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Authors: Ivo Tokarski and Robin Vegter, 2011.

Abstract

This paper aims to research how BAE Systems try to gain competitive advantage, in the European market for combat vehicles, in terms of product and process innovations and how they relate this to their strategy.

We have analysed secondary data in order to distinguish forces influencing the macro-, meso- and micro-environment of the business.

Our analysis shows that BAE Systems is focusing mainly on product innovations in order to counteract the high risk of substitute products. They adopt a strategy of becoming an expert in military supply to gain competitive advantage, because of the heavy regulated market they operate in. Our recommendations for them suggest a consideration of process innovations and the targeting also public markets that are less heavy regulated.

Keywords: Industry Analysis, BAE Systems, Defence Industry, Strategy, Innovation.

1. Introduction

This study will investigate the defence industry In Europe. The defence industry is a heavily regulated industry, which deals with enormous amounts of money. We like to explore the defence industry, because for most people it still is relatively unknown, while being such a big industry. Especially in this moment, where the Middle East (Iraq, Afghanistan, Libya, Syria etc) is about to experience a revolution. This revolution goes hand in hand with military interventions of Western countries. Therefore, the defence industry affects so many people on the world. We like to investigate what kind of industry is behind all these developments.

At the same time the defence industry is under pressure because of the financial crisis. Because the main buyers in this industry are governments of different countries. The same governments who have to cope with the financial crisis, which is still going on. Governments are cutting their spending’s in order to decrease their debt ratio. The defence industry will suffer from these cuts, because governments will also cut on their defence spending (Anderson, 2011). The consequences for the defence industry will be further analysed in chapter 2. Overall, we think that a industry, which is so big and affects so many people deserves a closer look.

1.1 Definition of the industry

The defence industry is a very broad industry, which is active all over the world. Besides the fact that the market is a global one, it has also several segments, like land, air and sea defence products. Every segment is already so big, that it could be considered as an individual market. Therefore this paper will focus on the European market of combat vehicles. The segment “land” is the biggest segment in terms of turnover and therefore we decided to choose for combat vehicles. Although land defence products comprises more than just combat vehicles, this study focuses on combat vehicles.

Combat vehicles are special designed vehicles with a specific fighting function and are mostly used at the frontline of combat area (Lechevin et al., 2009). There are a lot of different kinds of combat vehicles, the most known combat vehicle is probably “the tank”, which also has different types. Combat vehicles are often used for a specific mission or target, when there is incomplete information available about the area, target or enemy. Combat vehicles are than deployed to complete the mission (Lechevin et al., 2009).

Europe spends, after North America, the most money on defence products with a share of 16.4 percent of total spending compared to North America 51 percent (Anderson, 2011)[1]. Asia, including China, only holds 15.1 percent. For an emerging continent, which is numerous times bigger than Europe, this is quite remarkable. As said, in this paper we focus on the second largest continent, namely Europe.

Within Europe there are three countries that have a significant market share in defence industry, namely The United Kingdom, Germany and France (Anderson, 2011). They are all listed in the top 5 countries in terms of market share in defence products. In this paper we will therefore mainly focus on these countries.

1.2 Individual company

After having explained the industry, the individual company will be highlighted. This paper is written from the perspective of BAE Systems. BAE systems is the second largest global defence company of the world, based on their 2010 turnover, which was 22.4 billion pounds. They have home bases in Australia, India, Saudi-Arabia, South Africa, Sweden, United Stated, United Kingdom and provide their products and services to more than hundred countries in the world. They provide almost every possible product or service within the defence industry. BAE Systems deliver products and services for air, land and sea forces, as well information technology solutions and support services. Because of this broad range of products and services BAE Systems offers, we chose to only focus on BAE Systems land defence products and more specifically combat vehicles. BAE systems offices in United Kingdom and Sweden are responsible for the land and Armaments segment.

It is clear that BAE Systems is trying to be a big player in every possible product category and geographic market. They claim to deliver the best and most innovative products in all segments. Besides that, they also provide through-life support on their products. Therefore BAE systems likely to be classified as an organization who uses product leadership as main strategy.

1.3 Purpose of this paper

The purpose of this paper is to see how BAE systems tries to gain competitive advantage in the European market for combat vehicles by making product and process innovations. Secondly this paper looks how this is integrated into their strategy. The purpose of this paper is formulated into a research question:

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?

