Sustainable Growth Strategies in the Canadian Space Sector
Sustainable Growth Strategies in the Canadian Space Sector
Submitted by: Ian Christison
Applied Project (APRJ-699)
Word Count 20,187
Academic Coach: Conor VibertCarroll
Submission Date: March 31, 2008
Assignment Number: 3
Sustainable Growth Strategies in the Canadian Space Sector 2
Table of Contents
1 Introduction...... 4 1.1 Defining the Problem ...... 7 1.2 Problem Issues...... 7 1.3 Topic Definition...... 8 1.4 Project Definition Literature Search ...... 8 1.5 Research Effective Reading Method and Literature Review...... 8 1.6 Project Challenges and Focus Strategy...... 9 2 Literature Review...... 10 2.1 Research Questions ...... 10 2.2 Research Boundaries ...... 10 2.3 Alternative Courses of Action to be Evaluated...... 10 2.4 Research users ...... 11 2.5 Introduction to the Research Approach ...... 11 2.5.1 Research Purpose...... 11 2.5.2 What research should be done?...... 11 2.5.3 How should the research be designed to help answer the research question(s)?...... 11 2.5.4 What will be done with the research output? ...... 12 3 Hypotheses...... 13 4 Methodology ...... 15 5 Results Discussion ...... 18 5.1 Historical RBV Analysis 2002-2006 ...... 19 5.1.1 Physical ...... 20 5.1.2 Financial...... 23 5.1.3 Human...... 28 5.1.4 Organizational ...... 31 5.1.5 Historical Weighted Scorecard Summary ...... 34 5.1.6 Historical Weighted Scorecard Hypothesis Test...... 37 5.2 Future Projected RBV Analysis 2007-2011 ...... 38 5.2.1 Physical ...... 40 5.2.2 Financial...... 43 5.2.3 Human...... 47 5.2.4 Organizational ...... 49 5.2.5 Future Weighted Scorecard Summary ...... 52 5.2.6 Future Weighted Scorecard Hypothesis Test ...... 54 6 Conclusion...... 56 6.1 Summary and Call to Action ...... 59 6.2 Implications for Managers...... 61 6.3 Shortcomings...... 63 6.4 Suggestions for Future Work...... 65 7 References ...... 69 Sustainable Growth Strategies in the Canadian Space Sector 3
List of Tables
Table 1 Resource Based Viewpoint (RBV) Metrics...... 17 Table 2 RBV Weighted Average over 2002-2006 ...... 36 Table 3 Human Weighted Average 2002-2006...... 36 Table 4 Historical RBV Hypothesis Test Results ...... 37 Table 5 RBV Weighted Average over 2007-2011 ...... 54 Table 6 Future RBV Hypothesis Test Results...... 55 Table 7 RBV SWOT Analysis ...... 56
List of Figures
Figure 1 Market Share by Revenue 2006 ...... 19 Figure 2 Average Gross Margin 2002-2006...... 21 Figure 3 Average Total Asset Turnover Ratio 2002-2006...... 22 Figure 4 Average Revenue Growth 2002-2006 ...... 24 Figure 5 Average Earnings per Share 2002-2006...... 25 Figure 6. Average Price Earnings Ratio 2002-2006...... 27 Figure 7 Average Revenue per Employee 2002-2006...... 29 Figure 8 Patents per Employee ...... 30 Figure 9 Average R&D Expense as % of Revenues 2002-2006...... 32 Figure 10 Average Inventory Turnover Ratio 2002-2006...... 33 Figure 11 Historical RBV Weighted Scorecard Summary 2002-2006...... 35 Figure 12 Market Share by Revenue 2011 ...... 38 Figure 13 Projected Average Gross Margin 2007-2011...... 40 Figure 14 Projected Average Asset Turnover Ratio 2007-2011...... 42 Figure 15 Projected Revenue Growth 2007-2011...... 43 Figure 16 Projected EPS 2007-2011 ...... 44 Figure 17 Projected PE Ratio 2007-2011 ...... 46 Figure 18 Projected Average Revenues per Employee 2007-2011 ...... 48 Figure 19 Projected Average R&D Revenues per Employee 2007-2011...... 50 Figure 20 Projected Average Inventory Turnover 2007-2011 ...... 51 Figure 21 Future RBV Weighted Scorecard 2007-2011...... 53 Sustainable Growth Strategies in the Canadian Space Sector 4
1 Introduction
ComDev is a Large Scale Enterprise (LSE) international aerospace company based in Cambridge Ontario specializing in the manufacture of equipment and sub systems for space applications. ComDev employs over nine hundred employees worldwide. Six hundred work in the Cambridge plant while the remainder work in plants in the UK, US, China and Ottawa. ComDev was established in 1974 to supply the niche market of high performance output multiplexer (Mux) hardware requirements for communications satellites. Since that time the business has sustained organic growth within its core business, added capacity and diversified into Switches for beam switching networks, Space Electronics payload solutions and other related products. According to ComDev’s annual reports listed on SEDAR (2006), revenues were $153.8M, up 23.8% from 124.2M in 2005, achieving a compound annual growth rate (CAGR) of 7.95% over the past five years. Strong growth in civil and military product revenues exceeded commercial products for the first time in 2006. ComDev’s year over year growth objectives over the long term are 10%-15%. Growth strategies are focused on limiting risk and include supplying existing product to new customers, new products to existing customers and market development by leveraging existing capability, Christison, (2008).
Past diversification strategies at ComDev included investment in Broadband and Wireless products in the early part of the new millennium which resulted in a write down of $11.9 M in 2002 when the broadband market collapsed, expected sales were not realized and the divisions were divested. Strategic investment in the Ottawa Space Science group from MacDonald Dettwiler (MDA) in FY06 resulted in an outflow of $5.2M for the acquisition and a corresponding increase in backlog of $18M flowing from future contract commitments to the James Web Space Telescope project with the Canadian Space Agency (CSA) and NASA. This merger also positioned ComDev in a more strategic position in the Space Science Instrument food chain by moving from a sub system provider to a system integrator. However, higher levels of product integration require new and improved engineering and contract management skills to keep projects under control and on schedule. Initial cost overruns indicate an additional learning curve as these skills are developed, resulting in higher than anticipated transactional costs of acquisition. Clearly a strategic approach to both organic and diversification growth is required to mitigate market risk and continuously improve management skills to meet new challenges. Major stakeholders in the Canadian Space sector include the Canadian Space Agency (CSA), MacDonald Dettwiler (MDA), Telesat Canada and SED Systems.
According to the CSA Report on Planning, (2005), the Canadian space sector domestic and export revenues for 2005 were C$2.5B, an increase of 2.3% over 2004 returns and a CAGR of 5.94% over the past five years from 2001-2005. Sustainable Growth Strategies in the Canadian Space Sector 5
Export growth was 3.1% in that period and represented 50% of overall revenues, the highest since tracking began. The US continued to be the strongest export market with 47.6% of exports, 7.5% higher than 2004. This was closely followed by Europe which was 32.2% of exports, down by 7.2% from the previous year and Asia, up 3.4% from 2004 at 8% of total export revenues. The satellite communications sector represented over 77% of space revenues, indicating the significance of this market. ComDev strategic objectives over the long term, according to its Letter to Shareholders included in the annual report filed on SEDAR (2006), indicate a growth target of 10-15% per year. Since this goal out performs historical market trends the strategies required to achieve this growth include Product Integration, Intensive Competitive Positioning and Diversification. These strategies will be further reviewed, summarized and prioritized in the report.
MDA, a major Canadian prime contractor, customer and competitor for ComDev, is a Product Information Systems company based in Vancouver, BC with annual revenues of $1053M in 2006, according to their annual report filed on SEDAR (2006). Major divisions include Financial Services with 2006 revenues of $686M, up 42% from 2005 and Surveillance and Intelligence with revenues of $367M, up 4.7% from 2005. Advanced Technology Solutions is embedded into the Surveillance division and may form part of a new venture going forward. MDA has chosen a Conglomerate Diversification strategy focusing on both organic growth and acquisition to sustain growth and meet shareholder needs, achieving a CAGR of 13.03% over the past five years.
Telesat is a leading Canadian satellite service provider and post launch user of ComDev products. Telesat has five major divisions and sustained losses in its Business Networks and Carrier divisions of 14.2% and 19.7% respectively, according to its annual report filed on SEDAR (2006). However gains in its Broadcast, Consulting and Subsidiaries divisions offset the short fall to achieve overall gains of 0.9% over 2005 of $479M. Telesat ‘s diversification strategy includes selectively pursuing acquisitions and strategic transactions and focuses on concentric diversification. Telesat has achieved a CAGR of 7.95% over the past five years.
SED Systems is a technology services company based in Saskatoon and operates in the space and ground segments in Canada and abroad. SED (Systems Engineering Division) forms one of two major divisions of Calian Technologies based in Kanata Ontario. Revenues for Calian were $183M in 2006, up 2.8% from the previous year. Conversely SED revenues were down 27% to $37M and the Business and Technology Services Division revenues were up 15% to 146M, according to the annual report filed on SEDAR (2006). Calian’s growth strategy is one of concentric diversification and has achieved a CAGR of 3.8% over the past five years.
Sustainable Growth Strategies in the Canadian Space Sector 6
Toronto based Spar Aerospace was formed by a merger between de Havilland’s Special Product Division (Alouette) and AV Roe’s Applied Research Division (Arrow) in the early 1960’s. It incorporated in 1968 to provide service and maintenance support for Canada’s aviation industry. Spar employed a concentric diversification growth strategy and expanded into the robotics, satellite and communications markets in the 1980’s. By the late 1990’s Spar was the largest space company in Canada employing over 2500 people and reporting revenues of $600M. Its most notable achievements were the robotic Canada Arm for Nasa and the Anik and Olympus Satellites for Telesat and Fokker. However, its investment in telecom products suffered major losses in the mid 1990’s. This was followed by a downturn in the Asian market and several technical problems in its satellite business. According to MacLean’s (1999) profitability declined significantly in 1999 and a group of majority shareholders grew restless. Sweeping changes were made to the board, strategic assets sold and proceeds paid to the shareholders, resulting in severely restricted financing for further growth. The Robotics and Space Systems divisions were sold to MDA in 1998 leaving only the profitable aviation services division which was subsequently acquired by L-3 Communications. The culmination of failed strategic plans, slow response to market changes and unfavorable economic conditions resulted in the loss of a major Canadian Space manufacturer, the associated loss of high value knowledge worker jobs and loss of taxes and associated export revenues to the Canadian economy.
The purpose of the research is to investigate the proposed hypothesis that Resource Based Viewpoint (RBV) theory, described by Barney (1991), has out performed and will out perform the aerospace market in the five year periods from 2002 to 2006 and 2007 to 2011. The analysis includes the social, economic, political, competitive and legal environment in order to establish growth strategies that are able meet Com Dev corporate long term objectives. The proposed work will draw upon the established theoretical baseline, organizational theory, global marketing, economic strategy and corporate finance to provide a framework for the analysis and subsequent strategies derived from it. The framework will be supplemented by supporting articles from industry journals, financial reports, marketing reports and academic proceedings to provide an objective numerical baseline for analysis. The analysis will focus on specific measurable, achievable and time bound criteria relevant to ComDev, the industry and its stakeholders.
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1.1 Defining the Problem
Conventional growth strategies address external opportunities and threats as well as internal strengths and weaknesses in order to succeed and meet shareholder performance expectations. The management challenge is to identify future trends, identify windows of opportunity and mobilize corporate resources in a timely manner to benefit from the opportunity before a competitor steps in. Barney, (1991) focuses on the management of internal resources in order to sustain growth and is based on four empirical indicators, value, rareness, imitability and substitutability. These corporate attributers are applied to historic and future objectives of a sample number of aerospace companies over a five year period to demonstrate the advantage of RBV over the market in the long term.
1.2 Problem Issues
Long term growth strategies require a broader outlook than simple economic indicators such as Return on Investment (ROI), shareholder dividends or employee job satisfaction. All of these issues and many more impact all the stakeholders associated with corporate success. Sexty (2002) proposed the Stakeholder Concept as those corporate players, individuals and interest groups that have some share or interest in the functioning of the business. These include customers, employees, owners, suppliers, distributors, business organizations, governments, service professionals, educational facilities, society at large, regional interest groups, the media and many others. Key stakeholder problems include:
1. Can ComDev sustain a CAGR of 10-15% into the next decade? 2. Is the product portfolio future proofed against new entrants? 3. Will emergent economies like China and India pose a threat or an opportunity? 4. What threat are new technologies? 5. Is the availability of knowledge workers sufficient to meet the growth needs? 6. Will growing export restriction limit growth in the US market? 7. Will ComDev focus on government business in times of conflict and loose its competitive edge?
Corporate growth strategies impact all of the stakeholders and strategic positioning for competitive advantage needs to address stakeholder needs according to their impact on the company to achieve sustainable growth. Sustainable Growth Strategies in the Canadian Space Sector 8
1.3 Topic Definition
Resource Based Viewpoints as they apply to sustainable growth strategies in the aerospace sector will form the basis for topic definition. The resulting strategies will be derived from the RBV models highlighted for hypotheses testing and analysis. David, (2003) describes growth strategy categorization as follows:
1. Integration. Forward, backward or horizontal seeking control over distributors, suppliers or competitors. 2. Intensive. Market penetration, market development, product development. 3. Diversification. Concentric, new but related products, horizontal, new unrelated products to existing customers and conglomerate, new unrelated products to new customers.. 4. Defensive. Retrenchment, divestiture, liquidation.
These strategies, together with their impact on the social, economic, regional and competitive environment, and stakeholder values, will be reviewed within the framework of RBV.
1.4 Project Definition Literature Search
In order to focus on key issues affecting the space industry the literature search will concentrate on the key stakeholders, periodicals, annual reports and academic sources specializing in aerospace and Canadian space sector issues. These include Canadian and international competitors such as SED Systems, Canadian and international customers such as the CSA and the major international systems providers such as Telesat.
1.5 Research Effective Reading Method and Literature Review
Exploratory research will be used to provide insight into the general nature of the problem, highlight alternative approaches and determine the specific criteria to be used for evaluation and subsequent performance measurement. Market and competitive analysis will be used to determine competition, corporate commitment, pricing and entry and exit strategies. Strategic positioning analysis will be used to determine competitive advantage, opportunity cost and performance measurement. Organizational theory will be used to determine internal efficiencies, corporate culture and change management. Sustainable Growth Strategies in the Canadian Space Sector 9
1.6 Project Challenges and Focus Strategy
In order to remain focused throughout the study the following strategy is proposed: • Context. The goal is to review and recommend growth strategies that are sustainable and achievable in the current competitive and economic climate. Emphasis will be placed on recent economic models tempered with historical and market trends to identify blue ocean strategies that retain long term shareholder and stakeholder value. • Boundary condition delimiters. Only those data that relate directly to the identified problems which can be described in rational terms and validated by standard measurable criteria will be considered. Emphasis will be placed on tangible criteria where quantitative analysis, conclusions and subsequent measurement for continuous improvement can be applied. • Landmark study identification. Benchmark studies, reports and comparative criteria have been used in this proposal to retain competitive focus, ensure data integrity, objective market and competitive evaluation. • Adequate literature review for background research. Once the theoretical baseline for growth has been established the literature searches, articles, reports and media research will be focused on providing a rational framework for analysis and subsequent recommendations. • Research question focus. The research questions will be focused on providing answers to the stated problems so that solutions are specific, measurable, achievable, relevant and time bound. • Research topic support. The general topic includes review of specific growth strategies that meet corporate objectives and stakeholder needs. Several academic, industrial and media reports, studies and publications will be used to validate each key issue. • Attention to detail in key areas. To achieve this, key stake holder issues will be identified and their impact on the organization and external environment highlighted. This technique will help maintain focus, objectivity and data integrity. • Organizational approach. The study will be separated into manageable sections of a report that include problem statements, questions, research, conclusions and call to action. • Clear and articulate problem statement, research goals and conclusions. Problem statement and research goals are included in this proposal. Conclusions will be based on detailed research and data reduction.
