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Suborbital Research Market Industry Structural Analysis

Mr. Ken Davidian, Federal Aviation Administration, Washington, DC, USA Ms. Cindy Conrad, Southwest Research Institute, Boulder, CO, USA

Abstract

This report conducts an initial Industry Structural Analysis (ISA) based on the framework developed by Dr. Michael Porter of Harvard Business School and detailed in his “Competitive Strategy” text. The ISA framework characterizes the profitability of an industry being dependent on the strength and sources of five predominant forces: (1) the threat of entry by potential entrants, (2) the intensity of rivalry among existing competitors, (3) the pressure from substitute products, (4) the bargaining power of suppliers, and (5) the bargaining power of buyers. The threat of entry by potential entrants is dominated by seven different barrier of entry categories: (i) economies of scale, (ii) product differentiation, (iii) capital requirements, (iv) switching costs, (v) access to distribution channels, (vi) cost disadvantages independent of scale, and (vii) government policy. This analysis intentionally avoids identification of specific firms or detailed proprietary data within the commercial suborbital transportation market with the intent of avoiding financial or political sensitivities that may be held by members of the industry. An analysis of this nature is not intended to be “the final word” but a starting point for a discussion by interested members of the industry using a well-defined, baseline structure and vocabulary to facilitate a better understanding and comprehension of the analysis’ observations.

Abbreviations and Acronyms

BoE(s) Barrier(s) of Entry NASA National Aeronautics and Space AdministrationFARs Federal Acquisition Regulations PI(s) Principal Investigator(s) FOP Flight Opportunities Program RLV(s) Reusable Launch Vehicle(s) Hr Hour sRLV(s) Suborbital RLV(s)HTHL Horizontal Take-off Horizontal Landing SwRI Southwest Research Institute ISA Industry Structural Analysis US United StatesITAR International Trade in Arms Regulation USG United States Government K-12 Kindergarten through Twelfth Grade VT Vertical Take-offMgt Management VTVL Vertical Take-off Vertical Landing

Introduction

Based on industrial organization economics, Michael Porter provides a three-part analysis of competitive posturing using a model of five forces. [Ref. 1] The five forces are:

Force 1: Threat of Entry Force 2: Intensity of Rivalry Among Existing Competitors Force 3: Pressure from Substitute Products Force 4: Bargaining Power of Buyers Force 5: Bargaining Power of Suppliers

The first of the three-part analysis, the Industry Structural Analysis (ISA), is employed here to understand the strength and sources of these five forces as they exists in the current suborbital reusable launch vehicle (sRLV) research market.

After an in-depth discussion of the five forces, a final overview analysis is conducted followed with a table summarizing the results of the suborbital research market ISA.

Preceding the analysis, however, is a description of the market being analyzed.

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Market Description Being Analyzed

The existing suborbital research market consists of service providers giving access to either (a) time in a microgravity environment, or (b) access to various launch and/or space environments (e.g., time at altitude, radiation levels, launch conditions, etc.).

The suborbital research market is currently served primarily by sounding rocket launch vehicles or near-substitute capabilities in the form of drop towers and parabolic-trajectory aircraft.

Potential customers for this market include universities and government organizations in the following areas of research: physical and biological processes in microgravity, Earth science, space science and human research.

The types of facilities and vehicles that characterize the suborbital market for scientific payloads included in this report consist of drop towers, parabolic-trajectory aircraft, sounding rockets, and reusable suborbital spacecraft.

Two types of traditional research vehicles that focus primarily on atmospheric science, the airborne and balloon-based research sectors, are not included in this report because they do not provide microgravity services.

Based on this general classification of available services and substitutes, the ISA is conducted, the five forces are evaluated and discussed, and the overall profitability of the industry is qualitatively rated.

Force 1: Threat of Entry

The Threat of Entry force is broken into two different components, barriers of entry (BOEs) to new firms and competitive reaction from incumbent firms:

The following seven barriers of entry are discussed below:

Economies of Scale Product Differentiation Capital Requirements Switching Costs Access to Distribution Channels Cost Disadvantages Independent of Scale Government Policy

In each BoE instance, the barrier is described briefly, assessed in parameters of strength, source, what type of firm it favors, and the ability of firms to control it. A discussion of the competitive reaction component concludes this subsection.

Barrier of Entry: Economies of Scale

Economies of scale are defined as “declines in unit costs of a product (or operation or function that goes into producing a product) as the absolute volume per period increases.” [Ref. 1, page 7]

For the suborbital research market, the volume per period metric defined for this analysis was the number of flights sold per time interval (e.g. number of flights per day, per week, per month, or per year).

Typical business functions were identified as the following:

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Management processes, the processes that govern the operation of a system. Typical management processes include "Corporate Governance" and "Strategic Management".

Operational processes, processes that constitute the core business and create the primary value stream. Typical operational processes are Purchasing, Manufacturing, Advertising and Marketing, and Sales.

Supporting processes, which support the core processes. Examples include Accounting, Recruitment, Call center, Technical support.

Analysis

The table below lists each business function, the unit cost for that function and the associated effect (increasing or decreasing) and strength. The content of the “Effect” column responds to the question “Is there an effect on the unit cost as the volume per period increases?” “None” indicates no effect, “Decline” indicates there is a decline in the unit cost as the volume per period increases and “Increase” indicates there is an increase in the unit cost as the volume per period increases.

Function – Sub-function Unit Cost Effect Strength

Mgt Process – Corp Governance Management labor ($/hr) None None

Mgt Process – Strategic Mgt Management labor ($/hr) None None

Operational Process - Purchasing Unit cost of goods and services

($/item) Decline Moderate

Purchasing labor ($/hr) None None

Operational Process – Manufacturing

Unit cost of goods and services manufactured ($/item) None None

Manufacturing labor ($/hr) None None

Operational Process – Advertising Total ad placement cost ($/month) None None

Operational Process – Marketing Marketing labor ($/hr) None None

Operational Process – Sales Sales labor ($/hr) None None

Support Process - Accounting Accounting labor ($/hr) None None

Support Process – Recruitment Recruitment labor ($/hr) None None

Support Process – Customer Service Customer Service labor ($/hr) None None

Support Process – Technical Support Technical labor ($/hr) None None

It should be noted that some companies in this market are multi-business firms and may have the benefit of the economy of scale barrier associated with the operational process of purchasing, but most do not.

Other considerations that might provide economies of scale barriers to new entrants include shared function of operations, joint cost benefits, the availability of exploitable intangible assets and vertical integration economies.

Some companies in this market are multi-business firms and may have the benefit of the shared function of operations barrier, but most do not. Therefore, for the same “cottage industry” reasons, shared functions of operations do not provide a barrier of entry for any of the business functions or operations.

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The potential for joint cost benefits could exist for the suppliers in this industry. Demand from other markets could be met with excess payload capacity of these vehicles as is being pursued by some members of the industry (e.g., VG’s providing access to micro-gravity via parabolic trajectories after the SpaceShipTwo has been released) whose vehicles have the excess capabilities. These joint cost benefits can provide companies with a distinct advantage in the marketplace.

Some prominent members of the suborbital research field of suppliers have strong intangible assets to exploit, but not all (e.g, VG, Blue Origin). Others have intangible assets but they are not as strong or directly transferable to the suborbital research market (e.g. Armadillo). This may provide an advantage to some companies over the others.

Vertical integration economies do exist. For example, the experience of Virgin in the airline business may give VG an advantage over other companies because of their experience in accommodating people through the reservation system. In the suborbital research market, this advantage may be minimized, especially at the outset of operations when customers will be innovators and early adopters, willing to contribute significant levels of effort to overcome deficiencies of the less experienced operators.

The only business function that is considered a possible barrier to entry is the purchasing operation of consumable goods. Even so, right now it may only be applicable to a small fraction of the industry suppliers. It may be possible that the Manufacturing BOE might exist (if the number of vehicles being built is so great that manufacturing economies of scale might become significant) but it currently does not.

In summary, the only business function that is considered a possible barrier to entry is the purchasing operation of consumable goods. Even so, right now it may only be applicable to a small fraction of the industry suppliers. It may be possible that the manufacturing barrier of entry might exist (if the number of vehicles being built is so great that manufacturing economies of scale might become significant) but it currently does not. In other words, because the suborbital vehicles are being hand-crafted one-by-one in what could still yet be considered a “cottage” industry, the overall Economies of Scale barrier of entry strength is considered very low.

The strength of the economies of scale barrier of entry currently favors smaller companies. This low barrier of entry enables smaller companies to enter the market easily. For example, small companies were able to satisfy selection criteria of NASA’s Flight Opportunities Program (FOP) as well as some much larger companies.

Since there are not that many significant economies of scale barriers of entry, firms do not have to expend much effort to exert control over them.

It is believed that firms in this market can easily overcome of the economies of scale barriers of entry through wise hiring choices and savvy contracting practices.

Finally on the topic of economies of scale, limits to this barrier of entry are not being approached in the suborbital research market because it is still so young and in the initial stages of market emergence. [Ref. 3]

Barrier of Entry: Product Differentiation

Product Differentiation is defined as “brand identification and customer loyalties possessed by established firms which stem from past advertising, customer service, product differences, or simply being first into the industry.” [Ref. 1, page 9.]

