BOEING CASESTUDY EXTERNAL INDUSTRY ANALYSIS Himmie Langford April 2012 Introduction The large industry now known

n as the aircraft industry actual originated from a humble beginning in 1903 by the Wright brothers, Wilbur and Orville, when they built the first successful airplane. However, due to the Americans and worlds perception at that time that air transport was highly dangerous, the aviation industry did not achieve an immediate acceptance. This view was later changed in 1927 when Charles Lindbergh successfully flew across the Atlantic Ocean, sparking a huge enthusiasm towards flying and aircraft making (Boyd 2000). The industry actually gained more permanence during World War I and after the United States Government established the U.S. Postal Service and the Kelly Airmail Act of 1925; which allowed private airlines commercially couriered mails, parcels and at times, even

people. With this new trend, new players like Donald Douglas, William Boeing and Alan Loughead entered the aircraft manufacturing industry. When Boeing built a single-engine plane with the capacity to transport both mails and passengers over the Rocky Mountains, it gained a comparative advantage over its competitors (Heppenheimer). With the commencement of the Second World War, the aircraft industry both suffered a setback and an opportunity. A set-back due to the reduced commercial demand during the war and an opportunity due to the investment made into aviation research and development for meanly military purposes. Many of these technical improvements actually found their way into the commercial industry after the end of World War II (Boyd 2000). In the 1950s, Boeing and Douglas both introduced the Boeing 707 and the DC 8 Model planes respectively (Heppenheimer); that was an era of rivalry between the two; however, following the end of the Vietnam War, Boeing became the overall leader in the industry following the fall of Douglas due to the reduction in R&D by the American Government. By the late 1970s the France, German and English combined resources and expertise to establish the Airbus Company to rival the Boeing. This merger pay-off and established the current aircraft manufacturing oligopoly in an industry which Boeing held 55% of the market and Airbus holding a little of 40% (Landler 2006). The industry is growing constantly and is a

market that extends worldwide and in 2006 had a size of US$ 63 billion gross sales (EADS 2007a, p.III; Boeing 2006a, p.9); with both companies having a combined market share of 86% for airplanes over 100 seats. characteristics of this industry. High entry barriers and investment in R&D are

Strategic objectives Because the airplane manufacturing industry projects a steady growth in the next two decades, both Airbus and Boeing strategic of objective are to increase market shares by acquiring returns higher than the industry average. As stated in Boeings mission statement, it wants to be the number one aerospace company in the world and among the premier industrial concerns in terms of quality, profitability and growth (123helpme, 2012) while Airbus says its objectives are to meet the needs of airlines and operators by producing the most modern and comprehensive aircraft family on the market, complemented by the highest standard of product support (Mayer, S., 2007).

Consolidation and Strategic objective Competitive Forces in the Aircraft Manufacturing Industry Utilising the Porters Five Forces Model, the aircraft industry will be briefly scrutinised focusing on the threat of emerging competitors and close substitutes, suppliers and buyers power and the intensity of the Boeing/Airbus rivalry.

Emerging Competitors Threats of new entrants to the aircraft manufacturing industry is low because of the high barrier to entry; aircraft are enormously complex to build due to the cost, supply chain and technology required, few countries and companies possess the resources to construct them. However, China and India may before the mid-point of the twenty-first, due to current economic growth in these countries, enter this industry and gain significant market share.

Because Airbus and Boeing outsources to China in a quest to gain access to the fastest and

biggest airplane market in the world; that means the transferal of some aircraft manufacturing technology in that country which is likely to jump start their domestic aircraft industry (Bloomberg Business Week 2006).

The Intensity of the Airbus/Boeing Rivalry As stated earlier in the introduction, Airbus and Boeing are the only two major players in the aircraft manufacturing industry. The rivalry of these two companies is very intense; each tries to outmaneuver the other through legal, political and innovative means. Although the market of buyers keeps expanding around the world and specifically in Asia, their struggle to gain the highest share and profit margin is an ongoing battle. Because the biggest buyers, the airline industry, is losing in their operations, the desire for more newer or upgraded and efficient planes cannot be over emphasised; therefore, this trend has compelled both rivals to become innovative at producing aircraft that are lower in purchasing cost and maintenance. Conflict arises sometimes and reaches the offices the World Trade Organisation (WTO) (Pavcnik 2002).

The Achievement of Competitive Advantage and Market Share Because the aircraft industry provides millions of jobs directly and indirectly, contributes tremendously to the GDP of the United States and the European nations, governments intervene through policies and subsidy while the manufacturing rivals design technical, structural and procedural strategies to achieve above average returns and greater market shares. Cases has also been filed with the WTO by both companies claiming the other has received unfair investment advantage from their respective government with the motive of outdoing the other in its annual revenue performance reports and the achievement of first mover advantage through rigorous R&D(McDermott J. 2009).

