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Maity, Amitkumar and Bhat, Sangeetha and Tangri, Joshna (2012) Analysis Of The Aerospace & Defence Industry – Tata Consultancy Services. [Dissertation (University of Nottingham only)] (Unpublished)
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2012 University Of Nottingham, Business School
Group Management Project – MBA (2011-12) BY Amitkumar Maity Sangeetha Bhat Joshna Tangri
Analysis Of The Aerospace & Defense Industry – Tata Consultancy Services
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Contents
Acknowledgement............................................................................................................................. 6
Introduction – Objectives .................................................................................................................. 7
Reasons for choosing the topic .......................................................................................................... 8
Methodology ..................................................................................................................................... 9
Overall Project Approach ............................................................................................................... 9
Approach to formulate a strategy for TCS ...................................................................................... 9
Scanning the Environment ........................................................................................................... 10
Porter’s Five Forces ..................................................................................................................... 10
Findings ........................................................................................................................................... 11
Industry Analysis.......................................................................................................................... 12
Defence Market Current Scenario ................................................................................................ 12
European Markets ................................................................................................................... 12
The UK ..................................................................................................................................... 12
Market Size and Sub-sectors ........................................................................................................ 13
Sub-sectors .............................................................................................................................. 13
Major world markets for Aerospace and Defence .................................................................... 13
Defence Market size and Markets Share of Major players ........................................................ 14
Industry Concentration ................................................................................................................ 14
Opportunities in the global A&D market .......................................................................................... 15
Information Technology and Cyber security ................................................................................. 15
Emerging Markets ....................................................................................................................... 16
Exports lead the way/ Major Deals .............................................................................................. 16
Other Dominant Trends ............................................................................................................... 17
M&A deals soar high ................................................................................................................ 17
Defence divestures become more common ............................................................................. 17
Challenges in the global A&D market ....................................................................................... 17
Other Issues .................................................................................................................................... 17
Industry Risk ................................................................................................................................ 17
Shortage of Capital and human resource: ................................................................................ 17
Profitability: ............................................................................................................................. 18
Liquidity ................................................................................................................................... 18
Intellectual Capital Loss ............................................................................................................... 19
Pension Cost ................................................................................................................................ 19
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Conclusions/ Recommendations ...................................................................................................... 19
Possible Business and IT solutions that can be offered ................................................................. 20
Possible Engineering Services ...................................................................................................... 20
Limitations of PESTEL and Porter’s Five Forces ................................................................................. 21
Critiques on PESTEL Analysis ........................................................................................................ 21
Critiques of Porter’s 5 forces........................................................................................................ 21
Literature Review ........................................................................................................................ 22
Design of the study ...................................................................................................................... 23
Resource Based View (RBV) ......................................................................................................... 24
Study – Comparison of Rolls Royce and Meggit PLC ......................................................................... 27
Rolls Royce .................................................................................................................................. 27
Products/Services to the Government ......................................................................................... 27
Effect of Defence Cut ................................................................................................................... 28
Analysis _Rolls Royce ................................................................................................................... 28
Values and Culture ................................................................................................................... 28
Strategy ................................................................................................................................... 29
Scale ........................................................................................................................................ 31
Order Book .............................................................................................................................. 31
R&D Spending .......................................................................................................................... 32
Opportunities within the market .............................................................................................. 32
Core Competence – Rolls Royce ............................................................................................... 33
Trent Engines. .......................................................................................................................... 33
Competitiveness ...................................................................................................................... 33
Technology .............................................................................................................................. 34
Other Affiliation Programmes .................................................................................................. 35
Technology Framework............................................................................................................ 35
Capabilities Perspective ........................................................................................................... 36
Resources ................................................................................................................................ 36
Research Centres ..................................................................................................................... 37
Financial Resources.................................................................................................................. 37
Human Capital ......................................................................................................................... 38
Intangible Resources – Relationships and Innovation ............................................................... 38
Architecture............................................................................................................................. 38
Supplier Partnerships ............................................................................................................... 39
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Joint Ventures.......................................................................................................................... 39
Reputation ............................................................................................................................... 40
Innovation ............................................................................................................................... 40
Diversification of resources into new markets .......................................................................... 41
Resources – VRIN Framework .................................................................................................. 42
Meggitt PLC ................................................................................................................................. 43
Introduction ................................................................................................................................ 43
Government Business .................................................................................................................. 43
Effect of Defence cut ................................................................................................................... 44
Scale ........................................................................................................................................ 44
Order Book .............................................................................................................................. 44
R&D Spending .......................................................................................................................... 44
Values and Culture ................................................................................................................... 45
Strategy ................................................................................................................................... 45
Core Competence .................................................................................................................... 46
Resources for Dynamic capabilities .......................................................................................... 47
Technology .............................................................................................................................. 47
Architecture............................................................................................................................. 48
Innovation ............................................................................................................................... 50
Resource Based View – VRIN Framework ................................................................................. 50
Resources to be applied to other markets ................................................................................ 51
Comparison of Rolls Royce and Meggitt ....................................................................................... 51
Conclusion from RBV Analysis ...................................................................................................... 53
Limitations of RBV framework ..................................................................................................... 53
Strategy Formulation to remove RBV Limitations ......................................................................... 54
For Rolls Royce ........................................................................................................................ 55
For Meggitt.................................................................................................................................. 56
Company Analysis ........................................................................................................................... 57
Finmeccanica- Case Study ............................................................................................................ 57
Challenges ............................................................................................................................... 57
Recommendations ................................................................................................................... 59
QinetiQ- Case Study ..................................................................................................................... 60
Business Strategy ..................................................................................................................... 60
How objectives are achieved- .................................................................................................. 61
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Challenges- .................................................................................................................................. 61
Opportunities .............................................................................................................................. 62
Change for the Future Prospects- ............................................................................................. 62
Recommendations ................................................................................................................... 63
Disadvantages of secondary data ................................................................................................. 64
Our Learning from the project with TCS ........................................................................................... 65
References- ..................................................................................................................................... 66
Appendix ......................................................................................................................................... 75
Analysis of the Industry (PESTLE) ..................................................................................................... 75
Political Factors impacting the Industry ....................................................................................... 75
Economic Factors Impacting the Industry .................................................................................... 76
Sociological factors Impacting the Industry .................................................................................. 76
Technological factors impacting the Industry ............................................................................... 77
Environmental Factors ................................................................................................................. 78
Legal Factors................................................................................................................................ 78
Porter’s Five Forces ......................................................................................................................... 80
Barrier to Entry ............................................................................................................................ 80
Threat of substitutes: Low ........................................................................................................... 81
Bargaining Power of Suppliers: Moderate .................................................................................... 81
Bargaining Power of Buyers-Moderate ........................................................................................ 82
Rivalry – High............................................................................................................................... 82
TCS Submissions 83
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Acknowledgement
We would like to express our deepest gratitude to our Supervisor, Prof. John Colley for his
excellent guidance, practical approach, patience, and undying support while he provided us
with an excellent atmosphere for carrying out the management project.
We would like to thank Mr Amitkumar Shah who presented us with this opportunity to work
for Tata Consulting Services (TCS) where we have learnt about the company’s work culture
& procedures that are carried out in the United Kingdom. We appreciate his full
involvement in the project and his willingness to constantly review and make suggestions in
our best interest of achieving a detailed and meaningful report. He instilled confidence in us
in commencing this vast project.
Mr Shah’s contribution has been remarkable as he has provided us with exposure to the
current Aerospace and Defence industry through meetings with Professionals such as Mr
Paul Ferguson, The Business development Manager at TCS from whom we have acquired
valuable suggestion and insight about the global aerospace and defence market.
We are highly indebted to Nottingham University Business School that served as a platform
and the staff for their guidance and constant supervision in providing necessary information
regarding the project & also for their support in completing the project. We would like to
extend our sincere thanks to all of them.
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Introduction – Objectives
This is a group management project which will fulfil the objective proposed by Tata Consultancy
Services (TCS) - Strategic Analysis of Aerospace and Defence Industry.
TCS wants to offer its services to the Aerospace and Defence sector (A&D) particularly in the UK and
European markets. To achieve this objective TCS wanted to conduct a detailed analysis of the
Aerospace and Defence sector and some of the major players in this sector. The companies that TCS
wanted to study are -Rolls Royce, Meggitt, Cobham, QinetiQ, GKN, Finmeccanica, Babcock, and
Bombardier. TCS wanted to analyse each of these companies on various perspectives such as
strategic and financial (R&D, investment plans, Mergers and Acquisition plans).
Analysis of these companies in the backdrop of trends in the A&D industry would ultimately enable
us to advise TCS on various opportunities that available in the A&D industry space in Europe,
particularly the UK. This in turn would enable TCS to formulate a strategy to enter the European A&D
market where currently it has no presence. Furthermore, we would also advise TCS on any cross
selling opportunities that are available in the A&D space within Europe.
Overall, once we perform the above analysis, we would be able to recommend and suggest TCS on
the following
- Identifying the challenging factors and opportunities that are present in aerospace and
defence sector.
- Evaluating and identifying various business challenges faced by the companies, where TCS
can offer services and solutions.
- Analysing the company in terms of future strategy and drivers will enable us to understand
the outlook of the company in the near term.
- After evaluating all the above points, a strategy for TCS to enhance its business solutions
offerings within the A&D market in Europe and the UK.
For literature review we have chosen Resource Based view (RBV) as a tool to analyse the following :
’In the light of defence cuts that are impacting global aerospace and defence market; can a company
sustain its competitive advantage solely based on its resources? - An RBV perspective’’.
As part of the study we will analyse two companies Rolls Royce vs. Meggitt (emerging player) in
aerospace and defence sector through the specs of RBV.
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The main objective of this literature review is to see can these players sustain their competitive
advantage in the face of budget cut. Currently Rolls Royce is one of the leading players with 2.67%
of Global aerospace and defence market as of March 2012. (PWC, 2012) Meggit is an emerging
player currently holding 0.34% of Global aerospace and defence market. (PWC, 2012)
Reasons for choosing the topic
Global economies are experiencing budget cuts and austerity measures in various sectors (including
defence) due to unemployment and general lull in business. Under such condition it becomes a
challenge for all the firms to sustain competitiveness. Some companies consider such economic
period as a time when revenue of the firm will go down and wait for right time to act. Some
companies consider this as a suitable time to implement developmental and restructuring plans to
prepare them for economic upturn.
This attracted our attention where we could relate our company project as a live example of this
economic movement. Our team is performing the analysis of Aerospace and defence sector for Tata
Consultancy Services. We decided to consider Rolls Royce, the second largest service provider in
defence sector and Meggitt the emerging player of this sector. The reason behind selection of these
two firms is to compare the major player and emerging player in terms of their core competencies
and strengths and to analyse their strategies by which they are planning to bring about growth and
profit under such unfavourable condition.
In order to continue with the analysis and derive the conclusion from it we have used Resource
Based View framework where our focus is to find out the main resources and capabilities each firm
has and how it is helping them to compete and sustain in the present economic condition. We have
taken into consideration the financial, technical, human skills and operational aspects for both of the
companies and created VRIN framework which indicates the unique strength each firm enjoys and
how company has used it till now to develop its business. The main purpose of this analysis is to find
and compare how a big firm and a relatively small firm gets affected by unfavourable changes in
their industry sector and what are the factors that helps a big company and emerging company to
sustain and increase the profit. This is more about researching how much of a company’s
competitiveness is driven by sheer scale and how much by its core competence, innovation, R&D
spending etc.
Further we have taken into consideration the limitations of RBV analysis and have used Strategic
Performance framework where we have suggested future development scope for each firm. Under
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this section we have searched for future trends that would be beneficial for industries in aerospace
and defence industry to increase their revenue and market size. Thus we arrived at some trends and
scope for development in future which these companies can focus on and exploit them using the
resources and investment plans which the companies already possess.
Methodology
Overall Project Approach
The study would be conducted on the basis of qualitative data (secondary sources). We would go
about gathering the data through various publically available information and university subscribed
websites.
In order to go about providing TCS with the needed insights on possible opportunities to enter the
European A&D market, research through secondary sources was the appropriate route. The scope
for primary research was limited due to the following reasons,
The project scope with TCS did not entail contacting European A&D companies
Neither the University of Nottingham nor any of the members of the group had any contact
with these companies.
Approach to formulate a strategy for TCS
Before venturing into advising TCS on possible business strategy, basic understanding of the external
factors that could impact the A&D industry as a whole was necessary. This entailed a detailed
understanding of the Aerospace & Defence industry, through various strategic tools for analysis such
as PESTLE and Porter’s Five Forces model.
Once the industry analysis is completed it will enable us to find the challenges, threats within the
industry. Then we will look at possible opportunities that exist within the industry. Upon completion
of the industry analysis we will recommend the opportunities within the industry where TCS can
possibly offer its solutions.
After analysing the industry, we would evaluate the eight companies in light of the current trends in
the industry. The purpose of that is to analyse these companies to understand their weaknesses and
problems in the long haul. We aim to build a business case around the problems of the company
after carefully evaluating the current, future strategies, financial performance etc. Furthermore, we
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seek to understand from publically available sources if the entity has an existing relationship with
Tata Group. Any previous business or existing relationship could be leveraged by TCS to evaluate
cross selling opportunities within the A&D space.
Scanning the Environment
Evaluating and scanning the external environment in the context of the Aerospace & Defence (A&D)
industry is essential in understanding the changes in the competitive environment. (Henry A., 2008).
There are various tools available to monitor the external environment, to enable an organisation to
understand the trends within an industry and forecast the future direction of these trends. Ginter
and Duncan (1990) suggest that the macro analysis acts as an early warning system to predict
opportunities and threats, to develop possible responses.
PESTEL analysis is a widely used tool to understand the general environment (cited in Walsh et al,
2005). PESTEL refers to Political, Economic, Social, Technological, Legal and Environmental factors.
This tool can be used by organisations to understand the trends in general environment that will
ultimately impact a company’s competitive environment (Henry A., 2008)
Political factor evaluates the impact of changes in government policy which might impact the
industry. This includes government regulation, taxation policy. Economic factors are interest rates,
disposable income, inflation and unemployment. Social factors are generally the cultural changes
within the environment that shape consumer behaviour. Advent of new technology, obsolescence
can change industry dynamics by allowing new competitors to enter the market and gain market
share. Environmental factors have come into the picture only recently, this factor covers
environmental issues, regulations as well as stakeholder values.
Legal factors consist of legal factors that impact the industry. These factors include health and
safety, equal opportunities, advertising standards, consumer rights and laws, and product safety.
(professionalacademy.com,2012)
Porter’s Five Forces
This framework analyses the industry from the point of view of an incumbent to determine if a new
player should enter the industry (Henry A., 2008).Understanding the competitive forces reveals
industry’s current profitability and anticipating competition and profitability over time. (Porter,
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2008). The five forces that share competition in the industry are entry barriers, power of suppliers,
power of buyers, threat of substitutes, and rivalry among existing players. (Henry A, 2008)
According to Porter a competitive strategy within an organisation should aim to find a competitive
position within an industry that an organisation can defend against competitive forces. Their ability
to change the industry structure will be in direct proportion to the five forces.
Threat of entry - New entrants come in and desire to gain market share and in turn put pressure on
prices, and costs. Low entry barriers restrict the profit potential of an industry. (Porter, 2008)
Threat of substitutes – The industry profitability takes a hit when the threat of substitutes is high
(Porter, 2008)
Bargaining Power of Buyers – Powerful customers can change the industry dynamics by negotiating
for lower prices, demanding better quality of services (thus driving the costs up). Buyers are said to
have negotiating leverage if, (Porter, 2008)
Only few buyers exist, Purchase volumes required by buyers are large relative to the size of
single vendor
If industry’s products are standardized
Low switching cost to change suppliers
Buyers can integrate backwards, if vendors are profitable
Bargaining Power of Suppliers - Suppliers can benefit by charging higher prices and passing on the
costs to industry participants. Suppliers are powerful if, (Porter, 2008)
Supplier group is more concentrated than the industry
Low dependency on the industry for revenue
High switching costs to change suppliers
Products are differentiated (Porter, 2008)
Rivalry among existing competitors - If there is high rivalry among the incumbents then the industry
profitability is again limited. Particularly the rivalry can be destructive if it is solely based on price.
This is the case when the products are identical products.
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Findings
Industry Analysis
(For details on PESTEL analysis and Porter’s Five Forces, please refer to the appendix no. 1 and 2)
Defence Market Current Scenario
The defence sector remained soft largely on account of defence cuts announced by the US. The
industry is challenged by the prospect of sequestration in the US, which could trigger further cuts in
defence spending. As the president’s budget forecasted a 1.0% decline in fiscal budget for 2013 and
over $500 billion reduced budget spend in the next decade. (PwC, 2012)
The US defence spend accounts for about 53.9% of the global spend. This in turn means that the
non-American A&D companies’ business may remain the same or go a little lower. Particularly,
cutbacks in some programs could disproportionately affect European companies (Delloite, 2012).
This entails higher competition between European and US companies as they plan to tap emerging
markets.
European Markets
The European A&D market has slowed down considerably in terms of growth, with just 0.6%
increase in value in 2010-11 (Datamonitor, 2011).
The UK
Given the challenging market environment in the UK, the MoD (The Ministry of Defence) has been
encouraging reduced cost base and single source procurement. In the UK the focus of various
programmes is focused on maintaining the existing military capabilities at a lower cost. The defence
support services market in the UK is estimated to be worth GBP 16 billion per year by 2020, as
service led capabilities present future growth opportunities.
The current industry events include the following (PwC, 2012)
Increased focus on border security and intelligence
Focus on lower cost base and operational efficiencies to survive in a challenging market
Onus on securing more contracts with the UK MOD (MOD, 2012 - “National Security Through
Technology: Technology, Equipment, and Support for Defence and Security,” February 2012)
Enhanced focus on M&A (Mergers & Acquisitions) activity
Enhanced data collection and knowledge to negotiate better with procurement agencies
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Market Size and Sub-sectors
Aerospace and Defence market was valued at $1066 billion in 2010 (Datamonitor, 2011). By 2015
the market is expected to grow at 12.9% from 2010 levels to reach $1204.2 billion.
Sub-sectors
The global aerospace industry can further be sub-divided into commercial aircraft and defence.
Within the industry defence accounts for about 74.2% of the overall market. (Datamonitor, 2011)
Major world markets for Aerospace and Defence
Countries in the US and Europe are the dominant markets. America accounts for little more than half
of the global market revenue. Developing nations like China, India, Mexico and Brazil are emerging
as leading markets. (Wordpress, 2012)
14
Defence Market size and Markets Share of Major players
Defences market (excluding maintenance revenue) was valued at about $677 billion in 2011. (PwC,
2012). According to PWC the Market Share of top-5 players in the market is as follows
Industry Concentration
Market Share of Top-5 players alone represents 36.5% showing a rather concentrated share among
few industry giants.
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Opportunities in the global A&D market
Information Technology and Cyber security
Although the military budgets are cut worldwide, the military is investing heavily on
information technology. There is scope for information systems to store information and
enemy tactics. IT solutions for real time information processing and management for
strategic decision making.
Cyber security is another area where governments around the world are investing into.
Cyber security market was about USD 63.70 billion in 2011, Market is expected to grow at a
CAGR of 11.3% to reach USD 120.10 billion by 2017. UK Support Services Market is
estimated to be 16 billion by 2020.
Unmanned Aerial Vehicles (UAV) demand is high; the global market is expected to grow
exponentially to USD 86.50 billion in next decade. Globally the market is expected to grow
4.28% till 2015 (7.26 billion). The US budget allocated USD 2.50 billion for additional UAV
Key Players will be AeroVironment Inc., BAE Systems plc. Israel Aerospace Industries Ltd.,
The Boeing Co., etc.
Other defence segments that are in demand for national security priorities are cyber-
security, satellites, missiles and nuclear defence. With China leading the way, Informatized
war” is an integral component of defense tactics. (qfinance.com,2012)
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Emerging Markets
Defence companies have started to focus on growth markets of India, Brazil, Middle East and South
East Asia. Although, the entry barriers in these countries are tricky. Frost and Sullivan (2012) predict
that Asia’s overall budget will account for 32% of the defence spending worldwide by 2016, up 24%
from 2007. On the other hand North American share is expected to fall from 39% to 29%.
Exports lead the way/ Major Deals
- Much of the increase in defence exports has been supported by growing military power in
Asia as China is enhancing its military power as tension between North Korea and South
Korea escalates. In 2011, the defence export deals increased to $327 billion, in terms of
backlog. With growth of emerging economies, the opportunity for defence exports has more
than doubled from 2006 till 2010. Some of the major industry deals include,
Saudi Arabia has orders on 84 F-15s and 70 upgrades, worth $30 billion (PwC, 2012)
• Dassault Rafale fighters valued at $10 billion were selected by India (PwC, 2012)
• Next generation fighter F-35 was selected by Japan, for about $8 billion (PwC, 2012)
• Taiwan has order to upgrade F-16 fleet, $6 billion (PwC, 2012)
• The United Arab Emirates bought $3.5 billion worth of THAAD missiles (PwC, 2012)
• 10 C-17s were bought by India for $2 billion (PwC, 2012)
• Turkey confirmed orders for 100 F-35s valued at $16 billion(PwC, 2012)
India particularly remains a growth market, as the country is expected to spend $100 billion on its
military in the next decade. Boeing is one of the leading companies that will provide new system to
replace India’s old fleet of MiG-21 fighter jets made in Russia. The fighter jets F-18 of Boeing
compete with F-16 made by Lockheed Martin, the Russian MiG-35 fighter, the French Rafale
(Dassault Aviation), JAS-39 Gripen (SAAB) from Sweden, and the European Eurofighter Typhoon
(EADS). (qfinance.com, 2012)
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Other Dominant Trends
M&A deals soar high
2011 saw many strategic transactions within the A&D industry. 341 deals worth $43.70 billion were
announced in 2011 compared to 332 deals in 2010. At the beginning of 2011 global A&D companies
had a total of $49.50 billion in free cash flow. (Delloite, 2012)
Defence divestures become more common
As defence cuts loom, most defence companies are forced to focus on being efficient. This in turn
reflects a slew of divestures of slow growth defence deals and private equity exits. PwC expects the
future M&A activity to grow in 2012. (PwC, 2012). The sector would streamline further as divesture
of non -core assets escalates, Delloite also foresees some strategic acquisitions
Defence M&A is likely to be around large spin offs. Furthermore, as the defence budget is expected
to fall further the industry is more than likely to consolidate (PWC, 2012). For more information on
large deals of 2011, (refer appendix no. 3).
Challenges in the global A&D market
The financial performance of industry players is likely to be challenged on account of lower
opportunities for revenue growth (Delloite, 2012)
Cost pressure to remain profitable in the industry are mounting, as companies face margin
pressures.
As the industry is likely to undergo more stream lining of its cost structure, mergers and
acquisitions activity is on the rise.
Other Issues
Industry Risk
Shortage of Capital and human resource: The risk and obstacles the A&D firms are facing at present
scenario is mainly concentrated around capital and human resource.
Long time lag exists between the manufacturing and final sales. Thus, there is an inherent risk of
order cancellation and a consequent sales backlog that could arise in an economic downturn.
