ANALYSIS OF THE EXTERNAL ENVIRONMENT— OPPORTUNITIES AND THREATS

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Opportunities and threats develop from forces in the external environment. These forces have the power to change the direction and economic viability of the firm and are beyond the control of the firm. However, successful firms align their strategies with these forces. Scanning the external environment for forces and their effects begins with the opinions of experts and develops from there. The objective is to identify and assess the forces that are "dealmakers" or "deal breakers." The "possible maybes" may be worth watching for the future, but it is important to keep the analysis simple, focused, and relevant.

The Analysis of Societal Forces

For strategic planning purposes, it is important to understand the societal forces that are creating the opportunities and threats facing the firm. To guide the analyst's thinking, most strategy books offer lists of societal forces (e.g., economic, legal, natural, political, sociocultural, and technological forces). Typically, only a few forces are truly decisive in shaping the direction of the firm. Here, the discussion focuses on the societal forces affecting NGC. These forces and their future manifestations (i.e., what they morph into) are likely to play a significant role in shaping the future of

NGC over the next three to five years. Thus, the forces discussed here (i.e., societal, competitive, and stakeholder forces) are generally not static.

It is important to remember that an opportunity for one group of stakeholders may be a threat to another. For example, NGC's management may see terrorist and cyber-attacks on the United States as a business opportunity with a moral imperative to protect the nation's interests and the people of the United States. Alternatively, the general population is likely to see terrorist and cyber-attacks on the United States as a threat. Thus, in the following analyses, the reader should interpret the labeling of forces as opportunities or threats as meaning "more threats than opportunities" or "more opportunities than threats."

Economic Forces—Threats

At the onset of 2011, economic forces dominated NGC's strategic planning environment. The recession that began in 2007 had unleashed powerful forces that significantly affected many firms and governments in the United States and Europe, and to lesser degrees, firms and governments in Asia, Africa, and South America. For most firms, the recession posed significant threats; for some it was fatal; and for a few, it created opportunities (e.g., merger and acquisition opportunities). Similarly, it brought some governments (e.g., Greece, Ireland, Portugal, and Spain) to the brink of potentially disastrous sovereign debt defaults.

In November 2010, the Federal Reserve Bank's Open Market Committee reviewed the U.S. economic situation and its plans to manage inflationary and deflationary pressures and keep the federal funds rate between 0 and 1/4 percent. It noted that the rate of recovery in output and employment was slow. Household spending was increasing slowly, but it was limited by high unemployment (9.4%), modest personal income growth, depressed home values and housing starts, and tight credit. Business spending on equipment was rising, but more slowly than earlier in the year, although investment in commercial and industrial real estate remained weak. Businesses were hesitant to add employees. Meanwhile, inflationary expectations remained stable. To encourage economic recovery the committee decided to purchase a further $600 billion of longer-term treasury securities by the end of June 2011.21

Global leaders gave the Fed's decision mixed reviews. Detractors said the injection of $600 billion would devalue the U.S. dollar, creating a revenue advantage for U.S.-based exporters (i.e., an opportunity) or a revenue disadvantage for U.S.-based importers (i.e., a threat). Others feared the injection of $600 billion would trigger inflation and speculation-driven asset bubbles. The minutes of the committee's December 2010 meeting confirmed that it planned to continue its controversial $600 billion bond purchases.

In November 2010, President Obama's commission on reducing the federal budget deficit recommended sweeping spending cuts and various increases and decreases in taxes.22 At fiscal year-end, September 30, 2010, the U.S. budget deficit was $1.3 trillion, and the national debt was $13.7 trillion or about 97 percent of gross domestic product. The commission recommended a $100 billion reduction in the DoD's annual expenditures over the next five years. However, its recommendations were controversial and nonbinding.

