CAPABILITIES IN SPACE: ENTERING THE NEWSPACE INDUSTRY

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CAPABILITIES IN SPACE:

ENTERING THE NEWSPACE

INDUSTRY

by

Louise Went

University Supervisor: P.M.M. de Faria TNO Supervisor: Ir. B. Dunnebier

Master Thesis 2012 University of Groningen Faculty of Economics and Business

MSc Business Administration: Strategy & Innovation louisewent@gmail.com

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ABSTRACT

Helfat and Lieberman (2002) propose that when entering an industry a required resource profile should be actively managed in order to prosper and survive in an industry. This thesis sets out to identify the resources and dynamic capabilities which make up the required resource profile for entering the NewSpace industry.

By analyzing the space industry and using a case study of a research institute intending to enter the commercial NewSpace industry, this research has identified the following dynamic capabilities and resources necessary in order for an entrant to become a competitive player in the NewSpace industry:

- Capital requirements

- Relevant knowledge in workforce - Entrepreneurial mindset

- Reputational capital

- Marketing; marketing skills and having market information - Advocate in higher management

- Bold strategic intent

- Business model substantiating exploitation

- Clearly defined new product development process for risk management

Furthermore, the following characteristics were recognized as facilitators in acquiring the necessary capabilities and resources:

- Access to partnerships and alliances - Legal mechanism to protect an innovation - Building networks

- Influencing regulations

This thesis shows that these dynamic capabilities and resources are necessary for successful entry and survival in the NewSpace industry.

Key words: Required resource profile, entry, dynamic capabilities, strategic intent,

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PREFACE

Space, my final frontier. Having concluded my Bachelor´s degree with a “space” thesis, finishing my Master’s with further research on the space industry seemed like the only logical next step. Space and the space industry have been a significant area of interest of mine for years now.

While I already had a basic knowledge on certain space companies, I could not have gained so much knowledge on the industry without the internship at TNO Space. I would like to thank Gerard Blaauw, now retired as director of TNO Space, for taking an interest and creating a position for me. The new director, Bas Dunnebier, ended up supervising me. I would like to sincerely thank him for taking the time to have endless discussions and giving me direction in my own thoughts. Gratitude must go out to Jeffrey Vermeer for pointing out the sometimes immense gap between theory and practice by giving me insights on the internal functioning of TNO Space. For answering questions about the physics and technological aspects of thing, Erik Laan must be thanked and I must give praise to the division Space 2.0 for welcoming me and letting me participate in meetings and conferences.

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ACRONYMS & GLOSSARY

BLM: Business Line Manager

CNES: French national Space program DoD: U.S. Department of Defense

EADS: European Aeronautic Defense and Space Company N.V. EC: European Commission

EL&I: Dutch ministry of Economic Affairs, Agriculture and Innovation ESA: European Space Agency

ESP: European Space Policy

ESTEC: Department of ESA based in Noordwijk, The Netherlands EU: European Union

Eumetsat: European Organization for the Exploitation of Meteorological Satellites, intergovernmental organization.

EVA: Extra-vehicular Activity (e.g. space walks)

FAA: Federal Aviation Association, an American organization FP7: Framework programs through which the EU finances research IPR: Intellectual Property Rights

ISS: International Space Station

ITT: Invitation to Tender,falls under FP7/ESA

ITAR: U.S. regulation International Trade in Arms Regulations JAXA: Japanese national space agency

KIP: Knowledge Implementation Plan KLM: KLM Royal Dutch airlines LEO: Low Earth Orbit

NASA: National Aeronautics and Space Administration. U.S.A. national space agency

NewSpace industry: niche of space industry concerned with space tourism, mining and other commercial space activities (not satellites)

NPD: New product development

NSO: Netherlands Space Organization; Dutch space agency ROI: Return on investment

Roscosmos: Russian national space agency SNC: Sierra Nevada Corporation

Space 2.0: Division of TNO Space involved in NewSpace industry SXC: Space Experience Curacao, LEO space tourism company

TNO: “Nederlandse Organisatie voor toegepast-natuurwetenschappelijk onderzoek” (Netherlands Organization for Applied Scientific Research)

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1. INTRODUCTION

“The sky is no longer the limit1_”

Legend tells us that men have been reaching for outer space as far back as the Ming dynasty. Wán Hû, a Chinese official, wanted to go to the Moon. He let his 47 assistants tie up 47 large rockets to his wicker chair. His assistants lit the rockets, and after a loud bang, the smoke cleared and Wán Hû was gone (www.nasa.gov).

Spaceflight became successful during the twentieth century in times of war. The first artifact to cross the line of Kármán2 was a German V2 long-range ballistic missile developed to target London in 1944. After WWII, American and Russian troops began to collect V2 rocket parts (and scientists) and shipping them back as soon as possible (www.nasa.gov). With the aftermath of WWII, tensions rose between the U.S.A. and the Soviet Union, and the Cold War begun.

Both nations worked on developing the rockets, but apparently the Soviets also put extra effort in their space program. When the Soviet Union launched the first satellite Sputnik 1 in 1957, the U.S.A. was alarmed and started project Mercury, a human spaceflight program. On April 12, 1961 the Soviet Union won this leg of the race as well by just a month as Yuri Gagarin became the first man in space. With the failed invasion of the Bay of Pigs, also in April 19613, tensions rose even more. In an attempt to divert attention from this incident, and fear of losing the technological competition as well, President Kennedy, once opposed to the space program4, announced in May 1961 the goal of landing a man on the Moon (www.nasa.gov).

The Soviets had already put a manned made object on the Moon in 1959, but the U.S. finally ‘won’ the space race with its manned Apollo 11 mission in 1969. Between 1969 and 1972, six manned missions made it to the lunar surface, giving 12 men the opportunity of a lunar walk. The Soviets gave up manned missions after failed launches and eventually because of economic reasons. The U.S. cancelled Apollo missions 18 through 20, bound for the Moon, due to NASA’s shrinking budget.

In the 1960´s Europe founded two space agencies, which later combined to form ESA. Europe was mainly dependant on the U.S.A. for launches. As NASA had a monopoly position, its fare rates rose to such a height that ESA decided to develop its own launcher. The Ariane launcher gave Europe the freedom of its own launches and took down costs.

