BAE Systems

INTRODUCTION
BAE Systems, currently run by Charles Woodburn, is a British Multinational company and one of
the biggest contractors in the defense sector. The company has a skilled workforce of 89,600
(as of 2021) and is the main supplier of arms, intelligence and critical infrastructure to client
nations. With subsidiaries in India, Saudi Arabia, the U.K. and the USA, BAE systems has
successfully rendered its top-notch services to other countries such as Australia and South
Africa while recording measurable success.
BAE systems supplies its clients with high intelligence as well as sophisticated war weapons for
security and defense. To this end, they partner with academic and industrial leaders to develop
new technologies to support future product strategies, designing, manufacturing and upgrading
combat trainer aircraft, among others (BAE Systems, 2021).
Other services It is the 7th largest defense contractor in the world based on applicable 2021
revenues (Wikipedia, 2021). Given current and possibly future events, BAE systems considers
establishing a subsidiary in Moldova for the following reasons.
REASONS FOR INTERNATIONALISATION
• Market Expansion

• High proximity to Ukraine and other nearby countries: BAE systems has high probability
of providing Moldova and other bordering countries with high intel and proactive
measures on how to protect themselves from national crisis as in the case of Ukraine.
With its high level of technology and sophisticated infrastructure, BAE Systems provides
client countries with high defense mechanisms and skills to engage in combat with
rogue countries. Establishing its subsidiary in Moldova gives Ukraine greater advantage
as it extends its paid services to fight back Russia. Given that Russia has directed 75% of
its armory to fighting Ukraine, it is imperative that Ukraine, Moldova and other nearby
countries form alliances with BAE Systems in order to bolster their various security
systems, in this case, Moldova.
• Due to the unrest between warring nations Russia and Ukraine, BAE systems have
recorded a surge in their shares. The company which has its operations across the U.K
and other select nations recorded a rise in its share price by more than 14% as of
Monday the 28th of February 2022. Also, its operating profits rose from £1.9 billion to
£2.3 billion over this same period. (Jon Robinson, 2022) This gives BAE Systems more
capacity to establish a subsidiary.

Using the Porter Diamond Model, we take into consideration the four major determinants of
competitive advantage of this Industry-the defense sector.
1. Firm Strategy, Structure and Rivalry
BAE Systems Strategies have always been to:
• Maintain and grow business with focus on adjacent markets such as the UK,
Asia-Pacific, Africa, the US, Saudi Arabia, Central and South America, and
Europe.
• Leverage on global capabilities and products
• Generating long-term and collaborative customer relationships
• Inspire and develop a diverse work force with a strong safety culture through
jobs and national intelligence
• Deliver on financial performance and program execution
According to Loren Thompson, Senior contributor to the Aerospace and Defense column
on Forbes, BAE Systems, Inc., the U.S. arm of Britain’s biggest aerospace and defense
conglomerate, has created an organization within its Electronic Systems unit called FAST
Labs that combines funding from federal research centers with venture capital and
commercial technology incubators to greatly accelerate the velocity of innovation.
(Thompson, 2019)
With a strong rivalry from fellow competitors like Lockheed Martin’s, Secure works,
Broadcom (Symantec), Alert Logic, etc., BAE Systems has a long-standing history of
delivering above-standard products and services and has as such, gained a competitive
edge over other competitors in the defense sector.

2. Demand Conditions
Given the Ukraine-Russia situation, BAE Systems aims to take advantage of the need for
its services and products in Moldova and other nearby nations to help tighten their
defense and security strength. It is also aimed at gaining higher competitive advantage
over other security and defense companies.

This has increased the demand for security and cyber intelligence amongst other
products which BAE Systems provide. As a proactive measure, Moldova and its sister
countries need security now more than ever to protect its lives and resources. According
to analyst Valeriu Pasa from the WatchDog,"the Moldovans know that they don't have
the security guarantee that NATO membership offers," in contrast to neighboring
Romania. Everything depends on the situation on the ground: particularly if Russia
occupies the region around Odessa, Moldova will be exposed," (AFP, 2022).

3. Factor conditions
Moldova is rich in iron and steel as this is one of the most important factories in
Moldova given that it can produce more than 1 million tons of crude steel annually.
 She has a 1.25-million strong active workforce, and the general occupation rate is 40%.
Unemployment stood at 4% in 2019. The unemployment rate rose due to Covid-19 in
2020 and ever since (Invest Moldova, 2019). This shows the availability of human capital
as BAE Systems opens its subsidiary in Moldova.

