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Liz Varga and Peter Allen, Cranfield School of Management page 1
A case-study of the 3 largest aerospace manufacturing
organizations: An exploration of organizational
strategy, innovation and evolution
Liz Varga and Peter Allen
Cranfield School of Management
Cranfield University
Beds. MK43 0AL
England
Abstract
Many of the most successful firms have placed a strong emphasis on strategy. Strategies
help decision-makers in organizations to think through what the organization needs to
achieve and how these needs may be satisfied. This case study considers what the Chief
Executive Officers of the top three aerospace manufacturers say about their strategies and
how these strategies are being implemented. The aerospace manufacturing industry is
interesting from a number of respects: its dependence on innovation, its global nature, its
relationships with government and other firms and the different characteristics of the civil
and defence markets. This aerospace manufacturing triad is also interesting because of
its industry sector coverage; one is a largely defence aerospace manufacturer, the second
a largely commercial aerospace manufacturer and the third, an aerospace manufacturer
with a balanced portfolio.
Strategies are shifting to take an holistic view of the firm as the firm is increasingly being
recognised as a complex system. This holism is particularly evident in the manufacturing
firms examined, as they balance innovation, strategy and organizational characteristics in
an evolutionary manner. Innovation is fundamental to evolution and this case study
employs a novel holistic approach to innovation portfolio assessment. A Complex
Systems perspective is taken for organizational analysis allowing the examination of how
fluctuations, resource richness, freedom, capacity to innovate, culture, technology and
strategy are balanced and made synergetic. This case study reflects upon how these
organizations’ strategies are reflected in their organizational forms, their investments in
innovations, their performance and ultimately in their potential to evolve.
Strategic perspective
The creation of strategies and acting strategically places a focus on the long term and the
things that are essential for evolution. Anderson (1999) applies complex systems models
to strategic management and concludes that this leads to an “emphasis on building
systems that can rapidly evolve effective adaptive solutions”. Strategic direction requires
environments to be managed and reconfiguring the organizational architecture to fit
anticipated adaptation of agents.
Liz Varga and Peter Allen, Cranfield School of Management page 2
The allocation of resources in line with strategic plans ensures that short-term
interruptions do not deflect from long-term goals. However, strategies need to be
adaptable to changing circumstances. Exploration is fundamental to adaptation and
complexity science provides a theoretical basis for empirical findings, in particular,
archetypal patterns of strategy, structure and environment (Maguire, 1999).
Strategy and strategic change itself are influenced by the extent to which leaders believe
that it is driven by content (that is structure) and by process. Strategies driven by content
are influenced largely by the field of economics and focus is on management activities
that aim to achieve pre-determined, optimum, rational objectives. These include 1) the
Strategy-Structure-Performance school, concerned with scale, scope and form of
organizations 2) the Structure-Content-Performance school concerned with position and
market power and 3) Resource-Based View and core competencies. They are similar in
that they make assumption about economic rationality and Newtonian concepts of
equilibrium and stability (MacIntosh and MacLean, 1999).
There is now increasing recognition of the importance of key intangible organizational
attributes, such as tacit knowledge, learning and intelligence that may signal a more
evolutionary view of economics and a demand for a new paradigm focused more on
process-driven strategies, essentially challenging the fact that economic rationality should
be the primary determinant of strategic behaviour. The process-driven school focuses on
the extent to which strategy and change are dominated by events and activities that
emerge from a wide variety of influences. The school includes 1) the way that decisions
are made 2) implementation of strategic change which considers the scope or pace/type
and particularly identifies the importance of organizational form with distinct behavioural
implications (MacIntosh and MacLean, 1999).
This case study will assess the clarity of long-term goals, resource alignment to long-term
goals, the extent of adaptability of the strategy and whether the emphasis in strategic
focus is on content (structure) or process, for the three companies that form the
substantive focus.
Innovation perspective
In his PhD thesis, Adams (2003) presents an holistic approach to innovation
classification. Three innovation types (Readily Adopted, Challenging and Under Cover)
form a generalisable framework of innovation, enabling comparison across cases, based
on the innovation as the unit of analysis. The benefit of this holistic approach in
innovation research is that it enables those items that have traditionally been viewed as
discrete (i.e. as multiple attributes) to be meshed in a powerful integrating device. This
integrating device is the residue of a thorough analysis of literature research and case
study, It ensued from an analysis of descriptions of constructs, construct inter-
relationships, organizational contexts, processes from multiple stakeholder perspectives,
various data collection methods and levels of analysis. It has enabled the exploitation of
the richness of case study (Yin and Heinsohn, 1980) and reflected the significance of
Liz Varga and Peter Allen, Cranfield School of Management page 3
organizations as complex systems. The analysis provided nomothetic advantages by
examining cross-sectional patterns by statistical examination across varying situations
(Lucas, 1974) eliminating the lack of generalisability of single cases and enabling
generalisation to large populations. The innovation framework is adopted in this case
study as a means of evaluation of the innovations of the three organizations explored.
Innovation attributes are classified by four first order categories: Newness, Ideation,
Application and Benefit. Figure 1 below positions each innovation attribute into a first
order category.
First-order
Category
Sub-
category
Description
Newness
Novelty
The extent of change represented by the innovation compared to what
preceded it.
Departure The extent of change to existing practice, routines, behaviour.
Disruption
The extent to which the departure from prevailing practice occurred in a
disruptive manner.
Risk
The extent to which the innovation is inherently risky or threatens
individuals, the institution or user base
Ideation
Ideation Innovation is the consequence of combinations of existing and new
knowledge. 3 levels of ideation: ‘originated’ (wholly original); ‘borrowed’
(copied, with no modification); ‘adapted’ (modified to fit the local
context).
Application
Uncertainty
Knowledge concerning the link between innovation inputs, processes, and
outcomes.
Scope
The extent to which the innovation stands-alone (within the context of its
application), or requires changes elsewhere (outside the group).