1_{Richard Nixon: Los Angeles, August 13, 1969, Speech honoring Apollo 11 Astronauts (First moon walkers)} 2

The line of Kármán is the 100 km above sea level boundary between the Earth’s atmosphere and outer space, accepted as the height at which one becomes an astronaut.

3_{Mission of the U.S.A. to invade Cuba and overthrow the Fidel Castro administration.} 4

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This brief history of the development of the space program is still distinctive in many ways for the space industry today. The space industry is drenched with political influence and prone to economic crisis and thus budget cuts. It is dominated and heavily influenced by institutional organizations. The sector is different from most economic sectors as the role of governments has severe influences on the way the sector is build up and restructured (Pisano, 2006).

Commercialization

The idea of commercial space flight already started in the 1960´s. Pan Am, an American airline, gave people the opportunity to sign up to a waiting list for a ticket to the Moon. This “First moon flights” club was only a concept on the drawing board, but nevertheless almost 100,000 people signed up. During this time, a flight into space costs millions of dollars. NASA’s mantra during the Apollo program was “waist anything but time”. They saw time as the most crucial factor and thus paid no attention to developing an efficient, reusable, sustainable and cost effective way of putting people into space. Flights remained too expensive and no actual tourist flights ever happened.

In 1985 a giant leap was taken in civilian spaceflight. A few private spaceflight ventures were started and Christa McAuliffe, a high school teacher, would become the first civilian in space aboard the Challenger space shuttle. But in January 1986 the Challenger exploded within minutes of its launch, leaving an impact on U.S. society and the space program (NY Times, 01-29-1986; Went, 2010). Commercial ventures were cancelled and NASA changed its policy to only national security and science missions where human presence was essential. All commercial satellite launches were now in the hands of the Ariane rocket (www. msl1.mit.edu).

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within two weeks would win $10 million. The goal of the competition was to drive innovation and competition in the space industry. Although a few commercial companies already existed, this could be seen as the start of the Newspace industry. It was after this announcement that most incumbents joined the industry.

Since then, Tier One (Mojave Aerospace Adventures) has won the Ansari X-prize. Furthermore, 7 people have become an space tourist to the ISS. Companies, such as Virgin Galactic and SXC (Space Experience Curacao), are developing commercial spaceflight for tourism, while SpaceX successfully finished the first commercial mission to resupply the ISS in 2012. Bigelow Aerospace has had two test space stations in orbit around Earth since 2006, to eventually develop a commercial space station.

Commercial companies for launches of satellites, cargo or human spaceflight have been popping up around the globe. Commercial ventures are investigating how getting involved in the space industry can help them gain sustainable competitive advantages and tap into new markets.

1.1 The Dutch

The Netherlands joined the space sector in the 1960’s. The Netherlands spends €100 million a year in the space industry. This is divided over ESA, national programs and Eumetsat. Another €20 million is spend on the Dutch commercial space industry (www.spaceoffice.nl). The Netherlands has numerous institutes that contribute at top level in astrophysics and atmospheric research. The world is dependent on the Dutch spectrometers on satellites. In addition, the Netherlands plays a crucial role in miniature technologies, satellites, measurement instruments, telescopes and launches (www.spaceoffice.nl).

Within the European market, France, Germany and the U.K. are the biggest competitors of The Netherlands. Economic crises and budget cuts influence subsidies for the Dutch space sector and the amount of contracts ESA spends in the Netherlands. In light of these developments, a transition in the Dutch space sector to commercialization is called for to become less dependent and influenced by public funding.

The commercial space industry consist of multiple segments; launch industry (transport), satellite manufacturing, satellite services, ground equipment manufacturing, commercial human spaceflight, and the Earth Observation program. This is a multi-billion euro industry. The Netherlands is involved in most segments. As the Dutch have not chosen particular segments to focus on, the threat of spreading oneself thin over too many domains arises.

1.2 TNO Space

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infancy, TNO will in some cases set up a company under the TNO umbrella in order to bring the developed knowledge to the market (www.tno.nl).

TNO has been involved in the space industry for over 40 years. Under the name TNO Space, it works together with the Dutch public sector, Dutch companies, universities but also international institutions such as ESA. It is a leader in developing small measurement instruments for satellites but involved in more areas than just this.

TNO Space is a recognized partner in R&D for the upstream space industry but also has an impact on national and European space policy. To bring focus to certain areas, TNO Space is split up into 8 cornerstones:

1. Space Policy 2. Earth Observation 3. SatCom

4. Integrated Applications

5. Enabling Technologies & Knowledge for Space Systems (ETK4SS) 6. ESA Science Missions

7. Earth Based Astronomy 8. Space 2.0

A total of € 4.8 million can be invested in 2011 in the 8 cornerstones. This should lead to €20-22 million in revenue, about 5% of TNO’s total expected revenue.

TNO Space started its Space 2.0 cornerstone in 2011. This cornerstone will focus on the NewSpace industry instead of the institutional industry, in which the other 7 cornerstones reside. With its division Space 2.0, TNO Space would like to develop and stimulate the NewSpace industry in The Netherlands. It has several projects that could be used for entry in the NewSpace industry and the commercialization of TNO Space. Although TNO Space is an established organization in the institutional space industry, the case of its Space 2.0 division will be interesting when investigating entry strategy and dynamic capabilities necessary for becoming a competitor in the NewSpace industry.

1.3 Problem definition

Commercialization of the space industry has been a trend across the globe (Peeters, 2002). Besides Roscosmos (Russia), the only agency which has flown commercial astronauts into space thus far, president Obama called for commercialization of NASA with the presentation of his budget proposal in February of 2010. Obama cancelled the follow-up program of the space shuttle, project Constellation, and suggested that NASA should become involved in commercial spaceflight (The Times, 2-2-2010).

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and Italy pose a severe threat to the continuation of the ESTEC department in The Netherlands. Instead of cutting back funding, Holland’s biggest competitors within Europe (France & Germany) are increasing their budget for ESA.

As TNO is a not-for-profit organization, the threat of not being economically viable arises. With the worldwide trend of commercialization, TNO Space is gaining competitors in the space industry. TNO Space is also heavily influenced by funding from the Dutch government. As economic crises affect the amount of money spend, not only does TNO receive less direct funding from the government, but also experiences cutbacks in the amount ESA spends on contracts with TNO Space through the geo-return system (see section 4.1.1). For survival in the long run, commercialization of TNO Space might be necessary.

