RTD and Aviation:
Mid-Air Collision or Safe Trip Home?
Strategic Decision Making and SWOT:
Implementation and Usefulness
By:
Jeroen Willems
RTD and Aviation: Mid-Air Collision or Safe Trip Home?
A Strategic Market Research for RTD Quality Services BV
Rijksuniversiteit Groningen
Faculty of Management and Organisation
Author: Jeroen Willems
Studentnumber: 1157035
Supervisors Rijksuniversiteit Groningen:
Ir. J. Slagter Ir. G. Henstra
Groningen, October 2004
The author is responsible for the content of this research report; copyright of this report rests with the
Preface
This report concludes a seven month research project at RTD Quality services and my graduation at the faculty of Management and Organization in Technology Management at the State University of Groningen (Rijksuniversiteit Groningen) .
This research is a striking example of the difficulties a consultant can run into in matching the internal capabilities and external environment into good and practical strategic recommendations. It also sketches the benifits and major drawbacks of SWOT, a framework that is regarded as one of the foundations of Management and Organization sciences.
A consultant/ advisor should provide clarity and transparency when there is a need for reduction of complexity, as was the case in assessing the aerospace industry and RTD altogether. To my opinion things have worked out really well. The recommendations in this report are usable as they do not only consider the aerospace market, but could also provide RTD with a new perspective on things within the organisation and its stance towards the future.
My greatest gratitude goes to all the people I have interviewed in the last few months, outside and within RTD. In particular I would like to thank all of my colleagues at BMD for their help, advices and openness during my seven months of research.
I would also like to thank my supervisors at the university, mr. Slagter and mr. Henstra, for their advices and mindsetting considering the total research concept.
Finally, I would like to thank all of my family and friends and Gjilke in particular for their support during the last seven months.
Jeroen Willems,
Groningen/Rotterdam, November 2004
Executive Summary
In this report a thorough external and internal analysis are presented in order to to make clear what the opportunities are for RTD in aerospace in Europe and to determine if it should advance into aerospace and how this should be done competitively.
the research has been complemented by the use of several theoretical concepts of management and organization sciences. The concepts of Porter and Day have been used, complemented by the ASSIST model of Duncan and the service profit chain of Heskett.
External Analysis
The market is expected to grow incrementally and stable with four to five percentage points a year.
Aerospace entities are more explicitly looking for outsource opportunities for their maintenance and , consequently, for NDT services as well. Identified product/market combinations for RTD are outsource opportunities in commercial MRO, military MRO and in Manufacturing labour.
However, market forces are very strong, especially because of the presence of the OEMs and the inhouse capabilities of aerospace MRO parties.
Generally speaking, entering the aerospace NDT market is difficult as the market is not very attractive altogether.
Internal Analysis
The weaknesses that are mostly of interest right now are in Marketing and Sales and in HRM. These so called uniqueness drivers add value to the product a company provides.
The management of RTD has assessed these weaknesses before and is busy with tackling these problems and creating the drive, the strategy and the measures that are necessary to create and maintain competitive advantages. RTD does not want to be a cost leader. However, cost control is essentially a requirement to compete in the overall industry of NDT services; cost control is subordinate but still important.
Conclusions
Despite of the steady overall growth of the aerospace NDT market in Europe and the growing outsource opportunities, especially in MRO, it is very awkward for RTD to enter the aerospace market. The generally low attractivity of the market, the entry barriers, the competencies of RTD and its shared goal, mission and vision pose too many hurdles for RTD. Moreover because RTD is still in the midst of a transition and does not have the experience beforehand to be a competitive player on the aerospace NDT market in Europe.
Apart from the R&D buyer group, price is really the main driver for outsourcing of NDT to third parties, so, to be competitive, one must be a “price fighter”. RTD does not want to be one and isn’t capable of doing so as well. All in all, based on the data provided by these research, the opportunities in aerospace do not weigh upon the difficulties it poses for RTD, thus, RTD is advised not to enter this market.
