Commercial Aircraft Industry: Innovation and Technological Change - Essay Example

Commercial Aircraft Industry- Innovation and Technological Change In this essay, general theory is used to explain the contribution of competitive and of monopolistic market structures. Then the commercial aircraft industry particularly where technology plays a significant role is analyzed with respect to the market structures in the industry and its relationship to the innovation process. Market Structure - Introduction The importance of the market structure is that it determines how the company's within it operate, its performance and behaviour. The degree of competition within the market determines how the pricing will affect the consumer. Indices of market structure developed over time offer us an approximate measure how much of an industry is concentrated in the hands of a small group of companies. This tells just how competitive an industry really is. A market structure defines the condition of a prevailing market and identifies how it is made up in terms of The number of firms in the industry The nature of the product produced The degree of dominancy each firm has Te degree of influence of the firm on price Profit levels Firm's policies and behaviour The extent to barriers to entry Perfect Competition: Large number of firms, with homogenous products, characterizes this and therefore there is no specific preference by the consumer for the product. The barriers of entry are low and so competitors exit in and out of the market. Since there is myriad options for the customers, prices are set by customer demand. Consumers and suppliers have a complete knowledge of the market. In an ideal scenario, a perfectly competitive market on one extreme balances a monopoly on the other. In reality, no such thing as a true perfectly competitive market exists. Let us now consider the other popular types of market structures, monopoly, oligopoly, and monopolistic competition. Monopolistic Competition: Monopolistic competition is a market structure in which many companies operate independent of each other in an industry. In monopolistic competition, there are too many companies and so the primary aim is to attract customers to one's own product specifications. In monopolistic competition due to the large number of firms, the companies can enter the market relatively easily since the barriers of entry are less, although more compared to perfect competition. This makes profit margins low due to the long-term equilibrium Due to the competitions; firms drop prices in order to expand volumes. Monopolistic competition has a normal downward-sloping demand curve. The competing companies in monopolistic competition are forced to vary the price rather than set a stable price and hold it. In monopolistic competition, there are many firms vying for control of one market. Each firm offers a different type of product or differentiate their product to achieve that edge in marketing of their products. Differentiation is a necessity to attract consumers by a parameter beyond the price. Monopoly: A monopoly is a market structure in which, there is only one company that operates within the industry. This generally does not exist, since substitutes in some form emerge usually. Unregulated monopolies with no government ties can generally do whatever they want. After all, there is no one else to offer a different sort of service or a different price. Monopoly may be characterized by high influence on prices and output. Barriers of entry are high and pricing strategies are employed to stifle competition. Monopolies are achieved by being the first in the field, by mergers and acquisitions or being a patent holder or by nationalisation. Complacency may be an issue due to the lack of competition, rendering it inefficient and consumers may be affected by the high pricing power of the firm. Oligopoly: An oligopoly is a market structure in which there are a small number of interdependent companies in the industry. In oligopolies, there are few companies so if you were a company and you made some sort of decision, it will always be made to be a strategic tactic made to outwit your rivals. The primary property of oligopoly is a small number of competing firms. Thus, to be able to best compete, firms make decisions based on planning against their rivals. That is the key property of oligopolies: all firms in oligopolies execute strategic planning Another possible model of oligopoly is the contestable market model, in which firms make decisions based on barriers to entry and exit. In this model, oligopoly companies make decisions so that new firms cannot enter the market. These offer a very high barrier of entry to new entrants. Oligopolies also tend to get into heated competition in the form of price wars and other ways of corporate fighting. There are a small number of companies and thus, the relations between companies are very important. They are highly competitive and end up owning a high concentration of the total market share. The behaviour of these firms is affected by what their rivals do. Branding and brand loyalty determine the purchase and perceived value is an important criterion for purchase. The Process of Innovation and Technology Innovation is the implementation of a new or significantly improved idea, good, service, process or practice that is intended to be useful. Innovations are generally differentiated into five main types of innovation: product innovation, process innovation, organizational innovation, marketing innovation and business model innovation. Since innovation is also considered a major driver of the economy, the factors that lead to innovation are also considered critical to policy makers. An