The Development of the Firms Profitability - Term Paper Example

Airbus assignment Executive Summary When operating within the modern market firms have to face a strong competition from all other companies that activate in the same industrial area. In order to survive under this pressure, firms internationally need to take the appropriate measures ensuring that the chances for a failure will be minimized. However, such an effort is not an easy one. In fact, most firms have to proceed to a series of changes within their internal practices in order to effectively respond to the current needs of customers around the world. In the case of Airbus, which is examined in current paper, the managerial choices have led to the achievement of a significant growth which has not yet been stabilized. More specifically, although the rate of increase of the firm’s performance is extremely high, the challenges that the industry faced the last years especially under the events of September the 11th in the USA have created severe obstacles towards the stabilization of growth of the firms operating in the specific industry. For this reason, a series of measures are proposed through this paper in order to help towards the improvement of the firm’s performance mainly through the alteration of existing practices. Current firm’s practices are analytically examined and explained trying to identify the reasons for the delay in the firm’s further growth. Finally, appropriate theoretical models are proposed as their application could help towards the increase of the firm’s profitability. In any case, it should be noticed that current position of Airbus in its market is considered to be satisfactory; however appropriate measures need to be taken in order for the firm to secure its existence in the industry in the long term. 1. Introduction The development of the firm’s profitability within the modern market is usually depended on a series of factors. Generally, it is noticed by Schuler et al. (1998, p.159) that all firms should take into consideration the following issues when developing their strategic plans: ‘a) the business structure, b) the legislative and employment relationship context, c) the patterns of HRM competence and decision-making and d) the national culture’. From a different point of view, it is suggested by Pritsker (1997, 32) that ‘industry analysis typically focuses on a company's external dimensions such as its markets, customers, and competitors’. The above view refers especially to industry analysis as part of the corporate planning procedure. In fact, before formulating its strategic plan, any firm within the modern market has to proceed to the appropriate examination and analysis of each environment (internal and external). It is only through this procedure that a firm can precisely identify its weaknesses and define the appropriate changes in accordance with the conditions of the market and the customer preferences. In this context, the particular sectors of the firm should be carefully reviewed and evaluated. Human resources is considered to be one of the most significant sectors of modern firms. It is for this reason that Harris et al. (2004, 156) supported that ‘the particular set of HR practices that an organization adopts must fit with other organizational factors in order for it to be effective’. In other words, the policies applied by the HR department should play an important role in the development of the firm’s profitability but only under the terms that they will be in accordance with existing firm’s strategies. In any case, all parts of the corporate activity should be carefully examined by the firm’s leader trying to improve the firm’s profitability especially in the long term. With a special reference to the operation management followed by modern firms, Gomez et al. (2002) notices that the firm’s sectors/ activities that should be reviewed in order for its performance to be developed should be the following ones: ‘inputs (materials, energy, information, management, technology, facilities and labor), transformation (or conversion process) and disposition (marketing and sales)’ (Gomez et al., 2002, Ch. 15). In fact, these sectors represent the majority of any firm’s activities. The careful review of the above activities could ensure the development of the corporate performance even in the long term. 2. Airbus – Overview of the firm Airbus is one of the leading aircraft manufacturers globally. The company first established in 1970 and soon achieved a high level of growth. In 2006, the firm’s profits reached the 26 billion euros, a significant amount if current financial conditions around the world are taken into consideration. In accordance with the corporate website ‘between 2006 and 2025, some new 22,700 passenger and freight aircraft valued at US$2.6 trillion will be required by aircraft operators, according to the latest Airbus Global Market Forecast; this represents an increase of some 5,400 aircraft compared with the previous one’ [1]. In accordance with the above, even under the pressure of the global competition (as it can be observed in the Porter’s five forces model, Figure 1, Appendices section) the company is expected to achieve a high rate of growth in the future. 