External industry analysis of defence Aerospace

As of 31st December 2009, the global defence market grew to a total of $533.38 billion. The USA, Canada, Mexico, Brazil, Argentina, Columbia, Chile and Venezuela, herein referred to as the Americas, total 55.4 percent of this global market value, whilst Europe represents a 25.7 percent share of the market (Datamonitor [1], 2009: 11) in which the United Kingdom holds 17.5 percent of the market, the Second biggest country with respect to Europe’s market share (Datamonitor [2], 2009: 3). As a single entity, the European Aeronautic and Space Company (EADS) own the largest share of the global market value, being 8.7 percent. EADS functions in six sub-divisions, one of which is Airbus. Lockheed Martin Corporation owns a further 5.9 percent of the global market share (Datamonitor [1], 2009: 12). The European defence market is worth $128.74 billion, in which Rolls-Royce Group plc control 3.4 percent of the aerospace and defence market (Datamonitor [3], 2009: 12). BAE systems are the leaders in the UK aerospace and defence market, having 24 percent, in which the defence sector is worth $17.60 billion (Datamonitor [2], 2009: 8).

Aside from government bodies, the major players operating in the Global defence market are NASA, Lockheed Martin, General Electric, EADS, BAE Systems, Babcock, Rolls-Royce plc group and Boeing, amongst others.

The products and markets utilised within the Defence Aerospace sphere are such things as helicopters, combat jets, Unmanned Aerial Vehicles (UAV’s), missiles, missile defence systems and transporters. Transporters are heavy-lift rotorcrafts (Rolls-Royce website [5], 2010) that carry, for example, aid in the form of food, water and clothing for third world countries or areas that have been subject to natural disaster. In addition, satellites, satellite launch vehicles and trainers – aircraft comprising of air to surface guided missiles or free-fall bombs – are further examples of products whose application is within the defence aerospace industry. Furthermore, tactical aircrafts escorting army troops to base camps or supporting troops in convoy or in combat on the ground are major products manufactured for the defence aerospace business.

Defence Aerospace – an external industry analysis

When analysing the potential success of an organisation within an industry sector, it is prudent to analyse the forces affecting the industry as a whole. This is done using Porter’s Five Forces model, the basis of which states that, “industry profitability is not determined by what the product looks like, nor whether it embodies high or low technology: it is determined by the structure of the industry” (Bowman, 1990: 27). That is to say that a firm’s strategy should not be simply born of gaining a competitive position relative to its foremost competitors that will, in turn, lead to financial superiority and sustainability, but that the factors affecting the profitability of the industry from an external viewpoint should also be considered prior to devising a strategy. The five forces contributing to the overall attractiveness of a chosen industry are; competitive rivalry, threat of entry, threat of substitutes, power of buyers and power of suppliers.

Looking at the defence aerospace industry (Appendix 1), competitive rivalry is intense. It is, as such, unattractive to existing firms, given that the companies that operate within this sector are all substantial with regards to both the number of countries they each function within and the quality of the technologies they possess. An additional factor in the fierce rivalry of these organisations is the need to win contracts given that the major buyer of defence products is the Government. As such, businesses must utilise innovation and new technology in order to provide differentiation, further adding to competitive rivalry.

The threat of entry to the defence industry is weak, due to the aforementioned magnitude of the existing organisations working within the division. This makes the threat of entry attractive for existing competitors because these companies are well established in terms of their knowledge and capability within the industry. Strict rules and regulations govern the successful operation within the industry such as matters of export compliance, logistics requirements and security issues. Expanding further, huge amounts of capital spending would exist for potential entrants to the industry including warehousing and set-up costs as well as procurement of raw materials. Companies looking to enter the defence sector would more than likely have to be large and well established in a number of other sub-divisions in order to successfully attract key individuals from other successful defence companies to grow the business within the defence sector, among other factors. Possibly the only unattractive feature for current companies in this industry is the need to develop, integrate and even change their products in order to reduce the overall carbon footprint attributed to the company. However, most of these players are already implementing strategies to cut their carbon footprint by a certain amount over a relatively short term.