Complexity
The extent to which the innovation, regardless of scope, by dint of its
connections (inherent or in terms of other social units) to other parts,
renders it difficult to understand and use.
Adaptability
The extent to which the innovation can be refined, elaborated and
modified according to the needs and objectives of the group.
Benefit
Relative
Advantage
The extent to which an innovation is perceived as being better than the
condition it supersedes.
Actual
operation
The extent to which the innovation is perceived to have satisfied original
objectives set for it.
Observability
The extent to which the innovation is observable by others.
Profile
The extent to which the innovation raises personal, group or institutional
profile.
Figure 1: Innovation Attributes (Adams, 2003)
The interesting result that Adams found was that an extensive study of many different
innovation cases led to the identification of essentially only three types of innovation.
Considering all the “a priori” possible permutations of the list above (2
13
if we consider
High and Low for each) Adams scores innovations by considering the significance of
their underlying innovation attributes. The classification is presented in Figure 2 below.
Some innovation attributes are not significant in the classification and are greyed out in
Figure 2, others are found to be significantly low or high or not applicable (shown with a
dash).
Liz Varga and Peter Allen, Cranfield School of Management page 4
First-order
Category
Sub-
category
Readily
Adopted
Challenging Under Cover
Newness
Novelty
Departure
Disruption Low High -
Risk Low High -
Ideation
Ideation
Application
Uncertainty - - Low
Scope - High Low
Complexity - High -
Adaptability High - -
Benefit
Relative
Advantage
Actual
operation
High - Low
Observability High - Low
Profile - - Low
Figure 2: Innovation Types (Adams, 2003)
It is the underlying nature of these innovation types that is of primary interest as Adams
proposed underlying process characteristics of the innovation types. Readily Adopted
innovations have a focus on initiation activities, particularly idea screening and business
analysis. Solutions need to mould to local circumstances and the requirement for
adaptability is high. The presence of a champion is indicated for Readily Adopted
innovations. Challenging innovations are characterised by high ratings for risk,
disruption, scope and complexity. They are focused on implementation rather than
initiation. Under Cover innovations are notable for an absence of management
commitment outside the innovating group although management commitment has been
positively associated with innovation success.
There would be considerable interest in examining the reasons why so many potentially
possible types are not found. Something like organizational systematics (McKelvey,
1978) or the “cladistic” models (Allen, Strathern, and Baldwin, 2005) may be able to
show the incompatibility of certain pairs.
Here, however, we are interested in studying and classifying the innovations identified by
the CEOs in their annual reports by evaluating the significance of relevant innovation
attributes. The classification allows discussion of the portfolio of innovations which
emerges and so the innovation framework is used as a typology facilitating analysis.
Organizational perspective
The third and final perspective contributing to this case study is the organizational
perspective which focuses on the evolution potential of each organization.
Liz Varga and Peter Allen, Cranfield School of Management page 5
Complex Systems Theory is concerned with the perspective of an organization as a non-
linear dynamical system that is continuously probing its own stability with fluctuations of
various kinds. Non-linearity describes the fact that variables are linked by
“disproportionate” responses. This can either be negative in the sense that a fluctuation is
damped, and the previous condition is stable, or it can be positive, in which case a
fluctuation can be amplified and can transform the system structure (Allen, 1994).
In any case, a complex system is always fluctuating. Fluctuation is essential for the
existence of a complex system, whether it is at the microscopic, macroscopic or any level
between. Our observations of fluctuations in the complex system are time-bound and so
we cannot say at any one time that the system is stable or otherwise because of the
arbitrary long transients that may occur prior to settling on a structural attractor.
Fluctuations originate from both within and without the organization. One or more of
these fluctuations (or perturbations) in some combination are capable of initiating change
and evolution in the organization. Most fluctuations are absorbed and so the emergent
structures observed at the macroscopic layer as a consequence of the permitted
fluctuations are likely to be robust and significant.
When the current stability of the structure of a system is tested for example when a new
idea or practice is “trying” to invade, it encounters a ‘fork in the road’ or bifurcation
point. It is at these points that the system can self-organise through unpredictable leaps
into different states (Kauffman, 1991). If the old dominant organizational form or
attractor basin can dissipate the force or instability then potential changes fail and the
system reverts to a variation of its former state. If the new set of influences takes
advantage, the forces or energies go into the formation of a new configuration.
Bifurcation points and attractors always exist as latent potentials within any complex
non-linear system and they signal the potentials for self-organization and the evolution of
new form.
A stable organization, that is, one not experiencing much fluctuation is not evolving. It
may be surviving and perhaps doing so profitably however its evolution is uncertain. If
the organization’s resources have requisite variety (Ashby, 1962) and are deployed and
exploited for the benefits of the organization during times of environmental change, then
the organization may continue to exist. This very existence may consume excessive
resources and may not be viable or sustainable in the long term.
Any change to the practices or components within a complex system may influence the
extant structural attractor of the system. If some bifurcation point occurs and a different
structural attractor emerges, this could become the new norm. Arriving at bifurcation
will be due to the new combination of components in the system, which themselves may
not yet have settled. The system may re-organize to the new structural attractor if it is
‘better’ in some qualitative sense that the extant one. Any re-organization is
unpredictable and self-organizing because the relationship between components and the
system is non-linear. And in excessively turbulent environmental conditions,
hyperturbulence can overwhelm adaptive capacity beyond management (McCann and
Selsky, 1984)
Liz Varga and Peter Allen, Cranfield School of Management page 6
A particularly strong metaphor for evolution is that of the organization as a biological
organism (Morgan, 1997). This metaphor captures the view of organizations as living
entities and suggests the existence of different species and of variety. It emphasises the
need for ecology, i.e. understanding the inter-relations between organizations and their
environments. The metaphor also suggests that the management of organizations can be
improved through systematic attention of the needs that must be satisfied for an
organization to survive. This focus on needs encourages the insight of organizations as
amalgams of interacting characteristics, including those driven by culture, technology and
strategy, which have to be balanced in order to survive. Further, the health of the overall
system is dependent on the extent of synergy between such interacting characteristics
(Allen, 1994).
