Diversification into attractive adjacent markets provides an opportunity for traditional aerospace & defense (A&D) firms to offset potential declines in their core business in the face of defense spending reductions and/or declines in the highly cyclical commercial aerospace market. This presentation—given by The Avascent Group at the Wharton Aerospace 2010 Conference—considers key strategic questions faced by A&D industry leaders as they evaluate various paths for expanding into several potential adjacent markets, including cyber-security, health care information technology, energy, and “smart” power.

1. January 2010
Adjacent Market Strategy
Development & Execution
Prepared for

2. This breakout session on adjacent markets will focus on the following…
 Key questions A&D leaders are asking about adjacent markets today
 Overview of a variety of adjacent market strategies that have been employed
previously by A&D firms
 Methodology for maximizing success when entering adjacent markets
 Analysis of several high visibility adjacent markets of interest to the A&D
community
– Cyber
– Health IT
– Energy & Environmental
– Smart power
THE AVASCENT GROUP | 2

3. We are the leading independent management consulting firm serving
companies dedicated to meeting the most demanding government challenges
20+ Years of experience (formerly DFI Corporate Services)
Experienced, cross-functional team of over 50 professionals
Worldwide network of subject and regional experts
We bring:
Pragmatic Growth
Solutions
Informed
Strategic Insight
Sophisticated
Fact-Based Analysis
Fact-
To help our clients conceive, develop and execute
Business Growth Strategies
to address
Complex Public Sector Needs
THE AVASCENT GROUP | 3

4. The slowdown in the defense spending growth cycle naturally raises cause for concern and
scrutiny at senior levels throughout the A&D industry
National Security Macrotrend Budgetary Risk Analysis
DoD Budget, 1948-2010 Key Market Issues
Including Supplementals, Real $
800 • OPTEMPO in Iraq and
Afghanistan has driven
700
defense spending to
unprecedented levels
600
• Total topline DoD
$B spending is expected to
500 decline in the next few
years, but historical
400 peacetime funding will still
be substantial
300
• Many of the cuts have
already been made in the
200
procurement arena,
targeting under
100 performing and non-
strategic programs
0
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
1948
1950
1952
1954
1956
1958
1960
1962
1964
1966
1968
1970
1972
1974
• R&D remains steady as
well as a variety of
support service functions
RDT&E Military Personnel Other Procurement Operations & Maintenance (particularly white collar)
Source: DoD Greenbook, Avascent Analysis THE AVASCENT GROUP | 4

5. When recent historic corporate growth objectives become increasingly difficult to attain,
adjacent markets gain greater visibility
Paths to Growth
Corporate
Objective
8-10% growth*
Organic Inorganic
Growth Growth
Gain share from Grow new Fill gaps or gain customer Purchase new
competitors capabilities access capabilities
Core Adjacent New
Markets Markets Markets
* Assumption based on recent past performance THE AVASCENT GROUP | 5

6. As a result, these types of questions about adjacent markets are being heard frequently by
Boards, C level leaders, and heads of strategy and corporate development
Key Questions
“My core market is projected to be stagnant or declining in the near to medium term
after years of robust growth… should my company enter new markets or try to
compete more aggressively in the core?”
“If my company enters an adjacent market, how can adjacent markets be compared?”
“How can a company leverage its capabilities and customers into new markets – and
can it be done organically or through acquisition?”
“Will a major play into an adjacent market be positive in the near to medium term for
creating shareholder value given current growth and margin expectations?”
“What types of partners and/or acquisition targets should my company be familiar with
as we look to enter these new markets?”
“Does my company need to hire people with non-traditional backgrounds and
expertise in these new markets in order to be successful?”
“My competitor just stood up a (cyber, smart power, health IT, energy) organization,
should I be concerned and should I stand one up as well?”
THE AVASCENT GROUP | 6

