British Aerospace (BAE Systems)

OUR VISION

To be the premier global defence, aerospace and security company.

OUR MISSION

To deliver sustainable growth in shareholder value through our commitment to Total
Performance.

Macro-level
The macro environment will be assessed by a PEST analysis, which stands for Political,
Economical, Socio-cultural and Technological developments. The goal of this chapter is,
to give an insight on the forces on macro-level, which influences the performance of BAE
Systems.

Political/legal force

The political force is a very important one in the defence industry. As described in the
introduction, the defence industry is a heavily regulated industry, where the main buyers
are the governments of different countries. The relation between governments and
manufacturers can be described as a Military-industrial complex (MIC) (Lens, 1970).
This concept explains the monetary and policy relations between governments, defence
manufacturers and Ministries of Defence. The US arm industry is known for this concept,
but industries in Europe are more or less the same. This can be explained by the facts that
stable political countries want to regulate the defence industry, to make sure that contracts
with private organizations or persons cannot be made. In countries where the political
situation is less stabile, you often see more illegal trades and contracts, which have an
influence on the safety in a certain country.

Economic force

The second force, is also a very important one in the defence industry. Because the main
buyers of defence manufacturers are governments, it makes them vulnerable for
economic recessions. The current economic recession and financial crisis forces
governments to cut their spendings and debt ratios. Important countries for BAE
Systems like France, United Kingdom, Germany and especially Italy spent too much
money during years of economic welfare (Anderson, 2011) This caused high debt ratios
for certain European countries like, Greece, Italy, Spain, Portugal and Ireland. History
shows us that countries cut their spendings during recessions on defence products.
Because most of BAE Systems customers are governments, this is a real threat. Probably
the recession causes no problems at this moment, because most contracts are multiple
year contracts, but they are more likely to feel the effect of the financial and economic
crisis in a few years.

Socio-cultural force

Because the defence industry is a business to business industry, there are less social
forces, which influence BAE Systems. However, the users of the combat vehicles BAE
System delivers are off course soldiers. During wars in the Middle East a lot of soldiers
died, which raises questions whether it could be prevented. Especially in the United
States, which lost a lot of soldiers during wars in the Middle East, the soldiers safety has
become an issue. Therefore the demand for safer equipment is increasing (Anderson,
2011). This results in research and the development of unmanned combat vehicles. BAE
Systems already offers a limited amount of unmanned combat vehicles. However, a lot of
progress can still be made in this sector also in perspective of the ethical questioning the
social environment has created. But in the end even unmanned combat vehicles serve a
rather unethical mean, namely killing.

Technological force

The technological force influencing BAE Systems gives an opportunity for them to
develop certain new capabilities in developing areas like internet networking, robotics
and unmanned combat vehicles. Defence product manufacturers like BAE Systems claim
to develop their products and make incremental innovations on current products and
technologies. However, those new applicable technologies influence the directions of
product innovations as well as further incremental changes.

Interpretation of findings on the macro level

The political force has a strong influence on the macro surrounding of BAE Systems. It
creates a heavy regulated market sector in that the main customers (governments) decide
about the rules of the game. The economic forces therefore are indeed also influenced by
the political forces and can increase the fluctuations in armament spendings but because
of the long-term nature of this industry those fluctuations can be counterweighted. The
socio-cultural force has no powerful leverage towards the overwhelming defence industry
players. The ethical problems concerning the supply of warfare materials have been
common ever since but in the same way the governments and manufacturers were able to
ignore concerns. The ethical questioning however could have influenced the decision of
starting to research and produce unmanned combat vehicles. The technological force is
influencing to some degree the trends into the research of BAE Systems is being guided.
The main emphasis lays in networking the technology and create unmanned vehicles by
using robotics.

Summing up the five forces analysis we conclude that:

1. The bargaining power of the suppliers in the case of BAE Systems is low, because
the suppliers that are providing technological solutions are mainly integrated in
the Advanced Technology Centres and slipped into the internal network of BAEs
lean production.
2. The threat of new entrants is low because of the mature industry life cycle, the
high capital requirements and entry barriers generated through the established
companies as well as through legislation.
3. The bargaining power of buyers is high, because the governments are their main
and only target buyer.
4. The threat of substitutes is high because of secret product developments and big
switching costs when they realize that a substitute has been developed.
5. Rivalry among existing competitors is high because they are established
companies with big resources to cover competition costs.



Micro Level

this section we consider the micro level analysis of BAE Systems and give insights to
the organizational structure, the internal strengths/weaknesses, the external
opportunities/threats, as well as innovation activities and how the company adjusted their
corporate strategy according to this.