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Analysis

Some firms have very strong product differentiation that is directly applicable to the suborbital research market (example: VG is part of the Virgin family of companies that are highly recognizable from their world-renown music stores and airlines). Others have strong product differentiation that is very strong but not directly applicable to the suborbital research market (example: the association of Blue Origin to Amazon.com through the owner of the two companies, Jeff Bezos, is widely recognized although the two companies are not closely related.). On the other hand, a major fraction of firms in this industry segment have no real product differentiation stemming from past advertising, customer service or product differences (example: companies like Masten Space Systems don’t have any prior brand identification or customer loyalties. It is estimated that even Armadillo Aerospace, owned by John Carmack who is widely-known among the video gaming community, may only benefit in a minor way applying the brand ID and customer loyalties of the gaming community to his rocket activities).

In light of this, the barrier of entry of each component of product differentiation is estimated below.

Brand identification and customer loyalties stem from:

Past advertising: moderate (attributable to Blue) to strong (in favor of VG). Customer service: moderate (attributable to Blue) to strong (in favor of VG). Product differences: moderate. There may be real barriers of entry due to product

differences due to differences of payload integration rack configurations or the optical properties of vehicle windows, for example.

Simply being first into the industry: weak (just because nobody has really been first to market yet although Armadillo has flown research experiments a couple of times to date).

Based on this evaluation, the overall product differentiation barrier of entry is estimated to be moderate.

In the case of the current suborbital research market, the overall product differentiation barrier of entries may not favor either the smaller nor larger companies because they funding decisions are not necessarily heavily dependent upon past experience or customer preference. Since funding is predominantly provided by the government, brand identification and customer loyalties are weighted less heavily than are more objective selection criteria.

Firms in the suborbital research market that are disadvantaged by the product differentiation barriers of entry have the resources and skills to allow them to overcome these barriers because (a) being the smaller of the firms, their prices will (presumably) be less than the larger firms, thereby attracting the smaller, privately-funded research experiments, and (b) low costs and basic functionality will be sufficient to be rated favorably in competitions for the larger, government-funded experiments where brand identification and customer loyalty are not major selection criteria in the procurement auctions.

Barrier of Entry: Capital Requirements

Capital Requirements refers to “the need to invest large financial resources in order to compete creates a barrier to entry, particularly if the capital is required for risky or unrecoverable up-front advertising or research and development (R&D). [It is …] One of the major factors influencing entry barriers.” [Ref. 1, pages 9-10.]

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“In economics, capital, capital goods, or real capital refers to already-produced durable goods used in production of goods or services. The capital goods are not significantly consumed, though they may depreciate in the production process. Capital is distinct from land in that capital must itself be produced by human labor before it can be a factor of production. At any moment in time, total physical capital may be referred to as the capital stock, a usage different from the same term applied to a business entity. In a fundamental sense, capital consists of any produced thing that can enhance a person's power to perform economically useful work—a stone or an arrow is capital for a caveman who can use it as a hunting instrument, and roads are capital for inhabitants of a city.” [Ref. 4]”

Analysis

Capital requirements of the suborbital research market include financial capital, facilities, vehicle system and subsystem hardware, and intellectual property.

Examples of financial capital include the operating funds to purchase goods and services and to pay infrastructure rent and labor costs associated with the suborbital reusable launch vehicle operation.

Examples of facility capital (i.e., facilities) include the buildings, hangars, launch pads and office space. Infrastructure is included in this category, including items such as runways, control facilities, and safety and security equipment.

Examples of vehicle system and subsystem hardware include all the non-consumable materials that comprise a suborbital reusable launch vehicle (sRLV), including the communications equipment not located on the vehicle.

Examples of intellectual property includes the theoretical and applied “know-how” that is required to design, build, operate, maintain and improve a sRLV.

The strength of the financial capital requirement is very strong. Costs of materials, labor, facilities and infrastructure tend to be very high in the RLV industry.

The strength of the facility capital requirement is very strong. Due to the hazardous nature of sRLV operations, there is a high degree of oversight imposed on vehicle and facility operators in the form of regulations (primarily imposed by OSHA).

The strength of the vehicle hardware capital requirements is very strong. sRLV hardware has very high controls on material and manufacturing precision and quality. These result in very high barriers of cost and schedule to maximize the probability of success.

The strength of the intellectual capital requirements is very strong. Rocket operations are still a very demanding activity that does not lightly tolerate off-nominal conditions or parameters. The theoretical and applied knowledge required for these activities is still considered to be fairly demanding with respect to other fields such as automotive, marine or aviation vehicle operations.

Overall, the strength of the capital requirements barrier of entry force is very strong

The capital requirements barrier of entry force may favor larger companies because they might have more resources available to pay the costs associated with each of the component capital requirements. Smaller companies will struggle to satisfy all the requirements thereby requiring cut-backs in some categories (intellectual capital, for example) to meet the requirements of others.

To control the financial capital requirements, the firm can devote resources to raising funds from the various traditional sources. In many cases, however, the most

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successful sRLV operators are those who are self-funded by using wealth gained from previous or concurrent business activities.

To control the facilities requirements, the firm can establish their operations on a facility that has experience and demonstrated capabilities of providing the necessary facilities and services to meet the requirements. Some companies have succeeded in making progress without basing their operations at a fixed facility, although as operations become more complex and frequent, independent operation becomes less likely.

To control the vehicle system and subsystem hardware requirements, the firm can utilize existing systems and subsystems instead of designing their own.

To control the intellectual property requirements, the firm can hire the proper personnel who possess the necessary intellectual knowledge. To maintain this capital, the firm can ensure that the compensation package for its employees is sufficient to retain their services.

The ability to raise financial capital might favor larger firms because the perception of capability and chances of success will be proportional to firm size.

The ability to overcome the facility and hardware capital will depend on the size of the operation which does not necessarily correlate to the size of the firm, so firm size will not provide favor for these two capital requirement categories.

Some firms in the suborbital research market do possess resources and skills that would allow them to overcome the capital requirements more cheaply than their competitors. For example, those firms located where the cost of living is low relative to those of their competitors may have a lower labor cost.

Barrier of Entry: Switching Costs

Switching Costs are defined as “one-time costs facing the buyer (or seller) of switching from one supplier’s (or buyer’s) product to another’s. One of the major factors influencing entry barriers.” [Ref. 1, page 10]

Analysis

The buyers (customers) for this market include universities and government organizations in the following areas of research: physical and biological processes in microgravity, Earth science, space science and human research. Typically, NASA is the predominant buyer, although they typically provide funding through research grants to universities and the principal investigators (PI) will decide upon the launch provider. There may be certain restrictions placed upon the PI as a condition of the grant that predetermines the launch provider, thereby usurping the decision-making authority of the PI and making NASA the real buyer.

If that is indeed the case (that NASA makes the grant funding conditional on the use of a specific launch provider) then a switching cost barrier of entry will be the cost of including a new supplier into the already-defined and practiced procurement process (that includes many individuals and steps to complete) that complies with the terms of the grant, the Federal Acquisition Regulations (FARs) and the NASA FAR Supplements (if the FAR is applicable). This cost would not be incurred if NASA continues to purchase suborbital research launches from vendors it has used previously.

If the new vendor operates from a launch site different than one previously used by NASA, then there may be switching costs of money or time associated with the new

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launch site, including waiting for the site to be properly licensed (that requires an environmental assessment that is costly and requires a lot of time to complete).

Bringing a new supplier “up to speed” in the NASA procedures for payload integration may also be a significant switching cost depending on the capabilities and expectations of the new vendor.

It is estimated that although switching cost barriers of entry may exist for the suborbital research market, they are of moderate strength at best but probably more fairly characterized as weak overall. The suppliers have a demonstrated willingness to comply with NASA process and procedures, and NASA as a buyer has demonstrated a high degree of flexibility and accommodation toward the new suppliers in their procurement processes, thereby minimizing the impact of these switching costs.

The overall strength of the switching cost barrier of entry is estimated to be weak.

The weak strength of the switch cast barrier of entry favors smaller companies because they it allows the customers of the incumbent firms to purchase from the new entrants very readily.

A firm can work to accommodate the process of change that the buyer must execute in order to make the switch from some other supplier to them perhaps by implementing their own processes that mimic how the buyer is used to operating. Otherwise, there is not much a firm (as the supplier) can do to control the switching cost barrier of entry.

The larger firms in the sRLV research market may possess resources or skills from their other lines of business (Amazon.com in the case of Blue Origin, and Virgin Airlines in the case of Virgin Galactic) that would allow them to overcome the specific examples in the switching cost barriers of entry more cheaply than their competitors

Barrier of Entry: Access to Distribution Channels

The access to distribution channels is “the new entrant’s need to secure distribution for its product. One of the major factors influencing entry barriers.” [Ref. 1, page XX.]

Analysis

Distribution channels for many of the suborbital research vehicle operators have not formally been established because they are too far from commercial operations to non-innovator customer groups. NASA and some university PIs are could be considered “innovators” and the lack of distribution channels are not an impediment to their decision to purchase suborbital research flights. Lack of distribution channels may be enough of an impediment to “early adopters” that keeps them from deciding to purchase suborbital research vehicle flights.

In some ways, NASA is playing the role of distribution channel through the Flight Opportunities Program (FOP) by paying for flights and recruiting payloads to take advantage of those flight opportunities.

