Strat.

Change 14: 1524 (2005)

Published online in Wiley InterScience
(www.interscience.wiley.com). DOI: 10.1002/jsc.706 Strategic Change

Changes in industry structure and

competition: the use of strategic
alliances by UK defence
manufacturing firms
Colin J. Butler*
Faculty of Business and Economics, UAE University, United Arab Emirates

 This paper outlines the changes which have occurred in the business environment for
UK defence manufacturers over the last 10 years. It highlights how the opening up of
the UK market to foreign competition has compelled UK firms to become more aggres-
sive on the export market.
 UK firms have responded by increasing their use of cross-border strategic alliances as a
means of accessing emerging markets as well as acquiring technology and sharing costs
with firms from the USA and Europe.
 Specifically the paper analyses and discusses the drivers of change and restructuring
within the industry; the characteristics of UK firms using cross-border strategic alliances;
the characteristics of alliance structures and partners; the motives for forming alliances
and the relationship between the buyer and suppliers.
Copyright 2005 John Wiley & Sons, Ltd.

Introduction: the evolving their counterparts in other industries. This

defence market
Changes in the defence manufacturing indus-
try environment pose new challenges for
those involved in industry management. Like
all industries, the execution of strategy
requires management skills reflecting the
unique demands of the particular industry. For
many years up to the early 1990s, the man-
agement skills required by executives working
in defence manufacturing, a protected monop-
sonistic market, were not the same as those of
* Correspondence to: Colin J. Butler, Faculty of Business
and Economics, UAE University, Al Ain, United Arab
Emirates. E-mail: c.butler@uaeu.ac.ae
protected status has diminished, particularly
for UK defence manufacturing executives,
and the evolving business environment has
brought new demands on the management
skills of those managing in the industry.
Whilst other industries had to grapple with
the challenges of the common market within
the European Union, the defence manufactur-
ing industry found itself protected from such
demands. This was facilitated by the exclusion
of arms manufacturing from the Treaty of
Rome on the grounds of strategic importance
to member countries. Thus, over 40 years, a
unique culture developed and thrived within
defence manufacturing. This culture placed
the emphasis on research and development of
technology. The background of personnel