Structure of BAE Systems

The organizational structure of BAE Systems is ordered in hierarchical manner due to the
high needs of reliability and accountability (Powell, 1990) towards the governments as
buyers, as well as for the need for information processing and the successful exploitation
of resources.

The downsides to this organizational structure are inflexibility and a danger of structural
inertia (Hannan and Freeman, 1984) as well as hindering the capabilities of exploring
new technologies and processes.

The normative basis of this structure is explained by employment relationships that are
based on routines in the means of communication, where conflicts are ruled out through
supervision.

The structure of BAE Systems plc can be depicted in which the headquarter is
supervising three functional levels divided geographically, namely the USA, UK and the
rest of the world. The adnotation to the company name in form of the three letters plc
stands for public limited company, which means that shares of the company can be sold
to public investors we will not continue to add plc in the paper unless necessary for
distinction. The most important aspect for our analysis lays on the UK based group that
includes the Advanced Technology Centre, which is the think tank or innovation
generator for the USA based group as well as the rest of the world. This R&D unit
employs more than 400 scientists and engineers and works throughout the supply chain
also with collaborations and partnerships to academia and innovative organisations. The
innovations that have been generated will be diffused to the division that produces the
preceding product or can benefit from the new insights, for production. The sector that we
base our analysis on is the combat vehicles, which are produced in the USA based group
in the Land & Armaments division.

This localized separation between the innovation centre and the manufacturing facility, in
our opinion, can have a negative impact on the rate of innovation success because a big
input for R&D is geographically too far abroad to transfer tacit knowledge. More so, the
hierarchical structure might have also impediments for knowledge transfer because the
employees will follow certain routines and therefore create structural inertia, or the R&D
department might develop technologies that are not applicable in the real world.

The downsides to such a structure are that the divisions can be too isolated from each
other, therefore there could be a deficit of cross-pollinations between the R&D
department and those employees working on the operational level that could also have
influence incremental changes of the products. We believe that a more network like
function of the R&D department within the company boundaries of the company, would
benefit the success rate of innovation because it would add also possibilities for process
innovation or manufacturing capabilities.

SWOT Analysis
















Innovation & Strategy

The case of BAE Systems shows a two pillars of innovations, one focusing the product
innovations to create inferior technologies and products and the second focused on the
process innovation, which mainly focuses on increasing security of the systems involved.

Product innovation

The centralized key department is the Advanced Technology Centre (ATC) that is
located in the UK (see Appendix A) is focused on the product innovations. This ATC is
just another expression for the in-house R&D. As mentioned before this ATC is the key
central element for all innovations generated and then implemented in the manufacturing
process worldwide. The reason for the centralized R&D is the classified information with
which the scientists and engineers are working with. Only with this format it is somehow
possible to prevent sensitive knowledge to spill over the company boundaries. In the
armament industry this knowledge is rather not tacit but codified, which means that it can
be copied and used for counteractive systems. In this industry this can mean the
difference between life and death, e.g. if the knowledge about a certain composite of the
armour-plates leeks to competitors they will engineer weapons that can penetrate this
armour. The nature of this industry makes this form of engineering a closed vacuum
contrary to the network structures and cross-pollination emphasized by the author Powell
(1990). This necessity brings a certain implication with it, namely the danger of getting
caught in the exploration trap as described by March (1991). The possibility exists that
within this ATC they will focus too much on exploration, which could result in many
undeveloped ideas and too little distinctive competence.

A minor critique towards the product innovations and technologies developed are
primarily concepts for the military market and are not commercialized in the first instance
on the public market which in some cases could benefit from the commercialization, as
well as the company could increase profits by also commercializing a public version of
the innovation in the public market. In case of the combat vehicles it could be the
heavy-duty shock absorbers that could be implemented in regular Off-road cars.

Process innovation

To avoid the exploration trap BAE Systems has created an Investment In Innovation
program, which is dedicated to investments in security and technology development by
external organizations. BAE Systems offers in this program not only monetary funding of
projects but also engineering and technology resources and testing facilities. This
outside-in knowledge transfer increases their own process innovation capability and on
the other hand by sending out own engineers they have a bigger chance of not sharing
classified knowledge about their products. The main interests and investments by this
program relate to the focus on cyber-security, biometrics and surveillance that not only
focus on a innovative way of securing their companys technologies and manufacturing
against cyber-crime and ensuring secrecy but in some degree this also allows to create a
synergy between with technology platforms, which can cooperate safely. This gives a
clue that the own capabilities of BAE within this area are not enough developed to
engineer those in-house and therefore are not integrated in the internal innovation process.
It can also be the sign of a rapidly changing and fast paced industry sector, which BAE
Systems due to its structure cannot cope with.

