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Nexter, also known as KNDS is a French defense manufacturer. Contextual environment in the defense industry is marked by high rates of uncertainty. Defense budgets are decreasing, which necessitates Nexter to look towards diversification and R&D to build revenues. Joint ventures and acquisitions, particularly within Europe are beneficial to firm growth. At present, Nexter is producing only terrestrial weapon systems, but in future, should diversify within both military weapons technology as well as civil technology projects. Key competitors such as Thales and Airbus are already working on several civil projects successfully, from where they generate maximum revenues. The DGA is a key stakeholder, who expects to see Nexter as a self-sustaining business with market leadership position. Nexter’s unique value is in product differentiation through disruptive technology. Through its SCORPION project and other cutting-edge technologies, it should aim to restructure the defense market at European scale. Social media can help build PR and market the disruptive ability of Nexter’s technology in the industry.
1.1 Contextual environment
Contextual environment is the world around us, in which events take place. We have little control over these events and have to adjust our own strategies in accordance with these events. The PESTEL analysis is often used to evaluate contextual environment. Political, economic, sociocultural, technological, environmental and legal factors affecting a business, government or any other stakeholder are studied.
1.2 Transactional environment
In transactional environment, one has some degree of control over own behaviors and that of others, which in turn influence outcomes within that environment (Sherman, 2017). Internal environment of a firm or company may be considered as transactional environment, whereby firm decisions and employee behaviors affect future happenings.
Scenarios are hypothetical situations of the future, which help identify possible and plausible paths to some future results. In other words, scenarios are based on realistic assumptions of what will happen in a future. They are usually developed by strategic experts to interpret how a strategic objective may be achieved in the future (Schoemaker, 1995).
1.4 Strategic thinking
Evaluating one’s contextual and transactional environments to understand the nature of the world in which one operates is called strategic thinking. Usually, this also entails building future scenarios based on present trends, identifying potential paths to achieve strategic objectives and identifying risks in the process (Heracleous, 1998).
1.5 Strategic planning
Strategic objectives are the outcome of strategic thinking process. Once these objectives are mapped out, strategic planning process is conducted to implement these objectives. Performance measures and concrete actions are devised for each objective through industry, competitor, stakeholder analyses and unique value proposition (McCarthy, 2018).
1.6 Strategy versus tactics
While strategy is the overall campaign plan towards a certain end goal, tactic is the concrete method set out to achieve that goal (Sherman, 2017). These two terms are often confused however, tactics are specific and measurable actual means of achieving strategic goals. For example, the strategy may be to increase revenues in the next two years. Tactic may be to double production rate within 24 months and hence achieve the strategic objective.
Resilience is the organization’s ability to withstand surprises offered by the contextual environment, in which anything can happen at any time. Modern organizations operate in increasingly unprecedented contextual environments (Rumelt, 2012). Only resilient organizations tend to survive and absorb such shocks. Usually, this is done through strategic thinking to minimize risks and surprises (Woods, 2017).
Key performance indicators are generally mapped against strategic objectives and tactics to achieve these objectives. They are factors that are measurable and determine the success of any objective. They are dependent on strategic objective (Marr, 2012). In the previous example, the strategic objective was to increase revenues over the next two years, against which the tactic was to double production rate. Some KPIs to measure success may be production rate, revenues, cash flows, ROI and profits.
2. Contextual Environment
The PESTEL analysis tool is applied here to evaluate defense industry’s contextual environment. Only the most significant factors are discussed,
As Nexter is a government-owned weapons manufacturer, political influence has significant importance in its contextual environment. France’s international relations with other European countries including Italy and Belgium in particular, determine Nexter’s sales in these countries. French government’s military partnerships with other international countries can directly increase or decrease Nexter’s weapon sales in these countries (Kolodziej, 1980). At times, foreign governments may order products and services with conditions attached. For instance, a government may request in-house production in home country, or technology transfer after order completion. Defense industry is also highly dependent on defense budgets by respective governments (Tran, 2018).
The French defense industry relies heavily on export sales to be economically self-sustainable. In 2018, France’s defense budget was EUR 35 billion, which is slightly greater than the average budget in previous years. In general, the defense budget is shrinking since 1990 (SIPRI, 2019). This shrinking budget has pushed French government to realize that France no longer has the capacity to develop weapons and military technology across the full spectrum. Instead defense contractors have been asked to focus on R&D, conduct joint ventures with other European countries and build their core competencies (Belin et al., 2018). Instead of producing newer products, French defense manufacturers are producing families of products based on the same design. According to Thomson-CSF, profits from upgrades is nearly equal to first-market sales of new products (Euske and Wang, 2012).
