July 2005 Defense Horizons  

Defense

Technological innovation is central to the American way of war. 

In the Cold War, superior technology compensated for American 

numerical inferiority compared to the Soviet and Chinese military 

forces. Since the end of the Cold War, innovation has spearheaded 

the transformation of the American military into a more agile and 

flexible instrument of national strategy. Today, important developments are reducing the payback from defense innovation. Two trends 

in particular stand out. 

First, today’s weapons and support systems are more complex 

than their predecessors. Doctrine demands that these systems operate in an integrated framework. The greater demand for specialized 

expertise and training and the requirement for increased supervision drive up costs. Purchase price has become a smaller percentage 

of the total cost of ownership as operations and maintenance (O&M) 

costs have increased. Signs of this are ubiquitous. Shortages of 

specialist manpower and the need to use scarce military manpower 

for “tip of the spear” occupations are fueling a whole new industry 

of outsourcing companies to handle work the military cannot manage in-house. In 2003, Halliburton, a service company, became the 

Army’s number one contractor. Prime defense contractors can now 

earn more profit from O&M and systems integration than from building weapons. Their corporate strategies are shifting to a different 

part of the value chain: services and integration, not products.1

A second change is that the Department of Defense (DOD) 

is buying fewer products and more integrated systems, especially 

information technology (IT) systems. The locus of innovation used 

to be in airplanes, tanks, and other platforms; incorporating the latest technology in them led to better quality forces and to military 

superiority. Now the payoff is in getting those platforms to work 

together better.

DOD has always mitigated the difficulty of buying new systems 

by employing a creative ability to upgrade and retrofit existing 

systems to meet changing threats and technologies. New systems, 

while promising great technological advances, tend to be difficult 

to start and take many years to develop and buy, with the result 

Overview

In a rapidly evolving business environment, many successful 

companies have transformed themselves by reexamining their 

core missions and competencies and exploiting innovation in 

nontraditional ways. General Electric still manufactures products but now identifies itself as a services company. Wal-Mart 

has become the premier retailer by capitalizing on its logistics 

and support systems. These two giants and other companies have 

realized that they can become more profitable by exploiting new 

regions of the business landscape.

Applying this business model to national defense, the innovation landscape can be said to have three regions: products 

(airplanes, tanks, ships), processes (integrated systems), and 

retrofits of legacy systems. While the Department of Defense 

(DOD) is not a commercial enterprise, nor can it change its 

critical missions as a private firm might do, it, too, operates in 

a dynamic environment and should be in a continual process of 

transformation to adjust to and exploit change. Achieving the 

right balance of effort in these three regions will pay handsome 

dividends.

Until recently, DOD has invested most heavily in region 

one, the acquisition of new hardware based on new technologies. Already expensive to acquire, new hardware is even costlier 

because of its added complexity and need for extensive contractor support. To increase value realized from defense investments, 

the authors recommend shifting some resources to regions two 

and three. Creating a framework for exploiting process and retrofit innovation would provide significant increases in capabilities 

while facilitating successful integration of new product technologies into the existing infrastructure. 

The Changing Landscape of 

Defense Innovation

by Paul Bracken, Linda Brandt, and Stuart E. Johnson

A publication of the

Center for Technology and National Security Policy

National Defense University

Number 47

Horizonsj u l y 2 0 0 5
 Defense Horizons July 2005

Paul Bracken is professor of management and political science at Yale 

University; he may be contacted at paul.bracken@yale.edu. Linda Brandt 

holds the Acquisition Chair, Industrial College of the Armed Forces, National 

Defense University, available at brandtl@ndu.edu. Stuart E. Johnson is 

distinguished research professor, Center for Technology and National Security 

Policy, National Defense University, available at johnsons@ndu.edu.

that fewer units are purchased than planned. Upgrades often are 

easier to initiate, fund, and sustain. Military systems are used and 

improved over decades and are never the same systems that had 

originally been procured. This is true for all classes of DOD systems. 

From the B–52, an airframe likely to last five decades or more, to 

the Multiple Launch Rocket System, which was begun in the 1960s 

and still is in use, long-lived systems prove that weapons platforms 

can be upgraded greatly, avoiding the need to launch a new system. 

Indeed, the DOD spiral acquisition process has at its core the idea 

of constantly upgrading systems, even as they are fielded. Yet this 

process is also becoming more complex as integration of systems 

becomes as critical as the upgrade of individual systems. DOD has a 

history of improving the performance of systems; the challenge now 

is to do so at lower cost. 