In another sense, the Southwest Research Institute (SwRI) is playing the role of distribution channel in three ways: (1) like NASA, by encouraging the participation of academic principal investigators to develop payloads that can fly on the vehicles of the emerging suborbital research vehicles; (2) by encouraging the suborbital vehicle operators to donate payload space on early flights of these vehicles that can be awarded to researchers (students or PIs) through competitions or lotteries of chance; and (3) by purchasing flights themselves.

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The “distribution channels” mentioned above do indeed have excess capacity and are able to accommodate new clients. Because of the unique nature of the academic research community, it may not be feasible to expect a commercial distribution channel to emerge to support the suborbital vehicle operators.

The barrier of entry for each distribution channel (NASA and SwRI) is fairly low, although it’s probably a bit higher for the NASA channel than the SwRI channel.

The overall distribution channel barrier of entry is estimated to be low.

The low distribution channel barrier of entry does not favor neither larger nor smaller companies. The NASA channel may slightly favor larger companies but NASA is working hard to make the process as easy as possible to minimize the barriers to smaller firms.

Firms cannot expect to be able to influence the NASA distribution channel because of federal laws and regulations that discourage such influence. SwRI, because it is not protected in the same way by the same laws and regulations, could be influenced by outside pressures, but it is not in their interest to cede their control as a distribution channel for many reasons and SwRI will most probably resist any attempts of outside influence. Therefore, because of law (protecting NASA) or self-interest (on the part of SwRI and the firms themselves who would be negatively affected by the disruption of existing distribution channels), firms are strongly discouraged from attempting to control the existing distribution channels for suborbital research flights.

Because the distribution channel barriers of entry are fairly low, firms in this market do not require special resources or skills to overcome them. Therefore, there is no cost advantage to any of the firms in overcoming the distribution channel barriers of entry.

Barrier of Entry: Cost Disadvantages Independent of Scale

Critical Cost Advantages Independent of Scale are defined as “The most critical cost advantages independent of scale are factors such as: Proprietary Technology, Access to Raw Materials, Favorable Location, Government Subsidies, Operational Experience Cost Savings, and Shared Operations.” [Ref. 1, page 11]

Analysis

Each firm in the suborbital research vehicle market has its own proprietary technology. Although some component technologies may not be proprietary of themselves (some were developed using government funds and are therefore in the public domain), integration of these technologies at the vehicle level can itself be a proprietary technology.

The strength of the cost disadvantages independent of scale barrier of entry represented by proprietary technology among suborbital research vehicle firms is estimated to be moderate simply because the difficulty in developing the proprietary technology (i.e. “This *is* rocket science after all.)

There are no examples of individual firms within the suborbital research vehicle market having more favorable access to raw materials than any of their competitors.

The strength of the cost disadvantages independent of scale barrier of entry represented by unfavorable access to raw materials among suborbital research vehicle firms is estimated to be low.

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Some firms may have more favorable access to locations at which testing of their suborbital research vehicles can take place (i.e., spaceports or testing facilities) than other firms. Specifically, some firms own their own facilities, some lease facilities at a suitable facility, and some have their manufacturing facilities in one location and are required to transport their vehicles and operating infrastructure and consumables to a testing site, in some cases a distance that requires many hours to drive.

The strength of the cost disadvantages independent of scale barrier of entry represented by unfavorable location among suborbital research vehicle firms is estimated to be moderate.

There are examples of government subsidies in the form of the Flight Opportunities Program (FOP) provided to those suborbital research vehicle firms that competed and were selected to receive those awards. Not all firms in this market chose to compete and all that competed were not necessarily selected.

The strength of the cost disadvantages independent of scale barrier of entry represented by blocked access to government subsidy among suborbital research vehicle firms is estimated to be high because of the industry’s high capital requirements.

The suborbital research vehicle industry is not yet in the proper phase of product development to realize cost declines resulting from operational experience. Although this type of economy may be realized at some point, it has not yet been realized.

The strength of the cost disadvantages independent of scale barrier of entry represented by cost savings resulting from operational experience among suborbital research vehicle firms is estimated to be low simply because the industry is not yet mature enough to realize these types of advantages.

Although there are examples of shared operations and/or related activities within the same company among members of the suborbital research vehicle market, the amount of benefit that may be derived from these shared operations can be debated because the traditionally low-volume, non-commercial aspects of the research community in general (and the suborbital research community in particular).

The strength of the cost disadvantages independent of scale barrier of entry represented by the lack of shared operations or related activities within the same company among suborbital research vehicle firms is estimated to be low because of the low-volume, non-commercial nature of suborbital research.

The strength of each cost disadvantages barrier of entry is shown in the table below:

The overall cost disadvantages independent of scale barrier of entry is estimated to be moderate and favors smaller firms.

Barrier of Entry: Government Policy

The government policy BOE influence factor is defined as the “Licensing or permitting requirements (i.e., regulation), limits on access to raw materials, or restrictions on operating standards can be a major BoE source. Though typically imposed for societal

High Moderate Low

Government Subsidies Proprietary Technology Favorable Location

Access to Raw Materials Operational Experience Cost Savings Shared Operations

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benefits, these policies can also impose increased capital cost and lead time barriers on market participants.” [Ref. 1, page XX.]

There are a number of government policy barriers of entry for the suborbital research market:

International Trade in Arms Regulations (ITAR) Suborbital RLV Licensing NASA Acquisition Policy (a requirement to fulfill mission requirements through any

acquisition) NASA FAR Requirements (that impose accounting and other business practices on

the contractor)

Analysis

The estimated strength of each government policy is discussed below.

ITAR: This is barrier of entry can be very strong if the operator is seeking customers outside the US.

Suborbital RLV Licensing: The strength of this barrier depends on the technical and financial capabilities of the vehicle operator. Based on subjective polling of vehicle operators [Ref. 5], this barrier has been estimated to be reasonable. It is estimated that this barrier can be neither high nor low but medium in strength.

NASA Acquisition Policy: The strength of this barrier is estimated to be medium because it has not proven to be insurmountable as shown by the execution of the Flight Opportunities Program. However, strategic development of the industry is not always best served by imposing a full set of mission requirements on new entrants to an emerging market. Therefore, this policy is estimated as being of medium strength.

NASA FAR Requirements: TBD

Based on this discussion, the estimated overall government policy barrier of entry is estimated to be of moderate strength.

The moderate strength estimation of government policy barriers favors larger companies because they are better able to meet (a) the administrative and technical reporting requirements imposed by ITAR and RLV Licensing and (b) the financial burden incurred during the regulatory processes.

All the government policies mentioned above are independent of all the other barrier of entries mentioned previously with only one exception. ITAR is estimated to dependent only on the “Cost Disadvantages Independent of Scale” barrier of entry because it is a function of cost disadvantages such as the proprietary technologies in use.

A firm can control the ITAR barrier of entry by limiting itself to a US customer base. No suborbital operator can avoid the s RLV Licensing barrier. Firms can avoid the NASA Acquisition Policy barrier by declining to do business with NASA. This option, however, is not realistic for some firms who look to the government subsidy to cover their development costs.

Larger firms may have better business operations support that can lighten or distribute the work load incurred by the ITAR or Suborbital RLV Licensing policies. For example, larger firms may employ multiple technical experts in different disciplines that can collectively meet the reporting requirements of these policies, whereas in a smaller firm, the entire set of requirements may be imposed on a single individual who does not have the depth of knowledge or experience in all the relevant technical disciplines.

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Competitive Reaction

Currently there are no suborbital vehicle suppliers conducting commercial operations. The first firms to begin commercial operations will not any competitive response to their entry because that would seem detrimental to the overall industry. This situation may change as the industry matures, but in its pre-emerging stage of formulation, competitor reaction is not expected to impede entry of new firms into the suborbital research industry.

Summary of Force 1

The seven barriers of entry are sorted below in categories of high, moderate and low strength.

Not surprisingly, the strongest BOE is the high capital requirement of this industry.

Taken as a whole, it is estimated that the contribution of all BOEs to the Threat of Entry force is moderate with a tendency toward low.

However, it may be noteworthy that all the remaining BOEs are not necessarily weak This distinction can help new entrant suppliers focus their attention on the BOEs evaluated to be moderate, namely product differentiation, cost disadvantages independent of scale and government policy. Competitive reaction is not anticipated to be very strong simply because of the early development stage of this industry.

Force 2: Intensity of Rivalry Among Existing Competitors

Intense rivalry is the result of a number of interacting structural factors.

Numerous or Equally Balanced Competitors. Slow Industry Growth High Fixed or Storage Costs (relative to value added) Lack of Differentiation or Switching Costs Capacity Augmented in Large Increments Diverse Competitors High Strategic Stakes High Exit Barriers

“Exit barriers are economic, strategic, and emotional factors that keep companies competing in businesses even though they may be earning low or even negative returns on investment.” [Ref. 1, page 20.] Major sources of exit barriers include: Specialized assets, Fixed costs of exit, Strategic interrelationships, Emotional barriers, Government and social restrictions.

Mutual dependency is a market state in which “competitive moves by one firm have noticeable effects on its competitors and thus may incite retaliation or efforts to counter the move.” [Ref. 1, page 17.]

High Moderate Low

Capital Requirements

Product Differentiation Cost Disadvantages Independent of Scale Government Policy

Economies of Scale Switching Costs Access to Distribution Channels

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Analysis

Examples of mutual dependency between firms in this market are difficult to cite because none of the firms are conducting commercial operations yet.