Further, few factors that aggravate the risk are the huge amount of capital required for Research
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and Development (R&D) activity as well as the time to develop new product and technologies to
satisfy the future market. The R&D activity is considered as sunk cost and profits are uncertain and
do not materialize quickly. Thus R&D program puts pressure on profitability and creates additional
risk regarding expected cash flow.
Profitability: Higher the operating margin lowers the risk company will default on its interest and tax
obligation. Although the margin for CSIS Index is higher today than past decades, it has been
constantly lower to those of commercial Indices.
Operating Margin comparison, CSIS Defence Index and Commercial Benchmarks, 1990-2010
Liquidity: Current Ratio is the ratio of current assets to current liabilities. Higher ratio implies that
the company is capable of meeting its current obligation with current assets. Current ratio for CSIS
index is constant but slightly lower than other commercial indices.
Current Ratio Comparison , CSIS Defence Index and Commercial Benchmarks, 1990-2010
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Intellectual Capital Loss
The risk of intellectual capital loss from both retirees and new entrants has heightened due to the
fact that fewer students are obtaining degrees in science, technology, engineering and mathematics.
The graduates from these fields have decreased from 32% in 1995 to 27% in 2004. This could raise
question on ability of the industry to create new products and satisfy demand. (As on 12 July, 2012).
Refer appendix ii for more details
Pension Cost
One more challenge for A&D defence firms today is the pension cost. As pension plans return are
directly linked to the stock market return the drop in stock markets affected the pension liabilities as
company cash flow decline. So firms are facing the financial cost arising from scare liquidity and
volatility in the capital markets and economic policy measures like decreasing the defence budget.
(Delloite, 2012)
Conclusions/ Recommendations
As the defense industry gets more competitive, the aerospace and defense companies are focused
on product innovations, and services. Furthermore, taking on a hybrid approach the companies aim
to maintain a lean operating model. In addition, the companies will look for ways to identify new
market opportunities and partners for collaboration.
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In light of these events, the businesses are likely to focus on updating their databases, IT systems
and systems to enhance customer relationships (KPMG, Business Pulse Survey, 2012)
Possible Business and IT solutions that can be offered
Customized business Intelligence platforms to track right mix of products and markets
Enhanced IT systems, databases to track costs and lean operations
Platforms and services in social computing (This solution is offered by Infosys at the moment
to Aerospace). (Infosys.com, 2012) Advanced offerings in Product Life Cycle Management
(PLM) and Enterprise Resource Planning(ERP) offerings.
Supply chain solutions as companies seek agile supply chains (Mc Kinzey, 2012) by deploying
end to end visibility of inventory, and improving the process of asset tracking, logistics
communications.
Possible Engineering Services
Design Services in satellite and missiles – these are the possible products that are going to
be high in demand
Particularly with its Avionics Solutions offerings TCS can focus on offering avionic systems
integrated with hardware and software solutions in the cyber security, safety and mission
critical military systems.
TCS can further enhance its end-to-end engineering solutions to offer better quality services
through its offshore centers. Company directors/C.E.Os. have cited cost reduction initiatives
as key area in 2012 (Refer appendix no.4), KPMG 2012.
TCS can also invest in building on communication platforms to facilitate real time
information exchange as ‘Informatised war’ escalates (qfinance, 2012)
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Limitations of PESTEL and Porter’s Five Forces
Critiques on PESTEL Analysis
By comparing various views on PEST analysis from various authors (Burt et al) we find that there are
arguments that challenge the usefulness of PEST analysis. The factors considered in PEST analysis are
of limited help to an organization in exploring and understanding the total business scenario,
because they bring up generic factors, fail in delivering understanding of the interrelationships and
interdependences among variables, and provide incomplete understanding of the (potential)
External drivers of change. (BURT et al,2006)
In our case this argument holds good. Aerospace and Defense sector is very volatile in terms of
political, economic, technological and social. The environment in which this industry sector works in
dependent on various other factors. The change in oil price, emplacement, CO2 emission, defense
budget allocation, market competitiveness and various other factors can affect the A&D sector.
In order to have complete analysis we think that only PESTEL analysis is not enough. It must be
combined with various other analysis and frameworks where more in-depth information is available
to the managers so that decision making process can be done with full information and confidence.
The same indication is given in journals by (Philip Walsh and Burt et al) where they stress on
combining PEST analysis with scenario planning and internal resource analysis. The combination of
both the traditional approaches and the scenario approach will help the firm in constructing the
future strategy in a changing environment
Critiques of Porter’s 5 forces
Porter’s 5 forces only cover the macro analysis, i.e. at the industry level, as opposed to the analysis
of more specific product-market segments at a micro level. As in aerospace and defense industry the
overall structure of all the companies in this sector are nearly same it is the product and service
segment that differentiates them from their competitors. So this model does not provide all tools to
analyze competitors. The model does not provide full analysis of complex market structure. The only
focus on particular segments of such industries, however, bears the risk of missing important
elements. For example our analysis about the companies in A&D sector reveals the complex network
in procurement sector for every company. As each component is integration of numbers of parts
22
supplied by various suppliers. It is very difficult to analyze the relation or dependency of supplier and
buyer. ( Grundy,2006)
The model takes into consideration relatively static market structures. This is not the case in A&D
sector. In present fast paced markets technological breakthroughs and dynamic market entrants
from start-ups or other industries completely change business competition, entry barriers and
relationships along the supply chain within short times. The live example is before us where Tata
Consultancy Service is planning to enter and develop their business in A&D sector. Looking at the
profile of TATA group one can cast less doubt on this plan. (TCS services and offering description in
Appendix no.4)
The model revolves around the idea of competition. It assumes that companies try to achieve
competitive advantages over other players in the markets as well as over suppliers or customers.
With this focus, it neglects other strategies like strategic alliances, electronic linking of information
systems of all companies along a value chain, virtual enterprise-networks or others.(
TheManager.org,2012). In specific to our project we have found that companies in A&D sector have
undergone consolidation where companies on both sides have certain advantages, as conditions
affecting the sector are changing rapidly.
But 5 forces model be more effective and applied ‘systems thinking’1. This helped us to determine
the industry attractiveness. It is not limited to simplistic focus on relative market growth rates. This
helped us to find out the factors, which should be considered while comparing companies operating
and competing on different product platform. The model also provided initial and start point to start
the industry and company analysis. (Grundy et al, 2006)
Literature Review
Research methodology is systematic approach to solving a research problem. There are two
approaches to research –(1) qualitative research (2) quantitative research (www.bignerds.com,2012)
The research for the above topic is conducted through qualitative research. Qualitative research is
“an inquiry process of understanding” where the researcher develops a “complex, holistic picture,
1 Its essence is seeing inter-relationships rather than linear cause-and-effect chains, and in seeing processes of
change rather than snapshots (Senge).Systems thinking is a way of interpreting the universe as a series of interconnected and inter-related wholes. It is a way of identifying the inherent organisation within a complex situation and has been called organised complexity-http://www.reallylearning.com/Free_Resources/Systems_Thinking/systems_thinking.html
23
analyses words, reports detailed views of informants, and conducts the study in a natural setting”
(Creswell, 1998, p. 15). In this method the research is conducted through the lens of constructivist
(Guba & Lincoln, 1982) and advocacy perspective (Mertens, 2003)
As part of the study we will evaluate the two companies through the lens of Resource Based View of
the firm. For the purposes of the study we use qualitative research – secondary methods. The use of
secondary sources data refer to use of existing data to answer a research question that differs from
the one in primary study (McArt & McDougal, 1985; McCall et al 1991). The scope for conducting
interviews did not make sense simply due to the lack of contacts with the company either by the
students or the university.
Design of the study
(1) Data Collection
The qualitative approach to the study entails that the data be collected on both companies –
Rolls Royce and Meggitt PLC to understand the competitive advantages, competence of the
firm as well as firm resources. Here most of the data for the study is taken from respective
company websites, conference calls and investor presentations.
(2) Data Analysis
As pointed out by Merriam (1998), in qualitative analysis collection of data as well as
analysis are taken up simultaneously. Data Analysis involves application of logical or
statistical techniques to evaluate the data. Here we have relied on prevalent management
research to support our analysis and findings. According to Shamoo and Resnik (2003), these
analytical procedures “provide a way of drawing inductive inferences from data and
distinguishing the signal (the phenomenon of interest) from the noise (statistical
fluctuations) present in the data”.
The steps in data analysis include,
Primary evaluation of data
Analysis of data using Resource Based View (RBV) framework to identify the core
competence, and resources of the companies
24
(3) Inference and Analysis
Analysis of the data to answer and evaluate the research question. It needs to be pointed
out here that the analysis of qualitative data is subjective and suffer from lack of consensus.
(Mittman et al, 2001)
As the study is conducted solely based on information that has been published on the public domain,
the limitations are that the data may not be validated. Although there is a wide ranging argument by
researchers that validity is not applicable to qualitative research. Creswell & Miller (2000) argue that
researcher’s perception of validity affects the validity itself. (Jandagh et al, 2010)
Furthermore, there is scope for bias given the interpretative nature of the research. (Ivankova, 2002)
Resource Based View (RBV)
The resource based view of the firm was introduced in 1991 where resources and capabilities of an
organisation were used to understand the sustained competitive advantage of a firm (Barney,1991).
The basic ideas of the concept were established nearly two decades ago- (e.g., Barney 1991;
Henderson & Cockburn, 1994). Each firm has its unique resources and this heterogeneous element
confers differences in competitive advantage and thus performance (Hammel et al, 1990; Reed at al,
1990). It is important to note that not all resources can be source of competitive advantage. The
resources that are valuable, rare, inimitable and non-substitutable create a sustained competitive
advantage. Firstly, the resource ought be valuable (Barney, 1986, 1991,1997). Second, the resource
be rare (Barney, 1986, 1991, 1997).Third, the resource must be hard to imitate (Barney, 1991, Collis
et al, 1995). Fourth, there should not be an available substitute for the resource (Barney, 1991,
1997; Collis and Montgomery, 1995; Dierickx and Cool, 1989). Lastly the resource should not be
easily tradable (Dierickx et al, 1989 and Peteraf, 1993).
Strategic capability of a company is derived by both resources and its competencies. "Strategy is
likely to be expressed in broad statements both about the direction that the organisation should be
taking and the types of action required to achieve objectives".(Johnson, Scholes, & Whittington,
2009). The strategic capabilities enable an organisation create value by "seek to build competitive
advantage" (Johnson, Scholes, & Whittington, 2009).
With the Resource based view of the firm the competitive advantages and performance of the firm
is explained, as the resources are distinct. (Johnson, Scholes, & Whittington, 2009). Resources of the
firm are said to be valuable in a market and it can act as an entry barrier. Economies of scale with
the use of resource are prime example of entry barrier. If the resource is a position barrier then it
25
may be irrational for a new entrant to buy the resource. Overall, RBV of the firm explains better
performance of firms and thus the competitive edge. Superior performance is measured in terms of
increased profits, sales and market share.
Core Competence of a firm came to the forefront with the recognition of intellectual
capital/property as source of differentiation. This was largely a criticism of Porter’s five forces as it
failed to identify resources through which companies can enhance their competitive edge. (Hafeez
et al, 2002). Prahalad and Hamel’s influential use of the term core competence was more so to refer
to collective learning and resources that are difficult to imitate. Core competence by definition
should provide access to a range of markets. (Hamel, 1993)
The competence view of the firm brings out the fact that core competence is not discrete assets.
Rather core competence offers a unified framework for diversification and unique resources and
learning. Core competence is an integrated, collective learning of the whole organisation (Prahalad
and Hamel, 1990). Integral to the concept of core competence is core technologies. Also, the ability
of the organisation to unify multiple technologies is what differentiates the firm. ‘Creative Bundling’
of many technologies and customer knowledge is what creates a competitive advantage.
Test of Core Competence is three staged.
- Is it offering competitive differentiation
- Is this spread, diversified across business?
- Is it difficult for the competitors to imitate
As RBV evolved, a new perspective of capabilities was added to overcome shortcomings within RBV.
Dynamic capabilities defined as (Eisenhardt and Martin, 2000; Teece et al., 1997). ‘’ the capacity to
renew competencies so as to achieve congruence with the changing business environment” by
“adapting, integrating, and reconfiguring internal and external organizational skills, resources, and
functional competencies”. Basically these dynamic capabilities are built than acquired in most cases
(Makadok, 2001). Therefore learning is at the heart of dynamic capabilities (Zollo and Winter, 2002)
The Dynamic capabilities perspective has been proved essential to understand how firm has
acquired and resources, renewed and reconfigured for the firm to survive (Danneels, 2002). Firm can
also enhance capabilities by getting rid of some redundant resources or bringing together resources
in new ways (Simon and Hitt, 2003).
Other important concept that has evolved from RBV is the distinctiveness of organisation’s resources
that confer competitive advantages Kay (1993). These distinctive capabilities are classified into three
26
areas – architecture, reputation and innovation. Architecture refers to a company’s relationships and
contacts that exist inside and outside the firm.
Within the framework of RBV various other research have related to resources. These include
resources and diversification (Harrison, Hitt, Hoskisson, & Ireland, 1991), organisational identity as a
resource (Fiol,1991), key executives as resources (Castanis & Helfat, 1991)
Key resources include intangible assets that include patents, copyrights and client trust,
relationships. Also, the capabilities such as skills and knowledge are intangible resources. (Hall 1993,
Barney & Wright 1998; Smart and Wolfe, 2000). Here even competitive advantage is explained by
superior customer value that is translated into competitive advantage.
According to (Wernerfelt, 1984; Barney 1986) with the recent development in RBV of the firm, the
assumptions that strategy implementation process can be looked into out of the context of content
of the firm’s strategies is not appropriate. The strategy implementations skills have to be related to
particular strategies that implemented by the firm. Resource based view highlights the importance
of behavioural and social phenomenon in helping firms to formulate and implement their strategies
(Barney 1986b, 1991).
According to Schein (1985), culture is defined as a ‘’pattern of basic assumptions – invented,
discovered, or developed by a given group as it learns to cope with the problems of external
adaptation and internal integration’’. Cartwright and Cooper (1992) noticed the significance of
organizational culture. According to them organizational cultural contributes in understanding the
merger phenomenon both in terms of its impact on organizational performance and on the
managers and employees involved.
RBV explains Competitive advantage, from the RBV perspective is achieved by focusing on and
exploiting the firm’s internal characteristics, specifically its resource pro- file (Rumelt, 1994; Hamel
and Prahalad, 1994).
RBV approach identifies human capital, in which the Ž firm invests as the potential source to create
superior performance. Thus, the RBV of the firm offers an explanation for possible link between
success of the company and HRM ( Wright et al., 1994, 1998; Lado and Wilson, 1994; Kamoche,
1996; Mueller, 1996; Boxall, 1996; Guest, 1997; Barney and Wright, 1998)
Competitive advantage is normally created by natural resources, technology, economies of scale,
creates value, and may be easy to imitate vis a vis employment systems (Becker and Gerhart, 1996:
27
781). A good HR system may particularly impart sustained competitive advantage (Lado ae al, 1994;
Wright et al., 1994).
Study – Comparison of Rolls Royce and Meggitt PLC
Rolls Royce
Rolls Royce is a leading company that offers power systems and services in civil and defence
industry. The company designs, engineers and markets commercial and military aero engines as well
as aftermarket services. The company ranks second largest provider of defence and aero engines.
Products/Services to the Government
The Engines that are developed by Rolls Royce are made in a time of about 3-5 years, and an engine
could be in service for about 30 years. (rollsroyce.com, 2012)
Rolls Royce is the leading engine provider for military transport aircraft, Rolls Royce provides engines
for C-27J, C-130J and V-22 Osprey and supports 2800 fixed and rotary wing aircraft with the US
army. Within civil aerospace, Rolls Royce has 34% market share in business jet engines.
(rollsroyce.com, 2012)
Rolls Royce derives very small revenue from the UK, with Europe constituting only 30% of its
revenue. Emerging economies of Asia and Middle East represent higher chunk of order book.
(Source- Rolls Royce Data pack 2012)
28
Effect of Defence Cut
Rolls Royce (RR) is not worried about US defence cut of $487billion. With 18000 operational engines
globally RR holds solid portfolio of products. Only 20% of RR business resides in defence aerospace
and rest in Civil aerospace. Also civil aerospace has project growth for next few years for which
services by RR will be required. RR is working on 2 US Air Force engine development projects: the
Embedded Turbine Engine and Adaptive Versatile Engine Technology, and see no need to cut jobs in
present scenario. (defesenews.com, 2012)
Rolls Royce revenue performance has been good, reflecting higher engine deliveries and services
opportunity provided by the installed engine base. Although, the impact of defence cut can be felt
by decline in order book. ((Source- Rolls Royce, 2012)
The defence cut in the UK has mainly been in personnel rather than equipment. The UK defence
spending is currently around $21.8 billion. Defence cut in the UK may not have an impact on Rolls
Royce given the fact that it derives more revenue from international markets.(cnbc.com, 2012)
Analysis _Rolls Royce
Values and Culture
Built on trust, driven by performance
Rolls-Royce has built and maintained its image with integrity, reliability and innovation.
Irrespective of country and people, RR gives utmost importance in maintaining good relation
with its customers and considers it as a platform on which the reputation is built on and
maintained.
Delivering high performance and making their professional fulfilment a priority are
important steps by which RR creates trust and delivers excellence to clients. Rolls-Royce has
gained the trust because of its performance. It has created high expectations and unlocked
potential ideas. Rolls Royce always recognises exceptional contributions and inspiring others
to reach the same heights.
29
RR culture has always supported continuous personal and professional development. In
2010, more than 34,000 Rolls-Royce employees, from 55 countries, attended up to 94,439
hours of training. Also provided over 2,400 learning solutions related to health, diversity and
ethics, to safety and the environment and corporate and management responsibility.
Rolls-Royce encourages everyone to create their own tailored development programme
,which includes professional accreditation and support with professional membership.
(rollsroyce.com, 2012)
Strategy
Strategy- Due to vision and continuous pursuit for excellence over the past 20 years, RR have
secured consistent growth in four long-term markets: marine, energy, and civil and defence
aerospace, by following this strategy over the next 20 years, RR is positive that the total business
opportunity available in the markets will be over $2 trillion. (Rolls Royce, 2012)
Rolls Royce has a solid revenue stream through aftermarket services, around 2/3 of aftermarket
revenues are due to long-term services agreement and 1/3 is from T&M. In Civil about 3/4 is from
aftermarket and about 1/4 of it comes from time and materials
Global markets- The 4 Global markets for RR are Civil aerospace. Defence Aerospace, Marine and
Energy. As per the business reach RR is catering to large customer base with respect to each of the
markets. With large product and service portfolio and presence in more than 100 counties explains
the reach of RR.
3034
1134 1070 445
Civil Aerospace Defence Aerospace
Marine Energy
Revenue (£m) 2012 HY
30
The International Air Transport Association (IATA) calculates that global air transport revenues
increased by 9.3% to $597 billion in 2011. However net profits halved from 2010 with the net profit
margin narrowing to 1.3% in 2011 from 2.9% in 2010.
In 2012, global revenue is forecast to continue rising – by 5.7% over the year mainly due to rising
passenger numbers. (Barclays.co.uk, 2012)
China-US aviation cooperation program research indicated that till 2015, China will need 1,997
general aviation aircrafts, 1,415 aircrafts for training and private flying, represented a compounded
growth of 21%. CAAC (Civil Aviation Administration of China) forecasts that, the general aviation
aircrafts will grow at a compound rate of 22% and exceed 10,000 at 2020, - (General Aviation, 2012)
As there will be demand and market growth for civil aerospace sector but doubt has been raised on
the net profit increase. So it would be challenging for RR to increase its market share and also
increase the profit margin. (Damodaran, 2012)
Industry Name Growth in Sales
Aerospace/Defense 9.41%
Heavy Truck & Equip 7.38%
Maritime 5.93%
Oilfield Svcs/Equip. 17.02%
Power 43.06%
31
Scale
2011 2010 2009 2008 2007
Revenue 11277 10866 10108 9147 7817
Order Book 62.2 59.2 58.3 55.5 45.9
Engine Deliveries 1853 1657 1600 1621 1439
Installed Thrust 400 382 367 348 334
(Source- RollsRoyce.com)
Rolls Royce has very high scale in terms of number of engines delivered. Within the Engine market,
Rolls Royce has the second largest producer of aircraft engines after General Electric. According to
Rolls Royce, aircrafts powered by its engines take off every 2.5 seconds. (economictimes.com, 2012).
The company intends to double its Trent engine production over the next five years.
(seekingalpha.com, 2012)
Order Book
Rolls Royce felt the pinch of the defence cut, according to the latest order book as on July 2012.
Order book as on 2012 declined by 8% due to budget cutbacks by customers in North America and
Europe. The company reported order cancellations of £0.40 billion, as the US DoD cancelled C27J
aircraft.
H1 12 H1 11 Change
Order book (£bn) 5.5 6.0 -8%
Engine deliveries 393 330 +19%
Underlying Revenue (£m) 1134 1088 +4%
Underlying OE Revenue (£m) 559 504 +11%
Underlying Service Revenue (£m) 575 584 -2%
Underlying profit before financing (£m) 196 219 -11%
*Source (rollsroyce.com, 2012)
32
R&D Spending
*Source (rollsroyce.com, 2012)
Opportunities within the market
DREAM (ValiDation of Radical Engine Architecture systems) is a large multinational FP7 R&T project
that is the response of the engine community to reduce CO2 emissions and militate against any
future shortages and increased cost of Jet A1 fuel. The objectives of DREAM are to reduce
SFC (Specific Fuel Consumption) and CO2 by at least 27% and community noise by 9dB cumulative
compared with the current Y2000 turbofan engines. Rolls-Royce has allocated total budget of 40
million Euros to DREAM in three years’ time period. DREAM has over 44 partners (OEMs, SMEs,
Universities and Research establishments) in 13 countries from within the EU, Russia and
Turkey.(RollsRoyce.com, 2012)
U.S. Air Force’s Adaptive Engine Technology Development (AETD) program, intends to bring forth
fuel-saving features for future bombers, sixth-generation fighters and tactical aircraft. It has become
the point of attraction for many defence companies. General Electric, which was formerly in
partnership with Rolls on the cancelled F136 – the alternate F-35 engine – also is bidding for AETD.
Rolls and GE compete neck to neck on the Highly Efficient Embedded Turbine Engine (Heete)
program, that offers extreme high-pressure-ratio core technology which saves fuel by 35%
compared to the existing engines.(Aviationweek.com, 2012)
381 403
379
422 463
0
50
100
150
200
250
300
350
400
450
500
2007 2008 2009 2010 2011
£m
33
According to the report by UK trade and Investment, UAE is seen as the potential customer for
Defence and Security Market. Potential suppliers are USA, France, Germany, Switzerland, and UK.
