Northrop Grumman is an American multinational aerospace and defense contractor based in West Falls Church, Virginia. It was formed in 1939 by John K. Northrop, Thomas V. Jones, and Kent Kresa. The company produces a different range of products through its division, including Aeronautics System, Mission Systems, Defense System, and Space System (Northrop Grumman, 2021). The majority of its subsidiaries are located in North America. It is well known for its aviation success in military planes as well as combat systems. Its products include the design, development, integration, and production of crewed aircraft, autonomous systems, spacecraft, high-energy laser systems, microelectronics, and other systems and subsystems. Its aeronautical division is the major defense contractor of the United States. It also holds key defense contracts in the United States. Porter’s five forces model is a useful tool to identify threats and opportunities faced by Northrop Grumman in the defense industry.
Competitive Rivalry in the Market
The healthy growth of the defense industry is noted in the last two decades. The recent security threats are the reason for its development in the last couple of years. The main rival of Northrop Grumman is The United States-based defense contractor Lockheed Martin and Raytheon Technologies. They are well known for their aerospace and defense product in the world. They pose a series of competition to the company. The annual revenue of Northrop Grumman in 2020 was $36,799M (Fortune, 2021). Lockheed Martin posted the yearly income of the same period, $65,398M (Fortune, 2021). At the same time, Raytheon Technologies posted annual revenue of $56,587M (Fortune, 2021). The competition between companies has been increased because the main contractor is the Department of Defense. The establishment of industry in Europe and Asia will be causing a decrease in export orders in the near future. The US exports majority of its defense products in those regions.
Threat of Substitutes
The geopolitical tensions across the globe are driving the growth in the defense industry. The industry is rapidly evolving to fulfill the needs of the 21st century. The overall threat of substitution is low because of the higher demand for defense technology from all over the world and the evolution of the technology by the industry’s frontrunner. The industry is moving well at a time to innovate the better product. Global defense spending is expected to grow about 2.8% in 2021, crossing the $2 trillion mark (Deloitte, 2021). Countries worldwide continue to spend on strengthening their militaries as geopolitical tensions intensify despite the global pandemic. Northrop Grumman is leading the aerospace digital transformation in the world. It is collaborating with the US Air force, Nasa, and other agencies. Northrop Grumman is designing, testing, and deploying capabilities faster to respond to current and emerging needs. The threat level is low as long as they move with the requirement of the time.
Threat of New Entrants
The defense industry is private worldwide. It is regulated strictly by the regulated bodies and governments because of security reasons. It requires higher capital investment to set up the company. Besides capital investment, technological advancement & product quality makes it impossible for the new entrants. The new entrants must come with viable products for the market. The Government provides contracts that help in industry growth. The arrangements are usually long-term, so it means the money will slowly come from sales. The Government funds the industry leaders for their Research and development programs (Serbu, 2020). The market is concentrated and highly competitive. The difficult part is getting the Government’s contract for long-term financial security. The industry’s frontrunner receives the majority of the defense contracts, which makes it difficult for startups to keep up with those companies. The threat of a new entrance is very low.
Bargaining Power of Buyers
The major buyers of defense equipment are countries around the world & joint bodies. The buyer holds the higher bargaining power if it purchases in large volumes. Large-volume buyers are particularly potent forces if high fixed costs characterize the industry (Porter, 1979). In this case majority of the industry depend on the regulated bodies & defense contracts. The Defense department controls the product and also acts as the main buyer. They provide them long-term defense contract, which gave them higher negotiating power. The countries in the emerging market hold lesser bargaining power than developed countries like the United States. The major buyers can enforce their bargaining power by acquiring better quality and reduction in price. Overall bargaining power depends on the buyer, but it is moderate to high.
Bargaining Power of Suppliers
The supplier in the defense industry is the one who provides raw material and parts. The supplier can exert its powers and reduce the profitability of the company. The market is concentrated, and the buyer is limited (Martin, 2019). The supplier in this industry holds power because of the cost of integration with the company. The industry wants to keep working with its suppliers because of integration and the quality of the product. The defense contracts usually take decades to complete. The company doesn’t want to compromise on its product. It results in long-term recurring contracts for the supplier. The forward integration cost & duration of the contract can act as the bargaining chip for the supplier. There are very few defense industries that use their in-house facilities to make their products and vertically integrated. Vertically integration requires a huge amount of capital. Which the majority of companies can’t afford. Then overall bargaining power is higher in favor of the supplier.
References
Deloitte (2021) 2021 aerospace and defense industry outlook. Available at: https://www2.deloitte.com/us/en/pages/manufacturing/articles/global-aerospace-and-defense-industry-outlook.html
Fortune. (2021) Lockheed Martin. Available at: https://fortune.com/company/lockheed-martin/fortune500/
Fortune. (2021) Northrop Grumman. Available at: https://fortune.com/company/northrop-grumman/fortune500/
Fortune. (2021) Raytheon Technologies. Available at: https://fortune.com/company/united-technologies/fortune500/
Lineberger., R (2019) 2018 global aerospace and defense industry outlook. Available at https://www2.deloitte.com/content/dam/Deloitte/us/Documents/manufacturing/us-mfg-2019-global-a-and-d-sector-outlook.pdf
Martin., M (2019) How Porter’s Five Forces Can Help Small Businesses Analyze the Competition. Available at: https://www.businessnewsdaily.com/5446-porters-five-forces.html
Northrop Grumman. (2021) What we do. Available at: https://www.northropgrumman.com/what-we-do/
Porter., E. M (1979) How Competitive Forces Shape Strategy. Available at: https://hbr.org/1979/03/how-competitive-forces-shape-strategy
Serbu., J (2020) Pentagon R&D spending still lags behind an otherwise healthy Defense budget. Available at: https://federalnewsnetwork.com/defense-main/2020/10/pentagon-rd-spending-still-lags-behind-an-otherwise-healthy-defense-budget/