The importance of organizational form, that is, the particular set of characteristics that
makes one organization similar to or different from another organization, is highly
applicable to the process of innovation. When a new invention arises either in the
environment or in the organization, the organization’s capability to innovate (or indeed to
decide not to innovate) is dependent on its organizational form. And, this is largely
dependent on the path along which it has evolved.
The organizational perspective will form the final part of the analysis framework. Key
points for identification are a) the fluctuations that exist within each organization and
outside it to determine if the organization is evolving or relatively stable; b) the attractor
basins (or latent potentials) in order to suggest how the organization may evolve; c)
whether each organization’s resources have adequate variety to exploit changes in the
environment and if the needs are being satisfied systematically; d) whether the interacting
characteristics of culture, technology and strategy are balanced and what synergies are
present; e) what capacity the organization has to innovate and f) how its organizational
form helps it innovate. Making these evaluations is limited by the nature of the research
however the same process is applied without bias to each organization in the case study.
Research method
A grounded, qualitative, inductive approach is taken in examining the public-domain data
related to the three organizations in this case study. A breadth in data coverage and data
source was the target as the focus on the case study was to identify specific
organizational constructs that pertained to evolution. The use of multiple sources
permitted some triangulation although all data used were public domain, second order
data and so my interpretation of this interpreted data will bias my results. My own
expectations in using a complex systems lens were to find indications of evolution in: 1)
modularity and de-composability of components, that will increase the overall fitness of
the firm and its capability to mutate Simon (2002), 2) integration and aggregation
(Holland, 1995) of components in a synergetic manner (Allen, 1994) that is emergent, 3)
non-linearity and feedback causing self reinforcing patterns or structures (Arthur,
Ermoliev and Kaniovski, 1987), 4) self-organization (Kauffman, 1995)) and self-
reference in the creation of structure through the process of social construction
Liz Varga and Peter Allen, Cranfield School of Management page 7
(Hofstadter, 1976)) and 5) components of systemic survival (diversity, inter-dependence,
flexibility, cooperation and partnership, cyclical flow of resources (Capra, 1996)).
The primary source of data collection for the company strategy and innovations of each
of these companies was the Chief Executive Officer (CEO) statements in current
published annual reports. These reports were coded sentence by sentence using content
analysis to identify constructs that each CEO (or his writer) had used to describe the
evolution of the firm. These constructs were then organised into themes for each CEO
report on a within-case basis by clustering constructs that were similar. The specific
words and language used in each CEO statement plus frequency and size devoted to the
construct, together with the themes, were analysed in order to arrive at some conclusions
as to the relative importance of evolutionary activity of the firm. The emphasis indicated
by the CEO of particular evolutionary activity, for example, by stating that this ‘came
first’ or ‘was most significant’ was used as a gauge to assess its relative importance to the
firm. Each CEO statement was analysed in this way and triangulated with business
reports (via electronic business data sources) regarding these companies. Where
anomalies were found between CEO statements and business reports, some scepticism
was recorded against the relative importance of the CEO emphasis. In addition, the
companies’ web-sites were used to obtain further details of each of the innovations
mentioned in the annual reports. Cross-case assessment was carried out as the final stage
of analysis to explore the differences and similarities between the cases.
Substantive focus
The two primary sectors in the aerospace industry are commercial and defence aviation.
Each sector is dominated by two key firms: Boeing and EADS (largely Airbus) in the
commercial sector and Boeing and Lockheed Martin in the defence sector (Aerospace
Innovation and Growth Team, 2003). Based on figures from their latest annual reports,
comparative analysis has been carried out. Note that the figures for EADS are in Euros
and that the more recent (2003) Annual Report from Lockheed Martin has been used.
Boeing’s revenues are largely equal between the two sectors being 53% commercial and
47% defence. Boeing’s revenues roughly equal that of its main competitors in each
segment: Boeing’s commercial revenue of $28.7bn exceeds that of EADS’s commercial
revenue of €24bn and Boeing’s defence revenue of $25.4bn falls short of Lockheed’s
defence revenue of $30.1bn. EADS makes 80% if its revenue from the commercial
market. Lockheed Martin has 95% of its revenues in the defence market. See Figure 3 for
a comparative analysis of revenue. With 166,800 employees, Boeing is by far the largest
employer; Lockheed Martin has 130,000 employees and EADS just over 100,000. Figure
4 presents revenue per employee with Boeing achieving the greatest performance.
Boeing sold 381 commercial planes and EADS sold 303 in these periods; the number of
commercial planes sold per 100,000 commercial employees (determined as the
proportion of commercial revenue to total revenue) also shows Boeing as the better
performer in Figure 4.
Liz Varga and Peter Allen, Cranfield School of Management page 8
All three organizations aspire to excel, be global leaders or to be the best. With
overlapping and competing products, they provide excellent challenge to each other.
Revenue and Operating Profit
0
10
20
30
40
50
60
Boeing (2002) Lockheed Martin (2003) EADS (2002)
Revenue $bn (EADS in €bn)
0
0.5
1
1.5
2
2.5
Consolidated Operating Profit $bn (EADS in €bn)
Defense -
Military, missiles
& systems
Defense Space
and
Communications
Civil Space &
Communications
Civil/commercial
planes
Consolidated
operating profit
Figure 3: Comparative Analysis of Revenue and Operating Profit
In commercial aircraft manufacture, manufacturers must produce very high quality,
reliable airplanes at competitive prices. Technological innovation and feature
differentiation are very desirable but it is more important to remain competitive. Access
to global markets and manufacturing process technology is also vitally important. In
defence aircraft manufacture, manufacturers must offer aircraft with innovative features
that are technologically more advanced. Cost is not of primary concern. Design secrecy
is highly important and the prime customer is usually the home country’s Government
(Albert Antoine, Carl B Frank, Hideaki Murato and Edward Roberts, 2003).
