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Contents
Background of the Aerospace Industry. 3
Boeing Company SWOT Analysis. 5
Bargaining Power of Buyers. 12
Bargaining Power of Suppliers. 13
Executive Summary
The Boeing Company is an aeronautical firm that is globally involved in the design and manufacture of military aircraft, jetliners, satellites, space flight systems, and missile defense systems. The aeronautical company does its operations through various divisions which include Precision Engagement and Mobility Systems, Commercial Airplanes, Network and Space Systems, Boeing Capital Corporation segments and Support Systems.
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The company is a dominant aeronautical industry player owing to its experience, staff, and financial strengths. Due to its power play, the company is considered an industry leader that other players find hard to compete favorably against. In today’s continually expanding airline industry, the company is quite well cautioned against competition and has increased its profits over time.
Boeing’s experimentations have seen it produce desirable long-term value. The company’s pursuit of continuity and persistence in this regard has allowed it to come up with new products and services that suit the changing needs of the airline industry. Its goods and services have enhanced its competitive edge and as a result, outpaced potential competition from other industry players. It aims to align its products and services to specific needs and solutions that are never easy to replicate.
Introduction
This paper aims to analyze the aeronautical company looking at the strengths, weaknesses, opportunities, and threats that it faces within the global aeronautical industry. For a long time, few major global players mainly Boeing and Airbus have dominated the airline industry. The rivalry between the two companies is to some extent representative of seemingly opposing market philosophies. The Airbus represents a not-so-free approach of government subsidization in strategic markets while Boeing has positioned itself as a leader in the free market.
Background of the Aerospace Industry
The market of the commercial jet aircraft industry is mainly dependent on trends in airline passenger traffic, which in turn can best be highlighted through aspects like economic growth in emerging and established markets, the profitability of the industry, political stability in various markets, and consolidation and globalization industry. Other important considerations that act to shape the industry include limitations in the air transport infrastructure such as environmental factors, government regulations, and air traffic controls.
Since 1991, global travel through air has been steadily increasing at an annual rate of approximately five percent (Szymanski, 2011). Despite this steady growth, most airlines globally have cut back on their purchase of new aircraft owing to the dismal performance in financial aspects. This has led to a significant reduction in order backlogs of airline manufacturers. For instance, in 1995, Air France canceled an order amounting to five hundred million dollars from Airbus and Boeing due to the poor financial performance.
Moreover, three major players including Airbus Industries, Boeing, and McDonnell Douglas dominate the global commercial aircraft industry. Other players like British Aerospace, Fokker, and manufacturers of turboprop engines for use in commuter planes are also in existence although they contribute less competition in the industry. At the same time, it is capital intensive requiring a lot of time to recoup investments (Weisskopf & Schlumberger, 2014). For a company to thrive, it needs to possess a large base of skilled personnel to meet the needs of sophisticated and demanding customers. Government intervention, international trade relations, and industrial policies are some of the major driving forces have characterized the industry. The major competitive strategies that have been applied by the industry’s players to facilitate survival are as discussed below.
Firstly, to meet the requirements for passenger airlines, there has been the need to possess an extensive aircraft portfolio. Boeing is a champion of aviation portfolio with aircraft of capacities ranging from one hundred to five hundred passengers. On the other hand, Airbus has been closely following suit with additions like the four-engine long-haul aircraft.
The other technique that has been applied by the global airline companies is the use of technology to reduce the number of pilots that are needed to operate flights. For instance, the introduction of the fly-by-wire technique has seen airline companies reduce the number of pilots from three to two and established easier transfer from one type of aircraft to the other. This has significantly reduced the time needed by the companies to train their pilots through developing “the family” concept.
Moreover, the companies have thrived in terms of enhancing the cost-effectiveness of their planes. This has seen the introduction of twin-engine aircraft that can carry more passengers. The planes have enabled the aircraft companies to improve their fuel efficiency and configuration of layouts of seats to increase passenger capacity. Financial considerations also constitute a major challenge in the industry due to the high costs of acquiring and maintaining aircraft. For this reason, the companies introduced financing and leasing services to their customers. With the increasing financial difficulties arising from challenging economic times in various countries, funding has become a major factor in the industry. Services such as leasing and provision of finance have become a major competitive approach that airline manufacturers have adopted to improve on their market share. Other focuses in the airline manufacture industry have been the alliances and joint ventures with foreign governments.
Boeing Company SWOT Analysis
Boeing’s SWOT-analysis helps to highlight its strengths, weaknesses, opportunities, and threats in the industry. Therefore, this section will be discussing the strengths and weaknesses that the company possesses and further highlighting the sector’s opportunities and threats.