3. Strategic choices of Airbus Airbus has been given a lot of chances to update its strategies. In fact, the existence of a specific strategy related with the development of the firm’s activities would have helped the firm to improve its competitiveness. Regarding this issue, it is suggested by Parnell (2003, 16) that ‘in many respects, the evidence for the existence of a strategy can permeate an organization; its customers appreciate knowing what a company is attempting to accomplish and prospective investors tend to hesitate when they do not have a clear grasp of the firm's position and future priorities’. However, the effectiveness of a firm’s strategy cannot be guaranteed in advance. In fact, it is possible that many failures would appear when applying a particular strategy if the appropriate measures are not taken in advance. In this context, the value of information used by the organization has been highlighted extensively. More specifically, Steyn (2004, 615) found that ‘successful organisations are knowledge-creating organisations, which produce, disseminate and embody new knowledge in new products and services; to this end, knowledge management enables organisations to improve efficiency and effectiveness mainly by decoding tacit knowledge into explicit information’. In accordance with the above, the firm that manages to retrieve and appropriate use valuable information or the firm that will use existing information most appropriately has many chances to move ahead of its competitors. In this context, all firm’s sectors (HR, supply chain and so on) would be examined carefully in order to identify any corporate activity that should be appropriately supported. Referring especially to the supply chain management sector, Krishnan et al. (2001, 259 mentioned that ‘supply chain management has become an important part of strategic planning in both large and small businesses since the 1990s as firms increasingly choose outsourcing as an externally-driven strategic growth path’. However, the above comments should be equally applied for all firm’s sectors – as explained above. 4. Evaluation of effectiveness of corporate strategy for the last 5 years In order to evaluate the firm’s strategy for the last 5 years we should refer to its activities and its relations with its stakeholders for the above period. Moreover, a reference to the relevant rations would be necessary. The firm’s supply chain management should be considered as effective. The above assumption is based on the fact that all criteria of such a characteristic exist: In fact in accordance with Agrawal et al. (2001, 22) ‘products reach customers through a chain of retailers, distributors, wholesalers, manufacturers, and component suppliers; supply chain management is intended to accelerate the flow of goods, information, and capital in both directions, along the chain's entire length, and to help companies monitor that flow’. In the specific case, the relationship between the firm and its suppliers should be considered as quite successful. Appropriate innovative plans are also introduced by the firm constantly. Towards this direction, it is suggested by Kesler (2000, 26) that innovation should refer to the following sectors: ‘1. Finance, 2. Process, 3. Offering and 4. Delivery’. On the other hand, it has been found by Walker (2000, 5) that ‘the measure of performance is not compliance with rules and procedures, but the achievement of real results; results (or outcomes) are not to be confused with mere outputs which just give us a sense of how much work has been done, but results give us an indication of the real impacts of the work’. In the case of Airbus the firm’s performance should be evaluated in accordance with its position in its market, its relationship with its stakeholders and the level of its financial performance (as indicated by the figures related with the corporate activity). Of course, it should be expected that problems would also exist. More specifically, as it is noticed by Akkermans et al. (1992, 7) all operational initiatives present problems that would belong to the following categories: ‘(1) problems regarding the organizational structure within which the persons involved work; (2) problems regarding the cognitive skills of the persons involved; and (3) problems regarding the attitudes of the persons involved’. The firm will be able to face the above problems by appropriately promoting its activities and using its existed resources. Specifically, for the supply chain management of the firm, this could be improved through the following strategies: ‘making and keeping relationships, implementing new technology in the supply channel, the use of forecasting to increase supply chain effectiveness, outsourcing to increase efficiency, and cost management as a strategic weapon’ (Cook et al., 2001, 14). In any case, the firm should prioritize its initiatives trying to focus on the absolutely important strategic choices. Competitors should be taken into account by the firm when designing its strategies. For this reason, it is noticed by Santos et al. (2000, 2) that ‘according to its characteristics, objectives and the resources available (human, physical, financial etc.), each company prioritizes some competitive criteria, according to market tendencies and concentrates its efforts to get a competitive position relating to concurrence’. Apart from the above issues, and the possible turbulences in its profitability, Airbus has to face the problems caused because of the differences in the exchange rates of dollar and euro (a difference that is increased almost on a daily basis). Regarding this issue, it is noticed by Seith (November 23, 2007) that ‘Airbus in particular suffers from the exchange rate: the airplanes it produces are made in the euro zone but paid for in dollars. The "Power 8" restructuring program put in place nearly a year ago is based on a euro exchange rate of $1.35’. Moreover, it seems that the problem of the firm is not only the price of dollar. In fact, it is mentioned that ‘the