1. What are the dynamics of competition in the commercial aircraft industry?
One of the major downturns of the commercial aircraft industry happened after the September 11th terrorist attacks. Recent events in the aircraft and airline industry have significant impact on the competition in all around world. While the commercial aircraft sector slowly stabilizing and rebounding it self, United States airline industry is still in trouble. Commercial aircraft industry has too many uncertainties, which contain risks. It is the reason that there are two major commercial jet makers in the world. Economy is a major factor that affects the aircraft manufacturers.
The decrease in the new airplane orders can be explained by the downturn of the economy. It is all connected to each other, when there is a recession, the demand for the airline travel will be poor. This will affect the purchase power of airlines. On the other hand, one of the major dynamic that affects the competition in the aircraft industry is terrorism. Terrorist attacks are not predictable and it gives passengers fear for flying, therefore customers will not use planes as their transporter. Again, demand for the airlines will affect the demand for airplanes.
On the other hand globalization makes the aircraft industry more competitive; with the help of globalization there will be a demand for high capacity airplanes to carry more people at the same time. Aircraft manufacturers will compete with each other to serve the best needs of airline companies. Also the price of an airplane is really high and it takes years of development. Price plays an important role, because aircraft manufacturers should have to minimize their costs in order to eliminate the negative cash flow. Increased customer expectations play an important role for competition. As the information technology grows faster and faster, people in the planes wants to fly with highly sophisticated planes, that can provide them not only safety, but also information when it is needed.
Especially on the transatlantic or transpacific flights people expectations become much more important due to the long range of flights. Also another dynamic which affects this industry is the production of the jet engines. It is a really costly and risky business, therefore airplane manufacturers started to work closely with the engine makers such as GE, Rolls Royce. As the engine performance improved, planes were redesigned for the new capabilities of the plane. This helped to have more seats in the cabin. Also as the rivalry among the two companies grows, competition becomes more important and challenging. Aircraft manufacturers reduce the price of the planes they make. Another important factor that has an impact on competition is the airlines.
Airlines are the ones who orders planes before their production. It is vital for aircraft manufacturers to share ideas and information with the airlines to sell their planes. Aircraft manufacturers should obtain a cost management strategy and must have a flexible lean manufacturing system to produce fast and low cost airplanes for the airlines. At last governments play an important role in the competition, because aircraft manufacturers sell defense, space and information systems to the governments. As an example Boeing is the NASA’s largest supplier and the Pentagon’s second largest contractor. Those kind of businesses with governments help companies to increase their dominant power on the industry.
2. In what ways did Boeing limit the risks of the project?
Commercial aircraft manufacturing is an industry of risks. The major reason that the aircraft manufacturers failed was the huge product cost developments. It is also very hard to break even, because it takes around 5 to 6 years to develop a jetliner and it is approximately 15 billion US dollars investment. It is very important for companies to follow the costumer tastes and the airline expectations before develop an airplane. Otherwise the commercial air plane program will not be able to make the money. Management philosophy is very important because it determines the strategy that the company will pursue for the program. Boeing Company used a risk-sharing strategy to reduce the risk on the company. This strategy enabled companies to share a substantial part of the airplane’s developments costs with a subcontractor. Also before the project started Boeing Executive Vice President and future CEO Philip Condit asked for the opinions of the other airline companies, like United Airlines.
They also made a market assessment for the next 14 years. After completion of the analysis it is estimated that there will be a need for 9000 new commercial jets. This forecast anticipated the outcome of the project. They have listened their customers to understand what they want from an airplane. They also invited other airline carriers to participate in the project for the design and development phase of the 777. This participation eliminated the time and other risks. On the other hand Boeing Company used global subcontracting as a marketing tool as well.
Sharing the design and production with other overseas firms, they required overseas to buy the new air craft. Japan sold 46 777 jets to the three Japanese air carriers. This helped the company to generate more money and be dependent on overseas. Also 777’s flexibility helped Boeing to manage the project’s risks. They offered a family of planes based on a single design to accommodate future changes in customer’s preferences. They spread the 777 projects risks to a number of models that belongs to the same family.