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2 Literature Review
The research approach will be exploratory using academic reference to form the framework of the questions and analysis, annual reports, media, government and scientific studies to provide quantitative supporting data, recommendations and final call to action.
2.1 Research Questions
The following questions form the basis of the proposed research and are intended to clarify the problem definition:
1. How have Resource Based Viewpoint strategies out performed the market over the past five years? 2. Why will Resource Based Viewpoint strategies out perform the market over the next five years? 3. Who will benefit from Resource Based Viewpoint strategies? 4. What Resource Based Viewpoint strategies should be implemented? 5. When should the Resource Based Viewpoint strategies be implemented? 6. Where in the organization should the Resource Based Viewpoint strategies be implemented?
Historical examples and benchmarking will be used to provide a clear framework for the research and analysis. Competitor and market data will be used to assist a balanced scorecard approach to ranking and analysis.
2.2 Research Boundaries
Research boundaries will be established by focusing only on stated problems and issues and providing answers to the research questions derived to address the problem statements. Several data points will be researched for each question in order to provide accurate and objective data points.
2.3 Alternative Courses of Action to be Evaluated
Since ComDev management growth objectives are significantly higher than market, organic growth alone is unlikely to be successful. Forward integration to obtain part of the EMS Space Science team was used as a recent strategy and it is likely that a mix of Intensive Strategies and Diversification strategies would be most likely to succeed. Market development, specifically the US, EU, Asia Pacific and South America, product development and concentric diversification retain core product synergy while broadening and deepening the product offering. Sustainable Growth Strategies in the Canadian Space Sector 11
2.4 Research users
The final report will be of interest to all stakeholders but will be targeted specifically at the senior management team. These senior managers make the ultimate strategic recommendations on the future of the company, its overall mission and objectives.
2.5 Introduction to the Research Approach
2.5.1 Research Purpose.
The purpose of the research is to address the stated problems and issues, provide a rational basis for subsequent analysis, recommendations and call to action.
2.5.2 What research should be done? . The research to be done will be sufficient to provide clear, unambiguous answers to the research questions, establish a baseline for further analysis and provide benchmark data from competitors and other participants in the space sector. The scope of literature search will be as follows:
• International Space agency mandates, activities and budgets. • Major international system integrator consolidation, objectives and performance. • Emergent economies space development program status and objectives. • International and Canadian competitive landscape. • Alternate and disruptive technology status and risk. • Identification and review of landmark studies. • Geo political landscape. • World economic climate. • Emerging economy impact. • New and disruptive technology review.
2.5.3 How should the research be designed to help answer the research question(s)?
Research approach will include literature searches, scientific journals, government publications, annual reports, media searches, Use of search bots and intelligent search engines were used to identify useful material in a timely manner. The internet will be used sparingly and emphasis will be placed on obtaining research material from verified and reviewed sources.
Resources include physical, financial, human and organizational. Physical resources include access to raw materials, technology, location or equipment Sustainable Growth Strategies in the Canadian Space Sector 12 and can be measured by value added transactional cost, competitive position, profitability and return on assets . Financial resources include all sources of revenues such as sales, intangibles, debt and equity and can be measured by compound annual growth rate (CAGR), Intangibles, bond rating and earnings per share. Human resources include technical staff, managerial experience and number of patents and can be measured by staff turnover, total asset turnover and number of patents per employee. Organizational resources can be attributes of individuals including culture, reporting structure, IT structure etc and can be measured by net profitability after selling and Directors costs, net trade cycle or cash conversion and employee retention.
According to Barney (1991) sustained competitive advantage depends upon the potential for competitive duplication. Resources are valuable when they enable a firm to implement strategies that improve efficiency and effectiveness. Resources are rare when they cannot be easily possessed by other firms. Resources are non substitutable when they are rare and difficult to imitate. Resources are difficult to copy when they enjoy a synergy of unique historical conditions, are causally ambiguous and socially complex. Unique historical conditions may be consistent growth in revenues, EPS etc. Causal ambiguity occurs when the reason for competitive advantage is not known or is difficult to define and may include value flow dependence on tacit knowledge of employees, their impact on internal transactional efficiency, gross and net profitability. Socially complex environments can include communities of practice and other less formal peer groups who impact the transactional process indirectly.
2.5.4 What will be done with the research output?
Once the data has been collected it will be categorized by problem statement and subject question, summarized by use of graphics, charts and spread sheets to highlight key issues, prioritize recommendations and call to action. A further explanation will be provided to clarify and provide counterpoints where necessary. Scenarios will be presented to enable senior management to make strategic recommendations, monitor performance and change directives if necessary. Data will be presented in Pareto Chart format with the most significant data on the left and the least significant on the right. A sample of 22 companies will be chosen to represent the group. Historical data from 2002- 2006 will provide the baseline for analysis and trends derived from these data will be projected forward from 2007-2011 to provide future value assumptions. Where applicable, standard deviation will be provided to indicate market variance over the sample period. Sustainable Growth Strategies in the Canadian Space Sector 13
3 Hypotheses
The hypothesis is based on the premise that the top 50% of companies using resource based viewpoint strategies have out performed the market over the past 5 years and will out perform the market in the next five years. In order to objectively evaluate this hypothesis, criteria were established to determine the four empirical attributes proposed by Barney (1991) which are physical, financial, human and organizational resources. The performance of these resources was evaluated using their publicly reported and performance data and ranked to facilitate a balanced scorecard from which to determine past and future hypothesis tests.
The five step procedure proposed by Lind, Marchal and Wathen. (2005) for hypothesis testing was used, as follows:
1. Step 1. State null and alternate hypothesis. 2. Step 2. Select a level of significance. 3. Step 3. Identify the test statistic. 4. Step 4. Formulate a decision rule. 5. Step 5. Take a sample and make a decision.
The decision to accept or reject the null hypothesis is based on analysis of 22 companies and associated sample data available from their public filings and associated government sources.
The level of significance of 5% was chosen to be consistent with typical commercial research project evaluation criteria.
The test statistic is the value determined from sample information used to determine whether to reject the null hypothesis or accept it. The total number of companies in the sample group was 22 so the top 50% after ranking was 11 companies. In order to approximate the Central Limit Theorem the t-statistic was used.
The decision rule is based on the critical value which is the dividing point between the region where the null hypotheses is rejected and the region where it is not rejected. This was determined by comparing the mean of the top 50% of samples, according to the RBV ranking criteria, with the mean value of the total number (22) of samples that represent the market.
The decision is based on comparing the two means as described above using descriptive statistics for hypothesis testing and verifying the weight of evidence with the associated P-Value computed from the results.
Sustainable Growth Strategies in the Canadian Space Sector 14
Hypothesis 1. The top 50% of companies using Resource Based strategies have out performed the market in the aerospace sector over the long term.
Consequently, the Null hypothesis can be written:
H 0 : µ RBS ≤ Historical _ market Where:
µ RBS = Resource Based Value Mean (Defined parameter) Historical _ market = (Defined parameter)
Therefore, the alternate hypothesis can be written:
H1 : µ RBS > Historical _ market
Hypothesis 2. The top 50% of companies using Resource Based strategies will out perform the market in the aerospace sector over the long term.
Consequently, the Null hypothesis can be written:
H 0 : µ RBS ≤ Forecast _ market Where: Forecast _ market = (Defined Parameter)
Therefore, the alternate hypothesis can be written:
H1 : µ RBS > Forecast _ market
In order to determine the probability of rejecting a Null hypothesis when it is true a level of significance is 5% used. The P value was computed to help interpret the weight of evidence against Ho. The sample mean was used because the population mean is not readily available. This includes all corporate sample data. Therefore the Central Limit Theorem was approximated by using t- values for criticality definition. The decision rule was determined using a one tailed test of significance.
Future projections for each resource criteria were derived from linear regression curve fitting of past trends and projected into the future. These data were then ranked, re sorted and tested in the same way as the historical data. Sustainable Growth Strategies in the Canadian Space Sector 15
4 Methodology
In order to provide an objective framework for further analysis and discussion the methodology used was based on the definition of resources first proposed by Barney (1991) and again elaborated on and expanded by Barney and Clark (2007), as follows:
1. Physical capital resources. Physical capital resources include the physical technology used in a firm, its plant and equipment, geographic location, and access to raw materials. 2. Financial capital resources. Financial capital resources include all the firms access to revenue including debt, equity and retained earnings. 3. Human capital resources. Human capital resources include training, experience, judgment, intelligence, relationships and insight of individual managers and workers in the firm. 4. Organizational capital resources. Organizational capital resources include all the attributes of collections of individuals, culture, reporting structure, planning, control and coordination systems.
Primary data sources used for the analysis included annual reports and financial reports obtained through securities exchange commissions web sites in Canada, SEDAR, and the US, EDGAR. Patent filing data was obtained from the US Patent Office web site. Most companies and securities commissions retain accurate records of the last 5 years. This time scale was chosen for the comparison baseline. Most analysis was ratio based and was therefore not currency specific. However, where required, currency was converted to Canadian dollars using the currency converter tool on the Bank of Canada website for the specific year and currency in question.
Ratio data were calculated in accordance with generally accepted definitions of financial ratios provided by Fraser and Ormiston, (2004). For analysis and presentation purposes ratios were calculated annually over a period of 5 years and averaged. For the purpose of rationalization these data were normalized as a percentage of the total sample sum and weighted accordingly. Two or more parameters were selected to represent each major resource definition and their total weighted average determined as the representative statistic for that resource. In order to provide some visibility into variance over time and associated risk in the sample group the standard deviation for each company over 5 years is included in the right hand axis of each ratio table. Each parameter is sorted from most to least significant weighted average in Pareto Chart format in order to highlight the most significant performers and quickly differentiate the least significant ones.
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Barney, Delwyn and Clark, (2007), define Competitive Advantage, Economic value and Sustained Competitive Advantage as follows:
1. Competitive advantage. Possessing the ability to create more economic value than the marginal (break even) competitor in its product market. 2. Economic value. The economic value created by an enterprise in the course of providing a good or service is the difference between the perceived benefits gained by the purchaser of the good and the economic cost to the enterprise. To demonstrate this concept the weighted scorecards created for each resource category were averaged, ranked and compared against the weighted average of total revenues for the sample companies representing the market. The top 50% RBV ranked companies were compared to the percentage of total revenues of their respective companies to determine their performance against market. 3. Sustained competitive advantage. The firms resource must have four attributes. They must be valuable, rare, non-substitutable and difficult to copy. A firms resources are valuable when they implement strategies that improve efficiency and effectiveness. A firms resources are rare when they create competitive advantage by utilizing niche skills that are unique in the market and industry. A firms resources are non substitutable when they depend on unique historical conditions, causally ambiguous and socially complex.
Physical resources include location, physical technology used in the firm, plant, equipment and access to raw materials. Gross profit margin represents management’s ability to translate sales dollars into profit and shows the ratio of sales to the cost of goods sold. Total asset turnover represents management’s ability to manage assets and generate sales efficiently. Gross Profit margin and Total Asset Turnover are financial ratios that illustrate management’s ability to improve efficiency and effectiveness by managing physical resources.
Financial resources include all the firms’ revenue sources including debt, equity and retained earnings. Average revenue growth represents management’s ability to sustain growth over time. Price earnings ratio represents the multiple that the stock market places on a firms earnings. Earnings per share shows the return to common stockholders for each share owned. Average revenue growth, Price Earnings ratio and Earnings per share are financial ratios that illustrate management’s ability to manage financial resources.
Human resources include all training, experience, judgment, intelligence, relationships, manager insight, knowledge workers and management systems. Revenue per employee represents management’s ability to generate high productivity per employee. Patents per employee represent management’s ability to maintain and protect high interest in intellectual property in a knowledge based business. Revenues per employee and patents per employee are ratios that describe management’s effectiveness in managing human resources. Sustainable Growth Strategies in the Canadian Space Sector 17
Organizational resources include reporting structure, communities of practice, internal and external relationships, planning and control. Inventory turnover ratio represents management’s ability to effectively manage planning and control to sell inventory. R&D expense and a percentage of revenues indicate management’s commitment to product development in a knowledge based business. Inventory Turnover Ratio and corporate R&D Expense as a percentage of revenues are a measure of planning and control efficiency and corporate culture in a highly knowledge based industry.
Future performance was estimated by projecting historical trends for each parameter into the future. Projected future data were sorted for most effective RBV strategies and compared to ranked historic data. The strengths and weakness of the most effective RBV strategies were reviewed in order to provide a baseline for recommendations and conclusions to management.
The following criteria for evaluating RBV strategic impact and sustainability are included in table 1:
Table 1 Resource Based Viewpoint (RBV) Metrics
The hypothesis statements were tested using these criteria against market criteria and projections to illustrate the value of the Resource Based Viewpoint as it applies to historical and future sustainable growth strategies. Sustainable Growth Strategies in the Canadian Space Sector 18
5 Results Discussion
The results discussion focuses on the most successful RBV performers, their strategies and applicability to ComDev’s stated objectives over the next five years. The discussion includes the impact on all major stakeholders including customers, investors, employees, suppliers, competitors, financial institutions and the community, Results of the analysis will be used to identify and quantify sustainable growth strategies to be presented to management for the next five year plan.
The research focused on 22 public companies in the aerospace sector worldwide who have at least five years of historical data from which to compare performance and draw conclusions. Several large international companies were excluded because recent merger and acquisition activity made tracking of their historical data difficult to determine in a timely manner. However, while the companies included do not represent the total world market, they are considered a representative sample for the purpose of this study.
Results are separated into historical RBV analysis and future projected RBV analysis. Future performance is projected from past trends and ranked in the same way as historical data. Emphasis is placed on historical data which is based on objective published financial and performance data. Projections of future performance are somewhat subjective since they are based on trends and do not include external and internal political, governmental, financial, environmental or structural influences that may impact them going forward. Therefore conclusions and recommendations are based on historical performance and their likely impact on future performance. Sustainable Growth Strategies in the Canadian Space Sector 19
5.1 Historical RBV Analysis 2002-2006
Figure 1 illustrates that about 70% of the aerospace world market is dominated by 20% of the companies and that the large US and European aerospace companies including General Electric, Boeing and EADS dominate the market. For this reason the market is segmented into Tier 1 system integrators, Tier 2 equipment providers and Tier 3 component suppliers. Tier 2 equipment providers such as ComDev supply sub systems into Tier 1 system integrators and utilize components and parts from Tier 3 component suppliers.
The market leaders all have diversified portfolios in the aerospace industry including space, defense, avionics, and commercial business sectors. These diversified portfolios help mitigate the cyclic nature of the space and defense sectors and the impact of economic downturns on government and non government spending. Recent geo political terrorist events world wide have improved revenues in the defense sector. Consolidation in the civil aerospace sector has depressed revenues and consolidation of the larger European aerospace primes continues to impact US and European aerospace competition prices and export controls. Figure 1 illustrates the % market share by revenue of the sample group of aerospace companies included in this study.