1.4 Methodology

Because of limited time, this research will be conducted with secondary data. There is a lot of secondary data available about the defence industry. The website of BAE Systems does provide a lot of information, mission statement, figures and annual reports on the organization, which will be used for the company analyses. For the industry analyses academic journals, articles, websites and newspaper will be used. A total list of references can be found in the reference list at the end of this paper.

1.5 Structure of the paper

The paper is divided in two main chapters, namely the industry analyses, which will be the next chapter. Here the industry will be explain with Porter 5 forces model and a PEST analyses of the macro environment. After the industry analyses, BAE systems will be discussed by performing a SWOT analyses, which will results in the main Strengths, Weaknesses, Opportunities and Treats of BEA Systems. Finally, this paper will end with our conclusions and a answer on the research question.

2. Industry Analysis

In this section we will perform an industry analysis starting at the meso-level with the five competitive forces that shape strategy according to Porter (2008), which will be put into a macro level perspective by the second part by performing a PEST analysis (Kotler, 1998).

2.1 Macro-level

In this chapter we will address the macro environment of BAE Systems. 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.

2.1.1 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.

Secondly, governments decide to a certain degree what kinds of products are developed. Because governments are by far the most important customers of manufacturers, they have significant influence on what kinds of products are being developed and put into the market. Besides that, defence manufacturers are forced by regulations to meet all kinds of safety and quality standards. Off course, every industry has to meet certain standards, however in the defence this is significantly higher (Steinberg, 1992).

Third, politics are in fact the founder of the defence industry. Defence products in all their kind are necessary for situations where governments (or networks; see Al Qaida) of different countries are not able to solve their problems with sound arguments. Currently we see conflicts between Western and Middle East countries.

2.1.2 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 spending’s and debt ratio’s. 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 spending’s 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.

However, countries will always need defence products and technology will continue developing, so in the long run governments will keep spending large amounts of money on military equipment and in this case on combat vehicles. Era’s of economic and financial crisis only might postpone spending’s on defence products until moments of economic welfare arise again (Steinberg, 1992).

Another issue is that the global economic fluctuations in raw material prices for steel, aluminium and copper might fluctuate, (10% in of November 2011, metallprices.com, 2011), which might effect the predictability and planning of the business. However, BAE Systems has experience to overlap those times by essential financial resources they have gathered over time.

2.1.3 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.

2.1.4 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. The development of internet networking for example, triggered the R&D towards an integrated network of combat technologies as well. Current product developments try to combine, integrate and cooperate several technical elements to a holistic combat networking systems. The developments are guided by the idea of networking websites where individuals can effectively cooperate with each other. In military terms this cooperation should increase communication in combat situations. The future according to BAE Systems will bring soldiers that are equipped with eye-pieces displaying all relevant information for their task (distance, position of enemies, emergency calls of fellow soldiers etc.). This device will be connected to the vehicles themselves that will track and identify their users and positions. All the military equipment therefore at some point can be tracked and controlled by a centralized headquarter. Another trend influenced by technology is the implementation of unmanned combat vehicles and robotics. The development of those technologies is still in its beginnings but first successes can be seen in fully workable unmanned ‘drones’ (small remote controlled airplanes) that are able to spy on foreign territories or even carry bombs. The technological advances in the combat vehicles are still in their first development stage but are guided by the robotic advances done by universities and other researching companies. With the automatization processes that robotics can offer, the future trend is guided towards the automatized delivery and remote steering of vehicles to the war front, being it for supply or fighting reasons.

Overall the economic surrounding and the evolution of technology supply technological trends. The individual company itself does the adaptation and development of those technologies to defence industry needs.

2.1.5 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 spending’s 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.

2.2 Meso-level

Using the five forces model on the defined market sector of BAE Systems, we can distinguish following factors that shape the industry competition.

Figure 1 – Five Forces

In the next section we will evaluate each point displayed in this model that was build in according Porter’s Five Forces in respect to BAE Systems.

Bargaining power of suppliers

The defence industry usually works like the ThyssenKrupp company manages their supply chain and innovation processes, namely in an integrative platform (TyhssenKrupp.com, 2011). The companies’ within this industry try to form networks in which they can reach for the individual competences of the members (suppliers) involved. This is basically done by the joint development of innovative products and the exchange of information and know-how. Those business contacts that are formed in this network give access to new markets and possibilities. Those platforms are usually located outside the company and are not integrated in the hierarchy.

