Seminar Paper, 2002, 32 Pages
1. THE INTRODUCTION………………………………………………..…….. 1
2. THE ENVIRONMENT - THE AEROSPACE INDUSTRY…………..…… 1
3. THE COMPANY………………………………………………………....…… 10
4. KEY STRATEGIC ISSUE & STRATEGIC RECOMMENDATIONS….. 14
5. THE CONCLUSION………………………………………………………….. 19
1. THE INTRODUCTION 1
The purpose of my paper is to analyze the competitive situation of the Boeing Company in the aerospace sector. The first part provides detailed information about the whole business sector with the intention to establish a foundation for an understanding of the complex and unique nature of this branche. Only having a comprehensive overview over the whole sector, one is able to identify the industry attractiveness properly, including the trends and driving forces. The second part provides a concise evaluation of the competitiveness of North America (Boeing’s main production place) based on a theoretical framework. The third part is concerned with the Boeing Company itself and contains a brief company description and a broader competitiveness analysis of the firm. Furthermore, the author will attempt to identify the core competencies of Boeing and to point out potential business opportunities. Finally, in the last part, one can find particular strategic recommendations based on the factual data with respect to Boeing and its business environment and the theoretical analysis.
2. THE ENVIRONMENT - THE AEROSPACE INDUSTRY 23
2.1 The data
Involved companies: The beginnings of the commercial aircraft industry are tightly connected with the name of William Boeing. In March 1910 William Boeing purchased Health’s shipyard on the Duwamish River, which became the place, where his first aircrafts were constructed. From then on the Boeing Company influenced significantly the aircraft market and is still doing so. The aircraft sector is a very important one in today’s globalized world, which got the first main development push during World War II. After the war there has been a shift from military dominated aircraft production to commercial passenger transportation.
1 Detailed information with respect to references can be found on the Notes Page (page 16). The author chose this unusual design, since particular references include extensive comments.
2 The aerospace industry can be divided into three sub-sectors, the commercial aircraft industry, the space industry, and the defense industry. The Boeing Company is involved in all of them, however since taking all sectors to be object of this study would exceed the limited amount of space, the author decided to focus mainly on the commercial aircraft industry. The reasons supporting this choice are that Boeing’s operations are mostly within this industry; this industry can be seen as being more market-oriented than defense or space industry; this industry is more suited for an assessment with theoretical economic models; the commercial aircraft industry is not object of any limitations with respect to a country’s national security; finally, the current strategic behavior of the Boeing Company indicates an increased focus on commercial aircraft industry (especially after the US contact for a joint striker was lost on the part of Lockheed Martin).
3 Information based on materials derived from Boeing’s official website, respectively, EADS official website.
The industry’s particularity for the developed countries, which subsidized the sector in a huge scale in the past, led to a consolidation of the market in such as scope, that the today’s market is divided between two companies, Boeing and Airbus, after Lockheed Martin’s exit out of this market (1971) and Boeing’s acquisition of McDonnell Douglas (1997). In contrast to the Boeing Company the Airbus Company’s history is relatively short; founded in 1970 in an effort to stay competitive with the Americans when several European companies agreed to combine their efforts under a single umbrella company, Airbus Industry. In 2000 the consortium has been transformed into the European Aeronautics Defense and Space Co. (EADS). The challenge between these companies is also a competition between the strongest world economies, the North American and European. 4 One of the main characteristics of this oligopoly is that economies of scale are enormous relative to market demand.
Industry data: The aircraft industry has faced an enormous growth during the last 30 years, caused mainly by revolutionary innovations in the technological sector and the globalization process of worldwide economies. However, the world’s economic downturn at the beginning of the millennium and the tragic terrorist attacks of September 11 led the current world demand decrease through out all economic sectors, especially affecting in the aircraft sector, which today suffers its worst decline since World War II. This illustrated by the Illustrations 1 and 2.