The status of the interacting structural factors and what that indicates about the intensity of rivalry in the suborbital research vehicle market is given below:

Numerous or Equally Balanced Competitors: There are very few competitors in the suborbital research vehicle market and the competitors are not equally balanced. Relative strength of the few firms in the market is well known. There are no foreign competitors that figure into the industry structural analysis at this time due to their very low level of activity at the present time (Copenhagen Suborbital?). That indicates that the firms will target and appeal to different market niches, thereby leading to a low level of intensity of rivalry in the market.

Slow Industry Growth: The suborbital research vehicle market has not yet entered the growth phase and is, therefore, still experiencing (very) slow industry growth. Had the industry been in a growth phase of rapid expansion, market expansion by firms would lead to highly volatile competition. Therefore, the level of intensity of rivalry in the market due to this factor is low.

High Fixed or Storage Costs (relative to value added): There is a high initial capital cost in the development of the vehicles, but once that investment has been made and the vehicle design, fabrication and testing has been completed, the fixed costs should be reduced almost entirely to facility rents and wages. The combination of fixed and storage costs may be a strong function of the size of the payroll. The most prominent of the current set of suborbital research vehicle firms have relatively large payrolls and facilities, so it is estimated that the fixed and storage costs are indeed relatively high compared to the value (that will someday be ) added. These high fixed costs create strong pressures to fill capacity further leading to price cutting when excess capacity exists. Price cutting will lead to a deterioration of industry profits. Therefore, this structural factor leads to a high level of intensity of rivalry in the suborbital research vehicle market.

Lack of Differentiation or Switching Costs: Although the suborbital research vehicle market is not perceived as a commodity, the overall strength of the switching cost barrier of entry is estimated to be weak as stated above which diminishes the level of intensity of rivalry of this structural factor. However, the overall product differentiation barrier of entry is estimated to be moderate as described in Force 1b above, thereby creating impediments to competitive attacks because of buyer loyalties and preferences. The overall level of intensity of rivalry of this structural element is thereby estimated to be low.

Capacity Augmented in Large Increments: Addition of capacity comes in large when considering small payload masses with respect to total vehicle payload capacities. For example, for payloads that are 1/n of the total payload capacity of a suborbital research vehicle, the additional capacity of the operation of an additional single vehicle would “n” times. Therefore, for smaller, less expensive (and presumably less technically capable and significant) payloads, capacity could indeed be augmented in large increments. For more “substantial” payloads that are limited by the entire payload capacity of an individual vehicle, the augmented capacity represented by the addition of a single vehicle will be small. Therefore, for the smaller payload market niche, the addition of each new suborbital research vehicle risks disrupting the market supply/demand balance. This in turn may lead to the price cutting market behavior and high level of rivalry discussed above. For the larger payload market niche, the amount of supply/demand imbalance caused by the addition of new

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capacity would be minimized. Since the number of smaller payload is greater than the number of larger payloads, the intensity of rivalry of this structural factor is estimated to be influence by the smaller payload market. Therefore, the intensity of rivalry would be estimated to be moderate.

Diverse Competitors: There is a great diversity of competitors in the suborbital research vehicle market, but since none of them have started commercial operations yet, reading the intentions of the competitors is not yet an issue. This indicates that this structural factor’s influence on the intensity of rivalry is low.

High Strategic Stakes: The suborbital research vehicle firms that have the most at stake in their ventures also have the highest capacity to tolerate the loss of their investment (Blue, VG). The smaller firms undoubtedly have very high stakes in their ventures as well, but it is estimated that none would undertake a high intensity of rivalry level under dire circumstances. Therefore, this structural factor’s influence on the intensity of rivalry is low.

High Exit Barriers: The exit barriers of the suborbital research vehicle market are discussed in the subsection entitled “Sources of Exit Barriers” below where they are estimated to be high.

The eight interacting structural factors are sorted below in categories of high, moderate and low strength.

Overall, the estimated intensity of rivalry for all the structural factors would be estimated to be low.

FurtherDiscussion

In the suborbital research market, the number of firms is relatively small. The size of firms range in number of personnel and level of activity (as measured in lifetime revenue or expenditures) from very small (dozens of employees and less than $1M in revenue and/or expenditures) to much larger (hundreds or even thousands of employees and tens to hundreds of millions of dollars in lifetime revenue and/or expenditures). There are some non-US entities in the market, although they tend toward the low-end of the size/revenue/expenditure scale.

Market stability is not affected by the wide range of firm sizes in the suborbital research market because of the current “pre-emerging” state of the industry.

The growth rate of this market is still very low [Ref. 3] and this means that the nature of competition among firms in this market is very cordial and relatively cooperative.

The suborbital research market product (vehicles and operations) has a low fixed/storage cost with respect to value added (i.e., it is not hard or costly to store) so there is no pressure trend to fill capacity by cutting price in times of excess capacity. Vehicles will sit idle in times of low demand and cutting prices will not likely increase demand. (In other words, below some minimal price, the market demand may be relatively inelastic with respect to price.)

High Moderate Low

High Fixed or Storage Costs (relative to value added)

High Exit Barriers

Capacity Augmented in Large Increments

Numerous or Equally Balanced Competitors Slow Industry Growth Lack of Differentiation or Switching Costs Diverse Competitors High Strategic Stakes

15  

The suborbital research market product is not currently seen as a commodity. The vehicle systems and operations are highly integrated to maximize performance in an attempt to meet customer needs and requirements.

The resulting level of volatility of this market’s rivalry is low.

The increment of capacity that can be added in this market depends on the metric being investigated.

If the metric of interest is time in microgravity, the increment of capacity could be infinitely small (a function of the vehicle trajectory and propulsion system performance capabilities). This could mean that competition might be focused on the propulsion and navigation system performance with respect to the degree that the vehicle trajectory can be tailored to a customer’s needs.

If the metric of interest is maximized reflight capability of the same vehicle or time between reflights, then the increment of capacity is limited by the maximum number of flights for that vehicle. This metric is a function of the vehicle design and operators will be pressed to design their vehicles that allows for increasing number of reflights with quicker turn-around times. This may mean sacrificing high performance for fault-tolerant designs, thereby decreasing payload mass capacity. The result will on competition focused on vehicle design to simplify operations.

If the metric of interest is payload capacity, then the increment of capacity could be infinitely small payload mass increments. Increasing this metric is a function of vehicle design and propulsion system performance capability. To offer higher payload capacities, operators will decrease the weight of their vehicles (possibly by removing redundant systems and decreasing factors of safety) or increase the propulsion system capabilities (increased propellant tank sizes for longer burn times, or different propellant combinations for higher combustive performance, etc.). The competition might focus on the propulsion system or vehicle design to pursue demand with higher payload capacity requirements.

The sRLV research market demonstrates a great diversity in terms of strategies, origins, personalities, and relationships with their parent companies.

Strategies: Some companies are employing traditional technical strategy, VT and parachute landing (Whittington, Up) and some are employing newer technical strategies of VTVL (Armadillo, MSS, Blue), or HTHL (VG, XCOR).

Origins: The origins of many companies can be characterized as a “garage band” (MSS, Armadillo, Up, Whittington, XCOR). Some companies developed from an established company (it could be said that VG evolved from Scaled). Some companies were formed from scratch and are personality-driven (Blue)

Personalities: Companies range in terms of willingness to share the progress of their activities from very quiet on purpose to avoid publicity (Blue), somewhat quiet (publicizing only when there is something good to report, including VG, XCOR), very open (Armadillo, Masten, UP Aerospace). Some companies have very low profiles either because their communications are non-existent or only slightly effective.

Relationships with Parent Companies: In all cases except two, there is no parent company with which to have a relationship. In the case of VG, the parent company is the Virgin Group and the relationship is very close and is a favorite of the parent company owner. In the case of Blue, the parent company is Amazon and again, the relationship is very close and a favorite of the parent company owner.

The strategic stakes in the suborbital research market are fairly high, because safe and successful operation may be a determining factor in any given firm’s long-term success

16  

and viability. Therefore, operators are being very careful not to be too hurried in their rush to market (to gain first-to-market advantages) because it may sacrifice operational safety and subsequent success. The competition among firms, therefore, has been measured and deliberate. Specific milestones with firm target dates have been avoided. Explicit statements of “we’ll fly when it’s safe” have been repeated by many (if not all) of the operators. (Can we find specific quotes?)

SourcesofExitBarriers

The following is the state of each of the major sources of exit barriers in the suborbital research market:

Specialized assets: Due to the high capital requirements barrier of entry that must be overcome to develop and operate the specialized assets of the suborbital research market, there may indeed be high exit barriers that originate from this source.

Fixed costs of exit: There are minimal if any fixed costs of exit in the suborbital research market. Therefore, this not a high source of exit barriers in this market.

Strategic interrelationships: The predominant strategic interrelationships that exist in the suborbital research market are that between firms and the government agencies that are providing market subsidies. This source may be considered as supporting an exit barrier of moderate strength.

Emotional barriers: It may be said that the commercial space markets are driven (to some extent) by irrational decision-making (used in both the financial and common definition of the term “irrational”). Therefore, it is estimated that is a moderate to high source of exit barriers in the suborbital research market.

