The aerospace and defence sector is one of the most innovative and dynamic sectors. Typically, it is among the top industries to develop and adopt new technologies, which are fundamental to the sector's success and sustainability.
Although in recent years it has undergone considerable changes, and security issues arose, such as the September 11 attack in the US and high competition among world airlines (resulting in the cooperation of top Europeans airlines for instance), it remains a highly-valued market and one in which governments will keep investing.
The aerospace and defence industry is of cyclical nature, thus it is highly sensitive to price changes and economic cycles. Firms operating in this sector need to device strategies that will help them keep their costs down, whilst remaining competitive.
AeroParts have established themselves as a company dedicated to providing high quality products to their customers. Their extensive expertise has allowed them to work with the major players in the market. They realise that it's important, especially in this sector, to keep investing in new technologies. However, they are faced with a number of challenges and need to act quickly, if they want to expand their business. The following are some of the issues AeroParts are faced with:
First of all, AeroParts are reliant on one industry - that as mentioned earlier, is of cyclical nature – and on one market – the UK market. This makes them particularly vulnerable and sensitive to market changes and economic conditions of that specific sector. Also, restricting their operations to the local market makes them less competitive and less attractive to big companies, which are increasingly seeking to work with suppliers that can offer services in foreign markets. The trend, in most sectors, is in fact to have fewer but bigger suppliers with global presence.
They have a very small customer base; AeroParts in fact are reliant on two of the major players in the market, which can choose from various suppliers. This undoubtedly limits their business growth, especially if they are not on BAE's and Rolls Royce's top suppliers' list.
Additionally, there seems to be an issue, either with the machine's production capacity or with lack of personnel. Perhaps the number of machines available is not enough to fulfill more orders. The company seems to be extremely concerned with getting new business on board, for fear of having to let somebody down, as stated in the case study, should BAE's orders come through.
AeroParts do not appear to be ‘aggressive' enough. They mention that they might not be Rolls Royce's favourite supplier for a potential order. However, it is not clear what the company is doing to try and gain that business. They seem to be somewhat passive. Do they have an active sales team in place or do their products need to be profiled in a more appealing way to their customers?
Their product range is rather limited. The company is specialised in the production of tensile steel components. With rapid technological advances, new substitutes could potentially be introduced; in that case, the company would fairly quickly run out of business.
It is obvious that the company has been so reliant on BAE Systems and Rolls Royce to grow their business; so much so that they have not been concerned with marketing their products outside their current customer base. If you run a search on the internet, AeroParts are nowhere to be found; they are not even listed on company databases such as Kompass and Europages.
AeroParts have decided that their short term strategy will be to grow their business through ‘market penetration'. Therefore, they believe that, presently, they should continue selling their product ‘as is' in their current market.
As mentioned above, AeroParts' have a limited customer base, consisting of BAE Systems and Rolls Royce Aerospace. As far as their product offer is concerned, they produce one main product: tensile steel components used for military and civil aircraft. In the short term, growth through market penetration seems to be a wise choice, for the following reasons:
AeroParts have not yet gained a significant market position locally, due to the fact that they only work with two companies. Therefore, it is recommendable to gain a bigger market share domestically. The UK aerospace industry thrives with companies, thus there should be plenty of business opportunities to explore. Additionally, it is wiser to have a stronger foothold in the domestic market before considering expansion into international markets.
It is advisable in the short term to adopt this strategy, in order for the company not to have to spend a large amount of money on their promotion activity.
As mentioned previously, the company has a few challenges to deal with. For a while, it was rather easy to gain new business: there was a number of suppliers, clustered around an OEM, that received enough work from the OEM to keep their business and product line going. However, in the past few years, competition has increased considerably, as major companies can and do easily move production to other countries, where for instance both production and labour costs might be cheaper, or where more technological know-how is available.
Subsequently, it's fundamental for AeroParts to develop a sound promotion strategy that will allow them to expand to the rest of the market and win new customers.
In terms of promotion, the company should consider the following: image; rebranding; sales team and generation of sales leads; and promotional material.
One of the first things AeroParts should concentrate on is to define how they want to portray themselves, in other words, they need to consider their image.
For instance, they believe in providing only quality products and services: they show they are a serious company. Furthermore, they have the expertise, the know-how coupled with advanced technology: new machinery and sophisticated software. In other words, the company's strengths must be highlighted in their promotional material.
It is recommendable that the company change or adjust its existing name. Presently, the name ‘AeroParts' is too broad. A more catchy and selective name is necessary; something more unique. People won't necessarily remember a name just because it is simple. Thus, it would be advisable to either add to the name or change it altogether.