Liz Varga and Peter Allen, Cranfield School of Management page 9
Per employee statistics
0
50,000
100,000
150,000
200,000
250,000
300,000
350,000
400,000
Boeing (2002) Lockheed Martin (2003) EADS (2002)
Revenue per employee $ (EADS in €)
0
50
100
150
200
250
300
350
400
450
500
Commercial Planes
Revenue per
employee
Commercial airplanes
delivered
Commercial Airplanes
per 100,000
'commercial'
employees
Figure 4: Performance per Employee
Boeing
Boeing is the largest aerospace manufacturer with turnover twice that of its nearest
competitor. Global revenues were $51.1 billion in 2002 of which 53% were generated
from Boeing Commercial Airplanes and 47% from Integrated Defense Systems (Boeing,
2003). The commercial/defence portfolio mix has changed markedly since 1993 when
80% was generated from the commercial market. Philip Condit was the Chairman and
CEO at the time of the annual report publication but resigned on 1
st
Dec 2003 at age 62
marking the end of 7 years at the helm. Condit’s resignation followed shortly after his
firing of the Chief Financial Officer for alleged unethical practices and the July 2003
punishment by the Pentagon for possessing 35,000 pages of stolen Lockheed Martin
documents (Business Week, 2004) A class action accusing Boeing of underpaying
female employees and denying them promotions was set to the largest sex-discrimination
lawsuit ever to go on trial but has since been settled out of court (Seattle Post
Intelligencer, 2004). New CEO Harry Stonecipher is the retired Boeing president aged
67 and was chief of McDonnell Douglas when Boeing bought it in 1997 (Time Canada,
2003). Condit, recognised as a brilliant engineer, moved Boeing from Seattle to Chicago
in 2001 (Fortune (Europe), 2003).
Philip Condit’s statement in the Annual Report (Boeing, 2003) is entitled “Defining the
Future” which has immediate focus on the evolution of the industry. He covers three
explicit topics: Strategy, Execution and Markets.
Condit desires Boeing’s strategy to be adequately abstract so as not to have to change
frequently. The strategy is to “Excel in All Principal Aerospace Markets”. This has
Liz Varga and Peter Allen, Cranfield School of Management page 10
meant creating a diversified company “of unrivalled breadth and balance”. Boeing
perceives balance providing greater stability, strength and agility and to this end they
have created a company with ‘balanced’ revenue from civil and defence markets. With
this diversification comes compromise since each market segment is likely to provide
variable levels of profitability and whereas one segment’s profit might smooth another’s
loss, overall, profitability cannot be optimal. Condit also retains a technical focus to
Boeing’s Strategy requiring the delivery of outstanding performance. Company growth
is also identified.
The Strategy itself is tri-part:
1) Run healthy core businesses, no exceptions and no excuses
2) Leverage our strengths to enter new markets where we have the customer
knowledge or the technology to make an immediate impact
3) Open new frontiers in aerospace with the potential to transform the future
Boeing put operations first, entering existing markets where they have competences next
and developing new markets last. This is a risk-averse profile, limiting feedback and
self-organization.
Condit’s description of Boeing ‘execution’ is centred on customer and investor
satisfaction, by “reliability and excellence in financial performance as well as technical
performance”. The importance of meeting expectations and taking immediate and
decisive action is highlighted, an example being to match capacity to demand following
9/11. The Boeing expectation is of further reductions in commercial airplane deliveries.
Lean manufacturing and the introduction of moving lines have reduced final assembly
times, an innovation focussed on efficiency improvement and cost reduction, but
evidencing integration and aggregation.
Concurrent investment in the future of the business is demonstrated by investment in the
new 7E7 and derivatives of existing planes, the Extended Range 747-400ER and 777-
300ER.
Condit states that the “best companies … shape the markets of tomorrow.” He recognises
the different characteristics of commercial and non-commercial markets. For commercial
aviation and space he notes the prolonged downturn. For defence and non-commercial
space, the markets are strong and growing. Condit demonstrates Boeing’s market
shaping by the creation of the city-to-city non-stop low-cost and convenience market
fragment they have created by airplane range performance improvements having
exploited opportunities in regulatory liberalisation.
Condit identifies Boeing Connexion and Boeing Air Traffic Management businesses as
having “the potential to transform the future of flight.” Integration in the defence arena
is offering “tremendous opportunities… in a networked world of interoperable platforms
and systems”. Boeing’s re-organization of military aircraft and missile systems and
space and communications businesses into a single organization, Boeing Integrated
Defence Systems, demonstrates Boeing’s own belief in integration.
Liz Varga and Peter Allen, Cranfield School of Management page 11
In Condit’s concluding remarks, he looks to the Future for Boeing. The anticipation is
for solid financial results, demonstrating the balance that the portfolio mix is having for
Boeing. Condit answers his own rhetorical question “Why am I confident of the future of
the Boeing Company?” and his answers are 1. great people, 2. right strategy 3. good
execution 4. shaping markets of tomorrow 5. character and integrity of the company.
Although ‘great people’ are cited first, his strategy does not mention the investment in
learning and innovation that Boeing provide. These include the Learning Together
Programme which is underpinned by Boeing’s Vision 2016 to have the best educated
workforce in the world, and the Chairman’s Innovation Initiative which identifies new
business concepts and spin-outs and expansion of the intellectual property portfolio by
generating new invention disclosures and patent application.
According to Adams’s (2003) innovation framework, Figure 5 below is presented as an
analysis of the innovations identified in the Boeing annual report (2003). The innovation
types were determined following an assessment of the apparent significance of the
innovation attributes (disruption, uncertainty, etc – see Figure 2) as discussed in Boeing’s
annual report. Each innovation could be classified by Innovation Type. A discussion
appears after the EADS and Lockheed Martin summaries.