innovation is characterized by its impact on existing businesses and markets. Firms that produce specialized and differentiated goods with low levels of substitutability enjoy a greater share of the demand. As long as they offer value, they can hold their market share and will be able to encroach upon their rivals target segment. In addition, innovating and upgrading their product or service allows them to achieve a higher level of quality creating a natural and tougher barrier of entry to their competitors. They will be able to sell their products at higher price-costs-margins because potential competitors have to face higher costs to move into their niches and customers are less ready to rely on them in terms of quality assessment and credibility. A clear differentiation due to the innovation gives them an edge to sustain in a monopolistic market dominated by few niche players. The levels of the price-costs-margins are strictly associated with the degree of product differentiation. With high levels of product differentiation, monopolistic competition cum barriers to entry and to mobility can apply. The effects of reputation and brand loyalty add on in increasing the height of these specific barriers to entry in adjacent and yet heterogeneous product markets. Innovation is often tied closely to the technical advances taking places. Technology may be utilised to better the product or process creating better efficiencies within the existing parameter and constraints overall creating better value and performance that may be a key differentiator in the selling process. With the rapid pace of technological developments in the global arena, it is no surprise that economical growth is tied to the technical advances of the markets. These technological changes, cumulatively, result in increases in total factor productivity for the economy, i.e., technological progress. Competition-induced innovations, through time, result in both firm and industry-level technological changes. Innovations that are thoroughly researched and are a true outcome of the competition serve to enhance the product efficiencies and deliver effectively. This is especially true in the commercial aircraft sector where the contribution of competitive and of monopolistic market structures in promoting the innovation process is clearly visible. The Commercial Aircraft Industry In the last decades, the commercial aircraft industry has dominated by three main manufactures: Boeing, Airbus and McDonnell. Together with Lockheed and other small companies, they formed the whole industry. With mergers and buyouts, the global commercial aircraft sector now consists of only two major competitors-Boeing in the United States and Airbus Industrie in Europe. In spite of limited number of players, the principal challenge to the commercial aircraft industry is creating profits. Despite the high investments required to sustain, profit margins remain flat compared with the profitability and return on investment. Boeing and Airbus have embraced technology with zeal to innovate and have a long history of vying with each other to make technically innovative and commercially producible aircrafts to maintain their dominance in the market. To ensure profitability and maintain market dominance in the commercial sector, these two companies are striving to improve profit margins by streamlining production processes, reducing overhead costs, and entering into strategic partnerships to stimulate revenue-generating opportunities. Boeing and Airbus - the Innovative Competitors The Boeing Company is the world's leading aircraft and aerospace manufacturer, headquartered in Chicago, Illinois, with its largest production facilities in Everett, Washington, about 30 miles north of Seattle, Washington. It is also the second-largest defence contractor in the world and 2005 the world's largest civil aircraft manufacturer in terms of value (but 49 % of orders and 45% of deliveries), overtaking Airbus for the first time since 2000. It is also the largest exporter in the world. Boeing continued to diversify in the military segment building guided missiles, bombers etc. In 1950's it built and delivered the B707, USA's first commercial jetliner cruised the skies. Taking the technological advances, Boeing, in 1970, launched the first B747, a four-engine long-range airliner, and finally entered service. This famous aircraft changed completely the way of flying, with its 450-passenger seating capacity and its upper deck. Until 2001, Boeing was the only manufacturer to offer such an airliner and had delivered near to 1,400 units. The McDonald-Douglas Aircraft Company launched the MD-11 on Dec. 30, 1986 Boeing enjoyed a market share of 80% along with McDonald Douglas who cornered 20%. Boeing continued its successful flying records with commercial single aisle planes, 727's with more than 100 seats capacity, 737's with more 150 seats capacity and 757-200 with more than 250 seat capacity. Its International flights included large aircrafts twin aisle Boeing 767 - 250 seats, twin engine Boeing 747 - 400 seats, and quad engine large size market leader. More than two engines were required for transatlantic flights due to FAA mandate and engine reliability issues. Airbus entered industry, in 2001, and Boeing's arch competitor emerged. Europe's two largest defence contractors, EADS (80%) and BAE Systems (20%) jointly hold Airbus. Airbus employs around 50,000 people in essentially four European countries: France, Germany, the United Kingdom, and Spain. Final assembly production occurs at Toulouse (France) and Hamburg (Germany). The main competitor of Airbus is of course, Boeing, with which it fights an intense commercial and political war. Airbus gained popularity due