The key customers are Bahrain, Jordan, Tunisia, Oman, and Kuwait.(UK Trade & Investment,2012)
Core Competence – Rolls Royce
Prahalad and Hamel contend that sustained advantage is achieved by core competencies that
involve ‘’ "the collective learning in the organization, especially how to coordinate diverse
production skills and integrate multiple streams of technology" (cited in Smith, 2008)
For Rolls Royce, its core competence is offering engines that power the civil, defense, marine and
energy sectors globally. Rolls-Royce’s success against GE Aircraft Engines is based on a strong
product range and superior technology. Rolls-Royce has the largest portfolio of engines and most
civil aircrafts use Rolls Royce compared to any other company. Rolls Royce powers more than 13000
engines and 300 types of Commercial Aircraft the world over.
Offering Engines within transport – Aerospace & Defence. The company is the second largest
provider of defence and aero-engine products globally – transport, combat, training,
helicopters, reconnaissance, and unmanned aerial vehicles. (rollsroyce.com,2012)
Submarine propulsion- design, supply and support of nuclear steam raising plant (NSRP)
Trent Engines.
Trent family of engines of Rolls Royce are a differentiated family of engines that power over 50% of
the modern day aircraft. The unique feature is the hollow titanium fan blades that produce strong
propulsion (85% engine trust) while minimising engine noise.(RollsRoyce.com, 2012)
Competitiveness
Rolls Royce has high competitiveness, for Airbus A 380, Rolls Royce Trent Engine faces competition
from GP72000 offered by the General Electric as well as Pratt & Whitney Alliance. Here as the
aircraft engine market is protected from any monopoly with an intention that no supplier gains a
dominant market position to dictate engine price. Therefore, the competitiveness is determined by
34
technological advancements. Given the cost of engine development, technological breakthrough is
sought to gain market share.
The differentiating factor for two engines is based on cost efficiency. The differentiating factor for
Trent Engines is the fact that it has slightly higher thrust of 3.0% (www.ktwop.wordpress.com, 2010)
Technology
Rolls Royce’s present competitiveness in the industry is attributable to its superior technological
capabilities – three shaft architecture of its turbofan engines. ‘’ Moreover, three-shaft engines are
simpler, shorter, lighter and more rigid than competing engines based on two-shaft architectures
three-shaft engine to sustain high levels of performance throughout its life, thus resulting in low
maintenance costs’’ (Williams, 1995). During 2011 alone the company filed 475 new applications for
patents. (rollsroyce.com, 2012)
Path Dependency: The technology used in Trent is difficult to replicate as it has taken over ten years
of development to reach the current state of offering (rollsroyce.com, 2012). Rolls Royce engines
power mission critical aircrafts in defence – RQ-4A Global Hawk, MH-6 Little Bird Helicopters with
the US army. Rolls Royce engines power helicopters used by 160 militaries in 130 nations. Rolls
Royce is part of the Joint Striker Fighter (JSF) world’s largest ever fighter program.
35
RR engines power over 23% of US military aircraft
Over 4500 current and planned US military aircraft and ships
About 1200 of Rolls Royce powered rotorcrafts serve the US Army (rollsroyce.com, 2012)
Technology on its own cannot be a core competence. Technology along with tacit learning of the
whole organisation is what constitutes core competence. It is the ability of the firm to harmonise
multiple technologies. (Prahalad et al, 1993)
Major performance benefits as below give an edge over competitors by creating superior customer
value. (rollsroyce.com, 2012)
Weight reduction of about 30%
Engine health monitoring , with complex software to transmit data while aircraft is in flight
Long on-wing life and low maintenance costs
The installed Engine base is very high to drive aftermarket services business (Rolls Royce Annual report, 2011)
Other Affiliation Programmes
US Air force Adaptive Versatile Engine Technology (ADVENT), the company continues to
invest in mission ranges that reduce fuel consumption
Development of Electrical and thermal management system for US Air Force Research Lab
(AFRL) and Integrated Vehicle Energy Technology (INVENT) – (rollsroyce.com, 2012)
Technology Framework
Rolls Royce is an organisation driven by technology. Rolls Royce has continually invested in
development of technology through a structured framework. The study found that in Rolls Royce
information systems help in Technology Road Mapping and Risk Management. This enhances
collaboration across global businesses. (Foden et al, 2010)
36
Technology Management Framework for Rolls Royce
Capabilities Perspective
Capabilities that allow sustaining a competitive advantage in the face of changes in external
environment. Dynamic view of resources explains how dynamic capability confers an adaptive
change to given resources. These capabilities are important to sustain rent streams. (Ambrosini et al,
2009) Overall, resources can be disadvantageous if resources are not refreshed (Barton, 1992). Firms
need to look at new ways to create extend and modify resource base (Helfat et al, 2007)
Resources
Resource based view translates competitive advantage into financial, physical, human and
technological capabilities (Hofer and Schendel et al, 1978),
Financial Resources – Invest in research programmes, attract the right people, collaborate
and acquire other companies
Physical Resources : Testing, training facilities for developing and testing products and IT
Intangible Resources : Skilled People, Integrated teams with technical skills
Innovation : In house (internal) and external (acquiring companies)
37
Research Centres
Rolls Royce does not own any if its research centres. Its research is conducted through university,
and some of the wold class academics and research teams. Partnerships with leading academic staff
globally - combustion and aerodynamics to noise and manufacturing technology. The continuous
research and investment in technology is what differentiates Rolls Royce.
Rolls Royce’s investment in low carbon technology should serve the company well, as particularly
governments are encouraging such technologies. Particularly the US DOD – EIO (Energy Initiatives
Office) has reiterated that the army has a goal of attaining 25% of Energy needs from renewable
sources by 2025.2 (c2es.org, 2012) The UK also has supported the low carbon technology as; HM
Government seeks to reduce greenhouse emission by 80% by 2050. Defences accounts for 10% of
emissions in the UK.3 (decc.gov.uk, 2012)
Financial Resources *Source (rollsroyce.com, 2012)
2011 2010 2009
Debt/Equity Ratio 0.26 0.51 0.92
Current Ratio 1.2 1.6 1.3
Quick Ratio 0.9 0.9 0.9
Interest Coverage 5.2 10.3 32.9
Leverage Ratio 3.2 2.9 2.9
Book Value/Share 22.74 27.79 27.4
2 http://www.c2es.org/blog/wurzelmanns/strong-defense-low-carbon-innovation-and-low-carbon-innovation-
strong-defense 3 http://www.decc.gov.uk/assets/decc/What%20we%20do/A%20low%20carbon%20UK/1358-the-carbon-
plan.pdf
38
Human Capital
The company continually invests in developing the employee base. As it is the company attracts
highly talented engineers and researchers from around the world. In 2011 alone the company
invested £38 million on their learning. Besides the company has 3500 online learning centres in
2011. The revenue per employee was as high as £27400, indicating skilled labour force.
(rollsroyce.com, 2012)
Intangible Resources – Relationships and Innovation
Heskett et al., 1994 identify Customer satisfaction is the key to achieve customer loyalty. Customer
satisfaction on the whole is recognised as a better predictor of intentions to rebuy than overall or
inferred service quality (Liljander and Strandvik, 1995a).Certain technical features of the product or
supporting services when added to the basic solution in order to enhance the value of offerings to
the customers. (Christopher et al, 1991)
Architecture
Exclusive Contracts Customers
Civil
Trent XWB – Exclusive contract for Airbus 350
Trent 700 for Airbus 330
Trent 900 engine for Airbus (selected by 11 out of 16
airlines)
Defence
EJ200 Engine for the Eurofighter programme
Renewed contract with US Navy – Adour F405 Support
Contract 2011
AE2100Engines for Lockheed Martin C-130J
AE2100 Engines for Alenia C-27J Transport
11 year Contract with the UK Ministry of Defense (MoD)
for nuclear reactor in Derby, UK
TP400 Engine for Airbus A400M large military aircraft
39
Marine
MT30, world’s most powerful turbine engine to power US
Navy Littoral Combat ships
Energy
MoU with EDF, world’s largest utility operator
EDF program on world’s largest reactor upgrade
programme
Agreement with Rosatom, Russian state owned company
for global civil nuclear programme
25 year service agreement with EDF to modernise safety
critical systems. Until 2048
Supplier Partnerships
About 70% of the company’s business is conducted in house within the supply chain. As the
company continues to develop intellectual property.
Joint Ventures
Rolls Royce has collaborated with many companies to further develop on and research on its world
leading technologies and products
Joint Venture/Partnership Purpose Unique Proposition
Rolls Royce and Snecma (50:50) Research on next generation
UK and French combat engines
Affordable and
efficient/affordable solution in
military propulsion
Rolls Royce and Daimler,
acquired Tognum
Create world leading high-
speed reciprocating engines
Complimentary technologies to
create design, power,
propulsion systems in the
marine business.
Rolls Royce and Pratt & Whitney Develop advanced engines for
future mid-sized aircraft
Continued long term
relationship with Pratt on
technology and collaboration
40
Reputation
Fombrun (1996) explains reputation to be constituted by credibility, reliability, responsibility and
trustworthiness. Clark and Montgomery (1998) add that observers’ perceptions and interpretations
shape reputation. Reputation serves as an intangible resource and enhances competitiveness where
forms can signal key characteristics to maximise economic profit (Fombrun et al, 1990). Hall (1992)
argues that reputation is critical factor in gaining competitive advantage as competitors may not
match up to fame and esteem created by it. Several empirical research by (Yoon et al, 1993;
Nachum, 1996). Dollinger, Golden and Saxon (1997) contend that reputation is a resource even in
terms of being targeted for joint venture.
Rolls Royce is involved in designing and supplying nuclear reactors for the Royal navy for 50 years.
Rolls Royce is Ranked 372 by the global 2000 companies in Aerospace & Defence 2012. Rolls Royce is
a constituent of the FTSE 100 (2012). Included in Fortune’s (2011) list of the 350 most admired
companies in the world. Included in the 2012 Times Top 50 Employers for Women. However,
lawsuits damage RR’s brand image. The suit stated that RR deliberately cheated Carnival Cruise Lines
about problems with the Rolls-Royce Mermaid propulsion system. In January 2011, Rolls Royce was
found guilty and had to pay $24 million to Carnival Cruise Lines. In December 2010, Qantas Airways
filed a suit against Rolls-Royce for supplying defective superjumbo engines. In June 2011, the
company paid $100 million settlement with Qantas Airways.
In terms of brand Rolls Royce Ranked number one in the Centre for Brand Analysis business super
brands official top 500 in 2011. Ranked 403 in the 2011 Brand finance top 500 most valuable brands.
Innovation
Innovation has become important for every firm due to emergence of Knowledge, economy, fierce
global competition and advancement in technology. Here innovation plays an important role in
increasing competitiveness. Firms do not compete on new products, but rather on a deeper factor —
the capacity to develop new products (Prahalad & Hamel, 1990). Leading innovators have always
encouraged and reward innovation from everywhere within the organisation — not just research
and development. This connects organisational learning and knowledge to products with processes,
technologies and mainstream capabilities. These companies do not consider innovation as just a user
of scarce resources for uncertain outcomes, but rather as a pathway for generating new knowledge
and competitive advantage.
41
While the resource-based view of strategy (RBV) is useful for all Žfirms, but it proves more suitable
for small ones. One of the major problems that such Žfirms face in innovation is lack of resources
and the need to obtain them through collaboration with other Žfirms or organizations.
According to the findings of M. Hitt & H. Kim international diversification is positively related to R&D
intensity. This explains the importance of innovation in development of the firm.
Trent Engines are very innovative, in which over 3 types of titanium are fused, through
technologically advanced diffusion bonding. This process has 60 patents registered by Rolls Royce.
Other innovative products to enter the market
Joint Strike fighter and marine gas turbine, MT30 for the US Navy
Engine BR75 that powers Gulfstream is scheduled to enter service later in the year
Diversification of resources into new markets
Rolls Royce has resources in terms of technological superiority, reputation and customer
relationships that can be spread across markets. According to the RBV perspective, firm can
optimise its resources better by diversifying across related businesses. This would enable the firm to
achieve better returns (Barney, 1997). Although this has to be done in the right measure, as it could
be challenging to manage a very diverse portfolio ((Hill & Hoskisson, 1987; Grant, Jammine, &
Thomas, 1988, Jones et al, 1988). As pointed by Rumelt, the success of related diversification is
based on economies of shared factors of production. Overall when resources are bundled together
the firm can ensure that it can sustain competitive advantage for a long time (wan et al, 2011)
Rolls-Royce engines support helicopters of 160 military forces in 130 nations. (As the
company is able to use its technological competence an resources across markets)
Rolls – Royce has also been able to diversify its resources into the marine by acquiring
capabilities through strategic transactions.
(In 1999 Rolls Royce acquired Vickers PLC, a key player in marine market to become world
leader in Marine systems. Currently Rolls Royce has about 15% of its revenue from marine
with the potential to achieve 30% over the next ten years)4
Rolls Royce has also been able to boost its sale of engine parts to airlines that service and
maintain aircraft. This is derived from Rolls Royce’s core capability in the new engine market.
4 http://www.rolls-royce.com/Images/acquisitions_tcm92-11185.pdf
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Resources – VRIN Framework
Barney (1991) highlighted that the development of tools to analyse external opportunities and
threats has been more rapid than the development of tools to evaluate a company’s internal
strengths and weaknesses. According to (Andersen, 2011) VRIO criteria examines the organization’s
activities and identifies the capabilities that may enhance a firm’s competitive position in the market
place. VRIN framework helps to identify firm’s most critical capabilities, which are the value creation
drivers of the firm. Second, the framework employs fuzzy set of theory to allow quantification of
hard- to-quantify resources as intangible assets that involves uncertainty. Also VIRO based
framework could alleviate the shortcomings of traditional SWOT analysis and providing more
perceptive, reliable and actionable insights.
Financial Resources Valuable Rare Perfectly Imitable
Non Substitutable
Free Cash Flow
Access to debt-equity
Physical
Research Centres
University Technology Centres
Research & Technology (Applied
programmes supported by UTC)
Intangible
Technology
Fuel Cells (Fossil Fuels)
Carbon Capture & Storage
Patented technology
Trent Family of Engines
Partnerships
R&D Collaboration
Joint Ventures
Exclusive agreements
Human Resources
Employees
Training/Learning Programmes
43
Most of Rolls Royce core competence is centred on Trent engines. The technology is patented and
not imitable and is better than its competitors by offering value to customers. The Resource Based
View of the firm is explored in academic literature as ability of the firm to provide customer value
through superior production systems, low cost structure and customer service (Clulow et al, 2007)
Technology that is not imitable and protected by patents such as Low Carbon Technology, Fuel Cells,
and Carbon Capture & Storage is what differentiates Rolls Royce. The intangible resources are
strengthened and served by its physical resources and technology centres, while its joint ventures
and exclusive service agreements further preserve the uniqueness of these resources. Human
resource is another important resource that is at the forefront driving innovation.
Resources such as technological capability and patents are creators of customer value, barriers to
duplication and thus serve as resources of the firm. Fahy (2000) highlighted resources of the firm
confer a competitive advantage as reflected in the superior performance (Amit and Shoemaker,
1993; Fahy et al, 1999). The competitive advantage is in turn is measured by financial terms,
increased market share (Montgomery et al, 1995; Hunt et al 1995; Wilcox-King at al 2001Fahy,
2002).
Meggitt PLC
Introduction
Meggitt PLC is an engineering company that offers sub-systems and extreme environmental
components to the Aerospace, Defence and Energy markets globally. Within the defence market, the
company provides components for military aircrafts, land and naval systems, marine threat
simulation and weapons systems.
Headquartered in the UK, Meggitt PLC has operations in Asia, Europe and North America. The
company has regional presence in Brazil, India and the Middle East. (meggit.com, 2012)
Government Business Meggitt relies on government for its business; US DoD is its largest customer. The US accounts for
about 27% of its revenue.5 Therefore, Meggitt’s defence unit is dependent on the US defence cuts.
(meggit.com, 2012)
5 http://sobic.co.uk/wp-content/uploads/2012/04/Meggitt-Report.pdf
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Effect of Defence cut
Meggitt- In first 6 months Meggitt saw the increase of 19% in its revenue. In second half order book
is up by 8% as compare to 2011. The reason for this increase is investment in cap-ex and R&D, which
in turn supported to win various contracts. (meggit.com, 2012) (More information in Appendix 6)
Sensing the change in the business environment the group has undertaken transformation program
from last 3 years. Meggitt was awarded with five-year agreement from Sikorsky Aircraft Corporation
worth $129m.
Good organic growth was augmented by the acquisition of Pacific Scientific Aerospace. The ability of
Meggitt to invest and to diversify the product portfolio has helped the firm to win contracts in US as
well as in UK which ultimately strengthen its revenue growth.
Scale
2011 2010 2009 2008 2007
Revenue 1455.3 1162 1150.5 1162.6 878.2
Order Book 1524.8 1212.4 1096.2 1152.9 912.1
(Source- meggit.com, 2012)
Order Book
The order book of the company remained robust with 26% increase recorded in 2011. A strong order
book translates into an opportunity for Meggitt to generate aftermarket services. Most of Meggitt’s
orders are on a sole source basis
R&D Spending
Meggitt is primarily a component manufacturer and most of its spending is in development activity
after a contract has been won. As a percentage of revenue Meggitt’s R&D spending accounts for
about 6-8% of its revenue.
45
(Source- Meggitt Annual Report)
Values and Culture
Meggitt has developed a set of values to realise its ambitions and guide decision-making at all levels
of the business. Meggitt considers integrity as the core part of their culture. Either the firm is
focusing on long term investment, striving for performance excellence or establishing global team
for customers. Meggitt plans to do it with integrity. By such action Meggitt is aiming to increase the
stakeholder value.
Work culture of Meggitt gives importance to individuals and encourages a diverse and inclusive work
environment. From past 60years they have achieved success through pure dedication, commitment,
and expertise of its employees. Meggitt promotes Trust, Respect, Accountability, and Community
Involvement while promoting a healthy balance between work, personal, and family life
Strategy
Improvement in components and sub-systems for harsh environments
Invest in products with high technology content and aftermarket value
Deliver growth through organic investment and acquisition
Target is mainly on aerospace and defence, primarily, and specialist positions in energy.
878.20
1,162.60 1,150.50 1,162.00
1,455.30
70.256 79.0568 85.137 83.664 110.6028
2007 2008 2009 2010 2011
Revenue and R&D (£m)
Revenue R&D
46
Meggitt aims to achieve its strategic objective by developing and investing in people, facility,
operations and strategy-led technology development. Below are the growth steps for each business
segment that is considered by Meggitt as reinforcement for strong organic growth.
Control System-
- Deliver weight-saving aerospace products with precise control that can sustain higher engine
temperatures, meet low emission regulation, optimise industrial power generation plant efficiency,
Implement low-cost manufacturing and optimise sourcing.
Areas of Operation Status
Aircraft Braking Systems
Secure position as a sole source on new aircraft program, develop
market-leading technologies specially in electric braking and
innovative, long-life carbon heat sink materials
Polymers & Composites
Maintain and increase the contract for aircraft fuel cells , become
the leading supplier of sealing solutions and energy-conscious
electro-thermal ice protection for fixed wing aircraft
Sensing Systems
Invest in high-performance sensing technologies and Focus on
growing energy market by expanding geographical presence and
marketing highly targeted solutions and to Re-establish market
leadership in test and measurement
Equipment Group
Major focus would be on Fire protection, Power, Heat transfer,
Avionics, Combat systems, Live-fire and simulation training,
Automotive and industrial control. Develop products that could
serve in these fields
Core Competence
Design and manufacture of components and sub-systems for aerospace & defense
- Control and braking systems,
- Sensing systems
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Resources for Dynamic capabilities
Technology
Meggitt continues to invest in R&D. As the components are suited for new aircraft programme. This
also ensures that the company is able to meet the demand for aftermarket products and services.
Increased air traffic growth with economic recovery should boost the demand for aftermarket
services
Meggitt has a leading engine vibration monitoring technology that is offered through its group
company vibro-meter. This technology offers distinctive capability to predict pre-event engine
bearing failure. This reduces chances of in-flight shut down. Meggitt is industry leader in engine
vibration monitoring.
Customer Value: This technology creates customer value by lowering flight shut down while
enhancing efficiency of engines
Electric Brakes
Meggitt was a pioneer of electric brakes and was the first and only company to have successfully
tested them on a commercial demonstrator aircraft in 2008 with no hydraulic back-up
Meggit’s e-braking system is used by Bombardier. According to the company the Meggitt braking
system has 50.0% of the market in world-wide jet wheels, brake and control market.
Military Aircraft Fuel cells
Meggitt Polymers & Composites are highly innovative in the industry, here Meggitt has number one
position in the industry (meggit.com). The features of these innovative offerings are unique
Flexible, ballistic ally resistant – These products have reduced fuel spillage and death and
injury in crashes to almost zero
Long life light weight bladder fuel cells based on polyurethane technology
Meggitt has further enhanced on fire detection and control capability with the acquisition of
Pacific Scientific Aerospace business
Meggitt is a market leader in live-fire and virtual simulation training products
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Architecture
Meggitt has very good reputation and contracts from major customers such as Boeing, Bombardier,
EADS, Finmeccanica (Agusta Westland), General Dynamics, General Electric, Honeywell, Lockheed
Martin, Rolls Royce and United Technologies
Meggitt has very good presence in aftermarket services market as it is the only company
that is permitted to provide servicing and equipment that are certified on the aircraft.
Although, Meggitt does provide the original equipment manufacturers at below cost price
Meggitt presence in aftermarket service is quite good as the margins are high and the entry
barriers are high. As switching equipment once installed is protected by contractual and
regulatory barriers.
Pacsci, the company it acquired in 2011, follows a similar business model and has
strengthened Meggit’s aftermarket business as well
Through the acquisition of Whittaker Corporation (California) Meggitt has increased
presence in aftermarket business acquiring major OEMs as customers
(Source- Meggitt ’s annual report ,2011)
41%
25%
6%
28%
Military Revenues by sector Fixed Wing
Rotary Wing
Land Vehicles
Traning and Other
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Customers
Exclusive Contracts
Department of Defense (DoD) is its largest customer
Thermal management for Hamilton Sundstrand on Pratt &
Whitney’s turbo fan engines
Cooling systems for Boeing 787
Sensor packages for General Electric’s Leap X Engine
Braking systems for Bombardier’s Global 7000/8000 aircraft
Fuel bladders were delivered to BAE system’s ground vehicle
Meggitt Sensing Systems a primary supplier for Pratt &
Whitney Pure Power geared turbofan
Components for Boeing and Airbus jets
Multi-year agreements, position on key platforms in service –
Black Hawk, Apache and Rafale
Supplier to UK Chinook Fleet
Advanced Airborne Vibration Monitor (AAVM) on Boeing 737
aircraft
Recent Agreements
Meggitt won contract for fire protection system for Airbus
A320 neo, that will be in service from 2015
Multi-year $1 billion contract for Hamilton Sundstrand
thermal packages for Pratt & Whitney
£13 million contract with UK MoD – relationship in virtual
and live fire training systems
Meggitt was selected among five suppliers to offer live-fire
training range at US army installations ($475 million) over
the next five years
Strategic Transaction Purpose Unique Proposition
Acquisition of Pacsci Enhanced capabilities in aircraft
electrical power
New centres in Mexico and Vietnam
Low cost manufacturing
Aircraft Electrical Power
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Innovation
Innovative product in terms of the heat exchanger
Innovative long life carbon heat sink material
For military the products optimise industrial power efficiency
Weight saving, reliable electro-mechanical devices to replace hydraulics in military ground
vehicles.