With the start of space tourism, the era of NewSpace has started. NewSpace, the new commercial space industry, should be taken into consideration as it could become a significant revenue producing industry in the foreseeable future (FAA, 2008). Commercial space travel, whether cargo or humans, not only provides the industry with private customers, but can also create technology transfers for the launch and transport sector.

When entering an industry, pre-entry resources and capabilities can affect the likelihood of success of a firm (Helfat & Lieberman, 2002). Helfat and Lieberman propose that while prior experience is of high value, studies have also shown that “given their past success, leading firms may be blind to critical gaps in their resource profile for the new product or service.” When research institutes incumbent in an institutional industry enter a commercial industry, like TNO Space with the case of the NewSpace industry, the question arises what critical gap these institutes run into and how this gap can be overcome.

This thesis will focus on entering the NewSpace industry using TNO Space as a case study. As TNO Space is already an incumbent of the institutional space industry, entering the NewSpace industry will identify the critical gap a research institute must overcome to survive in the Newspace industry. This results in the main research question:

What resources and dynamic capabilities are necessary for entry of NewSpace industry?

To answer the main research question the following sub questions will be addressed:

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The first part of this research consists of a literature review of concepts used in the field of strategy and innovation. This will consist of secondary data from academic resources such as articles and books. This literature review will provide a theoretical framework with which the rest of this thesis will be approached.

In chapter 3 the methodology of this thesis will be described. This will set out the approach of how data is obtained and analyzed for the second and third part of this thesis.

The second part of this thesis will consist of an analysis of the factors influencing the space industry in chapter 4. With the use of a PESTEL-analysis and Porter’s Five Forces Models the peculiarities of the space industry are set out. This will give the necessary background to fully understand in what environment the case study is acting. Capabilities and resources necessary for survival in the NewSpace industry, identified by the analyses and seen in incumbents, will be presented.

In the third part of this thesis, a case study of TNO Space and its entry into the NewSpace industry will be presented. Here its strategic intent (chapter 5), current state (chapter 6) and strategic stretch (chapter 7) are presented in order to identify the critical gap this research institute must overcome in order to survive in this commercial space industry. Recommendations will be done and conclusions will be drawn in order to answer the main research question.

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2. THEORETICAL REFLECTION

In order to give an answer to the main research question of this thesis, this chapter will scrutinize theoretical concepts that will be used in the rest of this paper.

2.1 Required resource profile for entry and the strategic stretch

Industries, like life sciences, go through a cycle of life. This life cycle is made up of 4 stages; introduction, growth, maturity and decline. Industry life cycle is based on the amount of firms that participate in an industry. In the technology adaption life cycle model the diffusion of an innovation in a market is shown. Moore (1991) introduces the ‘chasm’ to the technology adoption life cycle model (see figure 1). The chasm is the gap between 15 and 18% market penetration. This chasm is the tipping point in reaching mass market. Once the chasm is crossed, the mainstream market accepts the product.

Figure 1. The Chasm (Moore, 1991)

In order to reach this mainstream market, one must obtain a strategy for satisfying the pragmatist a 100% upon the requirements of a product. The adoption rate can be influenced by adopting a marketing mix for each stage, changing the nature of the innovation itself or gaining legitimacy (Jobber, 2004).

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2010). Each category of entry has its own (dis)advantages. In the case of a pioneer, the market will be undeveloped and complementary assets could be missing. Slack et al. (2007) propose that while the qualifiers of a product have to do with quality standards in the case of early market, the likely order-winning factors are the characteristics of the product. With no dominant design set in this stage of the industry life cycle model, a customer can choose from a wide range of characteristics. Because of this, firms should be flexible and provide high quality and customized products to gain market share and keep up with the changing market circumstances.

When entering an industry “the greater the similarity between pre-entry firm resources and the required resources in an industry […] the greater the likelihood that the firm will survive and prosper (Helfat & Lieberman, 2002). Helfat and Lieberman identify three types of entrants: a diversifying company, a parent-company venture or a new start-up company. While the first two enjoy financial backing and resources of the original company, the latter is thought to have little resources. All types of entrants can run into gaps in resources that need to be filled. These gaps are either filled by leveraging resources from a parent company, acquisition or joint ventures.

The resource profile necessary for survival in the industry can consist of multiple components such as core competencies, dynamic capabilities, resources such as finances and an appropriability regime in order to capture value. Core competencies are the collective learning in an organization which enables a firm to coordinate diverse skills and integrate technologies to gain a competitive advantage (Prahalad & Hamel, 1990). These competencies should provide potential access to a wide variety of markets, make a significant contribution to the perceived consumer benefits and should be difficult to for competitors to imitate (Prahalad & Hamel, 1990). Besides core competencies that are specific to a technology or product, a company can also develop competencies that enable it to reconfigure its structure and routine in reaction to possible opportunities. These are called dynamic capabilities. In contrast to core competencies, a dynamic capability is not defined by the rarity or inimitability of the competency. Competitors can achieve the same capabilities and therefore a dynamic capability should be treated as a competitive, but not sustainable, advantage (Eisenhardt & Martin, 2000).

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The nature of dynamic capabilities differs depending on the dynamics of the market. If a market is moderately dynamic (change occurs but predictable) capabilities rely more on existing knowledge. In high-velocity markets, dynamic capabilities tend to be simpler and rely on being able to rapidly create new situation-specific knowledge (Eisenhardt & Martin, 1990). Dynamic capabilities can be divided into two domains, targeting the business environment and targeting the firm’s value chain (Tashman & Marano, 2010). Within these two domains several categories can be identified. Integrating, transformational and acquiring capabilities are part of both domains. Only shedding capabilities are exclusive for targeting the firm’s value chain. The domain business environment can be seen as the analysis with which the firm can identify the drivers of its competitiveness. The capabilities in the value chain domain could give the firm the ability to address weaknesses in its environment. The main difference between the two domains that the value chain is focused on resource altering process and the business environment is a domain of analysis (Tashman & Marano, 2010). Dynamic capabilities can be linked with the resource based view (RBV) in strategic management. Capabilities can affect the boundaries of an organization (Kasch & Dowling, 2008). The concept resource based view entails that a company actively manages its resource base to gain a competitive advantage. This could mean that a firm can actively manage its dynamic capabilities in order to gain competitiveness.