% Market Share by Revenues 2006
40.00% 35.00% 30.00% 25.00% 20.00% 15.00% 10.00% 5.00% 0.00% G B E H N B G L R B B A B B S C M O E C S C o o A A C o T a r p M p o o a A a o e e a r i c e m s l a b a D n r E y K l m n n E l E c S i
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Figure 1 Market Share by Revenue 2006
Sustainable Growth Strategies in the Canadian Space Sector 20
ComDev currently supplies to the primes such as EADS, Boeing and Northrop Grumman. Current product and market development and penetrations strategies are targeting existing customers and non core customers and markets in the commercial and military space segments as well as searching out new markets and product opportunities by both organic growth and mergers.
The Canadian Space Agency report on Global Space Sector Market Trends, (2004), states that the general decline in demand for new satellites and slow rate of new orders early in the decade caused a downturn in revenues but the demand for Direct to Home high definition TV and broadband services will drive growth in the satellite industry over the next decade creating opportunities in new commercial sectors. Datamonitor (2006) reports that the US, European and Asia Pacific aerospace markets grew by a compound annual growth rate, CAGR, of 6.7%, 1.3% and 3.4% respectively over the period 2002-2006 and are expected to grow at a CAGR of 3.4%, 3.9% and 4.1% respectively over the period 2006- 2011. Over 75% of this growth is expected to be in the defense sector. These data indicate that ComDev’s growth strategies over the next 5 years will need to out perform the industry in order to meet its stated strategic objectives and shareholder expectations.
5.1.1 Physical
Physical capital includes physical plant and equipment, physical technology, geographic location and access to raw materials. Management’s ability to manage these resources efficiently can be measured by the ratio between sales and Cost of Sales, Gross Margin and by the Total Asset Turnover.
Since the Cost of Sales includes selling, administrative, salaries and general expenses increase in Gross Margin can be achieved by increasing productivity, reducing sales cost and reducing overhead fixed costs. It is interesting to note that the top four companies were not the most productive within the sample group therefore in order to beat market their transactional costs, salaries, sales costs and administrative costs must be lower then their competitors. Figure 2 illustrates the average gross margins of the sample group from 2002-2006.
Sustainable Growth Strategies in the Canadian Space Sector 21
Average Gross Margin 2002-2006
40.00% 50.00% 35.00% 45.00%
40.00% n
30.00% o i t n i 35.00% a i
g 25.00% v r e a 30.00% D M
20.00%
d s 25.00% r s 15.00% a o d r 20.00% n G a
10.00% t 15.00% S 5.00% 10.00% 0.00% 5.00% M S G C N L G B B B S B M E O C R A H C B E B o p A o o o r p a A a a T o o A M C e e r a a i c b a r m e a s l l y n m n n K r E c D E E l i t -5.00% S 0.00% k i k
a c i c t t e e h e t D n A b o S h D h a e n
e e y r r r g T a l o e a u e a e l t
e
D
w
T S r M n o e l p e l r S v A
d e o e a n e c E
d D y c i a v G v s l e l c h
l s l y d i g e M p e e r h n r t n
e r u a e c n D n o a a a l m c m t c l o l g r e r m a o e t e i l e m t s c i n o g n t s i
c
w g i e e L A s i i n e s o l e e s r r a r o l s p a c e
Figure 2 Average Gross Margin 2002-2006
Physical technology can include highly specialized processes dependent upon skilled knowledge worker capabilities, specialized processes developed over time and protected by patent, copyright or trade secret. This can result in lower transactional costs and higher entry costs for competitors resulting in price elasticity and higher margins. As plant and equipment ages it becomes less productive and more costly to maintain which increases transactional costs and decreases margins. Advantages of scale and scope associated with larger capital resources can lead to higher efficiencies. The five top ranked companies by Gross margin are all large scale enterprises, LSE’s, with greater than 500 employees and mature product lines. Geographic location of plant in depressed or non central industrial regions where there is less competition for talent can reduce salary costs and reduce margins. Proximity to major customers, highways, airports, seaways or railways can result in lower shipping costs and higher margins. Knowledge workers require extensive secondary education so proximity to universities and colleges provides a source of new recruits, replacement of attrition and for opportunities for continuous training which reduces overhead costs and improves margins. Enterprise resource planning tools can connect internal departments, external customers and suppliers and provide an integrated management system able to respond quickly to customer needs which reduces transactional costs and improves margins.
Variance in gross margins by CAE and Space Systems Loral were caused by retrenchment strategies necessary to mitigate continued declines in the aviation industry. A change in accounting practices by Loral Space and Communications Systems caused changes in reported income in the short term. Overcapacity in satellite channels together with competition from terrestrial fiber has slowed growth in the space sector restricting sales and reducing margins. Sustainable Growth Strategies in the Canadian Space Sector 22
Total asset turnover is the ratio of net sales to total assets. Total assets include current assets, plant, equipment, real estate, long term receivables and investment in unconsolidated subsidiaries. Total asset turnover ratio is a measure of management’s effectiveness in managing assets and turning them into sales. Generally the higher the ratio the smaller the investment is required to generate sales and the more profitable is the enterprise. When the ratio is low relative to the industry or to the firms history, investment in assets are too excessive or sales are too low. However, the ratio may be low if the firm has just invested significantly in plant for future expansion which will impact immediate total asset turnover but will have a positive impact on cash flow in the long term. Figure 3 illustrates the average total asset turnover of the sample group from 2002-2006.
Average Total Asset Turnover Ratio 2002-2006
3.00 0.90 0.80 2.50 0.70
2.00 0.60 a m
0.50 g 1.50 i S
0.40 1 1.00 0.30 0.20 0.50 0.10 0.00 0.00 C S L B B B O N B C G E M B H A G M S R B E C o a p r A a o o o M o o T p a C A A r e e a a i c b l a s l r e m m n a y n K n E c r E D E i l t S k i a
k c t i e c t t h e e D A n o D b h S h a n
e e y e r r r g T l o a e e l e u a a
e t D
w
T
M e n r S o e S r p l l v A
d
e o e e c a n d
D E y c a i v s G l v c h l e
l s i y d l g M p e e e h n r r t n
e a u r n c e n o D a a a l c m c t m o l l r e g a o m r e t e l i m t e o i n g c s n s t i g
i c w
e e A L i s i e n s o l e e s r r r a o l s p a c e
Figure 3 Average Total Asset Turnover Ratio 2002-2006
Plant, equipment, physical location and access to raw materials are all challenges to management in order to meet customer needs in a timely manner. Efficient location and utilization of physical resources can lead to competitive advantage which are difficult for competitors to copy or replicate. They create high entry barriers to competitors and mitigate supplier power. The combination of location with major customers close by, large labor pool of knowledge workers and good transport infra structure for materials and export provide a rare and valuable combination of capital asset advantages.
Calian Technologies with the highest asset turnover ratio in the sample group is situated in Kanata Ontario, otherwise known as “Silicon Valley North” with two universities close by, its largest customer the Federal Government in the same city and is located close to the Trans Canada Highway and US border. Calian Technologies has two major divisions, System Engineering which accounted for 20% of revenues in 2006 and Business and Technology Services that accounted Sustainable Growth Strategies in the Canadian Space Sector 23 for the remainder in that year. The Business and Technology Services division is a knowledge worker services contract business with low capital asset requirements which generates high sales with low overhead. This type of business can sustain short term sales but is dependent on a few customers and sensitive to their OPEX budgets and to government spending. SpaceDev revenues in 2006 more than tripled because of a merger with StarSys intended to increase capacity and Small Sat sales. On the lower end General Electric, GE, and Space Systems Loral have low overall total Asset Turnover compared to market. GE showed improvement over the 5 year period and is likely to improve going forward which should reflect in improvements in Gross Margins also.
5.1.2 Financial
Financial capital resources include all the firms’ access to revenue including debt, equity and retained earnings. Management’s ability to manage these resources efficiently can be measured by average revenue growth, earnings per share and price earnings ratio.
Average revenue growth measures the year over year growth rate of revenues of the sample group over the last 5 year period. These data provide an insight into management’s ability to sustain sales growth over the long term. Major stakeholders include shareholders, customers, suppliers, employees and the community. Growth can be achieved organically, by internal capacity growth or externally by merger and acquisition. Organic growth requires investment in plant, equipment, facilities and new employees. Advantages include cultural alignment, employee advancement opportunities, commitment and growth. Disadvantages include delayed time to revenue, cost of new sales and support channels required and higher fixed cost. External growth requires investment in corporate entities that specialize in the area of desired growth. Advantages include access to sales channels, fast time to revenue and low development cost. Disadvantages include higher transactional cost of cultural and transactional adjustment, higher cost of regional adjustment and cost of alignment of management information systems, ERP and customer management. Figure 4 illustrates the average revenue growth of the sample group from 2002-2006.
Sustainable Growth Strategies in the Canadian Space Sector 24
Average Revenue Growth 2002-2006
90.00% 120.00%
80.00% 100.00% 70.00% n o
60.00% i t Y
/ 80.00% a i Y
50.00% v e h t D
w d o
40.00% 60.00% r r a G d
30.00% n % a t
40.00% S 20.00%
10.00% 20.00% 0.00% B B A B C T B E T M H L G C R A S E S D M G A S M N G B o S D e e O A o v C o o A o A a e y l c y T p e M r a a e o a c u c c m e m r e n y r s p i n e e a n K E E D g E r c c e i o C B r r k a m h h b E r s i e t t a a n t c e -10.00% t 0.00% k e D n t n a b D S h s e t h r h n n a a i t y r c m e e r w M e l t t m g c g a o e p m i o e l a r e o o i l l a w c e r D a t n i l u e i e r l o a i a n e l a S v l l l l e c d n s o o e e p e s n c l a d n n s i g g l r v e e l l d i i r e e s s
Figure 4 Average Revenue Growth 2002-2006
SpaceDev, a US based small satellite manufacturer, experienced revenue growth of 3.6X in 2006 due to its merger with StarSys which increased capacity, customer base and growth potential going forward. ATK, a US defense contractor, benefited from the US involvement in worldwide political unrest. Its Ballistics and Solid Rocket Propellant divisions contributed to over 60% of sales which have shown steady growth since 2002. ATK recently purchased the MDA Information Systems Division, Canada’s prime contractor for space systems, for $1.3B. This acquisition leaves a large gap in Canada’s ability to bid on large space missions and places ComDev in the number 1 position in the Canadian Space Industry. BCE and Bristol Magellan Aerospace experienced significant losses in 2002 because of lack of sales due to telecom industry over capacity and civil airline consolidation. They both rallied toward the end of 2006 but revenue growth was still marginal, reflecting continued weakness in those sectors.
Sustainable growth is dependent upon a management’s ability to constantly generate more value than the cost of sales. This means continuous focus on value added products, innovation and uniqueness to differentiate from the market average and a combination of tangible and intangible attributes that make its value proposition difficult to copy.
Earnings per share, EPS, are the ratios between net earnings and the total number of common shares outstanding. EPS illustrates management’s ability to generate returns on common shares for each common share owned. Net earnings or bottom line represents the profit after all revenue and expenses for the reporting period. Major stakeholders include executives, employees, Sustainable Growth Strategies in the Canadian Space Sector 25 shareholders, banks, and securities organizations. An increase in EPS indicates that the organization has improved its earning potential. However, changes may occur because of treasury stock transactions or release of common shares on the market for equity purposes. EPS must be disclosed on the face of the income statement for public companies. Figure 5 illustrates the average EPS of the sample group from 2002-2006.
Average EPS 2002-2006
6.00 25.00
4.00 20.00
2.00 n o i t a i
15.00 v 0.00 e T A B B A S B E R C G M D M S T E C L B S H G A D M N G
S B D o e O e e o A v y C A a o y p l A o c o T M e r a a e o $ d a c u c c r e p e e r s y m n e a m i n n K E E D g r c E r c e o i B C r a r k m h h b i a n r s E t t a t c e e t e D k n a t n s a e S h D t b r h h n a i n a c e t m e r y r w t M l t e m g c p d g o m e o i a l a e r o i l o e a l e r D c w a n l t i u i (2.00) e a a e l o n i r n l a e l S l v l l e c n s d o o e e p e s c n a l a n d 10.00 n s i g t g r v l e l e l d i i S r e e s s (4.00)
5.00 (6.00)
(8.00) 0.00
Figure 5 Average Earnings per Share 2002-2006
General Dynamics (2006) benefited from increased defense appropriations due to the current war time budget environment in the US. Growth in its largest line of business, Information Systems and Technologies, came from acquisitions rather than organic growth according to its 2006 financial report. Space Systems Loral emerged from bankruptcy on the Fall of 2005 which is reflected by the large variance in EPS over the period 2002-2005.
Companies with the higher earnings per share over the period 2002-2006 tended to be the larger US based LSE’s with a significant part of their line of business, LOB, portfolios in the defense sector. Particularly strong sectors within defense were information systems which include remote sensing systems, equipments and technologies. Non US defense contractors like BAE have improved their performance significantly in the latter part of the 5 year period by diversifying into the US and building business relationships there. Disadvantages with this strategy include the restricting trade practices imposed by the US on exports of aerospace and defense components and products with US content, including parts and processes, in them. The US OPEX and CAPEX budgets for aerospace and defense products are largely restricted to US companies and citizens only. These restrictions have largely shut out foreign competition in the US aerospace and defense market and restricted access to equipment and parts for export. Sustainable Growth Strategies in the Canadian Space Sector 26
Successful valuation strategies over the past 5 years include horizontal integration into the desired markets, as demonstrated by General Dynamics, share value maximization strategies employed by Northrop Grumman and product development and diversification with existing customers employed by ATK and other aerospace and defense companies. Unique historical world wide security and conflict situations have positively impacted the aerospace sector by increasing sales earnings of military, remote sensing and information technology products, favoring companies’ earnings in these markets.
Price Earnings ratio, PE, is the ratio between market price at which the stock trades and the earnings per common share. The PE ratio is a function of many tangible and intangible factors. Tangible factors include ratios found in financial statements relating to liquidity, earnings trend, profitability, dividend payout and financial strength as indicated by the balance sheet ratios. Intangible factors include quality of management, growth within the industry, competitive position and prospects for the company. The ratio reflects the views of investors and speculators within the industry who decide what the price of the share is worth in the market. PE illustrates management’s ability to maintain a high level of confidence in the market, keeping the stock price up while generating quality earnings for the shareholders. For instance if two companies offered earnings per share of $1 and $2 each and were selling at $10 and $20 respectively, they would be considered by the market as the same value because their PE ratios were equal. The main purpose of the PE ratio, apart from indicating dividend protection, is to enable comparison of the shares market price. The PE ratio is one of the most useful and widely used ratios because it represents all other ratios combined into one. Figure 6 illustrates the average PE ratio of the sample group from 2002-2006. Sustainable Growth Strategies in the Canadian Space Sector 27
Average PE 2002-2006
150.00 400.00
100.00 350.00
300.00 50.00 n o i t
250.00 a i v
0.00 e E C B O B A B E L S G R M N B B M C G C H S B D o
A A o o T A M p a o C a o a o p r r e e a a i b c m d e a y r l m l n a s K n n D E E r E c l i S t 200.00 r i $ k k
a i c t e c t t e h e D n A S b h D o a a h
e n e y e r r r T g a e o l l e a u e a d t e
D w
T r e o n S M S e l p r l
-50.00 v n A d
e o e c n e a E d
D y a c i a v v G s l e t h c l
l s i l d y g e M p e e 150.00 r n h r S t
n e r u a n c e o n D a a a l m c c t m l o l g r e o r m a e e t i l e m t g c i o s n s n t
-100.00 i i w c g
e e L A s i
i 100.00 s n e o l e e s r r r a o l s
-150.00 p a 50.00 c e
-200.00 0.00
Figure 6. Average Price Earnings Ratio 2002-2006
Orbital sciences common stock significantly out performed the S&P 500 index and the Dow Jones Aerospace and Defense index over the period 2002 to 2006 according to its 2006 financial statement. The Satellite and Space Systems division has provided the engine for growth over the past few years with sales increasing significantly in recent years accounting for 53% of revenues in 2006 and 36% of revenues in 2005. EMS Technologies earnings per share were low over the period due to losses from discontinued operations, including their Montreal Satellite Networks division and low income from continued operations.