Innovation Sector Newness Application Benefit Innovation
Type
Boeing Connexion Commercial Low - High Readily
Adopted
Delta IV booster Defence High High - Challenging
Ground-based Midcourse
Defense program
Defence High High - Challenging
X-45A Unmanned Combat
Air Vehicle
Defence High High - Challenging
Boeing Air Traffic
Management
Commercial - Low Low Under Cover
747-400ER (extended
range)
Commercial Low Low Low Under Cover
777-300ER Commercial Low Low Low Under Cover
Boeing 7E7 (bulk of R&D
in Commercial Airplanes)
Commercial - - Low Under Cover
Lean manufacturing (and
moving lines) Commercial
Airplanes
Commercial Low - Low Under Cover
Figure 5: Boeing Innovations
EADS
EADS is the second largest aerospace and defence company with turnover of €29.9
billion (European Aeronautic Defence and Space Company EADS N.V., 2002). With 1
Euro worth 1.04 USD, the exchange rate was close to par at the end of 2002. The Euro is
now stronger and exchanges for approximately 1.28 USD (2006). Around 80% of EADS
revenues arise from the commercial market to which Airbus contributes significantly.
EADS are moving towards an expected financial recovery.
Liz Varga and Peter Allen, Cranfield School of Management page 12
EADS, with head-offices in France and Germany, has 2 Chief Executive Officers –
Philippe Camus and Rainer Hertrich. A recent article, one of a very few relating to
EADS, finds Camus endorsing the creation of a European armament, military capabilities
and research agency to combat tighter US technology transfer restrictions (Aviation
Week & Space Technology, 2003).
The “Message from the CEOs” in the Annual Report is organised into a question and
answer format. It covers the EADS activity in three markets – Defence, Civil and Space
and then explores the strengths and strategy of EADS.
Although the building up of the defence side of EADS is a strategic priority, the CEOs
recognise the nature of the defence projects as long-term and subject to political change.
Completed projects include the creation of MBDA, the 2
nd
largest missile systems
company in the world. The importance of partnership is recognised include partnerships
with BAE Systems and Finmeccanica. Preferred bidder status with the UK MoD
(Ministry of Defence) is expected to help their breakthrough into all European Markets
and even NATO. The creation of North American EADS is expected to improve market
access to the US and particularly to gain access to US technology. These comments from
the CEOs recognise the need for systemic survival, in particular co-operation and
partnerships.
The CEOs note that the A400M programme in Germany is expected to “trigger synergies
with Airbus civil activities”. The Airbus fleet has a unique advantage of operational
commonality, leading to savings for operators in terms of crew training and improved
efficiency and flexibility. This recognises the need for modularity in complex systems.
The Civil market is described as lacklustre, driving production down 22% to 303 aircraft
albeit up on market share. The down-cycle is harsh and unpredictable but Airbus state
they are better shape than ever to manage it, particularly by productivity improvements
and benefits of scale. Development of the very large future aircraft A380 is self-
financed, entering peak R&D and capital expenditures. Increased demand for Eurocopter
places it holding 60% of market share in this segment.
Space business is the most challenging for EADS, suffering from both over-capacity and
lower demand. EADS’s launcher business is directly affected by the difficult
telecommunications satellite market and by the problems with the new Ariane 5 ESCA
launcher that are being worked on. Opportunities are expected to deliver in programmes
like Paradigm and Galileo.
The strategy for global leadership has been pursued successfully, despite the difficult
environment, due largely to EADS’s capacity to react and adjust to uncertainties and the
building of a strong, united company. A clear vision over growth is expected via EADS
International, which supports marketing around the world, and works across divisional
boundaries. EADS is ambitious to achieve and maintain global leadership but also to
take a realistic approach recognising the unpredictable nature of the world. The CEOs
recognise that feedback occurs and there is need for flexibility. Tactics are to look for
Liz Varga and Peter Allen, Cranfield School of Management page 13
cost savings and cash generation where growth is not available and to give demanding
development targets where growth prospects exist. EADS recognises its main strengths
as successful products and quality of their people.
Figure 6 below is presented as an analysis of EADS’s innovations using the same
innovation framework and method as for the Boeing assessment. The discussion
appears after the Lockheed Martin summary.
Innovation Commercial/
Defence
Newness Application Benefit Innovation
Type
555-seat A380, largest ever
civil aircraft
Commercial High High High Challenging
Ariane 5 ESCA launcher Commercial High High High Challenging
A400M military transport Defence High High - Challenging
Air Re-fuelling Boom
System Development
Defence High High - Challenging
CN-235 with FITS (Fully
Integrated Tactical Mission
System)
Defence High High - Challenging
Tiger military helicopter &
NH90 military transport
helicopter
Defence High High - Challenging
Eurofighter combat aircraft Defence High High - Challenging
Missiles – Meteor, Aster &
Storm Shadow
Defence High High - Challenging
Galileo satellite navigation
system
Defence High High - Challenging
Paradigm space-based
defence communication
Defence High High - Challenging
A340-500/600 ultra long-
range
Commercial Low Low Low Under Cover
A318 – 100 seater regional
airliner
Commercial - - Low Under Cover
Figure 6: EADS Innovations
Lockheed Martin
Lockheed Martin Corporation is the third largest aerospace manufacturer with turnover of
$31.8 billion in 2003 (Lockheed Martin Corporation, 2003). 95% of their business is in
the defence market. Lockheed Martin CEO Vance D. Coffman was named Chairman on
24 Apr 1998 succeeding Norman R. Augustine who remained a director (The Wall Street
Journal (Eastern Edition), 1998). Coffman retired on 6
th
August 2004 and Robert Stevens
has taken over as CEO.
At the top of Lockheed’s priorities is customer satisfaction as stated by Coffman in the
Annual Report. This is aided by the creation of Integrated Systems & Solutions and the
Global Vision Network that are enabling collaboration among customers and Lockheed.