Copyright 2005 John Wiley & Sons, Ltd. Strategic Change, JanFeb 2005
16
A unique culture
developed and thrived
within defence
manufacturing
working in the industry was mainly scientific
or engineering. There was less emphasis on
finance and marketing and more on building
weapons platforms that were technologically
superior to the enemy regardless of cost.
As defence manufacturing was and still is a
monopsonistic market, in which the buyers
are governments, financial issues and issues of
investment and return were relegated to the
pursuit of the best weapons technology that
could be developed. With governments willing
to overlook massive over-runs in cost and time
projections, complacency in the management
of these issues became firmly embedded in the
management of organizations. There was a
marked dearth of ideas in developing new
management strategies because there was no
demand to justify expenditure, to manage
resources more efficiently or compete aggres-
sively in domestic markets against foreign
firms. Strategy was guided by the technical
factors of weapons development.
Technology and costs
The need for change in the business practices
of the industry is fundamentally being driven
by the mounting need to share costs and lower
risk. Strategic alliances such as collaboration
have helped the drive towards these goals
by sharing development costs and securing
longer production runs. One of the effects of
this change in approach to strategy by defence
manufacturing executives has been for firms
to attempt market stabilization behaviour by
the formation of pre-competitive collaboration
in weapons and defence equipment research
(Mussington, 1994). However, in terms of
industrial consolidation, it has done little to
help (Weston, 1999).
Copyright 2005 John Wiley & Sons, Ltd.
Colin J. Butler
The defence manufacturing industry is a mil-
itary and economic asset where the state is
closely involved in determining supply and
demand. Lawrence (1998) asserts that break-
ing the link between aerospace and the state
even in Europe is unlikely. One of the main
problems for defence manufacturers in Europe
is the national security impetus to maintain a
domestic defence production (Mussington,
1994). If governments decide to relinquish
control completely over armaments produc-
tion then defence manufacturers could behave
more like multinational companies.
The rising technology costs are mostly due
to the increased sophistication of weapons
systems; sophistication gained mainly by the
installation of more electronic subsystems
geared towards the increasing demands for
C4I capabilities.1 For example, the percentage
costs devoted to research and development for
a combat aircraft have doubled in 25 years.The
costs of a military aircraft increase by a factor
of 4 every 10 years (Blunden, 1989).
Due to rising costs, buyers are seeking less
costly ways of achieving a share of the indus-
trial benefits associated with the purchase of
foreign defence equipment. Purchasers of
defence equipment tend to have a preference
for agreements promoting the indigenous
development and production of such goods
because it is believed that this form of pro-
curement generates new technologies (which
might spill over into civil industry), provides
jobs, improves the balance of payments and
offers security of supply (Martin and Hartley,
1995). In the UK, the reductions in defence
spending budgets, the increases in costs and
the opening up of previously protected
domestic markets are driving firms to assess
what type of strategies to adopt for the future.
Industrial restructuring
With the guarantee of regular and lucrative
work removed, some firms can no longer
afford to manufacture across several sector
1
Command, Control, Communication, Computers and
Intelligence.
Strategic Change, JanFeb 2005
Changes in industry structure and competition
lines. The loss of a single contract may compel
the firm to exit that particular sector alto-
gether because there may not be another con-
tract which they could win for several years.
Indeed, for large weapons platforms this could
be a waiting period of 1015 years.
The economic viability problems for the
buyers stem from the fact that European
security needs, and therefore defence product
needs, have been transformed dramatically
since the need to defend the German border
against Soviet tanks. The primary threat to UK
and European interests has now been replaced
by international terrorism and the prolifera-
tion of missile technology, including nuclear
technology, by so-called rogue states.
Although threat assessments have changed,
the dominant influence on defence firms for
the conduct of strategy-making continues to
be the amount of money available for pur-
chasing their goods. Martin and Hartley (1995:
21) point to the decline in defence spending
as a fundamental cause of restructuring of
markets and a greater need for better strate-
gies in the export market. They noted that:
Increased exports are one way in which
individual firms might attempt to make
good declining sales in the European and
American markets.
This added emphasis on the export market as
a means of off-setting the problems of reduced
domestic market profitability has focused
attention on the advantages of using cross-
border strategic alliances. Kirkpatrick (1997:
60) recommends that:
Increased exports offer the prospect of
reduced costs via the economies of scale
associated with a longer production run.
LaCivita and Malese (1994: 223) suggest that:
Restructuring of the defense industry is
unlikely to involve many firms switching
from the defense to commercial work . . .
experience shows that most defense firms
attempts at commercial business have not
Copyright 2005 John Wiley & Sons, Ltd.
17
been successful . . . largely due to differ-
ences in overhead requirements and a
lack of the necessary marketing and sales
experience to compete in the marketplace.
Methodology
Many of the alliances in the defence industry
are relatively new and still active. Investigating
alliances which have not ended does place a
limit on retrospective assessment. However,
this same environment provides an opportu-
nity to gauge approaches to the problems
posed by the advent of the global market place
and the utilization of strategic alliances to
meet these new challenges. It also helps
understand why defence managers choose to
use cross-border strategic alliances.
Many of the alliances in
the defence industry are
relatively new
The sample for this research was taken from
the UK defence industry population. As such,
any findings refer specifically to the experi-
ence of UK firms only and are not generalized
to include all firms world-wide. The sample is
drawn from the list of members of the Defence
Manufacturers Association (DMA), which is
the collaborating body for this study.
The research aimed to bridge the gap
between strategic alliance theories developed
so far and the strategic management issues
facing executives in the defence industry.
However, it does not aim to contribute to
related management issues, such as procure-
ment policies or practices. Whilst the role of
the buyer is an essential ingredient in any
investigation of management issues, particu-
larly one pertaining so much to market access,
the research presented here is intended to
contribute to management theory rather than
shed light on governmental behaviour.
The data gathered is from UK defence firm
executives and it is their perspective which is
Strategic Change, JanFeb 2005
18 Colin J. Butler

