2006 Annual Report Strategy (21st February 2007)
Delivering on our strategy
Our Group strategy is ‘to deliver sustainable growth in shareholder value by being the premier global defence and aerospace company’. We deliver this through our group strategic objectives, business portfolio actions and integrated business plans. The five group strategic objectives are owned by the Executive Committee and apply across the Group. The business portfolio actions are championed by the relevant Executive Committee members and are delivered by the businesses either separately or jointly.
| Group strategy | |||||||||||||
| To deliver sustainable growth in shareholder value by being the premier global defence and aerospace company |
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| Group strategic objectives | |||||||||||||
| Continue to embed a high-performance culture across the Company Further enhance our programme execution capabilities Increase sharing of expertise, technology and best practice between our global businesses Develop a partnership approach to meet our customer requirements Develop our capabilities in emerging growth markets |
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| Business portfolio actions | |||||||||||||
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| Integrated business plans |
Financial metrics of sales, order intake and order book are used by the Board in measuring business growth. Return on sales, underlying EBITA and operating business cash flow are used to measure performance of the business.
These metrics directly underpin the Group strategic objectives and business portfolio actions above.
Group strategy
The significant progress made in 2006 has been reflected by the evolution of our Group strategy. We have refocused our strategy to be ‘to deliver sustainable growth in shareholder value by being the premier global defence and aerospace company’ where previously the emphasis was just transatlantic. This recognises the renewed emphasis on growing our six home markets (UK, US, Australia, Saudi Arabia, South Africa and Sweden) and on generating exports from these established home markets. We will also now consider opportunities in new high-growth markets.
We have reviewed and updated the Group strategic objectives. We have also made a number of changes to the business portfolio actions to reflect recent progress.
Customers’ requirements increasingly demand the ability to offer ‘through-life’ and ‘capability’ solutions. We now identify portfolio actions that, consistent with our customers’ requirements, will support the delivery of our strategy. Increasingly businesses must find ways to work together across traditional business boundaries to deliver these actions. As a result our businesses may now support more than one portfolio action. The updated actions also reflect the Group’s revised organisational structure.
Business portfolio actions
The drive to build sustainable, profitable, through-life businesses in the air, land and sea sectors of the UK market continues, building on the good progress last year.
We continue to seek growth in the US through continuing to target above-market organic growth from the Group’s established business activities, and by looking for value-enhancing acquisitions.
Following our success in recent years in establishing a global land systems business we continue to pursue growth opportunities in this market sector.
The Group will continue to target growth in support, solutions and services activity in our global markets, reflecting the increasing focus of customers to procure capability on a through-life basis.
The sale of the Group’s 20% interest in Airbus successfully delivered the action of maximising the value from our Airbus stake and that action has now been removed.
Good progress made in 2006 to address non-core activities within the Group through business disposals has enabled this action to be removed.
Two new actions have been introduced.
Building on a relationship that spans several decades we will pursue opportunities to grow our business in the Kingdom of Saudi Arabia. Our focus will be the transition of the relationship from one of an export market to the implementation of a home market strategy.
Export sales are an important source of growth for the Group and we look to generate export business from our home markets.
Our global markets
Global defence procurement expenditure1 continued to rise with a 7% real increase among the 15 largest military nations. With customers in over 100 countries and strong positions in the UK, US, Australia, Saudi Arabia, South Africa and Sweden, BAE Systems is well placed for further growth in both new and established defence markets.
1 last available data 2005
The defence industry in the UK and US has consolidated over recent years resulting in fewer, larger, defence companies. The nature of the defence industry today is such that many of these industry constituents are suppliers, customers and partners as well as competitors.
BAE Systems is one of the world’s leading defence companies and is one of only four companies with global defence sales in excess of $20bn. It is Europe’s largest defence company and ranks number seven within the US defence industry.
BAE Systems is reliant upon the levels of funding committed by the domestic governments of the countries in which the Group’s operations are based and those to which the Group exports.
United States
The Group’s US business now delivers over US$9bn (£5bn) of annual sales and employs approximately 40,000 people in 36 states.
BAE Systems is both a prime contractor to the US government and a supplier of major sub-systems to the other large prime contractors. The Group is a market leader in the provision of electronic warfare systems, many of which have application on airborne programmes. BAE Systems has a substantial business supporting network systems and IT for US government agencies and provides technical support services to the US Navy, US Army, NASA and the FAA. In land systems, the Group is one of the two largest suppliers of armoured vehicles in the US and the wider accessible global market.