Contents
1. INTRODUCTION --- 8
1.1ORGANISATION AND SERVICES... 8
1.1.2ROLE OF NDT ... 8
1.1.3THE PRODUCT... 8
1.2TECHNIQUES; MAKING THE INVISIBLE VISIBLE... 9
1.2.1RADIOGRAPHY... 9
1.2.2LIQUID PENETRANTS... 9
1.2.3ULTRASONICS... 9
1.2.4MAGNETICAL PARTICLES... 10
1.3HISTORY... 10
2. RESEARCH SET-UP --- 11
2.1BACKGROUND... 11
2.2MOTIVE FOR THIS RESEARCH... 12
2.3THE ASSIGNMENT... 12
2.4TYPE OF RESEARCH... 13
2.5OBJECTIVE... 13
2.6RESEARCH QUESTION... 13
2.7SCOPE AND BOUNDARIES... 13
2.8CONCEPTUAL FRAMEWORK... 14
2.9RESEARCH APPROACH... 15
2.10METHODS AND SUB-QUESTIONS... 17
3. EXTERNAL ANALYSIS--- 19
3.1MACRO-ENVIRONMENT;GLOBAL AEROSPACE... 20
3.1.1THE AIRLINE INDUSTRY... 20
3.1.2MANUFACTURERS... 21
3.2MESO-ENVIRONMENT;EUROPEAN AEROSPACE MANUFACTURING INDUSTRY... 23
3.3.1COMMERCIAL MRO... 25
3.3.2OVERALL COMMERCIAL MROOUTLOOK... 29
3.3.3MILITARY MRO ... 30
3.4MICRO ENVIRONMENT;MARKET FORCES... 32
3.4.1MARKET FORCES... 33
3.4.2EXTERNAL FACTORS... 36
3.4.3SUB-CONCLUSION; MICRO ENVIRONMENT... 37
3.5RESULTS OF THE EXTERNAL ANALYSIS... 38
4. INTERNAL ANALYSIS --- 39
4.1PHASE 1:SURVEYING POTENTIAL STRENGTHS AND WEAKNESSES... 40
4.1.1PRIMARY ACTIVITIES;OPERATIONS... 42
4.1.2PRIMARY ACTIVITIES;MARKETING AND SALES... 43
4.1.3PRIMARY ACTIVITIES;SERVICE... 44
4.1.4SUPPORT ACTIVITIES;HUMAN RESOURCE MANAGEMENT... 44
4.1.5SUPPORT ACTIVITIES;PROCUREMENT... 45
4.1.6SUPPORT ACTIVITIES;TECHNOLOGY DEVELOPMENT... 46
4.1.7FIRM INFRASTRUCTURE... 47
4.2PHASE TWO:CATEGORISING ORGANISATIONAL DIFFERENCES... 48
4.4PHASE FOUR:EVALUATING COMPETITIVE ADVANTAGE... 54
4.5CONCLUSIVE RESULTS OF THE INTERNAL ANALYSIS... 54
5. STRATEGIC POSSIBILITIES --- 55
5.1SWOT... 56
5.1.1SWOT CONFRONTATION- MATRIX... 56
5.1.2INTERPRETING SWOT... 57
5.1.3EVALUATION OF THE SWOT ... 57
5.2COMPLEMENTARY CONCEPTS... 59
5.2.1SPACE- MATRIX... 59
5.2.2GENERAL ELECTRIC’S TRAFFIC LIGHT CHART... 61
6. CONCLUSIONS AND RECOMMENDATIONS --- 62
6.1CONCLUSIONS... 62
6.2RECOMMENDATIONS... 63
6.2.1OVERALL RECOMMENDATIONS... 63
RECOMMENDATION 1 ... 63
RECOMMENDATION 2 ... 63
6.2.2HUMAN RESOURCE MANAGEMENT RECOMMENDATIONS... 64
RECOMMENDATION 3 ... 64
RECOMMENDATION 4 ... 64
RECOMMENDATION 5 ... 64
RECOMMENDATION 6 ... 64
6.2.3MARKETING AND SALES RECOMMENDATIONS... 65
RECOMMENDATION 7 ... 65
RECOMMENDATION 8 ... 65
RECOMMENDATION 9 ... 65
7. DISCUSSION AND REFLECTION --- 66
7.1DISCUSSION... 66
7.2REFLECTION... 67
8. REFERENCES --- 68
Tables, figures and pictures
Tables
Table 1: Goal, Mission and Vision of RTD………10
Table 2: Overall Opportunities and Threats………38
Table 3: Resources and Capabilities………...49
Table 4: ASSIST model of RTD……….51
Table 5: Strategic Relevant Strenghts and Weaknesses……… 52
Table 6: Sources of competitive (dis) advantages………..53
Figures Figure 1: Role of NDT and RTD……….8
Figure 2: Conceptual framework………14
Figure 3: The Research Approach………..16
Figure 4: External Analysis………19
Figure 5: Air travel and GDP……….20
Figure 6: Air traffic recovery……….21
Figure 7: Airbus and Boeing………..22
Figure 8: Turnover and Employment……….23
Figure 9: Civil/ Military turnover………...23
Figure 10: Commercial MRO in Europe………25
Figure 11: Engine Overhaul………...26
Figure 12: Outlook NDT in Commercial MRO in Europe………30
Figure 13: Military Outlook………...31
Figure 14: Five Forces model and External Factors………..32
Figure 15: Outlook Aerospace NDT………..36
Figure 16: Adapted Value Chain………40
Figure 17: Service Profit Chain………..41
Figure 18: Organization chart RTD ………47
Figure 19: Confrontation matrix………56
Figure 20: “Hits” RTD and Aviation……….57
Figure 21: SPACE Matrix RTD and Aviation………...60
Figure 22: General Electric’s Traffic Light Chart………...61
Pictures Picture 1: Engine overhaul facility……….27
Picture 2: D-checks……….27
1. Introduction
1.1 Organisation and services
RTD Quality Services is a mid-size company who employs about 1100 people around the world. With its headquarters in Rotterdam, the RTD group consists of Business Units in Belgium, Germany, Czech Republic, Canada and the USA and a network of several dozens of agents around the world.
RTD Quality Services is one of the leading companies in Non - Destructive Testing (NDT) services. Leading means it is large compared to other NDT service organizations and because of its large market share in the petrochemical industry, with revenues totalling around 90 million.