BAE Systems on the other hand is claiming to rely on external an open architecture in order to increase their own technological capability in order to fulfil the requirements of their customers (baesystems.com, 2011). They use a tiered approach to increase the added value throughout their supply chain, which ranges from full strategic and operational performance partnerships (baesystems.com, 2011). One of their main suppliers is the Advancing UK AeroSpace, Defence & Security Industries (ADS) that cooperates with BAE Systems in four main sectors, namely: Technology, Skills and Operational Improvement; Routes to Market; Policy and Events (adsgroup.org.uk, 2011). ADS is a supplier that has the same diverse technological diversity to support the four sectors BAE Systems has foothold in, being it aerospace, defence, security or space. ADS supplies BAE Systems primarily in matters of services like advice on export licensing, offsets, international trafficking in arms and security directive – a smaller share of services is concerned with technological improvement (adsgroup.ork.uk, 2011). We therefore can define this supplier as the main consulting partner in legal matters, operational improvement and skill/knowledge transfer.

Because of secrecy issues and high ranked technological development and innovations, BAE Systems has adopted a new supplier development program in 2006 (BAE Systems, 2011) that changed from the traditional supplier quality approach from a series of reviewing in timely periods (initial six months, six to twenty months and twelve of eighteen months) – to a lean production process adopted from the car industry. Especially for this purpose they have developed the FRACA systems in order to make the qualitative improvements of suppliers measurable. The FRACA systems is working with complex variables to calculated a balanced scorecard in supplier management that consists of four main sectors, namely Process and KPI’s (Key Performance Indicators), Project Management, Relationship Management, critical milestones and joint actions (Penfors & Jaros, 2011).

Taking this into consideration we can conclude that 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 Centre’s ’  and slipped into the internal network of BAE’s lean production. Furthermore, due to secrecy issues concerning the developed technologies and the strict monitoring by the FRACA program, suppliers are constrained from serving also other manufacturers. Supporting this statement is also the research conducted by the author Sanderson (2008) on the buyer-supplier partnering in the UK defence procurement, that “none of the power relations in the supply network discussed is primarily characterized by interdependence and there is no evidence of partnering.”

Threat of new entrants

The defence industry is a world of ‘big players’, which divide the market among them. In the end of the year 2010, BAE Systems announced a turnover of £22,392 million pounds with a profit of £1,081 million pounds (BAE Systems Annual Report, 2010). The capital requirements to enter such a playground are enormous. Another barrier is the access to distribution channels because the main purchasers are governments, more specifically the MOD’s (Ministry of Defence), which need to be convinced of the legitimacy of the manufacturer (Aldrich & Fiol, 1994). This market is a international one, which means that not only that he is heavily regulated by international law but also requires an immediate scale efficiency from the producers in order to gain profitability and growth.

Putting it in terms of the authors Aldrich & Fiol (1998), new entrants will face a barrier in creating cognitive legitimacy and even more essential for this industry, socio-political legitimacy. In order to attain cognitive legitimacy, new entrants would have to achieve trust and reputation without having historical background in this field and they would also have to be cooperating with the already established organizations in this industry in order to help building their own reputation and legitimacy on a socio-political level (Aldrich & Fiol, 1998). Because it is very unlikely that the established companies have the intention to cooperate with new entrants, and the entrants themself will have to come up with huge capital requirements and production facilities, we therefore conclude that the threat of new entrants is low in this case.

Bargaining power of buyers

The defence industry, as mentioned before, is a heavy regulated business sector in which the entry requirements for new companies are high and difficult to obtain, but once established there are a very focused and affluent buyer base. The main buyers are governments represented by their Ministries of Defence (MOD), which invest the budgets granted by the governmental policies on a national level. From the perspective of the companies selling there are up- and downsides to such a market. The upsides are that their buyers have big capital reserves to spend and it is rather unlikely that a country will go completely bankrupt (neglecting the not foreseeable outcome of Greece’s future). The purchases are made in bulk so the profits generated by the companies are also dependent on the governmental spending habits. If the government has nothing to spend, the company has nothing to gain. But as the government buys the company has immediate profits due to secured financing. The MOD’s in general are the negotiating partners in forming deals with the companies within this industry and has a very strong bargaining power towards them because it can negotiate with several competing companies on a global basis and can create political pressure relating to the restriction of supplying different governments with whom they are in conflict. The only really effective countermeasure BAE Systems (or a company in their position) has, is the negotiating power of workforce employment. BAE Systems employees over 111,578 people in the UK alone which gave a certain negotiation power for the UK government to invest in their products in order to ensure employment for British citizens. But the fact of the matter is that a company in the defence industry cannot be represented in each country with such a big work force as a ‘negotiation hostage’. With governments of other countries they have to negotiate on a price basis.