7. Aerospace & Defense companies large and small have had the entire gamut of results when
entering adjacent markets over the last decade
Company Adjacent Market Strategy Results Lesson Learned
Fortune 100 Launch of telecom business unit during $1.5B and exit from market Anticipated market
Defense and period of rapid growth in IT/Telecom demand did not
Aerospace markets by building on deep IT expertise materialize
Company
Fortune 100 Launch of high-speed Internet service Exited market due to lack Anticipated market
for travelers worldwide by leveraging of demand demand did not
Defense and ground and data stations materialize
Aerospace
Company
Developed strategy to improve oil Sold capability to oil & gas Challenge to monetize
Fortune 100
exploration using its own deep defense industry leader non-core business
Defense and technology expertise and through a
Aerospace partner’s capabilities
Company
Expanded into energy market to service Stand-alone business Near term results in
Multi-
Multi-billion oil & gas firms by using market leading dedicated to Energy adjacent markets may
manufacturing capabilities markets under-perform even when
Dollar Aerospace
long term strategy sound
company
Paid significant multiple to acquire cyber Formed the core of the Short-commute adjacency
Fortune 100 company’s market leading expansions are lower risk
business that had leading edge
Defense and technology and intelligence community cyber business
Aerospace relationships
Company
Expansion into security marketplace via Multi-billion dollar Understanding core
Fortune 50
multiple acquisitions with the goal of business today and a core competencies leads to
Defense & corporate business entry into optimal
establishing market leadership
Industrial adjacencies
Company
THE AVASCENT GROUP | 7

8. Given this uncertainty around entering adjacent markets, companies can reduce risk and
maximize opportunity through a phased market targeting process
Identifying Adjacent Markets
Phase 1 Phase 2 Phase 3
Competency / Customer General Market Targeted Adjacency
Match – Inside-Out Attractiveness - Outside-In Assessment
Can a company leverage its How attractive is the What are the entry points
core competencies and market? and opportunities for a
customer relationships? company in the market?
• Screen of adjacent • Screen based on overall • Final set of targeted
horizontal and vertical market attractiveness adjacencies for a company
markets based on a
• Representative markets
company’s core
~ 20 Markets could include:
competencies and • Examination of market to
customers include: • Cyber
• Examination would include: • Health
• Customer
• Customer relationships • Energy
• Competitor
• Smart Power
• Technical/ • Supplier ~ 20 Markets
manufacturing
capabilities • Market growth • Assessment of optimal
• Culture • Market size market entry points
THE AVASCENT GROUP | 8

9. Phase 1: Inside-Out - When looking to expand into adjacent markets, “short commutes” by
either customer or capability but not both simultaneously tend to be easier to achieve
 Maintain
– Maintain existing customer base and Growth Map
technology focus
– Organic Focus
NEW
 Extend: New Capability, Current Customer Extend Big Bang
– Expanding service offerings to existing
CUSTOMERS
customer groups offers growth path
– Organic or Inorganic
 Extend: Current Capability, New Customer
– Likewise, offering current capabilities to
CURRENT
new customer groups is a logical
adjacency- if existing technology supports Maintain Extend
easy transfer
– Organic or Inorganic
CURRENT NEW
 “Big Bang”: New Capability, New Customer
CAPABILITIES
– Expanding both capabilities offered and
customers served would indicate a
significant change of direction - likely
driven by inorganic growth
– Inorganic Focus
THE AVASCENT GROUP | 9

