Introduction
The primary aim of this report is to assess the strategic positioning of Northrop Grumman in the defense system and aerospace industry by applying strategic management models and concepts. The document presents an analysis of the key external factors of the industry in which the company operates to determine how it affects its performance. Moreover, the document concludes with the evaluation of the existing strategies of the company and its competitors and provides recommendations for improving its strategic positioning in the industry. Also, the comparison of internal and external factors is made to determine the company’s potential strengths and weaknesses to evaluate its strategies.
Company Profile
Northrop Grumman is a defense system and aerospace technology developer. The company primarily operates in four main segments that are aerospace systems, electronic systems, information systems and technical systems providing global security to companies across the globe. It offers innovative systems for governments and states worldwide. It was established by John K Jack Northrop in 1939 and is currently headquartered in Virginia (Northrope Gumman, 2015). Northrop is among the prominent companies in the United States aerospace and defense industry contributing 1.83 percent of the global industry’s business (Northrope Gumman, 2015). The company has strategically aligned itself by upgrading and improving its strategies to sustain its competitive edge in the industry. However, the company faces strong competition from local and international competitors. The main competitors of the company are General Dynamic, Textron, Raytheon Company, Lockheed Martin, Rockwell Collins and others.
Industry Overview (SCP model)
Structure
Northrop Grumman operates in the aerospace and defense industry, and its revenue streams are dependent on the spending of government on defense and military globally. In the past two years, the military and defense industry faced a decline in revenues due to low spending of the government on defense and military. There is a constant fluctuation in the sector because of the changing trends in the industry and the firms operating in the industry are currently facing a decline in their revenues. There is a decline in the economic supply of military gadgets and technology because of the innovation and concentration on other segments in the industry. The United States spending accounts for 78.6 percent on defense and 21.4 percent on civil aerospace (Northrope Gumman, 2015). The aerospace and defense industry of the United States is the key player in the industry that accounts for 36.2 percent. Second largest spender is Asia that accounts for 29.2 percent. Europe is 24.8 percent and 9.9 percent by other states across the globe (Northrope Gumman, 2015).
Conduct
There is a regular cut down in the budget of government on military spending. The companies that focus on the United States market face a major decline because of the reduction in the military budget. It is the reason that the companies present in the industry are expanding their business in the international market. Therefore, the firms’ strategy is inclined towards geographically expansion of their operations. Also, there is a constant change in the research and development in the industry because of the emerging technologies and security threats.
Performance
The industry reported revenues of approximately $461.9 billion in 2014. In 2014, the United States reported a negative change of 2.6 percent in the industry’s revenues. However, the growth in Europe and Asia Pacific region was reported at 4.3 percent and 8 percent respectively in the same year (Delliotte, 2015). In 2014, the performance of the defense segment remained poor as compared to the civil aerospace segment that is expected to have outstanding growth till 2019 (Delliotte, 2015). However, it is also predicted that the performance of the defense segment could accelerate in the next five years. It is noted that the companies operating in the industry are generating more profits from doing business in the international markets such as Germany, Saudi Arabia, Qatar, and Poland, etc.
Five Forces Model
Bargaining Power of Buyer
The bargaining power of buyers in the industry is low. It is because the aerospace and defense industry has an oligopolistic tendency that prevails because of the strategic and political reasons. The aerospace industry’s key players have a strong bargaining power of buyers such as Boeing and Airbus Group, which have the preference because of their origin such as Boeing is based in the United States and it is more preferred by the US suppliers. However, the choices for buyers of aerospace and defense military products are less. The buyers maintain their hegemony by forming contracts with the manufacturers. There are few companies in the industry and sale of products is mainly done at the government level that makes the switching cost for buyers higher. It eventually reduces the bargaining power of buyers because each company has its innovation and uniqueness that is difficult for competitors to imitate.
Bargaining Power of Suppliers
The bargaining power of suppliers in the industry is high. It is because the defense and aerospace industry is highly dependent upon the material required for production. It is important for companies to build and maintain strong relationships with high-quality suppliers. Moreover, due to the decline in oil prices companies are able to save on their production costs and it is encouraging them to expand their operations that require higher materials intake.
Furthermore, there are challenges related to maintaining a consistent growth of metals faced by high-quality suppliers that eventually makes the bargaining power of suppliers high in the industry. The suppliers are mainly in contract with the key manufacturers in the industry that makes the supply segregated for other firms.
Threat of New entrants
The threat of new entrants in the industry is low. It is because a new entry in the industry requires huge capital. Furthermore, owners’ reputation plays an important role in building relationships. There is a strong preference for reputed brands in the industry that makes it very difficult to compete against for the new entrants. There is a constant need for investment in research and development and innovation that could be difficult for the new entrants to make. Also, the business requires a specialized staff and equipment that have high operating costs that make it difficult for new companies to generate profits.
A new company is also required to acquire a license for manufacturing that involves lengthy and critical assessments and approvals from the national security department. There are restrictions on companies to export and import which creates another barrier for the new entrants in the industry. Therefore, it is difficult for new companies to enter the market. However, the market remains attractive because its high revenues and profits.
Threat of Substitutes
The threat of substitutes is low because there is no particular substitute for defense systems. There can be potential alterations and improvements in the existing systems, but there are no particular substitutes for such systems. However, there can be alternatives for aerospace products because of the diverse preferences of consumers and availability of alternative modes of transportation. However, air transport is relatively convenient and faster that cannot be replicated by other means of transportation. It is the reason that makes aerospace products are preferred over other means of transport. It should be noted that companies in the aerospace segment are creating competition by focusing on developing fuel-efficient and environment-friendly technologies.