At this moment RTD mainly provides services regarding installations, storage tanks, pipe lines and (nuclear) power plants. RTD has and does perform NDT services in the aerospace as well, but this is on a relatively modest scale compared to the pipeline and project services it performs in the petrochemical industry.
1.1.2 Role of NDT
Inspection is a part of the overall maintenance of the installation of (potential) customers. This inspection is performed through visual inspection beforehand and when visual inspection does not provide the information needed to clear a part for use, NDT, and thus RTD, comes into play.
RTD is a service providing organization. It does so by performing the inspection, but also interpreting data and reporting the results of the inspections to its customer. RTD provides its customer with the information that shows the integrity and safety of its installation and in some cases can approve an installation for further use.
The position or role NDT and, subsequently, RTD has within operations and maintenance programs of its customers is strikingly represented in figure 1.
1.1.3 The Product
The product of RTD is the report it hands over to a customer. This report consists of a summary of the inspections it has performed, a summary of the data it has collected from these inspections and an interpretation of this data combined into an advice how to maintain the integrity of the installation (or whatever the object is that has been inspected).
Operations
Maintenance
Inspection s
NDT Role of RTD
Fig. 1, Role of NDT and RTD
This brings us to the definition of NDT services that will be used in this research: NDT-services are
“Performing visual inspection, non destructive inspection, data collection, data management and inspection management”.
Non destructive inspection provides the data collection and data management and inspection management implies RTD does more than only perform inspections; RTD advises and provide a client with a plan to maintain the integrity of an installation in the long run. This is what RTD targets its potential clients with and what the service of RTD consists of.
1.2 Techniques; making the invisible visible
As the term non-destructive technology implies, a NDT is a technique to show what the properties of an examined part are without wrecking or taking this object apart. By examining these properties it can be shown if an object is subject to, for instance, corrosion or cracks or other deformations in the material. The consequence of these deformations is that the properties of the object are negatively influenced and therefore make a certain object less suitable for the function it was designed for.
Applied to the services RTD delivers, it is a technique to show a client what the condition of a certain part or installation is. RTD is an expert with these techniques and applies a lot of variations for all kinds of specific problems, a brief discussion will be given of the standard methods that are used, just to give an impression about what kind of methods are used to perform the inspection services. These so called standard NDT methods are: Radiography, Liquid Penetrants, Ultrasonics and Magnetical Particles.
1.2.1 Radiography
Dependant on the material and thickness, several techniques can be applied. X-ray for instance is used very often as well as techniques using electrical particles. Radiography can be applied in a lot of areas, since every material can be radiated to a certain extend and the result can be photographed.
1.2.2 Liquid Penetrants
This technique is used to find surface defects and defects that run into the surface. Liquids are applied to objects and the liquid runs into cracks and other defects. After removing the penetrant liquid the liquids in the defects can be made visible by using fluorescence light.
1.2.3 Ultrasonics
This technique makes use of the property that materials guide sound in a certain way. By sending waves of sound through a material and pick up the waves that come back you can see deformations in material when the waves differ from that what they should be. Ultrasonics can be broadly applied.
1.2.4 Magnetical Particles
This technique makes use of the principle that a crack or other deformations at the surface of an (Ferro metallic) object cause a magnetic ”leak” in a magnetized area. This technique is only used to find small surface deformations.
1.3 History
Founded in 1937 RTD has a vast experience in NDT. Up until the nineties RTD was a profitable company, mainly driven by its monopolistic position on the petrochemical market. Owned by a big certification company (Lloyd’s), RTD was there to keep up with developments in inspections techniques rather than creating substantial profits for its shareholders.
By the end of the nineties the first signals of declining profits were apparent. RTD more and more experienced competition of other (smaller) companies and the result was that margins came under pressure.
RTD had to fight for its position, something it had never really experienced before.
These developments were strengthened by the fact that the owner of the company had trouble as well and, consequently, wanted to get rid of RTD. The result was a major restructuring of the company. This meant that the management was reorganized and unprecedented lay-offs swept throughout the company. The main goal was to prepare RTD for sale and that’s exactly what happened. Eventually in 2002 ABN-AMRO Capital took over the company.
The new management is now very busy in restructuring and refocusing the company. A new strategy is in development and the company is, right at this moment, turned into the commercially, customer driven entity it should be in order to survive in the ever increasingly competitive world of NDT.
The new owner has a very clear target regarding its ownership of RTD: doubling the value of RTD within 5 to 7 years and resell the fully reorganized, healthy company to a third party. An aspect that is considered necessary for doubling the value of this organization is the opening up of new markets.
This search for new markets are primarily through geographical expansion of operations, but markets in new industry segments are of interest to RTD as well.
Thus, RTD is trying to expand its activities, and the result in the end was the creation of the business unit Business and Market Development (BMD). BMD is responsible for searching for and opening up of new markets for RTD.
2. Research Set-up
2.1 Background
RTD Quality Services (RTD) is in the midst of a transition. The management is busy structuring and implementing a new corporate strategy. The main goal for RTD as an organisation is to strengthen the position of RTD organizationally and financially in the long term to secure the future of RTD.
The management of RTD states that the value creation of RTD as a whole for its shareholders will be through revenues of the existing business units and incremental changes in the segments it is serving.