Strengths
A major strength of the Boeing Company is the possession of various business segments that are characterized by strong market positions. Some of the firm’s business segments include the defense and the aerospace markets. Boeing is a major player in the aerospace industry and a leader in the manufacturer of commercial aircraft. Besides, the company is the main U.S. exporter supporting airlines and allied government customers all over the world.
The other key strength of the Boeing Company is its massive investment in research and development. The other business segments that the company has focused on include the operations, engineering, and technology activities, abbreviated as EO&T (Cento, 2013). These activities supply the company with functional and technical capabilities of research and development, information technology, environmental remediation management, technology strategy development, test and evaluation, and intellectual property management.
The third strength of the company is its improving operational performance. Boeing has experienced a significant increase in profits in the recent past. For instance, in 2011, the company’s operational profit rose to approximately six billion dollars up from two billion that was achieved in the preceding year (Cento, 2013). The constant increase in profits is indicative of the cost-effectiveness of management decisions by the company. This could be used as an advantage to fund the business’s plans for growth.
Weaknesses
One major weakness of the company is the fact that some of its business segments have continually recorded sluggish performance. For instance, despite the huge profit margin that has been registered in 2011, the company still encountered losses in a few of its business segments. The company’s network and space systems is an example of a segment that saw a decline of 8.3% (Barnhart & Smith, 2012). The company’s capital corporation division is another sector that experienced significant losses in the same year. This was attributed to the lower operating lease income. The dismal performance of the company in such areas adds to the pressure heaped on its managers to make profit-oriented decisions.
Moreover, the aeronautical company faces critical weakness in terms of its high dependency on contracts from the U.S. government. Boeing gets a significant percentage of its revenues from government contracts. This is a risky way of doing business because some of the government contracts can last for many years, thereby necessitating long-term financial and maintenance commitments on the part of the company.
A third weakness that characterizes the company is its overreliance on third parties for operations. For instance, Boeing heavily depends on other companies like suppliers and subcontractors to provide raw materials, produce sub-assemblies and integrated components, and provide various services to its customers. This could have detrimental impacts, for example, in situations where the third parties fail to play their role thereby rendering the company incapable of fulfilling its commitment to its customers. In some cases, the company depends on sole suppliers, such that any disruption on the suppliers’ services could have an adverse effect on its commitment to customers.
The final weakness that can be seen at the company is delayed in the development of commercial planes. For instance, Boeing delayed with the delivery of the 747-8 Intercontinental due to delays in flight testing and the duration needed to incorporate design changes and flight test-driven engineering. In the same year, the company suspended the delivery of the 787 Dreamliner due to reasons related to the supplier workmanship. The hard-earned reputation of the company could be ruined if the trend in delays continues.
Opportunities
One major opportunity that the industry presents to the Boeing Company is the increasing demand for commercial aircraft. Due to the shift towards globalization, air transport has received a boost in terms of increased usage. In addition to the growth in air travel, there has also been a significant increase in the development and adoption of new business models. These developments have acted to stabilize demand for airplanes. According to the company’s commercial outlook for 2012-2031, the passenger and freighter aircraft component will grow to 39, 780 (U.S. Government Accountability Office, 2014).
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A second opportunity is manifested in the military segment. With increased spending on defense by emerging economies like China and India, there will be a corresponding growth in the demand for military aircraft. In the recent past, military budgets of these countries have been characterized by double-digit growths. With the company’s heavy presence in India and China, the increased defense spending provides it with an opportunity for significant growth in the short and medium-term.
Another opportunity for the company is the potential for expansion through acquisitions. For example, in 2011, Boeing acquired the Solutions Made Simple, a former U.S. government information service provider (U.S. Government Accountability Office, 2014). The company’s technology allows customers to retrieve, query and share information kept in various applications and sources. Such a strategic acquisition would allow the company to venture into untapped markets and diversify its portfolio of products.
Threats
The major threat to the airline industry is the intense competition in air transport market. The company faces stiff competition from international competitors like Airbus in both commercial and military aircraft markets. For instance, Boeing Defense Space and Security (BDS) face competition from Northrop Grumman, Lockheed Martin, and General Dynamics.
Moreover, the aeronautical company faces a threat in the form of labor-related issues at its manufacturing plants. It has a large number of staff who are represented by unions. Due to workers’ strikes, Boeing has frequently experienced worker strikes many operations stoppages. For instance, in 2008, the company encountered a major strike that led to the work stoppage and subsequent delays in one program for BMA production. In addition, U.S. Government Accountability Office (2014) explains that in 2010, the company also faced a workers’ strike that involved 1700 personnel who were engaged in the assembly of a C-17 cargo jet, causing the jet’s production line to be closed indefinitely. Similar stoppages in the future would result in adverse impacts on the company’s business.
