Competitive Analysis of the
Defense & Aerospace Industry
&
By: Shaun Rorrison
Executive Summary
This report will describe the competetive environment of the Defense & Aerospace industry
and the main companies that compete in it; Boeing and Lockheed Martin. Boeing, inparticular,
competes in this industry through a business unit called Boeing Defense, Space and Security
(BDS).
An external analysis of the Defense & Aerospace industry show that the industry is very large,
and is primarily dominated by a few of the largest companies: BDS, Lockheed Martin,
Northrup Grumman, and Raytheon. The industry is foremost by customer demand and
budget. The toughest part about competing against eachother in terms of meeting customer
demand is that the industry's single largest customer is the U.S. government, accounting for an
average of 80% of sales.
Since the Defense & Aerospace industry is maturing, much of competetive rivalry occurs
through the capture of market share from other companies, rather than taking advantage of
new markets. Both companies, Boeing and Lockheed Martin, face challenges with fluctuating
demand caused by the U.S. government's allocation of funds to defense spending, as well as,
the overall health of the Economy. The US federal government under the Obama
administration continued to deliver bad news to defense contractors like Boeing and Lockheed
Martin, which took a direct hit when the Army's Future Combat Systems program was
cancelled in late 2010. Other than that, both of the main companies that this report looks at
were relatively unaffected by the President's 2011 budget cuts. (Daniels, Lockheed Martin Description) (Daniels)
In order for companies competing in this industry to remain competetive they must understand
the KSF and what ultimately drives the industry. This is a very capital intensive industry that
centers around capabilities in innovation, manufacturing technologies, customization, quality,
and access to skilled labor. It is similar to the KSF's of any typical high tech industry. As a
competing company aquires, or perfects, it's capabilities in these areas, they will be better
positioned to meet the strict requirements placed on them by the dominating influence of the
industry's main customer.
Introduction
The Defense & Aerospace industry, stemming from the Aerospace Products and Parts
Manufacturing industry is very mature, being dominated primarily by five companies in the
United States: Boeing, Lockheed Martin, Northrup Grumman, Raytheon, and General
Dynamics. A total of 1300 companies in the U.S. generate a combined annual revenue of $180
Billion. While the 20 largest companies account for 90% of industry revenue, most work as
subcontractors to the five largest competitors. (Hoovers)
Boeing is the world's largest aerospace company. It is ranked second,behind competitor Airbus,
as largest manufacturer of commercial jets; as well as, second in defense contracting, behind
Lockheed Martin. The company's primary business units include Commercial Airlines and
Boeing Defense, Space & Security (BDS). Roughly 60% of Boeings sales are generated in the
Americas and the U.S. government accounts for around 80% of BDS revenues. NASA,
international defense agencies, and satellite markets are also customers of BDS. (Daniels)
Lockheed Martin is a direct competitor with Boeing and is a leading global military contractor.
Like Boeing, Lockheed Martin competes in the civil and commercial sectors, but it is strongest
on the defense and government side of the aerospace industry. The US government accounts
for about 85% of its sales with roughly 60% coming from the U.S. Department of Defense.
The company competes largely in the Electronic Systems segment, providing sensors, and
missile launching and surveillance systems. Other segments include Aeronautics, Information
Systems & Global Services and Space Systems. Lockheed Martin is also a provider of
engineering, logistics, and information services. (Daniels, Lockheed Martin - Description)
Despite the severe cuts made recently to federal defense spending, the U.S. government
recently called for an increase in satellite launching which was a huge positive for Boeing and
Lockheed Martin's joint venture - United Launch Alliance (ULA). (Daniels, Lockheed Martin Description) (Daniels)
The shift in defense spending is forcing these companies to expand business capabilities in
order to remain competitive and profitable. Dependence on the U.S. government for sales acts
as a double-edge sword for Boeing and Lockheed Martin; turbulance can be avoided in the
commercial aerospace sector, but the companies are vulnerable to military spending cuts.