10. Phase 2: Outside-In – General Market Attractiveness Evaluation
Market Potential Relevant Customers Analysis Strategic Implications
 Aggressive funding and  Many companies are more
 Intelligence stakeholder battle creates focused on general network IT
Cyber FY10 Market Size
Community near-term opportunities development and
$12B
 DHS  Ill-defined programs implementation and rebranded
as Cyber
FY10-14 CAGR 8%  DOD outside of IC create
challenges  Customer positioning key to
long-term viability (NSA)
 Focus on EHR, network  New focus, but not new
 Military Health
Healthcare FY10 Market Size modernization, and market; many firms have
System application development
Information $10B already placed bets, with
Technology  VA are critical remaining targets often,
FY10-14 CAGR 5%  HHS  Contract vehicle less value-additive
positioning is key for future  Contract vehicle
 Social Security
success positioning is critical
Administration
 Near-term ARRA funding  Defining the addressable
Energy and  Dept of Energy
creates gap fill market and relative
FY08 Market Size
Environment  NOAA  Better funded market sub- positioning is key
$7B - $50B
 GSA segments are evolutionary,  Firms with flexible
e.g. green buildings and business models may offer
FY10-14 CAGR 5%  State and Local
green IT, & device energy greatest upside
mgmt
 High growth, large market  Some ‘reputational’
Smart Power FY10 Market Size  Department of with increasing policy disadvantage to defense
$10B State significance contractors
 DOD  Emerging market of strategic  Challenging business
FY10-14 CAGR 15%  USAID import with limited business models as groups emerge
sophistication from not-for-profit mentality
 NGOs
THE AVASCENT GROUP | 10

11. The Cyber market is often ill-defined to include many traditional IT functions, but
nevertheless is a $12B market that is projected to grow at more than 8 percent
Cyber Adjacent Market Profile
Cyber Investments Competitive Environment
Integrators have generally employed inorganic growth
strategies to build deep portfolios of cyber offerings
IT RF
Services Electronic Warfighting Integrated Solutions
Warfare Systems
IT Security
Command &
Network Control Information
Operations Niche Technology Providers
Configuration
RF
Network Collection
Operations Computer
Centers Network
Attack OCI Issues
ISR
Computer
Identity Network
Management Defense
Computer
Network
Exploitation
Foreign Opportunity Areas
Access Signals
Controls Intelligence  The Comprehensive National Cyber Security
Collection
Geospatial
(CNCI) introduced $17B in new cyber
Information development funding over FY09-13
Systems
 $6.6B DIA Solution for the Information
National
Intelligence
Technology (SITE) IDIQ is likely to have a large
Systems cyber component
THE AVASCENT GROUP | 11

12. Federal Health IT represents a potential growth alternative as customers tackle new
policies, data integration/sharing issues and EHR migration
Healthcare IT Adjacent Market Profile
Market Details
Customers
DoD: Veterans Affairs: HHS: Commercial, S&L
$1,040M $916M $1,557M (e.g. Hospitals, Labs)
Health IT
• Patient Management –
Public Health
Life Sciences
Capabilities
Clinical & Non-Clinical • Logistics & Supply Pharma
• Business Solutions Chain • Program Management
• Program Management & Research Support – • Quality Assurance
• IT Infrastructure
& Research Support – Life Sciences • Program Management
• Logistics & Supply Chain
Public Health • Quality Assurance & Research Support –
Pharma
Competitive Environment Opportunity Areas
Successful players in the Health IT domain have tended to  IDIQ contract vehicle turnover in FY10-11
combine organic growth with targeted acquisitions and
have usually focused on just one or two customers  Modernization of IT infrastructure
Northrop’s strategy has been primarily  Major system redesign
acquisitive and targeted at MHS
 Data interoperability
SAIC’s position is based on its long history
with massive programs at MHS and NCI  Increasing EHR adoption
SRA’s strategy has been organic growth of  Some stimulus opportunities
its NIH account and an acquisition targeted
at CDC and NIH
*All budget numbers based on the FY08 OMB IT Budget THE AVASCENT GROUP | 12

13. Energy has become a focus for this administration; opportunities are likely to be split
between facilities modernization and device-focused energy enhancements
Energy and Environment Adjacent Market Profile
Energy Market Value Chain/Life Cycle
Waste
Resource Resource Power Waste to
Distribution Storage Consumers Disposal &
Extraction Refining Generation Energy
Remediation
Energy Management
Micro
Macro
Competitive Environment Opportunity Areas
 Energy management, a service area that cuts
across multiple segments of the energy value chain,
offers the most opportunity
 DOE SmartGrid: $4.3B in stimulus funding to
improve electric grid efficiency/reliability
 Subcontract opportunities under DOE’s $80B
Energy Savings Performance Contract (ESPC) to
improve energy efficiency at federal facilities
Raytheon made a strategic choice to exit the energy
business and sold off its relevant intellectual property  Cyber security will rise in importance as energy
systems adopt networked solutions
THE AVASCENT GROUP | 13