Price Earnings remained high for the aircraft industry over the period, showed modest growth in the military and defense area driven largely by the current US war economy and showed slow recovery for marginal players. EMS technologies divested their under performers and are slowly recovering from losses to return to profitability. BAE expanded into the US and other non UK markets to mitigate risk associated with dealing with an increasingly price sensitive UK government customer. Bristol has re grouped its operations by re trenching and consolidation in order to improve operational efficiencies and regain profitability.
Sustainable Growth Strategies in the Canadian Space Sector 28
5.1.3 Human
According to Deloitte (2007) the three major talent management challenges for aerospace and defense companies are retention, recruiting and retirement. The shrinking talent pool in western democracies together with attrition caused by demographics as the baby boomer generation begins to retire has reduced the number of knowledge workers available to meet demand. Competitors in emergent economies are increasing their skilled work force and beginning to compete in these higher value areas traditionally dominated by the major economic nations. To mitigate these risks the report recommends aerospace and defense companies focus on knowledge management, rewards and strategic human resource management going forward. Management’s ability to manage human capital resources that include intangibles such as culture, experience, judgment, retention and training are difficult to rationalize without access to corporate evaluation criteria. However, some indicators of human resources performance can be rationalized by evaluating revenues per employee as a measure of overall return on investment in human resources and number of patents per employee as a measure of judgment, intelligence and intellectual property management effectiveness.
Average revenues per employee are measured by dividing the total revenues by the total number of employees for each year between 2002 and 2006 and averaging them over that period. The standard deviation of the data over that time period is plotted on the second Y axis to provide visibility into variance. Variance may be caused by business mergers, sudden large orders or major restructuring. Revenues per employee can be considered as management’s ability to generate sales from its investment in human resources. These data also provide some insight into the general nature of the revenue employee ratio drivers and potential efficiencies within each company in the industry. Higher revenue earning companies may have more efficient transactional processes due to build to order rather than resource to order business models, shorter throughput time P, demand time P, or P:D ratios, or have more motivated employees. Figure 7 illustrates the average revenue per employee of the sample group from 2002-2006.
Sustainable Growth Strategies in the Canadian Space Sector 29
Average Revenue per Employee 2002-2006
$700,000.00 $100,000.00 $600,000.00 $90,000.00 $80,000.00
s $500,000.00 $70,000.00 a e u $60,000.00 m
n $400,000.00 g i e $50,000.00 v S
e $300,000.00
$40,000.00 1 R $200,000.00 $30,000.00 $20,000.00 $100,000.00 $10,000.00 $0.00 $0.00 M C C S B C A E N H M B S B R L E B O G B B G o o a p r A T M o o A p o a A C a o r e e a a i c b m l a s r n a e y l m K n n r E c E D E i l S t k i k a
c t e c i t h t e e D n A D o h S b h a e n
e y e r r r T g l o e a o e l a e a t e
D
w
T M e n S o r p e S l r l v A
d
e e o e c a n
d D E y c a i v v G l s c h l e l
s d i y l g e M p e e h n r r t
n e r u a e n c n o D a a a l m c m c t o l l g e r a o m r e t e l i e m t o n g s i c t n s i g
i w
c e a A L i s i e s n o l e e s r r r a o l s p a c e
Figure 7 Average Revenue per Employee 2002-2006
The more productive companies such as Bombardier, General Electric and Ball Aerospace are large tier one players with dominant market positions and diversified product portfolios that focus on core strengths. The weaker market players such as Calian, ComDev and Bristol have weaker market positions, less efficient operational performance and a higher resource to order component in their portfolio that requires high employee count and is not easily scaleable. Canadian companies appear at both ends of the spectrum as well as in the middle indicating that geographic location and political climate have little impact on productivity although the small less diversified companies do exhibit low performance.
Successful strategies include product and market development and resurgence of business jet demand since 9/11 for Bombardier. General Electric Health and Infrastructure are high growth divisions benefiting from growing health care demand in the US and worldwide and demand for infrastructure replacement as older plant and equipment reach the end of its useful life. Ball Aerospace obtained 90% of revenues from its Packaging Division in 2006 and only 10% from its Aerospace business unit, illustrating an example of a diversified company that has leveraged its core process capabilities for metal and plastic packaging to meet market demand in new and growing markets.
Patents per employee are a measure of the total number of patents registered with the US patent office to date against the total number of employees in each company in 2006. These data provide a measure of the company’s ability to codify intellectual property, protect its unique market niche against potential key employee loss, increase competitor entry barriers and provide a culture of innovation and challenge for its employees. Patents typically cover a period of Sustainable Growth Strategies in the Canadian Space Sector 30
20 years of protection for the invention or design being protected. Patent strategy is a method of IP management and protection for core products and services. It can be used as a metric to compare against competitors and for information mining of competitive advantage. Figure 8 illustrates the % revenues per employee from 2002-2006.
% Patents per Employee 10.00% 9.00% 8.00% 7.00% 6.00%
% 5.00% 4.00% 3.00% 2.00% 1.00% 0.00% C L N G G A E O C B S B B B B B M H R E S C M o T M o p r a C A o A p o o e e r A o a a a a i b c K m a s l e a m r n n E n y D l E E c r S l i t k i t
k c i t c a h e e t D e o A b n h S D h
a e e e T n r r r y l a e o g e e l o a a
t e
D e
w
M
S S r r n o T e A p l l v c d o
e e y a n e d E D c a
v h i s G v s l i e l c
g e l l y n e p d M e t h r r e e r n o n a
u c a D n a m l a l c c m t l g o o r r a e m e e t i s e g l m i c n t s o n
t i i L
w c e g a A o s s i i n e l e r e a r s o r l s p a c e
Figure 8 Patents per Employee
Product life cycles differ and market demands change over time. Satellite missions are typically 2-15 years after which time they need to be de commissioned or replaced. Aircraft, road transport vehicles and communications infrastructure tend to be 5 -15 years. Deployable weapons have a long shelf life and short mission life and commercial electronics have a short shelf life and short service life. Wikipedia (2008) describes Moore’s law as stating that the number of transistors on an integrated circuit doubles every 2 years. The Wright brothers filed their first patent; US patent 821393, for a flying machine in 1906. Sixty three years later man put his first footprints on the moon. Technology continues to move at a rate that is difficult to predict and where the only constant is change. Advances in technology can easily provide disruptive competitive advantage that patents cannot protect against. Successful companies continuously strive to manage their IP and protect their unique value proposition while providing new variants for existing markets and developing new markets for existing technologies.
ComDev has a high ratio of patents per employee indicating that its processes are unique and could be copied by competitors if not protected by patent. However it does encourage employee innovation which helps maintain interest and retention in employees. ComDev’s Multiplexer division focuses on commercial space which generated almost 50% of revenues in 2006. As a small Sustainable Growth Strategies in the Canadian Space Sector 31 company on the world stage ComDev’s high patent to employee ratio indicates it has a bureaucratic culture focusing on uniformity, process control and constancy. These are necessary attributes to maintain leadership in its niche market and retain quality, delivery and price. Patents help protect leadership but limited product diversification also make it vulnerable to emergent economies or backward integration from larger customers. Calian Technologies have no registered patents and their major business and Technologies Services business accounted for 80% of sales for 2006. The growing services sector is largely driven by availability of knowledge workers rather than codified processes so patents do not provide protection against competitors and may only offer some level of intangible asset advantage for specific customers over a short period of time.
Successful strategies employed by ComDev, General Electric and EMS Technologies include patenting key attributes of their transformational processes that are visible to customers, i.e. that can be evaluated easily once the equipment is delivered. Some disadvantages of patenting include the cost of protection if the patent is challenged, establishing a meaningful present value for the patent and providing IP for public viewing through publication that other countries do not themselves easily provide.
5.1.4 Organizational
Organizational capital resources include worker communities of practice, culture, reporting structure, planning coordination and control. These diverse tangible and intangible internal resources are key to gaining economic value from the goods and services they provide. Competitive advantage may be gained by improving efficiency of the transformation process cost. This can be achieved by motivating employees, providing supporting internal infrastructure such as ERP, providing employee recognition plans, growth and career path plans and utilizing natural affiliations between professionals that exist outside the organization structural limits. An insight into management’s effectiveness in motivating employees, leveraging commitment by coordination and control and utilizing internal resources efficiently can be measured by the ratios of R&D expenses to revenues and by inventory turnover ratio.
Research and development, R&D, cost as a percentage of revenues was recorded over the period from 2002 to 2006 and averaged. The standard deviation of the data over that period was provided on the alternate Y axis in order to highlight variance over the period. R&D expense measure the amount of revenues that get re invested in research and development in order to develop new products. Companies develop new products in order to meet constantly changing customer demand, mitigate disruptive technology competitors and retain a high entry barrier for new competitors. Some variance can be seen for SpaceDev due to its acquisition of StarSys in 2006 and subsequent increase in Sustainable Growth Strategies in the Canadian Space Sector 32 revenue growth. Figure 9 illustrates the average R&D expenses as a % of revenues from 2002-2006.
Average R&D Expense as % of Revenues 2002-2006
20.00% 4.50% 18.00% 4.00% 16.00% 3.50% 14.00%
3.00% a
12.00% m
2.50% g 10.00% i S
2.00%
8.00% 1 6.00% 1.50% 4.00% 1.00% 2.00% 0.50% 0.00% 0.00% C B B M C S R E H G L B B C E O G B S A B N M o A o A a p a A o o r o M a p T C o e r e a a i c b e l a y n m s m l a r n n K E E c D E r i l S t k i a
k i c t e t c e t e h D n A h S b o D h a n
e e y e r r r g T o e a l a e l e a u
e t D w
T
n o e r M S l e S r l p v A d
e e o e a n c D d E
y c i a v l s G v c l h e l
s d y i l g M p e e e h n r r t
n e a u r n c e n D o a a a l c m c t m o l l e r g o a m r e t e l i t m e o g i n c s t n s i w g i
c
e e A L i s i e s n o l e e s r r r a o l s p a c e
Figure 9 Average R&D Expense as % of Revenues 2002-2006
High performers like CAE, BAE and ComDev invest significant proportions of revenues back into product development. These data indicate a dependence on knowledge workers for their success and willingness to invest significantly to improve sales, protect product competitive edge and to provide an innovative and challenging environment from which to motivate their knowledge worker base and reduce attrition. CAE have taken advantage of Technology Partnerships Canada programs for supporting R&D which has assisted in its leadership position in this area. BAE has diversified its markets and manufacturing capability into North America in order to access the US defense budget and mitigate risk from UK government cost sensitivity and willingness to outsource strategic aerospace systems. BCE has enjoyed steady net profit margins over the period of around 10% with little product development investment. It is currently re trenching and directing focus from director stock options and internal senior management rewards to customers and shareholders as the major stakeholders in the organization. The re focusing on product and service excellence is intended to continue company profitability in the near term and sustain growth as ownership transitions to the Teachers Union of Ontario.
The top 4 most aggressive R&D investment strategies have been employed by non US companies in an effort to gain market share in the US and world markets. These markets are currently dominated by US based companies because of the dominant defense budgets and restrictive trade practices by the US. The least Sustainable Growth Strategies in the Canadian Space Sector 33 aggressive include BCE and Ball Aerospace whose revenues have limited exposure to the aerospace market of 2% and 10% according to their financial statements for 2006. Smaller countries like Canada offer government support grants to its aerospace sector to help retain competitive edge against larger economies who have larger markets protected by restrictive practices like the International Trade in Arms agreement, ITAR. ITAR restricts end use of space science instruments and non weaponized space technology, effectively restricting access to those markets to non US companies. In order to mitigate this restrictive practice many companies, including ComDev and BAE, have set up plants in the US employing US citizens to provide access to otherwise restricted markets.
Inventory turnover ratio is an operational efficiency ratio that measures the cost of goods sold against inventory. Inventory turnover measures management’s effectiveness in turning inventory into sales and consequently the effectiveness of internal systems, ERP, manufacturing processes, sales and marketing and the overall business transactional flow. These data form part of the Net Trade Cycle and can be used as a measure of effectiveness or competitive advantage across the industry. The standard deviation is provided on the alternative Y axis to indicate variance over the period between 2002 and 2006. The major variance indicated in that period was SpaceDev who undertook major re structuring and merger with StarSys during the latter part of the period. Figure 10 illustrates the average inventory turnover of the sample group from 2002-2006.
Inventory Turnover Ratio 2002-2006
90.00 200.00 80.00 180.00 n
160.00 o 70.00 i t a
140.00 i
60.00 v 120.00 e D
50.00
100.00 d r
40.00 a
80.00 d n
30.00 a 60.00 t S 20.00 40.00 10.00 20.00 0.00 0.00 M M C B S B E E S O R B L H B A G B N C C B G o o r p o M A p a A o a T C o a A o r e e a a i b c m s a m a y n l r l e n K n r c D E E E l i S t i k k
a t c c t e i t e h e D A n D o b S h h a e
n e e y r r r T g o l a e e l a u e a t e
D w
T n M S r e o e S l p r l v A d
e e o a c n e d
D E y c a i v v l G s l e h c
l s d i y l g e M p e e r n h r t
n e r u a e n c D o n a a a l m c m c t l l o g e r a o m r e t e l i e t m n s g i o c t n s i w
i c g e e A L s i i s n e o l e e s r r r a o l s p a c e
Figure 10 Average Inventory Turnover Ratio 2002-2006
Sustainable Growth Strategies in the Canadian Space Sector 34
Orbital benefited from an increased sale of 61% in its Satellite Systems division and 39% increase in sales in its Transport management division in the later part of the period together with cost reductions due to scale and scope in those areas, according to its financial statements. Calian Technologies major revenues are derived from its business technology services division which is largely knowledge worker intensive and carries little inventory. This indicates a relatively high inventory turnover ratio as a result of the inherent nature of the core business activities.
Successful inventory turnover strategies include low inventory and Just in Time, JIT, and inventory control. Orbital sciences, a leading satellite provider, states in its 2006 financial report it has little difficulty obtaining parts for its rocket motors, satellites and systems. Non US based companies have restricted access to parts and processes manufactured in the US for these systems and suffer competitive disadvantage as a result of US trade practices. Long project timelines and resource to order business models like those practiced by MacDonald Dettwiler and ComDev tend to accumulate inventory not used on the project or ordered early to mitigate risk and retained in inventory for a long period of time. Integrated ERP systems help with JIT inventory control and can be integrated into suppliers and customers data bases to improve and take advantage of economies of scale and scope. Space agencies outside the US are beginning to react to the restrictive practices within the US and promote domestic component suppliers of critical parts. However, since the space segment is a small part of the defense and commercial electronics market, adoption of this process has been and continues to be slow.