Therefore we conclude that the bargaining power of buyers is high, because they are their main and only target market. To underline our statement we would like to point out a study conducted by Sanderson (2001), where he concludes, that “government regulation is a double-edged sword. It can either create or sustain a firm’s exchange power advantage, or it can be used to constrain or remove such an advantage.”

Threat of substitutes products or services

The defence industry is rather sensitive to the threat of substitutes in products rather than services. As explained before, services like legal matters and operational improvement can be outsourced to suppliers. The main threat lays in the development of superior products that could substitute the product of the own company in this sector. The R&D in the defence industry is considered as top secret because in the end the purpose still is to ensure that the product is superior to the enemy and therefore is an essential part of ‘winning a conflict’ in difficult times (or war). Manufacturers have big switching costs when they realize that a substitute has been developed. The timing of those moments is unforeseeable because as mentioned earlier their R&D is considered top secret. That means that the competitor is putting the company in front of a final product, which is ready to go to market immediately. The company with the inferior product will have to bear big switching costs in order to redirect production into the same direction as the competitors or putting capital into new product developments that on the other hand will surpass the substitute that has destroyed their market share and therefore comply with the industry growth and demand. We classify the threat of substitutes as high, because of that reasons. Supporting to our statement is the result of the research on patents, trade secrets and the correlation among R&D projects by the authors Bulut and Moschini (2006), who conclude that “the availability of additional modes of protection (trade secrets) may in fact lead R&D competitors to choose less correlated projects.” Following our argumentation this would imply a threat of substitution. 

Rivalry among existing competitors

The database of the Stockholm International Peace Research Institute (SIPRI) reveals that there are major regional differences among arms producing companies (SIPRI, 2011). The data reveals that of the top 100 arms producing companies in 2009 which generated worldwide a turnover of over $368 billon US dollars. 45 of those companies were located in the USA, and 33 in Western Europe. 26 of the top Western European countries are based in Italy, France, Germany and the UK (SIPRI, 2011).

As we define our industry analysis to the European market we will distinguish the main competitors from Europe in order to focus on a specific market. We have to admit however, that the defence industry is a global business were the biggest producers, coming from the USA (e.g. Lockheed Martin, Boeing, Northrop Grumman, General Dynamics, Raytheon, etc) also sell their products to Europe. We want to however to focus on the regional rivalry of this sector, which concentrates on those four countries mentioned before: Italy, France, Germany and the UK. The main competitors are defined by the list of the top 50 arms producing companies based in those four countries.

Figure 2 – Top 50 Western European companies

Arms sales, 2009 (US $ milions)

Source: SIPRI database, Top 100 arms sales (2009).

Figure 2 shows that there are companies in Europe that make more turnover in the defence industry sector, but BAE Systems is still one of the commercially healthiest of the sated rivals because they are able to generate profits from the turnover. Another advantage towards their rivals is the product portfolio of BAE Systems, which covers a diverse spectrum from land, air, space, water defence products to the technology, service and maintenance. If we take EADS for example as a comparison then we see a focus strategy on the air sector.

The distribution of market gain by division for BAE is divided as following.

Figure 3 – BAE Systems revenue by division (2008)

Source: BAE Systems, Preliminary Results (2008)

Figure 2 shows that approximately 34% of the $32,420 million generated in sales in 2008 have come from Land & Armaments. Therefore a substantial part of the $11,022 generated can be attributed to the armed vehicle business. Using the same percentage on the $33,250 million generated in 2009, $11,305 million can be attributed by estimation to the sector of Land & Armaments so that we can conclude that the combat vehicle sector is growing. From this simple insight we can draw a line to the industry life cycle and argue that the industry is still in growth. We find similar evidence when looking at the rivals.