3. What were the weaknesses of the Boeing 777 program?
* High Cost of the program
* Catia’s high cost
* Supplier problems
* Open Management Strategy
4. How should Boeing respond to these weaknesses?
The success of the company was great with the 777 project but the cost of the program that they use highly expensive. They did not estimate the future costs of Catia. Boeing’s reason for high cost of using digital design was slow computing tools, Catia’s response time lasted minutes. Boeing should update this program on yearly basis instead of four times. Boeing should make several enhancements to the Catia system to make it more productive for engineers. Boeing should also apply all the Boeing applications to Catia system in order to work it effectively with in the suppliers. To benefit more from Catia and solve the high cost problem Boeing should increase the speed of computing tools. Using sophisticated IBM mainframes and personal computers will enable Boeing to complete tasks more efficient and effective. For the suppliers problem Boeing must apply all the mainframe changes not only to the United States, but also to the supplier countries like in Japan. Open management strategy can be seen as an effective method to share ideas and other things. The results might not be effective. Boeing used to have a different management style than the new one, because of its military heritage and culture. Many managers could think of an authority problem when all the workers join the discussions. It is also true that sharing company information could be a threat to Boeing, because, the confidential matters could be stolen by competitors. This is not an easy problem and it should be handled carefully otherwise it could ruin all the company. As it is clear that Boeing has a military culture and their hierarchical structure could be avoided by enabling everyone to speak with others. On the other hand it is good to have a large volume of thinking, but it should be done carefully and it is certain that it should cover a long time period. Those problems also make team members and engineers work under pressure. This will lead team members not to function very well. Management should create a stress free environment to make people trust themselves.
5. What are the strengths of Boeing?
* High Cash Flow Models 737/747/777
* High Skilled Culture
* Boeing 777
* Dominant of the Industry
* Financially Strong
6. Examine the industry from the perspective of Porter’s five forces.
Based on the research I have done, I have found that firms that are competing in the same industry must identify their potential competitors. As a general aircraft industry has extremely high capital requirements to invest. Like in the Boeing case to produce and develop a completely new airliner, companies must invest 15 billion dollars, which shows that production of a new product is extremely high. Also the risks are very high that only a few companies can survive.
* Barriers to Entry
One of the major barriers in this Industry is the capital costs. It is very hard to find sufficient financial sources to produce a product. There is an also high fixed cost that makes companies not to invest in this industry. To produce a new airliner a company must invest approximately about 8 to 15 billion dollars, which is hard to find. On the other hand there are so few companies that compete in this industry. This makes the companies to have a high market share, so that it is a barrier for a new entrant to gain a market share. Also government regulations are very high in this industry. Permit requirements are very high.
* Threat of New Entrants
In this industry it is really hard to enter the market and gain a market share. Aircraft industry is dominated by two major airplane manufacturers which are Boeing and Airbus.
* Bargaining Power of Suppliers
In this industry millions of parts are needed. There are lots of independent contractors. Suppliers’ power is relatively low in this industry because there are lots of suppliers. Companies can purchase the parts from several of suppliers. Suppliers could not play with the companies like increasing prices because there are so many suppliers from all over the world.
* Threat of Substitute Products
As the world becomes more globalize the need for the airlines will be on demand. After the terrorist attacks to United States, the airline industry slowed down and people traveled with their cars and trains. Today, it is nearly impossible for one to travel overseas without a plane. Planes are the major transporter of people. People can use trains or cars for on land travel but it is hard to travel overseas without a plane. In the future one of the major threats to airplanes can be trains. Trains can go as fast as planes in the future by the help of tunnels under the ocean. But this is only a thesis right now. As a matter of fact another threat can be videoconferencing. It enables people to see each other whenever they want. As more people fear from planes due to the terrorist attack videoconferencing can be a major solution for the people who could not see their relatives or friends.
* Intensity of Rivalry among Competitors
Especially in this industry rivalry among competitors can be seen very high, because there is almost a duopoly. There are two major airplane manufacturers which compete in the industry. Japan and Russia will be the next countries which will compete in this industry. Right now United States and Europe companies compete with each other. In this industry Airbus uses a first mover strategy. Airbus takes strategic actions to be successful in this industry. Airbus is the first company which used the FBW aircraft. As it seem that competition between those two companies will remain same.
* Bargaining Power of Buyers
Airline industry has been suffering from September 11th and airplane manufacturers are seeing the most impact on themselves. Government deregulations affect the buying power of airlines. Airlines want to buy planes at the lowest possible price with a high volume. They generally make the agreements on the production basis of an airplane. Increased competition affects the buying powers of the airlines. They generally concern about the cost structures.
7. Following the introduction of Boeing 777, where is Boeing still vulnerable?