As it can be seen in Illustration 1(left), the industry sales rose steadily from the 1980 until a turning point in 1995 from where the numbers went up again until 2000. The 11/9 imposed a declining development again. Accordingly, the largest maker of commercial aircraft, Airbus SAS and Boeing Co., see orders fall as much as 60% in 2002. Already in 2001 the two companies’ orders fell as much as 41,6% after they have reached record of 1331 in 2000 5 . Despite the regressive numbers analysts agree that there is much future potential is the market. Additionally, the figure (right) demonstrates the market share of each of the two firms in the period 1997-1999. Although through history the Boeing Co. had the strongest position in the market, the European competitor, Airbus SAS, gets closer and closer to the market leader. This development has been recently strengthened by Easyjet’s invitation to
5 Slojewska, Swiderek, Przybylski.
bid, worth 5 US-billion Euro, which was won by Airbus 6 ; as a consequence, the sales almost equalized in 2002.
The described development becomes even cleaner through Illustration 3, which shows US yield data and European passenger traffic in the period of 2000-2002. Since the beginning 2001 we can see a continuous downturn reaching its bottom in the period after the 9/11 attacks. Employment & Turnover: The aircraft industry employees worldwide 1.22 million people directly. As seen in Illustration 4 (right) over 80% of the employment applies to the two biggest competitors, the United Stated of America and the European Union. Additionally to this number a large amount of indirect working places is highly connected to this industry, including pre-production processes (suppliers like General Electrics) and the utilization process (airports, food services). The figure (left) also shows the overall turnover of the industry of 214 US-trillion Euro, which by far even excels the budget of many countries.
Main products: The commercial aircraft company’s products are short-range and long-range passenger airplanes. The construction requires a wide variety of parts, indicating a connection with large supplier chains from different sectors, like the steel, the synthetic material or the electronic industry. The determinants of the product involved are basically speed, range and capacity. Concerning this, the market for aircraft is typically divided into two product categories: narrow-body and wide-body aircraft. Narrow-body aircraft are single aisle, short-range aircraft (up to 6,000 km) that typically carry between 100 to 200 passengers. The leading aircraft in this category are the Boeing 737, the Boeing 757, and the Airbus A-320. Wide-body aircraft are double aisle, medium to long-range aircraft (up to 14,000 km) that can carry between 200 to 450 passengers. The leading aircraft in this category are the Boeing 747, the Boeing 777, and the Airbus A-300, respectively A-380. Narrow- and wide-body aircraft are imperfect substitutes for one another because the planes are designed to serve different markets, and competition is much more intense within each category than between them. Illustration 5 plots the typical number of seats and the range of various aircraft and clearly indicates how localized the competition is within the narrow-body and wide-body segment.
Major plants: The industries major plants are logically those of Boeing and Airbus. The Boeing Co.’s world headquarter is settled in Chicago, USA, which monitors plants concentrated throughout the USA (the biggest in Washington and California), Canada (Ontario) and Australia. Moreover Boeing has recently made successful efforts to open subsidiaries in Russia 7 and China. In contrast to the US company’s concentrated production allocation, the Airbus SAS, which has headquarters in Paris and Munich owns 70 design and production facilities in France, Germany, Spain, the UK and Belgium. Furthermore the company has an engineering center in Moscow and 35 global representative offices oversee its development projects. Concerning the United States, the EADS employs 1,500 workers in the USA.
Suppliers & Customers: The suppliers and sub-suppliers are widely spread among different branches, since aircraft companies demand very different kind of products, from basic steel to customized avionics systems. General Electrics, Rolls-Royce, or Honeywell are the most famous among the suppliers. However, the supply chain of aircraft companies can be retraced even to small companies, which operate only locally. Different studies have shown that only in the USA Boeing, for instance, has in excess 500 direct suppliers. 8 Remarkably is that, some companies specialize just in the production for Boeing and Airbus and thus are highly dependent on their orders. Furthermore, evaluating the most recent developments in the supplier base, one can observe an increased consolidation process of companies. 9 This development can be mainly put down to the shrinking market for commercial aircrafts in the last past years (after the 9/11 terrorist attacks), which forced the companies to cut their costs significantly. Only a few firms were able to escape and to enter with their products other sectors and, accordingly, to diversify their operations. With respect to customers, both companies cover almost 90% of all commercial aircraft orders. The customers can be found on all continents. Also the demand can be considered as being fully global, since all customers demand the same product regardless of their geographical field of operations. Additionally, the level of customization is very limited by technological restrictions and