14. Smart Power holds potential as the USG adopts policies that aim to boost US influence
abroad by employing means other than traditional military power
Smart Power Adjacent Market Profile
Operating Environment
Instability Failing State Post-Conflict/Stabilization
Prescription
Military Law Humanitarian Health Reconstruction Education Democratization
Assistance Enforcement/ Assistance/
Counter-
Counter- Disaster
Policy
Narcotics Relief
Development & Humanitarian Aid
Logistics
Program Management
Functional
Training Training
Activities
Provision of Equipment &
Assets
International Organizations & NGO Support (including Peacekeeping)
Competitive Environment Opportunity Areas
• Department of State and USAID are the primary
funders of smart power and account for nearly 70%
of the total market (FY09 total $60B)
• Department of Defense dedicates nearly $10B
(FY09) to smart power initiatives
• The Department of Treasury and Department of
Agriculture together make up nearly 4% of the total,
with contributions in technical assistance, debt
restructuring, and education activities
THE AVASCENT GROUP | 14

15. Phase 3 – Targeted Adjacency Assessment – The internal and external assessments in
Phases 1 and 2 will yield an understanding of current adjacent market positioning and best
entry points – e.g. grow organically, partner, acquire and will help to define achievable goals
Cyber Market Case Study
NG
• Where do you fit and where do you want to be?
Integrators
High
• Gov’t IT and C4I Generalists provide the broadest level Multi-Service GD
LM
Providers
of competition with activities that span all Federal BAH Raytheon
customer communities SAIC
Breadth of Cyber / IT Capabilities
• Commercially-focused firms offer needed technology, ManTech CACI
but full-commitment to Federal customers is BAE
questionable ITT
• Cyber specialists serve as technology incubators and CSC
L-3
have historically represented key acquisition targets QinetiQ
Serco
Boeing SRA
HP/
EDS Thales /
Computer IBM Ncipher
Associates
Harris
Wyle
Symantec MacAulay-Brown
McAfee GAITS NCI
Cisco Trusted Computer
SafeNet Blue Coat Intelligent Endace
DeepNines NuBridges Smartronix Decisions ProObject
Low
New World Apps Arbor
Allot NuParadigm
Global Velocity Core Security TechUSA Bivio TecSec
Entrust, Inc. WebSense DynTek
Technologies IOactive Npulse KCG Syprus
Net Witness Galois
SecureWorks Core Cloudshield F5 Layer 7 Omen SNI
0% 100%
Market Positioning ( % Government Focus)
= Commercially-focused = Gov’t IT & C4I Generalists
= <$50M = $250M - $1B
= Cyber Specialists
= $50M - $250M = >$1B
(based on primary offerings)
THE AVASCENT GROUP | 15

16. Final considerations
 While the overall defense budges will be leveling-off, certain adjacent markets
represent real growth and scale
 A phased market entry approach to adjacent markets maximizes opportunity and
minimizes risk
 Short-commutes to adjacent markets by customer or capability but not both
simultaneously are typically easier to achieve
 Leading growth companies in these adjacent markets (e.g. cyber) have strong
interest from many suitors – acquiring at higher multiples can be expected
 Corporate growth and margin targets can be at odds with the higher risk/rewards
profile of entering adjacent markets – often there is a trade-off
 There is a distinction between launching an initiative and brand awareness in
adjacent markets vs. growing a business of scale – recognize which is the focus
THE AVASCENT GROUP | 16