AeroParts need to set up a sales team to help them promote their product. Preferably, a sales team with technical expertise, that are knowledgeable of the market conditions and have already some contacts/sales leads, so as to get AeroParts quickly introduced to the market. In addition, they need to develop a good profile for their product, comprising technical specifications and the advantages of using their product. Lastly, AeroParts should invest in developing promotional material, such as brochures, presentations and case histories – they could produce material showing their collaboration with BAE Systems and Rolls Royce, to help the market gain trust.
Regarding distribution channels, AeroParts should be aware of the increasing use of the internet. They should invest in setting up a representative website. Moreover, they should register with various search engines and online databases, so that people can find them. Additional ways to expand their distribution channels are through participating in industry trade events like fairs and exhibitions. Furthermore, way to gain access to a wider audience is through forming partnerships and joint ventures. This will not only allow them to enter the market but also to gain and/or share knowledge.
It is obvious that operating solely in the ‘shrinking' domestic market won't be sufficient if AeroParts want to remain competitive. Consequently, they need to develop medium- to long-term strategies to ensure business development.
One of the ongoing trends is for companies to expand into new markets, abroad. Companies have become more global and suppliers which can offer solutions in international markets, tend to be in a more favourable position. This , however, is not always easy for a SME which lacks necessary funds to pursue development. Especially, when in the case of AeroParts, the SME is located in the UK and is confronted with the situation of having to develop an effective pricing strategy: taking account of the pound sterling versus the euro and the dollar.
Regarding a pricing strategy for AeroParts, it would advisable to set prices slightly lower to allow for faster product introduction into the market, to generate growth. This strategy should be valid for both the domestic and international markets.
Since the introduction of the internet, companies have gained increasing global exposure and the internet could prove to be a useful and inexpensive distribution channel for AeroParts. Also, looking for agents and distributors in foreign countries can help them expand abroad, with a low investment level and lower risk. Forming mergers and alliances could be a way for AeroParts to, first of all, become a more solid company and to gain international presence; to acquire new strengths and knowledge e.g. on new technologies.
It is clear, considering the results of the Ansoff matrix, that definite opportunities for growth exist within AeroParts, both in the local and in international markets.
AeroParts operate CNC (Computer Numerical Control) milling machines to produce their steel components. So far, they have been targeting solely the aerospace industry but let us now consider the opportunities available to the company.
First of all, the company will initiate a strategy of market penetration. It is important that the company grows its market share domestically. Later on, they can make their current product available to foreign markets, provided they can offer competitive prices (through appropriate distribution channels).
Another way to achieve growth is through market segmentation. The company has been, until now, unwilling to move to other segments or industries. Clearly, the kind of product they produce, can be used in other industries, such as: the automotive industry, the plastics industry, the shipping/marine sector, aviations etc….basically, those steel components can be used by all those sectors closely related to engineering/high performance.
AeroParts could start targeting the automotive and plastics industries, for instance. Although, the automotive market is now a mature one, it will keep making use of high technology and engineering for differentiation, likewise, people will keep buying cars. Additionally, the company is, at present, perfectly located, thanks to its vicinity to the major British automotive clusters; with big players like TRW being close by.
Lastly, another industry I would recommend to AeroParts to enter, is the plastics sector. Steel components are widely used in plastics machinery and also, it is a growth sector. Plastics is used in a variety of products and by many industries, and it has already replaced various materials.
Naturally, AeroParts could look to develop new products and diversify, enter new niche markets like, for example, the digital technology field. However, the company does not seem ready and willing to do that, just yet. Therefore, it makes more sense for them to keep producing their current product and seek to expand to other markets with the same product.
Lastly, AeroParts should consider to participate in research programmes organized by the EU, specifically for the aerospace industry and especially set up to help SMEs operating in this sector. AeroParts should definitely take advantage of such programmes. The company would benefit, not only from the exposure these programmes provide but also from the subsidies and advice available within the EU (AECMA).
Ansoff, H. Igor, 1965. Corporate strategy: an analytical approach to business policy for growth and expansion. New York: McGraw-Hill.
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Kotabe, M. & Helsen K., 2001. Global Marketing Management. New York: Wiley.
Kotler, P., 1997. Marketing Management: analysis, planning, implementation and control. Upper Saddle River, NJ. Prentice Hall.
Rugman, A. & Verbeke A., 1990. Global Corporate Strategy and Trade Policy. London: Routledge.
PriceWaterhouseCoopers, Aerospace & Defence; www.pwcglobal.com
EU, Aerospace; http:/europa.eu.int
AECMA, European Association of Aerospace Industries; www.aecma.org
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