4. Related Supporting Industries

With the backing of its partner companies, BAE Systems is fully equipped to ensure the
delivery of its earlier stated services. It partners with companies such as Arachnys,
Ciphertrace, Guidewire, Kyckr, etc.
The input of these companies in the production process, gives BAE Systems a
competitive edge over other companies in the same industry. The services they render
to BAE Systems is what makes the company the best in the sector.

EVALUATION OF THE COMPANY’S HISTORICAL PERFORMANCE

BAE Systems has accrued major profits over the years in a progressive manner. For example, in
2018 revenue was $22,253 billion which was a 4.92% decline from 2017. In 2019, revenue
increased to $23,374 billion and in 2020, it further rose to $24,752 billion showing a 5.9%
increase from the previous year (Macro Trends, 2021). Below is the five-year summary for BAE
Systems according BAE Systems.

Income statement for the year ended 31 December 2020

2020 2019 2018 20171,2 2016
£m £m £m £m £m

Continuing operations

Sales3

Electronic Systems 4,557 4,439 3,965 3,598 3,282

Cyber & Intelligence 1,812 1,732 1,678 1,818 1,778

Platforms & Services (US) 3,503 3,337 3,005 2,951 2,874

Air 7,910 7,457 6,712 7,210 n/a

Maritime 3,257 3,116 2,975 2,877 n/a

Platforms & Services (UK) n/a n/a n/a n/a 7,806

 2020 2019 2018 20171,2 2016
£m £m £m £m £m

Platforms & Services (International) n/a n/a n/a n/a 3,943

HQ 190 387 350 336 233

Intra-group sales (367) (359) (278) (303) (896)

20,862 20,109 18,407 18,487 19,020

Underlying EBITA4

Electronic Systems 684 687 606 541 494

Cyber & Intelligence 136 91 111 58 90

Platforms & Services (US) 195 267 210 237 211

Air 941 887 859 967 n/a

Maritime 306 268 209 251 n/a

Platforms & Services (UK) n/a n/a n/a n/a 810

Platforms & Services (International) n/a n/a n/a n/a 400

HQ (130) (83) (67) (80) (100)

2,132 2,117 1,928 1,974 1,905

Non-recurring items

Loss/(profit) on business transactions (5) 9 (40) (13) (12)

Settlement gain on transfer of US pension

liabilities 64 - - - -

Impairment - inventory write down re

business exited in 2018 (13) - - - -

Derecognition of intangible assets - (36) - - -

Guaranteed Minimum Pension equalisation

charge (7) - (114) - -

Acquistion-related costs (20) - - - -

 2020 2019 2018 20171,2 2016
£m £m £m £m £m

EBITA 2,151 2,090 1,774 1,961 1,893

Amortisation and impairment of intangible

assets (141) (115) (118) (470) (87)

Finance costs including share of equity

accounted investments (366) (296) (394) (380) (619)

Profit before taxation 1,644 1,679 1,262 1,111 1,187

Taxation expense including share of equity

accounted investments (273) (147) (229) (254) (249)

Profit for the year 1,371 1,532 1,033 857 938

Balance sheet as at 31 December 2020

2020 20195 20186 20172 2016

£m £m £m £m £m

Intangible assets 11,745 10,371 10,658 10,378 11,264

Property, plant and equipment, right-of-use

assets and investment property7 3,158 3,188 2,017 1,977 1,999

Equity accounted investments and other

investments 409 441 442 328 305

Inventories 858 835 774 733 744

Payables and contract liabilities (excluding

cash received on customers' account) less
receivables7 (3,202) (3,004) (3,204) (3,493) (3,702)

Lease liabilities (1,203) (1,291) - - -

Net other financial assets and liabilities 36 34 70 18 121

Group's share of the net IAS 19 pension

deficit (4,485) (4,455) (4,029) (4,022) (6,054)
 2020 2019 2018 20171,2 2016
£m £m £m £m £m

Provisions (677) (685) (761) (835) (606)

Net tax assets and liabilities 906 690 449 413 935

Net debt (2,718) (743) (904) (752) (1,542)

Net assets held for sale 94 130 106 10 -

Non-controlling interests (278) (104) (72) (43) (26)

Total equity attributable to equity holders

of BAE Systems plc 4,643 5,407 5,546 4,712 3,438

Movement in net debt for the year ended

31 December 2020

2020 2019 2018 2017 2016

£m £m £m £m £m

Net cash flow from operating activities8 1,166 1,597 1,200 1,897 1,229

Net capital expenditure9 (392) (454) (464) (444) (450)