Strategy is fundamental to an organization’s success. Strategic decision shape the organization’s competitive persona; its collective understanding of how it is going to succeed within its competitive environment (Besanko et al., 2004). The strategy of a firm influences the way it develops innovations. There are three different orientations when it comes to innovation strategy; market, technology and entrepreneurial orientation. Market orientation tries to create superior customer value. Here the ‘market’ pulls the innovation. Technology orientation means that technology gets developed and it is then introduced into the market while there was no demand for this new technology. This is called a technology push. For the final orientation, entrepreneurial, it means that an entrepreneur comes first with an innovation, thereby taking high risk. When deciding for an appropriate strategy, one should take into consideration what kind of innovation has to be dealt with; tech-based or market-based. When a tech-based innovation is at hand, all three strategies have a positive impact. When a market-based innovation arises, the entrepreneurial orientation is the only one to have a positive impact. Entrepreneurial orientation is the only orientation to have a positive impact on both kinds of innovation.5

Success of an innovation is influenced by the competitive advantages a company holds. Resources and capabilities alone are not enough to create a competitive advantage. The resource based view (RBV) of the firm is the strategy of gaining sustainable competitive advantages by building and protecting scarce resources that are imperfectly mobile (Besanko et al., 2004). While the RBV in strategy builds competitive advantages around a company’s

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core competencies, strategic intent pushes a company to go beyond its current resource profile.

Strategic intent is a company’s long-term goal that ‘is ambitious, builds upon and stretches the firm’s existing core competencies, and draws from all levels of the organization” (Schilling, 2010). With strategic intent, the intent lies out of proportion of existing resources and capabilities. This entails that resources will have to be leveraged to be able to develop new businesses and markets. Filling the strategic stretch, the gap between the ambition and current resources, a company will have to expand and adapt (McGee et al., 2005). As strategic intent forces a forward-looking orientation on a corporation, the threat of focusing too much on current markets declines. With this strategy a company will be prepared to meet future market requirements and could even shape the market’s requirements in the future (Schilling, 2005). 2.2 Commercialization

While managing resources and filling a strategic stretch can be applicable to any situation of entering an industry, entering an industry in the process of commercialization or commercializing the company by entering an industry can lead to extra challenges. Merrow (1978) defines commercialization as the “process of private sector adoption of a technology for general use after most of the technological uncertainties have been resolved.” Merrow goes on to identify three categories of constraints on commercialization; technical, economical, and institutional.

Technical constraints can be seen as the performance characteristics of a technology or product. Slack et al. (2007) propose that in the invention stage of products one should take in mind if changing the design would make production of it more feasible. Economic constraints on commercialization have to do with the ability of the product to create an acceptable rate of return on investment. In this stage an analysis is made of feasibility and projected sales. The third constraint arises from the organizational context in which the commercialization takes place (Merrow, 1978). Institutional constraints on commercialization can come from areas such as organizational inertia, core rigidities and political context, an entrepreneur could forgo these constraints.

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Entrepreneurial opportunities will present themselves to people who will either have prior knowledge to identify or the cognitive ability to value an opportunity. The identification of such an opportunity is found in the exploration phase of an organization. Here risk is taken and the new product is developed. Shane and Venkataraman (2000) argue that apart from the realization that an opportunity has value, this value must also be exploited in order for the innovation to become a success. The exploitation phase consists of efficiency, refinement and selection. It is the stage where economies of scale are developed.

A start-up company will first be in the exploration phase before moving on to the exploitation phase. This is necessary as when a company stays in the exploration phase, it might lose focus and never finish or sell a product. However, if it stays in the exploitation phase too long, it might lose its ability to develop a new product and get structural inertia (Hannan & Freeman, 1984). A company, depending on its business model, should switch between these ‘inventor’ and ‘entrepreneurial’ phases. In an existing company both phases can be present at the same time. While these are contradicting activities, if this paradox is not balanced a company may not achieve desirable performance objectives (Lavie et al., 2010). Lavie et al. suggest that reconfiguration of resources and capabilities might be necessary in order to achieve to successfully implement the change set out to balance these two phases.

Apart from entrepreneurs, commercialization of technology is done by private, non-profit, public-private mixes and public organizations (Dudley & Rood, 1989). Dudley and Rood propose that the type of organization influences the way policies, procedures, management skills and public and private values should be adjusted to fit the organizational form. Public or a public-private mix organization can mean that decision-making lies with the government. The information and incentives of the economic market are absent for public organizations, which are concomitantly subject to much greater influence by external political and governmental institutions; public organizations are exposed to more external scrutiny and accountability and their goals are more numerous intangible and conflicting. Public managers have less autonomy due to constraints such as civil service rules (Perry & Hailey 1988, in Dudley & Larkin 1989). Poole and Fixler (1987) state that privatization can lead to cost savings due to the introduction of competition.

Studies have shown that commercialization plays a vital role in the success of research intensive companies (Kasch & Dowling, 2008). The introduction of a new product to a market is of increasing value to high-technologies organizations. Competition will lead to improvements in efficiency within a company in order to successfully compete. Barney (1999) argues that not only efficiency but also the resources and capabilities of an organization will influence the boundaries of the company. Studies on commercialization state that the level of competition is an important factor when deciding on a strategy to exploit an innovation (Kasch & Dowling, 2008).

2.3 Conceptual framework

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the strategic stretch of a research institute intending to commercialize by entering a commercial industry is presented. Combining these findings will answer the main research question by presenting the resources and capabilities necessary to prosper and survive when entering the NewSpace industry.

While performance management is key to holding to a successful position in the NewSpace industry, this thesis will focus on identifying the top half of the conceptual framework presented in Figure 2. By identifying the necessary capabilities and resources required to reach one’s strategic intent of entering an industry, this thesis sets out to add to existing literature by defining what these capabilities and resources entail.

Figure 2. Conceptual Framework adapted from Liedtka (2000)

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3. METHODOLOGY

This chapter set outs to define the methodology used in the rest of this thesis. With the theoretical review as a base to approach the industry analysis and the case study, the methodology will describe how the data was obtained used in the rest of this thesis in order to draw well-founded conclusions in the last chapter of this thesis.

3.1 Research design

This thesis is an exploratory research study to identify the resources and capabilities necessary to enter the NewSpace industry. Because of this, a qualitative method will be used in order to answer the main research question. The main research question can be seen as an open-ended question, leaving room for an unpredicted explanatory answer. By not using hypotheses there is flexibility in identifying factors for successful entry of the NewSpace industry.

