The Indonesian defence sector continues to encounter considerable obstacles in attaining a sustainable competitive advantage, despite concerted efforts by both the government and industry stakeholders. In response to these persistent challenges, the present study investigates the strategic significance of alliance strategy in strengthening competitive advantage within the Indonesian defence sector. Particular attention is given to the mediating influence of innovation capability and the moderating role of the regulatory environment. A quantitative methodology was adopted, utilising a 5-point Likert scale to gather responses from actors within the defence industry. Data collection was conducted through both physical distribution and digital platforms, including email and Google Forms, to ensure broad participation. A total of 170 completed questionnaires were obtained and employed for hypothesis testing. The findings reveal that alliance strategy positively impacts competitive advantage through the enhancement of innovation capability. However, the regulatory environment does not exhibit a moderating effect. This study offers both theoretical advancements and practical recommendations, supporting defence firms and policymakers in their pursuit of enduring competitiveness within a complex and evolving security landscape.