Some considerations about

industry analysis
(in the aerospace and defense sector)

by
Dr. Sorin Lungu
(December 13, 2010)
 Agenda

• Some considerations about the aerospace and defense sector

since the late 1980s
• Considerations about business strategy and the S-C-P
framework
• The Porter “5 forces” model
• Q&A
 Technology, economic security & international affairs

Relevant factors in assessing shifts in since

the late 1980s

INTERNATIONAL MILITARY
MILITARY
INTERNATIONAL
STRATEGIC TRANSFORMATIONS
TRANSFORMATIONS
STRATEGIC
ENVIRONMENT (CAPABILITIES&&
(CAPABILITIES
ENVIRONMENT
RMA)
RMA)
POST-COLDWAR
POST-COLD WAR
SECURITY&&
SECURITY
ECONOMICRELATIONS
ECONOMIC RELATIONS

ECONOMIC,
ECONOMIC,TECHNOLOGICAL
TECHNOLOGICAL&&DEFENSE
DEFENSE
INDUSTRIAL FACTORS
INDUSTRIAL FACTORS
(“DUAL-USE”
(“DUAL-USE”INDUSTRIES,
INDUSTRIES,TECHNOLOGY
TECHNOLOGY
POLICIES & CORPORATE STRATEGIES)
POLICIES & CORPORATE STRATEGIES)
 Technology, economic security & international affairs

Rand Corporation’s view of new

generators of national power in the post-industrial age (2000)

EXTERNAL
EXTERNALDIMENSION
DIMENSION DOMESTICDIMENSION
DIMENSION
Dominate DOMESTIC
Dominate“cycles
“cyclesofofnational
national Develop“hegemonic
Develop “hegemonicpotential”
potential”
innovation” in “leading
innovation” in “leading and“effective
“effectivemilitary
military
sectors” and
sectors” capabilities”
capabilities”

Source: Ashley Tellis, Janice Bially, Christopher Layne, Melissa McPherson, and Jerry Sollinger,
Measuring National Power in the Postindustrial Age: Analyst's Handbook, MR-1110/1-A (Santa Monica,
CA: Rand Corporation, 2000).
 Technology, economic security & international affairs

Technologies perceived in the post-industrial

age as critical to national power (Rand Corporation, 2000)

Informationand
Information andcommunications
communications
Biotechnologyand
Biotechnology andlife
lifesciences
sciences

AERONAUTICSand
AERONAUTICS andsurface
surfacetransportation
transportation

Materials
Materials
Energyand
Energy andenvironmental
environmentalresources
resources

Source: Ashley Tellis, Janice Bially, Christopher Layne, Melissa McPherson, and Jerry Sollinger, Measuring
National Power in the Postindustrial Age: Analyst's Handbook, MR-1110/1-A (Santa Monica, CA: Rand
Corporation, 2000).
 Analytical framework

The globalization of
defense industries &
the emerging supply chain
management issues

A redefined post-Cold War

relationship
“Dual-use” technology, among technology,
strategic industry & economic security &
strategic trade policy international affairs
THE AEROSPACE
& DEFENSE SECTOR

Structural power &

Transnational networks &
international state-firm
corporate governance
bargaining theory
 Structural power & international state-firm
bargaining theory

“… [It] is the power to shape and determine structures of the global

political economy within which other states, their political institutions, their
economic enterprises and (not least) their scientists and other professional
people, have to operate … Structural power, in short, confers the power to
decide how things shall be done, the power to shape frameworks in which
states relate to each other, or relate to corporate enterprises. The relative
power of each party in a relationship is more, or less, if one party is also
determining the surrounding structure of the relationship.”
Susan Strange, States and Markets (New York: Basil Blackwell, 1988), 21-22.
Structural power & international state-firm
bargaining theory

Knowledge/
Technology

Structural
Security Production
power

Credit
 Analytical framework

• Technology

• Politics

• Markets

• Firm strategies

• Finance

• Supply chain management

 Understanding the concept of (business/industry)
strategy
Strategy is different than aspirations
-- “Our strategy is to be #1 or #2 …“
-- “Our strategy is to grow …”
-- “Our strategy is to be the world leader …“
-- “Our strategy is to provide superior returns to our shareholders …”

Strategy is more than a particular set of actions

-- “Our strategy is to merge …“
-- “… Internationalize …”
-- “… consolidate the industry …”
-- “… Outsource …”
-- “… double our R&D budget …”
Strategy is not the same as vision
-- “Our strategy is to best understand and satisfy our customers’ needs...
-- “... provide superior products and services..”
-- “… to advance technology for mankind...”