Lastly, the company also faces a threat due to the fact that a big percentage of its consumer financing portfolio is located within distinct geographical areas like the United States. In circumstances where customers who hold substantial portfolio assets experience financial setbacks thereby failing to renew their leases, the company’s business operations would be adversely impacted.
Porter’s Model Evaluation
Porter’s model provides a framework for structural analysis of the industry in which a company operates. It provides a basis for analyzing the competitive forces, potential threats, and existing alliances in the airline market. The forces that are highlighted in this analysis can be classified into two broad categories: horizontal and vertical forces. Horizontal forces include the threat of new entrants, threat of substitutes, and competitive rivalry. On the other hand, vertical forces entail buyers’ and suppliers’ bargaining powers as discussed below.
Competitive Rivalry
Competitive rivalry is one of the key forces that exist between companies in a particular industry to a point where Porter says the rivalry between the firms arises. According to Ahlstrom and Bruton (2010), the competitive pressure that arises in a situation where there are a large number of players in the industry plays a critical role in defining profits, prices, and strategies. The airline manufacturing industry has for a long time been dominated by two major players due to its technical and complex aspects. The two major players, Airbus and Boeing, have been working consistently to outdo each other in terms of market share.
Incidentally, the cornerstone of the Boeing business strategy has been continuous improvements in the quality of its services and goods. This has been made possible by the company’s research and experiments that have enabled it to continuously identify its customers’ changing needs. To successfully compete in the dynamic environment, the company has also focused on cutting down on the waste and boosting productivity with the aim of delivering products of higher quality standards at the lowest possible cost in the market.
From the above strategies, it is evident that the company has been betting on better productivity in as a way of edging out its major rival, Airbus. Insisting on quality and technological advancements has been Boeing’s main strategy to beat the Airbus model that partly relies on government subsidies and national airlines that are cost-friendly to some extent. On the other hand, due to its subsidies, Airbus is able to offer lower sale prices which have been its key competitive advantage in the industry.
Threat of New Entrants
Porter demonstrated that threats to a company in an industry might not only be from the existing firms in the industry but also from new entrants. New companies would be attracted to a situation where the industry is considered lucrative in the long-run. With the absence of barriers to entry, new entrants may get into the market and reshape the industry dynamics that are not be favorable to the existing players most of the time (Hill & Jones, 2012). The current industry dynamics can act as barriers to entry into a new market. A more attractive case is one where an entrant perceives an industry as one possesses high barriers to entry and fewer barriers to exit. The economics of an industry is the major determinant of the degree of difficulty to enter a market.
In the airline manufacturing industry, new entrants face an uphill task of gaining access and surviving. Some of the major challenges to new players in the industry include huge capital requirements, regulations, skilled labor requirements, necessary proven track record, sophisticated support industries, and the aspect of the long wait before a firm attains profitability.
Nevertheless, despite the hindrances, the possibility of entry by new players cannot be ruled out. With the increasing interest in the airline industry due to globalization, nations have seen the essence of getting involved in the market. To facilitate trade between countries and even in the sector itself, governments have increased efforts to get involved through subsidies. With protective trade policies, technological advancements, and sophisticated industrial infrastructures, the possibilities of more players entering the market is very eminent.
Threats of Substitutes
In Porter’s framework, substitutes are defined as products that exist in a different industry but can be used for the same purpose to fulfill the same consumer needs (Wachenheim, 2016). The number of substitutes to a company’s products and services is inversely proportional to its profitability. The higher the number of substitutes, the larger the company’s competitive environment and the lower the profit that it is likely to earn.
A firm’s ability to set prices is directly affected by a high threat of substitutes. In a scenario where a substitute sets lower prices or better meets the needs of consumers, it may, as a result, attract more customers and reduce the market share of existing companies. In the case of the airline industry, it is almost impossible to foresee direct substitutes for airlines emerging particularly when long distances are involved. Commercial aircraft are the most efficient, economical, secure, and convenient mode of transport.
The U.S. airline industry does not experience a substantial threat of substitutes unlike in other parts of the world, especially in developing nations. This means that people do not always take buses and trains as flights are considered a phenomenon viable, more convenient alternative mode of transport. Therefore, as substitutes, trains and buses have no substantial impact on the industry.
Conversely, despite the many advantages of using air for transportation, there are a few threats that exist. For instance, fast bullet trains offer an attractive alternative to air transport for those who seek to travel between cities. With their high speeds, the trains take lesser time to connect between downtowns than airplanes. A good example that best explains this phenomenon is the introduction of the TVG service that operated between Lyons and Paris, which resulted in a significant reduction in travel by air between the two cities. With the adoption of similar technologies, the airline industry is likely to face more stiff competition from the trains as substitutes leading to a reduced number of fleets and a resultant loss of market share.