5.1.5 Historical Weighted Scorecard Summary
The weighted scorecard for Resource Based Strategies was determined by normalizing each parameter as a percentage of the total in each category, averaging across each category and obtaining a weighted average for each of the 4 major sub categories of Physical, Financial, Human and Organizational. These data were then averaged against all 4 categories to obtain a final weighted average and sorted in Pareto format to easily determine the higher and lower weighted scores. Figure 11 illustrates the weighted average RBV performance summary of the sample group from 2002-2006. Standard deviation data are included on the right side Y axis to illustrate the impact of the variance between each weighted score on the final result.
Sustainable Growth Strategies in the Canadian Space Sector 35
RBV Strategies Performance Summary 2002-2006
10.00% 18.00%
16.00% 8.00% 14.00% 6.00% 12.00%
4.00% a
10.00% m g i S
2.00% 8.00% 1
6.00% 0.00% S G A D E C S L E C B G H B R T M B B T M A A S M N G o D B S O e e c T y l A p A o o o o a A C e v y e M r a a e o c u a c c i n a e m e n m y e r r e p s 4.00% n K r E D g E E c e c r C B i o k a m r b h h a c n i e t s t r a E t e t e k D n t n S D b h t s a e h h r i a n a n m r e e y t c r w t m t l e M c g i a e o o p g m a e r l a e i l o l o c D r w e a u n i l t e -2.00% i i a r o l n a e l e a l v e l l l S c d n s e p e o e o s l n a c d n
n 2.00% s i v l g r g e l e l d i i r e e s s -4.00% 0.00%
Figure 11 Historical RBV Weighted Scorecard Summary 2002-2006
Results indicate that SpaceDev, Orbital Sciences and CAE are the top 3 performers for RBV strategies over the period 2002-2006. The bottom 3 from the sample group include EMS Technologies, Space Systems Loral and Bristol Magellan Aerospace. Table 2 illustrates that strengths in the top 3 organizations include Financial and Organizational attributes and weaknesses in this group include Human and to a lesser extent Physical attributes. The trailing group strengths are in their Human and Physical attributes and the weaknesses in this group are their financial attributes. It is interesting to note that the top performers focus on financial and organizational efficiencies and performance whereas the trailing performers show significant weaknesses in these areas.
Sustainable Growth Strategies in the Canadian Space Sector 36
Table 2 RBV Weighted Average over 2002-2006
Further analysis of the Human Resource criteria indicates that the strength is in patents per employee and the weakness in revenues per employee for the top performers. Table 3 illustrates the top Human Resource capital weighted average score over the period 2002-2006.
Table 3 Human Weighted Average 2002-2006
Sustainable Growth Strategies in the Canadian Space Sector 37
These data indicate that productivity improvements within each organization to improve Human Resource Management and associated return on investment would significantly improve performance within the Resource Based Theory boundaries. Improved utilization of physical resources including Lean or waste reduction techniques to reduce transactional costs, improve margins and achieve a higher return on assets would significantly improve bottom line results without necessarily investing in new plant and equipment or developing new markets.
5.1.6 Historical Weighted Scorecard Hypothesis Test
The companies selected for analysis consisted of the top international competitors in the aerospace industry for which performance data were readily available. However, these companies employed a variety of strategies to establish their place in the market and did not specifically implement RBV strategies. In order to test the Resource Based Viewpoint principles against the market the weighted average of the top 50% companies selected using RBV criteria was tested against the market average performance. The null hypothesis stated that the sample mean of the top RBV companies was less than or equal to the sample mean of the market. The alternate hypothesis stated that the top 50% of companies would out perform the market. Table 4 illustrates the results:
Hypothesis Test: Mean vs. Hypothesized Value
0.045500 hypothesized value 0.070689 mean % of 2006 Total Revenues 0.099846 std. dev. 0.030105 std. error 11 n 10 df
0.84 t .2111 p-value (one-tailed, upper)
Table 4 Historical RBV Hypothesis Test Results
The test statistic chosen was the t-statistic for testing the mean of small samples less than 30. The critical value was 4.55% with a level of significance of 5%. In this case the total group consisted of 22 companies and the sample tested included the top11 of them using the weighted average RBV balanced scorecard. The one tailed p-value of the sample indicates there is some evidence that Ho is not true. The mean of the sample is 7.1% greater than the mean of the hypothesized value of 4.55%. Therefore the Null Hypothesis is rejected and the Alternate Hypothesis is considered to be true. These data are not as compelling as would be preferred for a clear conclusion the RBV strategies are the most likely to succeed but they are sufficiently compelling to conclude the alternate Sustainable Growth Strategies in the Canadian Space Sector 38
Hypothesis to be true. The data indicate top 50% of RBV weighted companies out performed the market from 2002-2006. Further analysis indicated that the top 50% of companies with RBV weighted strategies captured 77.76% of the market. Appendix A illustrates that the top 50% of the sample group ranked by weighted RBV performance out performed the market.
5.2 Future Projected RBV Analysis 2007-2011
Future projected RBV analysis is somewhat less objective and is provided as a hypothetical test of the impact of past management decisions on future performance of RBV strategies rather than a specific strategic plan aligned to RBV objectives. In order to forecast results the past historical data were curve fitted using linear regression to capture the average slope and extrapolated out for the five years from 2007-2011. It is understood that the accuracy of this technique is questionable and does not account for the many decisions and course corrections continuously made by management to align strategic objectives to stakeholder expectations. However, it does provide an indication of the impact of past strategic planning decisions made by management on future performance in the context of RBV weighted criteria.
The market share landscape is not projected to change significantly over the next 5 years. Figure 12 illustrates the projected market share by revenue by 2011.
% Market Share by Revenues 2011
40.00%
35.00%
30.00%
25.00%
20.00%
15.00%
10.00%
5.00%
0.00% S C M A G A T D R B G E N G S B e y T e o A r y a e a l u o e s p c e r K r n e y n E g i B C o t m h r c a n s a t i e e e t h n s t a n h t c a e m r m m r o l e p g i e l l o r a l r c a l l i u i o a a s e a l l c n o p n c l n n s g e i e s
Figure 12 Market Share by Revenue 2011
Sustainable Growth Strategies in the Canadian Space Sector 39
General Electric is expected to retain its market dominance of over 35% of the total market. EADS and Boeing continue to battle over the commercial airliner market which dominates their respective sales. Based on past trends EADS is likely to move ahead of Boeing over the next 5 years. EADS current strategy is internationalization, global marketing and cost reduction, all of which are consistent the market forecasts geo political climate extrapolation from past trends. At the other end of the spectrum Space Systems Loral’s revenue growth has been slow and erratic over the past 5 years. If it’s retrenching and product development strategies are unsuccessful it will likely loose ground to ComDev or other emergent aerospace companies with a strong growth history who are looking to move up the product hierarchy food chain.
Datamonitor (2006) states that the CAGR of the aerospace industries in Europe, the US and the Asia Pacific region for the period from 2006-2011 are anticipated to be 3.9%, 3.4% and 4.1% respectively. These compare to growth over the past 5 year period from 2002 to 2006 of 1.3%, 6.7% and 3.4% respectively. These data indicate that the growth in Europe and Asia Pacific will out perform growth in the US, US growth will decline and strategies favoring international growth will likely out perform US centric strategies. The geo political legal environment landscape is currently changing. Current US defense budget spending favors US companies who thrive on defense spending. However, the ground swell of anti war sentiment in the US and around the world, together with a new presidential election in the US scheduled for November of 2008, may change the budget emphasis from defense products to transport, civil space and communications that are necessary to improve infrastructure. Economies of scale and scope together with trade and tariff barriers favor domestic suppliers within the US. However many non US companies can take advantage of government development programs and research and development tax credits that support product development outside the financial capability of many small to medium enterprises, SME. This may offer opportunities for product growth to Canadian and European companies enabling them to capture market share in less mature markets. Emergent economies in the Asia Pacific region and around the world will require infrastructure to grow their economies which should provide opportunities in the aerospace sector for an emerging market that is not yet developed. The economic environment is changing as the world becomes richer and more developed. Political strife in Ireland has declined as its southern economy has improved, indicating a strong correlation between personal wealth and social stability. The emergent social economies of India and China indicate a merging of high context implicit and indirect eastern cultures with low context direct and explicit western cultures. These cultural differences will need to be embraced in order to succeed and sustain growth going forward. Sustainable Growth Strategies in the Canadian Space Sector 40
5.2.1 Physical
Gross margins were calculated from the average over the past 5 years and the trends projected over the next 5 years. Management’s challenge to improve gross margins will be to increase sales and reduce costs. Sales growth may be achieved organically or by merger to bring new products or markets on line, develop new customers or sell new products to existing customers. Cost reduction can be achieved by reviewing the transactional process costs and implementing continuous improvement, identifying and managing cost drivers and reducing material costs. While US markets are mature and well represented by their own industrial infrastructure, emergent economies like China and India in Asia Pacific region and the Growing European Union are likely to provide sales opportunities to companies able to capture those markets. The opportunities are likely to favor companies from nations not seen as belligerent on the world stage such as Canada and the European Union. Cost reduction can be achieved by out sourcing to regions where labor cost is significantly lower than domestic labor cost. Advantages include lower cost of goods sold, lower inventory cost and higher margins. Disadvantages include hollowing out of key capability, loss of jobs to the local community and complicity in human rights and other forms of labor abuse that would not be allowed under domestic labor and civil laws. Figure 13 illustrates the average gross margins projected for the period 2007- 2011.
Average Gross Margin 2007-2011
70.00% 25.00% 60.00%
50.00% 20.00% 40.00%
15.00% a 30.00% m g i S 20.00% 10.00% 1 10.00% 0.00% M C S A R C E B B B C O B H S B G B G M E N L 5.00% o A p T a a M r A C o o o p o a A o r e e a a i b c a y s l m m n a e l r K n n r E E E c D i l S t i k k a
c t t e c -10.00% i t e e h D n A h o D b S a h e n
e y e r r r T g e l a o l a e a u e t
e
w D
T S o e M r n S l r l p e v A d
e e o e n c -20.00% a 0.00% E D
d y c a i v l v s G c h e l l
s i l y d g e p M e e h n r r t n
e r a u e n c n o D a a a l c m m c t l o l g e r a o r m e e t l i e t m s o n g c i s t n i
g
i c w e e L A i s i e s n o l e e s r r a r o l s p a c
e
Figure 13 Projected Average Gross Margin 2007-2011
Sustainable Growth Strategies in the Canadian Space Sector 41
EMS Technologies have shown a steadily increasing year over year growth in revenues over the past 5 years which, if maintained, will place them in the top position by 2011. However, EMS sales to customers outside the US declined from 40% in 2004 to 32% in 2006 according to their 2006 financial statement indicating they may not be well positioned to take advantage of growth outside the US over the next 5 years. Space Systems Loral’s margins improved significantly in 2006 due to recent acquisition. The standard deviation data indicate a significant variance in margins for Space Systems Loral and provides insight into the risk that these projections may not be achieved. However, managements challenge over the next five years will be to ensure the success of Space Systems Loral’s merger, cost reduction and market growth strategies in order to improve margins. On the other end of the spectrum BAE and CAE margins have been declining significantly over the past few years. If this trend continues they will face profitability challenges in the next few years that will inhibit growth and may require re structuring in order to align themselves to stakeholder expectations.
Total asset turnover ratio projections illustrated in figure 14 determine management’s effectiveness in generating sales from assets over the long run. The challenge for management over the period 2007-2011 will be to increase sales and reduce total assets. International sales strategies aligned to those previously discussed will likely benefit from growth in emerging markets and mitigate potential slowing of growth in the US markets. Capital intensive companies in the aerospace sector invest heavily in plant, equipment and inventory. Out sourcing of non essential services can help reduce overhead cost and current asset exposure. Investment in high productivity plant and equipment that provide higher yields leading to improvements in sales will improve total asset turnover. Integration of the corporate ERP system into customer demand data base and supplier data bases will provide faster throughput and improve time to market. Sustainable Growth Strategies in the Canadian Space Sector 42
Average Total Asset Turnover Ratio 2007-2011
3.00 0.20 0.18 2.50 0.16 0.14
2.00 a
0.12 m g 1.50 0.10 i S
0.08 1 1.00 0.06 0.50 0.04 0.02 0.00 0.00 A N C B B L C H B E G M E B B O S S R B M C G o T o o a o a o r M A o A p p a C A e r e a a i c b r m l e l n s m a a y K n n c D E E r E l i t S k i
a k i e t c c t h e t e D A n D o b S h h a n
e y e e r r r g T l o a e u e e a l a e
t w
D
T
e M n r S o p r e l S l v A
d
o e e e c a n
d D E y c a i G s l v v c h l e
l s y d i l g p M e e e h n r r t n
e u a r n e c n o D a a a l m c c m t o l l r e g o a m r e t e l i m t e i o g n s c n t s i g i
c w
e e A L i s i n e s o l e e s r r r a o l s p a c e
Figure 14 Projected Average Asset Turnover Ratio 2007-2011
Calian Technologies remains the highest performing company within the sample for asset turnover because its core business involves the supply of qualified knowledge workers to government departments in order to provide specialist devices. Very little plant, equipment, inventory or real estate is required for a services business so the inventory turnover metric can be expected to be high. However, supply of these resources does not benefit from economies of scale or scope or can be easily codified or replicated. Therefore growth is dependent on the availability of projects and project teams and would benefit from diversification into products in order to sustain growth in the long term. General Electric enjoyed moderate revenue growth but cyclic total asset management resulting in a poor performance projected forward over the next 5 years. Sustainable Growth Strategies in the Canadian Space Sector 43
5.2.2 Financial
Average revenue growth is a measure of management’s ability to maintain sales growth over the long term. In order to achieve this growth objective, new products, markets and customers need to be developed continuously. As previously discussed sales growth can be achieved organically or by merger and acquisition. Organic growth requires investment in plant, equipment and human resources to improve capacity. The advantages of organic growth include leveraging capabilities across the business, leveraging customers across the business and leveraging economies of scale across the business. Disadvantages include slow growth as the investment takes time to role out and reach maximum capacity and limited diversification since it is a strategy focused on what was already done rather than something new and synergistic. Mergers involve purchasing a controlling position of another company to achieve forward, backward or horizontal diversification. Advantages include time to market, time to revenue and diversification. Disadvantages include corporate cultural alignment and sustainability, coordination of R&D and product development and coordination of management and transactional processes. Figure 15 indicates the projected growth of the sample companies from 2007-2011.
Average Revenue Growth Y/Y 2007-2011
500.00% 120.00%
400.00% 100.00%
300.00% 80.00% a m g 200.00% 60.00% i S
1 100.00% 40.00%
0.00% 20.00% S B B S M B G C E C C B L N O R E A B B H G M o p r a p o o M a A C o a A T A o o e r e a a i b c s a l a e m l r y m n n K n c E E D E r l i S t i k
a k t c c i t e e t h e D A n o D h S b a h
n e e e y r r r g T l o e -100.00% a 0.00% e a l u e a e
t
D
w
T
M S n e o r r l S p e l v A
d
o e e a c e n D
d E y c a i s v G l v l h c e
l s d y i l g p M e e e n h r r t
n e a u r e n c D o n a a a l c m m c t l l o e r g a m o r e e t l i t m e n s g o i c t n s i
w
c i g e e A L s i i s e n o l e e s r r r a o l s p a c e
Figure 15 Projected Revenue Growth 2007-2011
SpaceDev revenues increased from $10.5M in 2005 to $37.1M in 2006, significantly altering its growth profile, as indicated by the change in standard deviation, and skewing forward projections. The challenge for management will Sustainable Growth Strategies in the Canadian Space Sector 44 be to ensure the merger with StarSys generates expected sales going forward and the investment in plant and equipment can match capacity with demand. Bombardier and Northrop Grumman experienced flat or declining sales over the period 2002-2006 in the transport sector in the UK, Germany and the US. Managements challenge will be to develop new markets for existing products and new products for existing customers.
