Qinetiq Business Strategy Proposal


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Qinetiq Business Strategy Proposal

  1. 1. Business Strategy Proposal [Edited Version] Global Defense and Aerospace Overview Sascha Michel saschamichel@gmail.comhttp://www.linkedin.com/in/saschamichel
  2. 2. Contents QinetiQ Status Update Slide 3 SCP Framework Summary Slide 4 Structure Conduct Performance Framework Slide 5-44 Portfolio Analysis Slide 45-55 Strategy Clock Slide 57 System Dynamics Slide 58 Final Recommendation Slide 59
  3. 3. QinetiQ generates 50% of its revenue from the US, while the UK and global divisions outperform, as federal cuts loom.Summary  QinetiQ Group plc (QinetiQ) is engaged in supplying of technical supply of technical support, • The UK services training, test and evaluation, and know-how to customers in the global defense, aerospace business, which tests•50% of revenues and security markets. The Company operates in three divisions: US Services, UK Services military aircraft for thecome from the US and Global Products. US Services involves aerospace operations, engineering management, UK Ministry of DefenseDivision but information services, mission solutions/cyber and software and systems engineering. UK and provides computer-underperforming. Services involves air engineering, test and evaluation, training and simulation, cyber security based simulation- and C4ISR, and programme and procurement support. Global Products involves training to sailors and•Shares survivability, unmanned systems, energy from waste, vehicle power management and air crew beforeunderperform OptaSense business. QinetiQ Annual Report 2011. deployment onmarket by 50% operations. Qinetiqs • Qinetiq is a small, tasty, and underachieving morsel. Since flotation in 2006, after being global productssince 2006. spun out of the UK Ministry of Defence, its shares have underperformed the sector by division, which sells nearly 50 per cent. Mr. Quinn has been turning things around since arriving two years ago: technology•Takeover theory costs have been trimmed at its UK division, its operating margin is 50 per cent higher than overseas, also helpednot in favor of it was a year ago, and the ratio of net debt to earnings before interest, tax, depreciation and improve margins, as themerger as at an amortisation has been slashed to 0.6 times from nearly three times in 2009. Its US group sold a greateradvantage division, which accounts for about 50 per cent of revenues, is labouring to keep up: number of high-margininnovating outside operating profits were down by one-third at the interim stage and margins were also a spares and mine-of a global giant. shade lower. There are two obstacles to the takeover theory. One is that Qinetiqs clearing robots. comparative advantage - its record for inventing things - may work better as a standalone However, The US•MOD Golden business than as part of an industry giant. There is also the UKs golden share, which limits services business, which any change of strategic ownership. The company is talking with the MoD about loosening accounts for just overshare limits change that rule, so it may not be permanent. Financial Times. London (UK): Nov 24, 2011. pg. one-third ofof strategic 10 turnover, continues toownership. suffer, with margins at the division declining•UK and Global from 7.8 per cent to 6.3Business per cent as federaloutperforming US   government moved to inas federal cuts sourceloom. services..FT.comnov 2011Status: Brief Update Qinetiq
  4. 4. New technological developments will change the way that A&D companies do business and competeSummary•Asymetric warfare Though this is hardly a shock, it is worth noting three changes in militarymay change the way technology.technology is used.  Asymmetric warfare leading to threats to the security of national communications networks.•Need for accurate  The advent joined up battlefield communications resulting inintelligence continues C4ISTAR‟s real time battlefield visibility for commanders at all levels.to drive the  The acceleration in the use of unmanned air vehicles particularly thetechnological ,perhaps inevitable, advent of unmanned combat air vehicles. Leadingdevelopment. to speculation and, in some sectors, discomfort that the next generation of combat aircraft is likely to be unmanned.•Next generation ofcombat is likely to beunmanned.External Shocks: Technology