company leadership has not put forth any calculations that would spell out exactly how much would be saved by selling plants and outsourcing part of its production’ (Seith, November 23, 2007). Because of the failure of the firm’s leaders to support effectively the firm through the years, the firm’s profitability has been reduced and the situation is worsened every day. The last 5 years the pressure faced by the firm in all its operational sectors is considered to be extremely strong. The firm’s strategies for the last five years should be considered as absolutely justified if taking into account the pressures made by the market globally (see also Porter’s five forces, Figure 1) and the difficulties related with the application of innovative strategic plans (Figures 2 and 3, Appendices section). The strategic options of Airbus could be explained also by using as a basis the Bowman’s strategic clock (Figure 4). The particular model can be used in order to explain the position of the firm within its market compared to the position of its competitors. In accordance with the above model the basis of the comparison between the firm and its competitors (as a whole) will be the offerings of the firm’s competitors. To a more analytical explanation of the strategic choices of Airbus using the Bowman’s strategic clock the following comments can be made: In case that the company would choose to apply a low price strategy, this should be specific and not be extended to all organizational products. There is also the case of the second option related with low price also. In accordance with this option the margins for profitability should be low. Because of the risk involved with the above options another strategy is available to Airbus. The company could apply the next available option (in accordance with Bowman’s strategy clock) and implement the principle of low cost in all its activities trying to reinvest whenever possible (hybrid option). Other options for the firm could include: a) the differentiation without or with a price premium; b) the focused differentiation; c) the increased price (at standard level or at low values) and d) the standard price. In the particular case, the following factors should be included as critical regarding the success of the corporate strategies both in the short and the long term: a) the continuous development of the firm’s products, b) the relatively low prices used for a long term and c) the participation of the firm in many markets around the world (distribution of risk involved with the corporate activities). The success of the firm’s strategies is proved by the fact that ‘in 2006, Airbus experienced its best year ever in terms of deliveries, and the second best year in terms of sales; this resulted in a record backlog, ensuring work for the next five years at very high production rates’ (corporate website, 2007). Generally, it could be stated that Airbus has become the leader in the civil aircraft industry (while it has also expanded its activities in the ‘military transport aircraft sector’ (corporate website, 2007). An indicative example of the firm’s success is the fact that during November of 2007 the firm delivered approximately 36 aircraft while it also received 183 new orders. 5. Support of business strategy 5.1 Resources The main source of support for any business strategy is the firm’s employees. In this context, the culture applied in the workplace can have also a decisive role to the support of corporate decisions. Regarding this issue, it is supported by Boselie et al. (2005, 11) that ‘culture management, strategic decision-making, fast change, and market driven connectivity – together comprise the HR competency domain of Strategic Contribution’. In the case of Airbus, employees participate actively in the development of the corporate activities; however they are not rewarded fairly. 5.2 Capabilities Apart from the value of firm’s employees, the firm’s leaders are also considered to have a significant role in the development of corporate activities, especially in the long term. Towards this direction, it is noticed by Bielski (2005, 26) that the CEOs within all modern firms should have the following characteristics: ‘a) they value managing and leading people, i.e., getting work done through others; b) they are intellectually curious, c) they ‘walk the talk’; d) they are comfortable with their authority e) they understand that to deliver full value, every aspect of the leadership system must be aligned with strategy: structure, processes, people, and human resource systems’. If the above characteristics do not exist in firm’s leaders then it is very likely that the firm’s strategies will fail. Towards this direction it is suggested by Rand (1999, 97) that ‘businesses fail because management does not have effective control of the business as management is too far removed from revenue-producing processes’. In other words, the lack of appropriate skills in CEOs can lead firms to severe financial turbulences influencing their performance both in the short and the long term. 6. Conclusion In accordance with above, Airbus should review its strategies and thoroughly examine its relationship with its stakeholders. In this context, it is noticed by Gelade et al. (2003, 383) that ‘few organizations can evaluate their performance accurately by averaging the performance of their employees; in most cases, the performance of an organization is determined by the productivity and efficiency of such higher-level organizational entities as departments, retail outlets, plants, or teams’. In other words, the evaluation of the employees’ performance would not be