Aerospace & Defense Joint Ventures: United Launch Alliance's New Future


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Aerospace & Defense Joint Ventures: United Launch Alliance's New FutureUNITED LAUNCH ALLIANCE (ULA) had a good first act. For nearly a decade, this 50:50 JV between Boeing and Lockheed Martin served as market maker and monopoly provider of space launch services to U.S. government customers including the Department of Defense (DoD), the National Aeronautics and Space Administration (NASA), and the National Reconnaissance Office (NRO). In 2014, it was awarded an $11 billion sole-source contract by the U.S. Air Force for 36 rocket cores – hardware enough to cover 28 launches. But with almost 10 years, 100 missions, and a near perfect success rate behind it, ULA is confronting industry disruption and a future full of uncertainty. Going forward, the JV’s second act will likely be defined by its ability to navigate a full-blown strategic transformation. In this, ULA is not alone.

Many companies with long lifespans eventually confront an inflection point somewhere along the line (e.g. shifts in the industry landscape or external environment, step-out expansions into adjacent products or geographic markets, major acquisition or investment opportunities, etc.) resulting in the need to strategically transform their core business.  Strategic transformation – the ability to evolve a JV’s strategy and dynamically adapt to changes in the external environment – is particularly critical in joint ventures and alliances. In fact, a study by my colleagues showed that roughly 80% of JVs that materially evolved their strategy and scope met or exceeded the performance expectations of their parent companies, versus only 33% of those JVs that remained unchanged. (see Bamford and Ernst, “Your Alliances Are Too Stable,” HBR) Furthermore, top-performing multinationals were twice as likely to have restructured their alliances as underperformers. Finally, overhauling a single large alliance had the potential to generate between $100 million and $300 million in annual income relative to maintaining the status quo. But strategic transformation is challenging for wholly-owned businesses, let alone joint ventures, and those businesses that struggle to respond to changes at key inflection points tend to stagnate and, in many cases, die early deaths.

The challenges. Strategic transformation requires speed, cash, entrepreneurial freedom, and agreement from the shareholders, all of which can be in short supply for JVs. Going fast is difficult for many reasons. JV Agreements often limit optionality through proscriptive terms (e.g., related to initial authorized scope, exclusivity, contributions, governance, etc.) and a lack of guidance on how to address future uncertainties. The management team generally has limited authority to take truly transformative decisions without the consent of shareholders and obtaining that consent can be a grueling and lengthy process. Plus, shaping strategy in JVs is inherently more difficult given the multiplicity of shareholders and people involved and given their fragmentation across layers of organization. After all, shareholders often have different views – be it their characterization of changing industry dynamics, their willingness or ability to invest, their interest in pursuing new product or market segments, or their preferred process for deliberating these and other strategic questions.  Collectively, these challenges tend to result in a slow-moving ship when decisive action is required.

In ULA’s case, the challenges seem daunting. The company is confronting industry pressures on all sides – from competitors, customers, and regulators. It started in 2014, when the U.S. Air Force certified SpaceX to launch military communications, navigation, early warning, and spy satellites, the same segments where ULA is active, and opened the national security launch program for competitive bidding. At the same time, U.S. trade sanctions against Russia banned the military use of ULA’s Russian-made RD-180 engine, which is the primary workhorse powering the initial launch phase of ULA’s Atlas V space rocket – its core launch vehicle.  Absent any waivers, the ban could theoretically confine ULA to participating in only five of the 34 open-bid procurements on tap through 2022. But no matter how the chips fall, SpaceX stands to gain a lot, while ULA is feeling the pressure to defend its incumbent market position.

The path forward. There are many ways that JVs can manage the risks and challenges involved with strategic transformation:

  • Forward-looking deal terms. For new JVs, we think that dealmakers should anticipate and prepare for future uncertainties by building into the JV Agreement contingent deal terms and other forward-looking guidance on how the JV should act when confronted by different eventualities. This might include principles for investment and growth opportunities, protocols for responding to competitive threats and industry disruptions, and processes for securing shareholder approval regarding material strategic changes in the JV’s product or market scope.
  • Advanced strategy tools and frameworks. In addition to classic strategy tools such as industry and economic analysis, game theory, or real options valuation, JVs require additional work to detect threats early and gain shareholder alignment around the need to evolve. A number of JV-specific strategy tools can be helpful to achieve this end, ranging from strategic gameboards and Guiding Principles on JV strategy and scope, to JV business system maps, shareholder strategic wants analysis, shareholder-endorsed investment criteria, and Total Venture Economics analysis. JV management teams also need a suite of strategy tools such as scenario planning to anticipate the need for strategic change in advance and to identify the early warning triggers that give the JV Board and shareholder organizations the much-needed lead time to consider strategic alternatives.
  • Governance framework for strategic change. JVs need a responsive governance system with well-grooved strategic planning processes. Board involvement is critical to bridging differences and getting to a reasonably quick answer. To that end, a subset of Board members may need to play a more active role. For instance, when disruptive threats emerge, designated Directors may take charge of evaluating intelligence and drawing out implications for the JV’s strategy and competitive positioning. Then, if the situation merits, they might chose to pull in the full Board to discuss neutralizing a competitive threat or undertaking an unscheduled strategic review prior to losing any key customers or sales accounts. Such a review may lead to reshaping the venture’s scope, competitive strategy, or sales channels and, in some cases, may lead to the shareholders planning a timely exit and winding-down the venture.

For the moment, it appears that ULA has a plan. In 2014, it initiated a series of internal restructurings aimed at re-positioning the company for future growth and competitiveness, including phasing Atlas V’s RD-180, and decreasing launch costs to compete with SpaceX and other international competitors in the commercial segment. The company also announced a cutting-edge next-generation platform – the Vulcan rocket – slated for operational readiness in 2019 (which means it could be certified by the U.S. Air Force as early as 2022). Meanwhile, ULA, in concert with its shareholders, requested a partial waiver from the U.S. Government regarding the ban of its RD-180 engine, in order to allow ULA’s continued participation in space launch procurements. It is also rallying for the government to support the new Vulcan platform. Most recently, it rejected an unsolicited $2 billion bid from Aerojet Rocketdyne, signaling its resolve to chart a new future.

Whether in oil and gas, metals and mining, or power and utilities, JVs with exclusive supplier positions to large government customers or state-owned enterprises often enjoy a privileged competitive position for a time, but are highly susceptible to industry disruption like the kind ULA is now facing. It will be interesting to see how ULA navigates its strategic transformation amid industry turbulence. Can the JV transform and build a new future? Or will it follow United Space Alliance and go the way of the past?