Table 1. Response rates for questionnaires 1 and 2

Questionnaire Manufacturers Replies received Response rate

1 300 150 50%

cross-border: 76
intra-UK only: 74
2 67 (cross-border 769) 31 46%

analysed. The views, therefore, could be seen Table 2. Turnover of firms involved in sample
as one-sided. The opinions of executives from
partner firms, be they French, German, Size of firm % of Sample Turnover
American or Indian, are not gathered. Small 42 <$10 million
The views of the buyers are not gathered. Medium 36 $10$200 million
Thus, the executives offer comments on both Large 22 >$200 million
partners and buyers without a mechanism for
N = 76.
any counter-veiling view to be put by the
appropriate party. However, the fundamental
objective is one of theorypractice compari- Table 3. Dependence on defence for overall turnover of
son and the investigation of how UK defence defence firms sample
managers perceive the usefulness and design
of cross-border strategic alliances, and not Dependence % Dependence %
foreign managers or buyers. This study helps <10% 16 5060 6
bridge this gap and both develops manage- 1020% 0 6070 0
ment theory in the industry and outlines the 2030% 10 7080 26
status and usage of the alliance management 3040% 6 8090 6
4050% 0 90100 30
tool by defence firms.
The total number of questionnaires dis- N = 76.
patched for the first survey was 300. Some 150
replies were received. Out of these 150
replies, 74 firms indicated that they were not Table 4. Structural representation of cross-border
alliances involving defence firms involved in sample
involved in cross-border alliances. Of the
remaining 76 replies, 67 identified themselves Variable % Rank
with name and address. The second question-
naire was then sent to these 67 firms and 31 Collaboration 80 1
firms replied to the second questionnaire. Consortia 69 2
Informal cooperation 66 3
Table 1 summarizes the response rates and Licensing 63 4
Tables 25 summarize the characteristics of JVs 40 5
the firms and alliances. Off-sets 36 6
The sensitive nature of defence implies that N = 76.
alliances with firms from countries with close
military and political ties with the UK would
be expected. Conversely, alliance participa- firms have developed the best technology.
tion with partners with poor political relations Partnerships with France and Germany are
would be expected to be low. The data indi- also prevalent. However, market size alone
cates that most UK firms are in partnership of does not direct alliance strategy. Political and
some form with firms in the USA. The reasons military relationships influence partner selec-
are clear. The USA is the biggest market and US tion, as does the degree of trust and history

Copyright 2005 John Wiley & Sons, Ltd. Strategic Change, JanFeb 2005
Changes in industry structure and competition 19

Table 5. Percentage of firms in sample allied to firms Table 6. Comparison of added value and equity risk
from the following countries: between firms involved with the USA and firms not
involved
Country %
Variable Region Mean Std dev.
USA 71.4
France 40.3 Value added USA 4.12 2.72
Germany 27.7 Non-USA 1.00 1.00
Italy 27.7 Equity risk USA 2.96 2.68
Spain 22.1 Non-USA 4.40 3.29
Sweden 19.5
Israel 3.9 N = 76.
Saudi Arabia 2.6
UAE 1.3
Australia 11.7
Singapore 10.4 Table 7. Top drivers of alliance formation of defence
Malaysia 9.1 firm sample
India 7.8
Japan 5.2
South Korea 3.9 Variable Mean Rank
South Africa 14.3
New procurement practices 3.29 1
N = 76. Declining defence budgets 3.21 2
Globalization 3.07 3
Emergence of improved competitors 3.04 4
Lower share of buyer in R & D 3.0 5
of business relationships between firms from
different countries. UK firms are not, for N = 31.
example, cooperating with firms in China
(only one firm in the sample indicated coop-
eration with firms in this country), despite the between alliances with firms from the USA and
potential size of the market. Cooperation is firms from other countries.
greatest (most popular) with the USA and
leading European manufacturers, followed by
Drivers of change and increased
second-tier European manufacturers, Australia
alliance activity
and South Africa. There is limited UK repre-
sentation with emerging markets such as The data shows that UK executives strongly
Israel, Brazil and India. There is a noticeable believe that the changes in business practices,
association between regional partners and coupled with reductions in defence expendi-
historical and political relationships. Former ture, are the main reasons for increased
British colonies are well represented and UK alliance activity over the last 10 years (Table
firms also have a tendency to form partner- 7). The decline in overall expenditure by gov-
ships with former colonial countries. This is ernments and the opening up of the UK
indicative of the ties, understanding and trust market are the main drivers compelling firms
which are well established in these countries. to increase sales in as many markets as possi-
The majority of alliances have two non-UK ble. Related to this are the effects of global-
firms involved. Although there was no expec- ization, cited as the main driver for other
tation over number of partners in alliances, industries, and the increasing cost of
prior to the research, patterns are important researching and developing new technology.
in order to gauge the effects of different mul- There is a significant difference in the value
tiples of partners on the main issues under attributed to defence budgets as a driver, with
investigation. Products derived from alliances stronger agreement amongst larger firms.
with US firms have the greatest added value Smaller firms feel that product life cycles are a
and have lower risk contributions for UK driver for their strategy more than executives
firms. Table 6 highlights the main differences from large firms (see Table 10). The data