Global defence spend
Forecast defence expenditure by major region
(US$ billions at constant 2007 prices)
The US represents around 45%
of the total forecast global defence
spend (including equipment,
personnel and operating costs)
to 2010.
Global equipment market
2007 forecast defence procurement
(US$ billions at constant 2007 prices)
The US accounts for over 45%
of forecast total global procurement
in 2007.
BAE Systems’ market position
Top 10 defence companies in 2006
(Defence revenue US$ billion)
| 1. Lockheed Martin | 2. Boeing |
| 3. Northrop Grumman | 4. BAE Systems |
| 5. Raytheon | 6. General Dynamics |
| 7. EADS | 8. L-3 |
| 9. Thales | 10. Halliburton |
The US defence market accounts for over 45% of global defence spending and remains one of BAE Systems’ key markets, offering programme scale and high levels of investment in research and development. US defence spending has increased substantially over recent years, including the Procurement and Research and Development budgets from which the defence industry derives much of its business. This high level of funding is expected to sustain further growth in the near term, but with a levelling out anticipated towards the end of the decade.
In addition to the underlying defence spend, the US market has seen large supplemental budget allocations to fund overseas operations. This supplemental spend includes the cost of resetting equipment to combat readiness following heavy operational use. BAE Systems has benefited from this funding, which is expected to continue in the near term but then reduce as current overseas deployments of armed forces decrease. Although growth in US defence spending is expected to slow, the Group is well placed to support the US Department of Defense’s likely continued emphasis on force sustainment and readiness.
United Kingdom
BAE Systems is the largest defence prime contractor in the UK with strong positions in the design, development, manufacture and support of air, land and sea systems. The Group also provides command and communications infrastructure. Business is generated in other defence markets around the globe through the export of UK-derived weapon system programmes, subject to UK government regulation.
The publication in December 2005 by the UK government of its Defence Industrial Strategy (DIS) was significant in shaping the future UK defence market. A key element of the industrial strategy is the formation of long-term partnering agreements between industry and the UK Ministry of Defence (MoD). A good start has been made in implementing such agreements and other elements of DIS.
BAE Systems now has a well-established, growing and successful through-life capability business in the air sector working closely with the UK MoD and the Royal Air Force. Progress has also been made in the land systems sector with the development of a similar armoured vehicle through-life partnership.
Despite a substantial forward programme of new equipment requirements, the UK defence procurement budget has been pacing inflation with only limited real growth. BAE Systems has successfully grown its participation in UK defence support activity which has, in turn, generated savings for the customer that are being passed through to enhance equipment procurement.
For some years the UK government has encouraged competition in the defence market from off-shore suppliers and, despite the Group’s strong presence in the UK, the market remains highly competitive.
The Kingdom of Saudi Arabia
Saudi Arabia has been an important market for BAE Systems for many decades and there are significant new opportunities to both continue, and strengthen, this relationship into the future.
A key growth opportunity is the Group’s role in supporting the partnership between the governments of the Kingdom of Saudi Arabia and the UK in updating the capability of the Kingdom’s armed forces. We are committed to assisting the Kingdom in developing its defence industrial base and the training and up-skilling of its workforce.
BAE Systems is pursuing a strategy to transition our Saudi business from a UK centric export sales operation to a significant in-Kingdom presence. In line with this strategy, we continue to make substantial investments in the Kingdom, establishing a major industrial footprint with a growing in-Kingdom technical capability enabling the Group to satisfy many of our Saudi customer’s needs from on-shore companies.
Industrialisation is a key feature in this market and the commitment to Typhoon will allow us to build on the established Tornado support activity. We also see opportunities for new business in other areas.
Rest of World
In addition to its strong positions in the UK, US and Kingdom of Saudi Arabia markets, BAE Systems has a significant presence in the other important markets of Australia, South Africa and Sweden.
BAE Systems’ Australian business continues to secure contracts and strengthen its position as a through-life capability partner to the Australian Defence Force. South Africa is another market that continues to offer opportunity, while our businesses in Sweden continue to perform well both in home markets and in securing export opportunities.
We continue to evaluate ways to develop in-country presence in markets which are forecast to have significant and growing defence expenditure and which want to develop a significant local defence industry. We have focused on a small group of countries, including India, which meet these criteria.