  5. 5. Public opinion that opposes conflict and increasing debt could influence the likehood of a decrease in defense budgets.Summary•Defence and securityspending is highlydependent on currentconflicts, publicopinion, budgetaryconcerns andalliances.  Again it was no shock that the defence budgets would be reduced severely however by how much was a shock. The UK‟s SDSR published in 2010 mandated a cutting in key capabilities as well as a much larger than expected reduction in service personnel.  These changes in severe reductions in defence budgets for the largest military spenders has provided difficulty for defence contractors.  Most defence contractors have coped by instigating severe cost and headcount reduction and indeed raised profits by doing so however these are short term tactics and there is, as yet, no indication of how they will manage sustained defence budget restrictions. Sources: FT.com, Bloomberg, Reuters, Datamonitor, Interview with member of RAF’s internal Management consultancy, Aviation Week, United Kingdom Defence Statistics 2011External Shocks: Tastes & Lifestyles
  6. 6. Looming budget cuts and changing strategies could lead to increased competition and “off the shelf” defence capabilitiesSummary  Equipment, Support, and Technology for UK Defense • Qinetiq is putting pressure on the Ministry of Defence to relax and Security: A Consultation Paper” in December•Us congress could the strict rules governing who can own the companys assets, in 2010, a study that is expected to establish the UKallow 1 trillion in a move that could make it easier for the defence company to sell industrial capabilities deemed essential to meetautomatic cuts over one or more of its units. The UK government has the power to national security needs.next 10 years veto any investors attempt to build up what it deems to be an  The consultation paper focuses on four key areas: 1. "unacceptable" level of ownership.If the company is successful Promoting exports as a replacement for•MOD have strict and the rules are softened, it would make it easier for the  reduced United Kingdom spending, which will requirerules governing some company to raise funds abroad or to sell some of its UK products to have an increased “off the shelf”company assets and operations.Fellow UK defence companies Rolls-Royce and BAE capability.ownership “golden Systems are governed by similar, but less wide-ranging, rules.share” where BAE  2. Bilateral activity, specifically within R&D, and The key restriction for them is that no single foreign investorand Rolls Royce have defense/ equipment cooperation, with the United States can attain more than a 15 per cent voting interest. Sources closeless widening rules. and France being the championed relationships. to the Qinetiq discussions say that it would be in favour of a similar arrangement.TheMoD confirmed the discussions, but  3. An intention to award a quarter of government•Obama plans to shift refused to go into detail."The golden share agreement is the contracts to small and medium-sized enterprisesglobal military focus subject of ongoing dialogue between the MoD and (SMEs).to middle east and Qinetiq.Source:Michael Stothard. Financial Times.  4. Ensuring that the United Kingdom develops nationalasia-pacific at London (UK): Aug 22, 2011. pg. 14 . cyber security capabilities. Source:Deloitte report.expense of army. 2011 Midyear outlook for the global aerospace and defense sector • Defense stocks also turned in a mixed performance as•Budget cuts in UK investors tried to make sense of whether a dysfunctional • A plan unveiled Jan. 5 by President Barack Obamawhich could increase U.S. Congress would really allow $1 trillion in automatic to shift the Pentagon‟s global military focus fromexports “off shelf” cuts over 10 years to begin to take effect in January 2013. Europe and the Middle East to the Asia-Pacificand look to bilateral source:http://www.aviationweek.com/aw/generic region appears on its face to benefit the Air Forceactivity in R&D with /story_generic.jsp?channel=aviationdaily&id=ne and Navy at the expense of the Armyintentions to award ws/avd/2012/01/09/10.xml • Source:Aviation daily.¼ of contracts to http://www.aviationweek.com/aw/generic/SME‟s. story_generic.jsp?channel=aviationdaily&i d=news/avd/2012/01/09/10.xmlExternal Shocks: Legislation
  7. 7. The US leads global defence spend, followed by Europe, and China which is part of the emerging (BRICK‟s) marketSummary Defense Market Share 2010•Defense is largest • Defense Budgetssegment with 71.8% • India £30 billion next 5 years America (52%)•US leads the way • US £726 (£78m reduction next 5 years)with 52% global Middle East/Africa (5.2%) • Europe £135 billionmarket share • Japan £11 billion Europe (21.10%) Asia Pacific (21.80%) • China £51 billion•Key Buyers are • Source: SIPRI yearbook 2010Government,Civilian Airline andSpace Companies • Key Aerospace and Defense buyers are government, airline companies•Governments tend 698 and space companies i.e. NASA.to exceed their Source: DATAMONITORdefense spending Defense Spending 2010 (in bln$) Global A&D report 2010 381against agreed 281budgets 119 100 48 60 34 59 41 28 55  Defense is the largest segment accounting for around 71.8 percent (US$660.8 billion)/UK  source: SIPRI yearbook 2010 22%. Source: Aerospace Global report 2011 ClearwaterEconomics of Demand: Global Market Segments
