Strategic Management of Boeing and Airbus - Case Study Example

Executive Summary The report seeks to critically analyse the structure of the civil aircraft manufacturing industry which is mainly dominated by two players namely Boeing and Airbus with the aim of establishing if it is a lucrative sector to compete in. The industry in which the organisations operate will be analysed in detail through the use of Porter’s five forces Model and PESTEL analysis. The strategic groups as well as a brief analysis of industry life cycle will also be discussed. The study will also outline the critical success factors which drive performance now and in the future and it will attempt to summarise key points and give a brief conclusion. 1. Introduction The structure of the civil aircraft manufacturing industry is quite complex and a bit challenging for new entrants to survive profitably. Research has shown that this industry is capital-intensive and requires highly sophisticated technology and enormous economies of scale (Xu and Chan 2008). It can be noted that the global large civil aircraft industry has been dominated by The Boeing Company ("Boeing") and Airbus S.A.S. ("Airbus"). Established in 1970, Airbus has been in business of civil aircraft manufacturing for over 30 years now but it more importantly, the introduction of the A320 aircraft, during the 1980s, the airline managed to establish their place as a major manufacturer in the civil aviation industry. It produces about half the world’s jets. On the other hand, Boeing is another internationally renowned aircraft manufacturer with a range of models of aircraft which tightly competes with Airbus. As a result of the stiff competition, these two aircraft giants often respond to each other by manufacturing equally attractive aircrafts as a way of attempting to waiver tight competition that exists between the two. In view of this scenario, it is imperative to analyse the nature of the civil aviation industry using Porter’s five forces model, PESTEL, strategic groups as well as industry life cycle as a way of evaluating if this is a lucrative sector to compete in. Porter’s five forces model According to an article entitled, ‘Five competitive forces –Porter’(n.d), the five forces model of Porter is, “an outside business strategy tool that is used to make an analysis of how attractive an industry is.” This is often regarded as a reliable business tool in most cases that aims to diagnose the external factors that affect the operations of the organisation such as competition (McCarthy J.E & Perreault W. D. 1996). The competitiveness of the aircraft industry is explained below using Porter’s five forces model which comprises of the following factors: Entry of competitors, threat of substitute, bargaining powers of buyers, bargaining powers of suppliers and rivalry among the existing players. The factors are explained in detail in the table shown in appendix 1. PESTEL Analysis Basically, one viable method which can be used to analyse the environment of an organisation is PESTEL analysis which tries to give an in-depth understanding of the operations of an organisation, vis-a-vis the external factors that may affect its operations. Basically, PESTEL stands for factors which may affect the operations of business such as political, economic, social, technological, environmental and legal. Refer to appendix 2. Strategic groups and Industry life cycle On the other hand, the strategic groups involved in the civil aircraft industry include the suppliers as well as the manufacturers outsourced by the major players in the industry. The concept of industry life cycle posits that every product has a life span which goes through stages until it is phased out or simply losses its luster. The cycle primarily involves the introduction, growth, maturity as well as the decline stages. Just like any other industry, the aviation industry also undergoes the same cycle and is the reason why there is constant innovation of new models of aircraft. A close analysis of the civil aircraft manufacturing industry shows that this industry is a bit tight for new entrants to easily penetrate and expect to operate profitably. One major strategy that has ensured the sustenance of competition mainly between the two rivals is the aspect of outsourcing. Both companies procure their supplies of equipment used in the manufacturing of aircraft especially from China. Information obtained online posits to the effect that although outsourcing has been evident since the 1970s, to the 1990s, Boeing and Airbus have become increasingly reliant on foreign suppliers, especially those in newly emerging markets, such as China (Xu and Chan 2008). These two giants realised that outsourcing is a noble idea since it would allow them to contract their production processes, and increasingly the actual design and engineering work, to Chinese suppliers in exchange for guaranteed sales of the finished aircraft to Chinese airlines (Xu and Chan 2008). Whilst it is difficult for new entrants to penetrate the civil aviation manufacturing industry, this strategy of outsourcing is a perfect opportunity for the two giants to remain viable. In most cases, airlines in different countries are wholly owned by the government or it would have a major stake hence the need to target partners who are likely to be customers of the finished products. It also follows from the notion that airline operators prefer to purchase their aircraft from reputable dealers hence it may be difficult for new entrants as they would face the risk of failing to attract customers. Thus, according to Kogan (2008), the best way especially for China to achieve its ambition in civil aviation in building its own aircraft is to partner with Airbus and Boeing rather than going solo. China being rated one of the fastest growing economies in the world and it cannot go solo in this complex industry which bears testimony on the nature of competition that exists between the two established aircraft manufacturing giants mentioned above. As it stands, China prefers to be a partner with the giants than being a competitor due to the aspect of the complexity of the industry. From this assessment, it can be noted that the civil aviation manufacturing industry is not that lucrative for the new entrants to penetrate it as there would be risks of loss making. 