We therefore conclude that the rivalry is high in this industry sector. According to the article of Anderson (2011), we also argue that in times of worldwide financial crisis the military spending’s plunge accordingly, and therefore the defence industry faces greater challenges in generating profits. This certainly is a factor that increases rivalry.

2.2.1 Interpretation of findings on the meso level

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 Centre’s and slipped into the internal network of BAE’s 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.

3. Company analysis

In 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.

3.1 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 from figure 4 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 (see Appendix A).

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.

3.2 SWOT Analysis

3.2.1 Confrontation Matrix

In this paragraph we will elaborate on the SWOT analyses by performing a confrontation matrix. In a confrontation matrix internal and external elements are confronted in order to see how they affect each other. At the same time you see which elements have big influence and which have less influence by the number of pluses and minuses you see at the end of each row. A confrontation matrix will result in a number of strategic issues. In the case of BAE Systems this will be three strategic issues, namely: Emerging markets, private sector and technological possibilities.

Strategic Issue 1: Technological possibilities (O2, O3, O4, T3, T4)

The first strategic issue that BAE System faces are technological possibilities they have. Because of their R&D department with high expertise, they have the possibility to continuously develop the latest innovations like; unmanned combat vehicles, safer equipment and integrated network systems. Secondly BAE Systems could create an technological lock-in, which means that certain products won’t work without complementary products of BAE Systems. At the same time it will take them relatively more time and more money, because of structural inertia and high transaction to process those changes. This way BAE Systems can block threats like that facts that technology is imitatable and cope with the ethical pressure.

Strategic Issue 2: Emerging markets (O1, T2, T3)

The second strategic issue which arises from this matrix, are new emerging markets like for example Brazil. It fits the current strategy of BAE Systems, because they are already a global player and they have a good reputation and the capital reserves for it. Thereby, it is also a good way of dealing with the economical crisis and to spread the risks of it. Because of the economical and financial crisis in Europe it would be smart to invest in emerging markets. Emerging markets do also have less regulations and are therefore easier to enter.

Strategic Issue 3: Private sector (W4, O2, T2, T5)

BAE Systems does not sell parts of technology, which they developed for defence products, to the private sector. For example, in case BAE Systems develops new shock breaks with a whole new technique, that would be interesting for car manufacturers as well. Some  competitors of BAE Systems do sell to the private sector, but for BAE Systems this would be very interesting because they have a very good R&D department. The private sector is way less regulated and would make them less dependable on government contracts. Secondly it would spread the risk of the economical crisis.

3.3 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.

3.3.1 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.

3.3.2 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 company’s 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.

3.3.3 Competitive advantage

Competitors of BAE Systems use a rather more network-like type of innovation integration compared to the hierarchal structured, centralized innovation integration of BAE Systems. The competitors rely on a joint development of certain technologies in order to cut development costs. The example of ThyssenKrupp, a main competitor of BAE Systems, shows that they cooperate with e.g. Siemens, Frauenhofer Institue, etc. (thyssenkrupp.com, 2011), in order to develop a common base in which technological insights and knowledge can be used by each member involved into the innovation creation process. The finial implementation of those technologies is done by every company on its own, so the detailed implementation into armament systems is also covered by secrecy issues. However, the innovations generated in this network can serve also other purposes for example the commercialization on the public market, like e.g. precision tools created for a certain prototype production where sold on the public market to watch manufacturers and aircraft engineers.

BAE Systems focuses rather on the in-house product innovations that are generated through their ATC and complements it by some degree of outside-in knowledge through their investments in innovation program. However, they do not follow a strategy of supplying other markets besides the defence industry through their main company, but rather focuses on becoming an expert and leader in the defence industry. The facts speak for itself, BAE Systems is one of the market leaders within the industry and is securing their knowledge through isolation. This seems to work in favour of them because they therefore try to stay in touch with technological developments and there scientific engineering in order to create a sustainable knowledge base. The advantages in this focused approach is by reaping all the benefits from an innovations once it is created without having to share it. Benefits are not only monetary ones, but in the same extent BAE wants to increase their knowledge asset, which can be benefical for each further step in development. By not sharing this knowledge they also make it harder for their competitors to follow, because – “how can you follow when you can not see the footsteps?”

3.3.4 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 MOD’s. 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.

3.5 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.

4. 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.

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[1]Based on figures from 2008