Because of the still significantly small size of French defense industry, ‘national champion’ firms such as Nexter enjoy monopoly and concentration of design and manufacturing know-how. Despite more economical weapons and military equipment options available externally, the French government keenly focuses on building reliance on own technologies. Core competencies of French defense industry, identified by Dassault are computer-aided design, new material, stealth, robotics and fabrication technologies such as superplastic (Kapstein and Oudot, 2009). Complexity and superiority of French military equipment has increased as a result of greater focus on R&D compared to production.
Overall, international security environment is moving towards trend of reduction in defense budgets. The French defense industry is moving away from a production-focused trend towards R&D focused development and self-sustained production in future. France has had some success in diversifying its weapons market and including some commercial and civil partners in production, design and sales. Over-emphasis is on arms exports, which according to some analysts such as Gibbons (1991) and Kapstein and Oudot (2009) has adversely affected French foreign policy objectives. French weapons manufacturers are no longer at the leading technological edge on international level. The military industry remains highly nationalized and dependent on defense budget and foreign policy of the French government.
In this context, French defense firms such as KNDS, who focus on R&D development, and are partially government-owned, hold an advantage. Dassault, with its impressive product portfolio, generation of upgraded equipment and cutting-edge technology, seems to be on top of the national arms manufacturer ladder. Smaller manufacturers such as Alumarine Shipyard and EuroTorp are at a relative disadvantage because it is difficult to secure joint ventures with other European contractors. Cuts in defense budget also force them to seek other revenue streams. With exports tightly controlled by the government, these manufacturers struggle to generate revenue and build technological know-how for market leadership. In this contextual environment, it is difficult for new players to enter the market because of tight regulatory control, large capital and operating costs, technological requirements and unpredictable international security environment.
3. Competition Strategy
Thomson-CSF, renamed as Thales Group, is a major defense contractor in France and is one of the key competitors of Nexter. In this section, Porter’s four corner analysis tool is applied to Thales to understand their competition and stakeholder strategy. The tool consists of four key parameters on the basis of which, competitor’s strategy is assessed. These are: assumptions, expectations, objectives and actions. They are discussed in more detail in following section.
The Thales Group considers itself one of the largest defense contractors in the world. They value their state-of-the-art technology as their core competency. Thales management is of the view that in rapidly changing international security environment, smart military technologies are the way forward. Hence, they have developed artificial intelligence and robotics in military technologies. They have over the years, diversified into support industry and now produce support equipment, systems and even software for defense products. Thales wants to focus on developing cooperation with NATO member states, in line with the French foreign policy (Thales, 2019). In light of these assumptions, Thales strategy is most likely to be proactive and aggressive. Thales is actively seeking new joint ventures within Europe and with the U.S. and Australia (Thales, 2019). It is also looking towards Asian markets for increasing export profits.
Based on Thales’ assumptions, it is likely that the company will respond to competition from Nexter and others through targeting its R&D as well as diversification. In recent years, Thales has aggressively pursued expansion of its revenue streams from diversifying its product and service portfolio through acquisitions of British Hardware security module vendor nCipher and Alcatel-Lucent in 2008 (Leyden, 2008) and 2014 respectively (Reuters, 2014), it strengthened its position in cybersecurity sub-sector of the defense industry. Thales’ capability of manufacturing electronic equipment to complement military products gives it an advantage over competitors. It can diversify its consumer portfolio by even including competitors as its customers.
Although Thales is a largely defense industry contractor, it has cleverly diversified into other fields to increase revenue streams. The fundamental objective of the company boils down to technological superiority over its competitors. This is achieved either through direct manufacture of defense equipment, or through indirect complementary products and services for defense equipment manufactured by third parties. The company is motivated by prospect of leading the world’s defense industry through technological prowess.
Thales’ international subsidiaries were able to generate more than 50% of its total revenue in 2008 (Thales, 2017), which shows the remarkable success of its internationalization strategy. The UK is the key external destination where Thales is most active. The company operates in a total of 68 countries and serves in five key sectors: space, aerospace, ground transportation, digital security and defense security. Thales works with both military and civil customers. With its Racal merger in the UK, the company has major involvement in the UK rail industry (Hotten, 2003). In Denmark too, Thales now has complete ownership of ‘East-West Consortium’ travel system. The company won the bid for the Royal Air force’s (RAF) Future Strategic Tanker Aircraft and British Army have design contracts.
4. Stakeholder analysis
The four corner analysis is applied to analyze stakeholder strategy of main stakeholder of Nexter. The Directorate General of Armaments (DGA) is the government body responsible for procurement and technology transfer of weapons systems in French military. It coordinates the armaments programs with French defense industry and within Europe. The four corner analysis tool is applied to this stakeholder to understand their expectations from Nexter.