The DoD's estimated budget for fiscal 2010 included $508 billion for defense programs plus $128 billion for the Global War on Terror (GWOT) for a total of $636 billion.23 (In 2002, the comparable budget was $342 billion.) Additional appropriations for the GWOT in fiscal 2010 were expected to increase the actual expenditure to perhaps $700 billion.24

In January 2011, Secretary of Defense Robert Gates was told to reduce the DoD's expenditures by $78 billion over the next five years.25 In sum, given the federal budget deficit and debt, DoD expenditures were likely to plateau or even decrease in the future. However, significant attacks on the United States (e.g., the 9/11 attacks) might result in renewed growth in the DoD expenditures despite the deficit and debt. In addition, the United Kingdom was planning to reduce its defense budget by 20 percent, and several European countries were analyzing similar reductions.

Military/Terrorist Forces—Threats

In the early days of 2011, U.S. security forces were engaged in two wars and ongoing terrorist activities. The 9/11 attacks in 2001 were history, and the president and some congressional representatives were questioning the need to spend $700 billion a year on national defense. This reticence posed a significant threat to firms in the aerospace and defense industry. However, a series of 9/11-magnitude terrorist attacks or the outbreak of another war in the Middle East or on the Korean peninsula could turn the threat into an opportunity for NGC and other firms in the industry.

In January 2011, pictures of China's J-20 stealth fighter's first test flight appeared on the Internet. Apparently, the development of the J-20 was more advanced than most analysts had estimated. Within days, Secretary of Defense Robert Gates met with China's president, Hu Jintao and asked him how the test flight went. From Hu's reaction it appeared he had not been briefed on the test flight, raising questions about the military's motives and the wisdom of putting President Hu in an embarrassing position. For more than 70 years, China's military had been under the control of the Chinese Communist Party.

Once in service, the J-20s could be based in the interior of China from which they could patrol Taiwan, the East and South China Seas, and the Western Pacific, threatening Japan, South Korea, and other Asian countries.26,27 The J-20 looked similar to the U.S. F-22 Raptor, which is the only operational stealth fighter in the world. Manufacturing of the F-22 was halted in 2009, but production could be restarted.

Cyber Forces—Threats

In April 2009, Defense Secretary Robert Gates said the United States is "under cyber attack virtually all the time, every day." The Wikileaks saga tested the cybersecurity of companies such as PayPal, MasterCard, and Visa. Experts considered the attacks relatively primitive. In contrast, J. B. "Gib" Godwin, NGC's vice president, Cyber-Security and Systems Integration, said, "Everyday there are an estimated 360 million probes directed at Pentagon computers, looking for vulnerabilities."28

In July 2009, Linda Mills, corporate vice president and president of NGC's information systems segment provided another example of a cyber-attack. "That attack involved nearly 170,000 zombie computers in 74 countries linked together . . . it managed to hit virtually every major federal agency, including the White House."29 She explained how NGC's engineers connected a personal computer loaded with the best commercial security software to the Internet. Within four hours, they detected the first ping by a potential hacker. Within a week, a hacker had installed a "root kit" to control the computer. Within two weeks, NGC's computer was enslaved and run by a server in Canada that was run by a server in Singapore that was run by a server that could not be traced. Then, NGC's computer was used to attack a computer in Poland.

On September 6, 2007, in a remote area of eastern Syria, North Korean workers were constructing a large building that analysts surmised would house a nuclear facility. Shortly after midnight, when most of the workers had left the site, Israeli F-15 Eagles and F-16 Falcons swept in and obliterated the building. Initially, Syria said nothing about the attack. Its Russian-built air-defense system gave no warning of the attack. Israel had taken control of Syria's computers, so the Syrians saw what the Israelis wanted them to see, which was status quo. Later Syria and North Korea expressed outrage at the attack. Syria said Israel destroyed an empty building. Syria cleaned up the debris and plowed the area. Israeli news services said nothing about the attack.30

NGC has been engaged in cybersecurity research for 20 years.31 The need for cybersecurity on NGC's networks led it to develop a high-tech network defense capability for the "management of vulnerabilities, intrusion detection and prevention, incident response, and forensics."i2 In July 2010, NGC opened its new Cyber Security Operations Center in Maryland, a cyber-threat detection and response center to protect NGC and extend the lessons learned to customers' networks. In October 2010, NGC opened its Fareham cyber range in the United Kingdom. NGC linked its U.K. range to its Maryland facility and other cyber ranges. The ranges simulate large complex computer networks and their responses to threats.