(Daniels, Lockheed Martin - Description)
Economic Features
In the Defense & Aerospace industry there is a large number of key economic features that
companies must be aware of in order to be successful.
Market Size
The market is demand driven; depending heavily on air travel and military
and/or government budgets. The market is huge though, generating $700
Billion in annual revenue globally. The top 20 U.S. companies generate 90% of
total revenue. (Hoovers)
Growth Rate
According to Hoovers, the forecasted output of U.S. aerospace manufacturing
is expected to grow at a compounded annual rate of 4% between 2011 and
2016. (Hoovers)
Number of Sellers
The U.S. industry is comprised of about 1300 companies, generating around
$180 Billion in revenue annually. The key players are Boeing, Lockheed Martin,
Northrup Grumman, and Raytheon. (Hoovers)
Number of Buyers
The majority of revenues are atributed to commercial and private aircraft
rather than defense aircraft. However, the U.S. governemnt, primarily the
Department of Defense, remains the industry's single largest customer.
(Hoovers)
Scope of Competitive Rivalry
Companies compete on an international scale. The highest amount of
competition on the defense side occurs in the U.S. and with ally countries and
their governments. The U.S. aerospace industry exports a large portion of its
outputs, primarily, to Germany, U.K., France, China, and Canada. (Hoovers)
Product About half of industry revenue is from maufacturing private, commercial,
Differentiation military, and business aircraft. 40% of revenue is from engines and other parts,
and 10% comes from missiles and space vehicles. (Hoovers)
Product Innovation
Innovation and R&D spending are crucial to the industry. R&D typically
accounts for 2% of revenues and companies frequently receive federal funding
for research. Systems development is a vital part of manufacturing guidance
systems, communications, and space vehicles. Several companies have business
units devoted entirely to electronic systems development. (Hoovers)
Supply & Demand Conditions
Demand is driven by the U.S. military budget and the overall economic climate,
which dictates travel and leisure expenditures. Aerospace products require high
grade raw materials to manufacture with so the price and availability of these
materials, especially aluminum, titanium, and carbon and boron composites,
can fluctuate wildly and are often only available through a few select suppliers.
Actual assembly is much more available and is often outsourced to other
companies. (Hoovers)
Number of Rivals
The industry is dominated by several large competitors who are increasingly
turning to smaller companies who are developing system integration
capabilities as large firms outsource more aspects of contracts. (Hoovers)
Scale of Economies
While large companies have economies of scale in design, manufacturing, and
purchasing; smaller companies compete effectively by concentrating on
selected components and parts manufacturing. Economies of scale does act as
a barrier to potential new entrants though. (Hoovers)
Vertical Integration
Companies within this industry remain fairly vertical, handling the design,
manufacturing, and purchasing processes. Lately, companies have begun
outsourcing parts of their processes to smaller sub-contractors. (Hoovers)
Effects of Learning/ Experience Curve
The industry is capital intensive, with average revenue per employee around
$400,000. A significant learning curve is required, not only through R&D
processes, but also in building a proven track record to please the industry's
number one customer, but coordinating with suppliers. The profitability of
companies depends on technical expertise and the ability to accurately price
long-term contracts. (Hoovers)
Aerospace & Defense Industry
This model explains the five main competitive forces present within the Defense & Aerospace
industry and how each of these forces affects the potential for success within this industry.
Subs0tute Products Commercial Aircraft Freight/Shipping Aircraft Suppliers Competing Companies Buyers U.S. Government Governments of U.S. Allies Aircraft parts manufacturers Metal/Raw Materials suppliers New Entrants Small parts manufacturers Current suppliers (Daniels), (Daniels, Lockheed Martin - Description)
Threat of New Entrants
Extremely high barriers of entry, regulations, high cost of capital,
and a required skilled labor force make the threat of new entrants
very low to non-existent. Also, since the U.S. government is this
industry's primary customer, new entrants will find it hard to
compete without a good track record of success.
