Declining post-war defense budgets, the increased pace of technological change and globalization are combining to reshape the defense industry. The question is whether we can reinvent ourselves or be dragged through impending change involuntarily.

Today more than one-third of all platform and service dollars spent by the Pentagon are with nontraditional commercial and international companies, according to a recent study by Booz & Co. (see page 47). Combined with the sharp drop in defense spending, U.S. defense companies are chasing a declining share of a declining market with fewer funds allocated for the development of next-generation technology.

Such change will become a growing problem if not properly managed. For generations the Pentagon has been a technology exporter to the commercial sector of transformational capabilities such as GPS and the initial Internet developments. Today it is increasingly becoming an importer of the technological advances taking place all around us. For example, given the role of information technology in everything from commerce to national security, we are increasingly relying on commercial industry for software and tools. Companies like Google and SpaceX are moving into defense. Soldiers can use smartphones to obtain real-time surveillance from drones or coordinate with fellow troops via text-messaging.

Unfortunately, there are no defense companies among the top 20 industrial research and development spenders worldwide. In fact, the company-funded R&D budgets of the top five U.S. defense contractors combined still would not put defense on the list. Next-generation commercial technology speeds ahead in areas such as 3-D printing, renewable energy, nanotechnology, autonomous vehicles and the Cloud.

Meanwhile, globalization is altering the defense industry in much the same way it has revamped other businesses. We live in a borderless world. China makes iPhones. Ohio builds Hondas. India produces generic drugs. No U.S. weapons system today is made without foreign parts and suppliers. In fact, the biggest U.S. military acquisition in history—the Joint Strike Fighter—has nine partner countries participating in its development.

How can the Pentagon and industry benefit the most from today's changing landscape? I would suggest three steps:

•For starters, the U.S. government should allow further consolidation where necessary, so industry can streamline operations and focus resources on the technology development that maintains U.S. pre-eminence globally. With a greater than 20% drop in defense spending in recent years, it is not possible or desirable to retain the current industry structure in these circumstances.

•Second, government and industry should more fully embrace globalization to benefit from the investments made by key U.S. allies and partners.

•Third, the Pentagon should pursue genuine acquisition reform, not just for the conventional reasons of lowering costs and reducing schedules. The goals of reform should include lowering the barriers to entry in the defense market to allow better access to commercial technology.

Taken together, competition would increase despite further consolidation if the U.S. concurrently made it easier for all companies to vie openly and fairly. This could only happen if the Pentagon overhauled its Byzantine acquisition process.

So far, the defense industry is moving slowly to adjust to this emerging environment. The largely financial focus on keeping stock prices high through share repurchases and increasing dividends has thus far deferred deeper consolidation or increased investments in next-generation, disruptive technology.

Short-term actions like this cannot go on indefinitely in a declining market. For real change to occur, U.S. defense companies must increase spending on research and development and leverage the world's best technology, especially from nations that purchase our defense systems and train and fight alongside our armed forces.

Ultimately, the Pentagon and our industry must let global free-market instincts prevail. That is the best and only way to harness the benefits of change and maintain U.S. technological superiority in the wake of this next evolution in the defense industry.

When it comes to our defense, today the U.S. has a unique opportunity to look beyond its borders, both physical and mental, and turn the tide of global and technological change to its advantage.

Lynn is the CEO of Finmeccanica North America and DRS Technologies and a former U.S. deputy secretary of defense.