2. Critical success factors The second part identifies the “critical success factors” which drive performance in the sector now and in the near future. This identifies the strategy that can be adopted by the organisation then looks at the initiative that can be taken to implement that strategy especially in the short-to long run period of the organisation’s operations. Strategy-There is need to embark on measures that are meant to streamline operations of the aircraft manufactures in order to meet the needs and interests of the consumers and try to satisfy them. Initiative- Market research is very useful as far as far as establishing the needs of the consumers are concerned. It can be noted that the contemporary period is characterised by changing trends in the people’s life styles and their consumption habits of certain products are also likely to change considerably. In the same vein, the customers can choose on their own the aircraft they would prefer to use depending on the new offerings in the market. It would be imperative for the organisation into the manufacturing of aircraft business to embark on a market research in order to identify the new demands of the customers. There is need to segment especially the local as well as international market into various categories based on factors such as level of income, gender, geographic location as well as other psychological factors. After gathering all the necessary information about the needs of the customers, there will be need to transform that information into action. Strategy-Product development is supposed to be guided by the needs and interests of the customers and the distribution channels of the product should be clearly defined. The potential buyers of the aircraft should be identified. Initiative- Having mapped out this course of action plan, there will be need to implement it and structures should be put in place to monitor progress with regards to the performance of the new products that would have been introduced to the market. Conclusion Over and above, it can be noted that the aircraft manufacturing industry is not that lucrative for new entrants to compete in as a result of many considerations outlined in detail above. Continuous market research ought to be carried out in order for the organisations in the aircraft industry to ensure steady growth and performance. References Cant M.C. (2000), Marketing Management, 4th Edition Juta and Co Ltd, SA. Eugene Kogan (February 5 2008), China’s commercial Aviation in Take off mood. Accessed on 23 Feb. 10 from: http://www.atimes.com/atimes/China_Business/JB05Cb02.html Five competitive forces ‘Porter’, Retrieved on 23 February 2010, from: http://www.12manage.com/methods_porter_five_forces.html McCarthy J.E & Perreault W. D. (1996), Basic Marketing: A Global Managerial Approach, 12th Edition, Irwin McGraw-Hill, USA. Pestel Analysis of the macro environment, Accessed on 12.02.10, From: http://www.oup.com/uk/orc/bin/9780199296378/01student/additional/page_12.htm Xu D. & Chan I. (09 September 2008), Ready to take off: The Global large civil aircraft industry. Accessed on 23 February 2010 from: http://hbr.org/product/ready-to-take-off-a-the-global-large-civil-aircraf/an/HKU788-PDF-ENG?Ntt=Isabella+Chan Appendix 1 Entry of competitors- The nature of competition is mainly based at international level and is characterised two dominant giants in aircraft manufacturing mainly Airbus and Boeing and the competition is too stiff for small actors to penetrate the industry. Threat of substitute- The probability of a substitute overtaking the range of aircraft models already in the market in terms of cost may be minimal since these giants are well established with good reputation internationally. Bargaining powers of buyers- Bargaining powers of buyers depends on the spending capacities of buyers on certain products. In this case focus is on the company’s ability to capture the market and sustain its dominance over other competitors. Bargaining powers of suppliers- The bargaining powers of suppliers depend on how strong the sellers are. In this case, both companies have many suppliers that are meant to keep pace with the growing demand of aircraft products and other accessories. Rivalry among the existing players- Rivalry mainly exists between the two aircraft giants where the other small actors are not a very big challenge that can affect the industry. Source http://www.12manage.com/methods_porter_five_forces.html Appendix 2 PESTEL Analysis It should always be borne in mind that each organisation does not exist in a vacuum where it would enjoy the monopoly of service provision but there would also be other actors who can pose a challenge to it and there would also be other inevitable forces as going to be discussed below using the PESTEL model. The table below illustrates these factors. Political factors -The government policies of the countries in which the aircraft manufactures are based affect all facets of business since all they would be expected to comply with the stipulated regulations. Bad policies can cause a decline in business. Economic Factors -Aspects such as global economic recession can negatively impact on various facets of the economy. The organisation is not spared from this crisis which may negatively impact on its performance since many clients will have little disposable income to spend on shopping. Social factors -The need to take into consideration different cultural values of people from different backgrounds is very essential as a way of ensuring satisfaction among all the clients. -Need to be socially responsible by giving to the needy and under privileged. Technological factors Outsourcing technology ensure variety Environmental factors -Climatic change in the form of global warming has become topical such that all the organisations are revising their policies towards the reduction of greenhouse gas emissions. Legal factors -All organisations operate within a legal framework which ought to guide their operations. Read More