7 PR Newswire.
applies basically only to the cabin equipment. Each order, usually, embraces multiple aircrafts (value: multiple millions) and, therefore, Boeing as well as Airbus competes hard in order to get a contract 10 . The key factors in order to maintain the current customer base and to acquire new clients are: costs, adaptability, innovation, and availability. 11
Driving Forces & Trends: Concluding, one can identify several main driving forces of the commercial aircraft sector: a strong consolidation process, close links to the defense industry, a increased privatization process, a high level of capital intensity, a cyclical nature of the industry, and a high governmental involvement. 1213
2.2. The theoretical application
The aerospace industry can be regarded as being a truly global industry, since the production takes place over national boundaries and customers worldwide reveal identical product needs. Moreover, another indicator of the global character is the high-level of good exchange among nations within this sector. Finally, the usage of only two currencies, the Dollar and the Euro, in most transactions underlines the high degree of participation in the globalization process. Therefore, trying to apply the aerospace industry to a theoretical framework, one needs to take a worldwide scope of investigation.
A detailed Porter’s Five Forces of Competition analysis seems to be most suitable to assess the competitive level of the commercial aircraft industry.
The threat of new entrants: The threat of new entrants is considerably low as far as the aerospace industry is concerned, although external companies might be lured by extensive economies of scale 14 . On the contrary, firms are reluctant to join the aerospace market, since high barriers of entry can be identified. The major concern is the high investment costs with a noticeable high fix costs share.
11 Redding, Munzer, Dean, Mortimer, Howard, Kitzmann. 12 European Commission - STAR 21 European Advisory Group on Aerospace.
13 Particular factors will be elaborated in the following sections. However, the impact of each factor has a very complex nature - a detailed analysis would extent the scope of this paper. Nevertheless, the author will use the listed factors as a point of reference for further explanations.
14 Ferreri, p.51.
Accordingly, the payback period (return of investment) is very long. Additionally, Boeing and Airbus have considerable cost advantages due to subsidies. The slow market growth and the high saturation of the market discourage potential investors, as well. The complex know-how is not widely available, and the maintaining of an own R&D program is expensive and results are not tangible in the short-term. Finally, the current market segmentation is unfavorable for new companies, since both companies established an oligopoly, which is supported by the American, respectively by the European government. There is no possibility for extensive product differentiation, the switching costs are extremely high and distribution channels might not be accessible immediately. Evaluating all arguments mentioned above, one could state that a threat of new entrants does not exist in the short run. As a result, only a company heavily subsidized by a government would be able to enter the market, as Airbus did in the 1970s. Currently, only two countries, Russia and Japan, might be able to afford the immense expenditures required to enter the market. However, the former did not finish its economic restructuring yet and the latter sustains an economic recession. Accordingly, both governments are rather concerned with internal issues and are not likely to find support for a risky long-term investment in the aerospace industry. Finally, most recently China completed its first space project 15 , thus a new competitor might evolve. The Chinese government might attempt to create spillover effects between the two adjacent sectors, namely the space and flight sector. Bargaining power of suppliers: Since the companies demand a broad variety of inputs, the bargaining power of suppliers differs from case to case. The critical characteristics are size and product. Accordingly, small companies are mostly heavily dependent on orders from Boeing or Airbus because they are overwhelmed by the quantities demanded by the aircraft firms. Only a few companies have a sufficient size of operations to be able to bargain with the buyers. With respect to the manufactured product, suppliers that are able to produce specific, customized inputs (e.g. avionic systems) have considerable bargaining power, since only a small number of firms is able to perform the task. On the opposite, firms that manufacture a product, which can be substituted easily (plastic components), will not be able to renegotiate the offered conditions.
15 The Economist.
Elaboration, 23 Pages
Elaboration, 24 Pages
Elaboration, 24 Pages
Elaboration, 23 Pages
Elaboration, 24 Pages
Elaboration, 24 Pages
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