Engineered light weight
Contact less sensor technology
Resource Based View – VRIN Framework
Financial Resources Valuable Rare Perfectly Imitable
Non Substitutable
Free Cash Flow
Access to debt-equity
Physical
Research Centres Offshore centres
Research & Technology
Intangible Technology
Engine Vibration Monitoring Technology
Meggitt Polymers & Composites
Electric breaking system
Acquisition of Pacific Scientific Aerospace Acquisition of Whittaker (aftermarket )
Human Resources
Employees
Training/Learning Programmes
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Resources to be applied to other markets
The RBV talks about leveraging the resources across markets in which those resources can
contribute competitive advantage. This is determined by resource specificity with specialized
resources such as expertise and technology. (Collis et al, 1995) Meggitt has very well established
presence as components supplier to business jets, with customer relationships with Boeing and
Airbus.
The business jet utilisation in the US is expected to go up. The business market for jets is expected to
grow at 6.9% to USD 30.70 billion in 2020.
European market also presents growth opportunities. Resources can be used to drive higher
aftermarket services of carbon brakes. The company has 40% military revenue – out of this 61% is
OEM and 39% is aftermarket. The UK MoD continues to enhance its Chinook fleet. This presents
opportunity for Meggitt, as the company already has large chipsets on the helicopter
Despite the defence cut and reduction in budget Aerospace and defence sector still remains the
important sector for the firms who are providing services in this area. Due to the nature of this
sector which is sensitive both politically and national security wise, will be of main concern to every
nation.
Comparison of Rolls Royce and Meggitt
Rolls Royce’s core competence is engine technology with Trent Engines offerings. The company has
established several long term exclusive contracts with Airbus, Euro fighter etc. Trent family of engine
offers unique customer value proposition by lowering noise and reducing the weight of engines.
Patented, industry leading technology, continuous investment in research, long standing customer
relationships and skilled human capital are the resources that are going to differentiate Rolls Royce.
The competence of Rolls Royce stems from its technological competence than its scale. Its
investment in research & development is the backbone of Rolls Royce’s competence.
From the analysis of Rolls Royce we found that Rolls Royce is the strongest player in this sector in
terms of providing defence needs (aerospace, marine, defence sector equipment and services) and
also involved in long term services contracts with its customers (department of defence country
wise). Rolls Royce has achieved and maintained its top 3 positions due to its huge product portfolio
which are based on providing latest technology, enthusiastic innovation drive and ability to make
52
investment in order to develop in this activity. Due to which Rolls Royce has now become the trusted
source for many parts around the globe. While analysing on RBV framework we found various
capabilities and resources which had made Rolls Royce most successful and rapidly growing firm. But
it also brought to our notice that has and could weaken Rolls Royce’s position in future.
Firstly being the primary supplier any downtrend in the industry sector will affect Rolls Royce first. At
present due to defence cut Rolls Royce has saw reduction in its order book. The huge investment
that Rolls Royce has undertaken for R&D and business development can weaken the firm financially.
Here its strength could turn out to be Rolls Royce constrain if such situation persist for long term.
Secondly due to rising concern around the globe about defence spending by various countries which
has ignited the series of consolidation in aerospace and defence sector could turn out as one more
constrain for Rolls Royce. As Rolls Royce has been very active in M&A, now for large entity it would
be difficult to compete and get contract order of the size which could show revenue growth for RR.
Finally from RBV analysis it is evident that Rolls Royce is leading provider of defence, marine,
aerospace technologies. But as the customers of this sector consider it as long term investment they
expect various services and facilities along with it. So Rolls Royce might now have to divert its focus
and develop itself in servicing sector where it could bundle various services and maintenance
facilities along with its products (jet engines, submarine propulsion system, etc) so that RR could
meet all requirements of its customers.
From RBV analysis we found that Meggitt has developed its self as strong player in component
manufacturing for aerospace and defence industry and catering to equipment manufactures.
Meggitt derives much of its competitive ability due to its ability to manufacture at a low cost and its
outsourcing abilities. The company does not invest much in research & development.
Due to investment which was mainly focused on increasing the quality of product and reducing the
production cost as compare to its competitors has helped Meggitt to up the ladder within less time.
Also Meggitt has got good range of products and technologies, which strengthen its product
portfolio.
But along with the strengths RBV analysis also reflected some of its weakness. Begin the component
supplier Meggitt falls at the second level where any changes in defence cut will affect the business of
Meggitt. But Meggitt could turn this weakness into opportunity if it is able to increase its customer
base so that whichever manufacturer gets the contract Meggitt should be its component and service
provider.
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Also along with the investment in product development Meggitt should consider to bring about
development in its customer management system. As consolidation is lowering the number of
players in aerospace and defence industry this could be favourable for Meggitt as there will be less
number of customers to focus on.
Moreover if Meggitt considers acquisition of some firms in component manufacturing sector this
could help Meggitt to reduce its competitors and add facilities for new product development.
Consider the requirement of customers in this sector, the after sale services and facilities must be
the aspect, which Meggitt should also consider and make investment in this direction.
Conclusion from RBV Analysis
In conclusion for big entity like Rolls Royce it is important for the business to increase its services
along with its product so that it could satisfy its customers and compete with its competitors (but
competition would be fierce as industry sector is becoming concentrated) and survive and grow in
the business.
For company like Meggitt it has to concentrate more on developing and maintaining relationship
with its customers (major player who are main contractors for defence departments) along with its
product and service base. This will help Meggitt to win business order as however wins the defence
contracts Meggitt should be its preferred component manufacturer. This can help Meggitt to survive
and grow in the business.
Limitations of RBV framework
The common criticism made on RBV is that it does not describe the important issues of resources
development and change over time and it is limited in terms of applicibility. It applies only to firms
striving to attain Sustained competitive advantage. Firms which are satisfied with their competitive
position, the RBV does not provide deep insight, as its relevance follows directly from managers’
vision and intentions. Also the dynamic role played by the individual within organization is not given
much importance. RBV has no managerial Implications. It invokes the illusion of total control and
exaggerating the limit up to which managers can control resources and predict their future values.
Lockett et al. (2009) and Priem and Butler (2001a, 2001b) argue the RBV does not contain the law-
like generalizations that must be expected. Rather, it stands on analytic statements that are
tautological, true by definition, and not able to be tested.
54
Sometimes the successful strategies can remain unchallenged for long time as identification or
resources helps to keep the work on track but it does not tell when changes in these strategies are
required and how to work on new strategy. Resource Based View does not consider concern with
processes of building strategic resources through innovation and redeveloping such resources.
As the nature of business changes with time due to changes in demand and supply, entry of new
competitors with time and various other external factors. RBV clearly explains what is present or
already exist, rather than tackling the tough questions of what can come into being. Only analysing
internal resources and focusing on strength, neglecting external competition can weaken the
strategy. Resource Based View neglects how resources help to create value, How resources should
be combined, in which way to yield maximum value. These are important implementation issues
that are currently outside the purview of the RBV.
The VRIN framework applied helps us to access the position of the firm and its competitiveness. But
the assessment process does not stop here. One has to also consider the strength and weakness of
other competitors so that the actual position of the firm can be determined. Furthermore RBV does
not consider the demand side of the market. The company might have resource and capabilities to
produce competitively but who is the consumer?
Strategy Formulation to remove RBV Limitations
Organization’s most valuable resources and capabilities have unique characteristics, which are they
are difficult to identify, imperfectly transferable, and difficult to imitate, and in which it has clear
ownership. This strategy is used to expose these resources and capabilities, which limits its activities
to where it possesses a competitive advantage. Below is the five stage model which helps the
organization in their strategy formulation. The focus is on the internal capability of the firm.
Also this resource based approach can eliminate the limitations of RBV analysis by taking the analysis
further and determining the future strategy. After determining the core resources and capabilities of
the firm, management could formulate the next course of action so as to sustain and grow in
changing business environment. Also by implementing this strategic approach one could access the
extra inputs that would be required in order to attain those strategic objectives. The key to resource
based approach to strategic formulation is to understand the interrelation between resources,
capabilities, competitive advantage and profitability. This in turn requires the design of strategies
which exploit to maximum effect each firm’s unique characteristics. (Henry A, 2008)
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For Rolls Royce
For instance RBV does not capture the data on future strategic plan of a company. This means that
the RBV of the firm has not taken into consideration the following. On weaknesses, Trent has slightly
lower fuel efficiency. With Trent 1000 engines Rolls Royce has invested in overcoming this
shortcoming (rollsroyce.com) 6
6 http://www.rolls-royce.com/Images/competition_tcm92-11184.pdf - Rolls Royce competing with
the changing world.
56
For Meggitt
Effect of Defence Budget Cut on Meggitt ( Appendix)
57
Company Analysis
Finmeccanica- Case Study
Ranked among the top 10 players in Aerospace, Defence and Security the company is Italy’s leading
industrial player in high technology sector. The group has great presence internationally with 350
companies, partnerships and joint ventures worldwide
The company derives about 73% of its revenue from three sectors – Helicopters, Defence
Electronics, Security & Aeronautics. The company has a strong presence in Space, a pioneer in
satellite services. The company manages all these segments through over 20 companies that are
held under Finmeccanica. The Group Structure is as follows.
Defence and Security market is the key market for the company, where the company has shifted its
focus more towards homeland security. However, the reliance of the company on Defence spending
entails that reductions in military spending word wide will have an impact on its business. For
instance, Finmeccanica registered a 22.0% decline in new orders.
Challenges
Social and Political situation in North Africa has impacted the company, as this is the major
market. There was interruption in major civil and military programmes
New Order in 2011 declined by 22.0% overall. Within the Aerospace segment a whopping
33.1% decline and 27.5% in defense2011. On the whole order backlog was down by 5%
- Causes are - delays in approval from the US government on defence budget
58
Lower orders are not only impacting the company’s revenue, but its margins as well as they are not
higher margin business therefore not as profitable. The order book of the company declined quite a
bit in 2011, as many programs are lower margin businesses. This is evident in the fact that the
operating margin of the company is way below the industry margin. During 2011, Finmeccanica had
margins of -1% while the industry average was 8.24% while S&P averaged 12.87%.The company has
restructuring programs in place from 2012 to 2013 to achieve EUR 440 million in cost savings by
2014. Within the Defense Electronics segment the restructuring plans are on to bring Selex entities
together to form a single entity. The company believes that all the cost saving initiatives is key to the
company being able to be profitable to be able to do business and enter new markets.
Margins are way below industry standards, due to unprofitable programmes.
The product portfolio of the company is too fragmented to be competitive in the market
Pipeline had to be revised as some of the programmes are no longer profitable (contracts for
the production of trains for Denmark, the Netherlands and Belgium for Ansaldo Breda)
Opportunities
Suspension of Libyan contracts has impacted the profitability of aerospace & defense
segment.
For margin improvements and cost efficiency programs the company has reiterated the need for
collaboration within defense. Recently, the CEO of the company reiterated the need for European
competitors to come together to be profitable in the defence industry. (Avionnews, July, 2012). This
trend presents opportunities/need for IT systems/platforms for collaboration between entities.
Within the Defense Electronics segment the restructuring plans are on to bring Selex entities
together to form a single entity. The company believes that all the cost saving initiatives is key to the
company being able to be profitable to be able to do business and enter new markets.
Presence in INDIA-
India has been on Finmeccanica’s radar for over 40 years. In 2007, the company signed a
memorandum of understanding with Bharat Heavy Electrical (BHEL). The company has provided
control equipment to Indian Navy, Communication systems for Indian army.
In 2010, the company specifically announced its plan to strengthen its presence in India through
partnership with key local players. In line with this the company seeks to extend its collaboration
with government companies (Eg: BEL, HAL, BHEL and BDL).
59
Although the company has not specifically stated a strategy for India in 2012, Finmeccanica is open
to expand into emerging markets, including India.7
Recommendations
As Finmeccanica actively seeks to improve its margin performance, TCS could offer services around
Enterprise Resource Services (ERP) and custom IT solutions to track costs for the company. In
addition, TCS can offer outsourcing services to offshore some of the administrative and back-office
services of TCS to India
Finmeccanica is going to be more focused on collaboration with competitors in the industry to share
research cost base). This trend presents opportunities/need for IT systems/platforms for
collaboration between entities. TCS can benefit from this by leveraging its IT solutions expertise to
develop a collaborative platform.
Finmeccanica has a relationship with Tata and this relationship can be leveraged by TCS to offer
aircraft design and other end-to-end engineering services to Finmeccanica. (For details on TCS
engineering services offerings please refer appendix) Intent to enter Emerging markets presents a
good entry point for Tata to start on collaboration talks, other outsourcing services, and engineering
services to enable Finmeccanica to establish its presence in India.
7 http://www.finmeccanica.it/EN/Common/files/Corporate/Interviste/2007/Intervista_CorrieredellaSera_18_02_2007_uk.pdf
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QinetiQ- Case Study
The company is headquartered in Farnborough, United Kingdom. It has major sites in the UK at
Farnborough, Hampshire, MoD Boscombe Down, Wiltshire, and Malvern, Worcestershire, each of
which are former DERA site. World's 52nd-largest defence contractor measured by 2011 defence
revenues, and the sixth-largest based in the UK.
The main market for QinetiQ is UK (54%) and North America (39%). But it is now building its large
operation base in Norway, Australia, Canada and New Zealand.
Business Strategy
Set a clear direction which reduces the span of focus and matches both customer needs and core
QinetiQ strength.
Upgrade leadership to ensure a commercial, value-oriented mindset
Establish a lower level of cost base to ensure future competitiveness;
Ensure a more unified approach Group wide to exploit key opportunities;
Drive for cash generation to strengthen the Group's balance sheet.
Under the challenging market environment and its impact on the business growth and profitability,
in May 2010, QinetiQ set out a 24 month self-help programme to restore value, to strengthen the
foundations, and build a path to future sustainable and profitable growth. The following priorities
have been put in place:
Focus
- Extracting value from the portfolio
Cultural transformation
- Building a more competitive culture
Strengthen the balance sheet
- Enable longer-term options
- Extracting value from the portfolio
This programme is created to increase the operational effectiveness, introduce more lean and agile
process and to strengthen the balance sheet of the company.
61
How objectives are achieved-
Full integration of the US Services businesses is underway to reduce duplicated overhead,
improving the ability of the division to compete effectively
The Group completed the disposal of the S&IS business and acquired Sensoptics Ltd to support
development of the OptaSense® business
Challenges-
Description Measures
A change in demand
from reduced military
operations in Iraq
and Afghanistan
Planning to carry on innovative research on the areas which is not
conflict related like aerospace security and intelligence and portfolio
diversification
A change in either US or UK
Government spending on
defence and security
Planning to diversify the portfolio by providing more services in
security and intelligence sector. As UK Gov. Is planning to spend
650m on cyber capability, QinetiQ is seeing this as an opportunity.
Funding of the defined
benefit pension scheme
The recent funding valuation of the Scheme, as at 30 June 2011,
resulted in a deficit of £74.7m.The group is taking external advices to
solve this problem. It has considered next 6 years recovering this
deficit. An increase in the deficit gives an indication that the Group to
increase the cash contributions to the scheme, which would reduce
the Group’s cash available for other purposes.
Fixed-price
contracts
There is a possibility that the costs required to complete contract
could be higher than those agreed in the contract as a result of the
performance of new or developed products, operational over-runs or
external factors, such as Inflation. The management try to review the
bids and fixed prices to avoid the cost overrun.
62
Opportunities
The company seeks to develop a US/UK cyber platform to exploit opportunities – principally it is
focusing on ‘five eyes’ markets (UK, US, Canada, Australia, New Zealand) – which has developed
due to government commitments to additional cyber security funding.
The company secured new contracts from the Scandinavian region including a Swedish defense
administration contract.
(New Opportunities from Scandinavia, including a £9m managed services contract to operate the
flight physiological centre for the Swedish defence administration and a £4m order for the
Norwegian Andoya Range System was added in 2011 revenue growth.)
QinetiQ is focusing more on aerospace security and intelligence services and trying to diversify the
product portfolio in this segment. The recent acquisition and divestment activity gives clear
indication that the company don’t want to relay on business where demand is uncertain and based
on certain conflict condition. In order to fulfil this QinetiQ wants to strengthen its cyber security
services and planning to expand in new market.
Change for the Future Prospects-
Approximately 90% of QinetiQ’s revenue is generated by proven businesses that have sustainable
competitive advantage. Approximately 8% of QinetiQ’s revenue comes from fully commercial
businesses in its Explore category. These are businesses that have a proven technology and
customers, but have yet to prove that they can achieve significant scale. Approximately 2% of
63
QinetiQ’s revenue is in the Test for Value category. These are businesses with proven technologies
but that have yet to prove commercial viability.
According to the business model of QinetiQ i.e. core, explore, and test for value. To expand and
strengthen the cyber security services QinetiQ is will stress more on explore part. The reason is
QinetiQ has acquired to firms Cyveillance® and OptaSense® which delivers cyber intelligence
solutions and fibre-optic sensing business. As the company considers the explore category business
as core business for future, it can be predicted that major investment will be done on this part.
Recommendations
Based on our analysis- QinetiQ is now focusing on developing cyber security product and services at
large scale in various countries like UK, US, Canada, Australia, New Zealand. So this could be the
opportunity for TCS to establish relation with QinetiQ and provide solution in IT and consultancy
sector. As TCS provides solutions in various sectors, some of this like IT services & solutions and
technical consultancy services could attract QinetiQ to establish business relation with TCS.
Limitations of data
Most of the data for the research is obtained through publically available sources and company
websites. The accuracy of the data that is available cannot be validated. Furthermore, most of the
findings are subject to interpretations of data.
The top layer of companies in the world is made up of large corporations with international markets,
internationally based production and a broad international shareholder base. These corporations
provide a large amount of information on financial performance as well as non-financial aspects of
their activities—such as measures taken to ensure environmental and social ‘sustainability’—in their
annual reports, company profiles, and press releases. However, scant information is provided on the
value and volume of arms and military production.
Only a few companies has provide comprehensive information about their future developments and
R&D in technologies related to arms, military and security division on a regular basis and in a format
that is comprehensible to the general public. The data related to technologies or research for
64
general public will use industrial development and that are relative easy to access. Valid information
provided on a voluntary basis directly by the industry or by single companies or by industry
associations—is even more limited. In general, information is provided on an ad hoc basis, in a
format that seldom facilitates international comparisons or comparison with civilian industrial
activities.
The companies we analysed are top players in the world. These companies have vast product
portfolio, which includes aerospace and defence sector. Any information on civil aerospace and
technology was easily available along with description and details. But there was very less
information about defence product portfolio. The information about the cost of project, R&D
partners, end user of products and suppliers of raw material were not displayed on any company’s
website. We were also able to locate few problems, which companies in A&D sector are facing like
pension deficit, reduced order book and employee reduction. But any further information regarding
these problems was unavailable. Like the reason for pension deficit was not described in any of the
company’s annual report. The main reason could be the degradation in value of the financial product
in which companies have invested. But this was not illustrated in any form in any of the companies
report.
Due to these limitations about gathering data, we tried to find the recent trends and short-term
opportunities in A&D sector and compared it with the core competence of every company. This
helped use to forecast and predict the near future plan for the companies and know the fields in
which the companies are interested.
Disadvantages of secondary data
One of the main disadvantage of secondary data is inherent in the fact that it was not
collected for answering our specific research questions
Finding the appropriate data has not been straightforward.
Most consultants are inside the company to analyse the company to find its strengths and
weaknesses. However, with TCS we were outside these companies trying to find the weaknesses,
and problems. Here availability of information is an issue. Furthermore, if there was a contact with
the company one would be in a better position to assess what exactly are the solutions the company
needs.
65
For instance TCS can leverage its expertise in providing IT solutions to address a company’s
problems. However, just using the secondary sources one cannot get details of IT spending,
procurement budgets and also any future IT investment the company may undertake. To top that
information on various suppliers of the company is not readily available. This data could help TCS to
analyse if TCS can approach these companies with a better solution or low cost offerings.
Data around key people, relationships and company’s IT contracts is not available publically.
Most of the analysis at times is based on inferences drawn from available data set. Here
interpretation and extrapolation of data may not be accurate.
Our Learning from the project with TCS
As it was a group work it created awareness of the dynamics of working in a team.For the first time
we were working on such project which was live business plan for TCS. This Experience of working
on a large-scale project couldn’t be achieved alone given the schedule and complexity of the
assignment. While working on this project as a team we got the opportunity to exchange our ideas
and inspire others to work together. This helped us in developing professional behaviour such as
finishing the work according to the time schedule, taking responsibility. The meetings and
conversations with TCS personnel also added to it.
Thus group work created the atmosphere of excitement. Various arguments, brain storming, work
pressure led us to formulate the solutions to the problems in our project.
From academic prospective we got to learn basic and main factors that one should consider while
performing in such kind of project. The main requirement of TCS from this project was to get the
business case related to all companies under analysis. The business case which describes the
problem the company is facing and new business plan under company’s consideration. This would
create an opportunity for TCS to approach these companies and provide business solutions, which in
turn will help TCS to develop in A&D sector.
While working on this project we realized that it is not only the financial factor that effects or plays
an important role in business development. With reference to A&D sector the factors like GDP,
government deficit, political stability, terrorist activity, occurrence of war, economic and financial
stability of nation holds importance and can have substantial amount of effect on this sector. So this
project has developed our understanding and thinking and given us an experience which will be
66
helpful for us while working on such sensitive sector. Now we consider ourselves as a candidate with
the knowledge who can analyse the on-going business process and suggest future development
plans for the same.
The overall development of structured thinking, teamwork, professionalism, critical analysis,
thinking beyond the numbers and interpretation of others perspective are the skills we have gained
while working on this project.
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http://www.decc.gov.uk/assets/decc/What%20we%20do/A%20low%20carbon%20UK/1358
-the-carbon-plan.pdf . [Last accessed on: 23 July 2012].
90. Datamonitor. (2011). ‘Aerospace & Defense in Europe’ (Reference Code: 0201-1002).
Datamonitor.com online [Online]. Available: Datamonitor.com. [Last accessed on: 17 June
2012.]
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Appendix
1. PESTLE Analysis
Analysis of the Industry (PESTLE)
Political Factors impacting the Industry
Countries still continue to spend on military and defence operations, as political and security
tensions mount. The world military spending has constantly risen since 1988.
There is still a concentration of military expenditure, in terms of few countries spending the largest
share. For instance in 2011, 15 countries with highest spending account for 81% of the total global
spending. Although NATO countries including Japan, South Korea and Australia alone account for
70% of the world total. However, with the rise of emerging economies – Indian, Brazil and China
their military spending is also increasing proportionate to their economic growth. This in turn
reflects the geo-political interests – “rising military spending for the USA, as the only superpower,
and for other major or intermediate powers, such as Brazil, China, Russia and India, appears to
represent a strategic choice in their long-term quest for global and regional influence; one that they
may be loath to go without, even in hard economic times”, (SIPRI )
Among the emerging markets, India has become a key revenue driver as a result of high demand for
advanced military hardware. As concerns of insurgencies and hostility rise from neighbouring
countries. South Korea, Singapore, Taiwan and Hong Kong are identified as developed regions with
highest growth potential. (Electronics Research, 2012). Other emerging opportunities are in the
Middle East and North Africa region (MENA). Political instability in Tunisia, Egypt, Bahrain, Libya and
Syria has encouraged higher defence spending by these countries. This in turn presents revenue
expectation from these regions in 2012. (Electronics Research, 2012).