Together with refocusing the organization on the customer it is serving, RTD is now reorganized in order to work more efficiently, resulting in higher profitability of RTD altogether. Also expansion by minor acquisitions is possible, but only if they do not put a heavy burden on the debt position of the organisation;
i.e. major acquisitions are out of the question.
Regarding its product, RTD will focus on delivering so called integral services. This means that several services are combined in a total package, taking care of the entire NDT services of a customer. RTD will focus on delivering an integrity scheme for a customer; this means that RTD can provide a total package to asses or maintain and advise about the total integrity of a certain installation.
All NDT services that are subject of outsourcing with clients fall under this concept as well. This research will assume that these outsourcing services should comply with overall capabilities and that they are feasible for the organisation to profit from.
This strategy of developing RTD as a service provider is a so called differentiation strategy. Porter (1985) defines differentiation as differentiating the product or service offering of the firm, creating something that is perceived in the industry as being unique. Differentiation, if achieved, is a viable strategy for earning above average returns in an industry because it creates a defensible position for coping with the competitive forces.
Differentiation provides insulation against competitive rivalry because of brand loyalty by customers, as the service profit chain in chapter 3 also points out. These new formulations have resulted in a goal, mission and vision of RTD, as interpreted by the researcher:
Goal, Mission and Vision of RTD
Goal
RTD strives for servicing the customer efficiently when assessing the integrity, reliability and safety of its installation
Mission
RTD acts as a commercially driven and customer oriented organisation where striving for creation of customer value is the main source of competitive advantage and profitability
Vision
By providing the customer with the integrity of its installations through integral services and by being capable of assessing and advising the customer to maintain the integrity of its installation, customer value will rise and will
2.2 Motive for this research
RTD signalised a few things regarding the aerospace industry. First of all RTD thinks the aerospace industry is shifting in regard of outsourcing of secondary activities to other parties. RTD thinks airliners are more prone to outsource activities like maintenance and inspections to be able to concentrate more on the core activity of an airliner: passenger and freight transportation.
RTD has had some experiences in aerospace in the past. Nowadays RTD still does some work for KLM Engineering & Maintenance and has a small aerospace business in Canada.
RTD has done work for the Dutch Air force as well, but these activities ceased to exist after the air force selected another party to perform these operations. RTD even applied for a special certification regarding aerospace maintenance because this certification became more important to collect these kind of jobs, but this ended because of difficulties in organising the certification and pure lack of interest.
The renewed searches for opportunities in aerospace are fuelled by the new strategic developments within RTD. Again, RTD thinks the aerospace looks interesting because of its fixed costs that could be outsourced to a party like RTD. This search for outsourcing possibilities resulted in negotiations between RTD and KLM, but these negotiations were finally broken of. This was mainly because of the small margins RTD would collect and difficulties RTD thought it would have in taking over personnel of KLM.
Still, RTD thinks opportunities are there and wants this research to give insight in what those real opportunities are in general in aerospace. If these opportunities are present, this research should also point out how and what RTD could do to profit from these opportunities.
2.3 The Assignment
The assignment is that this report should make clear if it is to be recommended that RTD should expand into the aerospace, how this should be done and what the recommendations regarding RTD are to make it all possible. This is where competencies and competitive advantages show up. Competitive advantage really comes down to the ability a firm has in creating value for its buyers (Porter, 1985) and it does so by its competences.
This report should make clear what the relevant opportunities are in the aerospace, taking into account the distinctive competencies of RTD, and what kind of strategies are possible to make use of these opportunities regarding NDT services.
It should also point out if RTD, yes or no, should enter the market and what strategies RTD should apply to make competitively, thus profitable use of these opportunities.
For the research it is also important to give a definition of what we mean by an opportunity. In this report an opportunity is defined as: “An application or problem that can be fulfilled or solved by a NDT service”.
Taking into account all three factors, the assignment can now be defined:
”Make clear what the opportunities are for RTD in aerospace and determine if it should advance into aerospace in Europe”.
2.4 Type of research
This research is descriptive and exploratory. Analysing the organisation and the aerospace environment thoroughly, the objective is to determine the opportunities in this aerospace environment, resulting in a go/no-go advice to enter the aerospace NDT market.
Also, its purpose is to provide the management with knowledge which can be used for strategy, resulting in a policy regarding, in this case, aerospace. It is policy supporting, meaning: “research of which the results increase the rationality of the policy in terms of effectiveness, efficiency and meaning for the actors” (de Leeuw, 2001).
This study is explorative because of the relative unknown territory that will be surveyed (i.e. the aerospace NDT industry).
2.5 Objective
The objective of the research is to identify what the opportunities are for NDT services in aerospace and to provide the management with a go/no go advice for entering the aerospace market taking into account the competitive (dis)advantages of RTD.
2.6 Research Question
Research is defined as deliberately and methodologically looking for new knowledge, in the form of answers to predetermined questions (Verschuren, 1986). The research question indicates the knowledge that is required to comply with the project’s objective. The research question is:
Taking into account the opportunities for NDT services in aerospace and the competitive (dis)advantages of RTD, should RTD advance into aerospace?