Copyright 2005 John Wiley & Sons, Ltd. Strategic Change, JanFeb 2005
20 Colin J. Butler

Table 8. Top tactical motives of defence firm sample for Table 9. Correlation between dependence on defence
alliance formation of sample and motives for alliance formation

Variable Mean Rank Variable Coefficient p-Value

Market power 3.96 1 Faster payback on investment -0.471 0.007**

Maintain position 3.96 1
Market development 3.81 3 **Indicates a 0.01 level of significance.
Share R&D 3.46 4
Technology development 3.46 4
Table 10. Correlation between firm size and drivers of
N = 31. alliance formation

Variable Coefficient p-Value

results show that the primary motives for
alliance formation are market orientated Defence budgets 0.4767 0.007**
(Table 8). These motives correlate with the Emergence of improved 0.3611 0.046*
competitors for global
main drivers of alliance formation, budget market
reduction and buyers insistence on value. Shrinking product life cycles -0.3828 0.034*
Contracts for very large weapons platforms
may only be offered in the domestic market *Indicates a 0.05 level of significance.
**Indicates a 0.01 level of significance.
every 15 years. Defence firms have always N = 31.
taken a long-term approach for this reason.
However, this approach is changing, mainly Table 11. Classification of alliances involving defence
driven, in the opinion of UK executives, by US firm sample
executives who are seeking an earlier payback
and are adopting shortmedium term strate- Class % Rank
gies. One UK executive, in the qualitative data,
Manufacturer/supplier 50 1
described his industrys restructuring policy Direct competitor 30 2
as a combination of the US mergers and acqui- Non-competitor 20 3
sitions, restructuring policy and the French
approach of networking globally in as many N = 31.
countries as possible.
The data on dependence on defence and between two first-tier large firms in direct
motives for alliance formation shows one competition.
significant negative correlation, with faster
payback on investment being a stronger
Discussion
motive for firms with low dependence on
defence (Table 9). This highlights the differ- Strategic alliances are used predominantly in
ences in long and short-term strategy devel- sectors and markets requiring high technology
opment between defence and non-defence components. Leading-edge technology is more
manufacturing firms. expensive and thus, exposes firms to greater
Table 11 highlights the substantial cooper- risk if they decide to pursue development on
ation between direct competitors in defence their own. Not only is the USA the biggest
manufacturing with less cooperation between market, but it also invests the most in research
firms who do not compete. Second-tier firms and development (R&D) and thus, consis-
supply components to the large firms for tently produces leading-edge defence technol-
different weapons platforms. The second-tier ogy. The market size and technological
firms can form partnerships with large firms leadership make US firms the most attractive
around the world due to bespoke components in strategic alliance formation, as both provide
which they manufacture and less attention market power the leading alliance motive
given to their agreements than agreements for any prospective partner.