Military decisions by major powers and geo-political tensions do have a strong impact on company’s
pipeline and stability of operations.
Global Distribution of Military Expenditure
76
Economic Factors Impacting the Industry
The global defence spending accounted for about 2.6% of world GDP in 2011. In real terms this
represented an increase of about 0.3% from 2010. This represents a slight decline compared to rapid
increases in military spending from 1998-2010. On the whole, the military spending is impacted by
budget cuts and austerity measures in many countries resulted in greater push for civilian spending.
Fewer jobs and slower GDP growth have particularly led to defence cuts particularly in the US and
Europe. The impact of recession on jobs has hit the army too with US government alone cutting
27000 jobs by 2013. (Appendix (iii) for more details)
The Year 2012 has brought in a heightened sense of uncertainty with European debt crisis and Arab
spring. Consequently the environment in the debt markets has been tough to access capital. The first
half of 2011 saw the leverage/loan market open up, but the second half was a different story. As a
result the market will see a lot of restructuring with UK leading the way. (Market Outlook, 2012)
These factors imply that the companies that still have large orders due in couple of years may face
challenges in terms of financing those deals. This could result in delays and cost overruns.
Sociological factors Impacting the Industry
Changing gender distribution of the workforce will continue to evolve towards a greater
participation of women. Part of the explanation lays in the changing nature of the major contractors,
77
but the main reasons are due to the overall change in the nature of the supply chain and the greater
involvement of civil and international companies.
More female executives are rising to the top levels of the largest defense companies, setting a
standard that industry officials say may help encourage more women to enter the field- The Boston
Globe 12 July 2012.
Changing geographical imperatives Changes in the nature of defence companies and the increasing
use of global outsourcing make it likely that defence-dependent communities will suffer as facilities
are relocated. Increasing internationalisation of the supply chain will continue to bring about
changes in the organisation and location of production.
Security Clearance Requirement Security clearance is mandatory due to nature of business in
defence industry sector. Most of the suitable candidates are not selected as they fail to clear security
checks or according to nationality criteria are not able to qualify. More than 50 percent of the
engineering doctorates awarded in the U.S. are attained by students who are ineligible for security
clearances, e.g. non-U.S. citizens.- How can the U.S. gain the lead in STEM Education? By
Maxine Bleich (http://www.seenmagazine.us/articles/article-detail/articleid/2024/how-can-the-u-
s-gain-the-lead-in-stem-education.aspx)
These sociological factors necessitate the need for skilled labour in the near future. So technical skills
and delivering ability of the firm have gained importance.
Technological factors impacting the Industry
Barriers to entry are high for major contracts, but they will become less important because of the
increase in joint ventures and in the use of COTS (commercial off-the-shelf) products, and growth of
outsourcing.
Department of Defence Conversion Commission defines the conversion as the process by which the
people, skills, technology, equipment, and facilities in defence are shifted into alternative economic
applications. This has emerged due to rapid and dramatic cuts in defence budgets in various nations.
-Defense Conversion and Dual-Use Technology: The Push toward Civil-Military Integration
Journal article by Linda Brandt; Policy Studies Journal, Vol. 22, 1994
Growth of dual-use technologies- This once seemed to be a significant development, but in reality it
has not become important and is unlikely to do so in future, given the increased use of civilian
78
technology. Eg, Weight is considered as one of the major issue in aircraft. With help of new
technology lighter seats for aircrafts has been developed which can save huge amount of fuel. –
Technology focus is on saving fuel by Philip Butterworth-Hayes The Wall Street Journal 10th July
2012.Communications and control technologies are becoming increasingly important in the field of
operations. Network-centred warfare is changing the nature of demand and leading to what has
been called the Revolution in Military Affairs. Internet which was originally developed by US military
has now become the important mode of communication. But these are potential threat on security
based on it. For example recently the group of unknown hackers exposed the data containing the
information about defence and intelligence officials in UK and US. –(The Guardian ‘Hackers expose
defence and intelligence officials in US and UK -Security breach by 'hacktivists' reveals email
addresses of 221 British military staff and 242 Nato officials’ on 8th Jan 2012 )
Environmental Factors
Factors impacting the environment such as air pollution, noise pollution have meant that the
industry has come under scrutiny for the same.
I. Fuel Crises:
The Obama administration has allotted only $75.3 billion towards the defense research and
development (R&D) for the year 2012 defense budget, down 7.4% from 2011 as a curtailed
R&D will be carried out especially along the lines of fuel efficiency and as fuel is becoming a
limited natural resource day by day.
Environmental factors could mean that the companies’ operations can come under scrutiny in terms
of compliance to clean technologies.
Legal Factors
79
The A&D companies face a host of regulatory compliance rules such as DCAA cost audits, ITAR
(International Traffic in Arms Regulations), FCPA (Foreign Corrupt Practices Act), and the False Claims
Act, Pwc(2012).
Given the wealth and security concerns in emerging markets the demand for defense exports is
increasing. However given the security concerns associated with arms, each country has its own
rules. As the defense industry has gone increasingly global there is a push for an international arms
treaty. (CITS, University of Georgia). On another angle, the US which is the largest market for
defense exports does have a very bureaucratic export control (US ITAR). This in turn has meant that
the American defense companies may not be as competitive. Canada’s recent announcement in July
2011 on a defense modernization program excluded American Technologies from key areas.
(Defense Industry Daily, 2011)
In line with the need for reformed export control, On April 20 2012 then-Secretary of Defense
Robert Gates outlined the administration's vision for overhauling the country's export control
system. This reforms plan to manage the operations of the company in A&D sector in streamlined
manner.The reformed export control system would include following process which will ensure
effectiveness and secure operation of the company in other countries.
A single control list
A single primary enforcement agency
A single information technology (IT) system
A single licensing agency
The new rule will take effect on August 15, 2011. These developments could help the US defense
companies to preserve their attractiveness as exporters of defense.
2.Porter’s Five Forces
80
Porter’s Five Forces
Barrier to Entry
The Aerospace and Defense industry is highly capital intensive with capital and expertise needed to
succeed. The investment on R&D is heavy and the time required to deliver the finished product is
long which is from 2-3 years. This requires flow of capital for longer period of time. A firm must gain
technical ability and then prepare proposals. Boeing spent three years acquiring the competence
needed to develop the Saturn 5 first stage. Grumman spent $2 million for its research and proposals
besides the sum it invested in facilities. And the money a company like Grumman must spend is
probably less than for an outsider to the industry. (Generalatomic.com, 2012)
Companies have to comply with various legal requirements to satisfy strict regulation. Compliance
with strict liability laws and regulations is a central element of doing business in this
environment. The companies constantly face legal challenges in rapidly changing, fluid and reactive
global environment.
The abundance in number of patents and the highly specialized equipment being manufactured.
(dotstoc.com, 2012 analyzed by Steve Comolli). Some technologies and services, such as intelligence
81
gathering equipment, are highly classified. In these cases, users are unlikely to switch vendors based
on cost savings as this will subject the classified information to unnecessary dissemination.
Incumbency in existing products is an important barrier to entry for parts suppliers. In many
instances, it is not possible to substitute parts, components or even entire products as, in addition to
having been designed and manufactured for specific uses, products are frequently certified through
rigorous tests that cannot be quickly replicated, or the cost of substitution is otherwise very high.
(Moody’s Investor, 2012)
Need for Economies of Scale
The US defence market has a large market to cater domestic and international both. So defence
contractors enjoy the benefits of economies of scale. The fixed production line and tooling cost adds
to economies of scale. But as due to defence budget cuts now the procurement budget on European
countries has fallen down so it has created grave situation for the producers on maintaining the
economies of scale. USA is roughly covering the 50% of market share so for non-US producers the
competition has become more intense and an economy of scale has become the essential factor for
them. (The National Academic Press, 2012)
Threat of substitutes: Low
Substitutes for an effective combat aircraft take many years to develop (eg. 10+ years) and whilst
buyers are budget-constrained, they are not price-sensitive. (Braddon et al, 2012)
The products or technologies are complex and are patented. Due to limited number of producers
and customized product choices, it becomes difficult to replace these products within less time. Also
most products are order specific. Overall, the threat of substitutes is low.
Bargaining Power of Suppliers: Moderate
Due to very complex special-purpose systems intended for unusual and extreme operating
environments advanced technology used in parts, which requires long lead time and highly
developed technology. So supplier of these components is important for the buyers.
But as the requirements are customized the supplier doesn’t enjoy the broad customer platform.
Here buyers are less and concentrated. The buyers rely on the suppliers for high quality product but
in very less quantities for their final product.
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Within the aerospace and defence market supplier are represented by companies that provide raw
materials and components for manufacturers. Quality and availability of materials, input in turn
determines the quality of output. Furthermore, the suppliers are not solely dependent on the
aerospace & defense companies. Other customers include companies in railway and automotive, so
supplier risk is diversified. However, as the number of suppliers in the industry is too many, their
bargaining power is diluted as they can easily be replaced by the players.
Also due to financial downturn there is effect on the supplier base as it is linked with the defence
cuts and the ability of Department of Defence in procurement of new defence services. (National
Defence University,2010)
Bargaining Power of Buyers-Moderate
The companies/players in the industry are large multinationals with integrated companies. Although
the contract size and financial resources of the government can somewhat offset this power.
Consolidation has led to increasingly smaller numbers of players. In 2011 there were many mega
deals where many firms of Aerospace and defence industry were acquired. According to PWC due to
defence budget cut this process will continue in 2012. The large size of these competitors, due to
past merger activity, means they have potentially strong bargaining power with buyers. The buyers
in the defence segment have good financial position as they are mostly government organization.
This power is diluted somewhat as aerospace and defense products and systems are highly
important to buyers. Companies like Lockheed Martin not only provide military aircraft and
hardware like missiles, but also cater for the repair and logistics needs of their buyers, which
increases switching costs and decreases buyer power. Rolls Royce provides maintenance and
services for jet engines and provides various types of fuels to more than 30 types of air craft. The
Manufacturers are able differentiate their products through innovation which weakens buyer power
further. Overall buyer power is moderate.
Rivalry – High
Within the Aerospace and Defence market rivalry among the present industry is strong with large
organizations competing intensely for government and commercial contracts. This is a market
dominated by large multinationals which provides various services and defence equipment i.e. they
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are highly diversified in terms of the products they manufacture. Also due to their presence in many
countries the aerospace and defence industry is concentrated and major share of market is owned
by few top most players. According to PWC forecast on A&D industry sector, in terms of revenue top
5 players enjoy 36% of total revenue on A&D sector. Factors such as the rising threat of global
terrorism have led to the defence sector being the most lucrative, with the market growing steadily.
Competition is also intense in terms of winning defence contracts and companies use innovation and
new technology to differentiate their service. Rivalry in this market is strong.
The duration of contract has increased the rivalry among the industries as the contracts are long
term, companies invest heavily on marketing and R&D to present the best product and services and
win the contract which is of high value. Rivalry has further increased due to moderate market
growth, government spending on defence sector, high strategic stakes, and high exit barriers.
3.Large M&A Deals of 2011
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Source : TCS.com
Tata Consultancy Services is part of the Tata group, one of India’s largest industrial conglomerates
and most respected brands. Tata Consultancy Services is an IT services, business solutions and
outsourcing organization that delivers real results to global businesses, ensuring a level of certainty
that no other firm can match. TCS offers a consulting-led integrated portfolio of IT and IT-enabled
services delivered through its unique Global Network Delivery Model™ (GNDM™), recognized as the
benchmark of excellence in software development. TCS has over 238,583 of the world’s best-trained
IT consultants in 42 countries with revenue of $10.17 billion (fiscal year ending March 31, 2012).
TCS has strategic partnerships with major global technology players like Alcatel-
Lucent, Cisco, EMC, Google, HP, IBM, JDA, Microsoft, NetApp, Oracle, RIM, SAP, Sun, Xerox.
Solution Partners are Adobe, BMC Software, CA, Informatica, Ingres, iTKO, Jaspersoft,
MicroStrategy, Netezza, Pegasystems, Quest Softwaer, Red Hat, Salesforce.com, SAS, Software AG,
Symantec, TIBCO
TCS has the depth and breadth of experience and expertise that you need to achieve your business
goals and succeed amidst the fiercest competition.
Industries
Banking & Financial Services
Energy, Resources & Utilities
Government
Healthcare
High Tech
Insurance
Life Sciences
Manufacturing
85
Media & Information Services
Retail & Consumer Products
Telecom
Travel, Transportation & Hospitality
Services
Assurance Services
BI & Performance Management
Business Process Outsourcing
Cloud Services
Connected Marketing Solutions
Consulting
Engineering & Industrial Services
Enterprise Solutions
iON - Small & Medium Business
IT Infrastructure Services
IT Services
Mobility Solutions and Services
Platform Solutions
Software TCS BaNCS
TCS MasterCraft
4. University Funded Research & Development Centres
86
87
- June 29, 2012 Rolls-Royce sold its shareholding in IAE, manufacturer of the V2500 engine, to Pratt
& Whitney. The relevant agreements remain subject to various closing conditions including
regulatory approvals. Rolls-Royce will remain a key supplier, responsible for the engineering support
and manufacture of high-pressure compressors and the final assembly of 50 per cent of the V2500
engine. Orders for over 150 V2500-powered aircraft were taken in 2011.
5. Acquisitions of Meggit PLC
Meggitt bought Insley, a cutting tools distributor, for £2.5 million in stock and cash in September
1984.Meggit bought diversified aerospace engineering firm Negretti for £16 million
1998- Meggitt acquired Microsystems Group for £33 million, guiding the electronics business into
the higher margins of ticketing machines, taxi meters, and telephone-logging systems.
88
Meggit’s Mergers &Acquisitions (M&A) activity
April 2011 Pacific Scientific Aerospace, a leading supplier of
equipment for critical military systems,
commercial transport aircraft, business jets and
general aviation
January 2008 Ferroperm Piezoceramics A/S, the Danish
producer of advanced piezoelectric ceramic
materials for sensing products
July 2007 K&F Industries Holdings Inc, a supplier of wheels,
brakes, brake control systems, flexible bladder
fuel tanks, helicopter interiors, ice guards and
sealants
October 2006 Firearms Training Systems, a provider of
simulation products for firearms training
September 2006 Keith Products, a supplier of compact air
conditioning systems for business jets and
general aviation aircraft
August 2006 Radatec, a US start-up with breakthrough
turbine tip clearance measurement technology
November 2005 ECET, an ignition systems and airborne electronic
equipment specialist
November 2005 Sensorex, a sensors and electronics specialist
July 2005 Avery-Hardoll, a manufacturer of aerospace
ground refuelling equipment
December 2004 Wilcoxon Research, a specialist sensors
manufacturer
December 2004 Schreiner Canada, unmanned aerial and marine
targetry
August 2004 The design and manufacturing division of Dunlop
Standard Aerospace. Dunlop Aerospace Braking
Systems and related aftermarket services
89
(Dunlop Aerospace Services) form a new, stand-
alone operating unit. Dunlop Ice.Protection &
Composites, Dunlop Precision Rubber (merging
with Bestobell. Aviation to become Dunlop
Bestobell, now Meggitt Polymer Solutions),
Dunlop. Equipment, Serck Aviation and Stewart
Warner South Wind are integrated into Meggitt’s
then aerospace equipment division
December 2003 Meggitt Western Design, a designer and
manufacturer of automated ammunition-
handling equipment and environmental control
systems
December 2003 Meggitt Airdynamics, a designer and
manufacturer of pumps, fans and compressors
for ground, naval and aircraft applications
March 2003 Caswell International, a supplier of ground-based
live fire training equipment systems
January 2003 General Electric turbine clearance control valve
product line
November 2002 Lodge (ex-Smith’s Group plc) temperature and
speed sensors
July 2002 BAE Systems’ military air data and data
acquisition computers
April 2002 Kaman Aerospace Corporation high integrity
radio frequency cables
6. Effect of Defence Budget Cut on Meggitt
The military market of Meggitt Plc contributes 40 % of the company’s total revenue in the year 2011.
Of this 40 % contributed by the military market, 67% of the total military revenue is contributed by
business carried out in North America, through an over dependence on government contracts.
Meggitt mainly generated its military revenues from the US Department of Defense, which is a high
risk of overdependence on a single revenue channel and remains the company's biggest customer,
and development partner. The defense budget cuts by the US government will impact the
90
company’s revenue and growth especially from the military market due to the uncertainty arising in
the near future and many of the and defense programs may be cancelled. A decrease in the
government spending may result in drastic reduction in the volume of contracts awarded to the
company. Meggitt also has resources applied to specific government contracts and if considering the
uncertainty of any termination in contracts, the company will incur substantial costs redeploying
those particular resources. Mount Vernon Mills and Meggitt Polymers each have nearly 1,200
employees and are overwhelmingly the leading employers in Chattooga and Polk counties which will
also be majorly impacted by the defense cuts. Doug Walker (Rome News-Tribune)
Overall Meggitt has a diversified risk and a global presence spread across the world. It has its
manufacturing facilities setup in US, UK, France, Switzerland, Denmark, and China and major
established operations in Europe, North America and the rapidly growing economy of Asia. It is one
of the leading players in the civil aerospace equipment (revenue 46%), sensing systems, combat
support and defense systems training. Meggitt’s diversified geographical presence ensures
protection against macroeconomic risks associated with operational presence in one location and
one particular market.
Meggitt Plc achieved a good growth during the first six months of 2012. Their underlying profit
before tax increased by 15% to £168.5m and revenues increased 19% contributing mainly from their
commercial and military markets. They increased the dividend by 12.5 % to 3.60 pence per share and
are assertive about its future prospects, despite uncertain defence markets. As Airbus and Boeing
are their main customers, they have strong order books to sustain for the next 3 years which inturn
is a growth for Meggitt. These major plane makers are ramping up output and are targeting more
than 1,100 deliveries in 2012, as there is a growing demand by airlines for new fuel-efficient planes
and rapidly growing economies. Meggitt’s Ceo, Terry Twiger expressed his concern for the Military
market and stated that they are self-sufficient in meeting the growing demands but growth from the
military market will remain uncertain until the U.S. presidential elections are carried out
Meggitt was awarded two contracts from BAE Systems plc for its range of cockpit display equipment
and electro-mechanical instrument and supply of the nose and main wheels, brakes and brake
control systems added spares both valued at £5 million and £8 million in the year 2011. Also in 2010
it won a $3.2 million training system upgrade contract from the Singapore Police Coast Guard.
Meggitt believes in acquisitions as a key part of their growth strategy and are intended to enhance
Meggitt’s core growth and business expansion which includes new technologies, additional products
and geographical spread-out. In 2011, Meggitt decided to acquire Pacific Scientific Aerospace
91
business from Dahaher Corporation which has enhanced meggitt’s product portfolio, having created
integrated fire and smoke detection and suppression offerings plus electrical solutions to support
the hydraulic/pneumatic technology in aircrafts. Meggitt further plans to acquire their Artus
business in the next 12 months, which would help in diversifying their sensors and anti-icing
products. The company will enhance its low cost manufacturing capability with the addition of
factories in Mexico and Vietnam. LONDON | Tue Aug 7, 2012 7:59am BST (Reuters)
The airlines are buying new fuel - efficient aircrafts so as to cut the ever growing fuel costs and the
Gulf and Asian carriers are looking to expand their businesses whereas the US airlines seeks to
replace their ageing fleets. All these factors serve as a positive outlook and opportunity for Meggitt,
who is a major producer of wheels, brakes and other parts for Airbus and Boeing. Meggitt’s civil
aerospace business accounts for 45% of their total revenue and there has been a 16 % increase in
sales this year whereas the military represents around 45% of Meggitt revenues and currently is
estimated to have only a 2% growth due to the uncertain defense cuts. Meggitt’s finance chief Mr.
Stephen Young was assertive about the large jets markets due to the growing demand world-wide,
as well as the military business grew 5 % in 2011. Wednesday March 7, 2012 By Daily Express
Reporter. Meggitt also expects Eurofighter Typhoon to fall by about 40% in 2012 and 2013, F-35
production could flatten over the same period. Overall Black Hawk utilization could reduce by up to
55% by 2014 due to the end of the Afghanistan operations.
http://www.guardian.co.uk/business/marketforceslive/2011/dec/06/ftse-wavers-retailers-
fall?INTCMP=SRCH
Meggitt should also look into the Cyber and IRS (intelligence, surveillance and reconnaissance) as
they are the only real growth areas in the defense sector at the moment and the big players are
looking to move into these areas. Rhys Jones and Andrea Shalal-Esa FARNBOROUGH,
England (Reuters).
7. TCS Submissions
Presentation (9th August 2012)
Company Analysis Pack
92
Finmeccanica
Company Information
Ranked among the top 10 players in Aerospace, Defence and Security the company is Italy’s leading
industrial player in high technology sector. The group has great presence internationally with 350
companies, partnerships and joint ventures worldwide
The company derives about 73% of its revenue from three sectors – Helicopters, Defence
Electronics, Security & Aeronautics. The company has a strong presence in Space, a pioneer in
satellite services. The company manages all these segments through over 20 companies that are
held under Finmeccanica. The Group Structure is as follows.
Finmeccanica as a group has two subsidiaries namely Finmeccanica Group Services and
Finmeccanica Group Real Estate. These two companies provide services that are common to all
entities within the group. Finmeccanica Real Estate manages and provides non critical services to the
group companies including power supply, ICT, purchasing, global services, logistics, asset
management and property management
Business Segments
The company operates through seven business segments Aerospace, Helicopters, Space, Defence
and Security Electronics, Defense Systems, Energy and Transportation. Here Defence security
Electronics along with Defence Systems is constituted under Defence Business.
93
Aeronautics – (Alenia Aermacchi)
Production of military, civil aircraft as well as ground support services. A 50% joint venture with
EADS is called ATR. ATR is the leader globally in turboprop aircraft. Another joint venture between
Alenia Aermacchi (51%) and Sukhoi Holding (49%) is called Superjetinternational. The company
specialises in sales and customisation of superjets.
Helicopters – AgustaWestland
Range of helicopters for civil and military clients
Defence & Security Electronics
Through its group companies Finmeccanica delivers mission critical systems for sustainment and
homeland security
Selex Galileo : Mission Critical systems for self protection and surveillance. Core skills in sensors,
tracking, targeting, target drones and playloads
Selex Eslag : Design, development and high technology solutions for defence, avionics, automation
and technology
SELEX Sistemi Integrati : Systems for homeland protection, radar sensors for defence, battlefield
management, naval warfare and air port solutions
Defence
Through its joint venture MBDA, (BAE Systems 37.5%, EADS 37.5% and Finmeccanica
25%)Finmeccanica is largest in Europe as missile systems producer.