The rivalry in the industry is intense because of the advancement in technology and integration of multinational companies that are consolidating their operations and acquiring businesses worldwide. The differentiation of defense systems is based on their capabilities, pricing, and technologies. It is noted that some companies are highly preferred by the government and greater proportion of military budget is assigned to these companies that intensifies the competition in the market.
The US remains to be the dominant consumer of defense and aerospace products, and it invests the most in the research and development of such products. Due of the recent decline in the government budget, it is predicted that the firms operating in the industry have to cut down their spending on research and development that may allow foreign companies to gain a stronger position and make improvement in its portfolios. The main competency of firms in the industry is dependent on their ability to develop advanced and diverse products and for this purpose they need to keep investing in development. Also, firms operating in the industry are facing competition from foreign organizations that are also engaged in developing newer defense system technologies. Therefore, it is can be determined that the degree of rivalry in the industry is high.
Organization Strategic group
Figure 1: Organization Strategic group
SWOT
It is important to conduct an internal analysis of the firm to identify its potential strengths and weaknesses and to evaluate its strategic positioning in the industry. Therefore, SWOT analysis is conducted to determine strategic position of the selected firm.
Strengths
One of major strengths of Northrop is that it has a diverse portfolio and operates in four business segments that have diversified revenue streams of the company. It offers wide range of systems that makes the revenues of the company balanced even if revenues from one operation are low. Diversification of portfolios reduces the potential risk and dependency on a particular market and product that may seize opportunities for the company. Moreover, the company has a strong brand image in the international market. The company has established its position in more than 25 countries across the globe that provides an opportunity to the company to operate in different regions and assess security needs timely and have a strong market watch on the changes occurring in the market (McKinsay, 2009). Also, the company offers a wide range of navigation services for airport system, communication system, and other warfare and security that are high in demand by many countries.
Weakness
The company is highly dependency on particular customers for its revenues. Northrop is dependent on the United States government and the reduction in the budget casts a significant decline in its revenues. It is because the major contractor, supplier or sub-supplier of the company is the US government. Also, overdependence on the United States exposes the company to many legislative issues and defense approvals that may have a negative impact on the ability of the company to compete with other companies. The other main issues include extended pensions, medical and other health insurances that can have a negative impact on the liquidity of company. The estimates for pension plan and employee benefits of the company should be done on forecasts based on rate of return that needs to be revised after reviewing the funded status of the company.
Opportunities
The company is operating at the international level and the defense and aerospace industry across the globe is growing. It is predicted that the growth in the industry is expected to increase more in 2018 that could boost revenues of the company. It can be a better strategy for the company to expand its market and generate higher revenues. Moreover, there are different countries that have a vast pool of knowledge and research that can help the company to improve its existing technology and developing system. It is predicted that the increased sales of missiles and other defense products also require maintenance and other services that the company can render to generate more revenues. The other main projection is the growth in the demand of unmanned aerial vehicles that it is expected to increase in the coming years that can provide great opportunities to the company to generate revenues from the sale of such products. Another main opportunity for the company is that it makes use of backlog and unfunded backlog that enables the company to transform its sales through its contracts. It is predicted that a significant increase in demand would increase the company’s revenues and profit (McKinsay, 2009).
Threats
The potential threat to the company is that it operates in a highly competitive market due to which the company needs to constantly engage in development. If the company is incapable to invest in the development then it may not be able to create differentiation in its products that may lead the company to fall behind its competitors in the industry. The major threat to the company is the declining defense budget of the US government that could further reduce spending on military and defense that would lower revenues of the company.
Analysis
Besides, the company is relying significantly on the United States but excessive dependence of the company on a particular market could lead to severe losses and higher resistance in the international market due to its alliance with the US government. The company’s strategy is currently focused on a particular market and its portfolio is limited to certain products and technologies (McKinsay, 2009). The company needs to diversify its portfolio. The diversification of portfolio is an effective approach that enables the company to survive even in difficult times by adopting different ways to generate revenues. The investment in research and development needs to be revised after assessing the rate of return to sustain a good profit margin in the long run. Moreover, the company’s strategies for employees’ pension and benefits also need critical assessment to ensure that they do not overburden the company’s financial resources as it can lead the company to major losses in the future.
Conclusion and Recommendation
It can be concluded from the above discussion that Northrop is in the top ranked and competitive companies in the industry. However, there is a constant change in the needs and requirements of clients that are dependent on continuous development and advancement by companies. For Northrop to remain competitive, it is crucial to ensure and maintain uniqueness of its products. The company needs to have a high-skilled staff and significant budget allocation for research and development that would require the company to generate substantial financial resources. Northrop is a global aerospace and defense technology company. It is important for the company to take appropriate strategic decisions to sustain its revenues by constantly focusing on opportunities in the existing and new markets. The reduction in the government budget on defense and military may have a negative impact on the firm's business in the future that could lead to serious financial problems or downsizing. It needs to expand its business geographically that would help the company to reduce its dependence on the US market. The company can generate more revenues by selling its products to international customers. Also, the company should ensure constant changes and improvement in its development process by diversifying its portfolio and improving technology to remain competitive in the market. If the company expands in the international market, then it could be suggested that the company can exchange greater ideas and skilled staff. It would enhance productivity and outputs of the product by increasing information sharing.
References
Delliotte, 2015. Defense and Military Industry Overlook. New York: Delliotte.
Kshetri, N., 2014. Global Entrepreneurship: Environment and Strategy. New York: Routledge.
McKinsay, 2009. Mckinsey and Company. Phiadelphia: McKinsey & Company.
Northrope Gumman, 2015. Annual Report 2015: Northrope Gumman. Financial. Virginia: Northrope Gumman.