Once again, threat of substitutes in the industry is weak, and highly attractive to existing organisations. This is because of the stringent quality measures required for defence products and the lack of ‘un-tapped’ resources in manufacturing such systems.

Power of buyers within defence aerospace is moderately attractive. This is due to the fact that a considerable percentage of sales are to governments. That said, the influence of buyer power is somewhat softened in this instance due to the increase of terrorism on a world scale and the subsequent worth and significance of defence aerospace products and systems. This, in turn, increases companies bargaining power with buyers. Contrary to this, despite the large established nature of firms operating within the sector, governments and industry players rely on each other, and the power of the government decreases bargaining power. To contradict this situation once more, companies with a good reputation, such as Rolls-Royce Group plc, use innovation such as after-sales support solutions and maintenance in order to weaken buyer power slightly.

On the same scale, supplier power could also be seen to be moderately attractive. Suppliers within the defence segment also provide to a number of other sectors meaning they are not simply dependent on catering to a single industry, thus, strengthening supplier power somewhat. Moreover, size of supplier firms may be relatively small in comparison to the defence companies themselves; however, supplier quality is paramount to the success of the manufacturing enterprise, again increasing supplier power. On the other hand, many of the integrated companies operating within defence are also active in the other industries to which the previously mentioned suppliers deliver. This will work to the opposite effect, strengthening operator bargaining power. To add increased substance to this power, operators have a wide array of suppliers from which to choose. Balancing each of the aforementioned points, it would be apparent that, ultimately, defence organisations have the upper hand, making supplier power relatively attractive (Datamonitor [1], 2009:15).

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In analysing the industry as a whole, an organisation wishing to critically analyse future potential success and develop strategies as a result would be making a grave error in simply utilising Porter’s Five Forces as an analysis tool. Whilst this model provides a sound insight into the forces affecting the industry, it perhaps does so from an insular viewpoint with regards to direct competitors, buyers, substitutes and suppliers. It would be prudent to investigate further factors by conducting an external analysis of what is happening in the industry environment by way of a STEP analysis. This, in addition to the 5 forces model, allows one to account for Sociological, Technological, Economic and Political issues that may bring about opportunities and threats in the industry in question. Appendix 2 shows a STEP analysis performed with regards to the Defence Aerospace sector as it stands currently.

Organisational Analysis – Rolls-Royce Group plc

Rolls-Royce manufactures engines for the civil aerospace, energy and marine, and defence aerospace sectors. The company is the second biggest defence engine supplier globally, of which their product portfolio spans across trainers, combat jets, tactical aircraft, helicopters and transporters. The group celebrated its centenary year in 2004, having been launched in 1884 by Henry Royce. Charles Rolls, a car dealer in London, was to meet Royce in 1904 who, in that same year, constructed his first motor vehicle. The two reached an agreement in which Royce would manufacture cars to be sold solely by Rolls and, after early success, Rolls-Royce Company was founded in 1906. Royce developed his first aero-engine, the Eagle, at the beginning of the First World War and manufacture of the Merlin during World War Two propelled Rolls-Royce into a major global force in aero engines. 1944 saw the development of the aero gas turbine by Rolls-Royce and with the company acquiring Vickers plc at the end of the twentieth century, “gas turbine activities transformed Rolls-Royce into the global leader in marine power systems” (Rolls-Royce website [6], 2010).

Rolls-Royce has positioned the firm by creating a strategy which accounts for the forces affecting the industries in which they operate (and attempting to anticipate shifts in those forces), the needs of buyers and the goals and missions of the company. Rolls Royce [4] website, 2010 declares such a strategy with the following characteristics:

“Address four global markets” (as above)

“Invest in technology, infrastructure and capability”

“Develop a competitive portfolio of products and services”

“Grow market share and installed product base”

“Add value for customers through the provision of product-related services”

The company acknowledges the importance of customers in generation of its strategies and the final point in particular adheres to Rolls-Royce’s innovative approach in which the organisation wishes to provide a balance between the after-market services they provide and the products. This relates to an increase of ten percent in services revenue for the company over the last decade, amounting to £4,755 million in 2008 (Rolls-Royce website [4], 2010).