Copyright 2005 John Wiley & Sons, Ltd. Strategic Change, JanFeb 2005
Changes in industry structure and competition
Strategic alliances are
used predominantly in
sectors requiring high
technology components
The main features characterizing partner
selection are reputation, technology transfer,
the declining number of potential partners,
the holdings of foreign governments in their
respective industries and the restrictions of
governments on exports. Large firms are more
constrained than small firms in the partner
selection process. First, they have fewer firms
of equal size to consider forming alliances
with and second, they are competing in a
highly concentrated primary tier.
Of the emerging competitors outside the
EU, South Africa and Australia are commonly
found in alliances with three or four other
partners. These countries are considered a
lower risk both politically and in terms of tech-
nology transfer. There is a very strong consen-
sus that partner selection processes in the UK
are robust enough to ensure the selection of
trustworthy partners for alliance formation.
The greatest source of concern in relation to
trust is that partners may make contacts with
third parties. This gains added relevance with
the acceleration of the effects of globalization
and the likelihood of a presence in a greater
number of countries. The quantitative analysis
indicates higher fears over technology transfer
when partner firms are from outside of Europe
or the USA. The qualitative analysis highlights
the importance for foreign partners to forge
closer personal relationships with their UK
counterparts, as well as ensuring the adoption
of a management culture similar to UK atti-
tudes and values. UK executives also stressed
the need for themselves to be adaptable to
other cultures, but they were referring mainly
to differences in national cultures and styles.
Conversely, firms in other countries seeking
alliances with UK partners must be willing to
learn what UK executives appreciate and what
frustrates them in order to strengthen the
Copyright 2005 John Wiley & Sons, Ltd.
21
alliance bond. A relationship built on trust and
a reputation of integrity, coupled with inter-
national professional business practices exer-
cised by all parties, is primarily what UK
executives seek in the personnel of potential
partner firms.
The development of relationships is an inte-
gral stage in the life cycle of defence manu-
facturing strategic alliances. Executives from
SMEs highlighted that this business commu-
nity is relatively a very small one, and execu-
tives at the highest level know each other and
most have friendships of varying strengths
with each other. This is the most important
consideration for joining in an alliance with
another firm. The integrity of the executives at
the other helm is known and trusted in many
cases before the idea of a partnership is sug-
gested. Executives from larger firms did not
make a point of stressing similar views as
strongly. They focused more on the compati-
bility of the partners group and activities with
their own, and the compatibility of the new
alliance structure with overall group struc-
tures. They implied that executives from large
firms in other countries would be similarly
culturized in international business practices.
Licensing is used by firms to limit foreign-
partner learning and unauthorized technology
transfer where executives do not want the
close cooperation and multiple interfirm
interfaces which collaboration would entail.
National history is a characteristic that is
influential in business relationships.This factor
does not feature heavily in contemporary
alliance theory. The political and military
history between states can have an impact on
relationships developed between executives.
It affects the perception of counterparts in
terms of ability, style, method, strengths and
weaknesses. This view predominates in the
SME sector. Larger firms appear to be more
internationalized and recognize the need to
consign stereotypes to history or watch com-
petitors ally together in competition against
them. One view expressed from the SME
sector recommended that it is better to do
business with friends than do business
and then become friends. This philosophy,
Strategic Change, JanFeb 2005
22
however, is not conducive with short-
term decision-making driven by shareholder
motives, which is a direction that executives
from the larger firms are under increasing
pressure to take.
Political developments, not surprisingly,
play such an important part in the develop-
ment of the alliance and any changes in the
political environment may have important
consequences for its future. Political changes
can include changes in government leader-
ship, changes in type of government, changes
in political alliances or balances of power and,
of course, war. Political developments can also
include internal reorganization of senior
staff within one of the partners.
Political developments can also occur
through commercial restructuring, whereby
shareholdings of partners change because a
competitor has acquired a partner, or a partner
merges with a competitor. The emergence of
a complex network of alliances means that this
scenario is a very real possibility. Firms will
find themselves cooperating with a foreign
group in one sector while simultaneously com-
peting against that group in another. This gives
added importance to both trust and legally
binding contracts.
Many of the alliances of European partners
involve multiple partners and this compounds
the complexity and the problems associated
with them. Having just one partner increases
the chances of a successful outcome for both
partners with fewer cultural differences,
quicker turnarounds in decision-making
processes and better quality communication
processes than multiple partner alliances.
Large firms indicated more strongly that
defence budgets and a contracting global
market were major drivers more than small
firms. The qualitative data explains this in