The approach for this thesis is a case study method in order to answer the main research question. This was chosen as no extensive research was done on this subject in order to use a propositional or cluster method approach (Yin & Heald, 1975). As the context, the space and NewSpace industry, was also not extensively analyzed in centralized literature, this thesis will first centralize research on the industry with the use of management models and analyses in order to provide the necessary background for the case study. As this thesis is split into two parts, research on the industry and a case study, this chapter will discuss the method of each separately.

3.2 Industry context

Given the main research question, an analysis of the space industry was needed in order to identify the resources and capabilities of players in the industry. Furthermore, the analysis of the context of the case study provides insights on factors influencing incumbents in the industry.

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unanticipated by the interviewer. Furthermore, this method gave the interviewees the opportunity to also address what was meaningful and significant in their opinion. Qualitative data of the interview was either matched in another interview or researched in hard documentation to ensure validity.

3.3 Case study

As the main research question focuses on entry of the NewSpace industry, a subject which was entering the NewSpace industry at the time of the research was chosen as a case study. TNO, a recognized research institute in The Netherlands, was chosen as their sub-division TNO Space was setting up a cornerstone to enter the NewSpace industry with its projects. By following the division Space 2.0 while it is entering the NewSpace industry, challenges in the domain of unavailable capabilities and resources could be identified and contribute in answering the main research question.

The approach of the case study was to first identify the strategic intent and current state of TNO Space. By comparing the resources and capabilities of industry incumbents with the strategic intent and current assets at TNO Space, the strategic stretch was defined. Using this case study not only validates the resources and capabilities defined with the industry context analysis, but also leaves room to identify additional resources and capabilities when experiencing entry of the NewSpace industry hands-on with the case of the Space 2.0 division.

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4. SPACE INDUSTRY

This chapter will analyze the space industry from a macro level as well as the micro environment. The macro level encompasses the general environment, from which a PESTEL-analysis will be conducted. Subsequently, in section 4.2 the micro environment will be scrutinized, by applying Porter’s five forces model in addition to the industry life cycle. These analyses will give the necessary background to define the resources and dynamic capabilities that are necessary in order to operate in the industry on a competitive level in section 4.3. 4.1 Macro environment

In this section the macro environment of the space industry will be discussed. The macro environment consists of factors which can hardly be influenced by a company.

The European space industry is intertwined with “global strategic interests and offers societal and economic benefits. The dominant drivers enabling the space sector to thrive therefore stem from political choices; public interest, the desire for technological independence and the associated public procurement” (HTSM, 2012). Public space programs stimulate private companies to act in the space domain and eventually enter the commercial market as well. With competition growing for public programs, innovations are made over the whole industry. Nonetheless, public funding still remains the current dominant driver of the space industry. As a result the space industry has unique characteristics because it is not self-sustainable at the moment. Companies have almost no other option than to compete on the institutional market in order to become a player in the commercial market (HTSM, 2012).

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Figure 3 shows how the finance mechanism in the space industry shifts from publicly funded to market driven income. European companies took a liking to staying in the first loop which is publicly financed. In this loop, companies were assured of long-term income through the geo-return system (discussed in section 4.1.1). Spin-offs did occur but mainly in other divisions of a company. With economic pressures forcing governments to cut back funding in the 1990’s, the first loop was becoming less reliant and companies were moving towards the secondary loop (Peeters, 2002). During their time in the first loop companies had developed capacity according to expected turnover. With a shift towards privately funded endeavors, the overcapacity was used for bidding for satellite or launch contracts. This resulted in a growing market share of Europe in the satellite industry.

Europe’s space industry is geographically segmented. National markets are predominantly the home markets of national space industries (ITRE, 2008). Opportunities to extend markets to other countries are limited by financing, regulatory issues and export controls on dual technologies (discussed in section 4.1.2). For the Dutch space industry, ESA and the EU are the main channels to take part in space activities.

ESA does serve as a customer across geographical boundaries but one has to keep in mind that ESA’s programs are developed with input from its members states, national space agencies, research institutes and the complex interaction amongst national interests. As ESA is an international association of national space agencies in Europe, it is unlike NASA: a national space agency. In comparison to NASA, ESA has a smaller budget forcing ESA to focus on innovative and highly effective missions. This difference in budget gives U.S. companies a competitive advantage as the U.S. government can act as a powerful initial customer.

Europe’s space sector is characterized by a dominant position of just a few companies (ITRE, 2008). While there were many start-up companies in the 1980’s, by the late 1990’s only two main conglomerates were left, EADS and Alcatel Space (Peeters, 2002). This is not uncommon for the space industry, in the period of 1994 to 2003 only four companies, Arianespace, Lockheed Martin, Sea Launch and Krunichev, were eligible for 93% of the total world market in launch services (ITRE, 2008). The small number of dominant players seems to be a natural trend in the industry due to high costs in R&D and production. Although the configuration is common in aerospace and defense industries around the world, it goes against several European regulations on cartel, monopoly or abuse of dominant market positions. As a oligopolistic supplier is usually accompanied by a monopsonistic buyer, in this case the institutional market, if left unregulated this configuration will lead to market failure (Kramer, 2001). The development of a stronger commercial space market will not only drive innovation but keep the space industry from market failure.

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4.1.1 Political

The space industry is heavily influenced by political factors. Nations have rivaled in the past to become the superpower in space. The space card has been played several times in the political arena to avert attention from other problems. President Kennedy with his famous speech “we choose to go to the Moon”6

diverted attention from the failed Bay of Pigs invasion to something positive about his administration. Bush Jr. attempted to do the same with project Constellation7. But when administrations change, so does the commitment to space programs. Obama cancelled project Constellation in light of budget cuts. In The Netherlands, commitment to the space program has changed with the replacement of ministers of Economic Affairs over the years8. Even though governments usually perceive space programs to be a driver of innovation and economic welfare, it is also an easy domain to cut back funding on when necessary. Because of this governmental influence, players in the European industry must try to influence the opinion of the government and ESA.