  8. 8. The European defence market is led by the UK, followed by Russia and France.Summary • The European aerospace & defense market had total revenues of $224.5 billion in2010, representing a compound annual growth rate (CAGR) of 4.4% between 2006 and 2010. The defense segment was the markets most lucrative in 2010, with total revenues of $132.3 billion, equivalent to 58.9% of the overall markets value. source: DATAMONITOR: Aerospace and Defense Europe Report 2010 Market Share•European market ishalf that of the USwith UK, Russia and Defense(58.9%)France holding thelargest segments Civil Aerospace(41.10%) Defense Spending Europe 2010 (in bln$) UK Russia 16% 23% Italy 15% Germany 4% 5% France 10% Turkey 15% 12% Spain Rest  source: SIPRI yearbook 2010 Economics of Demand: Market Segments- Europe
  9. 9. The main activities in the A&D industry is manufacturing, design & innovation, and servicesSummary•Firms in A&Dindustry mainlycomprisemanufacturing, service-provision anddesign & Innovation.•Differentorganisations focuson different aspectsof the market.  source: RAF internal management consultant Economics of Demand: Market Segments- Services
  10. 10. Governments still remain the primary customers for global A&D companies but to a lesser extent than 5 years agoSummary  Several A&D organisations are diversifying into private sector to escape government domination.Governments are  As an example, QinetiQ are formerly the Defence Testing and Research Agency of the UK and are now a military servicemain customers for company. They remain a partner of the UK Government, providing R & D and some training and base maintenance under aDefence firms due to long term agreementmilitary issues beingin control of the state.  Defence and national security pertain to the sovereignty of the state and are generally in the control of national governments, who purchase goods for use in their armed forces. Similar products and technological, engineering andMany organisations manufacturing capabilities have dual use in supplying airlines and civilian aerospace, leading to companies supplying a sectoroperating in the A&D known as „Aerospace and Defence‟.industry try to  Traditional suppliers within the market are manufacturers although military service companies are increasing their presencediversifybymovingint in the market. These companies supply services such as base maintenance ,training, security consulting and research ando the private development. More controversially, some service companies , such as Blackwater, are involved in supplying personnel tosector, while still conflict zones. These arms for hire cause some to question whether fully privatised armed forces or Publicretaininggovernment  Private Initiatives are the future of national armies.alpartenrs  Sources: DatamonitorThoughtraditionallyi Aerospace & Defencento Global Reportmanufacturing, most 2010, Deloitte 2010 Globalorganisations Aerospace &Defensenowoffer a diversity industry performanceof services. wrap-up, PwC Aerospace and Defence - 2010 year inGovernmentsarediver review and 2011 forecast.sifyignsupploychains UK defense Statistics 2011as A&Dcompanieslook toreducetheirrelianceon a smallnumber ofclients. Economics of Demand: Market Segments- Customers
  11. 11. Highly diversified companies win government contracts based on technology, innovation and capabilities-Rivalry is StrongSummary • Shisler outlines the following areas where he sees the aeronautics and defense industry growing: Foreign military sales•Growth products of aerospace, helicopters, and parts; Aerospace, including commercial and commercial derivative aircraft; Helicopterslinked to R&D, cyber of all kinds; New glass cockpit installations and upgrades; Omnibus contracts; New technologies that make soldierssecurity, UAV and and fliers smarter, faster, and better than the competition; Government sponsored research and development;training Homeland security, including border security; Cyber security;UAV aircraft and manned aircraft; and Training in the countries the US is leaving. Source: US aerospace and defense spending under the gun-Zintro.com 2011•Innovation in spaceexploration leading to • The aerospace and defense industry is mainly comprised of companies that manufacture products for military use.new technologies in This includes manufacturers of military ships, such as submarines, destroyers, or aircraft carriers, andthe global security commercial, private or government aircraft, such as bombers, fighter jets, and commercial or private airplanes, andmarket