Today, the locus of innovation is in cross-cutting systems, not 

stand-alone platforms. The space-based infrared system (SBIR), the 

Navy’s cooperative engagement capability (CEC), and many “black” 

tactical intelligence programs are the new sources of American military advantage. The innovation spotlight has shifted to middleware, 

grid computing, and sensor integration. 

DOD does not do a good job buying these systems, as the case 

of the Navy-Marine Corps Internet illustrates. This $8.8 billion outsourcing project, run by EDS in Plano, Texas, required the transfer 

of 67,000 separate Navy software programs to new personal computers. Poor planning marred the project from the start. The contractor 

did not have security clearances in order, so a large work force was 

getting paid without working. In addition, Navy specialists were frequently in training or traveling when needed. EDS had not thought 

through orchestrating this complex undertaking.2

Many nonmilitary integrated system purchases also have fared 

badly. The procurement process is complicated and difficult to manage. For example, the Royal Bank of Canada recently had enormous 

problems with its IT systems. The bank’s 10 million customers could 

not rely on information contained on their balance statements, 

which were often erroneous. Malfunctions shut down the bank’s 

payroll deposits, throwing corporate clients into chaos. The errors 

rippled through the system. Tens of thousands of customers did not 

receive their electronic deposit paychecks, thereby incurring penalties for late electronic payments to their creditors.3

The combined trends of increased complexity and the prominence of integrated systems have many consequences. Money for 

acquisition and training is reduced because it must be spent to 

patch together solutions in these areas. Military operations are 

affected. For example, the large work force that needs to be close 

to the combat theater to support operations must be fed, protected, 

and housed. As a consequence, the number of forces actually fighting is usually far lower than the number deployed would suggest.

Support work can be outsourced to private contractors, but this creates its own problem, as experiences with EDS and contractors in 

Iraq have demonstrated.

A fundamental rethinking of defense innovation is called for. 

The system must move beyond its historical focus on better platforms and devote at least as much effort to process innovations and 

the retrofit of the huge stock of materiel already fielded. While DOD 

has always retrofitted or modified weapon systems, retrofitting now 

involves the integration of systems into systems of systems. This is a 

big change for an innovation system that has concentrated mostly on 

turning out new and better weapons.

The legacy innovation system was designed for a world in which 

technology was new and the costs of inserting it were low. The system has to change to keep pace with a world of pervasive technology 

and complexity. The implications affect everyone. Large contractors, 

small defense companies, the military services and their supporting agencies, and DOD all need to get better at process innovation 

and retrofitting existing technology with new capabilities instead of 

churning out ever larger numbers of products.

Defense Innovation Systems 

 The concept of an innovation system has proven useful in 

analyzing competitive advantage of firms, industries, and countries.4 

An innovation system consists of the dynamics between the major 

players involved in turning new ideas into widely accepted practices. 

National innovation systems encompass investment patterns, incentives, and supporting organizations in science and technology—for 

example, in education. There is no presumption that a national innovation system has been consciously designed, or that its different 

parts work smoothly together. Many innovation systems have been 

more the product of accidents of history than of planning. They may 

contain major disincentives, as well.

Too many organizations never bother to question the innovation 

systems in which they find themselves, instead assuming that they 

are fixed and permanent. The Soviet Union in the 1980s assumed 

that by turning out better aircraft, ships, and tanks, it could compete 

with the United States. But this grossly underrated the importance 

of high-technology competition in stealth, missile defense, and precision strike. The Soviet innovation system did not supply engineers 

skilled in these areas. Rather, their system encouraged central control of increasingly specialized engineering skills focused on more 

and better platforms.5

A defense innovation system is simply that part of the U.S. 

national innovation system that deals with military and security 

innovations. This includes institutional actors such as DOD and the 

services, defense contractors, and supporting institutions such as 

universities. Investment flows of research and development (R&D), 

Wall Street valuation of defense contractors, and the amount of dual 

use are all part of the defense innovation system.

Defense innovation systems offer an important framework 

for understanding how technology and strategy interrelate. The 

framework suggests asking fundamental questions about structural 

relationships, key trends, and the fit of the innovation system with 

national strategy.
July 2005 Defense Horizons  

The Legacy Defense Innovation System 

The U.S. defense innovation system originated in the Cold War, 

replacing the mass-production system used to win World Wars I and 

II. More than any other factor, the system was typified by the experience curve of the aerospace industry. For decades this industry 

produced one generation of airplanes and missiles after another 

that were far better than earlier models. Look at the tremendous 

technological leap between the F–86 Sabre Jet, the first U.S. Air 

Force swept-wing jet fighter, and the F/A–22 Raptor Stealthfighter. 

The Raptor can perform missions never even dreamt of by those who 

flew the Sabre Jet.