ESA disperses contracts amongst its participating nations with the use of the geo-return system. The geo-return system entails that ESA guarantees a return of 90% of contributions by its member states. The geo-return system encourages small nations with limited budgets to participate in ESA as return of investment is guaranteed (IFRI, 2011). Because the geo-return system guarantees return, when there are multiple bidders from different nations, the final decision is not just based on merit, but the percentage of return of investment of a nation is taken into account. This can lead to decisions that are not necessarily the most efficient as parties can also be chosen on geo-return instead of capabilities. When investment cuts in ESA budgets are made by a national government, ESA will in return have to appoint less contracts to that nation.

The Netherlands has experienced a return of, on average, 115% for the past years (Dutch Budget Memorandum, 2011). The Netherlands earns back significantly more than it invests in ESA, especially when indirect industry revenue is added. With a budget around 80 million euro The Netherlands earns about 220 million Euros from the space industry (NRC, 03-16-2011).

Although the political arena has served the space industry well in the past, it is becoming more constraining to private companies nowadays. While NASA operates with a strong top-down management structure, within ESA consensus is a vital part in decision making and therefore holds a bottom-up structure. In the U.S.A., a residing president can decide if NASA for example will return to the Moon or have a manned mission to Mars. In Europe, no one director, president or government decides which objectives ESA will strive for. This means that European organizations and national governments can steer ESA and the European

6_{Rice University speech, 1962, after failed invasion of Cuba}

7_{Project Constellation was to be the follow-up program of the space shuttle program and return to the Moon.} Bush Jr. tried to divert attention of the war in Iraq and Afghanistan with a “positive” project.

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Commission (EC) in objectives and programs (FP7) 9 that should be developed. Because of this, players in the industry must try to influence government and ESA by lobbying and writing position papers. This could have an impact on the kind of bids that come out of ESA through the Invitation to Tender (ITT) and the European Commission FP7 program. A company could steer ESA and the EC in a direction where technology or other capabilities are necessary that the company incorporates.

Although the public industry (ESA) is still a vital source of income for most companies, the introduction of the commercial industry creates new opportunities. Companies could become less dependable on governmental funding and create a competitive environment. This new industry does call for action from national governments and the European Union.

4.1.2 Legal

Space law is still underdeveloped in Europe (ITRE, 2008). Thorough legislation for commercial enterprises (private launchers or space travel) is missing. Liability and insurance in the case of an accident is uncertain. In some states of the U.S.A., a commercial enterprise is already protected from liability and claims in the event of injury or death. Europe must catch up with legislation if it wants to participate in this industry and not give European players a competitive disadvantage compared to private companies elsewhere in the world.

In the Outer Space Treaty of 1967, decisions have been made regarding testing, placement and use of nuclear and other weapons of mass destruction in outer space (UN, 2002). Furthermore, it is stated that if a launch or object from a nation causes damage that the nation is responsible. The nation itself has to deal with the (private) parties concerning licenses for launching, and repayment in case of accidents.

The Moon (and other celestial bodies) is considered a common heritage of all mankind. In 1979 the Moon Treaty was developed. This treaty states that no one, nation or company can claim a piece (area) of the Moon. Furthermore it puts restrictions on the uses of resources of the Moon and states that materials obtained from the Moon should be made available to other nations as well. While space-faring countries have agreed to leave historical areas, such as the Apollo landing sites, alone, no country has ratified this treaty (UN, 2002).

Trading goods within the European Union is not a large problem. However, space related technology and items are usually seen as dual technology. This mean that the technology or object can be used in civil industry but can also be used for military purpose. When it comes to export and working across national boundaries there are predominantly two legislations that have significant impact.

The European Commission has developed Regulation 428/2009. In Annex IV of Regulation 428/2009, technologies/materials are listed which cannot be freely traded amongst EU

9

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countries due to dual use of these items. Under these items, space launch vehicles, components for certain rocket propulsion and production equipment and facilities are listed. In Annex IV only an exemption is made for under contract of ESA components/vehicles, national space agencies and/or if the contractual relationship is signed by at least two European governments. This means that while it supports the institutional space market, this regulation severally constrains the commercial market within Europe.

Furthermore, U.S.A.-made components fall under the International Traffic in Arms Regulation (ITAR). This American regulation puts restraints on transferring components outside the U.S. but also retransferring from country to country once it has left the U.S.. Here no exemption is made for projects under contract of ESA. Furthermore, ITAR is so restrictive that nuts, bolts and screws for commercial satellites are even held under this regulation (AIA, 2012). While it is argued that ITAR also restrains the American industry for developing a large international customer base, it brings larger disadvantages to non-U.S. companies. Non-U.S. companies have to go through an enormous amount of paperwork before they can move a component to another country. As it is so that one company usually does not build a rocket or satellite on its own, the component will travel through several countries before it is launched into space.

These regulations make it attractive for European companies to work under ESA contracts. Working under contract of ESA means, at least for European-build components, far less paperwork to move around countries. These regulations thus stimulate companies to remain in the institutional market as entering the commercial market brings barriers in international export and trade.

4.1.3 Economical

The space economy has been increasing over the past few years. With a estimated growth rate of 7.7% in 2010, it experienced an additional income of $20 billion, adding up to $276.52 billion (Space foundation, 2011). Although government spending increased slightly, the majority of this increase comes from the commercial sector. Infrastructure and support industries, including personal navigation systems, grew 13% in 2010 and products and service (for example Direct-to-Home broadcasting; satellite TV) expanded by 9 % (Space foundation, 2011). The only market to decrease was the commercial space transportation (space tourism) sector. This is due to the fact that no launch vehicle is fully finished yet to transport tourists. These companies are however still receiving deposits from interested customers. Even though governmental spending on space increased slightly, economist are concerned that some major players (nations) in the space industry made no change in spending or even decreased governmental spending (Space foundation, 2011).

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services is the most effective means for ensuring market-driven innovation and economic growth” (SPI &ESPI, 2009).

For The Netherlands, the economic climate is a huge threat for the Dutch space industry. Due to less funding, activities which are usually run in the ESA division ESTEC (at Noordwijk, The Netherlands) are now threatened to be moved to Spain or Germany (HTSM, 2012).While most European countries are not changing their national budget for ESA, budget cuts in the Dutch government could seriously harm the livelihood of the Dutch space sector (NRC, 03-16-2011). The Dutch could lose their prominent position in research on space-related science and fewer tenders through the Invitation to Tender (ITT) will be open for The Netherlands resulting from the geo-return system ESA applies (HTSM, 2012). As this will lead to less validation of technologies under the ESA framework, reputational capital for entering the commercial market will diminish. Furthermore, opportunities for technology transfer to the Dutch market will considerably be reduced.