Energy
Through its subsidiary Ansaldo Energia, Finmeccanica offers full cycle services to build turnkey power
plants and green filed sites
Transportation
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Within the rail transport sector, Finmeccanica offers products and services in rail signalling and
traffic monitoring systems
Ranking As of April 2012, the company was ranked 731 in the global 2000 companies in Aerospace &
Defense.
Headquarters Rome (Piazza Monte Grappa ), Italy
Geography (Key Markets) Italy, UK and the US (85% of Staff)
Other geographies – France, Germany and Poland. Has presence around the world through its 350
subsidiaries – joint ventures and partnerships. The company has about 45% of revenue from
international markets
Employees 70000 (as on Dec 2011 end)
Organisation Chart
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SECTOR COMPANY TITLE NAME
AERONAUTICS Alenia Aermacchi Chief Executive Officer
G. Giordo
ATR Chief Executive Officer
F. Bagnato
SuperJet International Chief Executive Officer
N. Cauceglia
HELICOPTERS AgustaWestland Chief Executive Officer
B. Spagnolini
SPACE Thales Alenia Space Chief Executive Officer
R. Seznec
Thales Alenia Space Italia Chairman and Chief Executive Officer
L. Pasquali
Telespazio Chief Executive Officer
C. Gualdaroni
DEFENCE AND SECURITY ELECTRONICS
SELEX Galileo Chief Executive Officer
F. Giulianini
SELEX Elsag Chief Executive Officer
N. Cardinali
SELEX Sistemi Integrati Chairman G. Veredice
DRS Technologies Chairman and Chief Executive Officer
W.J. Lynn
DEFENCE SYSTEMS Oto Melara Chief Executive Officer
C.A. Iardella
WASS Chief Executive Officer
R. Lunardi
MBDA Chief Executive Officer
A. Bouvier
MBDA ITALIA Chief Executive Officer and General Manager
A. Perfetti
ENERGY Ansaldo Energia Chief Executive Officer
G. Zampini
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FATA Managing Director S. Praitano
TRASPORTATION AnsaldoBreda Chief Executive Officer
M. Manfellotto
Ansaldo STS Chief Executive Officer
S. De Luca
BredaMenarinibus General Manager N. Saporoso
Profile – Key Personnel
Sir Kevin Reginald Tebbit (Director)
He has held various positions in Policy, Management, and Finance posts in Foreign & Commonwealth
office, NATO and the Ministry of Defence. He served as permanent under-secretary of state from
July 1998 to 2005.
Sir David Omand (Non Executive Director)
Served as security and Intelligence co-ordinator in the UK in 2002. He served over seven years on
UK’s joint intelligence committee, he also has experience in the Ministry of Defense, as Defense
Secretary in charge of the defense programme. In addition, he served three years in Brussels as
defense counsellor to NATO
Sir Brian Burridge
An MBA from the Open University Business School, Sir Brian Burridge has served over 39 years in the
Royal Air Force as a pilot. He has also spent many years in the MOD policy posts, even as principle
staff officer to the chief of defense staff.
97
Alberto de Benedictis – Chief Executive
Started his career as an economist in World Bank, Washington after graduating from School of
Economics of La Sapienza University of Rome. He joined the company in 1981 and became the vice
president of North America in 1989. He has also served on the boards of NASDAQ and NYSE listed
companies. He has been on the position of Chief Exceutive since 2005.
Culture Known for a culture of innovation and fostering right people. The company places emphasis on
employer branding. Here employees are part of its culture to communicate values and its corporate
culture in the international labour market. Also, the group believes in hiring highly skilled, educated
individuals.
Sustainability is at the core of its culture
- Economic Sustainability : Returns to shareholders, maintaining profitability
- Social Sustainability : Transparent Management of staff, Diversity
- Environmental Sustainability : Global solutions to address Earth surveillance, the exploitation
of natural resources, energy management, sustainable mobility, health education,
healthcare and environmental security
Business Strategy
The company remains committed to increase its presence in both domestic and non-domestic
markets within helicopters, defence electronics and aeronautics. Consequently, the group remains
focused on innovation and its investments in research and development.
Future Strategy
More investment in Helicopter business, shift in focus to commercial markets
Further opportunity for collaboration with Boeing in Aero structures
Defence, Electronics & Security to be the major growth driver
Leeway into Cyber by winning a first contract. (In Feb 2012, Selex Elsaf won EUR 50 million
contract in Cyber security jointly with Northrop Grumman for NATO)
Conslidate its position within the UAV Business (Selex Galelio and Alenia Aermacchi), looking
at reference role within European programmes.
Focus in Civilian markets: The company within its helicopter as well as other businesses wants to
look at new areas of growth within the civilian market. As per the business plan 2012, Finmeccanica
wants to dedicate almost two-third of its future investment in civilian sector.
Within helicopters, three different models - the AW169, AW139 and AW189. Also, the company has
purchased rights to AW609 tilt rotor of commercial transport.
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Strategy in India
India has been on Finmeccanica’s radar for over 40 years. In 2007, the company signed a
memorandum of understanding with Bharat Heavy Electrical (BHEL). The company has provided
control equipment to Indian Navy, Communication systems for Indian army.
In 2010, the company specifically announced its plan to strengthen its presence in India through
partnership with key local players. In line with this the company seeks to extend its collaboration
with government companies (Eg: BEL, HAL, BHEL and BDL).
Although the company has not specifically stated a strategy for India in 2012, Finmeccanica is open
to expand into emerging markets, including India.
http://www.finmeccanica.it/EN/Common/files/Corporate/Interviste/2007/Intervista_CorrieredellaSera_18_02_2007_uk.pdf
SELEX Galileo signed a joint venture agreement with Data Patterns Group, Chennai India, to produce
defense electronics products. This joint venture reflects Finmeccanica’s move in line with the
industry dynamics to move towards collaboration.
Drivers
Emerging markets present growth opportunities (The company expects to earn 5o% of its
revenue from Emerging markets in the future)
The company expects more revenue from BRIC countries
Finmeccanica has grown its business in Turkey, Algeria and Middle East
Business Case : Finmeccanica currently drives about 45% of its revenue from international markets.
The company seeks to increase the share to 50%, that represents adding close to a billion (EUR 959)
in revenue. In line with this, the company has been making headways in terms of securing joint
ventures for market entry in these countries. Also, as seen from the points above the company
expects more revenue from BRIC, and other Asian markets. The company’s future strategy of
investing more in the helicopter business also ties in with the company’s focus on emerging markets.
For instance, Augusta Westland and Oboronprom, a Russian company formed a joint
venture to market the SuperJet 100 in civil markets.
In India Finmeccanica formed a joint venture with Tata to form an assembly line with
assembly line for the AW119 helicopter. This again is strengthened by Finmeccanica’s
strategy in India to enhance its presence by partnering with local companies.
In Turkey Finmeccanica formed a joint venture with TAI for ATAK helicopter programme,
partnerships with largest A&D companies in the country.
The company’s entry into emerging markets appears to be largely based around its strength in
helicopters and trying to enter civil markets. Augusta Westland had EUR 3.96 billion in new orders
and EUR 12.2 billion in backlogs. Out of this at least 45% is in emerging markets. On top of that the
new joint ventures are going to add revenue. The company’s CEO in July 2012, reiterated his interest
in transforming the entity into an international one.
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Other Civil programs garner interest
Company’s international business is again bolstered by ATR 72 aircraft in maritime patrol that has
drawn interest from Poland, India and Algeria. Recently in July 2012, CEO Augusa Westland
announced that first three batch of AW101s be delivered to India in November. The company
forecasts indicate the export sales in 2012 to be about 52%.
(http://blogs.defensenews.com/farnborough/2012/07/09/finmeccanica-spells-out-export-
ambitions/)
Challenges
Slump in orders – On the back of situation in the US
Social and Political situation in North Africa has impacted the company, as this is the major
market. There was interruption in major civil and military programmes
New Order in 2011 declined by 22.0% overall. Within the Aerospace segment a whopping
33.1% decline and 27.5% in defense2011. On the whole order backlog was down by 5%
- Causes are - delays in approval from the US government on defence budget
Margins are way below industry standards, due to unprofitable programmes.
The product portfolio of the company is too fragmented to be competitive in the market
Pipeline had to be revised as some of the programmes are no longer profitable (contracts for the production of trains for Denmark, the Netherlands and Belgium for Ansaldo Breda)
Opportunities
Suspension of Libyan contracts has impacted the profitability of aerospace & defense
segment.
The order book of the company declined quite a bit in 2011, as many programs are lower margin
businesses. This is evident in the fact that the operating margin of the company is way below the
industry margin. During 2011, Finmeccanica had margins of -1% while the industry average was
8.24% while S&P averaged 12.87%. Compared to its immediate competitors as well, the operating
margins was low while gross margins were comparable. This shows that the company has high
operating expense, on account of too many business segment that support a fragmented product
portfolio. The average operating margins of its competitors within the jet market – BAE Systems,
Boeing and Lockheed Martin was about 8.5%. Although the Augusta Westland margins are high at
10.6% compared to Europter, the other businesses have high operating costs.
The company has restructuring programs in place from 2012 to 2013 to achieve EUR 440 million in
cost savings by 2014. Within the Defense Electronics segment the restructuring plans are on to bring
Selex entities together to form a single entity. Within this segment, the demand for systems that
support intelligence activities is high. The company wants to invest in developing smart grid and
smart city. The restructuring programs at Selex will open up better efficiency as it can grow both
vertically and horizontally. Unified Selex will better enable the company to draw from the broad
portfolio of products and technologies available at Selex Sistemi Integrati, Selex Galileo and Selex
Elsag
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The company believes that all the cost saving initiatives is key to the company being able to be
profitable to be able to do business and enter new markets.
For margin improvements and cost efficiency programs the company has reiterated the need for
collaboration within defense. Recently, the CEO of the company reiterated the need for European
competitors to come together to be profitable in the defence industry. (Avionnews, July, 2012). This
trend presents opportunities/need for IT systems/platforms for collaboration between entities.
Furthermore, within defense electronics the companies can offer outsourcing services in civilian
cyber security solutions. This ties in all – company’s strategy to go into emerging markets, while still
maintaining good margins.
R&D Spending
Finmeccanica invests about 12% of its revenues in research and development activities (EUR 2
billion in 2011).
Key News and New Orders
Other Key News/Press Release
July 23, 2012: Finmeccanica strengthened its presence in Russia through its merger with SELEX Elsag. This provided basis for strategic partnership agreement with CEO of Flanmeccanica Aleksandr Kiselev, Chief Operating Officer of Russian Post, during the official visit to the Russian Federation of the Italian Prime Minister Mario Monti. Under this new agreement series of joint venture activities will take effect by end of 2012.
New Contracts
July 19, 2012 : Finmeccanica signed USD 850 billion worth contracts with Israel. This represents
collaboration with Italian and Israeli governments. These contracts include agreements to offer 30
M-346 advanced trainer aircraft, high-resolution optical military satellite system for Earth
observation to the Italian government and systems for flight control of the 30 M-346 advanced
trainer aircraft
July 10, 2012: Finmeccanica won EUR 140 million in new orders that was given by the prime
contractor Northrop Grumman as part of NATO's Alliance Ground Surveillance (AGS) programme
July 10, 2012: AgustaWestland, a company owned by Finmeccanica announced orders for 37
helicopters worth EUR 300 million.
May 28,2012 : Finmeccanica through its companies Ansaldo Energia, SELEX Galileo, SELEX Elsag and
Telespazio received orders for a value worth EUR 220 million. The proect is to upgrade thermal cycle
and the turbogenerator under the nuclear power station, in Argentina.
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Products
Defence and Security Electronics
Within this segment the company is the second largest player within Europe and sixth largest
worldwide. Through the strategic transaction with SELEX, the group has now added more capabilities
in mission critical systems for situational awareness, radar sensors for air defence, battlefield
management, naval warfare, coastal and maritime surveillance
Key products include
- C4I Systems – SELEX System Integrati
- Nexos- SELEX Sistemi Integrati
- Ran 40L Series
- Global Airport – Selex Sistemi Interati
- VTMS – Selex Sistemi Integrati
Defense Systems
Through this segment, Finmeccanica designs as well as develops missile systems, torpedos, naval
artillery and armoured vehicles. Finmeccanica operates in this segment via OTO Melara and WASS.
WASS is a world leader in torpedos.
Key products include
- MU90/Impact ALWT – WASS
- C310 – WASS
- Black Shark –WASS
- Missiles
- Aster –MBDA
Competitiveness - Defence and Security Market
This market is a key market for the company, despite defense cuts this market has remained the key
market for the company. In this market the company has shifted more towards homeland security,
where the growth rate has been 5% per year. This is driven by
(i) Demand for security systems – Border Surveillance, security system for critical
infrastructure and transport
(ii) Demand for cyber security solutions
(iii) Investments in environmental monitoring systems
The company estimates the cyber market to be growing at a rate of 10% annually with investments
from US and Europe.
Key Competitors:
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Airbus, Airbus Military, Cassidian, Astrium and Eurocopter, BAE Systems
Financials
Comparison with industry
Growth Rates of Industry Industry S&P Company
Sales 4.95% 8.36% -7.36%
Net income 21.10% 4.30% -314%
Debt/Equity Ratio 0.51 0.85 0.74
Current ratio 1.60 1.20 0.98
Liquidity Ratio 0.90 0.80 0.70
Return On Equity 20.2% 36.2% -50.80%
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The group’s credit rating was downgraded. In terms of financial performance, the revenue of the
company has declined by 7.0% in 2011. This was largely on account of lower volume of Defence &
Security Electronics due to lower activity in the US. Lower revenue further aggravated by higher
operating cost led to the group posting operating losses. This was offset a little by a tiny net interest
income, but overall the group posted losses.
The debt-to-equity ratio of the company has worsened on account of higher debt in proportion to
equity. The debt in fact has declined by 1.1%. The shareholders’ equity suffered due to earning
losses.
The Return-on-Equity of the company has averaged at 9.8%, although in 2011 the return was
negative.
The cash generated from operations nearly halved in 2011, due to higher working capital needs on a
net loss. The company used more cash in financing activities as it completed merger deal with SELEX.
On the whole, the company has always invested more cash in financing activities than cash
generated. Free cash flow has remained negative in 2 consecutive years.
Relationship with TATA
Tata Group has a partnership with AgustaWestland, a company held by Finmeccanica. In 2011 Tata
formed a joint venture ‘Rotorcraft’ that will last till 2013. Through this joint venture Rotorcraft will
customise and flight test new helicopters in the world market.
*(http://www.agustawestland.com/news/indian-rotorcraft-holds-ground-breaking-ceremony-new-helicopter-production-facility-
hyderabad http://www.agustawestland.com/news/indian-rotorcraft-holds-ground-breaking-ceremony-new-helicopter-production-facility-
hyderabad)
Key Events
M&A activity – Restructuring within the Group
On March 28, 2011, Finmeccanica Group Companies Elsag datamat and SELEX Communications
merged as on June 1, 2011. This transaction is line with Finmeccanica’s restructuring activity that
started in 2010, to optimise Defence and Security Electronics division.
Within the Space division, the Telespazio Holding Srl (where Finmeccanica holds 67%) was merged
into Telespazio on Feb 2012
104
Effective January 2012, Alenia Aermacchi SpA and Alenia SIA SpA within the Aerospace segment merged into their parent company - Alenia Aeronautica SpA. *(http://www.avionews.com/index.php?corpo=see_news_home.php&news_id=1143549&pagina_chiamante=index.php)
Appendix
New Orders
http://www.flightglobal.com/news/articles/farnborough-interview-with-finmeccanica-ceo-giuseppe-
orsi-373550/
Babcock
Company Information
105
Babcock is a leading Engineering Support Services company in the UK and few markets
internationally. The company operates in three sectors – Defence, Energy, Telecommunications and
Transport
UK’s Navy Training Partner for 15 years. The company is UK’s largest provider of training services to
three armed forces. The company is the third largest after BAE Systems and Rolls Royce
The company is more oriented towards offering support services. Babcock derived about 80% of its
revenue from support.
Business Segments
The company operates through four business divisions - Marine & Technology (35% of revenue),
Defence & Security (20.0%), Support Services (35.6%) and International (9.1%) The first two
segments focus on the Defence sector. In terms of customers, defense has highest share
The Marine & Technology offers submarine through life support, war ship maintenance to the Royal
Navy, Australian and Canadian Government. Technology offers Engineering, Design and System
Integration services.
Defence & Security division provides military flying trainings, aircraft engineering, Royal Navy
training, fleet and construction vehicle management to army, navy and the air force.
Support Services deals with baggage handling, vocational training programmes.
International segment focuses on civil and military training and Support to the Royal Air force of
Oman.
Employees
Number as on December 2011 end - 25140
Headquarters
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London, England
Geography (Key Markets)
The other geographies where the company operates is Europe (France, Bulgaria), Australia, South
America, Middle East (Oman, Abu Dhabi), Africa, Asia (Singapore), South Africa.
UK is the largest geography for the company that accounts for 86% sales of the company.
Organisation Chart and profile
107
Name Title Profile
Mike Turner CBE Chairman Former Chief Exceutive of BAE Systems
Peter Rogers CBE, Chief Executive
Appointee to the board since 2002, former Director of Courtaulds PLC and Acordis BV.
Bill Tame Group Finance Director
Former Finance Director of Scapa Group PLC and is currently a non-executive Director of Carclo PLC
Sir Nigel Essenhigh GCB Non Executive
Retired from the Royal Navy in late 2002 he was First Sea Lord and Chief of the Naval Staff.
Justin Crookenden Non Executive
Experience in international Equity Execution and UK M&A. Formerky a managing director of UK Investmnet banking
Sir David Omand GCB Senior Independent Director
Experience in giverment service till 2005. Served as a Principal Private Secretary during the Falklands conflict.He was also the UK Defence Counsellor in NATO Brussels for three years.
John Davis Divisional Chief Executive - Defense and Security
Worked in defense since 1990s, formerly with BAE Systems. Have experience with securing major outsourcing contracts securing outsourcing contracts for Bombardier
108
Culture
The culture is entrenched in values of serving the customer, given that Babcock is a service company.
The company values both its customers and employees. At the core of its values is building long term
relationships with the customers
Business Strategy
Babcock aims to be a top three player in the markets that it operates in. Consequently the company
remains open to acquisitions in these divisions. The company wants to stay focused on nurturing and
maintaining its existing customer relationships. Although the company may take up short term
contracts it is always keen to build long term relationships.
Growth Strategy is underlined by
Growing existing contracts: The company seeks cross selling opportunities with existing
contracts with customers
Existing Customers: Building on the current relationships the company seeks to offer
broader range of services
Acquiring New Customers by selling new capabilities
Growing international support market revenue in navy
Drivers
Submarine support activities with Australian government’s reform of naval support activities
Building capacity in Canada for future work
Deliveries of Babcock system in Spain, in support of Spanish S 80 submarine programme.
Increasing pressure to hire new people but in light of budget cuts by MoD in the UK to drive
increased contracts in outsourcing
Core growth sectors for the company include nuclear, infrastructure, education and mobile
asset management
Looking ahead, the company wants to build on its market position in training and support to
leverage on outsourcing activities that are going to open up. Furthermore, the company seeks to
review opportunities in Australian and Middle Eastern Markets.
Opportunities
Babcock is focused on delivering greater customer value by delivering cost efficiencies. Entrenched
in service delivery model, the company states that it is well positioned to benefit from further
opportunities in outsourcing.
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The UK government which is the fourth largest spender of defence, is now on the search for
support side efficiencies. The UK MoD seeks £4 billion in cost saving opportunities over the
course of the year.
Enhanced opportunities in outsourcing activities in military training and equipment support
The company should be able to leverage is established position in Australia and Middle East
to grow new business
The company has about 80% of pipeline in the Support Services segment.
Secure IT Systems
As Babcock’s business model is centred on outsourcing activities, the company is invested in
protecting higly critical and confidential information. Babcock is heavily reliant on cyber security,
secure and reliable IT systems. Its business and customers largely depend on it
Current IT Spending plans
Babcock began IT transformation project in 2010 with a total value of £25 million. The total
cumulative IT expenditure in 2011 was about £14.4 million. The company expects to spend £2.2
million in 2012./13 to upgrade Dockyard facilities.
Pension funds
Pension funds that are held by the company are pension schemes are vulnerable to variation in
yields on corporate bonds and expectations of inflation. Company seeks to have a long term
relationship with trustees, mitigate and manage long term risks. Therefore, here we can point out
the need for risk management systems for the company.
Key News and New Orders
Other Key News/Press Release
May 14, 2012 : Babcock entered into an agreement with VT Holdings Inc, a special purpose vehicle backed by The Resolute Fund II, LP (a fund by Jordan company II LP) to dispose VT Services Inc. VT Services Inc Babcock’s defense business. The total consideration for the transaction is £61 million.
New Contracts
Beginning of 2012, the company signed a four year contract (till September 2016) with MoD to
provide maintenance service and incremental replacement for over 14,000 vehicles (cars, coaches
and trucks). The contract is estimated to be worth about £400 million.
During 2011, the company secured a £40 million two year contract with the Royal Electrical and
Mechanical Engineers.
110
In addition, Babcock secured a six year contract for training Fleet Outsourced activities of the Royal
Navy for £90 million. The contract could extend till the next 15 years
Nuclear Decommission Authority awarded a long term contract for cleaning up the Dounreay site for
£1.60 billion by 2025.
On July 10, 2012, Babcock entered into a contract with West Yorkshire Police for 3 years to maintain
and support 100 buildings and 10 radio masts.
Products
Defence
Within this segment the company offers services in Equipment and Training. Within Equipment
Babcock offers services for defence in the following areas
Key services
- Equipment Engineering Support : Support services ranging from,
- Helpdesk Operation
- Engineering support
- Asset Management, Stores, Logistics
- Production of technical handbooks
- Obsolescence Management
- Change Management
- System Integration across CADMID lifecycle
- Fleet Management and Equipment Support
- Military Logistics: Solutions design, requirement management and integrated logistics
support
- Design & Technology : Design, integration and management services to marine, oil and gas
and defence sectors worldwide
- Nuclear Equipment Design & Supply
Services in Training & Education is as below
Babcock is the largest provider of vocational training to military, local authorities and commercial
organisations.
- Safety Training : Tri Service Training and Training Support to armed forces in the UK and
overseas
- Fire & Rescue Training : Training in fire, rescue, management, health and safety
- Professional Training for Education Sector : Program for teachers and education
practitioners
Competitiveness
111
The company is one of the key suppliers to UK Mod (Ministry of Defence). As of October 2011, the
MoD statistics suggest that the company is the second largest supplier to MoD ahead of
Finmeccanica but behind BAE Systems.
Babcock has a solid market position in the UK as the only provider of deep and in-service
maintenance. In both UK and in International markets the company is well positioned to offers
services in naval equipment, infrastructure support and service for submarine and warship fleets
Key Competitors:
Finmeccanica, BAE Systems
112
Cobham
Company Information
A leading company in Aerospace that is involved in development, delivery, and leading edge
solutions based on innovative technologies. The company is a global tier two subsystem partner for
OEMs, Prime contractors and governments.