the companies which manufacture and distribute the necessary parts and components for these machines. Also included in this industry are weaponry, such as missiles or ammunition, and other defense-related technological•Multinationals: devices, such as radar, sonar, or satellites. The aerospace and defense industry also produces spacecraft, such as thosehighly diversified in used by government space administrations and commercial space tourism companies.geography and Source:http://globaledge.msu.edu/Industries/Aerospace-and-Defense/backgroundproducts theymanufacture • global security continuing to be served by the technologies produced in this industry, and new discoveries in the universe, enabled by the innovations in space exploration. Source:Delloitte-Midyear outlook for the global•Competition wining aerospace and defense sector 2011contracts is intense.New technology and • This is a market dominated by large multinationals that are highly diversified in terms of both the products theyinnovation to manufacture and their geographical presence. This protects from any unreliability in particular markets, thus easingdifferentiate. Rivalry rivalry. Competition is also intense in terms of winning defense contracts and companies use innovation and newis strong technology to differentiate their service. Rivalry in this market is strong. Source: DATAMONITOR global A&D report 2010•Governments more • Governments are now more interested in purchasing capabilities than equipment. Contractors are responding withinterested in through-life support rather than mere return-to-repair services. Reduced government spending means contractors arepurchasing extending their value chain into new areas such as financial, training, monitoring and maintenance, often relying oncapabilities than the right selection of outsourcing partners in areas outside their means. Source: Aerospace & defence issues:equipment PWC.co.ukcontractorsEconomics of Demand: Product Differentiability
  12. 12. Amid a retracting US market the sector continues to grow due to higher predicted defence spend in China and India.Summary•Demand and growthdriven by Asia/Pacificregion•Revenue growthslowed 2005-2010  Asia Pacific to grow by 9.1% by 2015 while Europe 5.1%. Source  India 2015 forecast CAGR 13.2% and 86.7%•CAGR 5.3% -2014 increase since 2010. Inflation 2006 6.6% and 2010 12%. source:DATAMONITOR global A&D report 2010•China, and Indialeading growth -2029  The United States will maintain its position as the largest A&D market, while the Asia pacific region will experience fastest growth during the reporting period at over 3%. source: Aerospace global report-clearwater 2011  Global A&D Defense Market to Reach $399 bn by 2015: Demand in aerospace and defense market to 2015 driven by Asia-Pacific region. Military and defense spending less affected by recession than commercial aviation sector. US  Source: PWC.com-aerospace & defence assets-Top- maintains position as largest A&D market source: 100-30Aug2011.pdf BUSINESS WIRE 2011 Economics of Demand: Rate Of Growth-Global
  13. 13. Further Slides [EDITED] Contact mesaschamichel@gmail.com
  14. 14. Organisational efficiency and innovation is driven by creating a highly skilled, adaptable and diverse workforceSummaryBuilding a skilledworkforce requires  Action plans to develop defence industry skilled workforce The plan has four key strategies: develop and sustain industrystrategies to recruit leadership and engagement in workforce planning and skills development improve the industry‟s ability to attract andtalent, retain diverse recruit a highly skilled workforce assist the defence industry to retain an adaptable and diverse workforce develop andworkforce and promote industry-led school to VET to higher education pathways.promote industry led  Source:http://www.dfeest.sa.gov.auschoolsDiversity is key todriving innovation  diversity is vital in the technology industry. "I dont believe you can have true innovation without diversity in thought and in people  Source:http://www.diversitycareers.comInternal Efficiency: Organisation Effectiveness