When the commercial market is developed, involving parties will not be influenced as much by political budgets but by economic pressure of being competitive. There will be a shift in stakeholders, such as government and society, to shareholders and other commercial parties. This will have implications on the identification of moral or philosophical guidelines for the operation and management of the corporation. Furthermore, the shift in power calls for an integration of the resource based view with market based view of the firm.

4.1.3 Social

“The public is relatively uninterested in space activities in several of the space faring countries” (Ehrenfreund & Peter, 2009). Space is an inspirational goal. Although the space industry is an indicator of advancement in technology and science, society generally views space as science-fiction and a remote fantasy. Although the space community believes that the investments made in space have shown enormous amount of economic, technological and scientific returns, the public has an incomplete awareness of these returns. This is because the public does not realize how the space industry contributes to their daily life (Ehrenfreund & Peter, 2009).

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Astronauts are perceived as “cool”, but visitor numbers to Kennedy Space Center are insignificant when compared to Disneyland. When it comes to the space industry, how do you promote funding for the space industry to the masses?

Over the past few years more companies are getting involved with space tourism. While Space Adventures has arranged seven tourists to go to the ISS, Virgin Galactic and Space Experience Curacao (SXC) are now focusing on suborbital tourism. These trips are far less expensive than the multimillion dollar fares to the ISS. Research by Futron Corporation (2002) has shown that of people with a net worth of over $7 million, 10 to 14% would very likely want to travel suborbital.

Figure 4. Passenger demand forecast with different market maturation periods (Futron, 2006) The increasing demand is partially explained by the proposition of the questionnaire that fair rates would decline over time. While this new niche market within the space domain does not have significant societal scientific value, it could increase the involvement and awareness of the general public in space activities. Furthermore, it could drive innovation in low-cost launch systems.

4.1.4 Technological

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Figure 5. Space “junk” around Earth (NASA.gov) has given the opportunity to the development of other technologies as well. For example, GPS-navigation systems for domestic use wouldn´t have existed if it wasn´t for satellites. The commercial market can be heavily influenced by the technical capabilities of incumbents. As the market has not established a dominant design for cargo or human transport, a diverse range of vehicles is available. This diversity also brings diversity in pricing, training requirements, constraints (i.e. in weight) and time till market.

Technology in the commercial field has no room for flaws. An accident, especially in a human cargo flight, will have severe implications for the market, let alone the involved firm. In the case of the NASA Challenger and Columbia space shuttle accidents, flights were postponed for several years and huge investments were made to investigate and solve problems (Went, 2010). The question arises if a private company, that does not rely on any funding, can survive such a period. Technology in this industry will not only have to be innovative in sense of cost-efficient and new abilities, but will also have to thrive through excellence.

The standard of quality of technology is extremely high. As parts cannot be easily replaced once a launcher or satellite is in LEO or further, there are no room for errors. In the next section environmental issues will be discussed which partially also have consequences on the standards of technology and material used in the space industry.

4.1.5 Environmental Issues

The space industry is not perceived as an environmental friendly industry. Launchers use an insane amount of fuel to get to orbit, let alone missions to the Moon or mars. With natural resources such as oil facing depletion in an estimated 50-60 years, the space industry faces serious challenges in the next decades to come up a substitution for current propulsion systems. Commercial developments in access to space are already becoming more efficient than the Space shuttle program. By launching from in the air instead of from the ground, several safety and costs issues can be overcome to reach Low Earth Orbit (LEO).

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effect which would cause space activity such as flights or satellites to become unfeasible for multiple generations. Since 1957 more than 4000 launches have taken place (wwww.theatlantic.com). These launches cause leftovers such as rocket parts, satellites, abandoned scientific experiments or lost materials during Extravehicular Activities (EVA). This is not a small number of debris. For example, in 1963, the U.S. put 480 million copper needles in orbit, as antennas, which now float around in lethal batches (Shapiro et al, 1964). An exploded satellite or rocket can easily cause 500 lethal parts. Kessler, NASA scientist, already said back in 1998 that in certain popular orbits, critical mass is already close. Each year the ISS runs the risk of a critical penetration with a 20% chance.

Another environmental issue is space weather. Space weather can be seen as solar winds (explosions on the sun) that can influence magnetic fields, radiation levels and matter. This can have consequences for GPS systems, energy, communications with a satellite and radiation affecting humans. Space weather is fairly predictable. With a routine of about 11 years, it is now already known that space weather will be more mischievous from 2012 to 2015 (Lloyd’s, 2010). This will also be the years that the long-awaited private space tourism companies will start making trips to outer space. The question arises if space weather will affect operations. Besides the known cycle in space weather, peaks in radiation occur several times a year. The buildup of these peaks in radiation intensity occurs within a few hours. With monitoring of the buildup of nominal flares on the Sun with X-ray precursors, warning time could be 30 minutes to about an hour (www.wisc.edu).

Figure 6.A solar flare (wind) hits the Earths magnetic field (blue lines)

The radiation levels are usually low enough for a person to be protected by a space suit. However at times of high solar activity, more radiation and high level energy particles ejected from the Sun could be lethal to humans in a matter of minutes of exposure (www.wisc.edu). This is something to take under consideration for the commercial human spaceflight sector and mining of celestial bodies.

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polymers (plastic) will become brittle in a short period of time due to out-gassing of material in the vacuum (NASA, 2005). Furthermore, the vacuum and radiation in space also have influence on the processors used in equipment. Processors (and other equipment) must be radiation hardened. This can be done by manipulating Silicon but this than slows down the conduciveness of the processor making computers in space not as advanced as on Earth10.

4.2 Micro Environment

In this section the micro environment of the NewSpace industry will be analyzed. The micro environment consist of factors which directly influence the way entrants of the NewSpace industry operate and can attain success. First on oversight of the life cycle stage that the NewSpace industry is in will be given. In section 3.2.1 the direct environment of entrants will be scrutinized with the use of Porter’s five forces model. Here entry barriers will be presented and put in perspective with the case study in this thesis by applying these forces to TNO Space.

