How to Grow During Sequestration

It’s no secret, especially in Washington, that sequestration has hurt many businesses in the defense industry.

A high-level defense official reported that military-related M&A deals have stalled due to the uncertainty. Brett Lambert, Deputy Assistant Secretary of Defense for Manufacturing and Industrial Policy, said banks are unwilling to lend to smaller defense firms over doubts such companies will remain in business, and be able to pay off their debt.

Their concern is warranted. Smaller firms are less able to recover from the loss of a contract than larger companies that can spread the costs and leverage economies of scale. Unfortunately, most defense cuts will be smaller contractors as opposed to large weapon programs, says Frank Kendall, the U.S. Undersecretary of Defense for Acquisitions Technology and Logistics. In addition, many small firms are research and development driven, and with cuts to the R&D budget the military will be unable to fund their research or buy their innovative products.

In any business, there are circumstances that are beyond your control. Changes in demand, competitors, disruptive technologies, new regulations and market conditions are a few of the factors that can affect your success.

For those in the defense industry, sequestration is an unforeseen circumstance that would have been difficult to predict before the financial crisis.

So what can you do if you find yourself in this situation? How can you thrive when markets are saturated and demand has decreased?

The key is to remain proactive and seek out opportunities for growth. At my firm, we often use the Opportunity Matrix to focus on future demand and evaluate the best options for growth. Future demand, after all, is key to company success.

The Opportunity Matrix can be used to find the optimum market where future demand will be the strongest. The grid (pictured below) allows you to assess both existing and future demand.

The Opportunity Matrix

Capstone often uses the Opportunity Matrix to focus on future demand and evaluate the best options for growth.

In light of sequestration and the expected cutbacks across the industry, many are choosing to leave the defense industry. A firm faced with declining revenues might choose “Distribution,” bringing products or services to new markets.

The most obvious choice for many is to expand to new geographic markets, and in fact firms are going overseas to sell to other governments. The Virginia Economic Development Partnership has even put together a “Going Global” Defense Initiative to help Virginia defense firms get a foothold overseas.

Another equally valuable, but less obvious opportunity is expansion to new vertical markets. By this I mean marketing your existing products in a new industry. Can your defense products be used in another industry such as oil and gas, construction or healthcare?

While you can’t always control external factors, you do have the ability to study your options. By being proactive instead of reactive, you open the door to growth, regardless of your circumstances.

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