Example Business Strategy Proposal

1. Business Strategy Proposal
[Edited Version]
Global Defense and Aerospace Overview
Sascha Michel
saschamichel@gmail.com
http://www.linkedin.com/in/saschamichel

2. Contents
 QinetiQ Status Update Slide 3
 SCP Framework Summary Slide 4
 Structure Conduct Performance Framework Slide 5-44
 Portfolio Analysis Slide 45-55
 Strategy Clock Slide 57
 System Dynamics Slide 58
 Final Recommendation Slide 59

3. QinetiQ generates 50% of its revenue from the US, while the
UK and global divisions outperform, as federal cuts loom.
Summary
 QinetiQ Group plc (QinetiQ) is engaged in supplying of technical supply of technical support, • The UK services
training, test and evaluation, and know-how to customers in the global defense, aerospace business, which tests
•50% of revenues
and security markets. The Company operates in three divisions: US Services, UK Services military aircraft for the
come from the US and Global Products. US Services involves aerospace operations, engineering management, UK Ministry of Defense
Division but information services, mission solutions/cyber and software and systems engineering. UK and provides computer-
underperforming. Services involves air engineering, test and evaluation, training and simulation, cyber security based simulation-
and C4ISR, and programme and procurement support. Global Products involves training to sailors and
•Shares survivability, unmanned systems, energy from waste, vehicle power management and air crew before
underperform OptaSense business. QinetiQ Annual Report 2011. deployment on
market by 50% operations. Qinetiq's
• Qinetiq is a small, tasty, and underachieving morsel. Since flotation in 2006, after being global products
since 2006.
spun out of the UK Ministry of Defence, its shares have underperformed the sector by division, which sells
nearly 50 per cent. Mr. Quinn has been turning things around since arriving two years ago: technology
•Takeover theory costs have been trimmed at its UK division, its operating margin is 50 per cent higher than overseas, also helped
not in favor of it was a year ago, and the ratio of net debt to earnings before interest, tax, depreciation and improve margins, as the
merger as at an amortisation has been slashed to 0.6 times from nearly three times in 2009. Its US group sold a greater
advantage division, which accounts for about 50 per cent of revenues, is labouring to keep up: number of high-margin
innovating outside operating profits were down by one-third at the interim stage and margins were also a spares and mine-
of a global giant. shade lower. There are two obstacles to the takeover theory. One is that Qinetiq's clearing robots.
comparative advantage - its record for inventing things - may work better as a standalone However, The US
•MOD Golden business than as part of an industry giant. There is also the UK's golden share, which limits services business, which
any change of strategic ownership. The company is talking with the MoD about loosening accounts for just over
share limits change
that rule, so it may not be permanent. Financial Times. London (UK): Nov 24, 2011. pg. one-third of
of strategic 10 turnover, continues to
ownership.
suffer, with margins at
the division declining
•UK and Global from 7.8 per cent to 6.3
Business per cent as federal
outperforming US   government moved to 'in
as federal cuts source'
loom. services..FT.comnov
2011
Status: Brief Update Qinetiq

4. New technological developments will change the way that A&D
companies do business and compete
Summary
•Asymetric warfare
Though this is hardly a shock, it is worth noting three changes in military
may change the way
technology.
technology is used.
 Asymmetric warfare leading to threats to the security of national
communications networks.
•Need for accurate
 The advent joined up battlefield communications resulting in
intelligence continues
C4ISTAR‟s real time battlefield visibility for commanders at all levels.
to drive the
 The acceleration in the use of unmanned air vehicles particularly the
technological
,perhaps inevitable, advent of unmanned combat air vehicles. Leading
development. to speculation and, in some sectors, discomfort that the next
generation of combat aircraft is likely to be unmanned.
•Next generation of
combat is likely to be
unmanned.
External Shocks: Technology