From a resource based viewpoint of Rolls-Royce group, the company has sustained its core competency throughout the generations since it was first established, being excellence in engineering and innovation in the reliable engines and gas turbines that the firm manufactures. Rolls-Royce seek to achieve strategic competitive advantage through these innovative technologies and the organisation has evolved in a manner that provides differentiation through providing, not only world-class engines, but support and after market services and maintenance. As Pitts and Lei (2003: 111) allude to, differentiation adds value because a product “comes with superior service” and that “differentiation builds competitive advantage by making customers more loyal – and less price-sensitive – to a given firm’s products.” The company also provides substance to the continuous quest for success by implementing diversification strategies in mature products such as the AE1107-C Liberty that can be seen in the Boston Matrix, Appendix 3. The business wishes to accomplish this by providing such things as low-cost upgrades that improve performance of existing engines. This is also underpinned by the company’s commitment to offering customised alternatives of each engine to cater for a broad range of clients.

Further to this, the corporate responsibility outlined by Rolls-Royce includes beliefs in a strong H, S & E culture, whilst going onto declare its intention in creating a work environment that will maximise the performance and motivation of employees whilst seeking to employ and keep hold of the best personnel worldwide (Rolls-Royce website [1], 2010).

One way of planning strategies is to look at and classify the products within the organisation or sub-division, in terms of the Boston Consulting group matrix. This matrix categorises the stars, problem children, question marks and dog products within the company in terms of market growth rate and market share relative to a company’s nearest competitor, and with the use of a numbering and timeline convention, can be utilised to devise forward plans with reference to the product lifecycle. However, the Boston Matrix should not be used as a single tool and should be used in conjunction with other models to determine long term goals and approaches for achieving them. As such, refer to Appendix 3 for the Boston Matrix of Rolls-Royce defence aerospace combat jet, helicopter and UAV products. It is of note, here, that the matrix detailed in Appendix 3 is the author’s perception of products available in the defence aerospace sector at Rolls-Royce relative to its nearest UK competitor, BAE Systems and not a firm and final matrix set out by the company. This is due to the absence of internal insight and market share/market growth of each product; thus, the products are gouped without timelines.

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Perhaps the most important step in indentifying the way forward and goals of the company is by performing a SWOT analysis, taking into account the internal strengths and weaknesses of the company and balancing them with the opportunities and threats surrounding the environment. In the case of Rolls-Royce as a defence aerospace sub-division, the opportunities and threats in the SWOT analysis detailed in Appendix 4 can be derived from the generic STEP analysis (Appendix 2) of the industry as a whole.

Furthermore, Rolls-Royce believe that a sustainable competitive advantage can be sought by making a commitment to invest in the communities that the company operates in and affects throughout the globe. The organisation takes the view that investing in these societies may help in providing advantages to the business whilst perhaps ensuring a good image of the company globally. In addition to this, the establishment has taken responsibility in ensuring that carbon-footprint and emissions are cut and have already reduced “total absolute greenhouse gas emissions by 24 per cent” in the last decade from 1998 – 2008 (Rolls-Royce website [2], 2010).

Rolls-Royce is renowned throughout the world for being a company that works to the highest standards of integrity, and this is reflected on the website (Rolls-Royce [3], 2010) where they vow to abide by strict laws and regulations in order to uphold their strong ethical stance. As such, having such standards will allow Rolls-Royce to maintain and further develop a first class supply chain in the future and to attempt to eradicate false, low quality products in their manufacturing businesses. The Global Code of Business ethics written by the company is produced in 18 different languages to ensure consistency and quality throughout, and reporting lines are made available to suppliers and customers should they have any concerns. This exacts fortification in their ethical processes and stands the company in good stead going forward.