This innovation system has been built around the trade-off of 

increased performance for increased cost. As long as performance 

grew faster than cost, innovation paid off. By climbing a steep performance learning curve, the United States gained strategic superiority 

over the Soviet Union. The United States gained this edge because 

strategic competition was heavily dependent on the nuclear and 

air forces balance, two areas which benefited from the aerospace 

innovation model. The defense innovation system, modeled on experiences in the aerospace industry, was closely aligned with national 

strategy. 

This cost-performance learning curve worked in many areas, 

but not in all of them. Nuclear weapons performance, early warning 

radars, munitions, and guided weapons all saw enormous improvements in the cost performance trade-off. However, Army weapons 

never experienced this escalation in performance. Their problems 

were different; ground war was less technological and more dependent on human factors than were strategic nuclear or air war. The 

M–1 Abrams tank was far better than the M–48 Patton tank of the 

1950s, but the degree of improvements was nowhere near as great 

as those achieved in aircraft or guided missiles of the same periods. 

Many of the criticisms the Army faces today stem from the expectation by DOD and others that its forces should have experienced the 

same levels of performance improvement achieved in aerospace.

Another area where the learning curve gains of aerospace did 

not translate was in ship design. Consider the Nimitz and Essex class 

aircraft carriers. Hull shape, speed, use of composite materials, and 

stealth do not differ significantly between these two classes. Ship 

design has never gone through the revolutionary transformations 

that aircraft design has over comparable time periods.

What might tanks and ships look like if their levels of innovation had kept pace with those of aircraft? The most common 

objection to the premise of this question is that the physics and 

engineering of each are so fundamentally different. However, in the 

Cold War, DOD simply applied the aerospace model of innovation 

to other areas without considering whether it fit them. There was 

far less of an imperative for a revolution in military affairs (RMA) 

for land and sea forces. The Army and Navy were not pressed in the 

same manner.

Had Cold War competition taken a different direction, this 

might not have been the case. For example, if the Vietnam War had 

taken place in the early 1950s, a tremendous burst of innovation 

would have occurred in counterinsurgency, psychological operations, and small unit ground tactics. Nuclear deterrence and global 

airpower might not have developed as the core of American strategy, 

and the aerospace industry would not have become the locus of U.S. 

defense innovation.

Another feature of the current legacy system is its use of a 

vocabulary constructed on cost–performance trade-offs. This vocabulary is important; it is the way that DOD organizations communicate with each other. How analysts converse with senior leaders, the 

metrics used, and the very idea of what constitutes a valid argument 

are deeply shaped by language. Getting support for an innovation 

that does not use this language is almost impossible. 

Operations research in its varied forms—systems analysis, 

cost-benefit analysis, programming models, and so forth—is the 

lingua franca of trade-offs. It works best under conditions of loose 

coupling and when the payoff of new technology can be confined 

to one department of the whole enterprise. Used for different kinds 

of problems, operations research can cause more problems than it 

solves.6 Operations research does not work very well when system 

interdependencies are high or when costs and benefits cut across 

many separate divisions. 

For example, the planning, programming and budgeting system 

(PPBS) introduced in the Pentagon in 1961 was based on a programming model of industrial firms, such as Ford and General Motors. 

The automobile industry in the 1950s was low-tech. Its inputs—

steel, labor, parts—each had separate cost accounts. Profitability 

resulted from combining these inputs in the mass production assembly plants of the era. PPBS has been used continuously since 1961, 

even though the context has changed enormously. Today’s military is 

far more tightly coupled. Jointness, data fusion, sensor integration, 

and battlespace management are far more important now than they 

were in previous decades.7

A similar development has occurred in the business world. 

Corporations historically have used discounted cash flow for buying 

capital equipment. Cash flows and costs could be compared between 

different machines. For lathes, machine tools, and drill presses, 

this worked fine. But it did not work for buying IT systems, because 

benefits and costs crossed department lines. Human resources, production, and engineering all benefited from IT, and all had to chip in 

to pay for it. Business is only now beginning to develop methods for 

developing optimal strategies for highly interdependent IT systems.

The New Defense Innovation Landscape 

Changing conditions, strategies, and economics mean that a 

defense innovation system that worked in one era may not work in 

another. Whereas the benefits and costs of innovation are changing, 

the U.S. defense innovation system is not. 