  15. 15. A&D companies are not immune to recessionary shocks with profitability directly linked to fixed costs, GDP and InflationSummary  Many defence programmes have been terminated, and defence•Revenue and profit budgets are scheduled for cuts in future years. Companies facelinked to global GDP more pressure than ever to improve productivity; increaseand Inflation. transparency; and respond to increasingly complex government regulations, tighter schedules, and generally higher expectations.•Profitability and Persistent security threats and geopolitical instability, as witnessedoperating profit recently in the Middle East, underscore the need for globaleffected by fixed costs security. The A&D industry used to be hyper-cyclical, overreactingin staffing, accurate to economic cycles. However, during the latest down cycle, thepricing and long term A&D industry has performed more consistently throughcontracts. disciplined management during the up cycle and better preparation for the economic down cycle and inevitable decline in•A&D industry defence spending. The steady growth and increased earningsusually overacts to among the majority of the top 100 A&D companies reflect theeconomic cycles but resiliency of end markets and improved management over the pasthas performed better decade. Source: PWC A&D 2010 review and 2011 forecast.through disciplinedmanagement andpreparation fordownward cycles.•Companies face  Profitability Driverspressure to improveproductivity and  Technical expertiserespond to  Accurately pricinggovernment  long-term contractsregulations, tighter  Source:schedules and higher http://globaledge.msu.edu/industries/aerospacexpectations. e-and-defense/Finance: Profitability
  16. 16. Leveraging new recourses by global value chain, and deeper design considerations, creates differentiation and adds valueSummary  Product development in the defence sector has tended to be driven by more purely functional criteria, which are ofThe defence sector course of vital importance, but which miss the opportunity to create the significant additional value that is madecan create greater possible by deeper design consideration of usability, materials, manufacturing and „look and feel‟ factors. Untilvalue through relatively recently this „functional‟ approach was also the main driver in the medical sector, where it was felt thatindustrial design industrial design had little to offer and “as long as the product meets the functional requirements then nothing elseinput working matters”. The defence sector will increasingly recognise the opportunity to build greater value through earlier andalongside their more comprehensive industrial design input. Source: Industrial Design in the Defence sectorclients http://www.kinneirdufort.com  A globally integrated enterprise operates as a unified whole – integratingValue can be created production and delivering value through athrough globally seamless network of internal and externalintegrated resources worldwideenterprises  .Serving global markets: Revenue from local versus non-local markets, globalSourcing hubs and clients, and global valuecollaboration can proposition/differentiation/ brandingcapture value in  Scope of activities: Global productionsupply chains and sites, sourcing hubs, assets andoperations as global collaboration (internally and externally)partnerships leverage  Value creation and capture: Levels ofnew recourses efficiency in running production, supply chain, and operations; the degree of partnering and globalization for value chain components  Sustained value-add: Long-term profitability by leveraging new resources, technology, standardized  Source: Going Global in A&D-IBM Institute business processes and innovation capabilities. Source: Going Global in A&D-IBM InstituteFinance: Value Creation
  17. 17. Import restrictions and tax complexities add to upfront risks and heavy investment in long term programmes overseasSummary • Mistakes • A&D companies take significant upfront risks by investing • Mismanage Changes in: heavily in long-term programmes alongside OEMs. The • Business•Upfront risks by ment Conductinvesting heavily in financial impact of mistakes, changes in schedules and build • Mistiming Policies rates or mismanagement is high. Likewise, in the defence • Schedulelong-term Changes • Legislationprogrammes. market, management must decide on which programmes to • Build Rates • Im/Export pursue based on the long-term technology position they wish RestrictionsChanges in Changes • Politicalschedules, impact of to maintain and the likely build rates, timing and life cycle of • Lifecycle of Stability the equipment Performance on major programmes must be Equipmentmistakes andmismanagement is well managed as it significantly affects both earnings andhigh. customer relationships. This has challenged companies to stretch their capabilities and risk profile, but the risks of failure can be high. The long-term production cycle of a Investment in•Programme long-termmanagement in long typical A&D program me makes it difficult to recover from programmesterm contracts is key errors or mismanagement, which can lead to billion dollarwith errors and losses, changes in senior management and a loss of marketmismanagement share. Throughout the organisation, there is an emergingresulting in billion push to streamline processes and integrate operations. At thedollar losses operating management levels, there are increasing rewards and penalties in the area of programme management.