The rise of Airbus from market challenger to global leader: Marketing perspective

2011-03-27T02:22:00.001-07:00

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Introduction

The aerospace industry is a multi-billion dollar industry and basically it has got two big players in the industry that has been competing against each other for such a long time. The work below discusses how Europe’s Airbus rose from a challenger to be the leader against US’ Boeing. It analyses the nature of competition between the two companies and the differentiating strategies Airbus adopted as against more conventional approaches of Boeing which led to its downfall.

Also this essay looks at the structure of the aerospace industry as a whole, and the current strategic positioning of the two companies is also discussed. Towards the end a brief assessment is furnished on the possibility of a third competitor entering the market and its sustainability.

1. Problems faced by Airbus initially and an analysis of the strategies used by Airbus to overcome the concerns.

History of Airbus started when the three European super powers Britain, Germany and France decided to enter the industry to compete with the American giant Boeing who had a monopoly at the time. However it took more time than expected for Airbus to pose a real challenge to Boeing. As it is common in any industry it takes some time for any company to establish its name and prove its worthiness in the industry. There are several causes for this. Following are some of the factors stated in the case study.

· Even though Britain was the frontrunner in aerospace industry before the Second World War era, it went into a slump due to lack of appropriate corporate and governing system. The industry did not get sufficient subsidies from European governments as compared to the US in the initial stage.

· Investment in the airline industry involves high risks and this certainly hampered people coming forward with decent investments. Boeing certainly enjoyed first mover advantages in the commercial airline manufacturing and it really helped it to develop an upright brand image in all airline operating companies.

· Another reason is product development process in aircrafts requires more time and it is indeed a lengthy process. Assessing demand, reaching technological advancements, developing models and holding discussions with potential clients is no easy task.

· Also at one stage Britain stepped down from the project due to some disagreement with the other partners. Spain joined the consortium in 1971 as a result.

2. Nature of competition between Airbus and Boeing. An analysis of strategies adopted by Airbus to differentiate it from Boeing. Sustainability of the advantages in the long run.

As explained in the first question Airbus was late to enter the industry and it entered at a time where Boeing was the clear leader. Boeing retained this position until the late 1990s even though Airbus was expanding its market share since the 1980s. The case study reveals that Airbus has virtually more than doubled its annual turnover from $11.6 billion in 1997 to 24.3 billion in 2002. There are numerous factors behind the success of Airbus and the downfall of Boeing. It could be mainly analysed in two angles. One from the angle of Airbus where it was more up to date and forward looking in its approach. The other being the Boeing’s failure to tackle and match the changes that were happening in the market.

First let’s have a look from Airbus’s perspective.

· The subsidies it achieved from the European governments. The European governments kept on pumping funds into the project and it was undoubtedly played a huge role especially during the initial stage.

· Though the governments played a role at the beginning Airbus’ upswing was largely dependent on its own commitments. Industry experts indicate that Airbus had higher production efficiency and an innovative product development approach.

· Innovative product development. Airbus always worked hard on introducing new aircrafts to cater the changing demands of the industry. It was the first to introduce lot of new developments. For instance during 1990s Airbus introduced four product families including nine new aircrafts. However Boeing introduced only two product families.

· New technological innovations helped in producing more fuel efficient aircrafts and these were well accepted by air cargo companies. Their opinion was that these aircrafts were newer in design and more economical to own. This was perhaps the single most important reason behind the boom for Airbus. It really revolutionised the world of air travel.

· Airbus kept on producing more and more aircrafts which had higher operating efficiencies and better performance levels. Also it had a wider product range and categories to select from as compared to Boeing.

· Production efficiency. New technology and modern production plants helped Airbus to cut down operating costs and overheads. For example Airbus required only half the number of workers to produce an aircraft as opposed to Boeing. There was a difference of 51% in the productivity between the two companies.

· Another critical role was that Airbus always conducted market surveys and research with potential clients, passengers and even the air ports as well. This helped it to fine tune its product concepts and avoid any defects.

Now let’s look at it from Boeing’s perspective.

Boeing had lot of internal problems which really didn’t help their cause at all. It always had a more conventional administration framework. Superfluous manufacturing processes together with out-dated IT systems further worsen the situation for them. As explained above Boeing failed to assess the market situation and bring in new innovations to its product line.

The manufacturing process was clearly old fashioned and this resulted in lower product efficiency levels. One would argue that Boeing was more complacent on its standing as the market leader and failed to keep up with the challenges that were thrown on them.

Airbus’ edge over Boeing and its sustainability in the longer run.

Although Airbus now has an upper hand over Boeing it should still be looking forward for new challenges and advancements. Even Boeing could rectify all its slipups and come back as a stronger competitor. There are all the chances that a third competitor might emerge at any time. Market research and information is the key to success as it has been for Airbus for a long time. Airbus should take a leaf out of Boeing’s story and there is every chance that it can happen to them as well.

Innovations, new product developments, advanced IT systems and constant improvements on manufacturing processes will be the name of the game.

3. Analyse the structure of the aerospace industry over the years and evaluate its effect on competition in the industry.

The analysis now focuses on the structure of the aerospace industry. It can be understood that the aerospace industry is highly diversified with variants such as passenger, military, cargo and space categories. The analysis focuses on the passenger airline category where the industry has been experiencing transitions in the past few years. This can be considered using Porter’s five forces framework (1979) which helps in analysing the industry attractiveness as well as the strategic implications of the industry structure.

