To document operational impact based on currently implemented strategies and show potential effects if continued based on forecasted data results by a financial model. Parties Parties Involves BAE Systems Board of Directors and the Business Consultant (Student’s Name). Methods and Processes A review of the company’s background information that has led to the strategy proposal and presentation of forecasted financial data by the use of financial models. Outputs/Deliverables BAE Systems will have a clear understanding of its current financial position and may reconsider the consultant’s recommended approach on strategy.
Time Frame The final report shall be submitted to BAE Systems Board of Directors by May 9 2019. Cost Estimate Still negotiable based on the approval and implementation of the proposed strategy. 2) Executive summary The aim for this report is to study the strategies implemented by BAE Systems during the last accounting year. BAE Systems with its 106,000 employees worldwide delivers a full range of products and services for air, land and naval forces, as well as advanced electronics, security, Information technology solutions and customer support services (BAE Systems 2010).
With the application of the company’s annual report for 2009 this study will analyse by comparing its strategies to a newly proposed one by showing financial projections using valuation models. 3) Proposition of a new strategy for BAE Systems The Aerospace and Global Defence industry can be considered an extremely cyclical. As seen on annual reports of the companies belonging to this industry year to year revenue figures can fluctuate dramatically (Brylawski 1995).
And currently this industry have also its share of intense competition, challenges on meeting government regulations and securing large defence contracts. Currently, BAE systems is the largest aerospace and global defence contractors in the world (West 2010). Operating as a group in seven home markets with a wide portfolio of products and capabilities serving defence customers across the air, land and sea domains (BAE Systems 2010:5). But based on its Annual report on the previous fiscal year, it posted a net loss of ?
45 million (see Appendix 2 : Group Income Statement), despite the annual revenue of ? 22. 4 billion and the underlying operating income of ? 982 million. The loss was mainly due to regulation penalties incurred during that fiscal year. This report is to provide a strategy that would ensure profitability on years to come given the volatility of the industry of BAE systems and the effects of inflation (which rose from 2. 9% to 3. 5% in 2009). Strategy taking into account methods to raise revenue, cost reduction and effective corporate governance would be recommended. 3.
1 General competitive position of BAE Systems On the group current strategy based on its vision in which to be the premier global defence, security and aerospace company; and mission to remain to deliver sustainable growth in shareholder value through a commitment to Total Performance (BAE Systems 2010:14). The current focus of strategy is positioning to optimise progress the business in the current environment, the Group Strategic Framework continues to develop to recognise against the strategic objectives, and to highlight the Group’s focus on delivery and performance (BAE Systems 2010:14).
This strategy has worked effectively during all the acquisitions and disposals transacted from the year 200 to 2009. For the group/department of BAE systems the Electronics, Intelligence & Support, the acquisition on the year 2000 of two former Lockheed Martin businesses, Control Systems and Aerospace Electronics Systems, have made BAE and the group the world leader in digital engine controls, flight controls and electronic warfare solutions.
For the Land & Armaments group, another key strategy of acquisition that has established a global land systems business was implemented on years 2004, 2005 and 2007, when the company acquired Alvis, United Defense and Armor Holdings respectively. For the Programmes & Support Division, another key acquisition that has provided access to government security business was done in 2008, when the company have finally acquired Detica and together with the acquisition of VT Group’s shipbuilding business has further strengthened the Group’s global maritime business (BAE Systems 2010:16).
And lastly for the international sector BAE as a group has become Australia’s largest defence contractor primarily due to the acquisition of Tenix Defence in 2008 (Smith & Frost 2008). According to the firms most current Annual report total sales revenue is at ? 22. 4 billion (see Table 1) an increase of 21% from 2008 numbers, operating income at ? 982 million (see Appendix 2: Group Income Statement), total assets listed at ? 25. 4 billion and total equity at ? 4. 7 billion (2009).
Table 1 show the percentage of Sales generated by each group under the BAE Systems in 2009 Source extracted from the Annual Report 2009. Using the Porter’s five forces analysis, we can derive a strategy outlining the major forces in Aerospace & Global Defence Industry. Bargaining Power of Suppliers BAE Systems has a wide range of suppliers for both large and small companies, thus if decided to switch; costs is not an issue, as long it can find a better supplier that can match technological capability to customer requirements.