of particular importance for the development of the firm’s profitability. Rather, the evaluation of the skills of the firm’s leaders would be more valuable towards the improvement of the firm’s performance. In fact, it is stated by Ashforth (1995) that a firm’s leaders should have many attributes, like: ‘leaders may persuade with logic, but they motivate through emotion; leaders must come to grips with the challenges of emotion, a key driver of productivity, quality and other factors that lead to business success’ (Ashforth, 1995, 97). On the other hand, the incorporation of the appropriate decisions would be necessary in order for the firm to achieve a high level of growth. Strategic decisions are also expanded in the area of HR. For this reason, it has been suggested by Korman et al. (1999, 221) that ‘of critical importance is the nature of fit; organizations need more versatile managers and are finding fewer candidates available with the skills they need’. The choice of the appropriate employees would help towards the appropriate use of all information related with the firm’s activities. In fact, Bendler et al. (2001, 8) noticed that ‘knowledge has become the pre-eminent production factor, and it needs as much careful, conscious management as its traditional counterparts’. The above assumption is also verified by the view of Buckley et al. (2004, 371) who suggested that ‘firms with more knowledge can engage in superior trading opportunities with greater confidence in the viability of their plans, in their ability to carry them out, and in the value they will achieve in the prevailing conditions’. The value of leaders’ decisions would remain significant. In fact, Engel (1997, 23) supported that ‘traditional managers perceive work teams as a threat because work teams are displacing traditional management methods and mind-sets, which bodes ill for managers from the old school’. However, even if the plans proposed by the firm’s leaders are appropriate towards the target required, the resistance developed within the workplace can create severe obstacles towards the improvement of the firm’s profitability. For this reason, Greve (1998, 149) stated that ‘as an outcome jointly determined by motivation to change, opportunity to change, and capability to change’. In the same context, Katzenbach et al., mentioned that (1996, 149) ‘change efforts are often conceived as waves of initiatives that sweep through an organization from the top down, or the bottom up, or both, and flow across functions’ while it is also suggested that ‘fundamental change in personnel, strategy, organizational identity, or established work roles and interests often triggers intense emotions; emotions in turn affect how different groups interpret a proposed change and how they behave’ (Huy, 2002, 31). However, even if proposed changes cause severe turbulences, the firm’s plans should be applied within the time specified by the leaders. Under these terms the effectiveness of the firm’s performance could be measured using as a basis its efficiency and its profitability (Robertson et al., 1995). If these issues are not taken into consideration all changes suggested are very likely to be led to failure. In this context, it is noticed by Bunker et al. (2005, 12) that ‘much of that failure stems from not understanding how to manage the structural side of change and the human dynamic of transition’. However, all these consequences could be avoided if the firm introduces a strategy that will be characterized by flexibility (Parnell, 2003). Airbus has been proved to have the appropriate support by its employees in order to achieve a high level of growth. However, the pressures made by the global monetary crisis and the following changes in the firm’s HR policies (including many redundancies) are expected to have a negative influence in the development of the firm in the future. References Agrawal, M., Pak, M., (2001). Getting Smart about Supply Chain Management. The McKinsey Quarterly, 22-24 Ashforth B. E. (1995). Emotion in the workplace: A reappraisal. Human Relations 48(2): 97 Bendler, A., Elzenheimer, J., Hauschild, S., Heckert, U., Kluge, J., Kronig, J., Licht, T., Stein, W., Stoffels, A. (2001). Knowledge Unplugged: The Mckinsey & Company Global Survey on Knowledge Management. New York: Palgrave Bielski, L. (2005). What Makes a Good Leader? the Go-To "Guy" with Vision and Passion Will Top the Org Chart-And Lead Change Management. ABA Banking Journal, 97(12): 21-27 Buckley, P., Carter, M. (2004). A Formal Analysis of Knowledge Combination in Multinational Enterprises. 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Spiegel Online International, [online], available at http://www.spiegel.de/international/business/0,1518,519269,00.html Steyn, G. (2004). Harnessing the Power of Knowledge in Higher Education. Education, 124(4): 615-623 http://www.airbus.com/en/corporate/gmf/ [1] Appendices Figure 1 – Porter - Five Forces (source: Porter, 1998, 22) What is the strategic target? Supplier Customer Competitor What is the strategic thrust? Differentiation Cost Innovation Growth Alliance What is the mode? Offensive Defensive What is the direction? Use Provide Figure 2 - Strategic Option Generator (Wiseman, C., 1985, ‘Strategy and Computers’, Dow Jones – Ivwin) Strategic impact of application development portfolio Low High Low Support Turnaround High Factory Strategic Figure 3 - Strategic Grid (McFarlan, F.W., McKenney, J.L., 1983, Corporate Information Systems Management: The Issues Facing Senior Executives, Irwin Figure 4 – Bowman’s Strategic clock (source: http://marketingteacher.com/Lessons/lesson_bowman.htm) Read More