Lockheed are keen to manage expectations and note that a government contractor they
are subject to oversight but that Government indemnification does not cover all risks.
Liz Varga and Peter Allen, Cranfield School of Management page 14
The commercial launch vehicle market place is recognised as very competitive with low
demand for new satellites and excess capacity in the telecommunications industry.
Opportunities are identified in space exploration. Defence business, in particular military
missions and reconstruction in Iraq and Afghanistan, is strong. The emphasis on
homeland security is expected to increase demand for Lockheed’s capabilities in air
traffic management, ports and waterways security, biohazard detection systems for postal
equipment and information systems’ security.
Lockheed has sold its commercial IT business to ACS in a transaction where Lockheed
bought the defence and most of the civil government IT business from ACS. There is
apparent focus on network-centric solutions for defence and national security customers
and on Citizen-centred civil government solutions using capabilities in critical
intelligence, knowledge management and e-Government. Both these activities recognise
the need for integration of complex systems. There is expected growth in business-
process outsourcing due to legislative change in public/private competitions and from the
government in upgrading and investing in new information technology systems and
solutions. Lockheed are continuing to focus resources in support of infrastructure
modernisation allowing interoperability and communication across agencies. Finally,
opportunities are also identified through organizational changes, where Lockheed can
leverage technical expertise across the organization.
Market focus is demonstrated by the reorganization of Lockheed’s business areas to
address the “changing and increasingly complex needs of our defense customers,
especially in the critical area of Information Superiority”. Lockheed’s focus as a lead
systems integrator recognises the emerging priority of the US Department of Defense
towards “joint operations, net-centric command and control and integrated capabilities
of the armed forces”.
Innovation is evident in the multiplicity of solutions. Globalisation and
internationalisation is demonstrated by the creation of the “Global Vision Network … and
the Global Vision Integration Center in Suffolk, Virginia”. The skills of “this innovative
corporation of 130,000 dedicated men and women… who bring a passion for invention”
and recognition that a “diverse and talented workforce is fundamentally important to our
future competitiveness”; and “superior development processes (and process
improvement)”.
Customer satisfaction and operational performance are high on the list of priorities.
These are achieved by recruitment and retention of the best people, the use of efficient
methods, such a lean manufacturing techniques, the importance of values to inspire the
management team and ethics and the importance of social responsibility.
Coffman’s vision for Lockheed to be the “best advanced technology systems integrator”
is consistent with the focus in resources. Coffman reflects on the successful execution of
their strategy of disciplined growth evidenced with a third straight year of positive
momentum in sales and operating profit. Coffman is now handing over and is “confident
that the future of Lockheed Martin is indeed bright and the best years are ahead”.
Liz Varga and Peter Allen, Cranfield School of Management page 15
Figure 7 below is presented as an analysis of Lockheed’s innovations using the same
innovation framework and method as for the Boeing assessment. The discussion
appears below.
Innovation
Commercial/
Defence
Newness
Application
Benefit
Innovation
Type
E-government solutions Defence (Civil) Low - High Readily
Adopted
Patriot Advanced Capacity
(PAC-3) missile
Defence High High - Challenging
Atlas V (or EELV)
launcher
Commercial High High - Challenging
Defence
F/A-22 Raptor Defence - - Low Under Cover
F-35 Joint Strike Fighter Defence High High - Challenging
Spitzer Space Telescope Defence High High - Challenging
Joint Air to Surface
Standoff Missile
Defence High High - Challenging
Global Vision Network Defence Low - High Readily
Adopted
ACS transaction Defence - Low Low Under Cover
Titan acquisition Defence - - Low Under Cover
LM21 (process
improvement and lean
manufacturing)
Defence Low - Low Under Cover
Figure 7: Lockheed Martin Innovations
Just one year prior to his handover of the chairmanship to Coffman, Augustine handed
over the CEO reigns to Coffman. At this time he offered 12 suggestions for the survival
of the US defence industry (Augustine, 1997). These suggestions are identifiable and
aligned with Coffman’s final CEO statement. Coffman’s recognition of the importance
of social responsibility is the only one Augustine does not mention.
Discussion
Boeing’s move from 80/20 commercial/defence revenues in 1993 (roughly the same as
EADS has in 2002) to 53/47 in 2002 is consistent with the strategy of reducing
dependence on the cyclical commercial airplane market. However, it is fortuitous that
Boeing had reduced its exposure to the commercial market by the time of the 2001
terrorist attack in New York that prompted a significant downturn in civilian travel but an
upturn in the defence market. Boeing’s resources had adequate variety to exploit the
changes in the environment and were aligned with the change. Further demands for
integrated solutions in the defence market have prompted a re-organization within Boeing
and the creation of a new business unit that should help it to innovate further. This is
particularly important in the defence market. In terms of strategic thinking, Boeing’s
strategy is driven by content/structure and traditional economic rationality.
Liz Varga and Peter Allen, Cranfield School of Management page 16
An analysis of Boeing’s 9 innovations reveals Boeing’s focus in the commercial market.
67% of its innovations are in the commercial sector although its revenues from this sector
amount to only 53%. This can indicate its desire to strengthen its commercial market
position. All 3 defence innovations are Challenging innovations, indicating a focus on
implementation. There is an absence of Readily Adopted innovations in the defence
industry innovations which signals a search for generic defence solutions rather than
locally customisable innovations. All bar one of the remaining 6 innovations are Under
Cover innovations. Adams (2003) found an absence of management commitment
(outside the innovating group) in Under Cover innovations and if the same is true for
these innovations, there are implications for Boeing given the number of such
innovations, assuming that the assessment of innovation type is correct. Only one
innovation is of Readily Adopted and this is in the Commercial sector. This indicates
that there is a product champion for Boeing Connexion and that it is highly adaptable
innovation.
There is evidence that interacting practices of culture, technology and strategy are
balanced however Condit does not mention that Boeing are building a Global Enterprise
(Boeing, 2003). Also, its investments in technology-focussed venture capital funds are
not reviewed by the CEO and these are potentially key sources of innovative strength.