The DGA considers itself as the most important body responsible, not only for equipping the French military and European defense forces with state-of-the-art technologies, but also in aligning industrial needs of military with weapons development and production processes at industry. The DGA officials are of the view that state-dominated defense industry is better than market mechanisms such as competition. Decisions are usually made secretively in a top-down manner and accountability is kept limited (Kapstein and Oudot, 2009).
The DGA values innovation but holds French sovereignty and military superiority above all. Hence, exports are strictly monitored and aligned with French foreign policy. The DGA is building and running engineering schools in France to develop workforce and research for improving defense industry output. It considers itself responsible for the overall environment of the defense industry (DGA, 2019).
The DGA has adopted a new strategy in wake of turbulent security environment and declining defense budget. The first objective of this strategy is to preserve and promote technological advancements and core competencies of French defense manufacturers. This is leading towards nationalization of defense companies. The second objective is to enable French manufacturers to play a leading role in restructuring the defense production on European scale. Collaborative researches, development programs, strategic alliances, acquisitions, mergers and joint ventures are being pursued to achieve this.
The agency expects French defense manufacturers to innovate the industry through technological advancements. It also wishes to see greater collaboration with European partners, not to transfer knowledge out of France, but to acquire external knowledge and skills, as well as to gain better foothold in European defense system. By being the largest weapons seller in regional market, France can aim towards becoming the largest and most well-recognized technologically superior weapon seller on international level. DGA, on behalf of French government, also wants to strengthen capabilities of the French military, through state-of-the-art indigenously produced technology.
Keeping this discussion on competition and stakeholders in mind, it may be observed that competitive advantage in the French defense industry is heavily centered on technological prowess, rather than increasing sales. Competitors such as Thales, have pursued diversification to escape repercussions of the defense budget crunch in recent years. This diversification has enabled them to service regular defense manufacturers, by providing complementary services such as electronic systems and cybersecurity. Thales is also actively working with the civil sector, wherein lies a large percentage of its revenues. However, it was observed that the DGA wishes to maintain stricter control over exports of defense equipment. It may however, be open to other civil partnerships such as non-military ground transportation as done by Thales. This can be an alternative and lucrative source of revenue, which may release burden on state to fund defense firms.
Nexter can compete through diversification as well. Currently, Nexter is focusing heavily on terrestrial defense systems and has little to no contribution in civil technology. Recent acquisitions and joint ventures by Nexter imply that it has capability to diversify to other fields however, more joint ventures with other European firms may be needed. Particularly with IT industry, Nexter has great scope for future R&D.
To satisfy the DGA, its key stakeholder, Nexter should improve its R&D by designing next generation technologies for existing product lines. This may be done in parallel to diversification. While diversification should be focused on expanding to civil sectors such as ground transportation and smart IT transport systems, R&D should be done for existing product lines. This can satisfy the DGA, which seeks to strengthen French defense producers through better technological development.
5. Unique value proposition
Unique value proposition (UVP) maintains product’s attractiveness and firm’s competitiveness in the market (Payne et al., 2017). In this section, UVP for Nexter is discussed in four steps.
The first step is to define the UVP through problem definition. The international security environment is highly unpredictable. New types of threats have emerged in recent years, of which terrorism is at the forefront, at least in European context. Unconventional weapons and surveillance equipment is needed. According to Gregory (1993), military strength depends on technological prowess. Smarter technologies and artificial intelligence in weapons systems are urgent, if not unmet needs. The solution is to manufacture smart and advanced technology of next generation weapons, surveillance and security equipment.
The next step is to evaluate the solution. Dombrowski and Gholz (2009) state that disruptive innovation is the future of defense industry. Companies that are able to introduce disruptive technologies will have competitive advantage. This implies that if Nexter focuses on producing disruptive innovation in terrestrial defense systems, it can restructure the industry. To achieve this, Nexter would have to focus on its R&D and work with other European partners to break existing trends. It may help to develop support system for its main disruptive technology in order to facilitate the latter’s assimilation into the industry. For example, if Nexter develops an artificially intelligent variant of its CAESAR 6X6 artillery and arms systems, it could be set a new trend for smart armored defense vehicles.
It is important to measure the UVP in order to assess that gains for the customer are considerably greater than the pain/cost of learning the new technology/system. Especially for disruptive innovations, the pains can be significant as these are new technologies and require considerable changes in existing standard procedures.