•Risks include • Source: PWC A&D Continuous Improvement inrestrictions on Operating Performanceimport/export, establishing operations inforeign countries, tax • Suppliers, on the other hand, are located throughout the world and are increasingly emerging from Asia. Large A&Dcomplexities i.e. cross companies establish special purpose entities such as joint ventures, partnerships and proxy boards to qualify asborder transactions suppliers in foreign countries and to meet offset requirements. The current international issues include: controls overand repatriation of the restrictions on import/export of technology and products; risks of establishing business operations in foreignprofits countries; accounting and tax complexities associated with special purpose entities and cross-border affiliated transactions; reinvestment and repatriation of profits and other A&D-specific accounting and tax issues associated with multinational operations.Source: PWC A&D Globalisation tiering Supply ChainFinance: Risk
  18. 18. Further Slides [EDITED] Contact mesaschamichel@gmail.com
  19. 19. Markets and Competitors Where? Portfolio AnalysisDirectional Policy Matrix
  20. 20. Portfolio Analysis Market GrowthSize of the Blobs  Emerging markets seen as an obvious choice, with India leading the way, and potential to build strength early on. However, to build competitive strength would require significant investment and undue risk, where an already struggling US Arm remains reliant on UK and global services  Projected growth in the long term for emerging markets, which might suggest a longer term strategy option QinetiQ to potentially build strength first and then look to invest capital in integration, acquisition and build partnerships in these markets
  21. 21. Portfolio Analysis Need for Foreign ImportsSize of the Blobs  China and Brazil show less reliance on foreign imports as both look to develop domestic capabilities and there is likelihood that they could compete in the exporting and manufacturing of defense products and systems  China is less reliant on imports in the short term as Brazil waits out a medium term strategy to waiver support from Europe
  22. 22. Portfolio Analysis Market SizeSize of the Blobs  US the single largest market with China not far behind  Opportunities in US and UK to select growth areas and to invest internally to continue to build market share and differentiation of customers in other federal departments and private sectors  Strength in the UK is highest, however, US still strong. Focus could be to develop market share fulfilling new technology needs in cyber security and UAV
  23. 23. Portfolio Analysis Concentration of SuppliersSize of the Blobs  US shows highest concentration of suppliers. Winning market share and seeking dominance is not an option. Costly, and competition is led by large multinationals, manufacturi ng across the whole supply chain.  It makes sense to look at new segments within this market either by acquisition or by diversifying  The private sector could help reduce QinetiQ‟s exposure to only one main customer (DOD) while sharing technology and innovation capabilities in horizontal markets i.e. cyber security, energy and networks  Emerging markets would require maximum investment to build market share and strength
  24. 24. Further Slides [EDITED] Contact mesaschamichel@gmail.com
  25. 25. Generating Options Strategy Clock-Differentiation Internal Change The focus is on a differentiation strategy by offering a better service and product by driving innovation and efficiencies through culture and efficiency changes A culture of cutting edge superior products at market price There are future opportunities with increased budget for cyber security across other federal departments and by focusing on superior products and people could lead to improved brand and reputation in a new market. Defense companies win on innovation and technology but is delivered by people. Rather than invest externally QinetiQ can drive behavior and satisfy the market trend of" do more with less” and in turn build brand value when targeting new bids for federal contracts. The US is an underperforming arms which by investing internally could give stability and surety to investors that everything possible is being done to compete head- on. This strategy is the least riskiest strategy in terms of capital outlay and suggests a “freezing” time until embarking on more riskier M&A or geographic strategies. Developing new products in new sectors via M&A would be a second option in the long term but short term imperatives are to stabilise the US division and compete for new contracts
  26. 26. Further Slides Final Recommendationsaschamichel@gmail.com