Principal element of lease payment and

receipts (226) (230) - - -

Dividends received from equity accounted

investments 27 142 57 72 38

Add back: Taxation 251 252 200 227 187

Operating business cash flow 826 1,307 993 1,752 1,004

Acquisitions and disposals (1,674) 74 41 (11) 6

Net interest paid (208) (205) (178) (181) (200)

Tax and dividends (1,016) (1,032) (931) (919) (881)

Net sale/(purchase) of own shares - - 1 (1) 3

Foreign exchange translation 220 72 (188) 301 (621)

 2020 2019 2018 20171,2 2016
£m £m £m £m £m

Other movements10 (123) (55) 110 (153) 571

Net (decrease)/increase in net funds (1,975) 161 (152) 788 (118)

Add back/(deduct): Cash classified as held

for sale - - - 2 (2)

Movement in net debt (1,975) 161 (152) 790 (120)

Opening net debt (743) (904) (752) (1,542) (1,422)

Closing net debt (2,718) (743) (904) (752) (1,542)

Other information

2020 2019 2018 20172 20163

Continuing operations

Basic earnings per share - total (pence) 40.7 46.4 31.3 26.0 28.8

Basic earnings per share -

underlying11 (pence) excluding one-off tax
benefit 46.8 45.8 42.9 42.1 40.3

Basic earnings per share -

underlying11 (pence) including one-off tax
benefit 46.8 50.8 42.9 42.1 40.3

Order backlog12 including the Group's share

of equity accounted investments (£bn) 45.2 45.4 48.4 38.7 42.0

Dividend per ordinary share (pence) 13 23.7 23.2 22.2 21.8 21.3

Number of employees, excluding share of

employees of equity accounted
investments, at year end 81,000 79,000 78,000 76,000 76,000
 2020 2019 2018 20171,2 2016
£m £m £m £m £m

Capital expenditure including leased

assets14 (£m) 800 697 593 626 65

SOURCE: BAE Systems (2020)

STRATEGIC MODES OF ENTRY AND POSSIBLE CONSEQUENCES

BAE Systems has the option of penetrating the Moldovan market through Green-field
Investment or through partnership.

• GREEN-FIELD INVESTMENT

Entering the Moldavian market through Green-field investment require the company
establishing its subsidiary from the ground up. In this case, the company runs the risk of facing
regulations or difficulties associated with omission of process, during its establishment. A
green-field investment would take a long time period to establish and given the urgency of the
situation in the nations surrounding Moldova, this would not be a recommended mode of
entry.

• LICENSING

This is the best mode of entry for BAE Systems in Moldova as it involves an already tested and
trusted indigenous company. Here, BAE Systems has the advantage of operating in Moldova
with the license of the company while enjoying the benefits of its goodwill. For example, back
in 2012, BAE Systems entered a partnership/agreement with International Systems Engineering
and Saudi Authority for Data and Artificial Intelligence to develop cybersecurity alongside other
areas of defense for Saudi Arabia (Sarah Glubb, 2022).

STRATEGY TO INTERNATIONALISE

Multinational companies such as BAE Systems always choose from these three basic
international strategies- multi-domestic strategy, transnational strategy and global strategy,
when the decision to integrate into the global market is on the table. Therefore, we evaluate
which of them is best for BAE Systems in Moldova.

A. Multi-domestic strategy: This entails BAE Systems responding to security and defense
needs based on how it affects Moldova. It is a tailor-made strategy that appeals to the
Moldovan need based on global standards.

B. Transnational Strategy: Here, BAE Systems is required to find a middle ground for
efficiency and adjustment to local preferences.

C. Global Strategy: A firm using a global strategy sacrifices responsiveness to local

requirements within each of its markets in favor of emphasizing efficiency (BC Campus,
2019). Here, BAE Systems is expected to make little or no adjustments to its local
preferences as it is based on already existing standards.

MULTI-DOMESTIC STRATEGY IN VIEW

Moldova has the poorest economy in Europe but is highly threatened by Russia who has
launched attack into Ukraine by invading the state. As the closest country to Ukraine and
having extended its hands of friendship to Ukraine in this chaotic situation, Moldova is a
clean target for Russia, Belarus and any other country that might decide to attack it.
Therefore, the strategy BAE Systems will adopt involves taking proactive measures in
getting classified intel and the production of sophisticated weapons of warfare to further
fortify the state. This means that the method it uses to handle security for a country with
less security threats is different and given that Moldova has been hesitant about joining
NATO, BAE Systems hence becomes the major defense of the state.

For example, BAE Systems will have to put up security measures to adequately ensure the
safety of the gas Moldova buys from Russia. Alternative sources of energy must be adopted
to curb Moldova’s heavy dependence on Russia in that light.

