A Strategic Analysis of Airbus - Case Study Example

A Strategic Analysis of Airbus Introduction The aircraft manufacturing industry is arguably one of the most competitive in the new global economy. A few years ago, the supply of commercial and military aircraft was dominated by a handful of companies located in the United States. Today, there are several international companies who now compete in this multi-billion euro market. This paper provides an in-depth analysis of one of these companies—European Aeronautic Defense and Space Company (EADS). Located in the European Union, this company is best known for the manufacture of the Airbus series of commercial aircraft. The paper examines the extent to which Airbus has recognized and succeeded in meeting the critical success factors defined by the industry as well as industry analysts prior to 2005. In addition, Porter’s generic strategies model will be used to assess the choices that the Airbus management team and Board made, and whether these choices succeeded in giving Airbus a competitive advantage. This analysis compares the performance of Airbus over the past five years to its major industry competitors, Boeing and Embraer. The paper concludes with a discussion of the feasibility and sustainability of the company’s strategic direction over the next five years. Critical Success Factors As early as the mid1990s, industry analysts such as R.W. Mann and Company identified several factors that were seen as critical for companies hoping to succeed in the aircraft manufacturing industry (www.rwmann.com). In their strategic planning documents and in annual reports to shareholders, the companies also recognized that rapidly changing market factors would require that they adapt their business strategies to address these emerging challenges. Birnbaum (2004) defines a critical success factor as a strategic area where successful performance must be achieved to accomplish the business goal. The phrase “must be achieved” is highlighted because as the analysis will show, Airbus either misread the critical success factors that were identified at the time, or they simply were unable to implement strategies to achieve their strategic goals. My review of the industry analysts’ predictions as well as my review of the company websites for Airbus, Boeing and Embraer, have identified the following five common critical success factors for the aircraft manufacturing industry back in 2005: 1. Companies must expand into international markets. The number of new airlines is projected to grow through 2010 to meet increased demand for passenger travel. This growth was projected to take place primarily in the Asia-Pacific region. 2. Companies must reduce production costs. Back in 2005, labor costs and costs associated with production delays were identified as primary areas affecting the ability to remain competitive. 3. Companies must plan for the small jet (50 seat) regional markets. Regional markets served by small, executive-type jet aircraft with a capacity of fifty or fewer passengers was seen as a significant growth market back in 2005. 4. Companies must remain competitive through major investments in research and development. The aircraft industry is technology-based and investments in research and development are needed to remain competitive. Specifically, the need to develop new, light weight aircraft components and more fuel efficient engines were identified. 5. Companies must develop the capability to rapidly adjust production processes in response to changing market conditions. The commercial aircraft sector is volatile to say the least. It is linked closely to macro-level changes in the economy and tends to be very cyclical in nature (boom and bust). Analysts five years ago began to warn the industry that successful companies needed to develop the capability to switch production from commercial aircraft to military and aerospace applications. Applying Porter’s Model to Airbus One major factor that helps determine a company’s success (profit) is the relative visibility of the industry in which it operates compared to other industries. A second important factor is the company’s relative position within the industry itself. Porter identifies three generic strategies that account for the company’s position within the industry. In other words, how is Airbus positioned within the aircraft manufacturing industry compared to Boeing and Embraer? Porter’s strategies are; cost leadership, differentiation and focus (1980). Cost leadership, as the term implies, concerns how effective a company is at managing costs for a given level of product quality. Companies generate cost advantages over competitors by improving production processes, through realizing labor efficiencies, through investments in new technologies, by outsourcing or through the development of new products. Firms with a history of success in cost leadership typically have easy access to capital for research and development investments and flexible and efficient manufacturing capabilities. The soft drink company, Coca Cola, is an example of a firm that has achieved cost leadership. Differentiation strategy refers to the firm’s product. Is the product different than what is supplied by other firms? If so, how does it differ? Companies