2.7 Scope and boundaries
This project has some restrictions, indicated by the management of RTD. These restrictions form the scope and boundaries of this study:
- Study at strategic management level;
- Study restricted to the market in Europe;
- Completion of the project within 7 months;
- The resulting strategic recommendations should comply with the overall goal, mission and vision of RTD;
2.8 Conceptual framework
A conceptual framework gives the broad view that underlies the research project (de Leeuw, 2001). The research purpose and objective, the research question, the scope and boundaries and the identified theoretical aspects form the conceptual framework described in figure 2.
In this research, first of all, there is the external environment. There is the aerospace industry with its characteristics, its actors and the potential customers of RTD who have their desires and problems that can be fulfilled through an NDT service entity like RTD. Determining these factors is based upon the five forces model of Porter (1980) and the concepts of Day (1990).
Secondly, the internal environment of RTD comes into play. The distinctive competences of RTD as a service provider determine the profitability of RTD in, in this case, the aerospace industry. Determining these competences is based upon the ASSIST model of Duncan (1998), the value chain by Porter (1985) and through assessing the service profit chain (Heskett, 1994).
So, the ability of RTD to provide the customer value, taking into account the external factors and through its internal capabilities determines the profitability of RTD in certain industry altogether. This research shall point out this “clash” between the internal factors on the one hand and external factors on the other, regarding RTD and the aerospace industry, thus determining if RTD should or should not enter this market.
Market growth
External opportunities and threats
GO NO GO
Structure HRM
Operations
Marketing&
Sales
Service
Legislation and governmental intervention
Technology change
New entrants Competitors Substitutes
Buyers
Business Opportunities
Aerospace?
Fig 2, Conceptual framework
2.9 Research approach
As the assignment, objective of the research and the research question are established, the approach to the research can now be determined.
For the external analysis Porter and Day’s analytical tools are used. Porter’s five forces model (1980) will be used to define and assess all the forces within the aerospace NDT market. The purpose in using these models is the fact that you can determine the power of all the forces in the marketplace and the resulting attractiveness of these markets.
The five forces model is a model with a high aggregation level, this research will not go into a lower level (strategic group analysis for instance (Porter, 1985)) because of the complexity and the limited amount of time (hence our scope and boundaries).
Day (1990) will be used to complement the concepts of Porter. Day uses Porter’s five forces to determine all the aspects that make a market segment more or less attractive. An attractive aspect is an opportunity; less attractive aspects of a market will be threats. All threats in the end will be considered entry barriers because RTD is not a real force in the aerospace market yet.
Inspired by the concepts of Duncan (1998), the internal analysis is executed. These concepts are based on Porter’s value chain, a tested model as well, and will examine the strengths and weaknesses of the organisation. Together with value chain analysis, the concepts of Heskett (1994) and his service profit chain are used in determining potential strengths and weaknesses specifically for a service providing organization like RTD.
Using the resource based approach (or inside-out approach) for strategy along with the so called positioning school is done because the positioning school (outside-in) is the stronger instrument for external analysis as the resource based view is for the internal analysis. Both approaches are designed to match a company’s strategy internally or externally, so both approaches will be complementary for each other, rather than the clash that has been sketched out in the conceptual framework.
This particular choice points out the methodological problems a researcher runs into in assessing a strategic assignment like this.
Should the research take into account only the external factors? Thus, identifying the opportunities and determining critical succesfactors to cope with the difficulties and enter a particular market if there are opportunities? Or should a company base a strategy purely on its competencies, and move onto a market guided by these competencies? Or should you do both, thus, moving onto a market, taking into account its competencies but also aware of both the opportunities and characteristics of a marketplace?
Both internal and internal factors should be assessed in order to determine if a certain market is suitable enough to enter. To the researcher’s opinion, a company should not only match to the external environment (outside-in approach or positioning school), but should find external opportunities to match its internal capabilities at the same time (resource based view).
So, in this research both the external as well as the internal factors will be analysed in order to asses if it is opportune to enter the aerospace NDT market, as is sketched by the research approach (figure 3).
A SWOT analysis (Strengths- Weaknesses-Opportunities-Threats) has been chosen as the descriptive framework that will be used by the end of this research to asses if the internal and external factors “match” enough to give a positive advice for entering this particular market in Europe.
The main advantage of using SWOT is the fact that it does not require a great deal of financial or computational resources and it can be done relatively quickly and with some degree of efficacy (Fleisher, 2003).
When dealing with complex situations, in a limited amount of time and trying to address all the strategic issues involved, SWOT is a proved means to do so. This is in line with the fact that this report has the purpose to be descriptive and exploratory, as is outlined before.
Mission, vision, goal of RTD
Recommendations Strategic
Possibilities
External Analysis Opportunities and Threats Internal Analysis
Strenghts and Weaknesses
Decisions and Implementation
Inside this research
Outside this research
Figure 3, the research approach
2.10 Methods and Sub-questions
The important aspects considering this research are identified; the research question and the research concept have been determined. The research question will be diveded into sub-questions. This separation is done because these parts should be independently assessed to be able to answer the research question in the end, thus completing the assignment. This paragraph will also make clear what methods to gather information are used and the analysis that has taken place with that data.