Rolls-Royce envelop a number of aims and characteristics into a single strategy that, ultimately, need not be modified or added to in terms of goals, but can be expanded upon regards future development and reaping of benefits for the defence aerospace division of the firm. By applying the following concepts, the group may then realise its potential and desire of becoming number one within the industry.

Looking at areas of potential growth for Rolls-Royce, The United States Department of Defence is the world’s largest purchaser and end-user of UAV’s. These Unmanned Aerial Systems play a significant part in U.S Military procedures and forecasts predict that the market will grow to a value of $62 billion over the next five years (Market Research Media website, 2010). The areas of the UAV market where there are potential for growth includes research and development, testing, service, after-sales support and maintenance. Rolls-Royce is already heavily involved in the manufacture of engines for UAV’s, and whilst currently supplying products and support to the U.S Military, attempting to expand in the UAV market of R & D in addition to providing the after-sales support so distinguished of the Rolls-Royce brand could provide a wealth of opportunities and growth for the company. This would uphold each of the objectives set out in the organisations’ generic strategies whilst strongly adhering to buyers needs. A study by Hartley & Sandler (2003) as cited in Hayward (2004: 128) argues that, “outside the US, defence companies may also tend to rank their national governments as a less important customer than foreign markets.”

Furthermore, whilst the UK government may have announced plans to cut defence spending by eight percent (BBC website [2], 2010), Rolls-Royce already has a number of “robust, long-term service contracts held directly with governmental defence departments” (Rolls-Royce website [7], 2010). The services side accounts for more than half of that revenue predicted over the coming 20 year period. This is instrumental in Rolls-Royce future success given that a distinct competitive advantage that the company possesses is not just the sale of high-quality products, but the rigorous after-sales services and maintenance provisions offered. The level to which these defence spending cuts may have an effect can be absorbed somewhat by the fact that the figure outlined includes a portion of departmental expenditure levels (DEL). These DEL’s amount to such things as buildings and personnel expenditure (BBC website [1], 2010) and would be more aligned to public sector organisations such as the Ministry of Defence. This being the case, procurement of defence products from private organisations, particularly regarding current combat in Afghanistan, will continue steadily. In addition, the European and U.S markets are set to experience periods of steady growth to the year 2014, and the United States defence market value during this period is, in particular, a significant motivation for defence contractors such as Rolls-Royce.

Partnerships and merger activity could prove to be the most prosperous option for Rolls-Royce as, indeed, attaining acquisitions could be. Whilst it may prove difficult to gain acquisitions in the current climate, Rolls-Royce have already become the market leaders in the Marine division through its acquisition of Vickers prior to the turn of the millennium, and such activity may well prove to be the key to future distinguished success of the company. As Hayward (2004: 130) states, “acquisition of emerging technology companies may offer a strategic response by the traditional primes.” Caution would have to be exercised in this instance, in so much that power of suppliers may be heightened by possible acquisition and expansion of a range of products due to those markets that fierce competitors are already established in. Moreover, however, Rolls-Royce currently partake in a partnership with Lockheed Martin, who control a 5.8 percent share of the global market and, as such, should be encouraged to forge a strong bond with the organisation. Combining forces in similar situations could be a decisive factor in propelling Rolls Royce into a market leading position within the Defence Aerospace segment.

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Conclusions and recommendations

Bearing all of the above in mind, it is clear that the defence aerospace segment is fairly attractive in terms of existing firms operating in the sector, with the only unattractive feature being the high level of competitive rivalry due to the sheer magnitude of these companies. In saying that, companies can use this competitiveness as motivation in addressing weaknesses within their own organisation and striving to become outright leaders in the sector.

Rolls-Royce incorporates a strategy that deals with these issues head on, whilst also addressing the balance of potential shifts in the forces affecting the business in future. This can be seen in the company’s commitment to research and development that, in working with other companies and government organisations, will strengthen their technological position in the market in addition to creating a high-barrier to new entry (Rolls-Royce website [4], 2010).