“Strategy defines the company’s distinctive approach to competing and the

competitive advantages on which it will be based.”
- Professor Michael E. Porter, Harvard Business School
 Key questions for strategic industry analysis

Industry Firm Firm & industry

structure conduct performance
1. What is the relevant 3. What strategies are
4. Are these strategies
industry for analysis? the major firms and
creating value?
businesses using to
2. What is the compete in the
competitive structure industry?
of the industry?
6. How should firms and
5. What are likely short- businesses adapt to
and medium-term improve performance
developments in the in the current and
industry? future industry
environments?

7. How should policy-makers adapt to current and future industry environments?

 Key questions for strategic industry analysis

Industry Firm Firm & industry

structure conduct performance
• Industry types • Firm strategy
•Choice of businesses Financial analysis
• Market types
to be in
• Types of competition
• 5 Forces framework • Business strategy
•Where to compete
•How to compete
•When to compete
•Strategic game
board – To capture
market value
Understanding the concept of (business/industry)
strategy
Understanding the concept of (business/industry)
strategy
 The Structure Conduct Performance (S-C-P) model

• The Structure Conduct Performance (SCP) model dates back to the

pioneering work of the Harvard economist Edward Mason, in the 1930s, and
of his doctoral student Joseph Bain, in the 1950s.

• Originally used by the U.S. government in crafting antitrust policy, the

model gained popularity among corporate strategists when Michael Porter
(Competitive Strategy, 1980) used it as an analytic tool for businesses
striving to compete within a market (the 5 Forces model).

• The model’s original form depicts the influence of an industry’s structure

(for example, the growth of demand and barriers to entry) on the conduct of
producers (pricing, for example) and the performance of both the industry
and the producers.

Source: https://www.mckinseyquarterly.com/ghost.aspx?ID=/Strategy/Strategic_Thinking/Enduring_ideas_The_SCP_Framework_2169
 The Structure Conduct Performance (SCP) model

Industry Firm Firm & industry

structure conduct performance

In the 1980s, McKinsey suggested an extension that added a dynamic element to a static
framework. The dynamic version suggests that the relationships among structure, conduct,
and performance are not unidirectional; they flow in the opposite direction, too.

1. This approach allows companies to consider the influence of their own conduct on
an industry’s structure and, ultimately, on their own performance. Many companies use the
revised model to “play through” various scenarios that might affect them, to gain an
understanding of what’s happening in their industries, and to develop their strategies.
2. The seemingly timeless dynamic SCP framework is useful across regions and
industries.
Source: https://www.mckinseyquarterly.com/ghost.aspx?ID=/Strategy/Strategic_Thinking/Enduring_ideas_The_SCP_Framework_2169
 The “5 forces framework” for industry analysis

“The job of the strategist is

to understand and cope with
competition.”

“The point of industry analysis is

not to declare the industry
attractive or unattractive, but to
understand the underpinning of
competition and the root causes of
profitability.”

Source: Michael E. Porter, “The Five Forces that Shape Strategy,” Harvard Business Review 28, no.1 (Jan. 2008): 78-93.
 Porter’s 5 forces model: Critique

• Its main weakness results from the historical context in which it was developed. In
the early 1980s, cyclical growth characterized the global economy.
– Thus, primary corporate objectives consisted of profitability and survival.
– A major prerequisite for achieving these objectives has been optimization of strategy in
relation to the external environment.
– At that time, development in most industries has been fairly stable and predictable,
compared with today’s dynamics.

In general, the meaningfulness of this model is reduced by the following factors:

• In the economic sense, the model assumes a classic perfect market. The more an
industry is regulated, the less meaningful insights the model can deliver.

• The model is best applicable for analysis of simple market structures.

– A comprehensive description and analysis of all five forces gets very difficult in complex
industries with multiple interrelations, product groups, by products and segments. A too
narrow focus on particular segments of such industries, however, bears the risk of
missing important elements.
 Porter’s 5 forces model: Critique

• The model assumes relatively static market structures.

– This is hardly the case in today’s dynamic markets. Technological breakthroughs and
dynamic market. entrants from start-ups or other industries may completely change
business models, entry barriers and relationships along the supply chain within short
times.
– The Five Forces model may have some use for later analysis of the new situation; but it
will hardly provide much meaningful advice for preventive actions.

• The model is based on the idea of competition. It assumes that companies try to
achieve competitive advantages over other players in the markets as well as over
suppliers or customers.
– With this focus, it does not really take into consideration strategies like strategic
alliances, electronic linking of information systems of all companies along a value chain,
virtual enterprise-networks or others.
Q&A