1. What are the opportunities and threats for NDT services in aerospace?
This is the external analysis of the conceptual framework. Data was gathered by extensive desk research (articles, annual reports and market reports, see references in chapter 8) and interviews with key figures in NDT services in aerospace (see appendix A). These key people were for instance managers at potential customers and/or rivals (for instance KLM Engineering & Maintenance, Lufthansa Technik or ESA), or people who have worked in aerospace and were involved in aerospace NDT services.
If there is no explicit reference in the report considering an assertion in the external analysis, this assertion is based on the annual and market report references outlined in chapter 8.
The concepts of Porter and Day were used to get a grip on all the information about aerospace and NDT services. It is very important first to know what the aerospace market in general is all about, what segments use NDT Services and the role of NDT services in certain segments. For competitive strategy formulation, an industry must be segmented because products, buyers or both within an industry are dissimilar in ways that affect their attractiveness or the way in which firms gain competitive advantage in supplying them (Porter, 1985). The end result should be a five forces model of aerospace NDT. This to asses the extend of how strong the forces in this market regarding NDT services are (Porter) and to make out what aspects of this market are attractive (opportunities) and what aspects are not (threats).
2. What are the distinctive competitive (dis)advantages of RTD?
This is the internal analysis of the conceptual framework. The data was gathered through extensive interviews (appendix A) with key figures in the organization, internal reports and personal experiences during the seven months of research. Also the ongoing discussions within and with the department of BMD were a valuable source of information.
As pointed out, for the internal analysis the concepts of the resource based view are used in this research.
Since this view means you are searching for resources and capabilities as means to identify strengths and weaknesses, the model created by Duncan, Ginter and Swayne (1998) was used. Duncan’s model tends to think about strengths and weaknesses in terms of strategic relevance, which is very useful for this research.
The outcome will consist of the strategic relevant resources and capabilities, resulting in the distinctive competitive (dis)advantages of RTD.
This model consists of four stages:
- Surveying potential strengths and weaknesses (using the value chain analysis of Porter)
- Categorizing organisational differences compared to competitors. Potential strengths and weaknesses are categorized as strategic resources and capabilities.
- The ASSIST (ASsessment of Internal factors for STrategic advantage) model is used to determine the competitive relevancy of the resources and capabilities systematically.
- Investigating the source of competitive advantage - Evaluating the competitive advantages
3. What are the business opportunities in aerospace for RTD?
The information gained in sub-question 1 and 2 will be brought together in several (theoretical) concepts.
The model of the Duncan et al. provides means to determine relevant strengths and weaknesses of the organization. Determining opportunities and threats will be the result of the micro-environmental analysis, using the five forces model of Porter and concepts by Day.
The indentified business opportunities will be put together as the aerospace NDT services opportunities in general and will be used as input for a SWOT confrontation matrix. The concepts of the SWOT confrontation-matrix of Witteveen (1998), the SPACE-matrix of Rowe et al. (1994) and General Electric’s Traffic Light chart are the tools that will be used and applied to asses if there are any real possibilities in Aerospace for RTD.
4. Should RTD enter the aerospace NDT market?
The results of the concepts presented in chapter 5 will be assessd in order to provide the most important answer. The internal, external analysis and the outlined strategic possibilities will be brought together in chapter 6 and will result in a overall conclusion and answer of subquestion 4. Chapter 6 will also include recommendations not only regarding RTD and Aerospace but also recommendations considering RTD as a whole. RTD is in the midst of a transformation and the internal analysis will be used to advise the management in doing so.
The main concepts that are used considering these internal recommendations are based upon the value chain of Porter, the ASSIST model of Duncan and the Service Profit Chain of Heskett.
3. External Analysis
The external analysis will be pointed out in this chapter, which will result in identifying opportunities and threats regarding NDT services in aerospace. It is important to point out the difference between the general environment and the specific environment (or task environment) in which a firm operates. In other words, to know what the rules of the game are in a specific industry, you first have to know why these rules are present. The general environment does not affect primary activities directly, but eventually always will (Daft, 2001).
In this research the external analysis will focus on determining how the general (aerospace) environment affects the task environment of the NDT services and how attractive this task environment is for an independent NDT entity like RTD. The general environment analysis is executed considering economical-, political-, societal- and technological aspects.
The task-environment will be assessed through the five forces model of Porter.
Before assessing the task environment the general environment will be segmented into two different so-called meso-environments. Porter pointed out that for competitive strategy formulation, an industry must be segmented.
This is because products, buyers or both within an industry are dissimilar in ways that affect their attractiveness or the way in which firms gain competitive advantage in supplying them (Porter, 1985), as was also pointed out in the research set-up. Segments frequently differ widely in their structural attractiveness and in the requirements needed to be competitive, and this is the reason why it is executed for this research as well.
If we consider this definition and asses the interviews and information sources, the relevant segments regarding aerospace NDT are in MRO (maintenance, repair and overhaul) and in the aerospace manufacturing industries. The task-environment analysis is applied to these two segments.
Thus, the following paragraphs will first consist of a general description of the aerospace (macro- environment), than a general description of both segments (meso-environment), followed by an assessment of the market forces of both the MRO NDT and Manufacturing NDT industries through the five forces model of Porter (micro-environment). The task of the meso-environment in the analysis is that it identifies the external factors who directly affect the attractiveness of the NDT-services market; i.e. through technological development, market growth and legislative and governmental barriers (Day, 1990).