Threats of Substitutes
Government contracts take quite a while to complete, making it
difficult for them to switch to a substitute product or service in
the short-run. Patents also protect the industry from providing
quality substitutes.
Buyer Bargaining Power
This is the strongest force on companies within the industry
because the U.S. government accounts for nearly 85% of defense
revenue, making it the largest single customer the industry has.
Supplier Bargaining Power
There are a large number of suppliers available, making their
bargaining power relatively weak. Bargaining power is given to
suppliers as the cost of raw metal,s and other materials,
fluctuates.
Degree of Rivalry
The level of competition among rival companies is very strong
since the industry is close to its peak. Advantages occur as rivals
find ways to steal market share from other companies, rather than
available niches.
Key Industry Drivers
In the Defense & Aerospace industry there are several driving forces that a company must be
aware of, which are listed in the table below. These drivers are what ultimately determine the
direction that the industry is heading. It is important for the companies that are competing in
this industry to understand them in order to build their business models around these
categories and prepare themselves by knowing what influences around the world could have an
impact on their company.
Changing Buyer Preferences
The industry's largest single customer is the U.S. government and demand is
primarily driven through their preferences and budget constraints. Increases in
Defense spending will grant the industry research funds to produce innovative
technologies that are needed in the military. Decreasing demand from
individuals wanting to travel will affect the industry's commercial airline
businesses, perhaps mostly in terms of innovation. (Hoovers)
Technological Change/Process Improvement
Process improvement drives the industry by helping alleviate risks associated
with fluctuating raw materials pricing and availability. Likewise, advancements
in technology can benefit companies by helping them become less dependent
on certain metals/materials commonly used in manufacturing. (Hoovers)
Diffusion of Technical Know-­‐How
The industry is currently dominated byfive large competitors, but the current
trend is to outsource more and more parts of contracts to specialized
subcontractor companies. In turn, these smaller companies are developing
system integration capabilities to make themselves more competitive.
(Hoovers)
Regulatory Influences
Government policy changes have become a key industry driver because of the
significant bargaining power this large customer has with companies. As
budget constraints tighten on defense spending, innovation and manufacturing
output is severely impacted. Similarly, as new regulations are formed regarding
leisure travel, the affect on consumer demand will impact industry growth.
(Hoovers)
**Source: (Hoovers)
Strategic Group Maps
** Bubble size is relative to company revenue
(Daniels, Lockheed Martin - Comapny Overview), (Daniels, Boeing - Company Overview)
Gross Profit ($B) 2011 Revenue v. Profits $16 $14 $12 $10 $8 $6 $4 $2 $-­‐ Boeing Defense, Space & Security Lockheed MarBn Northrop Grumman Raytheon $-­‐ $20 $40 $60 $80 Annual Revenue 2011 ($B) $100 * This chart shows that Lockheed Martin was less successful profiting in 2011
2011 Sales v. Employees Total # of Employees 250,000 200,000 Boeing Defense, Space & Security 150,000 Lockheed MarBn 100,000 Northrop Grumman 50,000 Raytheon -­‐ $-­‐ $20 $40 $60 $80 Annual Sales 2011 ($B) $100 * Sales per employee seem to be positively correlated in the industry
2011 Revenues v. Dependence on Primary Customer Percent of Revenues from U.S. Gov't 95% 90% Boeing Defense, Space & Security Lockheed MarBn 85% Northrop Grumman 80% Raytheon 75% $-­‐ $20 $40 $60 $80 Annual Revenues 2011 ($B) $100 * This chart shows that the companies that manage to broaden out and reach new customers have higher sales
Key Success Factors
This table describes the main Key Success Factors that a company within the Defense &
Aerospace industry must possess in order to remain competetive and, ultimately, be successful
A company in the Defense and Aerospace industry must be able to produce
Quality Control
high quality products to meet the demand of it's customers. The nature of the
products being produced involves precision manufactured components for
specific job applications. (Hoovers)
Technologic This is a KSF due to the high tech nature of the industry. The better a
al Expertise company within this industry understands, and utilizes, new technological
capabilities, the more successful it will be. (Hoovers)
Long-­‐term Pricing of This is important to being competitive in the industry. By strategically
forulating contracts with customers over a long period of time, a company
makes it more difficult for the customer to switch to a competitor's product or
service. (Hoovers)
Skilled
labor is valuable, and necessary, to all companies competing in this
Access to Skilled Labor
industry because of the innovation capabilities, quality control expertise, and
the precision manufacturing of parts needed to remain competitive. (Hoovers)
Customized Manufacturi
ng Capabilities
This industry is driven by the demand and budgets of it's leading customers.