MARKET SHARE

The BAE Systems [BA] share price has been flying high lately as the company’s stock has surged
21.34% since Russia began its invasion of Ukraine on 24 February, closing at 721.72p on the 18 th
of March 2022

There is a close correlation between the US defense budget and BAE Systems revenue in the
last five years as US military spending has increased by 15%, from around $634bn in 2015 to
almost $731bn in 2021 while BAE Systems’ revenue increased by over 10% in the same period,
from £17.7bn to £19.5bn.

According to Opto Trading Intelligence, the current hostilities are only likely to lead to an
increase in national defense budgets around the world, particularly from the US defense budget
which should boost BAE Systems’ share price prospects (Opto, 2022).

COMPETITIVE POSITION WITHIN THE INDUSTRY

The aerospace and combat/cyber security and national intelligence industry has very few
competitors which keeps BAE Systems at the top in the industry. However, the other companies
in this industry are Lockheed Martin, Northrop Grumman Corporation and Boeing (Mba Skool,
2011)

POSSIBLE ORGANISATIONAL AND MANAGERIAL PROBLEMS TO BE ENCOUNTERED IN

MOLDOVA

• Understaff

With an unemployment rate of 4.71% amounting to 22,900 persons as of 2020, Moldovan

unemployment rate has dropped from the 5.1% of 2019 (O'Neill, 2022). This means that there
will be less labor at high costs especially with the Ageing Population and Dwindling Labor Force.
The reduced number of skilled staff poses as a managerial problem for BAE Systems in
Moldova.

• Security Threats

With the unrest between neighboring nations, Russia and Ukraine, it is difficult to be neutral.
Moldova has tasked itself with taking in Ukrainian refugees. This automatically chooses which
side Moldova is on. The Moldova president, Maia Sandu, signed a formal application for her
country to join the European Union. This immediate request was as a result of the Ukrainian
Invasion by Russia (Tanas, 2022). Therefore, BAE Systems will have organizational problems
working in a country with high level security threats.

• Bureaucracy

Moldova is struggling with the legacy of a large bureaucracy, which enjoys significant
discretionary power. Corruption and bureaucracy stifle entrepreneurship as well as the
economic reform that a vibrant private sector would demand (International Trade
Administration, 2021). Moldovan laws and regulations are vague and open to considerable
leeway in interpretation, providing corruption opportunities for officials at every bureaucratic
level (Privacy Shield Framework, 2021).

• Dependence on Russian Energy Imports

With Moldova’s heavy dependence on Russian Gas combined with its accommodation of
Ukrainian refugees, BAE Systems risks being caught up in a state of emergency in the event of a
backlash by Russia. In September 2021, the contract to supply gas to Moldova expired and was
not renewed as a result of the hike in its prices by Russia which Moldova balked in paying.
Russia accused Moldova of owing them £514 million in debt which Moldova disputed but later
paid back (BBC News, 2021)

The war going on between Russia and Ukraine could destabilize relations between Moscow and
Moldova, making the Moldovan energy sector a dangerous battlefield.

While the Russian government was preparing for its recent military aggression, Ukrainian
authorities were making the first moves to prepare for the synchronization of its local energy
grid with the European continental network. This technical procedure would allow both
Moldova and Ukraine to import electricity from the EU thereby gaining independence from
Russian Energy (DW, 2022).

• Turnover

Starting off a new subsidiary comes with the question of profitability and with Moldova being
the poorest economy in Europe, BAE Systems can encounter difficulties in making high profits
initially, but the establishment of the company brings economic growth as the company comes
with its infrastructure and work structure. This leads to availability of jobs to Moldovan citizens.
The employment of skilled labor increases productivity and as such leads to high turnover rate.

STRATEGIC ADVICE TO OVERCOME THOSE PROBLEMS

BAE Systems subsidiary in Moldova needs to take proactive measures towards expanding
business and economic activity not just through imports and exports of consumption products
but also national security and cyber intelligence. Therefore, in the event of the problems stated
earlier in this text, Moldova must:

1) source for alternative sources of Energy (Natural Gas especially) to enable companies
like BAE Systems thrive in an economy such as Moldova’s. Moldova is heavily dependent
on Russia for Electricity and Natural gas.

2) Also, partnership with indigenous companies to reduce the level of bureaucracy

 encountered in establishing a Moldovan subsidiary. Paperwork and strict regulations are
highly avoided when BAE Systems operates with a license from an indigenous company.

3) To increase turnover, a profitable option is to increase demand by selling products and

services at fair prices to customers as well as encourage proactive orders of inventory.
This is to ensure that client nations enjoy security as well as other services BAE Systems
has to offer without restrictions.

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