Other threats to the airline industry come in the form of technological advancements such as the advent of video conferencing, collaborative computing, and electronically-controlled high-speed cars. Such technological developments serve to reduce business travels as people can now remotely handle their transactions without having to meet physically.
Bargaining Power of Buyers
When customers possess the ability to impact the prices of services and products in the industry, it becomes an important matter for firms to consider. Hill & Jones (2010) explains that the bargaining power of buyers is seen as high when they are crucial assets to a company. This can manifest in various ways including scenarios where buyers buy in bulk or can change to other suppliers who are the company’s competitors.
Customers in the airline manufacturing industry possess a lot of power. With the increasing number of downturns due to the challenging economic times in many countries across the world, aircraft manufacturers have been operating at the mercy of buyers. The latter mainly consist of airlines and leasing companies, as a result, they wield considerable power. The airline manufacturing industry is being capital-intensive, and this has seen many firms focus on cutting down on their investments to optimize their operations. Therefore, competition has continued stiffens among the suppliers.
Another challenging factor inherent from the suppliers’ perspective is the situation where buyers operate majorly as regulating bodies. Therefore, the industry has had to constantly deal with these organizations in a friendly manner in order to have favorable regulations that would result in their profitability. This, of course, is not an easy endeavor since convincing the institutions to pass laws that would work against them is almost impossible. The same is also true in situations where the regulatory institutions act as suppliers, like in the case of the Airbus Industries that is subsidized by the government. In such a situation, and they are faced with the dilemma of making choices that would potentially injure their competitive edge.
Bargaining Power of Suppliers
In an industry, suppliers play the role of providing raw materials that are essential in the provisions of goods and services (Roy, 2013). This implies that firms have to maintain and secure relationships with them. They possess relative power that is dependent on industry dynamics. Depending on the industry situation, suppliers may be able to set prices, dictate terms, and act as determinants to availability timelines. Powerful suppliers can easily increase their prices without changing their volume of sales or even reducing the quantity of the raw materials.
The strength of suppliers is inversely proportional to their number in the industry. Suppliers possess more power when are fewer of them in the industry; they tend to make it difficult and costly for companies to switch to competitors. Alternatively, there may be totally no alternates. A supplier may also be the sole provider of raw material. This may result from the supplying firm obtaining patents or merely possessing the requisite proprietary knowledge. In such instances, they can dictate prices with no worry of losing sales.
In the airline industry, suppliers can be categorized based on two criteria: their relative bargaining power and the formation of regulations that shape the industry. The first category of suppliers comprises engine manufacturers that possess considerable bargaining power especially with the current trend towards concentration. However, the power between suppliers and airline manufacturers somewhat balanced. The balance comes as a result of the fact that the companies get into separate negotiations with suppliers to meet specific raw material needs that may not be the same among all manufacturers. For instance, the firms have identified the need to initiate joint development to enhance the suitability of engines to the needs of the aircraft. This is because planes need different types of engines depending on their functions and preference of the manufacturers in response to the market dynamics and consumer demands. The other group of suppliers is the regulatory bodies like the EPA and FAA. They have the power to formulate policies that may act as constraints in the industry. The bargaining power of such suppliers is significant since they can introduce steep hindrances for the approval of planes.
Since the manufacture of aircraft is capital intensive, sources of financing and investment have considerable strength. An addition to the investment funding, there is the advent of the leasing companies that acquire planes for leasing to airlines. The International Lease Finance Corp is an example of a company whose operations involve purchasing planes for lease. The Airbus has also responded to the challenging financial requirements by the formation of a financing service that has access to a pool of credit facilities from different banks.
Nevertheless, with the constantly shrinking military market, suppliers are turning to commercial applications. With the change from military to commercial aircraft raw material production, it can be predicted that there will be a resultant increase in the number of suppliers who will be fighting for market share in the industry. With the almost fixed number of manufacturers, suppliers will gradually lose their competitive edge, a shift that will be advantageous to the airline manufacturers.
Conclusion
From the analysis provided, it is quite evident that Boeing will continue to be a leader in the airline manufacturing industry. The company has been in the industry for a long time and has established itself as one of the major players. It is able to use its experience to adapt to the dynamic needs of the industry. The firm also has a strong presence in many countries around the world, making it hard for competitors to outdo it in the global market. For these reasons, it is predicted that Boeing will continue to be a pacesetter in the airline industry.
References
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