The single largest customer, the U.S. DoD, is constantly looking for companies
that can manufacture very specific, and very unique products to ensure the U.S.
military has access to the most advanced products available. The industry is
not driven by regular mass production of a few simple parts. (Hoovers)
Product Innovation Expertise
Innovation is a very important KSF because of the demand driven market that
dominates the Defense and Aerospace industry. Customers are always looking
for the product innovation that will help them remain competitive in their
respective fields. (Hoovers)
Patent protection capabilities are necessary to remain successful due to the
Patent Protection
extreme innovation and highly classified nature of many products produced by
competing companies. (Hoovers)
Conclusion
The external competetive analysis of the Defense & Aerospace industry shows a very mature
industry that is highly competetive. The competition among rivals is driven primarily by the
influence of buyers on the industry. This is due to the fact that an average of 80% of industry
sales come from it's single largest competitor, the U.S. government through it's Department of
defense. Other competetive forces pose almost no threat on companies currently competing
within the industry.
The industry is dominated by a few large rivals that are mostly competing to capture
eachother's market share, rather than new markets. Due to the capital intensive nature of the
Defense & Aerospace industry and the successful track record customers demand from
competitors, a threat from new entrants is unlikely. Small suppliers are the closest to posing a
threat to the large competitors. Another potential threat could come from commercial or
freight airlines that are seeking to expand into new markets.
The U.S. government has the largest defense spending budget in the world. This ensures that it
will remain the industry's larges customer and strongest competetive influence for a long time.
The influence and bargaining power of suppliers is relatively weak since it is primarily driven
by fluctuation in raw materials pricing.
Both main companies, BDS and Lockheed Martin, are in good positions within the industry to
maintain a strong influence among competitors and be profitable. This is mostly due to the
proven track record of having extremely high quality, high precision products. Their abilities to
patent new, innovative technology and maintain long-term contracts with their customers
ensure longevity and growth within the industry.
Reference List
Daniels, N. (n.d.). Boeing - Company Overview. Retrieved February 25, 2012, from Hoovers:
http://subscriber.hoovers.com.byui.idm.oclc.org/H/company360/overview.html?companyId=
10221000000000
Daniels, N. (n.d.). Boeing - Description. Retrieved February 25, 2012, from Hoovers:
http://subscriber.hoovers.com.byui.idm.oclc.org/H/company360/fulldescription.html?compa
nyId=10221000000000
Daniels, N. (n.d.). Lockheed Martin - Comapny Overview. Retrieved February 25, 2012, from
Hoovers.
Daniels, N. (n.d.). Lockheed Martin - Description. Retrieved February 25, 2012, from Hoovers:
http://subscriber.hoovers.com.byui.idm.oclc.org/H/company360/fulldescription.html?compa
nyId=10903000000000
Hoovers. (n.d.). Aerospace Products & Parts Manufacturing - Industry Overview. Retrieved
February 25, 2012, from Hoovers:
http://subscriber.hoovers.com.byui.idm.oclc.org/H/industry360/overview.html?industryId=1
001