of production increases, you get scale benefits from an economic perspective. The third factor is learning. In aircraft production we know that the more aircraft we produce, labor hours per unit go down at a predictable rate. And the fourth factor is raw material cost constraints.

When you combine these four things you can begin to anticipate how a technology’s going to improve over time. Instead of looking at what happened over the last five years, we’re going to forecast what will happen the next three, five, or 10-years. You can begin to understand market readiness and technology readiness.

Sarah Senyo: And in thinking about the technology chain, you need to understand where you sit on the chain and what capabilities you have and need to have to support future growth. When you are doing a deal, this gets to the idea of doing the diligence necessary to understand your business, what technology you need to develop and where on the value chain you may need to acquire a business for its respective technological capabilities. What does the data show you, what metrics do you have that demonstrate your efficiency on the technology chain? Do you understand the same thing about your competitors and about the technologies they are developing?

Bill Lay: The metric you look at changes in disruption. If you are selling cars, you’re worried about the car sales price. But in autonomous ride sharing your product is mobility. That’s a completely different metric of cost per seat mile, not the cost of the vehicle. The car could be purchased at $100,000, but the cost per seat mile would be low enough to generate market leadership. The upfront cost is inconsequential because you are making money on something else—mobility at a reasonable cost. Framing competition this way helps identify and understand competing technologies your company is actually competing against. It helps identify disruptive threats, and opportunities, leading management teams down potentially different paths than before.

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