Opportunities for an entity (like RTD) to enter this market, are threats for entities that already operate in this market. The difference in interpreting the five forces model is this difference in position of the company that
Societal context Company
Task environment
Suppliers Competitors
Buyers
Potential Entrants Substitutes
Political context Economic context
Technological context General Environment
Fig 4, External Analysis
Fig 5, Air travel and GDP
is subject to the research. The identified opportunities and threats in this research are the ones relating to the position where RTD is in now; i.e. a new entrant.
All of the identified, relevant markets forces and the attractive and unattractive factors will eventually result in the relevant market opportunities and threats. Together with the identified opportunities and threats within the macro- and meso environment, the result of this chapter will be a long list of opportunities and threats that will be used as input for the SWOT analysis.
3.1 Macro-environment; Global Aerospace
Market growth, regarding NDT services, can be assessed by looking at the global aerospace in general, as they drive market volume of MRO and manufacturing. To be able to asses all forces within a NDT market, it must be clear what the trends in aerospace in general are and will do in the future. This is what will be outlined in this paragraph.
3.1.1 The Airline Industry
In the past decades the airline industry displayed a healthy growth rate, driven by overall rise in GDP (Gross Domestic Product) and greater demand for travel resulting from the ongoing globalisation. However, because air travel became more of a commodity, yields declined.
This was partly downsized by increases in efficiency by airliners (Franke, 2004) and restructured business models, but strong competitive forces within the industry made it very hard for a carrier to gain back their capital cost (Fleisher, 2003), i.e. the industry turned out to be not very profitable.
A big exception has been the so called “golden” nineties.
This is where a global upturn in the economy boosted air travel and the market subsequently rose beyond every expectation. This resulted in airliners acquiring more aircraft to keep up with the growth in required capacity. Furthermore, major airliners took advantage of the progress in computer development and were able to optimize their planning and logistics even more.
Because of this and the extensive deregulation and liberalization of the aerospace market, major airliners build up global networks around large hubs, thus creating the network carriers (NC) and resulting in massive consolidation and restructuring programs.
However, the new millennium could not have started more worse. During the year 2000 economic growth vaporised (fig. 5) and a crisis faced the airline industry. Moreover, revenues plummeted even more because of the terrorist attacks of 2001, the SARS epidemic, the war in Iraq and the fact that this downturn followed directly after excessive economic growth (resulting in excessive capacity in the market).
At the same time major airlines were facing the rise of the so-called low-cost carriers (LCCs). These carriers (Ryan Air, Easy Jet) offered the more price-sensitive customers, where there are many of during a crisis, an attractive alternative. The LCCs were able to show considerable growth in revenues even during the crisis.
These operators were able to show this growth largely because of their business model. They adopted the point-to-point system, which focuses on delivering the lowest cost travel between two points and they did not attempt to provide any integrated flight services. Major operators, who adopted the capital intensive hub and spoke system long ago, were not able to compete with the aggressive price cutting strategies of the LCCs.
Ironically, the probability of a successful business innovation by the major airliners has been increased by the pressure caused by the LCCs. In that respect the crisis could turn out to be beneficial for the industry as a whole. Airliners are now thoroughly assessing their internal cost drivers and organization, stimulated by the successful LCC business models. This assessment of internal cost factors has resulted in looking for outsourcing possibilities as well.
Major airliners have become significantly more focused on costs and value and are busy restructuring their business models altogether.
Together with the economic recovery and the restructuring of the industry, things look a bit more positive for the survivors in the airline industry (fig.
6). Despite high oil prices and the strong competitive forces in the marketplace the estimates are that revenues will recover (Franke, 2004).
Estimates are also that air travel growth will be about 4, 5 % over the next decade, resulting in an expansion of the active air transport fleet from 16000 in 2003 to 23000 in 2013.
3.1.2 Manufacturers
Commercial aircraft manufacturing constitute one of the few markets that are genuinely global. Though production is still overwhelmingly national (Boeing) or regional (Airbus), the only relevant market is still international. No national or regional market is large enough to sustain a profitable aircraft industry, given the immense development costs that go into each model. And even the world market for large commercial aircraft is currently large enough to support only two manufacturers, Airbus and Boeing (Sandholtz and Love, 2001).
Fig 6, Air traffic recovery
Aircraft Deliveries for Airbus and Boeing
0 100 200 300 400 500 600 700
1995 1996 1997 1998 1999 2000 2001 2002 2003
Airbus Boeing
Fig 7, Airbus and Boeing
Almost immediately after September 11, the manufacturing industry foresighted volume decline and reacted through shedding of labour and cut costs. The price of aircraft plummeted as the two major competitors struggled to capture the few remaining buyers. Despite the quick cuts in costs and capacity, both manufactures still have an excess capacity. Boeing has taken the hardest hit. Its airframe output dropped by almost fifty percent since its peak in 1999.
Airbus took a softer blow since it was growing less rapidly, resulting in a decline in airframe output of less than 10 percent in 2002 (fig 7). With reduced manufacturing processes and already low margins, both manufacturers have only two real options: to seek higher margins or to further reduce costs.