5. Public opinion that opposes conflict and increasing debt could
influence the likehood of a decrease in defense budgets.
Summary
•Defence and security
spending is highly
dependent on current
conflicts, public
opinion, budgetary
concerns and
alliances.
 Again it was no shock that the defence budgets would be reduced severely however by
how much was a shock. The UK‟s SDSR published in 2010 mandated a cutting in key
capabilities as well as a much larger than expected reduction in service personnel.
 These changes in severe reductions in defence budgets for the largest military spenders
has provided difficulty for defence contractors.
 Most defence contractors have coped by instigating severe cost and headcount reduction
and indeed raised profits by doing so however these are short term tactics and there is, as
yet, no indication of how they will manage sustained defence budget restrictions.
Sources: FT.com, Bloomberg, Reuters, Datamonitor, Interview with member of RAF’s internal
Management consultancy, Aviation Week, United Kingdom Defence Statistics 2011
External Shocks: Tastes & Lifestyles

6. Looming budget cuts and changing strategies could lead to
increased competition and “off the shelf” defence capabilities
Summary  Equipment, Support, and Technology for UK Defense
• Qinetiq is putting pressure on the Ministry of Defence to relax and Security: A Consultation Paper” in December
•Us congress could the strict rules governing who can own the company's assets, in 2010, a study that is expected to establish the UK
allow 1 trillion in a move that could make it easier for the defence company to sell industrial capabilities deemed essential to meet
automatic cuts over one or more of its units. The UK government has the power to national security needs.
next 10 years veto any investor's attempt to build up what it deems to be an  The consultation paper focuses on four key areas: 1.
"unacceptable" level of ownership.If the company is successful Promoting exports as a replacement for
•MOD have strict and the rules are softened, it would make it easier for the  reduced United Kingdom spending, which will require
rules governing some company to raise funds abroad or to sell some of its UK products to have an increased “off the shelf”
company assets and operations.Fellow UK defence companies Rolls-Royce and BAE capability.
ownership “golden Systems are governed by similar, but less wide-ranging, rules.
share” where BAE  2. Bilateral activity, specifically within R&D, and
The key restriction for them is that no single foreign investor
and Rolls Royce have defense/ equipment cooperation, with the United States
can attain more than a 15 per cent voting interest. Sources close
less widening rules. and France being the championed relationships.
to the Qinetiq discussions say that it would be in favour of a
similar arrangement.TheMoD confirmed the discussions, but  3. An intention to award a quarter of government
•Obama plans to shift refused to go into detail."The 'golden share agreement' is the contracts to small and medium-sized enterprises
global military focus subject of ongoing dialogue between the MoD and (SMEs).
to middle east and Qinetiq.Source:Michael Stothard. Financial Times.  4. Ensuring that the United Kingdom develops national
asia-pacific at London (UK): Aug 22, 2011. pg. 14 . cyber security capabilities. Source:Deloitte report.
expense of army. 2011 Midyear outlook for the global aerospace
and defense sector
• Defense stocks also turned in a mixed performance as
•Budget cuts in UK
investors tried to make sense of whether a dysfunctional • A plan unveiled Jan. 5 by President Barack Obama
which could increase
U.S. Congress would really allow $1 trillion in automatic to shift the Pentagon‟s global military focus from
exports “off shelf”
cuts over 10 years to begin to take effect in January 2013. Europe and the Middle East to the Asia-Pacific
and look to bilateral
source:http://www.aviationweek.com/aw/generic region appears on its face to benefit the Air Force
activity in R&D with
/story_generic.jsp?channel=aviationdaily&id=ne and Navy at the expense of the Army
intentions to award
ws/avd/2012/01/09/10.xml • Source:Aviation daily.
¼ of contracts to
http://www.aviationweek.com/aw/generic/
SME‟s. story_generic.jsp?channel=aviationdaily&i
d=news/avd/2012/01/09/10.xml
External Shocks: Legislation