greater detail. The larger defence firms have
closer contacts with the government and find
it more difficult to win major contracts from
foreign governments. The smaller firms tend to
make niche components required globally by
the larger firms. They can therefore supply
large firms in countries such as the USA,
France and Germany with their niche
Copyright 2005 John Wiley & Sons, Ltd.
Colin J. Butler
components without the disadvantage of
nationalism locking them out of the market,
compared to the nationalism which the large
firms experience.
The major surprise in the data was the rele-
gation of the restructuring of US firms as a
driver of restructuring in the UK. Executives
did not feel that this drove their strategies.This
may be related to their view that their firms
and governments should be proactive rather
than reactive in their strategy-making. Motives
for alliance formation primarily involve cor-
porate strategy goals, such as increasing
market power and market share, rather than
tactical goals such as sharing R&D or achiev-
ing economies of scale.
Collaboration is the preferred structure for
most firms and it is the preferred structure of
most executives because it allows more
control over the alliance life cycle. This affords
flexibility, both commercially and in terms of
security of technology. Commercially, the UK
firm likes to minimize the integration of the
partner into its group structure. Technology
transfer is controlled through reduced and
more formal contact between technical per-
sonnel from different firms. Collaboration pre-
vails mostly in the high-technology sector.
The multidimensional nature of the deci-
sion-making process in this industry influ-
ences the prevalence of the collaborative
structure. Firms using collaboration feel that
they retain more control in collaboration than
in joint ventures. This type of structure keeps
a potentially very complex alliance, in terms
of managerial and political processes, more
simple. Clearly, in partnerships where there is
a high degree of technology transfer, there is
more suspicion over the behaviour of part-
ners. The perception of defence industry man-
agement on motives for alliance formation
shows the primary motives are market-based.
Achieving economies of scale is not perceived
as such an important motive as market share
and power.
Collaboration allows the nature of the part-
nership to adapt to changes in the industry
environment. With alliances regarded as long
term in this industry, this flexibility is impor-
Strategic Change, JanFeb 2005
Changes in industry structure and competition
tant over 10 or more years and as the last 10
years have demonstrated, major changes can
occur. This is an important factor in the
control of the alliance and the impact of
cultural differences.
If the UK government does not maintain
close relations with its national firms, these
firms may decide to transfer ownership to
foreign firms or exit the industry altogether,
leaving the UK with no domestic suppliers.
This would ultimately undermine the strategic
advantage of having a well-developed and
technologically sophisticated industry. The
current policy of an open UK market and
declining support on the export market may
leave a UK industry characterized by small
suppliers developing specialist defence com-
ponents and American, French or German-
controlled OEMs paying large salaries to their UK
executives with support and influence by the
governments of the USA, France or Germany.
One view prevailing amongst British
defence executives is that strategy driven to
satisfy the needs of shareholders in the short
term is not conducive to the unique environ-
ment found in the defence manufacturing
business. This, perhaps, suggests that govern-
ments cannot afford to cut loose firms alto-
gether. If they do, then firms are free to decide
whether to exit sectors under increasing pres-
sure from shareholders and thus, reduce the
options for government supply. The growth of
multinational defence manufacturing firms,
driven by share holders demands, is a devel-
opment which the UK and other govern-
ments, as main buyers, need to consider when
they expose their domestic firms to foreign
competition. For this to happen, there is an
onus on government personnel to recognize
the new culture which exists in the industry
Strategy driven to satisfy
the short term is not
conducive to the defence
manufacturing business
Copyright 2005 John Wiley & Sons, Ltd.
23
as well as the new emphasis on commercial-
ism and marketing developed by UK execu-
tives. If the UK government does not do this
and insists on cutting firms loose altogether to
compete as other industries do, then they may
pay the cost in decision-making ability in other
spheres. If other governments have close rela-
tionships with their respectively associated
firms and these firms have market power, the
UK government may achieve greater monetary
value. However, this value will be accompa-
nied by conditions determining development
in other industries and political direction.
Reductions in defence budgets have been
the cause of the acceleration in alliance for-
mation by UK defence manufacturers. Accom-
panying these reductions have been changes
in business practices with the buyer, the UK
government, becoming more demanding and
less willing to share the risks of project devel-
opment and more willing to buy from foreign
manufacturers. On the global market, the
increased interface and demands for high stan-
dards between defence managers from the
leading western countries with managers in
emerging countries, which the alliance activ-
ity has brought, is helping to promote the
professionalization of the industry world-wide.
Biographical note
Colin Butler has been lecturing in the Middle
East for 3 years (Oman and the UAE). Prior
to this Colin lectured at the University of
Huddersfield. He holds a PhD in Strategic
Management from Huddersfield and an MA in
Defence Analysis from Lancaster University.
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