with a unique product are able to demand premium prices. Firms with successful product differentiation strategies normally are leaders in research and development, have linked the company brand to innovation and have an effective marketing campaign. Microsoft is one technology company that serves as an example of a highly differentiated firm. Porter’s focus strategy is where a firm selects a narrow segment of the market and attempts to achieve either cost leadership and/or differentiation within that specific market segment. The Bose entertainment company is an example of a firm that has achieved the focus strategy. An Assessment of Airbus Compared to its Major Competitors The senior leadership and the Board of Directors of EADS really misjudged the direction that the aircraft manufacturing industry was headed back in 2005. Not only did the company miss completely one critical factor that industry analysts had been pointing to since 2005, they failed to successfully implement several self-identified critical factors as well. In examining the company’s Consolidated Financial Statements (CFS), its disclosure documents and its annual review documents available online, the problems become immediately apparent (full citations for these documents for each of the years 2005-2009 are provided in the bibliography). In a 1997 industry alert, R.W. Mann issued a report identifying growing regional markets serviced by small jets as a strategic opportunity for the aircraft manufacturing industry. They referenced market studies that showed consumer preferences for jets over turbo props and the fact that fifty seat passenger jets operated on a lower cost per passenger mile. The report concluded that those firms who failed to advance with a small jet strategy would suffer a “Waterloo” referring to the battle where Napoleon was defeated. How did Airbus respond? First and foremost, the company never identified the small jet market as a critical factor in any of its strategic planning. Second, Airbus proceeded to invest billions of euros in the long haul, A380 jumbo jet. This can only be described as a strategic disaster for the company. In 2005, EADS enjoyed record sales revenues of $34,206 billion and net income of $1,676 billion (CFS) Its stock was trading at an all time high of $33.45 (Annual Review 2005). Today, the company continues to lose money and the global demand for the A380 in 2010 is only expected to be ten aircraft (Hephert and Blamont, 2009). Embraer, on the other hand, has increased its global market share for small jet aircraft each year for the past four years. Company revenues in 2009 were at an all time high and net income was a record 248.5 million U.S. dollars. The company’s strategy has been to focus on market segments where it has the expertise and technology to be the best. Corporate jets and small commercial jets are two examples. In the Annual Review 2006, the Chair of the Board noted that “EADS did not deliver what it promised.” (p.5). In one year, the company’s net income dropped to $99 million. This huge decline was primarily associated in increased production costs and penalties incurred as a result of delays in the delivery of the A380. EADS certainly doesn’t appear to be providing cost leadership in this example. In 2007, the company’s total revenues showed a decline from the previous year and net income was $446 million euros in the red (CFS). That same year, company notes to financial statements indicate that the total number of employees was up by over 12,000 since 2005 to a total workforce for 2007 of 116,493 (Annual Review 2007). EADS developed a corporate strategy that it named Vision 2020 that was adopted in 2008. Here, the company identified reducing production costs and realigning production to achieve a 50/50 balance between commercial aviation and military and aerospace applications (Annual Review 2008). It is worth noting that these same critical factors were identified by management and the Board back in 2005 and each year since. As of 2009, EADS had not achieved the cost reduction and production realignment goals that it has identified since 2005. The company currently has a backlog of over 3,000 unfilled orders and it continues to incur hefty penalties for production delays. The 2009 CFS show that the company reported a net loss in income of $752 million. By its own admission, the organizational structure of the EADS group is inefficient. There are many organizational layers within the various divisions of the company and poor communication and coordination costs the company time and money. The company has not even come close to the 50/50 realignment goal. The Airbus commercial arm of EADS generated sixty-four percent of the company’s total revenue in 2005 and that number was sixty-two percent in 2009. The company continues to be vulnerable to the cyclical market of the commercial airline industry. Moreover, Airbus has provided generous in-house financing and lease arrangements for start-up airlines to purchase or lease its equipment. Now it is regretting that decision as many of these “no frills” air carriers have gone bankrupt. EADS identifies this as one of its major business risks in its 2009 disclosure documents provided to shareholders. Boeing, on the other hand, is an example of a