One of the most important changes today is in the amount of 

technology already in use. The increasingly technical character of 

the American way of war began with the aerospace forces but has 

spread to all forces, because logistics, intelligence, personnel, and 

other areas have evolved from manual to automated systems. The 

need to make all these systems work together, when interdependencies are high and force structure (the number of divisions, ships, and 

air wings) is low, is a key difference from the Cold War. The changes 

point to the need for a very different innovation system.
 Defense Horizons July 2005

New technologies now incur a high insertion cost just to make 

them work with legacy systems. The Navy Marine Corps Internet has 

to work with the old IT systems. SBIRS and CEC must work with 

existing command and control systems. Making this happen often 

means hiring an army of contractors experienced in both legacy 

and new systems to install, operate, and maintain everything. As a 

consequence, O&M costs increase exponentially. Beyond a certain 

level of technology, small additional technology insertions can ripple 

through the system, driving up costs. New layers of management are 

needed to coordinate and deconflict the insertion. Different departments have to be brought together to communicate, which further 

increases coordination costs.

To see how complexity increases costs, perform a little experiment. Wander around your computer center and compare what you 

see with what you were told a few years back. Computing was supposed to become simpler and safer. It was going to be seamless and 

“always on.” We were promised open systems, self-healing networks, 

and secure computing. The payoff, according to the visionaries, 

would be IT systems that required little or no support. They would 

be like the television and telephone: simple to use. 

Does this describe the IT system where you work? We doubt 

it. The size of the work force at computer centers has skyrocketed. 

Software is not safer but rather more vulnerable. Help desks, call 

centers, and local area network specialists are needed to handle all 

the recent upgrades and software patches. Much of this added IT 

work is contracted out, but this does not mean that costs have gone 

down—they have just moved to a different accounting category. 

The solution to the problems of increased complexity and buying integrated systems is not to slow the pace of innovation, nor is it 

to artificially transfer costs to a different category through outsourcing. The answer lies in building capabilities in all different parts of 

the innovation landscape. An innovation landscape is a graphical 

picture of the benefit from different combinations of innovations.8

Advances in radars and satellites, for example, have led to spacebased radars, which combine the two technologies. 

An innovation landscape for space-based radars is shown in 

figure 1. Different regions of the innovation landscape (for example, 

representing regions of high payoff or of particularly attractive technical combinations) can be marked out. These models can be used 

to explore how strategies, budgets, and risks shape the innovation 

systems. Innovation landscapes point to questions that might not 

otherwise be considered and offer a way to move beyond pressuring the current innovation system to produce breakthroughs that it 

really is not designed to produce

Expanding our field of view of the innovation landscape 

is critical to coming to grips with the cost trends that are overwhelming DOD. Specifically, a new emphasis on a three-region 

model of defense innovation is needed to distinguish among new 

products (airplanes, tanks, ships); new processes (integrated 

systems); and retrofits of legacy systems. Figure 2 illustrates 

this landscape as a combination of the three kinds of innovation.

Different regions inside the triangle represent the payoff from 

various combinations of new product, new process, and retrofit innovations. The central argument of this paper is that the legacy U.S. 

systems cluster around the top of the triangle (that is, new product 

innovations). This is the world our institutions are built for. New 

requirements, however, are pulling toward the two bottom corners of 

the innovation landscape.

DOD has always done all three kinds of innovations; it is the 

relative balance of effort among these that needs to change. Our 

great innovation resources such as the Director of Defense Research 

and Engineering (DDR&E), the Defense Advanced Research Projects Agency (DARPA), the service laboratories, and contractors are 

all organized for working at the top of the landscape.

Something else also needs to change. The innovation landscape 

of figure 2 represents a trade space that is rarely considered in current planning. Asking whether the Air Force should buy more Joint 

Strike Fighters and fewer Raptors is a question that DOD knows how 

to address. It is a question the current organizations are well prepared to answer, because it deals only with investments at the top of 

the triangle, with new products and comparisons between them.

The question that DOD and the services are less capable of 

answering is whether a new weapon, a new integrated system, or a 

retrofit of a legacy system makes the best investment sense. What 

are the trade-offs among these alternatives? When is a retrofit better than a new weapon? How can integrated systems complement 

existing weapons? 

For a variety of reasons, such trade-offs are not always done 

by the existing institutions of DOD. Organizations separated by 

budget and mission often focus only on their own portions of the 

triangle (in the case of acquisition organizations, including the 

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July 2005 Defense Horizons  

R&D infrastructure, the top of the triangle). They are not treated 

like the integrated trade space that they are. But this is exactly 

where new problems lie.

Another way of saying this is that we navigate only a limited 

region of the defense innovation landscape. For decades, we have 

systematically focused on the new product area. The reason for this 

is the legacy of the Cold War-era innovation system. DOD and service 

organizations, contractors, and labs were created when technology 

content was low and jointness was downplayed. A new model of 

defense innovation is now needed, one matched to today’s strategies 

and problems.