Earnings per share are a measurement of management’s ability to retain and grow quality returns for the common shareholders. If net earnings are high, directors may elect to pay out a portion as dividends to satisfy shareholders. If net earnings are low or losses are incurred no dividend payout is made. Reducing net income to a per share basis makes it easier for common shareholders to see how profitable their ownership in the company is. Retention of net earnings may depend upon amount of net earnings, stability of earnings, working capital position, director’s policies, expansion or contraction plans. Strategies for increasing earnings per share include re investing into retained earnings to finance growth, increasing net profits by increasing sales, reducing operating costs and buying back treasury stock to increase the value of the remaining stock in the public domain. Figure 16 illustrates the projected EPS for the sample group over the period 2007-2011.
Average EPS 2007-2011
60.00 20.00
18.00 50.00 16.00
40.00 14.00
12.00 a 30.00 m g 10.00 i S
20.00 1 8.00
10.00 6.00 4.00 0.00 B L S R A D G H T B T A M E C S G B B E S C M A M N G S o D B e e O 2.00 A y a T y o o e l o c C o A p A v M r e a a e o c u a c c p s y e n n e r m i e m a r e K n E c r E D E g c e r B o C i k a m r h h b a t t n a e E i t c s r t e D k e n t n e h s D t b S a h r h n a n a i c e m y r e t w r t m M t e l g c m e p o i a o g e r a l i o l o l e -10.00 a 0.00 e r w c D a n u l i t e i a l o i a n r e e a l e S l l v l l c s d n p e o o e e s n l c a d n n s i l g g r v e l e l d i i r e e s s
Figure 16 Projected EPS 2007-2011
BAE sales have been cyclic over the past 5 years due to downward price pressure from the UK government but their net profits increased significantly in the latter part of the period from 2002-2006 because of market diversification and development strategy in the US and middle east. BAE also re-purchased Sustainable Growth Strategies in the Canadian Space Sector 45 treasury stock in 2006, further increasing the EPS valuation. The recent changes in sales, outstanding stock and market diversification impacted net profit growth significantly and may not be sustainable in the long run as recently implemented strategies stabilize and variance decreases. Space Systems Loral experienced similar recent increases in EPS due to a sudden change in revenues associated with a recent merger with Telesat Canada. While the strategy will likely increase sales in the long term they may not maintain the same rate of change achieved at the beginning of the acquisition. CAE profits were negatively impacted by costs associated with discontinued operations which adversely effected growth projections going forward. SpaceDev experienced record sales in 2006 but also incurred record costs of goods sold and general end administrational expenses resulting in a net loss for that year and declining growth projections going forward.
Price earnings ratio is a measurement of the current market price and the earnings per share. PE ratios are calculated on common stock and not preferreds. PE ratios reflect the views of many shareholders and market intermediaries and reflect the true quality of the offering. Challenges for management going forward will be to increase sales, reduce costs, increase net profits and retain shareholder interest by paying common share dividends while investing in retained earnings to stimulate growth and EPS. Strategies for increasing PE ratio include re investing into retained earnings to finance growth, increasing net profits by increasing sales, reducing operating costs and buying back treasury stock to increase the value of the remaining stock in the public domain. Stock price is set by the market and includes many intangibles such as the industry performance, competitive position and growth prospects. It is important for management to maintain shareholder confidence in order to prevent hostile takeover, ensure good credit and bond ratings to reduce borrowing cost and generate value for investors and other stakeholders. Figure 17 illustrates the projected PE ratios of the sample group over the period 2007-2011.
Sustainable Growth Strategies in the Canadian Space Sector 46
Average PE Ratio 2007-2011
400.00 140.00
300.00 120.00
200.00 100.00
100.00 80.00 a m g i S
0.00 60.00 1 S S A M L A T G C B R D M A E B H E B S B G T C M N G S B o D O e e c y v T o o a y e l C o A o p A A M e r a a e o a c u c c i s e p r e m e y n e r n m a K n r g c E D E E e c i B o r C r a k m b h h t r a s E t i t a n e c e t k e D n n t e a t D h s S b r h h i n a n a t c m e r y e r w t e t l M m c g m g o e o i p a l e a r a i o e l o l e r c w D a t n l u i e i e l o i n a a -100.00 r 40.00 e l a l S l l v e l c s n d o e e e p o s n a l c d n n s i g r l v g l e e l d i i r e e s s -200.00 20.00
-300.00 0.00
Figure 17 Projected PE Ratio 2007-2011
EADS and CAE experienced significant declines in EPS toward the end of the period in 2006. These data skewed the forward looking projections, as indicated by the standard deviation increase for that year and resulting in a high PE ratio projections going forward. Orbital Sciences and Space systems Loral both had negative trending historical PE profiles which translated into low PE projections going forward.
According to the Yahoo Finance (2008) web site EADS, CAE and BAE stock prices have shown steady growth over the past 5 years, indicating a continued confidence in the marketplace. While EPS growth has been cyclic, improvements in earnings will help sustain market confidence going forward. Their outward looking marketing strategies targeted at the US, EU and Asia Pacific regions where the new growth opportunities are emerging will likely sustain sales and reduce exposure to increasingly price sensitive domestic markets. While the aerospace industry worldwide has traditionally benefited from protectionist policies this cannot be relied upon to stimulate growth in the future. As emergent economies begin to move up the food chain incumbent monopolies and oligopolies will be threatened by cheaper labor and materials causing service providers to migrate to the lower cost solution. To mitigate these domestic manufacturers, systems providers integrators will need to reduce cost, automate and improve quality in order to retain high entry barriers, high switching costs and increase market share. Sustainable Growth Strategies in the Canadian Space Sector 47
5.2.3 Human
Average revenue per employee is a measure of management’s ability to generate sales from its investment in human resources. Maslow (1954) proposed a fundamental hierarchy of needs for human motivation and personal development starting from biological and physiological needs and culminating in self actualization and fulfillment. Companies who recognize the value of their major stakeholders and focus their strategies on meeting stakeholder needs are more likely to encourage employees to be more loyal and productive, customers to be more loyal and less willing to switch and investors to be more loyal and retain stock market confidence. Hertzberg (1968) suggests that praise, punishment and cash are likely to be less motivating to employees than simply making the job more interesting leading to peer recognition and self fulfillment. Learning and knowledge management are central to the success of aerospace companies who thrive on intellectual property development, knowledge worker motivation and productivity. Strategies that encourage a collaborative model including communities of practice for informal knowledge sharing, flexible employment, cross pollination of skills, intelligent risk taking and innovation are likely to motivate knowledge workers, improve productivity and retention. Most companies offer stock option plans, bonus and pension schemes or profit sharing plans aimed at financial motivation. However, many forward looking firms are beginning to incorporate Corporate Social Responsibility, CSR, strategies into their business policies to help motivate employees, support their communities and build sustainable relationships with stakeholders that can withstand the test of time. Figure 18 illustrates the average revenue per employee projected for the period 2007-2011 that were derived from historical data based on objectives in place over the period 2002-2006.
Sustainable Growth Strategies in the Canadian Space Sector 48
Average Revenue Per Employee 2007-2011
$700,000.00 $70,000.00
$600,000.00 $60,000.00
$500,000.00 $50,000.00 a
$400,000.00 $40,000.00 m g i S
$300,000.00 $30,000.00 1
$200,000.00 $20,000.00
$100,000.00 $10,000.00
$0.00 $0.00 G E E D A T B G L B M H S B S B T A A C S R M C M N G S o D B e O e l A y e o C o y o c A v T o p a A e M r a a e o c u a c c n e r p m n s e i e e m a y r n K D E c r E g E c e B o r C i a k m r h h b a n E a e t i t r c t s e t D k e t n n S s b e t a D h r h h n n a a i r m e c y e t r w M t m e t l g c i p a o m g e o a r e l l o i a l o e c r e w D a l n o t i e i i a a r n e o l l e a S l a l l l v c d s n o p e e o e s l c a n d n n s i g l r g v e e l l d i i r e e s s
Figure 18 Projected Average Revenues per Employee 2007-2011
General Electric encouraged employees to donate time and resources to their communities and to support healthcare initiatives worldwide. Employees have donated over 1 million hours of their time to supporting charitable organizations and the company has donated over $200M in products to support its corporate social responsibility, CSR, efforts. These CSR initiatives have provided an environment for encouraging and motivating staff, promoted good will and loyalty in the local and worldwide communities they serve and resulted in a highly productive workforce. EADS has continued to integrate its CSR policies into its everyday operating framework and strengthen its ethical and environmental standards in accordance with French and international standards. These corporate CSR initiatives have helped build employee productivity and improve the corporate image worldwide. While most companies support their local communities Calian Technologies has no clear strategy for CSR embedded into its corporate policies. ComDev supports several local community charities and events but has no clear CSR strategies embedded into its corporate policies. These organizations have not achieved the best productivity from their employees that may have been achieved with more focus on CSR and personal growth and achievement initiatives.
The number of patents per employee was determined by the total number of patents still in effect in 2006 and not the number issued per year. Since many companies have been operational for many years and patents were issues over their lifetime the number issued per year from 2002 to 2006 was not determined. Future projections had therefore no rational reference point from which to extrapolate or project future patent issues. Therefore the projected balanced Sustainable Growth Strategies in the Canadian Space Sector 49 scorecard for Human resources was derived from the average of projected revenues per employee and the same patent data used from historical data from 2002-2006 resulting in a weighted average for the total.
5.2.4 Organizational
Organizational capital resources include worker communities of practice, culture, reporting structure, planning coordination and control. Management’s ability to deal with organizational efficiency can be measured by average R&D expenses as a percentage of revenues, to provide an insight into culture and communities of practice and inventory turnover as a measure of planning, coordination and control. Management of these resources can result in significant improvements in productivity driven by motivation, self actualization and peer recognition and cost reduction due to Kaizen improvement in process control and transactional process.
Research and development, R&D, cost as a percentage of revenues were derived from trends observed over the period 2002-2006 and projected for the period from 2007-1011. Corporate R&D expenditure may be considered as management’s commitment to new product development. This strategy keeps entry barriers high; embraces disruptive technology and keeps customer need front and centre in its new product integration plans. Kotler, (2003) describes the four P’s of marketing as product, price, promotion and place. Product describes the features, size, function and physical attributes. Price describes the discounts allowances, payment terms and credit. Promotion describes the sales, advertising and public relations. Place describes channels, locations, inventory and transport. These attributes describe the product lifecycle as it transitions through introduction, growth, maturity and decline. In order to maintain sales, attract new customers, penetrate new markets and sustain growth it is necessary to improve features and reduce price on mature products and introduce new products to replace those in decline. New entrants will place price pressures on the product or threaten market share by introducing disruptive products that inherently improve customer perception of value. Research and development need to be aware of changing customer needs, lifecycle issues, threats and new technologies and manage their new product integration strategies accordingly. However, it is important to align the R&D expenses with the strategic objectives of the business in order to ensure shareholders dollars, in the form of investment or retained earnings, are utilized in the best interests of the corporation, its shareholders and its stakeholders. Figure 19 illustrates the average R&D expenses as a function of revenues that are projected for the period 2007-2011.
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Average Corporate R&D/Revenues 2007-2011
20.00% 1.60%
1.40% 15.00% 1.20%
1.00% 10.00%
0.80%
5.00% 0.60%
0.40% 0.00% C L C B E B H S T M G M G B D E A S T A R B S A M N G o B S D e O e A o o A A o y C y l v c T a o p e M r e a a e o c u a c c m e r p e n s e n e i y m a r n K E D E g c E r c e 0.20% i r C B o k a m r h b h i a s E t e t n a r t c e t e D k n t n D S t e a h b s h r h n i n a a c t y e m r e w r t M l m e t g c o m o g i e a p e l a r e i o a o l l e w r c D a n t u i l i e l n a i e o r a e l a v S l l e l l c s n d e e o p o e s a l n c n d n s i r l g g v l e e -5.00% l 0.00% d i i r e e s s
Figure 19 Projected Average R&D Revenues per Employee 2007-2011
CAE averaged R&D expenses of 16.7% of revenues over the period 2002-2006 which increased over time and accounted for the continuous growth projections over the period 2007-2011. This activity was focused primarily on flight simulator core product development. The Government of Canada Partnership Program provided support for this development, without which CAE may not have been able to participate to the same level or develop market leadership for products developed under this program. Boeing R&D expenses grew at a modest 3.9% over the period 2002-2006 as it continued to invest in its air transport sector products that take advantage of its scale and scope, technical strength and customer knowledge. BAE R&D expenses were focused on its US military sector over the period 2002-2006 and showed a moderate decrease over that time. Calian Technologies, primarily a services company, invested less than $1000 in R&D in 2006 and has no specific R&D strategy in it strategic landscape. SpaceDev R&D expense was cyclic and declining over the period 2002-2006. Emphasis was placed on boom antenna deployment systems for the Air Force which averaged at 2.9% of revenues over this period.
Inventory turnover ratio is an indication of management’s effectiveness in generating finished goods (value added) from existing inventory. Porter (1985) describes the primary Product Value Chain activities within an organization that provide the transformational processes required to produce the sale of finished goods from inventory. These include inbound logistics, operations, outbound logistics, marketing and sales and service. Inbound logistics include the receiving, warehousing and inventory control of materials. Operations include the Sustainable Growth Strategies in the Canadian Space Sector 51 value creating activities that transform the input materials into finished product. Outbound logistics are the activities required to get the finished product to the market, including warehousing and order fulfillment. Marketing and sales include the activities associated with getting buyers to purchase the product including channel selection, advertising and pricing. Service activities include those that maintain and enhance the products value, including customer support, repair and service. The product value chain can be enhanced by the combination of a recognized quality management system such as the International Standards Organization, ISO, together with an Enterprise Resources Planning, ERP, system designed to implement the mandated ISO transformational process. However, these processes, tools and quality systems are only as good as management’s ability to implement them in a cost effective, efficient and timely manner and to train staff effectively to use of them. Figure 20 illustrates the average inventory turnover projected estimates for the years 2002-2011.