Government and social restrictions: Considering both the negative and positive aspects of government regulation of commercial space in the US today, the status of government restrictions upon the suborbital research market is fairly minimal. There are no social restrictions upon the suborbital research market. Therefore, this source of exit barriers is considered to be very low.

The major exit barriers are sorted below in categories of high, moderate and low strength.

The overall strength of exit barriers can be considered moderate with a slight leaning to high.

Porter provides a correlation of an industry’s profit potential as a function of entry and exit barriers as shown in the following table. [Ref. 1, page XX]

Barriers of Entry

Exit Barriers

Low High

Low Low, Stable Returns Low, Risky Returns

High High, Stable Returns High, Risky Returns

The overall strength of the BOEs were evaluated to be moderate to low and the evaluation of exit barriers above to be moderate to high. Based on the first-order results

High Moderate Low

Specialized assets Emotional barriers Strategic interrelationships

Fixed costs of exit Government and social restrictions

17  

of the preceding analysis (both rated as moderate strength) would place the suborbital research market directly in the middle of this table, providing limited insight into the expected profitability and risk. However, this middle-of-the-road result may reflect the pre-emergent state of this market. However, by recognizing the second-order tendencies of these forces, the table above would indicate that, as the market evolves and matures, suborbital research firms can expect low returns but are accompanied by a moderate (to high) profile risk.

There are certain time-dependent characteristics of the rivalry in this market due to market maturity, acquisitions, and technological innovation:

Market Maturity: Currently the demand for suborbital research flight opportunities is small and the rivalry is low. As firms begin commercial operations, the rivalry will initially be high as firms compete for scare segments of market share. As the market matures from pre-emerging to emerging and demand for suborbital research increases, the market rivalry will decrease as each operator will be struggling to meet the increasing demand.

Acquisitions: The current set of suborbital vehicle operators may be subject to acquisition by one of the current competitors or by an outside company that will alter the dynamics and “personality” of the market. There have been no public indications or signals of pending acquisitions of this sort, so time-dependent characteristics that may result are not predictable.

Technological Innovation: It is expected that technological innovation within the suborbital research vehicle market will provide increases in operational safety, payload capacity, and quality of flight-provided research environments.

SummaryofForce2

Overall, the estimated intensity of rivalry for all the structural factors would be estimated to be low.

The overall strength of exit barriers can be considered moderate with a slight leaning to high.

Based on the evaluation of entry and exit barriers the market evolves and matures, suborbital research firms can expect low returns but are accompanied by a moderate (to high) profile risk.

Force 3: Pressure from Substitute Products

Substitute products are “other products that can perform the same function as the product of an industry. “The impact of substitutes can be summarized as the industry’s overall elasticity of demand”. “Substitutes not only limit profits in normal times, but they also reduce the bonanza an industry can reap in boom times.” “Position vis-à-vis substitute products may well be a matter of collective industry actions.” “Substitute products that deserve the most attention are those that (1) are subject to trends improving their price-performance tradeoff with the industry’s product, or (2) are produced by industries earning high profits.” [Ref. 1, pages 23-24.]

Analysis

The existing suborbital research market consists of service providers giving access to (a) time in a microgravity environment; (b) access to various launch and/or space environments (e.g., time at altitude, radiation levels, launch conditions, etc.); and (c)

18  

capabilities that are not currently available from the established suborbital research launch providers, including humans in the loop, cleaner microgravity environments, repeatable flights, and quicker payload access after a successful flight. Depending on the desired job to be performed, there are different substitute products available to the research customer.

For time in a microgravity environment, drop towers and parabolic-trajectory aircraft are the extant substitutes. Drop towers are Earth-based facilities that permit approximately 10-15 seconds of microgravity environment within controlled conditions. Existing drop tower facilities include (use text from my suborbital disruption innovation theory paper.) [Ref. 6]

For access to the altitudes commonly associated with “space,” the only substitute would be the expendable sounding rocket launch vehicles (this is true if our paper is analyzing RLVs, otherwise, the expendable sounding rocket is a direct competitor and this sentence should not be included).

Since suborbital RLVs are not currently part of a high-profit industry nor would a positive price-performance trade-off of sRLVs be mimicked by drop-towers or parabolic-trajectory aircraft, neither of these substitutes would be considered an imminent competitive threat that required dedicated resources to address.

Expendable sounding rockets on the other hand and despite the low-profit industry status of suborbital research, could potentially benefit from a price-performance trade-off of sRLVs due to similarities of launch vehicle designs and operations. For example... (example?) . Therefore, sRLV suppliers should pay attention to the operators of expendable sounding rockets as a substitute product threat.

SummaryofForce3

Based on this discussion, the strength of Force 3 (pressure from substitute products) is estimated to be low to moderate; Low because there is little pressure from the drop-tower substitutes and moderate because the profitability of the suborbital research market is not very high despite the fact that expendable sounding rockets could possibly benefit from a price-performance trade-off of the industry.

Force 4: Bargaining Power of Buyers

Buyers compete with the industry by forcing down prices, bargaining for higher quality or more services, and playing competitors against each other—all at the expense of industry profitability.

A buyer group is powerful if the following circumstances hold true:

It is concentrated or purchases large volumes relative to seller sales. The products it purchases from the industry represent a significant fraction of the

buyer’s costs or purchases. The products it purchases from the industry are standard or undifferentiated. It faces few switching costs. It earns low profits. Buyers pose a credible threat of backward integration. The industry’s product is unimportant to the quality of the buyers’ products or

services. The buyer has full information.

19  

The buyer groups in this market include U.S. Government entities, the principal investigators (PIs) of research universities, schools (K through 12), and private individuals or entities (purchasing services for novelty projects such as sending wedding rings to "space"). Appendix A gives a narrative analysis for each of these buyer groups and each of the circumstantial cases listed above.

The table below summarizes the analysis results given in Appendix A:

Bargaining Power Strength Of Buyers Due To…

Buyer Group Lar

ge

Vo

lum

e P

urc

has

es

Sig

nif

ican

t %

of

Bu

yers

’ Co

sts

Sta

nd

ard

P

rod

uct

s

Sw

itch

ing

C

ost

s

Ear

ns

Lo

w

Pro

fits

Bac

kwar

d

Inte

gra

tio

n

Th

reat

Imp

ort

ance

to

B

uye

rs’ Q

ual

ity

Bu

yer

has

Fu

ll In

fo

Ove

rall

U.S. Government Entities

High High High High High High High High High

University Researchers

Low High Low Low High Low Low Low Low

K-12 Schools (Educ. Projects)

Low Low Low Low Low Low High Low Low

Private Individuals (Novelty Projects)

Low High Low Low Low Low High Low Low

Since this is an emerging industry, there is no prior time period with which to compare the buying power of this group. As the industry develops, component power shifts for each buyer group should be investigated and noted.

SummaryofForce4

The most powerful buyer group is the USG. This represents a challenge to the industry since the USG customers will be able to steer the development of this industry to meet their needs. As discussed in the BOE section of Government Policy, the mission goal focus of NASA may not coincide with goals that maximize the chances of long-term industry viability.

Despite the fact that three of the four buyer groups are estimated to have low buyer group partner, the USG buyer group power is so strong that the overall power of all buyers is estimated to be moderate.

Force 5: Bargaining Power of Suppliers

Suppliers can exert bargaining power over participants in an industry by threatening to raise prices or reduce the quality of purchased goods and services.

A supplier group is powerful if it possesses the following characteristics:

It is dominated by a few companies and is more concentrated than the industry it sells to.

It is not obliged to contend with other substitute products for sale to the industry. The industry is not an important customer of the supplier group. The suppliers’ product is an important input to the buyer’s business.

20  

The supplier group’s products are differentiated or it has built up switching costs. The supplier group poses a credible threat of forward integration.

The supplier groups in this market include the following:

Suppliers of mechanical components such as valves, plumbing, solenoids, cabling, tubing, propellant tanks, etc.

Suppliers of composite materials used for construction of structures such as spacecraft fuselages and nosecones.

Machining equipment providers. Suppliers of Bulk and sheet metal materials for structures such as ... Skilled and unskilled labor Suppliers of solid consumables such as solid propellants, etc. Suppliers of liquid or gaseous consumables such as liquid or gaseous propellants,

working fluids, etc. Suppliers of electronic components for avionics Operating ranges such as spaceports

The principles in determining the potential power of labor as a supplier are similar to those just discussed for the other supplier groups. The key additions in assessing the power of labor are its degree of organization, and whether the supply of scarce varieties of labor can expand.

Appendix B gives a narrative analysis for each of these buyer groups and each of the circumstantial cases listed above.

The table below summarizes the analysis results given in Appendix B.