Changes in Business Innovation 

Making such a change may seem impossible, but a similar 

adjustment taking place in American business offers a model for 

the defense community. Leading corporations are embracing a hardheaded response to changing conditions of competition. In recent 

years, business innovation in the United States has shifted away from 

producing new things and toward process innovations and what we 

call retrofit innovation.9 Businesses now recognize three regions in 

the innovation landscape: new products, new processes, and retrofits. These regions are like the topography of a map. They define distinct geographies that require different skills and search strategies. 

Just as an army trained to fight in the desert would not be effective 

in the mountains, technology institutions unfamiliar with the new 

geography of innovation will fare poorly in the marketplace. 

General Electric 

For decades, General Electric (GE) was an industrial 

company that manufactured a wide range of products: washers and 

dryers, medical imaging machines, jet engines, and steam turbines, 

to name a few. Today, GE sees itself as a service company, not a 

product company. It still makes many products, but it makes more 

profit from repairing, upgrading, and operating things that it and 

other companies have already made. There is a big sunk cost in 

products—millions of them are out there. Servicing these products 

is more profitable than turning out more of them.

At GE, innovation is much more about using technology to 

improve services than about investing in plants and equipment. GE 

has broadened its definition of return on investment to include how 

technology makes its sales and service workers more productive. 

Had the company continued to innovate by having its laboratories 

churn out an increasing number of better products, it would not be 

focusing on the high profit part of its business. GE recognized that 

the payoff from innovation varies with changing strategic conditions and that to stay competitive, they need to change, too. The 

U.S. defense community needs to learn this lesson. Unlike GE, DOD 

cannot afford to shift away from the development and insertion of 

new technologies; it must learn to navigate the whole spectrum of 

the technology landscape and choose which portion offers the most 

effective solution to a military need. 

Wal-Mart

The Wal-Mart story is usually told as an example of how a company built a world-class logistic system. Let us look at this system 

from an innovation perspective.

Big retailers have historically succeeded by emphasizing product attributes, such as quality, displays, branding, and advertising. 

Wal-Mart chose a different path, for much the same reason that GE 

did. Competing on product attributes worked in the 1960s, but in 

the 1990s, when most households already owned more products than 

they knew what to do with and new products were flooding the market (and driving down profit margins), turning out better products 

did not yield the payoffs that it once did. 

Wal-Mart chose to innovate in a different region by building a 

distribution system based on carefully synchronized routines and 

tightly coupled processes, all linked to logistics and marketing, and 

aligned with the corporate strategy of being the low-price, "big-box" 

retailer. Each night a stream of data is sent via satellite from every 

Wal-Mart store in the country to headquarters in Arkansas. This 

information is used to assign trucks from inventory depots to stores, 

determine the products they will carry, and quickly refill store 

shelves with what is hot at the moment. Wal-Mart has flexible floor 

displays designed to easily accept these shipments. They can shift 

counters instantly to display fast-selling items shipped overnight by 

truck. Inserting new goods into Wal-Mart stores is quick and cheap.

Because a significant part of Wal-Mart’s inventory is in transit, 

rather than in the back rooms of stores, some 20 percent more floor 

space is available for selling inventory. In the low-margin retail business, this has big payoffs. Wal-Mart’s process changes are best contrasted with its chief rival, Kmart, whose innovation system was the 

classic one of offering better products that the company hoped would 

catch the consumer’s eye. It carried the innovation system that was 

successful in the 1960s into the 1990s and thus was playing the 

game the old way, throwing thousands of products at consumers and 

heavily advertising them. Trucking and IT systems were outsourced 

to a low-cost contractor with the justification that these were not 

Kmart’s core competencies. As a result of its inertia and the process 

innovations of its competitor, Kmart was forced into bankruptcy in 

the 1990s.

Shifting innovation from products to services allowed many 

companies to keep pace with the altered competitive dynamics of 

the 1990s. It freed them to focus their creative energies on the problems that generated the most payoffs. By recognizing when to exploit 

the process or retrofit a product instead of investing in new product 

innovation, DOD could likewise realize significant benefits. This is 

especially true because many DOD needs are related to support or 

services. Innovation in retrofit or process support is as important to 

DOD as new product innovation.

Retrofit Innovations

The value of retrofits is evident in many different areas. 

National hardware chains like Home Depot and Lowe’s now target 

the homeowner who wants to upgrade a home rather than buy a new 

one. The Baltimore Harbor development upgraded a crumbling old 

industrial neighborhood to a modern entertainment district. Airports 

are being refitted with security systems to protect against terrorists. 
 Defense Horizons July 2005

Hotel rooms are equipped for online gambling over the television, 

and JetBlue has retrofitted its Boeing 767 passenger jets with in-seat 

entertainment from DirectTV to transform the passenger experience 

in ways that caught its competition completely off guard.