Average Inventory Turnover 2007-2011
70.00 14.00
60.00 12.00
50.00 10.00 40.00 8.00 a m g 30.00 i S
6.00 1 20.00 4.00 10.00
0.00 2.00 L T B B R D G A S C G S T E B H M C B M A S A E M N G o S B D e O e A C a y T c A y l o o o o e p v A M r e a a e o c u a c c y n e i p s m n r m e r e a e K n E E r E g c D e c C r i B o k a m r h h b t a n a E t e s i t c r t e e D k n t n h e b D s t a S h r h n a i n a m e c r y t e r -10.00 w 0.00 t t m M l e c g e m i a o o p g e r a l o i l a o e l r e c w D a n i u l t e i i o a r l n a e e l a l l e S l v l c s d n o p o e e e s n l a c d n n s i g g l r v e l e l d i i r e e s s
Figure 20 Projected Average Inventory Turnover 2007-2011
Raytheon’s strategic objectives include market and product development in the military and aerospace sectors. According to its 2006 financial statements listed in the Edgar (2006) data base, it has implemented cost reduction initiatives in its operations that leverage off economies of scale and scope. This has resulted in an overall average decrease in year over year inventory of 20.5 % over the period 2002-2006 driving its historical inventory turnover up and influencing future projections for the period 2007-2011. BCE strategic initiatives include market development, cost reduction and productivity improvements according to its 2006 annual report listed on the Edgar (2006) data base. These strategies resulted in $724M cost savings in 2006 and a 5% average year over year Sustainable Growth Strategies in the Canadian Space Sector 52 reduction of inventories over the period 2002-2006 which influenced the forward looking projections over the period 2007-2011. EADS strategic objectives include production ramp of the Airbus A280 and A400, according to their annual report filed on the EDGAR (2000) data base. This resulted in significant build up of inventories in 2005 causing a decline in average year over year inventory turnover in the period 2002-2007 of 17.5%. However, back orders for aircraft were 1055 in 2006 including 20 for A380 and A400 sales expected in late 2006 indicating the strategic increase in inventories in 2005 will likely return profits from sales in 2007-2011.
5.2.5 Future Weighted Scorecard Summary
The weighted scorecard for Resource Based Strategies over the period 2007- 2011 was determined in the same way as the previous historical RBV strategy summary. The four RBV capital resource key parameters were measured over the period 2002-2006, trends projected over the next five year period of 2007- 2011, the results normalized to 100% and averaged. Datamonitor (2006) states that growth in the aerospace market is anticipated to decelerate in the US and accelerate in Europe and Asia Pacific over the period 2007-2011 to reach values of $594.5B, $284.3B and $192.1B respectively by 2011. The US remains the dominant market opportunity, is politically stable and economically sound. However, the US market is mature and declining, threats from incumbents protected by restrictive trade practices increase entry barriers. The cost of labor and materials is significantly higher than many of its competitors and emerging economies such as China and India. Kim and Mauborgne (2005) propose a strategy to create uncontested market space and make the competition irrelevant by using the ocean as a metaphor to describe the competitive landscape. Red oceans refer to mature markets and blue oceans refer to emergent markets where products are not yet well defined and competitors are not well structured. Strategies that address the emerging blue ocean opportunities and use their resources effectively to capture and develop those markets are likely to grow and be sustainable in the future. Figure 21 illustrates the weighted average RBV performance summary of the sample group from 2007-2011.
Sustainable Growth Strategies in the Canadian Space Sector 53
RBV Strategies Performance Summary 2007-2011
8.00% 12.00%
7.00% 10.00% 6.00% 8.00%
5.00% a m g 4.00% 6.00% i S
1 3.00% 4.00% 2.00% 2.00% 1.00%
0.00% 0.00% E C R B H C S N L G A B C E B S B B G B M O M o M a a C o o p o T A A A o p a o r e e r a a i c b l y n m a r m a l e s n K n E E E D c r i l S t k i a k t e c c i t h e e t D n h D S b o h a n e y e e r r r g e a l o u a e a l e t w D o r n p l e l v d e e n a d i l v e l l d r
Figure 21 Future RBV Weighted Scorecard 2007-2011
Results indicate that BAE, SpaceDev, and BCE are projected to be the top 3 performers for RBV strategies over the period 2007-2011. On the training edge of the sample group are Bristol, Orbital and MacDonald Dettwiler. Table 5 illustrates that strengths in the top 3 organizations include Financial and Organizational attributes and weaknesses in this group include Human and to a lesser extent Physical attributes. These data show the same trends as their historical predecessors. Projections were calculated from average weighted scores based on derivatives of the historical data, i.e. the slope of the curve, whereas historical data were simply averaged, so the two results can be considered to be separate.
Sustainable Growth Strategies in the Canadian Space Sector 54
Table 5 RBV Weighted Average over 2007-2011
Human resource management remains the most likely area for performance improvement against RBV strategic objectives followed by physical and organizational capital resource improvements. Productivity improvements would significantly improve bottom line results with no increase in sales. These can be achieved by lean initiatives to reduce cost, strategic human resource management initiatives to align personnel with business objectives and knowledge based initiatives to manage intellectual property and raise entry costs to competitors.
5.2.6 Future Weighted Scorecard Hypothesis Test The future weighted scorecard hypothesis test was based on data projected from the derivative of historical RBV weighted performance data. In order to test the Resource Based Viewpoint principles against the market the weighted average of the top 50% companies selected using RBV criteria was tested against the market average performance. The null hypothesis stated that the sample mean of the top RBV companies will be less than or equal to the sample mean of the future market. The alternate hypothesis stated that the top 50% of companies would out perform the market in the future. Table 6 illustrates the results:
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Hypothesis Test: Mean vs. Hypothesized Value
0.045500 hypothesized value 0.058843 mean % of 2011 Total Revenues 0.105822 std. dev. 0.031907 std. error 11 n 10 df
0.42 t .3423 p-value (one-tailed, upper)
Table 6 Future RBV Hypothesis Test Results
The test statistic chosen was the t-statistic for testing the mean of small samples less than 30. The critical value was 4.55% with a level of significance of 5%. In this case the total group consisted of 22 companies and the sample tested included the top11 of them using the weighted average RBV balanced scorecard. The one tailed p-value of the sample indicates there is some evidence that Ho is not true. The mean of the sample is 5.9% which is greater than the mean of the hypothesized value of 4.55%. Therefore the Null Hypothesis is rejected and the Alternate Hypothesis is considered to be true. These data are not as compelling as would be preferred for a clear conclusion that RBV strategies are the most likely to succeed but they are sufficiently compelling to conclude the alternate Hypothesis to be true. The data indicate top 50% of RBV weighted companies will out perform the market from 2007-2011. Further analysis indicates that the top 50% of companies with RBV weighted strategies will contribute to 64.73% of the market in 2011. Appendix A-1 illustrates that the top 50% of the sample group ranked by weighted RBV performance out performed the market.
Sustainable Growth Strategies in the Canadian Space Sector 56
6 Conclusion
The stated hypothesis that the top 50% of companies using Resource Based Strategies had out performed the market over the past 5 years and would out perform the market over the next five years was shown to be true. This conclusion was based on analysis of 22 sample companies in the aerospace sector using criteria meeting the RBV guidelines previously defined. In order to determine the most effective RBV strategies to meet a specific corporate business strategic plan such as previously described for ComDev, it is necessary to identify and highlight the most salient RBV drivers. Once identified, these drivers can be incorporated into a Specific, Measurable, Achievable, Realistic and Time Bound, SMART, strategies aimed at meeting corporate business objectives over the next 5 years. To help identify the RBV drivers the internal strengths and weaknesses of the sample group together with the external opportunities and threats faced by the aerospace industry going forward are summarized in Table 7, RBV SWOT analysis.
Table 7 RBV SWOT Analysis
Analysis of RBV strategies over the past 5 years and projections over the next 5 years both indicated strengths in financial and organizational capital resource Sustainable Growth Strategies in the Canadian Space Sector 57 management and weakness in human and physical resource management. Opportunities included a growing world economy with new opportunities emerging from Europe and the Asia Pacific countries. Threats included growing trade barriers and protectionism in the US, large Oligopolies like General Electric with associated advantages of scale and scope, the aging population and competition for skilled knowledge workers in the industry. The RBV SWOT analysis can be used to help identify sustainable growth strategies aligned to ComDev’s growth objectives to determine a sustainable strategic roadmap based on RBV principles. As previously discussed ComDev stated its long term growth objective is 10-15% per year. In order to sustain this growth strategic objectives include:
• Market development. Supplying an existing product or technology to a new customer and leveraging existing capability into new markets. • Horizontal diversification. Providing new products to an existing customer. • Concentric diversification. Leveraging an existing capability into a new market.
Market development can be achieved by combining opportunities in the economic sector, O1 and O2, with strategic geographic plant re-location close to the customer base in Europe and the US, O4, with operational strengths, S1-S5. This strategy will overcome threats from international trade barriers, T1, legal requirements for citizenship for US business and European content for European business, and political stability, T2. Strategically located plants in the UK and US would supply existing regional customers thereby achieving an element of horizontal diversification, be positioned to take advantage of growth inside tariff barriers and be a good cultural fit with traditional neighbors and founding nations. Threats from competition for knowledge workers and weaknesses from weak corporate CSR commitment and productivity could be improved by combining a Strategic Human Resource Management strategy for job fulfillment with employee volunteers providing support for regional CSR projects aligned to the corporate vision. These may include support for space camp, Space University, school projects, weather stations and micro satellite university projects where corporate resources and expertise would be welcome and beneficial to the community. General Electric utilizes this strategy and their productivity was the highest of the companies in the sample group, almost 10 times higher than least productive.
Horizontal diversification can be achieved by combining the opportunities provided by government grants and tax credits, O5, with operational strengths S1-S5 to overcome threats from larger oligopolies with their associated advantages of scale and scope. CAE employ this strategy with their aircraft simulator business and are able to compete with companies much larger than themselves. CAE exploit their niche capability with government R&D support and constantly improve their designs and platforms to meet the needs of their civil and military aviation customers. Horizontal integration is also a useful Sustainable Growth Strategies in the Canadian Space Sector 58 strategy for bringing new products to existing customers. This strategy has the advantages of time to market and time to revenue but the disadvantages of cultural alignment and operations alignment.
Concentric diversification can be achieved by global sourcing of parts, services or transformational processes. Sourcing of parts from global suppliers can lead to cost reduction derived from economies of scale and scope not available to smaller or regional suppliers. Recently, aerospace suppliers have begun forming formal and informal consortiums and communities of practice to overcome US trade practices that restrict access to critical parts. Forward and backward integration of ERP systems into customer demand and supplier component supply data bases can reduce throughput and cost by providing advance notice of demand and reducing cost by aggregating supply. Sourcing of services can benefit from reduced cost due to lower cost of labor and materials in different geographic regions. Many software companies have recently sprung up in India to support major European and US large and small to medium scale engineering enterprises. Sourcing of transformational processes can result in leveraging an existing capability with synergies to the core product and market into new markets. Strategic partnerships offer similar advantages but have a shorter life span, typically for one or a few specific projects.
In order for ComDev to meet its growth target of 10-15% it will need to improve its financial and organizational RBV strategies and focus on synergies between these and its financial performance objectives. ComDev IP is heavily protected by patents but its productivity is one of the lowest in the sample group making it vulnerable to price sensitive customers, low cost off shore competitors like China and India and under capacity system integrators in the un-differentiated product areas. New technologies do not pose an immediate threat due to the conservative nature of the business and ComDev invests heavily in R&D. Availability of knowledge workers is becoming a limiting factor for ComDev and it may need to expand its plants in the US and UK to accommodate new growth. Growing export restrictions in the US are restricting sales but opening of a new plant in the US is expected to mitigate this problem. ComDev core product in its Mux and Switch divisions is targeted at commercial applications. Its Space Electronics division will likely need to migrate away from government business and focus on commercial and military business in order to meet growth targets. This will impact its HRM strategy placing a stronger emphasis on product related business and employees with background and experience to lead the company in that direction. Sustainable Growth Strategies in the Canadian Space Sector 59
6.1 Summary and Call to Action
The purpose of the research was to investigate the proposed hypothesis that Resource Based Viewpoint (RBV) theory, described by Barney (1991), has out performed and will out perform the aerospace market in the five year periods from 2002 to 2006 and 2007 to 2011 respectively. Analysis of a sample of 22 aerospace companies over that time period indicated that the hypothesis was correct. The work was done to determine sustainable growth strategies in the Canadian space sector focusing on the Resource Based Theory proposed by Barney (1991). The historical time frame was 2002-2006 and the future time frame was 2007-2011. Since the space sector in Canada is very small the sample companies were selected from worldwide aerospace companies with a strong space segment in their business portfolio. Data was collected from public domain sources such as financial statements, securities commissions, national banks, university libraries and the US patent agency. Data was ranked and sorted in accordance with selected RBV criteria. The focal point for strategic planning was ComDev, a large scale enterprise with its head office in Cambridge Ontario and branch offices in Ottawa, the UK, US and China. Based on this analysis the following call to action is proposed:
1. Improve productivity by incorporating Corporate Social Responsibility, CSR, into Corporate Mission. Donate 0.05% of revenues and encourage employees to donate time toward synergistic CSR and citizenship projects such as high school, college and university projects, community activities, space camps and community high tech projects over the next five years and measure sales and productivity increase against the market. 2. Improve productivity by incorporating Communities of Practice into Mission. Offer corporate rebate fees for professional staff association memberships and measure productivity against the market over the next five years. 3. Improve productivity by Implementing Strategic Human Resource Management, SHRM, plan aligned to business objectives. Clarify mission and incorporate vision, goals, objectives and strategies at all levels of the organization. Hire, train, compensate and measure employees using a balanced scorecard aligned to mission, vision, goals and objectives of corporate and business units over the next five years. 4. Improve gross margins by incorporating global manager and key personnel training into global diversification plan. Mitigate cultural conflicts and associated labor and productivity issues associated with home market or offshore integration and capacity growth by key personnel training across the value chain. Establish a balanced scorecard for each primary activity of inbound logistics, operations, outbound logistics, marketing and sales and service. Invest 1% of revenues and measure gross margins against the market over five years. Sustainable Growth Strategies in the Canadian Space Sector 60
5. Improve location, technology and customer satisfaction by co-locating plants and customers. Invest 2% of sales in home market capacity growth to mitigate tariff barriers in the US and position for growth in Europe and Asia Pacific. Monitor regional sales and gross profit margins against the market. 6. Reduce asset turnover risk by market development in strategic home markets. Identify low risk mature product lines and seed home market capacity growth with mature value chain model and products. Effectively a franchising strategy for introducing existing products into new markets such as the US, Europe and Asia Pacific. Integrate over the next five years and measure inventory and total asset turnover against market. 7. Improve inventory turnover by integrating internal ERP, SHRP, Planning, Marketing, Sales and Business Intelligence with outbound logistics including customers and inbound logistics including suppliers. Invest 0.5% of revenues per year for five years to upgrade ERP and integrate into all parts of the value chain both internal and external as well as measure inventory turnover against market. 8. Improve asset turnover by expanding capacity to meet demand. Identify core product strength and key customer demand. Expand organically in rare and difficult to copy value chain activities like plating, tuning, specialist machining, complex circuit assembly, mask alignment and lithography. Invest 0.5% a year for five years in plant and equipment improvements for key customers and measure inventory turnover against market. 9. Improve product width by leveraging government tax credits and research grants for new product development. Identify government development initiatives, research grants, tax credits, research department mandates, space, defense and energy mandates and funding sources. Integrate corporate R&D plan with internal project strategies, external funding sources, government research and intellectual property development to reduce R&D cost and improve product width. No investment required to implement this strategy but success should be measured by improved segment sales and lower corporate R&D expenditure verses revenue against market over five years. 10. Improve sales and product depth by aligning R&D strategies with corporate growth objectives. Rationalize product road maps against customer demands, trends, feedback CAPEX budgets and competitive position. Seek and secure preferred partnership relationships by examining product synergies with project objectives and encourage high value added projects that are not easily copied or reproduced. No investment required to implement this strategy but success should be measured by improved segment sales and lower corporate R&D expenditure verses revenue against market over five years.