How these fit with ‘Execution’ is also not clear. The strategy does not consider how
market demand for commercial and military aircraft may change in the medium and long-
term. If the safety and security features being developed now are implemented in the
short-term and more people are encouraged to fly, then surely the mix will favour
commercial aircraft in the medium-term. In the long-term however, commercial flight
may be significantly curtailed because of escalating environmental conditions aggravated
by airplane emissions. Homeland defence demand is unlikely to be curtailed in this way.
Boeing’s strategy for a balanced portfolio will keep options open to them.
Perturbations within Boeing include the dismissal of the Chief Finance Officer and the
resignation of the CEO. This is particularly poignant as the CEO described the
importance of integrity in his annual statement. These departures are likely to push
Boeing into a new evolutionary direction. The resurrection of retired Boeing president
Stonecipher as the new CEO will be a holding position that is intended to bring some
stability in the light of outstanding actions and thus will pull Boeing back to its existing
attractor basin. This move will stifle evolution and enforce risk aversion. Until a new
CEO is appointed it is difficult to predict how Boeing will evolve.
EADS is vulnerable to the lower demands for civil airplanes and satellites/launchers
because of its exposure to this market segment. These fluctuations outside the
organization are reflected in the cutting back of production and greater need for
productivity efficiencies within EADS. There is some mitigation due to successful
growth in the defence market and in the Eurocopter. Overall, EADS is unlikely to be in a
stable situation and it is likely that structural attractors favouring the defence market and
customised personal transport (such as the Eurocopter) will be stronger.
Liz Varga and Peter Allen, Cranfield School of Management page 17
An analysis of EADS’s innovations highlights the company’s focus on defence market
implementation. Of the 12 innovations, 10 are Challenging innovations, and all
innovations in the defence market are Challenging innovation. Of the 4 commercial
innovations, 2 are Under Cover innovations; these are the long-range and the regional
airplane projects. The absence of Readily Adopted innovations could indicate the lack of
product champions in EADS. For an organization that achieves 80% of its revenue from
the commercial sector, only 33% of its innovations are in the commercial sector. This
too indicates the company’s push into the Defence market. The innovation portfolio is
unbalanced across innovation types and across markets signalling the potential for
significant internal fluctuation.
EADS is exposed to the civil airplane market however it has weathered storms before and
can perhaps withstand fluctuations in demand. Culture and technology appear to be
balanced and a strategy to grow defence using innovative staff is synergetic. This
demonstrates a more process-driven strategy. The organization invests substantially in
research and development and obtains grants for research. If progress in the space
market does not materialise, there will be a structural attractor away from this work and
maintaining a position in this market will be difficult.
In the medium-term, the structural attractor of the civil airplane market is likely to
strengthen for EADS as security improves and demand increases, particularly for long-
haul cheap flights. The A380 may arrive with perfect timing but will require the adaptive
ability of the organization to exploit it fully. In the long-term, the growth of the defence
(and space) business is the only area for evolution and this is already reflected by the
focus on defence market innovations.
Lockheed Martin has experienced significant recent growth of nearly 20% in 2003 and
11% in 2002. This is a reflection of the demand in defence and military aircraft and the
capability of Lockheed Martin to deliver to demand. This strengthens the structural
attractor that demands innovative staff. The organization has also recognised two major
new drivers for change – the demand for integration systems and the civil government
agenda for electronic service delivery. These have been recognised by acquisitions (and
disposals) which strengthen the capacity of the organization to evolve in this direction.
An analysis of Lockheed’s innovations presents a balanced innovation type portfolio. All
11 innovations are focused on the Defence market, although the Atlas V launcher can be
used in the commercial market. There are two Readily Adopted innovations, which focus
on initiation and have high adaptability. There are 5 Challenging innovations that are
highly product focussed and demand implementation attention. There are 4 Under Cover
innovations, which demonstrate an absence of management commitment outside the
innovating group and interestingly these are focussed more on process innovation.
Lockheed recognises the increasing complexity of the needs of their defence customers,
particularly with respect to information superiority. Lockheed is addressing this by
organizational changes to their workforce. There is evidence of content-driven strategy,
for example, the creation of Integrated Systems & Solutions and the Global Vision
Liz Varga and Peter Allen, Cranfield School of Management page 18
Network, but there is also some evidence of process-driven strategy and the
encouragement of behaviours that will enable organizational forms to develop. Culture,
technology and strategy are closely balanced and provide synergies. The recent departure
of the CEO will bring an internal fluctuation which could cause the organization to
evolve in a new direction or more rapidly into integrated systems. Long-term the current
growth rates are unlikely to be achieved as defence and military needs reduce. The
development of integrated systems may provide the structural attractor for evolution.
Conclusions and limitations
Figure 8 below summaries the strategy, innovation and organizational perspectives
reviewed in this case study. The assessments are relative to the companies examined, not
absolute values, and were interpreted from the text of the company annual reports. There
is no ‘right’ assessment for any of these criteria since they are contextual.