Currently BAE systems apply SBAC 21st Century Supply Chain Programme – SC21 tools and techniques for operational performance management and the tiered approach to supplier management (BAE Systems 2010). There are some areas of production for BAE like the creation of fighter aircrafts in which its supplier’s are usually concentrated and has strong labor unions, but again due to diversity of the overall business operations of BAE the assessment of this supplier power can be considered at medium risk.
Threat of Substitutes BAE systems is aware of its competitors’ ability to provide other substitute weaponry to its customers, but not every competitor can offer in-house equipment and production quality that BAE can actually deliver. The threat of substitute can be considered medium, because there is still the existence of low priced but relatively competitive arms and weapons companies in the aerospace industry. Bargaining Power of Buyers
The power of buyers describes the effect that the firm’s customers have on the profitability of BAE overall. Even though based in the UK, BAE’s main buyers are in the US. BAE’s US subsidiary alone has accounted for 58. 5% of total group sales (West 2010). The US Government in defence is by large have a lot of economic power and because of this the buyer’s power can be considered high due to the challenge of capturing a high proportion of the value created is reduced.
BAE’s large buyers have significant leverage to negotiate lower prices because of the threat of losing a buyer that accounts for more than a half of total sales revenue, BAE is on a weak position. Threat of New Entrants The threat of new entrants for BAE can be considered low, due to the Aerospace and defence large capital requirements, customer’s brand loyalty, government regulations, economies of scale unique products and BAE’s wide range access to inputs for continuous production.
If a new firm decides to enter the market, in order to just compete with the wide range of products and services being currently available for BAE, the former needs to undertake a massive an expensive campaign for marketing just to introduce their products, and the challenge is also the effectively of this marketing campaign since BAE systems have already established a strong brand identity in arms industry.
BAE has also the advantage of an advanced production system with key access to inputs, which a new firm may be overwhelmed to know that in order to be at par with the existing firms it has to have an outstanding production system with access to key inputs as well. Rivalry among Existing Competitors Among the other forces of this critical framework, the rivalry among BAE’s competitors is quite high. Major competitors globally by BAE are EADS from France, Raytheon from the US, Lockheed Martin and Boeing also from the US, and from the UK Rolls-Royce.
Majority of these companies have posted significant high sales revenue for the fiscal year period of 2009, and they also continue to consolidate to remain competitive. Becoming the market leader has been the main goal of all players in the Aerospace and Global defence industry, and with government budget cuts (Wachman 2010), especially in the US, competition on securing large contracts have never been intense. Overall cost of production is significantly high in this field, firms may tend to overproduce and reduce prices to sell more.
3. 2 Strategy recommendation BAE needs to be aware of its Book value and its total earnings, especially on depreciating assets. The strategy recommended, is to continue to acquire financially stable companies to add key improvements to the group, this is just one way to reflect a high closing book value, and dispose or sell, non performing divisions of the group. The BAE group should create a plan to maximize shareholder’s value by buying back their market shares by allocating an appropriate portion of their capital.
And due to lack of future contracts, they may opt to cut a portion of their work force just to drive down costs and focus the need to drive efficiencies across the business and the continued development of four global initiatives Land, Security, Readiness & Sustainment and Unmanned Aircraft Systems. 3. 3 Financial forecast To be able to compare and contrast the current and the proposed strategy, financial projection will be employed, to outline key differences and possible improvements for the Board of Directors for BAE System, and base their decision on its results. 3. 3. 1 Financial forecast based on current strategy
Using the residual Income and Dividend Valuation Models, we can forecast the 5 year financial projections based on the current strategy, all of the necessary inputs are available in the Balance Sheet of BAE systems (see Appendix 3) except for the Ke (Cost of Equity) in which we will compute as follows. Ke = 17. 6p (projected dividends next year with 10% value projection) + 0. 10 330. 30 GBX ( source: current FT Market data) Ke (Cost of Equity) = is valued at . 15 or 15%. Now we can compute for BAE Systems residual income using data we already have. On Table 3 we can see each individual outputs in millions of ?.
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