Political Forces—Opportunities

The president's and the Congress' agendas can have a significant effect on the prosperity of the aerospace and defense industry. The 9/11 attacks in 2001 led to a big increase in DoD expenditures. Today, President Obama's agenda is more oriented to domestic needs (e.g., improving education and healthcare). In addition, U.S. arms sales to other countries continue to have a significant political dimension and impact on the industry. Last, as Standard & Poor's explains, "weapons purchases are not based on price and performance alone, but also on political considerations."33 For example, the F-35 Joint Strike Fighter program elected to use a Pratt & Whitney (P&W) engine. General Electric (GE) and its supporters were promoting a GE engine. The DoD estimated the cost savings of halting the continuing development of the GE engine at $2.9 billion.34

The industry relies on many lobbyists and political action groups for access to the DoD. The contract acquisition market is not perfectly competitive. Thus, the DoD may continue to support military contracts for political reasons, even though the military need has passed. In addition, the DoD may award new contracts to support a contractor who needs the business or to preserve competition among the contractors.

Protecting jobs is important to congressional members, and the defense contractors leverage this fact. For example, in November 2010, NGC had 4,800 employees in San Diego County, California. About 2,300 worked on the development of its Global Hawk. In response to anticipated funding cuts, NGC put advertisements in five area newspapers explaining the importance of the Hawk and enabling people to use a Website to communicate directly with their congressional representatives. In addition, in November 2010, NGC was moving its corporate headquarters from Los Angeles to northern Virginia to be closer to the DoD (i.e., the Pentagon).

Innovation Forces—Opportunities

To identify societal forces, it makes sense to turn to the experts and start with their projections. For example, in mid-2009, McKinsey & Company analyzed "The 10 Trends You Have to Watch."35 Although such forecasts are useful, the trends are likely to affect firms and industries differently. For example, the McKinsey authors projected a trend they called "innovation marching on" and noted "innovation in fields such as information technology, biotechnology, nanotechnology, materials science, and clean energy." In these industries and the aerospace and defense industry, the saying is "innovate or die."

The aerospace and defense industry thrives on innovation, and the DoD contractors create innovative solutions that sometimes have civil and commercial applications (e.g., unmanned air systems). Thus, the McKinsey authors' claim that innovation will continue seems reasonable; innovation is a source of competitive advantage. However, following the end of the Cold War, large cutbacks in the DoD expenditures led to a major exodus of talent from the industry. According to Wes Bush, "As a result, across the industry, we have a population gap in our ranks between the ages of about 38 to 52 . . . simple rule . . . technology attracts talent."36 In sum, reductions in DoD technology funding are likely to shift talent to other industries (i.e., a threat).

Conclusions

In late 2010/early 2011, NGC faced several powerful societal forces. First, economic forces were a significant threat, and firms in the aerospace and defense industry were crafting retrenchment strategies (i.e., reducing costs and assets) and developing recovery strategies.37,38 Second, military/ terrorist forces had not been able to mount a successful attack in several years, and this fact threatened the industry's funding and preparedness. Third, cyber forces were an increasing threat, and the possibility of a cyber-war was no longer a Hollywood fantasy. Fourth, political forces, which usually created opportunities, were focused on reducing the DoD's funding, clearly a threat to many firms in the industry. Fifth, innovation forces, which typically created opportunities, were on the verge of declining. The aerospace and defense industry was retrenching. Firms were putting their low-potential projects on hold, and some of the talent that fueled innovation was looking for opportunities in other industries. An exodus of talent could be crippling.

Unfortunately, there is no way to quantify the societal forces and calculate, for example, a scaled assessment of an opportunity or threat (e.g., 90 = excellent opportunity, low threat; 50 = balanced opportunity and threat; and 10 = low opportunity, high threat). Although threats may conceal opportunities, the foregoing analysis suggests the aerospace and defense industry faces a period of declining opportunities and rising threats.

The next step in developing a SWOT analysis is to evaluate the competitive forces that are shaping the firm's industry. Here again, the purpose of the environmental scanning is to identify and assess the forces that are truly "dealmakers" or "deal breakers" and avoid being mired down in the analysis of minutia.

 
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