The industry has become subject to much public scrutiny; though it provides much needed job opportunities, even for those averse to working in the sector. Whilst the UK government has announced defence spending cuts, there is room for Rolls-Royce to progress in other areas and markets and these can be categorised by the following set of above mentioned recommendations:

Creation of partnerships / mergers / acquisitions of other companies in order to expand overall defence aerospace capability and drive desire to become number one

Expand in European and US markets that are forecast to have a period of steady growth during difficult economic times

Seek to enter and expand in the UAV market in America, which is set to experience high growth in next five years

Continue, act on and develop the corporate responsibilities and operational excellence objectives set out by the organisation; particularly with regards to improving the image of the company and industry as a whole by investing in communities in which they operate, and promising to cut carbon footprint in a sustainable and timely manner.

Continue to develop flourishing relationships with companies such as Lockheed Martin and excel in long term contracts that the company has won.


Appendix 1 – Porters 5 Forces: Defence Aerospace

Appendix 2 – STEP Analysis





– Public pressure on government; majority of public opposing war in Afghanistan

– Changes in way technology is developed due to need to cut carbon footprint

– Recession: job cuts, reduced sales; more work for engineers with less engineers to do the work

– Government announcement from recent budget to cut UK Defence spending by 8% by 2015, this figure includes purchasing of equipment

– Provides jobs, even for those who don’t want to work in the industry 

– Teleworking: Ability of companies to take on lean manufacturing approach in speeding up product manufacture to delivery.

– Moving out of recession may give suppliers better bargaining power

– Announcement of increase in tuition fees. Less engineering students attending more recognised university institutions, knock-on effect of quality of students defence organisations can employ


– Innovation and new technology required for competitive edge but difficult to implement. Need to create mergers / partners / acquisitions

– European and American markets set to grow steadily, prospects for developing into these markets, especially with announcement of UK defence spending cuts

– Short term reserves from government for war in Afghanistan; however, eventual pulling-out of military will lead to direct drop in sales

Appendix 3 – Rolls-Royce BCG Matrix (Defence Aerospace)

Appendix 4 – Rolls-Royce SWOT Analysis





Recognised brand name; excellence in engineering; excellent reputation/track record; good product portfolio

Medium sized business – main competitors much larger and have more resources to develop new products

Growing markets allow potential for more contracts awarded, helps develop business

Reduced supply chain, or supply chain becoming potential competitor if subcontracting too much work

Electronic and mechanical technical capability; ability to deliver any engineering product

Media coverage can affect business in numerous ways, e.g. Share price etc…

Develop new advanced processes and methods in hardware and software due to increase in global terrorism threat

less and less qualified engineers / engineering graduates available to standard Rolls-Royce require

Knowledge of markets (Civil aerospace, Defence aerospace; energy; marine and nuclear)

Workload usually greater than resources available to provide it due to new/big contracts

Merger / partner opportunities with other companies to extend product expertise / product range, or even via acquisition

External influences such as legislation or obsolescence. Affects products, project timescales, cost and effort

Niche markets in some areas i.e. Nuclear, of which Rolls-Royce are market leaders

Susceptible to fragile / diminishing supply chain i.e. Counterfeit components, or obtaining high reliability / military spec components from reliable / trusted source

Opportunity to expand in UK market over medium term with market forecast to rise by over 30%

Regulatory requirements – demands require yet further work / investment to stay ahead of competition e.g. Carbon emissions

Strong, long established customer relationships

Difficult to obtain more market share via new products / facilities – usually done via acquisition

also opportunity to expand into US market with smaller market growth predicted, but larger market value

Media tarnishing reputation – loss of confidence from customer despite proven track record

Customer focused



Recession means reduced sales, job cut risks, even more work with even less resources (more work in engineers remit)

Good pool of engineers; well experienced professionals, good work experience. Accomplished, competent staff



Moving out of recession may lead to increased supplier power

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