Thinking back on grade school, many among us surely recall the writing assignment “how I spent my summer vacation,” which welcomed our grudging return to the classroom at August’s end. It certainly comes to my mind as I set out to share my summer’s preoccupation with finding the crux of the challenge to engaging commercial entrepreneurship in defense innovation. The thesis of my essay: The Pentagon needs a strategy to restrain its buyer-power impulses.

In June, I attended the launch of the Atlantic Council’s commission to reform the defense innovation ecosystem. Co-chaired by former Defense Secretary Mark Esper and former Air Force Secretary Deborah Lee James, the Commission on Improving DoD Engagement with New Companies and Innovators aims “to address the urgent need for [the Department of Defense (DoD)] to absorb commercial innovation and speed up the delivery of critical capabilities to the field.”

To focus its mandate, the Esper-James commission cites Eric Schmidt, the ex-CEO of Google and first chairman of the Pentagon’s Defense Innovation Board, who in testimony before the House Armed Services Committee in 2018, said: “DoD does not have an innovation problem; it has an innovation adoption problem.” The commission is examining not the technologies or weapon systems that will animate innovation but instead “how DoD officials can recalibrate the department’s risk tolerance, realign relevant acquisition and budgetary processes and make big bets on novel commercial and dual-use technologies.”

In July, I read Richard Rumelt’s tremendous new book, The Crux, which is a playbook for the practical work of making strategy and the perfect complement to his incomparable Good Strategy/Bad Strategy. It first sets out what Rumelt calls “the gnarly challenge,” the only object of a true strategy. A strategic challenge merits the label “gnarly,” Rumelt says, when it appears to enterprise leaders as compelling but ill-defined and implicates a great bundle of their fears and ambitions but resists simple understanding of how the levers of managerial action might gain purchase on it.

Reading The Crux got me thinking about the mandate of the Esper/James commission as a great Rumeltian challenge. The root of the Pentagon’s innovation adoption problem is hard to determine. It is regarded as the center pin of a vital national security ambition. And it has been the object of Pentagon activism since at least 2015, when then-Defense Secretary Ashton Carter traveled to Silicon Valley to inaugurate a new office, the Defense Innovation Unit, charged with facilitating engagement of the “tech sector” with the U.S. military.

Rumelt tells us that to solve a gnarly challenge requires a strategy, but a strategy will achieve little more than puffy sloganeering until it is oriented on the crux of a problem. It is, Rumelt writes in words more suggestive of the crux’s power and mystery, “the paradox or central knot of the thing.”

In August, I’ve been pondering the central knot of the challenge impeding the engagement of the tech sector with the innovation imperatives of the Defense Department. While many focus on the incompatibility of the rules-bound bureaucracy of defense acquisition with the fail-fast, get-rich-quick impulses of Silicon Valley, the true nature of the problem runs deeper.

Economists have formulated a theory of market failure explaining what is going on when the “invisible hand” drops the ball. Among the theory’s pathologies is the exercise of market power, which undermines the role competition should play to yield efficient outcomes from the tussle of buyers and sellers. Monopoly is the most well-known expression of this microeconomic pathology.

Equally pathological, however, is monopsony, which distorts economic outcomes in markets with only one buyer. The Pentagon is a monopsonist in the U.S. market for complex weapon systems and with that power has filled its acquisition toolbox with exquisite instruments regulating the value-cost tradeoffs it demands from suppliers. In the jargon of another summer-reading book, the Pentagon employs its monopsony power to command a “red ocean” of cramped industrial expectations.

By contrast, the tech sector thrives in the pursuit of blue-ocean markets where suppliers can induce demand by transforming value-cost tradeoffs. No customer had a requirement for the smartphone when Steve Jobs unveiled the iPhone in 2007. Such innovations do not result from entrepreneurs navigating to a red ocean.

That is why I think the Pentagon’s market power is the ironic crux of the problem. A strategy to engage the tech sector with defense innovation imperatives will require the Pentagon to untie that central knot, foregoing the reflexive exercise of its market power and thereby making room for blue oceans of defense innovation.

Contributing columnist Steven Grundman is the principal of
Grundman Advisory and a former deputy undersecretary
of defense for industrial affairs.