Improvement in product differentiation by Airbus

To achieve the top spot in this growing industry, Airbus strategy is to focus its attention on product differentiation. Having claimed the top seat from 2001 2005 from Boeing, Airbus lost this position in 2006. With this loss, the company concluded that an efficient way to cut maintenance and acquisition cost to customers and reclaim the number one position was constructing a jumbo sized aircraft (A-380) with a capacity of 500 and above (Cook A. J. 2008). EADS-Airbus believes airlines will increasingly require larger aircrafts to meet the crasing numbers of passengers flying between major airports (QFinance, 2010).

Novel Distribution Channel by Boeing The Boeing says that the future belongs to medium-sized planes that can service smaller airports. To meet this demand, it has manufactured the Boeing 787 Dreamliner, an aircraft that it says is much more fuel-efficient than its competitors, and yields 20% less CO2 (QFinance, 2010).

The Race to winning newer markets During the end of 2006, it was clear that Boeing had regained the top spot; however, to stay on top of the industry and gain new markets, collaboration with emerging economies will become vital for both companies; their abilities to avoid delivery delays like Airbus A-380, a super jumbo jet, after production technical failures and not keeping an eye out for changing industry trend that may expose them to threats or opportunities (My Strategic Plan).

Buyer Power The negotiating power of buyer can either be high or low depending on the situation prevalent at the time. When the worlds economy experiences a downturn and the airline industry reduces its demand for new aircraft; they try to reduce administration, operation and investment cost, thereby forcing manufacturers to provide discounts and additional incentives to encourage them to change suppliers due to reduction in switching cost; however, because switching cost is normally high, the airline industry buyer power is mostly low. Considering that both Boeing and Airbus provide similar facilities in their aircraft, it is less likely that

airline would bother switching loyalty considering the cost it would take to train engineers, pilots and other essential staff to the technology of the alternative supplier (Hill, Jones and Galvin 2004) . Supplier Power Since Airbus and Boeing are the only buyers in the commercial aircraft industry, the supplier power is very low. These two companies exercise tremendous power over suppliers; however, as the industry grows and with more international regulations, suppliers could gain more say in this market; in this light, the launching of new brands by Boeing and Airbus do rest greatly on suppliers commitment to meet up with deadlines or else delay said activities being executed by these powerful manufacturers (Airbus and Boeing).

Close Substitutes Apart from Boeing and Airbus, there are relatively no other close substitutes; in fact, because these companies produce unique parts for the various crafts, consumers remain loyal to them and cannot go elsewhere to acquire services and parts because of the cost that would incurred due to an anticipated switch.

Observed Opportunities and Threats The aircraft industry is expected to grow 5% per annul and the Asian market is expected to lead this growth; however, as China, India and Russia continue to grow economically, it is not certain whether they might continue to rely on the Europeans and the Americans for their domestic supplies of aircraft. These economies possess the potential in the long run to acquire some market shares in this lucrative industry. As reported at the February's 2011 annual US Federal Aviation Administration forecast conference, Jerry Allyne, Boeing Commercial Airplanes vice-president of strategic planning and analysis, conceded and told attendees "We spend a lot of time asking ourselves how we are going to compete in the long term with their government support and 50-year planning window, "the Chinese are unstoppable" (Flightglobal 2011).

Recommendations 1. That Boeing assists in providing diversified supplies channels in potential rival markets; however, avoid the transferal of key technological knowhow to those countries. 2. That Boeing considers the possibility of including a jumbo jet as big as the A-380 in her plans since Airbus is considering the production of a A-350 similar to the 787 Dreamliner.

Reference Bloomberg Business Week, 2006. Boeing's Global Strategy Takes Off,

http://www.businessweek.com/magazine/content/06_05/b3969417.htm Flightglobal 2011, Can new entrants take on Airbus and Boeing

http://www.flightglobal.com/news/articles/can-new-entrants-take-on-airbus-and -boeing-354587/ Qfinance, 2009, Aviation Industry: Major Industry Trend http://www.qfinance.com/sectorprofiles/aviation 123HelpMe.com, 2012 "The Boeing <http://www.123HelpMe.com/view.asp?id=88896>. Company." Retrieved from

My Strategic Plan What we can learn from Airbus Strategy (or lack thereof) mystrategicplan.com/.../what-we-can-learn-from-airbus-strategy-or-la...

Mayer S. 2007, Airbus vs. Boeing Strategic Management Report, Munich, GRIN Publishing GmbH

McDermott J. 2009, WTO sides with Boeing against Airbus Busines US business Retrieved from www.msnbc.msn.com/.../wto-sides-boeing-over-airbus-s... - United States Cook A. J. 2008, Boeing versus Airbus: An economic analysis Thesis, Oxford, Retrieved from Ohiorave.ohiolink.edu/etdc/view?acc_num=muhonors1210008575