For more than 75 years the company has been offering services and products around
communications systems, land, and sea and air platforms. The company’s product range mainly
consists of circuits, high-tech components or subsystems that are mostly used in military equipment.
Business Segments
The company primarily operates in three business segments – Aerospace and Security, Defense
Systems and Mission Systems
Revenue by segment
Aerospace and Security Division
Cobham is a leader within this division in strategic communications, military, security surveillance
systems and communications. Within this segment the company has four strategic business units –
Aerospace Communications, Antenna Systems, Commercial Systems, Tactical Communications and
Surveillance
Defense Systems
Through this segment the company offers radar products, specialist antennas as well as microwave
subsystems. Its platforms were used in world’s major systems such as Aegis radar system, F-35
Lightning II Joint Strike Fighter and Standard Missile. Through this division the company provides
scientific, systems engineering and technical assistance (SETA) to intelligence agencies.
Aerospace security is the largest
segment of the company
113
Mission Systems
Through this segment the company designs, develops and offers technology for Air-to-Air refuelling,
Weapons, Life Support and robot applications. The company maintains 150 aircrafts on specialist
operations around the world. This division maintains over 150 fixed wing and rotary wing aircraft for
government agencies worldwide. Strategic business units include Aviation services, Life Support and
Mission Equipment
Ranking
As of June 2012, Cobham was 51 on the list of Top 100 Defence contractors on the Defense List.
Cobham has been excluded from the Washington Technology’s list of Top 100 contractors in 2011.
Headquarters
Wimborne Minister, UK
Geography (Key Markets)
The company’s international presence is in US, UK, Mexico, Sweden and Finland. Cobham has over
100 partners and customers. The company derives more than half of its revenue from the US.
Employees
5285 (as on Dec 2011 end)
114
Organisation Structure
Name Title Profile
J Devaney Chairman A career in Engineering companies
A Stevens Chief Executive Officer
A qualified Chartered Engineer, who also served as Managing Director in Rolls Royce
W Tucker Chief Financial Officer
MBA from INSEAD, has held senior financial positions in British Airways, Euro Disney and was Deputy Group Financial Director of Cable and Wireless.
M Wareing Non Executive Director
Formerly Prime Minister's envoy for reconstruction in Southern Iraq. Serves as a Chairman of the Iraq Advisory Board for G4S plc. He is Economic Development Adviser to the Government of Afghanistan
115
A Wood Independent Non Executive
Formerly served BAE systems as Strategic Development Director. She was responsible for corporate strategy and M&A.
M Hagee Independent Non Executive
Former US Marine Corp that served the Marin e corp for 39 years. He served as Commanding General and Executive Assistant to the Director of Central Intelligence.
Culture
The culture of the company is rooted in business ethics that strives to manage risk and minimise liability. Cobham is always focused on investing in technology to always build on better innovative products that are differentiated. Compliance is taken very seriously and employees are trained extensively on key principles of prevent, detect and respond
Business Strategy
The company remains committed to increase its presence in both domestic and non-domestic
markets within helicopters, defence electronics and aeronautics. Consequently, the group remains
focused on innovation and its investments in research and development.
Future Strategy
Selective investments in markets where Cobham has technical differentiation
Enhance growth inorganically through acquisition activities
Continued investment in technologies in fast growing markets
Focus on markets where Cobham has scale and differentiation
An export driven strategy to compensate for the slowing US defence market
Hold top 3 position in key markets by investing in technology
Drivers
USD 14 million investment in a new product ‘Radio and Audio Integration Management
System’ is expected to generate about USD 250 million in revenue over the product’s life.
116
Design of new ERP system to enhance operational performance is underway
£25 million in cost savings anticipated for 2012
Additional supply chain improvements in place by 2013, to result £75 million in savings
Challenges
During 2011, the core business declined by 7.0%, as the US Department of Defence budget
declined
US Defence market accounts for nearly 44% of revenue
Opportunities
Emerging market opportunities and international business. During 2011 non US defence
business grew by 5.0%
Cobham has seen increased activity in air fuelling and electronic subsystem exports
Emerging markets of India, Brazil, Middle East and parts of South East Asia.
Cobham has managed to achieve better net income margins than the industry average, despite
sluggish top line performance. Furthermore, the company appears to be concerned with supplier
optimisation as well. To achieve these initiatives the company has plans to implement an ERP
system.
Cyber security: The Company abides by strict regulatory and compliance requirements. For instance
the company has to follow the United States Lobbying Disclosure Act. Cobham has strict
environmental priorities to adhere to. Risk is at the heart of its focus even as Cobham chooses
suppliers based on social and environmental risk. This can be explained by the fact that the company
outsources the manufacturing of components while it only assembles products in house.
Strategy in India
India is an attractive market for Cobham. Cobham expanded its presence into the country in 2010 by
opening offices in Delhi and Bangalore. The company remains committed to investing in India in the
long term. In line with this Cobham wants to invest on having a dedicated sales force, account
management and Supplier management while leveraging Indian Indsutry.
Cobham seeks long term growth by partnering with Indian companies and develop local
solutions
Industrial co-operation through Indian Industry Joint Ventures
Deliver long term benefit to India by transferring leading edge technologies through
industrial co-operation
Foster strategic links with local technology universities
117
Research and Development
Cobham spent about £69 million on R&D in 2011, representing a core investment of £129 million.
The company’s investment in R&D is linked to market opportunities through Private Venture
Order Book
For 2011, the Company had an order book of £2.5 billion (£1.1 for aviation business)
Key News and New Orders
Other Key News/Press Release
During 2011 Embraer of Brazil selected Cobham to provide advanced flight display system for (14 EMB-312 Tucanos), Columbian Air Force in early 2012. In addition, Embraer selected Cobham for the development of Wing Aerial Refuelling Pod for the KC-390 Tactical Military Transport and Tanker for USD 60 million In 2011, the company completed the first ever integrated radar subsystems for the Apache Block attack helicopter for the US army.
New Contracts
August 2, 2012 : Boeing selected Cobham to provide On Board Inert Gas Generating system for the
new KC-46A Tanker Aircraft of US Air Force.
July 16, 2012 : Cobham was awarded a long term agreement for 18 months with Astrium to produce
fixed waveguides in a deal valued at £14 million
July 11, 2012 : Cobham secured an eight year contract from Oil Spill Response Ltd (OSRL) to offer
services on oil pollution detection and surveillance in the UK.
Products
Defence and Security Electronics
Cobham offers some of the complex rotating electromechanical sub systems, microwave and
mmWave antennas for radio frequency, Infra-red and Electro optic platforms.
‘’Electronic warfare antennas including jammers, radar warning, direction finding (DF) and
signal intelligence (SIGINT)
Communication, navigation and identification (CNI) antennas – line-of-sight communication
and data links, SATCOM and GPS, IFF, TACAN, marker beacon, altimeter
Radar antennas – fire control radar, weather radar, synthetic aperture radar
118
Radomes and advanced composites
High-precision positioners – sensor positioning systems, antenna positioning systems’’
(Cobham, 2012)
Mission Systems Division
Life Support
As a preferred supplier of pilot oxygen regulators for the US military Cobham has a good positioning within this segment. The company also offers On Board Oxygen Generating systems (OBOGS)
- Cooling Systems : Infra Red (IR) cooling in the Javelin, EKV and THAAD programs - Actuation & Control : Electro-explosive actated valves, gas storages devices - Space Systems : Pyrovalve and electro-explosive actuation technology for major launch
vehicles Mission Equipment Air-to-air refuelling to facilitate man machine interface right from avionics equipment in tanker aircrafts to refuelling probes in receiver aircraft.
- Air-to-air and air-to-ground systems employing both pneumatic and pyrotechnic ejection systems
Competitiveness - Defence and Security Market
The core competence of Cobham that sets it apart from competitors is that it offers fighters, satellites and unmanned vehicles that have lower weight yet provide greater functionality. Cobham has a solid position with KC-46A aerial refuelling tanker aircraft and the CH-53K heavy lift helicopter. The company has a strong position with its legacy F-16 and the F-18 fighter aircraft. Cobham has strategic product within the European market with Eurofighter Typhoon fighter aircraft and the NH90 utility helicopter. Unmanned aerial Vehicles (UAV) are some of the leading in the world, supported by Cobham’s increased investment in technogy. What differentiates Cobham from its competitors is the superior technology Cobham through its Mission Systems provides 95% of refuelling systems for both receiver and tanker aircraft. Also, Cobham is the world’s largest supplier of tactical linear Stirling cycle for infrared and other optical equipment. Furthermore, Cobham is the market leader in Air-to-Air fuelling within defense systems.
119
Products
120
Financials
Competitor benchmarks
Growth Rates of Industry S&P Company
Sales 8.36% -7.36%
Net income 4.30% -314%
Debt/Equity Ratio 0.85 0.74
Current ratio 1.20 0.98
Liquidity Ratio 0.80 0.70
Return On Equity 36.2% -50.80%
121
Cobham maintained the same revenue level as last year as challenging conditions in the US
defence/security market was mostly offset by strong growth in world defence markets. Order intake
for the year increased by 16.0%. Cobham’s cost efficiency programmes enabled the entity to realise
£25 million in savings. Overall the operating margin improved by 2.0%. Despite a sluggish top line
the company managed to enhance its net income by 22.8%
Debt-to-equity ratio of the company improved much as long term debt was paid by the company.
Return on equity improved significantly as well on account of improvement in net income.
Key Events
M&A activity – Restructuring within the Group
Cobham is active in M&A activity where the company has acquired over 50 companies in the past
decade for over £1.5 billion.
The company is very open to strategic transaction to fuel growth. In 2011 the company invested
about USD 280 million. Further Cobham divested Analytics Solutions Business (non core asset) for
USD 350 million.
In January 2011, The company acquired Telerob GmBh, manufacturer of advanced bomb disposal robots and threat response vehicles based in Germany.
On June 26, 2012, Cobham completed its acquisition of Thrane &Thrane A/S. Earlier in April 2012,
Cobham presented a formal offer to buy the above company. Thrane & Thrane A/S is a company
based in Denmark that manufactures infrastructure solutions, equipment for global mobile satellite
as well as radio communications on air, land and sea.
On July 9, 2012 Cobham divested its non-core US rescue beacon business to J.F Lehman for USD 73
million
Regulatory compliance
The company has lot of regulations to comply with as the government is the largest user of its
products. Cobham has to comply with the United States Lobbying Disclosure Act
Environment
For environment the company has set up the following priorities. In 2010, the company decided to
reduce energy use (water and waste) by 10%
‘’Increase energy efficiency from 1,499 MWh / £m to 1,049 MWh / £m
Reduce waste from 4.8 tonnes / £m to 3.7 tonnes / £m
Increase water efficiency from 259 m3 / £m to 113 m3 / £m’’
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Financials
In terms of financial performance, the revenue of the company has been on an upward trend. The revenue in 2012 increased by 14% driven by increased activity within submarine, and warship programmes. Contract wins in infrastructure, year-on-year growth within support services aided top line growth. Growth in top line together with cost synergy benefits, and improved contract margins aided the improvement in operating margin.
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Liquidity ratio of the company has been pretty healthy while the current ratio improved. The Gearing ratio has improved on account of significant reduction in long term debt. Long term debt declined considerable by 8.0%. Return on Equity improved due to net income on an enhanced shareholders’ equity base.
Key Events
M&A activity
October 6, 2011, The Group acquired a controlling stake in Careers Enterprise (Futures) Limited and
acquired net assets after allowing for negative value of joint venture. Total transaction consideration
was £nil.
July 8, 2010, The Group acquired 100% stake in VT Group PLC for consideration of £1.47 billion in
both share and cash. This business was later disposed off in 2011. See news section for more details
September 27, 2010, The Group acquired Evergreen Unmanned Systems, USA for a cash
consideration of £8.9 million.
Company- GKN PLC
Company information-
GKN is a British multinational automotive and aerospace components company founded in 1759.
The company was formerly known as Guest, Keen and Nettlefolds.
GKN is listed on the London Stock Exchange and is a constituent of the FTSE 100 Index.
Business segment-
GKN is global engineering group which produces the components for vehicles and aerospace. GKN
operates in four divisions GKN Driveline, GKN Powder Metallurgy, GKN aerospace and GKN land
systems. It has joint ventures in more than 34 countries.
GKN is first tier supplier of to manufacturers of aircraft, aircraft engines and equipments. Its
aerospace business comprises of 58% of civil and 42% of defence aerospace.
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Ranking-
Has been ranked 1370 among global 2000 by Forbes.
Headquarter-
Redditch, Worcestershire, England, United Kingdom.
Also have presence in Thailand, Germany and North America.
In India GKN have offices in Faridabad and Dharuhera (Haryana) and in Chennai (Tamil Nadu).
Key Market-
The businesses comprise reach from the US West Coast to the eastern shores of Japan, from
northern China throughout Europe to South Africa, Argentina and Australia, India, Thailand,
Malaysia.
*(http://www.gkn.com/aboutus/Pages/Where-we-operate.aspx)
Employees- 41900 (As on Dec 2011)
Aerospace Segment- 8500
Drive Line- 21,100
Powder Metallurgy- 6400
Land Systems- 5900
885
1481
845
2795
106
Land Systems
Aerospace
Powder metallurgy
Driveline
Other Business
Sales (£m)
Sales
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Organization Chart
Name Position
Michael Turner
Chairman
Former President of the Aerospace & Defence Industries Association of Europe. Fellow of the Royal Aeronautical Society. *Member of the Government’s Apprenticeship Ambassadors Network
Nigel Stein Chief Executive Officer
President of The Society of Motors Manufacturers and Traders Ltd and Member of Automotive Council.
Marcus Bryson Chief Executive Aerospace and Land Systems
*Vice President of Aerospace of ADS group
Tufan Erginbilgic
Independent non-executive Director
Shonaid Jemmett-Page
Independent non-executive Director *
Former non-executive Director of Havelock Europa plc. * Independent non-executive Director and Chair of the Audit Committee of APR Energy plc.
Richard Parry-Jones
Senior Independent Director *.
Former Chairman of the Welsh Assembly Government Ministerial Advisory Group
Andrew Reynolds Smith
Chief Executive Automotive and Powder Metallurgy *
Former Chairman of the CBI Manufacturing Council and former member of the Ministerial Advisory Group for Manufacturing. *Member of the Government's Green Economy Council.
William Seeger
Finance Director
John Sheldrick
Independent non-executive Director
Judith Felton
Company Secretary
Non-executive Director and Trustee of Young Enterprise UK.
Roland Seidel Managing Director GKN Driveline Trier- company contact
Rob Rickell global engineering director GKN Driveline
Business Model- Value is created by achieving the strategic objective through Market Leadership, Growth,
Operational Excellence, and Sustainability. The group always focus on finding new business
opportunity and achieve the best result through lean manufacturing. The superior technology and
outstanding employees , leveraging the global footprint and commitment to corporate responsibility
are considered as the key capabilities of GKN.
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Strategic objectives:
Market leadership
Achieve a leading market share in our chosen markets. Develop superior technology and quality in all our businesses. Deliver exceptional customer service.
Growth
Achieve above market growth in our chosen markets. Leverage and extend our global footprint to increase market share. Accelerate growth through value-enhancing strategic acquisitions.
Operational excellence
Develop a world-class enterprise, using Lean manufacturing techniques. Be an employer of choice with a high performance culture, motivated people and outstanding
leaders. Achieve preferred status with our strategic customers and suppliers.
Sustainability
Develop products and processes to help reduce emissions. Maintain a world-leading health and safety record. Have a positive impact on the environment and the communities in which we operate.
Business in India-
GKN currently manufactures only constant velocity joint (CVJ) systems across its three facilities in
India and is in the process of setting up a new facility at Pune at an investment of Rs 130 crore.
GKN has invested €20 milli and has created an innovative system concept, the first of its kind in the
world. It will improve safety; it introduces fully-automated flow lines; will minimise energy
consumption; and allow us to be more responsive to the customer. The main forgings of the new
systems will be precision-formed up to 950°C, cooled, descaled, cold formed, washed and then
treated with corrosion protection before quality control and despatch.
Two acquisition in 2011 has provided GKN growth platform in new and existing market. GKN has
acquired Getrag Driveline Products , global leader in All Wheel Drive Segment (AWD) and
Stromag , market leader in power management .
Joint ventur with Stromag India pvt.Limited for aerospace division and GNK Sinter Metals Pvt Ltd in
Powder metallurgy division and GNK Driveline India Ltd for Automotive division.
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Products-
GKN Driveline-
GKN Driveline is a leading global producer of CVJ Systems, AWD Systems, Trans Axle
Solutions and eDrive Systems and operates in 23 countries at 57 locations employing
22,000 people.
-Constant Velocity Jointed system including CV joints and side shafts -All wheel drive system( AWD) Including prop shafts, couplings, and final drive units -Trans-axle solution including open limited slip and locking differentials and electronic torque vectoring product. -eDrive systems including electric rear axles and electric transmissions.
GKN Aerospace-
-Integrated Aero structures, including wing and flight control surface sub-assembles and fuselage structure s and surfaces -Fixed and rotation propulsion products for aircraft engines fan case, exhaust, blades and nacelles. -Transperences including specially coated cockpit and cabin window -Niche products such as ice protection , fuel systems and floating devices. Operational in 27 Location across 5 countries
Toyota 7%
Ford 8%
BMW 5% Tata Group
2%
Mitsubishi 6%
General Motors
9%
Fiat/Chyrsler 11%
Renault/Nissan Group
13%
Volkswagen Group 16%
Others 23%
Sales by Customer
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Other Products-
GKN Land Systems- -Electro-mechanical power management devices -Single and multi pieces steel and aluminium wheels -Aftermarket parts for cars, trucks, and agriculture and construction vehicles. GKN Powder Metallurgy- -Sintered components for engines and gearboxes -Sintered bearing and filters , -Metal injection and moulding components -Soft magnetic components for use in electric motors.
Challenges & Measures taken by GKN - A) Technological Advancement- GKN is concern about losing its customer to competitors offering
new technologies. Also difficulty in adapting to market development such as changes in legislative,
regulatory, and industrial requirements. Therefore focus is on development and investing more on
research and development.
Measures undertaken-
In January 2012 have opened a joint venture with Rolls-Royce at Isle of Wright, UK for the
production of composite fan blades for aircraft- engines.
From 2012 GKN is planning to open Aerospace facility at Orangeburg, South Carolina, US.
This facility will mainly focus on the assembly operations of composite fuselage for the
Honda jet.
. In Filton plant, GKN manufactures advanced carbon fibre wings spares for new airbus
A350XWB. GKN is investing heavily at Filton site
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B) Supply chain disruption- Caused by lack of availability of raw material, components ,Services has
impacted GKN and its relation with customers. GKN aim to solve this problem by reducing
dependency on single supplier, monitoring financial viability of key suppliers.
Measures undertaken-
GKN PLC has bought the aircraft engine division of Swedish truck maker Volvo AB for SEK6.9 billion. ($1 billion). Volvo Aero designs, engineers and makes components for major aero-engine manufacturers such as the General Electric (GE), Safran SA joint venture CFM, Pratt & Whitney, and Rolls-Royce Holdings PLC. They all equip Airbus and Boeing aircraft. (The wall street Journal July 5 2012-GKN Buys Volvo Aero for $1 Billion as Supply-Chain Worries Grow-http://online.wsj.com/article/BT-CO-20120705-704259.html)
C) Pensions and post employment obligations- in UK the accounting deficit at 31 Dec 2011 were
£259m which was £188m higher than at the end of 2010. The overseas pension obligation rises
mainly in US, Germany and Japan. The deficit increased to £ 539m due to discount rate reduction in
US and Europe. The total deficit of group totalled £868m at the end of Dec 2011 while it was £600m
in 2010 end.
Measures undertaken-
At 31 Dec 2011 the group has the net borrowing of £538m. In addition, it has undrawn but
available committed UK borrowing facility totalling £642m.
OPPORTUNITES-
The multiyear programmes such as the UH-60 Black Hawk Helicopter (5 years), F/A 18 Super
Hornet (7 years), F-15 Eagle (7 years) and C-130J Super Hercules (5 years) from US provide
strong production base for the business.
Around $200m of new business at Filton which include Bombardier C-Series ailerons. $600m
long term agreement with Pat and Whitney to supply forward fan case for joint strike
fighter F135 Engine.
At 31 Dec 2011 the group has the net borrowing of £538m. In addition, it has undrawn but
available committed UK borrowing facility totalling £642m.
Civil aircraft production is expected to grow well with Airbus and Boeing continuing to
project the procurement of new single aisle and wide-bodied aircraft at between 26,900 and
33,500 by 2030.
Due to increase in demand in civil aerospace market and reduction in defence spendings by
important countries. GKN is now focusing more on civil aerospace (68%) which was (58%) earlier
and reduced the defence aerospace to (32%) from (42%)
Competitors-
Dana Holding Corporation, Meritor Inc.
Dana Holding Corporation engages in the design, manufacture, and supply of driveline products, technologies, and
service parts for vehicle manufacturers worldwide. It provides light axles, driveshaft, structural products, sealing
products, thermal products, and related service parts for light trucks, sport utility vehicles, crossover utility vehicles,
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vans, and passenger cars. Also provides agricultural, mining, forestry and material handling equipment, and a range of
non-vehicular and industrial applications.
Meritor, Inc. designs, develops, manufactures, sells, markets, distributes, services, and supports integrated systems,
modules, and components to original equipment manufacturers (OEMs) and the aftermarket for the commercial vehicle,
transportation, and industrial sectors. The company operates in three segments: Commercial Truck, Industrial, and
Aftermarket and Trailer.
Other competitor’s are-
American Axle & Manufacturing Holding Inc Detroit
BorgWarner Inc, Auburn Hills, MI
Corning Incorporated, Corning, NY
Relationship With TATA-
GKN Driveline has worked in partnership with Tata to focus development on
unique side shafts for the emerging sub-mini, low cost Nano platform.
The Tata Nano’s innovative side shaft is being manufactured at
GKN Driveline’s factory at Dharuhera near Delhi and supplied to Tata’s plant at Uttranchal.
GKN Driveline has long been a major supplier to Jaguar Land Rover
for high-performance XFR sports saloon. GKN Driveline also supplies
the propshafts that transfer power from the engine to the rear axle and
the side shafts that transfer power to the wheels.
GKN Westland Aerospace has selected TATA Technologies to supplement its business models. GKN intend to cut cost
and enhance product quality by adopting the fundamental changes suggested by TATA technologies.
Financials-
Particulars 2011 2010 2009
milli GBP milli GBP milli GBP
Turnover 6,112 5,429 4,223
Net Interest -42 -40 -114
Operating Profit 374 411 39
Net Income 306 326 -39
Profitability Ratios
EPS(Pence) 22.6 20.7 5.7
Return on Equity 0.24 0.25 -0.04
Leverage Ratios
Debt-to-Equity 1.7 1.4 2
Profit margin (%) 5.74 6.69 -1.28
Liquidity ratio (x) 0.65 0.95 0.89
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Current ratio (x) 1.08 1.44 1.39
Gearing (%) 184.9 142.65 205.49
Cash Flow
Cash From Operations -133 206 203
Free Cash Flow 147 188 136
Balance Sheet
Shareholders' Equity 1,252 1,313 948
Retained Earnings 194 308 -36
Assets 5087 4421 3946
Net Debt 538 151 300
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KPI Target (Financial)
To achieve growth rates at both a Group and divisional level in excess of the growth in our
major automotive, aerospace and land systems markets.