Summary of Force 5

Below is a table summarizing the discussion above:

Bargaining Power Strength Of Buyers Due To…

Supplier Group M

ore

C

on

cen

trat

ed

than

Bu

yers

Mu

st C

on

ten

d

Wit

h

Su

bst

itu

tes

Imp

ort

ance

of

Cu

sto

me r

Imp

ort

ant

to

Bu

yers

’ B

usi

nes

s

Dif

fere

nti

ated

o

r S

wit

chin

g

Co

sts

Cre

dib

le T

hre

at

of

Fo

rwar

d

Inte

gra

tio

n

Ove

rall

Mechanical Components

? ? High High Low Low Low

Composite Materials

? ? High High Low Low Low

Machining Equipment

? ? High High Mod Low Mod

Bulk & Sheet Metals

? ? High Low Low Low Low

Labor ? ? ? High High Low High

Solid Consumables

? ? High High High Low High

21  

Bargaining Power Strength Of Buyers Due To…

Supplier Group M

ore

C

on

cen

trat

ed

than

Bu

yers

Mu

st C

on

ten

d

Wit

h

Su

bst

itu

tes

Imp

ort

ance

of

Cu

sto

me r

Imp

ort

ant

to

Bu

yers

’ B

usi

nes

s

Dif

fere

nti

ated

o

r S

wit

chin

g

Co

sts

Cre

dib

le T

hre

at

of

Fo

rwar

d

Inte

gra

tio

n

Ove

rall

Liquid & Gas Consumables

? ? High High Low Low Low

Electronic Components

? ? High High Low Low Low

Spaceports ? ? Low High High Low High

Below, the supplier groups discussed above are sorted below into categories of high, moderate and low strength.

The overall strength of exit barriers can be considered moderate with a slight leaning to high.

Because the market is still in its initial stages of emerging, no changes to the power of supplier categories have been yet observed.

Ranking of the supplier categories within the “low”, “moderate”, “high” ranges is not attempted at this time.

Conclusions

Below is a “scorecard” for the ISA conducted on the suborbital research market summarizing the results discussed above. Following this is a final set of overview analysis questions to complete the ISA

ISAScorecard

The strengths of the five competitive sources are summarized below in the “scorecard” below.

SUBORBITAL RESEARCH MARKET ISA SCORECARD

Force Strength Source

Force 1: Threat of Entry by Potential Entrants

Moderate to Low

High Moderate Low

Labor Solid Consumables Spaceports

Machining Equipment Mechanical Components Composite Materials Bulk & Sheet Metals Liquid & Gas Consumables Electronic Components

22  

SUBORBITAL RESEARCH MARKET ISA SCORECARD

Force Strength Source

BOE - Economies of Scale

Low

Favors smaller firms. The only business function that is considered a possible

barrier to entry is the purchasing operation of consumable goods.

BOE - Product Differentiation

Moderate

Favors neither larger nor smaller firms. Brand identification and customer loyalties from past

advertising (moderate-high), customer service (moderate-high), product differences (low), and being first into the industry (low).

BOE - Capital Requirements

(Very) High Favors larger firms. Financial, facility, hardware and intellectual capital

requirements are all very high.

BOE - Switching Costs

Low Favors smaller firms. NASA, being the predominant buyer of the suborbital

research rides, has complex processes to overcome.

BOE - Access to Distribution Channels

Low Favors neither larger nor smaller firms. Government agencies and non-profit organizations

currently act as effective distribution channels.

BOE - Cost Disadvantages Independent of Scale

Moderate Favors smaller firms.

BOE - Government Policy

Moderate Favors larger firms. ITAR (high), Suborbital RLV Licensing (moderate),

NASA Acquisition Policy (moderate)

Competitor Reaction Low No firms conducting commercial operations

Force 2: Intensity of Rivalry Among Existing Competitors

Low Rivalry is expected to increase as firms begin commercial operations and vie for limited demand.

Force 3: Pressure from Substitute Products

Low to Moderate

Possible suborbital RLV price-performance benefits to sounding rockets exist.

Force 4: Bargaining Power of Buyers

Moderate The USG buyer group is so disproportionately strong as compared to the other buyer groups

Force 5: Bargaining Power of Suppliers Moderate

to High

Labor, solid consumables (propellant) and spaceports comprise a powerful set of suppliers although only one moderate and five low powered groups.

Below, the five forces discussed above are sorted below into categories of high, moderate and low strength.

High Moderate Low

None Force 1 (with tendencies to Low) Force 4 Force 5 (with tendencies to High)

Force 2 Force 3 (with tendencies to Moderate)

23  

The obvious observation is that none of the five forces are considered to be high. However, it should not be overlooked that the subcomponent BOE of capital requirements of Force 1 *is* high.

Each of these forces are discussed in greater detail within the body of the paper, but the pre-emerging status of the suborbital research industry market is estimated to be the predominant reason for this result.

FinalAnalysis

Based on the complete analysis given above, the suborbital research industry can be characterized as “pre-emerging,” that is there are currently no suborbital research vehicle operators that are currently conducting commercial operations but it is clear that multiple firms are in the research, testing and development stages of activity. With the support of USG activities, it is expected that one or more of these firms will begin commercial operation in the future. The industry may be considered as “emerging” after a time these firms begin commercial operation.

Clearly, the need for large amounts of capital to enter the industry is a BOE that must be overcome by all entrants but there are other barriers and forces they will encounter.

Similarly, although the bargaining power of buyers is considered to be moderate overall, the bargaining power of the USG as a buyer is extremely high and this particular fact must be acknowledged by the firms appropriately and addressed strategically.

Therefore, besides the high capital requirements and the high buyer group power of the USG, the forces of moderate level are the major challenges that firms in this industry must face and overcome. These include BOEs as a whole and the Bargaining Power of Suppliers.

Pressure from substitute products is evaluated as low to moderate so, along with intensity of rivalry among existing competitors, these are the two forces that can be attended to by the firms in this industry after the other forces have been satisfactorily addressed.

Future Work

There are some remaining questions of a comprehensive ISA that were not addressed in this report. These questions are listed here to help interested analysts make future suborbital research market ISAs more complete.

For all BOE influence factors (i.e., Economies of Scale, Product Differentiation, etc.) in Force 1:

Are the specific examples in each barrier of entry factor of influence independent of, or vary as a function of, the other barriers of entry?

For the Product Differentiation and Cost Disadvantages Independent of Scale BOE influence factors:

What can the firm do to control the specific examples in product differentiation barriers of entry?

For the Cost Disadvantages Independent of Scale BOE influence factor in Force 1:

24  

What are the cost disadvantages barriers of entry, independent of scale, if they even exist? (i.e., Do members of this market have scale-independent, critical advantages that represent cost disadvantages to their competitors?)

Do the firms in this market possess resources or skills that would allow them to overcome the specific examples in the cost disadvantages barriers of entry more cheaply than their competitors?

Experience is a more ethereal entry barrier than scale, and even though it can be just as effective keeping new firms from entering the market, it too, just as in the case of economies of scale, has limitations. Are any of these limits applicable to this specific market?

For each of the supplier groups identified in Force 5:

There are a lot of mechanical suppliers, and that group is less concentrated than the suborbital research launch industry. However, the subgroup of mechanical suppliers that can provide the required quality of equipment *may* be more concentrated. Is this true?] If this supplier group is more concentrated than the suborbital operators' industry then the suborbital operators' industry will appear fragmented to this supplier group which gives this supplier group high power.

Does this product contend with substitute products? If so, the power of this supplier is low.

For each of the Skilled and unskilled labor supplier group in Force 5:

Is the suborbital research industry an important customer of this supplier group? If not, then the power of this supplier group is high.

For all five forces:

How does government affect competition through each of the five competitive forces?

For reasons of keeping the analysis in this paper away from recommendations that could be perceived as advice, the following overall summary questions were not addressed:

What are the key factors for competitive success and the important industry opportunities and threats?

How can firms decrease the level of power of their buyers? How can firms decrease the level of power of their suppliers? Looking at the strength five forces from a different perspective, what are the

positions of competitive *disadvantage* that companies should avoid? For example, if the entry barrier of Economies of Scale is high, entering this market without large scale operations that can overcome that barrier would be a mistake. Therefore, to be competitive, companies intending to be successful in this market must avoid small scale operations.

Acknowledgements

I would like to thank the members of the Academy for their wonderful support for this work. I would also like to thank the set designers, sound designers, lighting crew, janitors, and all the other “little people” that helped set the stage for this monumental and important work that is destined to have irreversible social implications as we raise he visibility of the plight of kittens sleeping in boxes. Poor kitty!

25  

References

1. Porter, Michael E., Competitive Strategy, The Free Press, 1980. 2. http://en.wikipedia.org/wiki/Business_process 3. Davidian, Ken, Foust, Jeff, Kaiser, Dustin and Christensen, Ian, “Are Commercial

Space Transportation Industries Emerging?” presented at the International Astronautical Congress in Cape Town, South Africa on 4 October 2011.

4. Source URL: en.wikipedia.org/wiki/Capital_(economics) 5. Cite Tauri report saying what a good job AST is doing. 6. Davidian, Ken and Foust, Jeff, “Suborbital Market Overview and Application of the

Disruption Theory” presented at the AIAA Space Conference, 29 September 2010.

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APPENDIX A. ANALYSIS OF BARGAINING POWER STRENGTH OF BUYER GROUPS

Below is a discussion of the buyers groups described in this report, giving the detailed characteristics of each and the implications of each characteristic.

TABLE A. BARGAINING POWER STRENGTH OF BUYER GROUP

Buyer Groups

U.S. Gov’t Entities University Researchers

K-12 Schools (Educ.)

Private Individuals (Novelty)

Bar

gai

nin

g P

ow

er S

tren

gth

Du

e T

o L

arg

e V

olu

me

Pu

rch

ases

U.S. Government (USG) entities purchase the largest volume of services from the suborbital launch providers of all the current buyer groups. Although the industry does not have large fixed costs (the bulk of their costs are up-front in the development and construction of the vehicles, and their operating costs are variable, not fixed) the USG is a very powerful buyer group simply because of the overwhelmingly major fraction the volume of sales it represents.