4.2.1 Industry Life Cycle of NewSpace

The initial customer base that an early market will have is primarily made up of innovators and early adopters. Innovators are the enthusiasts and the early adopters can be seen as visionaries. Visionaries see the opportunity in the new technology. Players in the early market run into several problems: no expertise, selling the vision while the product still has to overcome development hurdles, or that the product fails to integrate into the system and does not become a dominate design.

NewSpace clearly is in its early market phase. Virgin Galactic and Space Experience Curacao are already selling tickets while the spacecraft is not finished yet. No dominant design for the craft for space tourist already exists. In other areas of the NewSpace industry, like commercial space station or mining of other celestial bodies, this is seen as well. While there is a clear vision of Bigelow Aerospace for a commercial space station or moon mining developments by RSC Energia or Harrison Schmitt (Apollo astronaut), funding, development or actual profit still has a long way to go.

Furthermore, companies like Space Experience Curacao are forced to take on partnerships for the building and marketing of their space tourism business. It is seen here that strategic alliances are taken on. Space Experience Curacao has KLM as a marketing partner. With this partnership, SXC can use the reputation capital of KLM to sell their flights. Virgin Galactic also makes use of the reputational capital of Virgin and Richard Branson. When a company introduces a technological innovation, its reputation will critically influence the market expectation about the likelihood of success of the product.

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4.2.2 Porter’s Five Forces Model

With the use of Porter’s Five Forces Model market attractiveness and internal competitiveness of the commercial space industry is analyzed. With analyzing the market attractiveness of the commercial space industry, an entrant of the NewSpace industry can decide what strategy it wants to apply in order to make full use of its core competencies, dynamic capabilities and business model in order to make a profit.

Threat of new entrants

According to Porter (2008) new entrants in an industry “bring new capacity and a desire to gain market share that puts pressure on prices, costs, and the rate of investment necessary to compete.” These new entrants can especially shake up an industry if these entrants are diversifying from other markets and using their existing capabilities and cash flows as leverage.

In the institutional space industry, the threat of entrants to the market is low. Investments in R&D are extremely high making the barrier to entry high. Furthermore, manufacturing a product for the space industry whether a satellite or rocket, is so expensive that one company could not bear the risk of carrying the project on their own.

Figure 7.Number of nations and government consortia operating in space (DoD & ODNI, 2011)

When looking at figure 7, it shows that more nations and government consortia have been entering the market over the last 50 years. Private companies can see these entrants as an opportunity because more “buyers” are entering the market.

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Company Year founded Product/sector Founder Origin Founder Scaled

Composites

1982 launch B. Rutan Aerospace

engineer Bigelow

Aerospace

1998 Space station R. Bigelow Hotels Space Adventures 1998 Tourist E. Anderson (P. Diamandis) Entrepreneur & aerospace engineer

XCOR 1999 Launch multiple Rotary Rocket

Virgin Galactic 1999/2004 Tourist Richard Branson Virgin: Music/ Airline, etc. Blue Origin 2000 Launch/tourist Jeff Bezos Amazon.com Armadillo

Aerospace

2000 launch John Carmack Doom & Quake (computer games) Odyssey Moon/

Moon Express

2010 Launch/ mining R. Richards Space International Space University 1987 Education R.Richards, T. Hawley, P. Diamandis Space/ entrepreneurs/ engineering

SpaceX 2002 launch E. Musk Paypal

Table 1. Incumbents in the NewSpace industry and their founders’ origins

Table 1 shows well-known incumbents in the NewSpace industry. What is striking that more than half of theses start-ups have founders not coming from another sector in the space industry. These founders are entrepreneurs in their fields, with financial capital from their successful company. Even though not all companies shown are evenly successful, it does show that the new industry does not necessarily ask for previous experience in the space industry. Entrepreneurial capabilities seems to be more imperative to become successful than past space experience. This goes against the theory of Helfat and Lieberman (2002) that companies enter industries and market that are closely related to pre-entry resources. While it might be unexpected, readily available knowledge on space technology does not seem to be the most crucial factor in the decision to enter the NewSpace industry as it can be acquired by acquisition or joint ventures. With these new entrants leveraging their entrepreneurial capabilities and existing cash flow into the NewSpace industry, the threat of these new entrants could be perceived as medium to high.

Porter (2008) identified seven major entry barriers where incumbents would have an advantage relative to new entrants:

1. Supply-side economies of scale

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command better terms from suppliers. Supply-side scale economies deter entry by forcing the aspiring entrant either to come into the industry on a large scale, which requires dislodging entrenched competitors, or to accept a cost disadvantage.” (Porter, 2008)

The impact of supply-side economies of scale in the NewSpace industry is limited as space industries are geographically fragmented due to regulations and national protectionisms. This entry barrier is still perceived as medium as high start-up investments and economies of scale of incumbents are present. New entrants can overcome this barrier by leveraging resources from other existing revenue streams, whether space-related or not.

2. Demand-side benefits of scale

According to Porter (2008) demand-side benefits of scale occur when a buyer’s willingness to pay increases with the size of customers a company has. For the NewSpace industry this barrier can be seen as low scale. Buyers in the space industry are made out of mainly national governments/agencies. New entrants should try to gain national agencies as their customer while incumbents should focus on customer retention. A new entrant could gain market share by adopting a strategy of providing unique services or goods. With this strategy in niche markets, direct rivalry with incumbent who enjoy economies of scale and network affects could be avoided.

3. Customer switching costs

With switching costs being fixed costs that buyers face when changing suppliers, this entry barrier is low in the NewSpace industry (Porter, 2008). As no dominant design in transport or space exploitation is present, a buyer has almost no switching cost. New entrants should urge for an industry wide open standard system, while incumbents should exhort proprietary standards in order to raise switching costs.

4. Capital requirements

The entry barrier of capital requirements lies in the extend in which financial resources are needed for start-up investments (facilities, R&D, start-up losses, purchases, etc.) in order to compete (Porter, 2008). This barrier is still seen as high for entrants in the NewSpace industry. In the event that industry returns become attractive and seem to remain so, this barrier will lower as investors will be more likely to fund start-up capital. As the market return of the NewSpace industry is currently little and uncertain for the future, an entrepreneur not enjoying income from alternate revenue streams will have a difficult time attracting investors.

5. Incumbency advantage independent of size

CAPABILITIES IN SPACE: ENTERING THE NEWSPACE INDUSTRY