7. The US leads global defence spend, followed by Europe, and
China which is part of the emerging (BRICK‟s) market
Summary Defense Market Share 2010
•Defense is largest • Defense Budgets
segment with 71.8%
• India £30 billion next 5 years
America (52%)
•US leads the way • US £726 (£78m reduction next 5 years)
with 52% global Middle East/Africa (5.2%)
• Europe £135 billion
market share • Japan £11 billion
Europe (21.10%)
Asia Pacific (21.80%)
• China £51 billion
•Key Buyers are
• Source: SIPRI yearbook 2010
Government,
Civilian Airline and
Space Companies
• Key Aerospace and Defense buyers
are government, airline companies
•Governments tend 698 and space companies i.e. NASA.
to exceed their Source: DATAMONITOR
defense spending Defense Spending 2010 (in bln$) Global A&D report 2010
381
against agreed 281
budgets
119 100
48 60 34 59 41 28 55
 Defense is the largest
segment accounting for
around 71.8 percent
(US$660.8 billion)/UK
 source: SIPRI yearbook 2010 22%. Source: Aerospace
Global report 2011
Clearwater
Economics of Demand: Global Market Segments

8. The European defence market is led by the UK, followed by
Russia and France.
Summary
• The European aerospace & defense market had total revenues of $224.5 billion
in2010, representing a compound annual growth rate (CAGR) of 4.4% between 2006 and 2010.
The defense segment was the markets most lucrative in 2010, with total revenues of $132.3
billion, equivalent to 58.9% of the overall markets value. source: DATAMONITOR:
Aerospace and Defense Europe Report 2010
Market Share
•European market is
half that of the US
with UK, Russia and Defense(58.9%)
France holding the
largest segments
Civil
Aerospace(41.10%)
Defense Spending Europe 2010 (in bln$)
UK
Russia
16%
23%
Italy
15% Germany
4%
5% France
10% Turkey
15%
12% Spain
Rest
 source: SIPRI yearbook 2010
Economics of Demand: Market Segments- Europe

9. The main activities in the A&D industry is
manufacturing, design & innovation, and services
Summary
•Firms in A&D
industry mainly
comprise
manufacturing, servic
e-provision and
design & Innovation.
•Different
organisations focus
on different aspects
of the market.
 source: RAF internal management consultant
Economics of Demand: Market Segments- Services

10. Governments still remain the primary customers for global
A&D companies but to a lesser extent than 5 years ago
Summary
 Several A&D organisations are diversifying into private sector to escape government domination.
Governments are  As an example, QinetiQ are formerly the Defence Testing and Research Agency of the UK and are now a military service
main customers for company. They remain a partner of the UK Government, providing R & D and some training and base maintenance under a
Defence firms due to long term agreement
military issues being
in control of the state.  Defence and national security pertain to the sovereignty of the state and are generally in the control of national
governments, who purchase goods for use in their armed forces. Similar products and technological, engineering and
Many organisations manufacturing capabilities have dual use in supplying airlines and civilian aerospace, leading to companies supplying a sector
operating in the A&D known as „Aerospace and Defence‟.
industry try to  Traditional suppliers within the market are manufacturers although military service companies are increasing their presence
diversifybymovingint in the market. These companies supply services such as base maintenance ,training, security consulting and research and
o the private development. More controversially, some service companies , such as Blackwater, are involved in supplying personnel to
sector, while still conflict zones. These arms for hire cause some to question whether fully privatised armed forces or Public
retaininggovernment  Private Initiatives are the future of national armies.
alpartenrs
 Sources: Datamonitor
Thoughtraditionallyi Aerospace & Defence
nto Global Report
manufacturing, most 2010, Deloitte 2010 Global
organisations Aerospace &Defense
nowoffer a diversity industry performance
of services. wrap-up, PwC Aerospace
and Defence - 2010 year in
Governmentsarediver review and 2011 forecast.
sifyignsupploychains UK defense Statistics 2011
as A&D
companieslook to
reducetheirreliance
on a smallnumber of
clients.
Economics of Demand: Market Segments- Customers