Customers can be demotivated to buy a product if it is too expensive and difficult to acquire. It is not suggested that Nexter seek a price competitive strategy as disruptive innovations are differentiation focused and not price competitive. However, distribution network should be made convenient. The DGA should be taken into confidence and prior agreements be made with local and external customers. For example, Belgian government may be offered to place order to the next generation smart CAESAR tanks beforehand. Test products may also be shared with governments to encourage them to purchase. Implementation and deployment can be made convenient by training relevant teams who purchase products. Continuous training and support activities should be conducted to facilitate implementation. In return, the customer will gain reputation as owner of advanced next generation technology. It will also improve performance and create deterrence.
The final step is to build and/or modify. Considering the contextual environment, the highlights of which are mentioned in chapter 2, the competition and stakeholder picture (see chapters 3 and 4); the design and manufacturing is undertaken. Nexter would have to get approval from DGA to manufacture a smart CAESAR tank version. At present, Thales and other competitors have not developed fully intelligent and completely automated ground infantry anti-missile tank technology. This disruptive technology will be Nexter’s UVP. Continuous modifications and improvements through families of the CAESAR smart tank can further enhance revenues.
6. Digital environment and value-state
Modern industries are operating in the digital age. Markets are transforming to value state. McCarthy (2018) explains that in a value state, economic, political and technological values are reconciled. The defense industry was generally controlled through highly conventional and rigid political means. While these controls still exist and defense industry is not as open as other sectors, digital era has certainly transformed the industry in many ways.
Firstly, defense industry is becoming open to civil partnerships and diversification. Thales for instance, is already working on several civil transportation projects across Europe. The defense industry in France is becoming more open to diversification and partnerships outside military establishments. This is an opportunity for Nexter to add value to its product mix through diversification. Digital connectivity has facilitated this diversification.
Secondly, defense companies are now marketing themselves and maintaining public relations through social media (Accenture, 2015). Nexter itself, is running extensive social media campaigns for its new SCORPION program. Defense contractors skim the web to look for next generation research and leading companies designing new technologies. This enables contractors to find manufacturers more conveniently.
Particularly in communicating disruptive nature of new technologies, social media plays a major role. News can spread quickly and may also become viral. Digital channels can demonstrate through video and audio aids, how the futuristic technology operates.
Social media is becoming particularly important for defense companies to brand themselves. Not only can these firms, which product highly destructive weapons, brand themselves as saviors of mankind, they can also position themselves as technology leaders in the industry. Nexter has launched an extensive social media campaign, aimed at introducing this image to the public.
Global dynamics can also be easily monitored and this is crucial to strategic goals of defense companies such as Nexter. According to Burston (2003), governments, firms and businesses are now on social media. Hence, social media analytics enable strategic thinkers to predict behavior of these state and non-state actors and adjust their strategies accordingly. They can also identify future market needs and target these for competitive advantage. For instance, Indian defense minister may announce the launch of a new partnership program or state initiative, which Nexter can target and bid for.
7. Success measurement
Key performance indicators (KPIs) are employed to measure success in organizations (Marr, 2012). These KPIs are unique to the organizational structure and objectives. Balance scorecard allows organization to evaluate its health from four different perspectives. Table 1 details a balance scorecard for Nexter. The table maps strategic objectives, based on Nexter’s priorities and outlines measurable targets for each of the four areas. The measures listed in table 1, against each objective are the KPIs on the basis of which performance will be measured. Targets set out the threshold of performance on which, the objective may be considered successful.
The financial objective of Nexter is to become financially stronger through net growth in profits in next five years. This can be measured through growth in ROI, assets, and overall company growth. Towards this goal, the company is seeking R&D joint ventures with European firms. Customer satisfaction and market leadership is the next strategic goals in a period of five years. Customer feedback that may be recorded through customer surveys and interviews. Complementary systems and support services can help add value. In terms of internal performance, product diversification is the strategic objective. In next five years, the company should double its product portfolio and introduce upgrades for existing products. Finally, knowledge management is needed for competitive advantage in the longer run. In-house knowledge management ability should be developed.
Table 1: Balance Scorecard for Nexter
|Become financial strong through greater profits in next five years||ROI
Productivity per person
|5% increase per year||Joint ventures and acquisitions|
|Become market leader in next five years
Ensure customers are satisfied with products/services
Number of sales
|Customer surveys and interviews||Value addition through support services|
Customer value addition
Corporate social responsibility
|Diversify product line and add value to existing products||Product portfolio
|Number of products per year
Number of support products
Build human resource
|Build a strong workforce for innovation and manage knowledge network||Employee survey
|Employee 360 degree feedback||In-house knowledge management|
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