competitor that has been remarkably successful in diversifying its product line thereby mitigating the cyclical risk associated with commercial aviation. Boeing’s 2009 revenues were up twelve percent over 2008 at $68,281 billion (CFS). This increase is primarily related to sales growth in the defense industry. The company has signed new contracts with the U.S. Defense Department to provide the F-18 Growler and F-22 state-of-the-art aircraft. Today, less than fifty percent of Boeing’s revenue is derived from the commercial aviation sector and the company is well positioned for the future. In the critical area of investment in research and development, EADS has fallen behind its competitors. Unfortunately, the company is heavily reliant upon funding from the various governments within the European Union. Many of the EU nations are facing serious financial problems and have not been able to maintain the levels of R & D funding that was originally promised back in the mid 1990s. The one and only critical success factor that EADS/Airbus has achieved over the past five years is in expanding market opportunities. The company’s orders for commercial aircraft remained strong until the global economic recession in 2008-09. The company has also improved its share of the market in the defense and aerospace sectors but their overall percentage of the company’s total revenue remains relatively small. In evaluating EADS utilizing Porter’s model, one must conclude that the company has failed the test. It has not demonstrated cost leadership, a differentiated product or a focused strategy. EADS managed to achieve only one of the five critical success factors that were identified by both industry analysts and companies in the aircraft manufacturing industry back in 2005. It is the senior management and the Board of Directors who must accept the responsibility for this less than satisfactory performance. This performance is particularly disconcerting given the success demonstrated by both Boeing and Embraer, companies that understood the critical factors facing the industry and responded accordingly. Future Opportunities for Airbus EADS is a large company whose success is critical to the economic well being of many countries in the European Union. That said, government will not let the company fail. The question becomes: what changes does the company need to make to improve its performance and achieve its Vision 2020 goals? First, the organization of the company needs to be revamped. There are too many quasi-independent divisions and as a result, integration and communication are very ineffective. Second, the company needs to implement a strategy to gain more flexibility in converting production to military and aerospace products as the market demand for its products changes. Third, the company needs to re-evaluate its in-house financing and leasing programs. I was pleased to note that this is defined as a business risk in the company’s 2009 disclosure filings. The company loses millions of dollars each year in foreign exchange because most of its orders are paid in U.S. dollars while its production costs are incurred in euros. This problem somehow needs to be addressed. Finally, the company notes in several of its annual reporting documents, that a number of its pension funds remain under funded and this needs to be addressed moving forward. Conclusion This paper examined the performance of EADS/Airbus in the context of the company’s ability to define and then respond to critical success strategies identified in the aircraft manufacturing industry in 2005. Although Airbus is a large company with annual revenues in excess of $40 billion euros and 116,000 employees, it was not as successful during the period of 2005-2009 as two of its main competitors, Boeing and Embraer. The company hopes to turn the situation around with the implementation of its new corporate strategy, Vision 2020. Let us hope that for the sake of its employees that it is able to do so. Bibliography Birnbaum, Bill. (2004). Strategic Thinking: A Four Piece Puzzle. Costa Mesa, CA: Douglas Mountain Publishers. Hephert, Tim and Blamont, Matthias. (2009). Airbus sees lower sales, deliveries in tough 2009. USA Today. Jan 15. Porter, Michael E. (1980). Competitive Strategy: Techniques for Analyzing Industries and Competitors. New York: The Free Press. R. W. Mann and Company, Ltd is one of the top airline industry analysts. For a comprehensive treatment of issues impacting the industry see: www.rwmann.com. Data on Embraer were retrieved from www.Embraer.com. Specifically, the following documents were used: 2008 Annual Report 2008 Financial Statements 2009 Financial Statements Data on Boeing were retrieved from www.boeing.com. Specifically, the following documents were used: Company Profile 4th Quarter and Full Year Results 2008 4th Quarter and Full Year Results 2009 Data on EADS were retrieved from www.eads.com. Specifically, the following documents were used: Company Profile Annual Review 2005 2005 Consolidated Financial Statements Annual Review 2006 2006 Consolidated Financial Statements Annual Review 2007 2007 Consolidated Financial Statements Annual Review 2008 2008 Consolidated Financial Statements 2009 Public Disclosure Documents 2009 Consolidated Financial Statements Read More