11. Highly diversified companies win government contracts based
on technology, innovation and capabilities-Rivalry is Strong
Summary
• Shisler outlines the following areas where he sees the aeronautics and defense industry growing: Foreign military sales
•Growth products of aerospace, helicopters, and parts; Aerospace, including commercial and commercial derivative aircraft; Helicopters
linked to R&D, cyber of all kinds; New glass cockpit installations and upgrades; Omnibus contracts; New technologies that make soldiers
security, UAV and and fliers smarter, faster, and better than the competition; Government sponsored research and development;
training Homeland security, including border security; Cyber security;UAV aircraft and manned aircraft; and Training in the
countries the US is leaving. Source: US aerospace and defense spending under the gun-Zintro.com 2011
•Innovation in space
exploration leading to • The aerospace and defense industry is mainly comprised of companies that manufacture products for military use.
new technologies in This includes manufacturers of military ships, such as submarines, destroyers, or aircraft carriers, and
the global security commercial, private or government aircraft, such as bombers, fighter jets, and commercial or private airplanes, and
market the companies which manufacture and distribute the necessary parts and components for these machines. Also
included in this industry are weaponry, such as missiles or ammunition, and other defense-related technological
•Multinationals: devices, such as radar, sonar, or satellites. The aerospace and defense industry also produces spacecraft, such as those
highly diversified in used by government space administrations and commercial space tourism companies.
geography and Source:http://globaledge.msu.edu/Industries/Aerospace-and-Defense/background
products they
manufacture • global security continuing to be served by the technologies produced in this industry, and new discoveries in the
universe, enabled by the innovations in space exploration. Source:Delloitte-Midyear outlook for the global
•Competition wining aerospace and defense sector 2011
contracts is intense.
New technology and • This is a market dominated by large multinationals that are highly diversified in terms of both the products they
innovation to manufacture and their geographical presence. This protects from any unreliability in particular markets, thus easing
differentiate. Rivalry rivalry. Competition is also intense in terms of winning defense contracts and companies use innovation and new
is strong technology to differentiate their service. Rivalry in this market is strong. Source: DATAMONITOR global A&D
report 2010
•Governments more • Governments are now more interested in purchasing capabilities than equipment. Contractors are responding with
interested in through-life support rather than mere return-to-repair services. Reduced government spending means contractors are
purchasing extending their value chain into new areas such as financial, training, monitoring and maintenance, often relying on
capabilities than the right selection of outsourcing partners in areas outside their means. Source: Aerospace & defence issues:
equipment PWC.co.uk
contractors
Economics of Demand: Product Differentiability

12. Amid a retracting US market the sector continues to grow due
to higher predicted defence spend in China and India.
Summary
•Demand and growth
driven by Asia/Pacific
region
•Revenue growth
slowed 2005-2010
 Asia Pacific to grow by 9.1% by 2015 while Europe
5.1%. Source
 India 2015 forecast CAGR 13.2% and 86.7%
•CAGR 5.3% -2014 increase since 2010. Inflation 2006 6.6% and 2010
12%. source:DATAMONITOR global A&D
report 2010
•China, and India
leading growth -2029  The United States will maintain its position as the
largest A&D market, while the Asia pacific region
will experience fastest growth during the reporting
period at over 3%. source: Aerospace global
report-clearwater 2011
 Global A&D Defense Market to Reach $399 bn by 2015:
Demand in aerospace and defense market to 2015 driven
by Asia-Pacific region. Military and defense spending less
affected by recession than commercial aviation sector. US  Source: PWC.com-aerospace & defence assets-Top-
maintains position as largest A&D market source: 100-30Aug2011.pdf
BUSINESS WIRE 2011
Economics of Demand: Rate Of Growth-Global

13. Further Slides
[EDITED]
Contact me
saschamichel@gmail.com

14. Organisational efficiency and innovation is driven by creating a
highly skilled, adaptable and diverse workforce
Summary
Building a skilled
workforce requires  Action plans to develop defence industry skilled workforce The plan has four key strategies: develop and sustain industry
strategies to recruit leadership and engagement in workforce planning and skills development improve the industry‟s ability to attract and
talent, retain diverse recruit a highly skilled workforce assist the defence industry to retain an adaptable and diverse workforce develop and
workforce and promote industry-led school to VET to higher education pathways.
promote industry led  Source:http://www.dfeest.sa.gov.au
schools
Diversity is key to
driving innovation
 diversity is vital in the technology industry. "I don't believe you can have true innovation without
diversity in thought and in people
 Source:http://www.diversitycareers.com
Internal Efficiency: Organisation Effectiveness