To achieve absolute growth in EPS each year and in the longer term, recognising the nature
and cyclicality of our major markets, to achieve average annual compound growth of at least
6%
To generate positive free cash flow sufficient to cover dividend payments and provide
funding resources to support organic and acquisitive earnings growth.
In Japan, GKN Driveline was affected less than the market generally by the earthquake
in 2011 and is therefore not benefiting from the significant bounce back in production volumes.
Trading profit increased to £121 million by June 2012 (2011: £94 million).
World-wide defence spending remains under pressure, largely driven by cutbacks throughout
Europe and likely reductions in the U.S. Defense Budget. GKN’s position on key multi-year
programmes such as the UH-60 Blackhawk helicopter, F/A-18 Super Hornet, F-15 Eagle and C-
130J Super Hercules provide a stable production base despite potential budget pressure and delay
in the F-35 programme ramp-up. Aerospace sales of £770 million were £47 million higher than the
prior period (2011: £723 million). The overall aerospace market remains positive in 2012 driven by a
growing civil aircraft market partly offset by a more subdued military market. The division has
increased its sales for civil aerospace to 63%, with defence representing 37%.
With plan to remain ahead in terms of technological advancement GKN has made huge investment
through M&A, Joint Ventures, and product devlelopment plans at various sites. Also due to
reduction in defence bugdet in USA and UK and pension deficit which rised due to weak market
return. Also this factors in increas in debt and decreasein free cash flow for GKN.
All the measures and developmental plans undertaken by GKN suggest that, the company is focusing
on increasing the global footprint through joint ventures and aquisitions. Also strengthening is
products by investing more in R&D and upgrading the main sites.
News-
10/07/2012- GKN Aerospace to open composite aerostructures manufacturing facility in Mexico The new site will be situated in the PIMSA industrial park. The site’s first products will be structures manufactured for the Sikorsky BLACK HAWK helicopter, with first parts scheduled to be delivered by the end of 2012.
09/07/2012GKN Aerospace selected to provide key composite and metal structures for Bell Helicopter's new 525 Relentless. . Manufacture will begin in late 2012 with initial deliveries scheduled for 2013 and continuing through to the end of 2015.
05/07/2012 GKN acquires Volvo Aero for £633 million
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02/07/2012GKN Driveline Trier invests €20 million to build world first flow line. The latest investment automates the production of precision forgings used in the production of CVJ Systems.
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QinetiQ Public Limited Company
Profile
QinetiQ was formed from the greater part of the former UK government agency, Defence Evaluation
and Research Agency (DERA). 2001 Defence Minister Lewis Moonie announced the creation of
QinetiQ and made it British Company based in UK. The ownership structure is as follows – Ministry
of Defence (MoD) 56%, Carlyle Group (US Private Equity Firm) 31% which was acquired in Feb 2003
and 13% by staff.
Headquarters
The company is headquartered in Farnborough, United Kingdom.
It has offices in North America and Australia.
Major Sites: It has major sites in the UK at Farnborough, Hampshire, MoD Boscombe Down,
Wiltshire, and Malvern, Worcestershire, each of which are former DERA site
Ranking
World's 52nd-largest defence contractor measured by 2011 defence revenues, and the sixth-largest
based in the UK
Recipient of Washington Technology Top 100- QinetiQ North America ranked 38rd on Washington
Technology’s Top 100 list of government contractors in 2012. Organizations that make the list are
ranked according to prime contracting revenue in government fiscal year 2011. *(http://www.qinetiq-na.com/company/awards/)
QinetiQ is listed on the London Stock Exchange and is a constituent of the FTSE 250 Index.
Key Markets
The main market for QinetiQ is UK (54%) and North America (39%). But it is now building its large
operation base in Norway, Australia, Canada and New Zealand.
Employees
10,180 (As on 31/03/2012)
Organization Chart
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QinetiQ Group Executive
136
Leo Quinn- Chief Executive Officer Group
Committee memberships
Member of the Compliance Committee, Nominations Committee and Security Committee.
Skills and experience
Leo was Chief Executive Officer of De La Rue plc between 2005and 2009. He was previously Chief
Operating Officer of Invensys plc’s Production Management Division and before that spent 16 years
with Honeywell Inc., in a variety of senior management roles in the USA, Europe, the Middle East
and Africa. He was formerly a Non-executive Director of Tomkins plc.
David Mellors -Chief Financial Officer Committee memberships Member of the Compliance Committee and Security Committee. Skills and experience David was previously deputy Chief Financial Officer of Logica plc. He was also Chief Financial Officer of Logica’s international division, covering operations in North America, Australia, the Middle East and Asia and, before that, was the Group Financial Controller. His earlier experience includes various roles with CMG plc, Rio Tinto plc and Price Waterhouse. He is a member of the Institute of Chartered Accountants in England & Wales.
Michael Harper
Deputy Chairman and Senior Independent Non-executive Director
Appointed Non-executive Director in November 2011.
Appointed Deputy Chairman and SID in February 2012.
Michael was appointed Chairman of BBA Aviation plc in June 2007, having joined the Board in
February 2005. He is an engineer by training and has a wealth of experience gained as a director of
Williams plc where, on the demerger in 2000, he became Chief Executive of Kidde plc. Michael is
Chairman of both the Vitec Group plc and Ricardo plc.
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Colin Balmer
Non-executive Director
Appointed Non-executive Director in February 2003.
Chairman of the Security Committee. Member of the Compliance Committee, Nominations
Committee and Remuneration Committee.
Colin served as Managing Director of the Cabinet Office from 2003 until his retirement in 2006.
Previously, he was Finance Director of the MOD, with responsibility for QinetiQ’s privatisation and
the subsequent investment by Carlyle as part of the PPP Transaction. Colin has extensive experience
across the MOD and is currently a member of the Foreign and Commonwealth Office’s Audit and
Risk Committee and he is currently on the Board of the Royal Mint, chairing its Audit Committee. The
Board considers that Colin’s extensive knowledge of the development of QinetiQ throughout its
public-private partnership, and his in-depth understanding of the working of Government,
particularly the UK MOD, provides the Board with a unique insight into the issues facing Government
in delivering its procurement objectives and partnering with industry suppliers.
Noreen Doyle
Non-executive Director
Appointed Non-executive Director in October 2005.
Chairman of the Remuneration Committee; Member of the Audit Committee.
Noreen sits on the Board of Credit Suisse Group (Zurich) and is a Non-executive Director of
Newmont Mining Corporation (Denver), where she is chair of the Audit Committee, and Rexam plc
where she is chair of the Finance Committee. Prior to her appointment in 2001 as First Vice
President of the European Bank for Reconstruction and Development (EBRD), Noreen was head of
Risk Management. Previously, Noreen had a distinguished career at Bankers Trust Company (now
Deutsche Bank) in corporate finance and leveraged financing, with a concentration in oil, gas and
mining. The Board considers that Noreen’s extensive international business experience, particularly
in the areas of corporate finance, risk management and banking, is of significant benefit to the
Board.
Admiral Sir James Burnell-Nugent
Non-executive Director
Appointed Non-executive Director in April 2010.
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Member of the Compliance Committee, Remuneration Committee and Security Committee.
Sir James commanded the aircraft carrier HMS Invincible and three other ships and submarines
during a 37-year career in the Royal Navy which culminated in his appointment as Commander-in-
Chief Fleet. In-between operational duties he served in several appointments in the Ministry of
Defence and gained cross-Whitehall experience while on secondment to HM Treasury. The Board
considers that Sir James’ expertise in the Government contracting domain, particularly with the UK
MOD and HM Treasury, to be highly beneficial in the context of QinetiQ’s Government sourced
operations.
Paul Murray
Non-executive Director
Appointed Non-executive Director in October 2010.
Chairman of the Audit Committee. Member of the Compliance Committee.
Paul is currently a Non-executive Director and Audit Committee chair at Royal Mail Holdings PLC. He
also holds directorships at Knowledge Peers plc and Tangent Communications plc and is a Trustee of
Pilotlight, a charity for the disadvantaged. He was previously Senior Independent Director of Taylor
Nelson Sofres plc, a Non-executive Director of Thomson SA and Tangent Communications plc, and
has also been Group Finance Director of Carlton Communications plc and LASMO plc. The Board
considers that Paul brings a broad range of experience in finance and corporate governance from a
cross section of industries, all of which leverage technology.
Key Executives
Colin Balmer, Non-Executive Director, served as Managing Director of the Cabinet Office from 2003
until his retirement in 2006. Was finance director to the MoD and was also secretary to MoD for
procurement. Served as MoD material in Washington DC,US
Leo Quinn, Chief Executive Officer of QinetiQ. Main role in defining the business sector and
diversifying the operations. Main role in decision making of the company’s operations.
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Culture QinetiQ’s culture is rooted in innovation, deep domain knowledge, rigorous independent thinking
and technical expertise. The company provides solutions that save life, reduce cost, ensure and
offer competitive advantage. QinetiQ is the UK’s largest research and technology organisation, and
more than 85% of our people carry high-level national security clearances.
QinetiQ is guided by core values of Care, Integrity, Teamwork, Commitment to Success and
Excellence.
Business Strategy
Set a clear direction which reduces the span of focus and matches both customer needs and core
QinetiQ strength.
Upgrade leadership to ensure a commercial, value-oriented mindset
Establish a lower level of cost base to ensure future competitiveness;
Ensure a more unified approach Group wide to exploit key opportunities;
Drive for cash generation to strengthen the Group's balance sheet.
Under the challenging market environment and its impact on the business growth and profitability,
in May 2010, QinetiQ set out a 24 month self-help programme to restore value, to strengthen the
foundations, and build a path to future sustainable and profitable growth. The following priorities
have been put in place:
Focus
- Extracting value from the portfolio
Cultural transformation
- Building a more competitive culture
Strengthen the balance sheet
- Enable longer-term options
This programme is created to increase the operational effectiveness, introduce more lean and agile
process and to strengthen the balance sheet of the company.
How objectives are achieved-
Full integration of the US Services businesses is underway to reduce duplicated overhead,
improving the ability of the division to compete effectively
The Group completed the disposal of the S&IS business and acquired Sensoptics Ltd to support
development of the OptaSense® business
Business in India-
OptaSense a QinetiQ company providing services for Oils and Gas Industry, Transportation Industry,
Defence and Security industry has delivered its services to India. It has mainly provided services
which improves the production process and reduces the overall cost of recovery. Also it provides
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monitoring and security for distribution pipeline network. Recently a new contract with Crain India
for Mangala Development Pipeline project has extended QinetiQ reach in India.
In Transportation sector with the project The Reduced cost Li-Ion (RED-LION) project QinetiQ has 2
years contract with India for Battery and Electric vehicles.
Products-
QinetiQ provides industrial expertise in Aerospace (Military & Civil), Defence (Land, Sea & Military
Aerospace) and Security (Critical Infrastructure protection, Enterprise Security, Government and Law
Enforcement). Along with this core sectors it provides significant problem solving contribution in
Energy & Environment, Transport, Space, Clinical trials and Human factors.
The group is recognised as a leader in the field of electro thermal chemical guns, thermal and blast
management, projectile and airframe design and payloads, guided and corrected munitions, internal
and external ballistics modelling, platform recoil management and gun dynamics. It has also
developed programs in ferroelectric thermal detector materials. The group is also developing CMOS
and radar sensors for UAV.
Global products
-Remote ID- Helping the police to Identify friendly asset
-Unmanned Aerial Vehicle- Zephyr
-RPG Defeat Protection – Light weight RPG armour for Tactical vehicles
-Instant GPS Anti-Jam Protection
- Vehicle Arresting Systems
-Robotics
-Ocellus- GPS/GPRS tracking asset where conventional device cannot work
New Technologies
-Tarsier-Runway hazard management system with FOD detection capabilities.
-Tip Timing System-Eddy current sensors for gas turbine health monitoring
-Defence GPS-Q20 High Dynamics GPS Receiver Module
-Energy from Waste-Decentralised waste management and energy-from-waste
-Smart Technologies-A UK sovereign capability in stealth materials across the three major signature
control domains
-Ocellus®- GPS/GPRS tracking products S100 & T100
OptaSense®- A Qinetiq Company
-Linear asset protection and perimeter detection
Applications- Third party Interface, Pig Tracking, Leak Detection
-Oil Field Servicing
-Infrastructure Security and Monitoring
-Rail and Road
-Technical and Data Services
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Analysis of Business Segments
USA Services
Delivery of technical services in aerospace operations and systems, engineering and lifecycle
management, information solutions, mission solutions, cyber and software and systems engineering.
Analysis- Successful completion of Iraqi flight training project Seven new contracts for mission-
critical services by key intelligence customers totalling US$25m.Five-year, US$36m contract to
provide a full range of training development and delivery services to the Tactical C2 Engineering
Division by the US Navy’s Space and Naval Warfare System Centre Atlantic (SSC-A). But there was
decrease in revenue by 7% due to currency impact by US government in sourcing and transfer of
some business to small business contractors.
UK Services
Provision of technical services in aerospace engineering, test and evaluation, training and simulation,
cyber security, information and intelligence and procurement consultancy.
Analysis-QinetiQ UK services won £11m contract to provide technical and information services for a
national police unit. Also due to few more contracts on approximately £40m of multi-year orders
and a £31m contract associated with the Ministry of Defence’s Defence Training Rationalisation
(DTR) programme provided support to the revenue growth. Also Weapon Technology centre has
increased the funding which helped QinetiQ to manage their complex weapon pipeline.
But the final revenue declined by 10% due to pressure on customers’ budgets and delays in spending
approvals. Budget uncertainties had the greatest impact on the provision of technical and
information services, where manpower utilisation has a direct correlation with profitability.
Due to higher pension service cost of nearly £5m has created pressure on revenue growth. Also due
to restructuring programme employee headcount was reduced by 662 in 2011.
Global Service
Focuses on the exploitation of intellectual property through the rapid development of concepts into
proven products and solutions, complemented by contract-funded research and development to
support the creation of the next generation of products for the international market.
Analysis-In the UK, the trading environment was impacted by further contract delays and
cancellations from the MODMRAP Lite vehicle, TALONTM robots and Shoulder-Worn Acoustic
Targeting System (SWATS) individual gunfire detection systems were in demand.
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£26.5m contract with Shell on The OptaSense® fibre-optic sensing business, a project for Cairn
Energy PLC to protect the 700km Mangala development pipeline in India and a £12m contract from
Force Protection Europe to design on the modular armour kits for the Light Protected Patrol were
main business contributors.
Challenges
Description Measures
A change in demand from reduced military operations in Iraq and Afghanistan
Planning to carry on innovative research on the areas which is not conflict related like aerospace security and intelligence and portfolio diversification
A change in either US or UK Government spending on defence and security
Planning to diversify the portfolio by providing more services in security and intelligence sector. As UK Gov. Is planning to spend 650m on cyber capability, QinetiQ is seeing this as an opportunity.
Funding of the defined benefit pension scheme
The most recent triennial funding valuation of the Scheme, as at 30 June 2011, resulted in a deficit of £74.7m.The group is taking external advices to solve this problem. It has considered next 6 years recovering this deficit. An increase in the deficit may require the Group to increase the cash contributions to the scheme, which would reduce the Group’s cash available for other purposes.
Fixed-price contracts
There is a risk that the costs required for the delivery of a contract could be higher than those agreed in the contract as a result of the performance of new or developed products, operational over-runs or external factors, such as Inflation. The management try to review the bids and fixed prices to avoid the cost overrun.
Opportunities
The company seeks to develop a US/UK cyber platform to exploit opportunities – principally in
‘five eyes’ markets (UK, US, Canada, Australia, New Zealand) – generated by government
commitments to additional cyber security funding.
The company secured new contracts from the Scandinavian region including a Swedish defense
administration contract.
(New Opportunities from Scandinavia, including a £9m managed services contract to operate the
flight physiological centre for the Swedish defence administration and a £4m order for the
Norwegian Andoya Range System was added in 2011 revenue growth.)
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QinetiQ is focusing more on aerospace security and intelligence services and trying to diversify the
product portfolio in this segment. The recent acquisition and divestment activity gives clear
indication that the company don’t want to relay on business where demand is uncertain and based
on certain conflict condition. In order to fulfil this QinetiQ wants to strengthen its cyber security
services and planning to expand in new market.
Change for the Future Prospects-
Approximately 90% of QinetiQ’s revenue is generated by proven businesses that have sustainable
competitive advantage. Approximately 8% of QinetiQ’s revenue comes from fully commercial
businesses in its Explore category. These are businesses that have a proven technology and
customers, but have yet to prove that they can achieve significant scale. Approximately 2% of
QinetiQ’s revenue is in the Test for Value category. These are businesses with proven technologies
but that have yet to prove commercial viability.
According to the business model of QinetiQ i.e. core, explore, and test for value. To expand and
strengthen the cyber security services QinetiQ is will stress more on explore part. The reason is
QinetiQ has acquired to firms Cyveillance® and OptaSense® which delivers cyber intelligence
solutions and fibre-optic sensing business. As the company considers the explore category business
as core business for future, it can be predicted that major investment will be done on this part.
90%
8%
2%
Revenue Breakdown
Core Explore Test for value
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But in order to achieve the objective of self help development program, the company has undergone
restructuring in number of employees. From graph it is evident that the company has reduced its
work strength nearly by 3,500 from 2010 till date. This indicates that QinetiQ is affected by defence
budget cut, Government In sourcing, change in demand (Afghanistan and Iraq Operations), and
pension deficit. So if the company is planning to increase its business, it raises question on its ability
to deliver the project within given time schedule.
Competitors –
Company Market Cap P/E
Boeing Co 1.59b 0.36
Honeywell International, Inc. 112.30b 49.64
Rolls-Royce Group PLC 15.86b 1,333.59
BAE Systems PLC 10.04b 845.78
Meggitt PLC 3.04b 1,640.76
QinetiQ Group PLC 1.09b 427.66
Financials
Particulars 2011 2010 2009
th GBP th GBP th GBP
Turnover 17,02,600 16,25,400 16,17,300
Overseas Turnover 10,78,900 9,05,400 8,44,400
UK Turnover 6,23,700 7,20,000 7,72,900
Net Interest -30,800 -34,600 -24,800
Operating Profit 54,700 -25,300 1,31,500
Net Income 5,000 -63,300 93,600
Profitability Ratios
0
5,000
10,000
15,000
2009 2010 2011 2012
Number of Employees
Number of Employees
145
EPS(Pence) 14.2 11.1 15.9
Return on Equity 1% -13% 16%
Leverage Ratios
Debt-to-Equity 0.61 1.12 1.31
Profit margin (%) 1.56 -4.07 7.05
Liquidity ratio (x) 0.86 1.17 1.71
Current ratio (x) 0.94 1.36 1.85
Gearing (%) 117.03 155.57 160.49
Cash Flow
Cash From Operations 2,55,800 1,69,200 1,52,400
Free Cash Flow 2,55,918 1,69,357 1,52,402
Balance Sheet
Shareholders' Equity 4,57,400 4,73,600 6,02,600
Retained Earnings 2,41,500 5,000 -94,900
Assets 14,83,300 16,34,000 20,40,500
Net Debt 2,60,900 4,57,400 5,37,900
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The positive effects of 2 year self-help program which was initiated by the company with the view to
reduce the debt and strengthen the balance sheet can be seen from above financial data. The net
income was able to remain on positive side in 2011 after huge loss in 2010. Earn per share was
increased by nearly 30% in 2011, which would help the company to gain the confidence from
investors. The self help program which will end in 2012 has shown its effectiveness by increasing the
retained earnings by 47% and reduce the net debt by 43%. But the reduction in discount rate and
weak market performance has created pension deficit for the company which is of major concern for
the company. Otherwise due to long term contracts and new business opportunity the order book of
the company remains intact.
The company’s wanted to maintain the target of keeping gearing ratio less than 2xEBITA. With the
successful implementation of self-help program, the management is able to increase its EBITA by
keeping the amount of interest paid under control. This could help QinetiQ to attract more
investment for future development plans and increase its credit rating.
th GBP 2009
th GBP 2010
th GBP 2011
th GBP 2012
EBITA 1,97,400 1,24,600 1,32,000 4,24,800
Net interest Paid
24,800 34,600 30,800 43,000
0
1,00,000
2,00,000
3,00,000
4,00,000
5,00,000
th GBP 2009
th GBP 2010
th GBP 2011
th GBP 2012
EBITA vs Net Interest Paid
EBITA Net interest Paid
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Relationship with TATA
QinetiQ is working closely with TATA Industrial Services Ltd to jointly develop new and exciting
opportunities in both Indian and International Aerospace markets. TATA Industrial Services and
QinetiQ will work together the leverage the manufacturing base and Industrial network of TATA
Industrial Services with India Inc. and QinetiQ's technology expertise to create projects of national
significance to meet Offset demand and the supply needs of Aerospace & Defence. *(http://www.india-
defence.com/reports-5010)
Key News and New Orders
24 May 2012-The Group has made a solid start to the 2012 / 2013 financial year. Two key
orders, with a combined value of $44m, were for Navistar’s MaxxPro® MRAP vehicles operating
in Afghanistan and for the US Army’s Heavy Expanded Mobility Tactical Truck (HEMTT) – the first
time Q-Net has been fitted to a large haulage vehicle.
20 July 2012- The new QinetiQ Training Innovations facility was opened on their headquarters
site at Farnborough, Hampshire
QinetiQ North America’s Mission Solutions Group has been awarded a contract by Abacus
Technology Corporation to support information management and communications activities for
the National Aeronautical and Space Administration's (NASA) Kennedy Space Centre. The
contract will run for up to nine years, with a potential value of $225 million.
*(http://www.qinetiq.com/news/PressReleases/Pages/qna-wins-nasa-contracts.aspx)
17 May 2012- QinetiQ has won the prestigious Cyber Security and Electronic Security of the Year
award for 2011. The award was given at the first Counter Terrorism and Specialist Security
award ceremony
25 May 2012- US elections delay QinetiQ contracts- Qinetiq, which used to be the Government's
military gadget-maker, yesterday warned contracts are being delayed in the US because of this
year's presidential elections.
*(http://www.independent.co.uk/news/business/news/us-elections-delay-qinetiq-contracts-7786215.html)
M&A activity
QinetiQ Plans To Enter First-Ever Joint Ventures, Telegraph Says QinetiQ Group Plc (QQ/) is planning
joint ventures for the first time to develop simulation and training projects and a fibre-optic cable
product called OptaSense®.
QinetiQ’s Chief Executive Officer Leo Quinn is seeking to split the company’s business into three
units, according to the newspaper. The core division will focus on defense and aerospace
technologies, such as remote bomb-disposal devices, while the other two will carry out more
experimental research, the Telegraph said
* By Grant Smith - May 20, 2012- http://www.bloomberg.com/news/2012-05-20/qinetiq-plans-to-enter-first-ever-joint-
ventures-telegraph-says.html
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