Each of these innovations could be looked at as a new product 

or process. But looking at innovation this way misses the larger picture. Installing gambling in a hotel room is not a process or a product 

as much as it is a value upgrade of the room for the hotel owner. It 

leverages the costs of building, operating, and maintaining the room. 

The home improvement store, which makes a greater profit on the 

sale of upgrade materials than on hammers and nails, leverages the 

sunk costs of the homeowner.

One of the best ways to see retrofit innovation is in traffic congestion. American metropolitan areas are clogged with cars. There 

are two options for dealing with this problem: build more highways 

or increase the throughput of the existing system.

The first option involves constructing new freeways, widening 

existing roads, or double-decking bridges and freeways. This was the 

practice from the 1950s to the 1980s; with ample Federal funding,

the gasoline tax, and the low cost of vacant land, road building 

seemed cheap.

By the 1980s, the costs of building new highways rose sharply. 

Actual construction expenses were only one part of the problem. 

Environmental, legal, and political obstacles also drove up the 

costs. Most important was the cost of inserting new capacity into 

the existing grid. By then, cities were surrounded by suburbs, and 

condemning homes and shops to install new highways had become 

prohibitively expensive. Imagine the cost of adding new traffic lanes 

to Interstate Route 95 between New York and Washington, DC. Whole 

neighborhoods of homes would have to be demolished. Double-decking Route 95 is feasible in an engineering sense, but probably not in 

an environmental or political sense. Key bottlenecks, such as the 

George Washington Bridge in New York, have already been doubledecked. Adding a third deck would mean building a new bridge, at 

extraordinary cost. 

An alternative to highway construction is to increase the 

throughput of the legacy system. Today, Route 95 is being retrofitted 

with a collection of automated toll collection systems; synchronized 

traffic signals; more responsive emergency vehicles to remove accidents; radio traffic alerts to warn drivers about congestion; and traffic cameras to spot tie-ups (and, someday, Internet notices to direct 

drivers around them). Each of these innovations can be considered 

a product or a process. But conceiving the problem this way misses 

a larger strategic change: an intelligent transportation system (ITS) 

is being retrofitted onto the legacy highway system.

The payoff from new highway construction has decreased. As 

the costs of new construction rise, retrofit innovation gives more 

bang for the buck. 

Figure 3 shows how innovations change as a function of complexity and sunk costs.10 As those variables increase, innovation 

needs to shift first to better processes, and later, to retrofits.

The Defense Innovation Landscape

The defense innovation system is stuck in a mindset, albeit one 

that succeeded for half a century, that focuses on new products at 

the expense of processes and retrofits. The question is whether this 

same approach makes sense now. Defense contractors used to spend 

most of their time and energy on R&D and building weapons. Today, 

the majority of them do not do research and do not build anything. 

Rather they operate, maintain, support, and install complex technologies into a force already loaded with hardware. Yet the innovation institutions of the Cold War continue to perceive their mission 

as turning out better products. Operation and maintenance are seen 

as someone else’s problem. Retrofits that exploit sunk costs are considered only in rare cases, and then not systematically.

People are trained for a world with low technology levels rather 

than for a world where making existing technologies work is the 

big challenge. For example, rather than writing new code, most 

computer programmers spend their time trying to figure out the programs someone else has written. They are not trained for this. It is 

just assumed that someone who reengineers old programs will need 

programming classes de novo.

For decades, DOD has purchased its IT systems from various 

vendors without giving enough attention to system interoperability. 

As a result, enormous amounts of effort have been expended on 

understanding how legacy systems fit with the new ones. Inserting 

a new IT system—the core of much current defense transformation—is a different kind of challenge than writing new code. It 

involves stitching together legacy systems, diagnosing faults, and 

checking for open loops.

The classic defense innovation pattern is shown on the left 

side of figure 4. The starting point of the arrow indicates the old 

system and the tip of the arrow the new, displayed on a cost-benefit 

diagram. The F–22 replaces the F–14. The cost of the F–22 is higher, 

but so is the performance. This is the kind of trade-off for which the 

current defense innovation system is built. It leverages technology 

against cost.

Low High

Rate of Major

Innovation Retrofit

Innovation Process

Innovation

Product

Innovation

Figure 3. Complexity and Sunk Costs 

Cost
July 2005 Defense Horizons  

But consider recent developments involving two innovations, 

the Joint Direct Attack Munition (JDAM) and the distribution of 

handheld global positioning system (GPS) receivers to Army and 

Special Operations forces. In the case of JDAMs, a guidance kit 

was retrofitted onto legacy gravity bombs. The JDAM leveraged the 

sunk cost in a large stockpile of “dumb” gravity bombs. GPS receivers similarly increased the performance of ground forces, yet were 

cheaper than the legacy system of beacons and radios the Army had 

been using. 