The location and technology required to succeed in aerospace include access to knowledge workers, customers and components. The three top performers, Sustainable Growth Strategies in the Canadian Space Sector 61
SpaceDev, Orbital Sciences and CAE are positioned in high tech environments with access to universities, colleges, knowledge worker centers and component vendors. The technologies are rare and difficult to copy because they have a tacit knowledge content which is difficult to imitate. Financial resources incur rents by offerings products that are unique, require special processes to meet the demanding environment of space and still deliver value to shareholders and stakeholders. Human resources solicit rents by being motivated, creative and productive. This can be achieved by engaging employees in corporate CSR strategies that add value to the community while representing the company through the efforts of its grass roots employees. Further employee commitment, motivation and productivity can be achieved by continuous knowledge worker training, cross training within the corporation and encouragement of communities of practice for the germination and sharing of ideas. Committed and motivated employees are likely to improve productivity, becoming more difficult to copy and imitate by competitors and more valuable to the company. Organizational improvements include R&D support from government in the form of R&D new product development for new and unique products that are hard to imitate by competitors because of patent protection, trademarks or secret processes that help differentiate and ensure market leadership, imitability and value.
6.2 Implications for Managers
The creation of competitive advantage from Resource Based Viewpoint strategies are inherently inward looking and benefit from inputs by managers at all levels in an organization. Herremans and Isaac (2004) suggest a bottom up approach that allows managers access to the employees who actually possess the skill providing competitive advantage rather than top down approach within the organization. The following implications to managers are recommended for further consideration:
1. Vertical Integration. According to Barney and Delwyn (2007) vertical integration decisions are made using transactional cost economics. If the transactional investment of the exchange is low it should be managed at arms length, medium cost should be managed by strategic alliance and high cost by vertical integration. The boundary decisions are usually made on economic future value conditions and ignore current resources. RBV strategies add value to these decisions by including the impact of physical, human, financial and organizational resources on historical conditions, social complexity and causal ambiguity and create sustainable competitive advantage. 2. Diversification. The marginal cost of diversification is likely to increase as diversification strategies diverge from core competence due to dilution of resource efficiency. However, RBV strategies used in the decision process help identify firm specific core competence in human capital investment that can be leveraged to obtain the optimum diversification Sustainable Growth Strategies in the Canadian Space Sector 62
scope and marginal benefit to the organization and create sustainable competitive advantage. 3. Merger and Acquisition. Strategic advantage from acquisition can be achieved when the advantages to one firm are greater than other interested competitors. This occurs when the synergy is greater for one firm creating uniquely valuable cash flow opportunities and potential for unexpected spin off due to synergy. RBV strategies may by used to identify physical, financial, human and organizational synergies between potential target firms to increase cash flows and create sustainable competitive advantage. 4. Physical Capital Resources. Value chain performance and measurement metrics aimed at value creation. Managers can review the efficiency of the resources involved in the transactional processes across the value chain by implementing measurement metrics and integrating lessons learned into the Kaizan continuous improvement process. The results of improved efficiencies over time will improve value by reducing cost and increase competitive advantage by developing unique company specific resources that are difficult to copy and not easily substitutable. 5. Financial capital resources. Financial managers can utilize RBV strategies to improve returns through strategic investment in corporate resources through retained earnings, government grants, tax credits, synergistic product development within projects and strategic integration strategies. Marketing managers can incorporate RBV strategies into strategic employee and product centric CSR initiatives into their marketing and communications, marcoms, plans. This will raise corporate profile, employee productivity, customer perception of performance and sustain share price confidence in the market place. 6. Human capital resources. Human resource and hiring managers can include RBV strategies into their strategic human resource management plans in order to align corporate vision and strategic objectives into human resource allocation. Strategic HRM strategies include cross training, work teams, strategic recruiting, flexible retirement, diversity, virtual teams and open book management. According to the data presented the productivity of leading RBV proponents in such companies as Bombardier terms of revenues per employee can be as much as 10X the least productive. 7. Organizational capital resources. Operational managers can include RBV strategies in their value chain ERP systems to improve throughput, inventory turnover and time to revenue. Marketing and sales managers can include a business intelligence data base in ERP to improve strategic marketing, focus and improve product and market development and improve competitive position. Human resource managers can include RBV strategies in their strategic human resource management plans to build synergy into teams making them more valuable to the company, difficult to copy and sustain competitive position. 8. Applying Resource Based Theory. Mills, Platts and Bourne, (2003), describe resources as “sticky bundles”. They go on to indicate that Sustainable Growth Strategies in the Canadian Space Sector 63
managers who focused on value chain processes and tools gained a good insight into RBV strategies and how external events and managerial actions had built resources into their own context. These strategies can help identify unsuspected resource value, recruitment, development and motivation value, and identification of change drivers by identification of dynamic resource capability. 9. Rules for riches. Managers often look for guidelines and checklists that when implemented provide a formulae for success. Since this would lead to any firm being able to imitate the recipe for success, RBV strategies do not lend themselves to codified implementation processes. Therefore managers should not consider implementing a recipe based strategic management plan because it will not provide competitive advantage or be sustainable in the long term. Managers should seek out and implement differentiating strategies that focus on value, differentiation, uniqueness and are difficult to copy. 10. Dynamic RBV strategies. Resource based viewpoint is based on resources being rare, valuable and costly to imitate. These attributes may change over time as employees grow, economies and political climates change, new products and markets developed. Managers can consider dynamic RBV strategies in their HRM and strategic models that encourage developing resources, train and continuously improve existing resources and re deploy declining resources to sustain competitive advantage.
The challenge for managers is to identify and develop synergy within the heterogeneous resources in their organization in order to provide sustained competitive advantage.
6.3 Shortcomings
The information and data presented in this paper is available to the public from financial reports, journals, public and university libraries, government agencies, books and periodicals. Insider information and privately owned companies who do not publish annual or financial reports are not included. This limits the evaluation criteria to readily available public information. The space sector is a small part of the aerospace sector and most LSE’s are diversified appropriately to reduce business risk and address several market sectors. Therefore the conclusions drawn from the data apply to the whole industry and cannot easily be differentiated to a small part of it. The following shortcomings are highlighted:
1. Accuracy of future projections. Future projections were calculated from the derivative of past performance and extrapolated forward using linear regression curve fitting. The analysis does not account for the continuous decisions made by managers to deploy and re deploy resources, political climate change, natural climate change or the business cycle. Consequently, the accuracy of projections are limited to the performance Sustainable Growth Strategies in the Canadian Space Sector 64
of one variable when in fact they are likely to be impacted by the performance of many variables. 2. Range of criteria for each resource category. The range of criteria chosen for each resource category was limited to two or three in order to keep the scope of the work within the time and resources allocated. Accuracy could be improved by selecting more criteria and increasing sample size. This would require considerably more time and effort to obtain the data and rationalize it but would be more representative of the key RBV drivers. 3. Patents by year. Patent data was obtained from the US Patent Office. File dates are provided but not in a format that lends itself to simple sorting methods that can be achieved in a timely manner. However, these data would provide an insight into product lifecycle, new product integration, lead indication of growth and product development strategies for business intelligence purposes and opportunities provided by end of life patents. 4. Sector granularity. In order to provide sufficient data to be statically relevant and ensure results were achievable the whole international aerospace sector was chosen as it impacts Canada and ComDev in particular. However, the space sector is a small part of the aerospace business and is more exposed to supplier pressure due to low volumes, competitive pressure due to customer capacity and economic pressure due to government spending and policy changes. 5. Rules for riches. RBV strategies are likely to be less rules based and more tacit knowledge based. They are aimed at developing synergies between available resources to create and sustain competitive advantage. Effective use of RBV strategies are likely to change over time as scale and scope grows in products and markets and the resources required to meet market demand change to meet them. The traditional top down decision process supported by codified value chain processes and hierarchical management may not be the most effective use of RBV strategy going forward. Use of focused project teams supported by temporary specialists when required would be more likely to take advantage of RBV resources. 6. Number of samples. The number of samples chosen was less than thirty so the t statistic was used. Standard normal distribution requires the recommended number of samples is greater than 30 when the shape of the distribution is not known. The t statistic is flatter and more spread out than the standard normal distribution and the errors slightly larger. A higher number of samples would improve accuracy of the data and help remove uncertainty in the analysis. 7. Appropriateness of the method. Resource based theory is based on the premise that a firms assets have identifiable attributes that generate and sustain competitive advantage. The method used was to assign measurable metrics to each RBV resource parameter, aligned to the specific attributes of that resource, determine trends over time, rank and compare to market performance. The inclusion of time in the analysis was considered important to establish sustained performance rather than transitional performance. These techniques could be further improved to Sustainable Growth Strategies in the Canadian Space Sector 65
include specific ranking for the RBV attributes: value, rare, non substitutable, difficult to copy. 8. Benchmarks. The role of benchmarks could be clarified to provide a better picture of the RBV drivers in competitor HRM plans and how they relate to the target firm strategic objectives, culture and performance. According to Barney and Clark (2007) these include; how the workforce skills compare, how the workforce commitment compares, how line managers roles compare, what the unique drivers are, what practices need to be developed to leverage the drivers, what HRM practices may be improved. 9. Key RBV driver identification. This research indicated that key drivers included financial resource management and areas for improvement included human resource management. This conclusion may have been influenced by the metrics for financial measurement that are more tangible than the HRM. More specific and measurable HRM performance criteria would help improve accuracy and relevance of results. 10. Importance of Introspection, employee motivation and competence. The research indicated that some firms, including GE, incorporated CSR and HRM strategies into their business model to build morale, loyalty, customer satisfaction and corporate profile. Productivity was one of the highest in the sample group and local economies as well as potential export markets benefited directly as a result. This strategy leverages several resource synergies to achieve competitive advantage, is highly motivational and is expected to be a powerful tool going forward. Integration of CSR strategies into corporate vision, mission and growth strategies was not readily available from most of the companies in the sample group indicating that it is not fully embraced in the industry today.
Resource based theory suggests that firm effects have a greater influence on performance than industry effects. The data presented focused on the impact of RBV strategies on value by measuring RBV resource criteria against market and sustainability by using data derived over time. Other metrics such as mobility or versatility may provide better insight into global and market development strategies.
6.4 Suggestions for Future Work
In order to further develop the principles of RBV evaluation for organizations it may be useful to identify clearer strategies and measurement guidelines to educate managers and staff and to evaluate effectiveness. Examples of sustained competitive advantage by General Electric were achieved by incorporation of several strategies including CSR and HRM into their overall business objectives resulting in easily measurable improvements in productivity. Social implications of RBV strategies on society as a whole may help shed light on the long term economic effects of out sourcing and off-shoring. The hollowing out of the industrial base caused by these strategies has resulted in the rapid Sustainable Growth Strategies in the Canadian Space Sector 66 growth of emerging economies and potential decline of the developed ones. If the off shore trend continues for consumer goods and moves to strategic value added products like auto parts, transport and aerospace a significant shift in trade balance from west to east and north to south is likely to result. Some recommendations for future work are included as follows:
• What are the RBV causal relationships? RBV relationships are synergistic and not pre determined. However, they can be identified by allocating attributes to each resource criteria that highlight its value, rarity and uniqueness. A SWOT analysis or similar strategic planning matrix can be used to identify synergies and determine sustainable growth strategies. • How is dynamic RBV evaluation defined? While market forces remain fairly constant some internal resources change consistently. Employee’s age, leave and join organizations, stock markets go up and down and business units expand and contract. Dynamic RBV strategies enable firms to react quickly to market changes and retain strategic advantage. It is likely to be important to managers to identify dynamic RBV resources, nurture emerging resources, train and motivate existing resources and re deploy declining resources. • How can RBV strategies be measured? External financial data may be influenced by many external influences not related to resource performance. Internal performance that is not aligned or measured against strategic objectives is not likely to provide sustained competitive advantage. A balanced scorecard approach enables use of direct and derived financial and performance criteria from financial reports and annual reports together with other public data to be incorporated with firm specific criteria for performance evaluation and continuous improvement. • What industry performance benchmarks should be used? Organizations can use any criteria they wish to monitor performance. However, unique internal metrics are difficult to benchmark throughout the industry because of disclosure, proprietary concerns and uniqueness of value chain processes. Full disclosure from annual reports is an obvious source of intelligence but communities of practice, professional associations and other associated groups may provide useful benchmark data for salaries, employee turnover, demographics, training, community CSR issues and other useful benchmarks. • How should sector performance benchmarks be determined? The North American Classification System, (2008) classifies industries into 20 broad sectors then sub divides into industry sub sectors and groups for the US, Canada and Mexico. This data base provides a well documented resource for competitive information that can be used to evaluate the competitive landscape. However, most large scale aerospace companies in the space business are diversified into several aerospace sectors, many are over seas and their financial performance information is difficult to obtain. Most companies are diversified such that the space segment is a small part of their portfolio. Consequently performance benchmarking Sustainable Growth Strategies in the Canadian Space Sector 67
becomes more of a business intelligence issue requiring information from specific business units to provide meaningful competitive advantage data. • How are RBV applicable to home market and emerging market growth strategies? Emerging markets have different laws for employee relations, securities, health and safety than home markets. This impacts outsourcing decisions as well as capacity expansion, HRM and strategic growth assumptions. Sustainable growth strategies will need to address the long term impact of emergent markets on sales and services as well as resources and plant investment. • What RBV strategies are applicable to SME, LSE enterprises? LSE’s are usually diversified, well financed and have the advantage of scale and scope over smaller companies. SME’s are usually niche focused with less resources and smaller markets. By focusing on RBV strategies the SME niche advantage and their scale and scope disadvantages can be leveraged into rare and valuable resource improvements that LSE’s cannot easily copy or substitute. This would raise entry barriers and make it more difficult for key customers to switch. • What RBV strategies are applicable to knowledge based verses mechanistic cultures? Knowledge based cultures have a high variety of unexpected and novel events that occur in the value chain process that are usually solved by following standard analyzable processes. Mechanistic cultures are also highly analyzable but variety is lower within the value chain conversion process. Synergies within resource groups and between them are likely to be different and not applicable from one group to another. Further studies across different and unrelated industrial sectors may help identify and highlight traits within the RBV framework that can be applied to specific industry sectors. • How should RBV resource make verses buy decisions be made? Strategic diversification strategy boundary conditions are usually determined by transactional cost of organic, merger and strategic partnership options. However, RBV strategies offer another dimension to consider. Use of RBV in the decision process highlights synergies within the existing organization and the target organization that can create sustainable and sometimes unexpected strategic advantage that would not be achieved by simple addition of the target organization resources. The resulting inimitable cash flows provide a valuable and rare synergy that adds value to the diversification decision process. Further study of RBV strategies as they apply to diversification strategies may help managers make more informed strategic growth decisions using RBV strategies that provide competitive advantage and sustainable growth.
Resource based theory has evolved to the point where it can be tested by quantitative methods using case studies like the one presented. Further evolution that compares RBV strategies to other related strategic management theories would help highlight strengths and weaknesses of the RBV process. Bayesian statistical methods may help highlight the synergies Sustainable Growth Strategies in the Canadian Space Sector 68 between different RBV resources and their effectiveness in the determination of sustainable growth strategies in the aerospace industry and in the Canadian space sector. Sustainable Growth Strategies in the Canadian Space Sector 69
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Appendix A
Appendix A 1 Past RBV Ranking 2002-2006
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Appendix A 2 Future RBV Ranking 2007-2011