Taken those two pillars of the ATC regarding the product innovations and the Investment
In Innovation program for the process innovation together, we can distinguish upsides in
the controlled knowledge transfer, trade secret control and engineering capabilities in the
ATC, supplemented by the open approach towards investments in innovations with
generate a knowledge flow outside-in and also controls the knowledge spill-over
inside-out.

A critique towards the process innovation approach is the neglect of innovations or
improvement suggestions coming from the operational level. The manufacturing plants
and assembly line workers could give additional insights into product production matters,
e.g. the accessibility of screws in tanks, easiness of repairs (etc), which could give
valuable insights to the product innovations and the product performance. Through the
centralized R&D approach, those information take a long time or even never get heard.

Corporate strategy

The corporate strategy of BAE Systems is strongly related to the strategy of their buyers,
which in this case will be explained on the example of one of the biggest buyers, namely
the MOD (Ministry of Defence) in the UK. This MOD itself has implemented a strategy
for the defence industry, which aims to improve how military equipment, supplies and
services are produced and supported (webarchieve.nationalarchieves,gov.uk, 2011). This
is accompanied with strategic assessments for future military requirements and
identifying the need for industry restructuring. This Defence Industrial Strategy (DIS)
gives a guiding function to BAE Systems in order to develop certain technologies or
capabilities within their ATC (Advanced Technology Centre) were the innovation activity
is held. This link between governmental requirements and future assessments therefore
influences the innovation activity at the ATC and furthermore influences the corporate
strategy of the company.

With this in mind we can distinguish hints for a strong bargaining power of the buyers
also in the corporate strategy. The official strategy statement is developing a culture of
Total Performance, which includes delivering our Corporate Responsibility (CR)
priorities through Responsible Behaviour, is embedded in our Group Strategic
Framework (baesystems.com, 2001). This Group Strategic Framework can be seen in
appendix A, where also can been seen that the internal strategies are all focused on
growth in the defence and security markets, growth in existing and new markets as well
as growth in the export market.

This main focus on growth means a strong interdependency on governments and their
MODs. Only if they can lay out their future needs and requirements, the company can
start researching and developing the required capabilities. The framework in appendix A
also gives a insight that BAE Systems is aware of the strong influence and control from
the governments but tries to use this in order to lock in their buyers in their technology
systems. This can be seen by strategic investments in services, platforms, electronic
systems and the maintenance.

Summing up we can argue that even though BAE System is heavily reliant on buyers and
their interpretation of future needs, they also have implemented a strategy that allows
them to lock in their buyer once he has acquired their products.

Interpretation of findings on the micro level

BAE Systems is able to secure and defend their tacit knowledge within the boundaries of
the hierarchal structured company. Even though competitors might adopt a different
approach by using rather open network-like innovation structures to reduce R&D costs
and increase the knowledge spill-over, BAE is performing the opposite approach by
ensuring no knowledge transfer inside-out but just inside-in. This focus can influence the
market positioning and recognition as being an expert. From this expert positioning
BAE System could benefit in the future which might influence the performance of their
products.

Conclusion

In this chapter we will try to give an answer to the research question, which was
formulated in the introduction:

How does BAE Systems try to gain competitive advantage, in the European market for
combat vehicles, in terms of product and process innovations and how do they relate this
to their strategy?

The first thought which became pretty clear is that the defence industry is a heavily
regulated industry, which has also influence on the innovativeness of BAE Systems,
because governments subside the R&D of certain manufacturers, which is off course not
without any expectations. Secondly we saw that from ethical perspective, product
innovations get stimulated, because there is a demand for saver equipment and unmanned
combat vehicles.

The main conclusions we can draw from the five forces model of Porter, is that there is a
constant threat of substitution. Therefore innovation becomes even more important,
which causes a rivalry among competitors. For BAE Systems it is important to be
continuously be one step ahead of their competitors in terms of new products and the
latest adjustments.

In the company analysis we performed a SWOT analysis, which showed that BAE
Systems has a strong focus on product innovations. In terms of competitive advantage,
they try to create this by offering the best and newest products. Therefore their R&D
department, with high expertise, is very important for them. In our opinion they could
utilize their innovativeness more, by also selling to the private sector and secure it by
creating technological lock-in. Because some competitors of BAE Systems already sell to
the private sector, it is remarkable to see that BAE Systems is not following them. It
would make them at the same time less dependable on government contracts.

In general we can conclude that BAE Systems is very (product) innovative. They could
focus more on process innovations and try to create knowledge spill lovers of their R&D
department. Besides that, the strategy of BAE Systems is totally focussed on serving
governments. In our opinions BAE Systems should adjust their strategy by entering
emerging markets and the private sector to fully utilize their innovativeness and create
even more competitive advantage.