In the longer term, the continuous pressure to reduce costs and maintain margins will force manufacturers to look for cheaper manufacturing possibilities. This explains the growing interest in moving parts of operations to Eastern Europe and China eventually putting into question the future of commercial aerospace manufacturing in Western Europe and the United States altogether.
In the military and space sector, cost consciousness is also gaining ground. Less government spending on defence, combined with new government purchasing policies have altered the strong relationships between the public sector and the private industry. The relationships are more profit minded now and there is increasing pressure for consolidation. For example EADS, the European Aeronautic Defence and Space Company emerged from the link up of the French, Spanish and German aerospace industries (Together with BAE Systems they form Airbus).
More European nations recognize the need to consolidate spending as a way to realize sound economies of scale. Parallel programs to produce fighter aircraft such as the Eurofighter Typhoon, France’s Rafale and the Swedish Grippen fighter will soon be history. The need for consolidation will only increase, as the increase in military spending after September 11th will prove to be temporary. Companies in the manufacturing industries, particularly in Europe, are rethinking their positions; the upcoming re-structuring of the commercial, military and space manufacturing industry is obvious.
Fig 9, Civil/ Military turnover
3.2 Meso-environment; European Aerospace Manufacturing Industry
The industry is suffering from the economic downturn, terrorist attacks and the war in Iraq, as was already pointed out. Demand dropped and the manufacturing industry reacted by cutting their labour forces and
rethinking their business concepts and products.
The European aerospace industries were not that severely hit like their American counterparts, but still, revenue losses were significant. Turnover of the manufacturing industry in Europe is valued (at the beginning of 2003) at about 59 billion (including maintenance), employing more than 400.000 employees (fig. 8).
The industry can be divided in three different product segments: Aircraft, Missile and Space manufacturing.
Within the aircraft segment 25% are military aircraft who are acquired, of course, by governments. The space and missiles turnover is mainly driven by government spending (so they are considered military).Market demand in the commercial sector (i.e. aircraft and engines) is driven mainly by overall demand in air travel (thus by GDP growth).
Currently the commercial aircraft and engine manufacturing market volume in Europe is about 37 billion, the “government spending” or military market is valued at about 21,5 billion and the maintenance market (which includes commercial and military MRO) is around 19 million. The MRO market place will be discussed in the next paragraph.
Driven by overall market growth within the commercial airline industry, expected market growth for the commercial aircraft and engine manufacturing industry is expected to be at an average of 4, 5 % a year for the next decade. This will result in a turnover of about 57 billion through 2013.
The trend in the military market however will be a flat line, at best. More likely turnover in the military market will go down, leaving most of the manufacturing market volume in commercial aircraft and engine manufacturing (fig. 9).
Total revenues in the manufacturing industries in Europe will be at about 75 billion in 2013, thus resulting Fig 8, Turnover and Employment
3.2.1 NDT Services in the manufacturing industries
NDT in manufacturing is used to inspect parts that have been produced or are in production. The NDT is used to search for the smallest deformations to asses a certain part’s integrity and to look for problems in manufacturing. During the development of a new aircraft or engine, new technologies or NDT applications are developed to cope with specific problems (new materials, new airframe and component designs).
Thus, the kind of NDT used in manufacturing is on the one hand standard inspections to asses the integrity of a part, but on the other hand new techniques or applications must be developed. This means that two opportunities exist for a NDT specialist; i.e. development of new applications (R&D) and outsourcing of standard inspections (Labour).
Labour
An opportunity lies within the existing production assembly facilities. If there is a capacity problem in production, the manufacturer out sources man-hours to other parties. This is what happening in Germany at the Stade facility of Airbus where RTD Germany sells 30.000 man-hours a year in inspection. If you are a party who can deliver the qualified personnel (and you have enough capacity) this is a reasonable substantial market. RTD is the only party who delivers this amount of manual workers to Airbus in Germany.
It should be emphasized that the NDT services that are performed within this labour sub-segment are, from RTD’s point of view, not really a “specific” aerospace service. What is provided to the manufacturer are labour hours, downgrading this segment to a “normal” industrial customer. These customers are the outsource customers that RTD already targets and serves (like with Airbus in Germany)
Market value for the European aerospace manufacturing regarding these standard inspections is estimated at 167000 man hours, which equal a potential turnover of about 9 million in the whole European aerospace manufacturing industries. This volume will expand, as the industry does, to a market volume of about 11, 5 million in 2013.
R&D and equipment building
This segment is characterised by development of NDT services between the manufacturer and another (NDT) entity that is willing to invest in development. Only the ESA is an entity that does its NDT development by themselves, however, the prime manufacturers (like EADS) of the space products, develops NDT to serve their production processes.
If a manufacturer foresees an inspection problem with a certain part it will develop with or without an external partner a solution of that problem. In Germany for instance, there is a technology centre where researchers of both Airbus and other companies develop NDT solutions and equipment.
It is a market primarily for equipment builders who seek opportunities to sell their techniques and equipment in the aftermarket (maintenance and production) that results from these developments and requires extensive R&D capabilities and capital resources.