15. A&D companies are not immune to recessionary shocks with
profitability directly linked to fixed costs, GDP and Inflation
Summary
 Many defence programmes have been terminated, and defence
•Revenue and profit budgets are scheduled for cuts in future years. Companies face
linked to global GDP more pressure than ever to improve productivity; increase
and Inflation. transparency; and respond to increasingly complex government
regulations, tighter schedules, and generally higher expectations.
•Profitability and Persistent security threats and geopolitical instability, as witnessed
operating profit recently in the Middle East, underscore the need for global
effected by fixed costs security. The A&D industry used to be hyper-cyclical, overreacting
in staffing, accurate to economic cycles. However, during the latest down cycle, the
pricing and long term A&D industry has performed more consistently through
contracts. disciplined management during the up cycle and better
preparation for the economic down cycle and inevitable decline in
•A&D industry defence spending. The steady growth and increased earnings
usually overacts to among the majority of the top 100 A&D companies reflect the
economic cycles but resiliency of end markets and improved management over the past
has performed better decade. Source: PWC A&D 2010 review and 2011 forecast.
through disciplined
management and
preparation for
downward cycles.
•Companies face
 Profitability Drivers
pressure to improve
productivity and  Technical expertise
respond to  Accurately pricing
government  long-term contracts
regulations, tighter  Source:
schedules and higher http://globaledge.msu.edu/industries/aerospac
expectations. e-and-defense/
Finance: Profitability

16. Leveraging new recourses by global value chain, and deeper
design considerations, creates differentiation and adds value
Summary
 Product development in the defence sector has tended to be driven by more purely functional criteria, which are of
The defence sector course of vital importance, but which miss the opportunity to create the significant additional value that is made
can create greater possible by deeper design consideration of usability, materials, manufacturing and „look and feel‟ factors. Until
value through relatively recently this „functional‟ approach was also the main driver in the medical sector, where it was felt that
industrial design industrial design had little to offer and “as long as the product meets the functional requirements then nothing else
input working matters”. The defence sector will increasingly recognise the opportunity to build greater value through earlier and
alongside their more comprehensive industrial design input. Source: Industrial Design in the Defence sector
clients http://www.kinneirdufort.com  A globally integrated enterprise operates
as a unified whole – integrating
Value can be created production and delivering value through a
through globally seamless network of internal and external
integrated resources worldwide
enterprises  .Serving global markets: Revenue from
local versus non-local markets, global
Sourcing hubs and clients, and global value
collaboration can proposition/differentiation/ branding
capture value in  Scope of activities: Global production
supply chains and sites, sourcing hubs, assets and
operations as global collaboration (internally and externally)
partnerships leverage  Value creation and capture: Levels of
new recourses efficiency in running production, supply
chain, and operations; the degree of
partnering and globalization for value
chain components
 Sustained value-add: Long-term
profitability by leveraging new
resources, technology, standardized
 Source: Going Global in A&D-IBM Institute business processes and innovation
capabilities. Source: Going Global in
A&D-IBM Institute
Finance: Value Creation

17. Import restrictions and tax complexities add to upfront risks
and heavy investment in long term programmes overseas
Summary • Mistakes
• A&D companies take significant upfront risks by investing • Mismanage
Changes in:
heavily in long-term programmes alongside OEMs. The • Business
•Upfront risks by ment
Conduct
investing heavily in financial impact of mistakes, changes in schedules and build • Mistiming
Policies
rates or mismanagement is high. Likewise, in the defence • Schedule
long-term Changes
• Legislation
programmes. market, management must decide on which programmes to • Build Rates
• Im/Export
pursue based on the long-term technology position they wish Restrictions
Changes in Changes
• Political
schedules, impact of to maintain and the likely build rates, timing and life cycle of • Lifecycle of
Stability
the equipment Performance on major programmes must be Equipment
mistakes and
mismanagement is well managed as it significantly affects both earnings and
high. customer relationships. This has challenged companies to
stretch their capabilities and risk profile, but the risks of
failure can be high. The long-term production cycle of a Investment in
•Programme long-term
management in long typical A&D program me makes it difficult to recover from
programmes
term contracts is key errors or mismanagement, which can lead to billion dollar
with errors and losses, changes in senior management and a loss of market
mismanagement share. Throughout the organisation, there is an emerging
resulting in billion push to streamline processes and integrate operations. At the
dollar losses operating management levels, there are increasing rewards
and penalties in the area of programme management.
•Risks include • Source: PWC A&D Continuous Improvement in
restrictions on Operating Performance
import/export, establ
ishing operations in
foreign countries, tax • Suppliers, on the other hand, are located throughout the world and are increasingly emerging from Asia. Large A&D
complexities i.e. cross companies establish special purpose entities such as joint ventures, partnerships and proxy boards to qualify as
border transactions suppliers in foreign countries and to meet offset requirements. The current international issues include: controls over
and repatriation of the restrictions on import/export of technology and products; risks of establishing business operations in foreign
profits countries; accounting and tax complexities associated with special purpose entities and cross-border affiliated
transactions; reinvestment and repatriation of profits and other A&D-specific accounting and tax issues associated with
multinational operations.Source: PWC A&D Globalisation tiering Supply Chain
Finance: Risk