There is no one best kind of innovation. The choice of approach 

depends on strategy and the relative costs of technology and performance. Sometimes historical circumstances determine which type of 

innovation works best. In the 1920s, for example, the German army, 

decimated in World War I, really had no choice but to rebuild from 

the ground up. Legacy hardware was not a problem because most of 

it had been captured or destroyed by the Allies. Force structure was 

limited by treaty. Historical studies have shown that these conditions 

pushed the German army to innovate in tank warfare.

The lesson usually drawn from the German interwar experience is that legacy systems need to be destroyed to make way for 

better weapons: German defeat in World War I removed bureaucratic 

obstacles, allowing the introduction of the tank. But this is the wrong 

lesson to draw. Disregarding the vast investment already made in 

legacy forces every time a new technology comes along would make 

no sense. Because of rapid product innovation, expensive and highly 

capable forces would have to be completely overhauled or replaced 

every few years. In a world of jointness and high interconnectivity, 

the result would be utter chaos.

Drawing conclusions about U.S. defense transformation in the 

21st century from the German army in the 1920s overlooks some basic 

economics. Historical circumstance made the German transformation costs in the 1920s low. The U.S. Army today faces a fundamentally different set of conditions. It can barely keep up with the high 

technology content it already has. 

Too often a political cast is given to this recurrent problem. 

For example, bureaucratic resistance is often cited as the biggest 

obstacle to innovation. Sometimes this is true, but not always. 

Bureaucratic forces may be the only ones correctly calculating the 

costs. What sometimes passes for bureaucratic opposition is often 

the failure of innovators to calculate the true costs of ownership. 

Their enthusiasm for new products blinds them to the economics of 

innovation.

Aligning Innovation with Strategy

America’s defense innovation system needs to align itself with 

strategy and place greater emphasis on process innovations and the 

retrofit of legacy systems. The current system is so oriented to new 

production that it is choking the capacity to integrate these products 

into legacy forces. A visit to any ship, airbase, or Army training center shows this. People are overwhelmed by the complexity of recent 

hardware, the burden of IT systems that do not work as advertised, 

and the need to spend time on making things work at the expense of 

sharpening combat skills.

DOD controls an enormous asset that it usually overlooks when 

it considers innovation: the multi-trillion-dollar sunk cost in its 

forces. In the corporate world, firms often suffer from technological 

myopia, the tendency to stick with the technologies they know. A 

company with investments in resources and people is not likely to 

innovate outside of its comfort zone.11 Firms stuck in old technologies stand to lose important competitive advantages if they change. 

Likewise, defense contractors prefer to stay with the technologies 

they know, because it is costly to switch, and they may not be as successful if they do so. 

DOD’s challenge is different. It does not share interests with 

the corporations that work for it and thus needs to see itself as a 

force for reshaping industry structure, getting firms to explore different regions of the innovation landscape. DOD should signal defense 

companies that it is going to consider all innovation alternatives to 

improve its fighting ability.

DOD has been rethinking its acquisition system, attempting to 

shift from the requirement of things to the acquisition of capabilities, 

and there are several ways to do this. It could offset the technological myopia of its contractors by signaling new opportunities to new 

entrants in the process and retrofit areas. Also, DOD could encourage all competitors to search the enlarged innovation landscape of 

figure 2. This would have the dual benefit of improving productivity 

where it is most needed and broadening the basis of defense competition away from domination by established firms whose innovations 

systems are geared to producing new products. 

Market pressure drove GE and Wal-Mart to adapt new innovation strategies. Without it, there would have been no incentive to 

change. Market pressure for new kinds of defense innovation must 

come from DOD; otherwise, firms have little reason to change. A 

hands-off DOD policy on innovation, leaving it to the market, belies 

a fundamental misunderstanding of industrial economics. Absent 

incentives to change for DOD contractors, innovation system costs 

will only rise as defense transformation proceeds, because defense 

companies directly benefit from the high cost of operations, maintenance, and technology insertion. They know their own products best, 

so they win the O&M, insertion, and outsourcing work that goes with 

those products. The greater the complexity of this work, the more 

profits they earn. Why would they change voluntarily?

Several unique aspects of defense that are absent from private 

business also need to be recognized. Some defense innovations 

require emergency responses to unforeseen attacks and challenges, 

where the costs of failure are much higher than they would be in the 

private sector. Retrofit innovation can be especially important here. 