A major fraction of the purchases for university experiments on suborbital vehicles is made possible by the USG. The volume of purchases actually made using university funding from the suborbital launch providers is very small. Although the industry does not have large fixed costs (the bulk of their costs are up-front in the development and construction of the vehicles, and their operating costs are variable, not fixed) the university PI buyer group is weak because of the low volume of sales it represents.

The buyer group representing K-12 schools conducting educational projects represent small (currently, almost negligible) fractions of the suborbital vehicle operators' sales. Because of the small volume of sales, this buyer group has very limited power.

The private novelty buyer group (representing private individuals conducing novelty projects) represents a small (currently, almost negligible) fraction of the suborbital vehicle operators' sales. Because of the small volume of sales, this buyer group has very limited power.

Bar

gai

nin

g P

ow

er S

tren

gth

D

ue

To

Sig

nif

ican

t %

of

Bu

yers

’ Co

sts

USG purchases of the suborbital launch services are not a major fraction of the government’s costs or purchases indicating that this factor reinforces the high strength of the USG as a buyer group. Since the fraction of costs these purchases represents is small, this would lead to low levels of price sensitivity of the USG buyer group, slightly diminishing the USG buyer group power. Overall, the USG buyer group power for this characteristic is estimated to be high.

The purchases by the university researchers using university funds of the suborbital launch services may be a major fraction of their costs or purchases , thereby making this group highly price sensitive which subsequently raising their buyer group power.

As a fraction of the K-12 schools educational project budgets, the projects that might utilize suborbital flight services may or may not represent a significant fraction of the buyer group's total budget, but since the novelty of this activity is very high, the price sensitivity of the buyer group is very low thereby limiting this buyer group's power.

The fraction spent on suborbital launch services by the private novelty buyer group is very large and will most probably represent a significant fraction of the buyer group's total budget. This would indicate high price sensitivity, thereby increasing the buyer power of this group. The high novelty of this activity will further increase this buyer group's power.

Bar

gai

nin

g P

ow

er S

tren

gth

D

ue

To

Sta

nd

ard

Pro

du

cts

The suborbital launch services are not currently standardized or undifferentiated. Therefore, if the USG becomes accustomed to operating with a specific operator, the opportunities to find alternative suppliers will be decreased, thereby diminishing buyer power of this buyer group. However, the USG tends to set the contractual terms of their purchases, so their buying group power is high despite any standardization or differentiation of the suborbital launch providers.

The suborbital launch services are not currently standardized or undifferentiated. Therefore, if a specific university researcher gets used to operating with a specific operator, the opportunities to find alternative suppliers will be decreased, thereby diminishing buyer power of this buyer group.

The suborbital launch services are not currently standardized or undifferentiated. Therefore, if a specific school gets used to operating with a specific operator, the opportunities to find alternative suppliers will be decreased, thereby diminishing buyer power of this buyer group.

The suborbital launch services are not currently standardized or undifferentiated. Therefore, if private individuals or entities get used to operating with a specific operator, the opportunities to find alternative suppliers will be decreased, thereby diminishing buyer power of this buyer group.

27  

TABLE A. BARGAINING POWER STRENGTH OF BUYER GROUP

Buyer Groups

U.S. Gov’t Entities University Researchers

K-12 Schools (Educ.)

Private Individuals (Novelty)

Bar

gai

nin

g P

ow

er S

tren

gth

Du

e T

o S

wit

chin

g

Co

sts

The switching costs of the USG buyers will depend on the flexibility of the USG procurement and purchasing processes. Relative to the other buyer groups for the suborbital research launch services, the switching costs of the USG buying group are high, thereby diminishing buyer power of this buyer group. However, in addition to what was stated above about the USG tends to set the contractual terms of their purchases, they are also the predominant customer in the suborbital research launch vehicle market, so their buying group power in this category will be high. Counter to this, the switching costs of suborbital launch operators are estimated to be low (to accommodate customers as much as possible) thereby increasing power of the USG buyer group.

The switching costs of the university researcher buyers will depend on the flexibility of the university procurement and purchasing processes. Relative to the other buyer groups for the suborbital research launch services, the switching costs of the university researcher buying group are high, thereby diminishing buyer power of this buyer group. Counter to this, the switching costs of suborbital launch operators are estimated to be low (to accommodate customers as much as possible) thereby increasing power of this buyer group.

The switching costs of the K-12 educational buyer group will depend on the flexibility of each individual school's procurement and purchasing processes. Relative to the other buyer groups for the suborbital research launch services, the switching costs of the K-12 educational buying group are low, thereby increasing the buyer power of this buyer group. Additionally, the switching costs of suborbital launch operators are estimated to be low (to accommodate customers as much as possible) thereby further increasing power of this buyer group. However, the fraction of sales that this buyer group represents is *so* low, the overall buyer power of this group is minimal at best.

The switching costs of the private individuals or entities buyer group will depend on the flexibility of each individual's procurement and purchasing processes. Relative to the other buyer groups for the suborbital research launch services, the switching costs of the private individuals or entities buying group are low, thereby increasing the buyer power of this buyer group. Contrary to this, the switching costs of suborbital launch operators are estimated to be low (to accommodate customers as much as possible) thereby increasing the power of this buyer group. However, the fraction of sales that this buyer group represents is *so* low, the overall buyer power of this group is minimal at best.

Bar

gai

nin

g P

ow

er S

tren

gth

D

ue

To

Ear

ns

Lo

w P

rofi

ts The USG buyer group does not

generate profits in the economic sense of the word so estimating price sensitivity is difficult. (Typically, high profit firms are typically less price- sensitive). Subjective observation might support the statement that the USG has traditionally been strong in their buyer power to lower suborbital launch costs through execution of the procurement auction practices required by the FARs.

The university researcher buyer group does not generate profits in the economic sense of the word. Subjective observation might support the statement that this buyer group would tend to be highly price-sensitive and thereby strong in their buyer power to lower suborbital launch costs.

The K-12 educational buyer group does not generate profits in the economic sense of the word. Subjective observation might support the statement that this buyer group has traditionally been weak in their buyer power to lower suborbital launch costs.

The private individuals or entities buyer group does not generate profits in the economic sense of the word. Subjective observation might support the statement that this buyer group has traditionally been weak in their buyer power to lower suborbital launch costs.

Bar

gai

nin

g P

ow

er

Str

eng

th D

ue

To

Th

reat

o

f B

ackw

ard

In

teg

rati

on

The USG buyer group is in a position to pose a credible threat of backward integration (i.e., to begin providing their own suborbital launch services) so they absolutely can demand concessions by the launch operators, indicating a strong buyer power position.

The university researcher buyer group is not in a position to pose a credible threat of backward integration (i.e., to begin providing their own suborbital launch services) so they cannot demand concessions by the launch operators, indicating a weak buyer power position.

The K-12 educational buyer group is not in a position to pose a credible threat of backward integration (i.e., to begin providing their own suborbital launch services) so they cannot demand concessions by the launch operators, indicating a weak buyer power position.

The private individuals or entities buyer group is not in a position to pose a credible threat of backward integration (i.e., to begin providing their own suborbital launch services) so they cannot demand concessions by the launch operators, indicating a weak buyer power position.

Bar

gai

nin

g P

ow

er S

tren

gth

D

ue

To

Imp

ort

ance

to

B

uye

rs’ Q

ual

ity

The suborbital launch service is realistically not a critical element in the quality of the USG’s achievement of mission goals or quality of experimental results. This means that the USG will demonstrate price sensitivity in the suborbital research launch services market. This increases the USG buyer group power.

The suborbital launch service is a critical element in the quality of the university researchers' quality of experimental results. This indicates that the university researchers will be insensitive to suborbital launch service price, thereby lowering the power of this buyer group.

Unlike the university researcher buyer group, the suborbital launch service is *not* a critical element in the quality of the K-12 educational project results. This means that the K-12 educational buyer group could be sensitive to suborbital launch service price, searching for the best price for a flight, thereby increasing the power of this buyer group.

Unlike the university researcher buyer group, the suborbital launch service is *not* a critical element in the quality of the private individuals or entities results. This means that the private individuals or entities buyer group could be sensitive to suborbital launch service price, searching for the best price for a flight, thereby increasing the power of this buyer group.

28  

TABLE A. BARGAINING POWER STRENGTH OF BUYER GROUP

Buyer Groups

U.S. Gov’t Entities University Researchers

K-12 Schools (Educ.)

Private Individuals (Novelty)

Bar

gai

nin

g P

ow

er S

tren

gth

D

ue

To

Bu

yer

has

Fu

ll In

form

atio

n

The USG buyer group will require full information about the internal costs and operations of the suborbital launch providers because government funding requires a high level of insight into market prices and operator cost. This high level of information leads to higher bargaining leverage and buyer power for this buyer group.

When buying suborbital research launch services on their own, the university researcher buyer group will not likely have full information about the internal costs and operations of the suborbital launch providers. The lack of this detailed information leads to lower bargaining leverage and buyer power for this buyer group.

The K-12 educational buyer group will not likely have full information about the internal costs and operations of the suborbital launch providers because they will be paying for the services themselves and will be treated as a traditional customer with limited insight into the operators' market, cost and pricing information. This low level of information leads to lower bargaining leverage and buyer power for this buyer group.