17. Avascent assists corporate clients to chart paths to growth across the full spectrum of
government missions and domains
Public Mission Expertise Government Domains
Homeland
Space Public Safety Infrastructure Defense & Federal
National Security &
Exploration & & Law & Intelligence Civilian
Security Disaster
Exploitation Enforcement Transportation Agencies Agencies
Response
Ground, naval, air Border, port , Military, civil and Law enforcement Construction, US Army, Navy, US federal civil
and joint military aviation, physical commercial space and public safety engineering and Air Force and agencies and
forces and and cyber security; operations, equipment operations of joint agencies programs
intelligence domestic and systems and systems, major facilities, and intelligence
operations international supporting ground programs and and transportation agencies
disaster response infrastructure services infrastructure
Global Government
Aviation & Health Care & Energy & State & Local
Development Business International
Aerospace Life Sciences Environment Governments
& Stabilization Systems
Aviation Military, veteran Generation, Stabilization, aid Business support US state and local Governments,
infrastructure and and public health distribution and and development systems and government NGOs, and major
commercial sector systems and conservation; support processes across entities multinationals
equipment and services and life environmental all levels of serving public
MRO services sciences monitoring & government sector needs
applications protection around the world
THE AVASCENT GROUP | 17

18. Our role is to help companies successfully navigate a high stakes market characterized by
constant change, customer complexity, and stiff competition
Government Market Challenges How Avascent Can Help
Changing Mission Needs Sophisticated Fact-Based Analysis
Fact-
 Multitude of forces (political, budgetary, Superior  Anticipate government needs and define
technological, bureaucratic, international) the emerging opportunity landscape
constantly shape and reshape demand Opportunity  Isolate the best growth opportunities for
 Long time horizons constantly buffeted by Discovery your company
near-term needs and forces
Complex Customer Requirements Strategic Insight
 Demanding customers with stringent New  Engineer innovative solutions that address
performance, schedule, and cost requirements Business customer needs and deliver business
that often require custom solutions results
Revenue
 Complex and often opaque buying processes  Partnership strategies that secure a
with many participants and shifting criteria
Streams strategic advantage over competitors
Competitive, High Stakes Environment Pragmatic solutions
 Intense market driven by high stakes/high risk Investment  Fact-based business cases with
Fact-
competitions and dominance of single buyers Confidence comprehensive risk/return evaluation
 Need to invest, partner, and innovate to & Reduced  Contract capture support
succeed and secure long-term revenue flows  On-going support post-capture to assure
Risk On- post-
value is delivered
Avascent Client Perspective:
“The value I receive from Avascent is critical to my firm achieving our objectives. The
Avascent team is a true partner and allows me and my team to tackle complex problems and
produce meaningful and actionable results.”
THE AVASCENT GROUP | 18

19. We help clients detect emerging opportunities then engineer winning growth strategies to
capture value for their business
Questions we help clients address
Engineer Business
Anticipate Opportunities Capture Business Value
Strategies
Define
Design Develop Fact-
Fact- Execute Value Deliver
Detect Mission Business
Business Based Capture Business
& Value Shifts Growth
Strategy Business Case Strategy Results
Opportunities
How will changes in What are the Organic Growth Challenges
the macro emerging or
environment to unexploited Who are the target What is the upside What are the most How do we insure
reshape the public opportunities in customers? What of capturing the important customer effective
sector priorities? my current and are their key needs/ opportunity? requirements? execution?
adjacent markets? preferences?
How are emerging What risk What risk What are the
missions driving Who are the What business scenarios do we scenarios do we appropriate
shifts in policy competitors in this models should we need to consider? need to consider? performance
priorities & budget space? Can we consider? milestones and
resources? build a competitive What investment, What investment, metrics?
advantage? How do we position competencies, competencies,
How will changes for success? organizational organizational What systems and
in regulations, What capabilities Pricing? Offering? systems do we systems do we processes need to
technology or and resources are Operations? need? need? be put in place?
customer needs required to address
reshape the market opportunities? Inorganic Growth Challenges
environment?
How attractive are How might an Will the target fulfill How should we How do we know
What risks, issues the opportunities acquisition best expectations integrate target? that we are
& opportunities do (risk/reward position us? Which regarding growth, What actions do we capturing the
these mission & profile)? Are they targets should we margin & strategic need to capitalize synergies we
value shifts create? aligned with goals? pursue? positioning? on acquisition? expect?
THE AVASCENT GROUP | 19