Integrating upgrades with legacy systems is often the fastest way to 

High Cost Low

Performance

High

Low

JDAM

Handheld GPS

F–22

Product

Innovations Retrofit

Innovations

Figure 4. Emerging Innovation Patterns in Defense
 Defense Horizons July 2005

mount a serious defense. For example, in response to Soviet acquisition of nuclear weapons in the early 1950s, the United States retrofitted its World War II forces with nuclear punch. Nuclear weapons 

were put on bombers, aircraft carriers, and even on Army recoilless 

rifles like the Davy Crockett. If time were available, it would have 

made more sense to tailor specific weapons for the nuclear mission. 

But time was not available. The United States was in an emergency 

situation to defend the country and its North Atlantic Treaty Organization allies.

A similar logic applies to homeland security. A second terrorist strike on the United States of a magnitude comparable to 9/11 

most likely would prompt a crash program to upgrade security at 

the Nation’s air and sea ports. There probably would not be time to 

build new systems; instead, retrofitting existing systems would be 

required.

Conclusions

DOD’s challenges are in many ways more complex than those 

faced in the private sector. It cannot change its core mission in the 

same way that private sector firms can. It can, however, become 

more agile and flexible in determining what range of solutions would 

best support its various needs. Becoming a more adept customer, one 

that drives the market, would enable the department to broaden its 

options and respond to changes in the strategic environment. A useful lesson to be learned from industry is that the synergies created 

from understanding and utilizing the landscape of innovation can 

provide more capabilities at equal or lower cost. America’s innovation capacity is one of the greatest sources of its military advantage. 

To harness its potential, the defense innovation system needs to take 

account of some of the important changes that have taken place in 

the last decade. 

Process and retrofit innovations are more important than they 

have been in the past. Yet many of the systems and rewards in place 

overlook this. Innovation needs to be aligned with strategy. Here, the 

interests of defense firms and DOD are different, and DOD has important responsibilities in aligning defense innovation to defense strategy

Notes

 1See P. W. Singer’s characterization of firms supporting the military in Corporate 

Warriors: The Rise of the Privatized Military Industry (Ithaca, NY: Cornell University 

Press, 2003), 136–148. 2

“Sink or Swim: After Landing Huge Navy Pact, EDS Finds It Is In Over Its 

Head,” The Wall Street Journal, April 6, 2004, A1. 3

“Clumsy Response Hits RBC Brand,” The Financial Times, June 16, 2004. 4

See Richard Nelson, ed., National Innovation Systems: A Comparative 

Analysis (New York: Oxford University Press, 1993) and Michael Porter, The 

Competitive Advantage of Nations (New York: Free Press, 1990). 5

Loren R. Graham, The Ghost of the Executed Engineer: Technology and the Fall 

of the Soviet Union (Cambridge: Harvard University Press, 1993). 6

Martin Shubik, “Game Theory and Operations Research: Some Musings 50 Years 

Later,” Operations Research 50 (January/February 2002): 1, 192–197. 7

For a detailed description of the difficulties of applying the DOD’s Planning, 

Programming, and Budgeting System (PPBS), developed along a model of planning 

in a successful 1950s industrial firm, to today’s military, see Stuart Johnson, “A New 

PPBS to Advance Transformation,” Defense Horizons 32, Center for Technology and 

National Security Policy (Washington, DC: National Defense University, September 

2003).8

Lee Fleming and Olav Soreson, “Navigating the Technology Landscape of 

Innovation,” Sloan Management Review (Winter 2003), 15–23. 9

Retrofit innovation is a concept developed by Paul Bracken while working with 

large corporations and teaching a course on innovation strategies at Yale. It draws on 

Storm Cunningham, The Restoration Economy (New York: Barrett-Koehler, 2002). 10This chart is the authors’ updating of James M. Utterback, Mastering the 

Dynamics of Innovation (Boston: Harvard Business School Press, 1996), 91. See also 

Cunningham, 30. 11Management theorists rediscover this problem every few years. It was 

originally put forth in Kenneth Arrow, “Economics, Welfare and the Allocation of 

Resources for Inventions,” in The Rate and Direction of Inventive Activity, ed. Richard 

Nelson (Princeton: Princeton University Press, 1962).

Defense Horizons is published by the Center for Technology and National Security Policy. This and other 

CTNSP publications are available online at http://www.ndu.edu/inss/press/nduphp.html.

The opinions, conclusions, and recommendations expressed or implied within are those of the 

contributors and do not necessarily reflect the views of the Department of Defense or any other 

department or agency of the Federal Government.

Center for Technology and National Security Policy

 Hans Binnendijk

Director