The President Challenges The Primes, Defines "Innovation"

A series of recent actions from the White House, Congress, and the Pentagon have sent an unusually strong signal to major defense contractors and market entrants that seek to compete in the defense ecosystem. Taken together, these actions point to the conclusion of a ten-year period of iterative and experimental processes around defense acquisition that settles on an organizing principle of "innovation" that will shape defense acquisitions for decades to come.

Perhaps not intuitively, "innovation" in this context does not refer to a vague system of process improvement, marginal updates to existing methods or systems, or bottom-up refinement led by junior leaders in a military organization. Rather, "innovation" in this new context refers to limiting military procurement from traditional defense contractors, and instead purchasing a substantial portion of hardware and software from newer entrants, and rapidly deploying those capabilities to the armed services.

For roughly the past thirty years, a small group of well capitalized, mostly publicly traded prime contractors has consistently captured a disproportionately large share of the Pentagon's contract dollars, earning the nickname the "Primes" for their proximity to defense acquisition and their role as the principal contractors responsible for delivering major systems. The Primes have delivered exquisite capabilities to the Pentagon throughout this era, but major production delays (especially around naval shipbuilding), cost overruns, scandals, and other performance issues have led to vocal and well-funded opposition to emerge. This opposition, sometimes called an "innovation ecosystem" or "defense technology / defense tech," has organized itself around the goal of lowering barriers to entry for smaller companies, thereby expanding the variety of options for military hardware procurement.

Coupled with an awareness of the industrial capacity the People's Republic of China has developed, this opposition argued for new organizations to be established within the Pentagon, new sources of funding to be provided to help smaller companies survive so-called "Valleys of Death," new contracting pathways that avoided the complexities of federal procurement rules, and other forms of outreach and incubation to set the conditions for an industrial renaissance. Together, these efforts are designed to enable the United States to build military hardware at the level of sophistication and mass required to maintain a tactical edge over adversaries.

A ten-year process of political, cultural, academic, and economic advocacy around "defense tech" came to a crescendo recently when the President signed an Executive Order on January 7, 2026¹ that accused the Primes of focusing more on financial engineering (e.g., making stock buybacks or issuing dividends to existing stockholders) than reinvesting in domestic industrial infrastructure. It provides a 30-day review period in which the Pentagon will identify existing defense contractors that are "underperforming on their contracts, not investing their own capital into necessary production capacity, not sufficiently prioritizing United States Government contracts, or whose production speed is insufficient as determined by the Secretary [of War]," and during such period of underperformance or insufficient prioritization, investment or production speed, "engaged in any stock buy-back or corporate distribution." Should the contractor fail to meet the intent of the 2026 EO following a 15-day remediation period, it may be subject to a range of penalties under both existing acquisition guidelines and the Defense Production Act. For future contracts, the 2026 EO will require executive incentive compensation to be linked to efficient production metrics (and not on short-term cash flow) and, during periods of contractor underperformance based on standards similar to those described above for existing contracts, the EO will prohibit stock buy-back and corporate distributions, and may cap contractor executive base salaries.

To be clear, while the tone of the 2026 EO is decisively negative toward the Primes (presumably to the benefit of the "innovation ecosystem" or "defense tech" companies that lack these "misplaced priorities"), the Primes remain the only realistic option for most major weapon systems such as warships, armored vehicles, precision munitions, and high-performance aircraft. This momentary advantage is unlikely to last much longer, however. Accordingly, while the 2026 EO could invite litigation under multiple grounds, the document may serve less as the start of a legal battle than a guideline for the Primes' behavior if they want to compete successfully against the rising tide of the "innovation ecosystem" and "defense tech."

This 2026 EO builds on prior directives, such as the April 2025 "Modernizing Defense Acquisitions and Spurring Innovation in the Defense Industrial Base"² which sought to identify the means available to the Pentagon to embrace the "innovation ecosystem" and "defense tech" and take advantage of this burgeoning culture and industry. With the January 2026 EO and the April 2025 EO, the President offers both a carrot and a stick to industry participants, demonstrating that, in the Administration's view, the previously described "innovation ecosystem" and "defense tech" "opposition" perspective is fundamentally correct.

The President is not acting alone. The FY 2026 National Defense Authorization Act³ demonstrates that Congress shares this sense of urgency. While funding for the Primes has not been meaningfully withheld, Congress has expanded the budget of institutions like the Defense Innovation Unit to support contracting methods that seek to align the needs of the armed services with the capabilities new market entrants seek to provide. Congress also codified elements of President Trump's January 2026 and April 2025 EOs and instructions from senior Pentagon leadership into law, affirming the Administration's critique of the defense industry. In an era where the two principal political parties agree on few topics, constructive reform to defense acquisitions is a rare point of functional bipartisan agreement. Again, the so-called "opposition" seems to have found allies on Capitol Hill.

These directives from the White House and Congress have been coupled with fundamental changes inside the Pentagon. The Department of the Army has launched an Army Transformation Initiative,⁴ the Department of the Navy has established a Rapid Capabilities Office, and the internal staff responsible for guiding technological development for the armed services has undergone a substantial reorganization to meet contemporary requirements.⁵ Furthermore, the Pentagon recently announced the appointment of Owen West,⁶ a former Assistant Secretary of Defense and capital markets professional to take over the Defense Innovation Unit, which had been without a leader for months. Instead of allowing the Defense Innovation Unit to drift, reorganizing it, or eliminating it entirely, the Trump Administration has embraced the institution and its core ethos of "innovation" being foremost a process of acquiring cutting edge technology.

In this series of announcements, orders, laws, and reorganizations, the Trump Administration has effectively settled a running debate within the Pentagon over how the acquisition process should be governed. Rather than accepting stasis or incremental change, the Pentagon is embracing the "opposition" mindset and rewiring its processes for interacting with the private sector. By emphasizing "innovation" as a product to purchase from the private sector, the Pentagon is inviting a wider array of new actors to share responsibility for national defense. With the President's announcement of a $1.5 trillion defense budget for FY 2027, it is clear that the Primes cannot merely expect to capture their traditional share of this substantial increase in spending. They will have to fight for it.

Footnotes

1. https://www.whitehouse.gov/presidential-actions/2026/01/prioritizing-the-warfighter-in-defense-contracting/

2. https://www.whitehouse.gov/presidential-actions/2025/04/modernizing-defense-acquisitions-and-spurring-innovation-in-the-defense-industrial-base/

3. https://www.armed-services.senate.gov/imo/media/doc/fy2026_ndaa_executive_summary.pdf

4. https://api.army.mil/e2/c/downloads/2025/05/01/c4c9539c/letter-to-the-force-army-transformation-initiative.pdf

5. See, e.g., https://media.defense.gov/2026/Jan/12/2003855657/-1/-1/0/TRANSFORMING-THE-DEFENSE-INNOVATION-ECOSYSTEM-TO-ACCELERATE-WARFIGHTING-ADVANTAGE.PDF

6. https://www.wsj.com/politics/national-security/pentagon-chooses-doge-official-and-former-trader-to-head-innovation-unit-f4f978b4?mod=Searchresults&pos=1&page=1

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