The private individuals or entities buyer group will not likely have full information about the internal costs and operations of the suborbital launch providers because they will be paying for the services themselves and will be treated as a traditional customer with limited insight into the operators' market, cost and pricing information. This low level of information leads to lower bargaining leverage and buyer power for this buyer group.

29  

APPENDIX B. ANALYSIS OF BARGAINING POWER STRENGTH OF SUPPLIER GROUPS

Below is a discussion of the supplier groups this report, giving the detailed characteristics of each and the implications of each characteristics.

TABLE B-1. BARGAINING POWER STRENGTH OF SUPPLIER GROUPS, PART 1

Supplier Groups

Mechanical Components Composite Materials Machining Equipment

Bulk & Sheet Metal Materials

Co

nce

nt

rate d

than

B

Not addressed in this report. Not addressed in this report.

Not addressed in this report.

Not addressed in this report.

nte nd

W

it h

Su Not addressed in this report. Not addressed in this

report.Not addressed in this report.

Not addressed in this report.

Imp

ort

ance

of

Cu

sto

mer

Because of the low level of redundancy and factors of safety in mechanical components, the vast majority of this supplier group's products could be considered "mission critical" and therefore would be rated as "important" to the manufacturing process or product quality for the suborbital operators. Therefore this supplier group is powerful for this characteristic.

The volume of sales represented by the suborbital operators is only a minor fraction of total sales for this supplier group, therefore the power of this supplier group for this characteristic is high.

The volume of sales represented by the suborbital operators is only a minor fraction of total sales for this supplier group, therefore the power of this supplier group for this characteristic is high.

The volume of sales represented by the suborbital operators is only a minor fraction of total sales for this supplier group, therefore the power of this supplier group for this characteristic is high.

Imp

ort

ant

to B

uye

rs’ B

usi

nes

s

The volume of sales represented by the suborbital operators is only a minor fraction of total sales for this supplier group, therefore the power of this supplier group for this characteristic is high. Mechanical components, however, can be stockpiled by suborbital operators which slightly diminishes the power of this supplier group.

Because of the low level of redundancy and factors of safety in composite materials, the vast majority of this supplier group's products could be considered "mission critical" and therefore would be rated as "important" to the manufacturing process or product quality for the suborbital operators. Therefore this supplier group is powerful for this characteristic. Composite materials, however, can be stockpiled by suborbital operators which slightly diminishes the power of this supplier group.

Because the manufacturing process heavily depends on the machining equipment used (and could not be manufactured by alternative means), this supplier group's products could be considered "mission critical" and therefore would be rated as "important" to the manufacturing process or product quality for the suborbital operators. Therefore this supplier group is powerful for this characteristic. Machining equipment is not a consumable which slightly diminishes the power of this supplier group.

Because bulk metal materials are primarily used for vehicle skins or fairings, the vast majority of this supplier group's products are not considered "mission critical" and therefore would not be rated as "important" to the manufacturing process or product quality for the suborbital operators. Therefore this the power of this supplier group is estimated to be low for this characteristic. Bulk and sheet metal materials, however, can be stockpiled by suborbital operators which slightly diminishes the power of this supplier group.

Dif

fere

nti

ated

or

Sw

itch

ing

Co

sts

There are many suppliers of mechanical components and the switching costs are low, so the power of these suppliers is low.

There are many suppliers of composite materials and the switching costs are low, so the power of these suppliers is low.

The suppliers of these products are not very differentiated, but the switching costs of machining equipment are high due to the size, weight power and space these machines ire. Therefore, the power of these suppliers is moderate.

The suppliers of bulk and sheet metal materials are not highly differentiated and there are many of them, minimizing switching costs. Therefore, the power of these suppliers is low.

Cre

dib

le

Th

reat

of

Fo

rwar

d

Inte

gra

tio

n

This supplier group does not pose a credible threat of forward integration therefore the power of this supplier group is low.

This supplier group does not pose a credible threat of forward integration therefore the power of this supplier group is low.

This supplier group does not pose a credible threat of forward integration therefore the power of this supplier group is low.

This supplier group does not pose a credible threat of forward integration therefore the power of this supplier group is low.

30  

TABLE B-2. BARGAINING POWER STRENGTH OF SUPPLIER GROUPS, PART 2

Supplier Groups

Solid Consumables Liquid & Gaseous Consumables Electronic Components Operating Ranges

cen

tra

te d

than

Not addressed in this report.

Not addressed in this report. Not addressed in this report. Not addressed in this report.

Co

nt

end

W

ith

S

ub

stit

u Not addressed in this report.

Not addressed in this report. Not addressed in this report. Not addressed in this report.

Imp

ort

ance

of

Cu

sto

mer

The volume of sales represented by the suborbital operators is only a minor fraction of total sales for this supplier group, therefore the power of this supplier group for this characteristic is high.

The volume of sales represented by the suborbital operators is only a minor fraction of total sales for this supplier group, therefore the power of this supplier group for this characteristic is high.

he volume of sales represented by the suborbital operators is only a minor fraction of total sales for this supplier group, therefore the power of this supplier group for this characteristic is high.

To some spaceports, the volume of sales represented by the suborbital operators may be a major fraction of the total sales, therefore the power of operating ranges for this characteristic may be low.

Imp

ort

ant

to B

uye

rs’ B

usi

nes

s

Because solid consumables (such as solid propellants) are "mission critical" to the manufacturing process and suborbital vehicle quality and mission success, the power of this supplier group is estimated to be high for this characteristic. Solid propellants, however, are storable and can be stockpiled by suborbital operators which slightly diminish the power of this supplier group.

Because liquid consumables (such as solid propellants) are "mission critical" to the suborbital vehicle quality and mission success, the power of this supplier group is estimated to be high for this characteristic. Because liquid propellants are *not* storable and *cannot* be stockpiled by suborbital operators, the power of this supplier group is slightly enhanced.

Because of the stringent performance requirements levied upon a suborbital vehicle's electronic components (specifically in the vehicle's avionics systems), the vast majority of this supplier group's products could be considered "mission critical" and therefore would be rated as "important" to the manufacturing process or product quality for the suborbital operators. Therefore this supplier group is powerful for this characteristic. Some electronic components, such as video equipment and data (not GNC) telemetry subsystems may not be considered as mission critical, but these represent a minor fraction of all the electronic systems on the vehicle.

Because launch and operating ranges are considered "mission critical" to suborbital operators, this supplier group is powerful for this characteristic.

Dif

fere

nti

ated

or

Sw

itch

ing

Co

sts

Solid consumables, including solid propellant rocket motors, is highly differentiated due to the chemical processing and manufacturing intricacies and variables. Solid rocket motors are not like liquid rocket engines in that the design of solid rocket vehicles is highly dependent on the motor design, thereby causing a very high switching cost. These suppliers have high power.

Once a certain level of purity of consumable liquids or gases has been specified and manufactured, the amount of differentiation among suppliers is minimal, thereby lowering the power of these suppliers. These suppliers have also developed methods of delivery that minimize the amount of fixed infrastructure required to utilize the products, so switching costs are also low, thereby further lowering the power of these suppliers.

Although a certain level of manufacturing and material quality must be maintained in flight hardware, there are enough options of electronic components that minimize the differentiation of these products. Because of the standardized high quality and high number of suppliers of electronics of sufficient quality, the switching costs that operators have for purchasing these products from these suppliers are low. The low differentiation and switching costs diminishes the supplier power.

The different spaceports are fairly differentiated. Some are able to accommodate only vertical or only horizontal launches and landings, whereas others can accommodate both. Most tend to be fairly remote geographically although not all are far away from anything. Because operations at a spaceport involve a certain amount of vehicle-specific infrastructure (propellant handling and storage facilities, pads, etc.), there are certain switching costs that are accepted by the operators. The power of this supplier category is high. The differentiation and switching costs that exist in the spaceports add to the power of suppliers.

Cre

dib

le

Th

reat

of

Fo

rwar

d

Inte

gra

tio

n

This supplier group does not pose a credible threat of forward integration therefore the power of this supplier group is low.

This supplier group does not pose a credible threat of forward integration therefore the power of this supplier group is low.

This supplier group does not pose a credible threat of forward integration therefore the power of this supplier group is low.

This supplier group does not pose a credible threat of forward integration therefore the power of this supplier group is low.

31  

SkilledandUnskilledLabor

Is the suborbital research industry an important customer of this supplier group? If not, then the power of this supplier group is high.

Skilled labor is very important to the manufacturing process and product quality of the suborbital operators' vehicles. Therefore the power of the labor supplier group is considered high for this characteristic.

Skilled labor is highly differentiated. Educational background is only a minor part of the labor requirements and the level of a potential employee’s appeal to an employer can depend on other variables such as operational experiences, interpersonal skills, and other “soft” traits and characteristics. Finding, recruiting, hiring, training, appraising, reprimanding, firing and/or replacing an employee (skilled or unskilled) are the hardest tasks many company’s undertake. Because of this, switching costs are very high, too. Therefore, the supplier of labor is very powerful.

This supplier group does not pose a credible threat of forward integration therefore the power of this supplier group is low.

Labor as a supplier on this market is a weak force because there is relatively small number of positions and quite a few candidates for the available positions. Because the suborbital research vehicle operators consist primarily of firms with relatively few employees, the ability of labor to unionize and expand is very weak.