its fleet A320 planes being more technologically advanced and were Fly-by-wire aircrafts with more modern design, and uniformity in cockpit layouts throughout its fleet. This offered the ease of using trained personnel interchangeable between planes with minimum training. The newer planes were more fuel-efficient and had lower costs of maintenance. Its A320 series competed with 737 in 100-150 seat capacity, and was a series from A318 to A321 based on size. It also later built the larger A330 and A340's twin aisle in answer to Boeing's products. Boeing had to respond and it did so by launching the next generation series, 737 NG 737-700, 800 and 900 completely redesigned aircraft. In 1994, Boeing introduced its most modern commercial jet aircraft, the twin-engine B777, with a seating capacity of 390 passengers. The longest-range twin in the world known as the "triple seven," reached an important milestone by being the first airliner to be designed "entirely by computer. This has been so successful that Boeing's 747 sales have been affected. The acquisition of McDonnell-Douglas was an important diversification step for Boeing, for it provides the company with an established military product line to dampen the cyclical impacts of commercial sales. As a result, of such diversification, commercial aircraft now account for only 59 percent of Boeing's business, instead of the pre-merger business split of 80 percent. By diversifying and seeking product support and service business, Boeing has reduced its exposure to the cyclical nature of the commercial market, added stability, and enhanced its profitability. In 1999, Airbus achieved a 57 percent share of the world's new aircraft orders-the first time Airbus orders have exceeded 50 percent of the world market in which it competes. Its previous high of 46 percent was achieved in 1998. After years of dominance in the market, Boeing lost ground to Europe's Airbus and subsequently lost its leadership of the market in 2003. It banked its rebound on the launch of the newly conceptualised, 787 as a platform of total fleet rejuvenation. The plan worked and by the end of 2005, Boeing had once again outsold Airbus. Boeing is striving to create larger operating margins and greater profits. . It continues to increase productivity by reducing square footage, overhead costs, and its supplier base. Furthermore, the company is streamlining operations and containing costs by divesting itself of excess facilities and unprofitable, non-core business activities. Innovation withstanding, the cost per passenger is a key constraint that Airlines look at. Therefore greater the efficiency of these planes, greater is their appeal. Hence, it is trying to build airplanes using lighter composite materials and more efficient planes tat can fly at higher altitudes and be more fuel-efficient. Like Boeing, Airbus, also has to streamline its operations to stay in the game. It reduces overhead costs by minimizing inventories through a combination of just-in-time delivery and conservative ordering of parts and supplies. Also on the Boeing model, the new Airbus Integrated Company is entering the military air lifter market in an effort to dampen overall market cycles. With more pressure for Airbus as a single corporate entity, Airbus will face additional pressures from stockholders to achieve profits with reduced government support than when it was a consortium in the past. Conclusion Innovation continues, and Boeing is planning to introduce four new aircraft, the 787 "Dreamliner", the ultra-long-range 777-200LR, the 737-900ER and the 747-8 and this is in response to the A350 by Airbus. However, Boeing has achieved greater interest for its 787 Dreamliner, outselling the rival Airbus A350. This whole process continues to be cyclical, where an innovation or upgrade by a rival offsets some sales until another competitive product emerges. As per the recent reports, Airbus has received 1,055 net orders, which nearly doubles its previous record year in 1998. Chicago-based Boeing achieved 1,002 net orders, surpassing its previous record of 877 orders in 1988. Airbus continued to outsell its competitor Boeing in terms of orders for the fifth consecutive year. It also maintained its leading position in terms of deliveries for the third year in a row. Airbus delivered 378 airliners, bringing the Airbus turnover to approximately 22.3 billion euros. Boeing delivered 290 aircrafts in 2005. (Source: http://www.chinadaily.com.cn/english/doc/2006-01/19/content_513585.htm) These trends show that Airbus and Boeing will split the world market for commercial aircraft over the next 5 years. As the world's economies become increasingly globalize, the need for commercial aircraft will continue to be strong. Continuous innovation aided by technology in response to market demands will be the key to success and profitability. Sources Competition Retrieved form website http://library.thinkquest.org/C004323/micro2.html#topic3 on 19th Jan 2006 Market Structure Retrieved from website http://www.bized.ac.uk/educators/16- 19/economics/firms/presentation/marketstructure.ppt#281,26,Duopoly on 19th Jan 2006 The Economist: "Airline alliances: Mergers in mind" (London), 26 Sep. 1998, p. 80 Boeing Wikipedia.org Retrieved from website http://en.wikipedia.org/wiki/Boeing on 19th Jan 2006 Hoating, Lu Boeing, Airbus both grab record orders in '05 19th Jan 2006 Retrieved from Website http://www.chinadaily.com.cn/english/doc/2006-01/19/content_513585.htm on 19th Jan 2006 Airbus Wikipedia.org Retrieved from website http://en.wikipedia.org/wiki/Airbus on 19th Jan 2006 The Aircraft Industry Defined Retrieved from website http://www.ndu.edu/icaf/industry/2000/aircraft/aircraft2.htm on 19th Jan 2006 Read More