Boeing Lockheed
Martin
EADS
STRATEGY
Clear long-term goals Medium Medium Medium
Resources aligned High Medium Medium
Adaptable Medium Medium High
Content (structure) focus High Medium Medium
Process focus Low Medium High
INNOVATION
Commercial
Cost leadership focus High Low High
Market access High High Medium
Manufacturing process technology High Medium High
Commercial Innovations % 67% 5% 33%
Defence
Advanced technology Medium High Medium
Home country government link High High Medium
Defence Innovations % 33% 95% 67%
Readily Adopted Innovations (initiation focus) % 11% 18% 0%
Challenging Innovations (implementation focus) % 33% 46% 83%
Under Cover Innovations (management
commitment query) %
56% 36% 17%
Alignment of innovations to long-term goals Medium High High
ORGANIZATION
Extent of fluctuations Medium Low High
Adequate variety and needs satisfied systematically Medium High Medium
Balance of culture, technology and strategy Medium High Medium
Level of synergy Low Medium High
Form and capability to innovate Medium High High
Latent Potentials Low Medium Medium
EVOLUTION
Extent of potential evolution visible Low Medium High
Figure 8: Triad relative assessment
Liz Varga and Peter Allen, Cranfield School of Management page 19
Boeing maintains that a balanced portfolio across defence and civil markets has given it
stability, strength and agility by the creation of a diversified company. But with
diversification comes integration cost which EADS has dealt with somewhat in its
approach to operational commonality. EADS is looking to increase its share of the
defence market so that it achieves 30% (from 20%) of revenue from defence and is
innovating aggressively to achieve this. Lockheed is almost entirely in the defence
market, although there is clearly much activity in integrated systems both within the
military and civil government. Boeing too have re-organised around the integration
scenario although theirs appears to be a structural integration rather than a technological
integration. As at 2002/3 most profits were made from the defence market and so EADS
suffered most and recognises its need to improve its exposure to the defence market.
Each supplier is exploring one or more market niches: Boeing Connexion and Boeing
Air Traffic Management projects; EADS’s Missile systems and Eurocopter, plus the
A380; Lockheed Martin’s Global Vision Network and e-Government solutions.
Operational demands for performance and efficiency are evident for all suppliers. EADS
had adapted is production levels and is improving efficiency in its civil business. Boeing
is focussed on financial and technical performance and on taking immediate action on
market changes. Lockheed Martin states the need for operational performance and
efficient methods but these diminish under the focus of innovation and growth
opportunities. Boeing and EADS are both relatively agile as has been demonstrated by
action to respond to reduced market demand. EADS’s desire for agility is reflected in the
frustration it feels at the anticipated long-term quest to penetrate the US defence market.
Lockheed Martin shows less agility and more risk awareness and aversion although these
are balanced somewhat by a passion for innovation. Boeing is also passionate about
innovating and opening new frontiers but its first priority is to run healthy core
businesses.
In terms of differences, EADS is the only organization that mentions partnerships and is
using these particularly to gain access to wider markets. EADS is the only one to
recognise synergies explicitly from defence across to Airbus. Lockheed Martin is the
only one engaged in acquisitions and disposals. Lockheed Martin is alone in its explicit
corporate social responsibility statement.
EADS appears to be placing most energy into evolution and is most process focused in its
strategic outlook therefore my prediction is that it will evolve most significantly. In
particular developments as a consequence of its 555-seater plane and its push for defence
market share provide significant latent potentials. Boeing is likely to stagnate in the short
to medium-term as it redefines its corporate identity under new leadership. Its
commercial market operational focus and innovation portfolio is inhibiting significant
innovation. Lockheed Martin is currently evolving successfully because of defence
market demand but this is likely to peak and may contract in the long-term. Civil
government and integrated solutions could provide Lockheed’s new evolutionary
pathway.
Liz Varga and Peter Allen, Cranfield School of Management page 20
This case study has explored the evolutionary potentials of the three largest aerospace
manufacturers by evaluating strategic focus, innovation portfolio and organization
potential for evolution. Both within-case and cross-case evaluations have been carried
out based on public information within Company Annual Reports. My contribution has
also extended Adams’s (2003) work into a new organizational context.
Further research could explore these organizations’ innovations more deeply and perhaps
create a matrix of innovations for each organization enabling a more accurate analysis of
innovation portfolios. The analysis of the innovations in the 3 annual reports is limited
by the innovations specifically identified by the CEOs and by their descriptions of these
innovations. Those working in the companies would be able to provide comprehensive
details of all innovations and would be better able to classify them (according to Adams)
resulting in a more accurate analysis. In particular a large limitation of the research is
that the amount of investment or emphasis placed on each innovation is taken as equal,
where in practice this is unlikely to be the case. The authors do not have access to the
detailed spend on each innovation nor its importance with regard to the evolution and
sustainability of the firms, therefore the conclusions are somewhat speculative. The
relationships between the innovations and organizational forms of each of these
companies could be studied to identify more clearly the developing latent potentials.
Unexplored environmental factors could also be considered.
Although the source text is indisputable, the authors’ interpretation of the text may differ
from either the intended interpretation or a consensus of constructions of the text. To
moderate this, the organizations themselves could rate the assessments of their
organizations, strategies and innovations and indicate whether they perceive the same
constructs and evaluations as the authors. Other raters, both with a complexity lens and
with other lenses, for example, resourced based view or contingency perspective, could
rate the annual reports and consider evolutionary potential. These analyses would
provide a richer more meaningful interpretation. In any event, the source text is
confirmable (capable of being tested and verified by access to the public documents) and
the process used for analysis in the study is consistent and repeatable (Miles and
Huberman, 1994). As our understanding of complex systems evolves, we are likely to
produce different results over time.
The value of the organizational analysis is limited to the Complex Adaptive Systems
perspective. The evolutionary approach taken and in particular identification of what
might lead to bifurcation points for these companies is subjective.
There is limited generalisability from the sample of aerospace manufacturers to all
aerospace manufacturers since it is the largest 3 firms that are examined and so are not
representative of the population as whole. There are strictly limited inferences that can
be made about motivation or intent as a consequence of the content analysis. A larger,
quantitative study of the industry could ameliorate sample limitations.
Application of the innovation framework (Adams, 2003) is potentially limited for the
aerospace industry since innovation types were concluded from research into NHS
Liz Varga and Peter Allen, Cranfield School of Management page 21
innovations. The NHS is the largest employer in the UK and organized into many
departments and services. This does not compare in size, location or industry sector to
aerospace and so it is likely that the innovation framework would have at least some
differences in morphology if it had been conducted in aerospace firms. However, if
confirmed, the innovation framework provides a valuable, integrated insight into a key
aspect of organization evolution, that of innovation.
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