Offset Management A Case Study of Saab AB Master of Science Thesis in the Master Degree Programme, Management and Economics of Innovation KIM HENRIKSSON MATTIAS HERMANSSON Department of Technology Management and Economics Division of Innovation Engineering and Management CHALMERS UNIVERSITY OF TECHNOLOGY Gothenburg, Sweden, 2011 Report No. E 2012:097 2 MASTER‟S THESIS E 2012:097 Offset Management A Case Study of Saab AB KIM HENRIKSSON MATTIAS HERMANSSON Tutor, Chalmers: Joakim Björkdahl Tutor, Saab AB: Johan Ström Tutor, Saab AB: Eva Söderström Department of Technology Management and Economics Division of Innovation Engineering and Management CHALMERS UNIVERSITY OF TECHNOLOGY Göteborg, Sweden 2012 3 Offset Management – A Case Study of Saab AB Kim Henriksson & Mattias Hermansson © Kim Henriksson & Mattias Hermansson, 2012 Master‟s Thesis E 2012:097 Department of Technology Management and Economics Division of Innovation Engineering and Management Chalmers University of Technology SE-412 96 Göteborg, Sweden Telephone: + 46 (0)31-772 1000 Chalmers Reproservice Göteborg, Sweden 2012 4 Abstract The purpose of this thesis is to improve Saab‟s offset management and develop suggestions for an improved offset process in order to minimize negative effects of offset on Saab‟s core business. Offset constitute a range of industrial compensation activities often required in international governmental procurements of a large technical systems. The thesis has been conducted as a case study at Saab, defining the offset phenomenon and describing the present offset process. A large set of interviews has been conducted at Saab together with a review of internal documents and processes. This empirical data has been compared to current offset management literature and has formed a set of recommendations. Key findings include 14 areas of improvement for offset management at Saab. These areas cover offset strategy, education and communication. Through offset Saab gains an additional dimension to elevate their offer to their potential customers. Furthermore, offset affects several parts of the organization. The worldwide spending on arms is shifting towards emerging markets. In these countries there is a trend towards increased direct offset demands and stricter rules for its implementation. Offset as a component in an arms trade will therefore become even more important. In conclusion, the pressure is increasing on Saab‟s Business Areas to handle more offset obligations of a more complex nature. Recommendations for Saab include: update processes to support offset activities, connect offset with long term strategies, map offset costs, describe offset in the organization and educate staff. 5 Acknowledgements We have received lots of help and encouragement during the whole thesis writing process. There are a few we would like to thank especially… …our supervisors at Saab, Johan Ström and Eva Söderström who both helped us with the initial idea spawning to endless questions about just everything there is to know about offset at Saab. …our supervisor at Chalmers, Joakim Björkdahl who has patiently guided us with the academic process. …Andreas Bolling for many interesting ideas and an outstanding support of our thesis. …the procurement department at EDS, whose engagement increased our knowledge in the offset field. …all the numerous employees at Saab who has taken their time to answer our questions, letting us participate in their workshops and attending ours. …Pär Rohman for not only explaining much about offset but also giving us a tour of the Gripen production plant ending with a chance to climb into a Gripen fighter. …Brian Bicknell for making our English more English in a last minute proofreading. Gothenburg, October 2012 ___________________________ __________________________ Kim Henriksson Mattias Hermansson 6 Table of contents 1 INTRODUCTION ................................................................................................................... 9 2 SAAB ..................................................................................................................................... 11 2.1 THE HISTORY OF SAAB ...................................................................................................... 11 2.2 KEY ECONOMIC FACTS ...................................................................................................... 11 2.3 ORGANIZATION ................................................................................................................ 13 2.4 MARKET AND PRODUCTS .................................................................................................. 13 3 THE OFFSET PHENOMENON AND THEORETICAL FRAMEWORK ......................... 17 3.1 OFFSET – WHAT IS IT? ...................................................................................................... 17 3.1.1 The origins of offset ................................................................................................. 17 3.1.2 Definition, terminology and cornerstones of the offset phenomenon .......................... 18 3.1.3 Offset as a component of an arms trade .................................................................... 20 3.1.4 The value of offset, offset credits and multipliers, banking of credits ......................... 21 3.1.5 Incentives for fulfilling offset obligations and consequences of failing ...................... 22 3.1.6 The bureaucracy behind offset: Additionality, causality and sequence ...................... 22 3.1.7 Offset practices varies from country to country ........................................................ 23 3.1.8 The offset market today and tomorrow ..................................................................... 23 3.2 MANAGEMENT REGARDING OFFSET ................................................................................... 24 3.3 TOOLS FOR ANALYZING THE IMPORTANCE AND THE EXTERNAL EFFECTS OF OFFSET ............. 25 3.3.1 Porter’s five forces .................................................................................................. 25 3.3.2 Porter’s value chain ................................................................................................ 28 4 EXECUTION AND METHODOLOGY ............................................................................... 30 4.1 CASE STUDY AS RESEARCH DESIGN .................................................................................... 30 4.2 RESEARCH STRATEGY ....................................................................................................... 30 4.3 DATA COLLECTION AND ANALYSIS .................................................................................... 33 4.3.1 Empirical data collected through interviews and analysis......................................... 33 4.3.2 Data collected from other internal sources at Saab and analysis .............................. 35 4.3.3 Offset management workshop .................................................................................. 36 4.4 VALIDITY ......................................................................................................................... 36 5 EMPIRICAL FINDINGS ...................................................................................................... 39 5.1 THE IMPORTANCE OF OFFSET ............................................................................................. 39 5.1.1 Rivalry among existing competitors ......................................................................... 39 5.1.2 Threat of new entrants ............................................................................................. 39 5.1.3 Bargaining power of suppliers ................................................................................. 40 5.1.4 Bargaining power of customers................................................................................ 40 5.2 OFFSET AT SAAB .............................................................................................................. 42 5.3 OFFSET DURING AN ARMS TRADE ...................................................................................... 44 5.3.1 Market phase ........................................................................................................... 45 5.3.2 Execution phase....................................................................................................... 46 5.3.3 Procurements role in the offset handling .................................................................. 46 5.4 THE BA‟S PERFORM DIFFERENTLY EVEN THOUGH THE BASIS FOR THEIR OFFSET PROCESSES ARE THE SAME .............................................................................................................................. 47 5.5 ASPECTS IDENTIFIED IN SAAB‟S OFFSET MANAGEMENT ...................................................... 49 6 ANALYSIS - HOW SHOULD OFFSET BE MANAGED AT SAAB? ................................. 54 6.1 CRITICAL ASPECTS IDENTIFIED IN SAAB‟S OFFSET MANAGEMENT........................................ 54 6.1.1 Organization and responsibilities during the offset process ...................................... 55 6.1.2 The cost of offset and how it is calculated................................................................. 56 6.1.3 Communication and system support ......................................................................... 57 6.1.4 Education and definitions ........................................................................................ 57 6.2 PROCUREMENT‟S INFLUENCE ON THE OFFSET ISSUE ...........................................................