18. Further Slides
[EDITED]
Contact me
saschamichel@gmail.com

19. Markets and Competitors
Where?
Portfolio
Analysis
Directional Policy Matrix

20. Portfolio Analysis
Market Growth
Size of the Blobs
 Emerging markets seen as
an obvious choice, with
India leading the way, and
potential to build strength
early on. However, to build
competitive strength would
require significant
investment and undue
risk, where an already
struggling US Arm remains
reliant on UK and global
services
 Projected growth in the long
term for emerging
markets, which might
suggest a longer term
strategy option QinetiQ to
potentially build strength
first and then look to invest
capital in
integration, acquisition and
build partnerships in these
markets

21. Portfolio Analysis
Need for Foreign Imports
Size of the Blobs
 China and Brazil show less
reliance on foreign imports
as both look to develop
domestic capabilities and
there is likelihood that they
could compete in the
exporting and
manufacturing of defense
products and systems
 China is less reliant on
imports in the short term as
Brazil waits out a medium
term strategy to waiver
support from Europe

22. Portfolio Analysis
Market Size
Size of the Blobs
 US the single largest market
with China not far behind
 Opportunities in US and UK
to select growth areas and to
invest internally to continue
to build market share and
differentiation of customers
in other federal
departments and private
sectors
 Strength in the UK is
highest, however, US still
strong. Focus could be to
develop market share
fulfilling new technology
needs in cyber security and
UAV

23. Portfolio Analysis
Concentration of Suppliers
Size of the Blobs  US shows highest
concentration of suppliers.
Winning market share and
seeking dominance is not an
option. Costly, and
competition is led by large
multinationals, manufacturi
ng across the whole supply
chain.
 It makes sense to look at
new segments within this
market either by acquisition
or by diversifying
 The private sector could
help reduce QinetiQ‟s
exposure to only one main
customer (DOD) while
sharing technology and
innovation capabilities in
horizontal markets i.e. cyber
security, energy and
networks
 Emerging markets would
require maximum
investment to build market
share and strength

24. Further Slides
[EDITED]
Contact me
saschamichel@gmail.com

25. Generating Options
Strategy Clock-Differentiation
Internal Change
 The focus is on a differentiation strategy by offering a
better service and product by driving innovation and
efficiencies through culture and efficiency changes
 A culture of cutting edge superior products at market
price
 There are future opportunities with increased budget
for cyber security across other federal departments and
by focusing on superior products and people could lead
to improved brand and reputation in a new market.
 Defense companies win on innovation and technology
but is delivered by people.
 Rather than invest externally QinetiQ can drive
behavior and satisfy the market trend of" do more with
less” and in turn build brand value when targeting new
bids for federal contracts.
 The US is an underperforming arms which by investing
internally could give stability and surety to investors
that everything possible is being done to compete head-
on.
 This strategy is the least riskiest strategy in terms of
capital outlay and suggests a “freezing” time until
embarking on more riskier M&A or geographic
strategies.
 Developing new products in new sectors via M&A
would be a second option in the long term but short
term imperatives are to stabilise the US division and
compete for new contracts

26. Further Slides
Final Recommendation
saschamichel@gmail.com