Figure 1: Porter’s Five Forces

Bargaining power of buyers

The buyers for the airliners consist of various flight operators each of whom has varied requirements. A transition which has gone on to dominate the airline industry is the operation of budget airlines such as Ryanair, which focus on least cost operations and overall short-haul flights. This increased demand for narrow-body models which accounted for 75% of the total airliners demanded from 2000-2010 (http://www.centreforaviation.com/news/2010/03/31/strong-airline-demand-emerges-in-february-iata-mindset-shift-needed-for-booming-emerging-markets/page1). The airliners have been able to address these needs using the models such as Airbus A320 and Boeing 737. But the effect on margins of flight operators due to both volatile fuel prices and decreased passengers as a result of developments in high speed rail, has forced them to demand new airliners with lesser operating costs. With more options now being available to buyers in terms of manufacturers when compared to 80’s and 90’s, the bargaining power can be said to be increasing.

Bargaining power of suppliers

All airliners employ various subcontractors around the world to complete parts of production which will be finally assembled at their assembly plants. But the usage of rare resources such as carbon-fibre and requirement for specialized facilities for production has shifted the bargaining power towards the suppliers. In addition, the high switching costs of airliners in case of moving to other suppliers has increased bargaining power of suppliers.

Threat of substitutes

Here, the threat to airliners can be said to be minimal as there are no direct substitutes to air travel and the close substitutes for airliners such as high speed rail being limited by availability. The viability perceived by consumers has also led to the minimization of substitutes which can be illustrated by using USA, which doesn’t employ high speed rail systems due to apathy by travellers (http://www.time.com/time/health/article/0,8599,1957575,00.html).

Threat of new entrants

The competitive position of the two major airliners has come under attack in the recent years due to the entrance of new competitors to the industry. Cost efficient new airliners such as Sukhoi Superjet 100 by a Russian and Italian partnership, Tupolev Tu series by Russia and the Comac C series by China will increase the pressure on the duopoly upon their launch. With global airline traffic predicted to grow by 5.3% year on year and world fleet of aircrafts predicted to be doubled by 2029 (http://atwonline.com/aircraft-engines-components/news/boeing-remains-bullish-long-term-aircraft-demand-0715), the industry is increasingly becoming attractive to new entrants. But the risk of entry remains high due to high R&D investment required. In addition, the issues of resourcing, technology and finance for new entrants have strengthened the duopoly in the market and created barriers to entry.

Effect of above factors on Competitive rivalry

The current market is dominated by two players, Airbus and Boeing with minor competition coming from manufacturers such as Ilyushin, Tupolev and Bombardier. But the new technology and cost effective operation guaranteed by the new entrants may challenge the market shares held by the two companies. Especially with flight operators showing interest in low maintenance costs and fuel efficiency (http://ec.europa.eu/environment/etap/inaction/sectors/Transport/245_en.html), new entrants such as fuel efficient Sukhoi might be able to steal customers from the two airliners. Upon identifying these, both Airbus and Boeing has developed their new range of aircrafts such as A380 and Boeing 747 & 787 Dreamliner which offers fuel efficiency, lesser maintenance costs and overall eco-friendly operations.

In addition, both manufacturers have faced production delays due to massive scale of orders (http://www.msnbc.msn.com/id/31508140/ns/business-businessweekcom/). This failure of both manufacturers to deliver products on time to customers will be pose a threat in the future as it could lead to customer discontent eventually leading to customer switching. The closeness to resources and the support received by governments of China and Russia will help new entrants placed in those countries in financing their operations and avoiding production delays.

Apart from the challenges from new entrants, there is intense rivalry between Airbus and Boeing. With new line-up of products aimed at addressing weaknesses of earlier models, both are aiming at being more competitive. For example, with A380, Airbus has been able to develop a challenger to Boeing 747 super jumbo jets with added advantages of fuel efficiency and high passenger capacity. In return, Boeing expects to retrieve market share they lost to A340 by developing the 747 and also expects to challenge the A380 by introducing the 787 Dreamliner which guarantees speed and fuel efficiency.

4. Briefly outline the present strategic position of the 2 companies.

The strategic position of a company can be evaluated in a three tiered approach which involves analysis of environment including macro environmental issues and markets, the current strategy and the strategic capability.

When considering the macro environmental factors affecting both companies, the main area that needs attention can be eco-friendly operations. Although Airliners only account for 2% of global carbon emissions (http://www.flightglobal.com/sectionhome/sectiondefault.aspx?NavigationID=502&CategoryID=10829&SlotID=31), more action is expected from manufacturers to reduce the burden on the environment. Both airliners have therefore introduced new models of aircrafts which are more fuel efficient and eco-friendly such as A380 and 787. But no viable proposals are brought forward by any manufacturer to reduce noise pollution and to reduce the environmental impact of aircrafts currently in operation other than replacement which is costly. It has to be noted that both manufacturers expect 44% of the current fleet of aircrafts to be replaced by 2029 (http://www.boeing.com/commercial/cmo/ and http://www.eads.com/dms/eads/int/en/investor-relations/documents/2010/Events-Reports/naif-2010/NAIF_Leahy.pdf), which leads to problems of recycling and waste management.

All these factors can also be identified as modern critical success factors valued by socially responsible flight operators of today where the ability to fulfil them acts as either strength or a weakness for a manufacturer. Considering Airbus, the fuel efficiency and lesser maintenance costs of their current line of airliners compared to Boeing acts as a strength which they might focus on in their promotions. On the other hand Boeing is aiming to overcome these weaknesses and divert their unique selling propositions towards technological excellence in promoting their new 787 series.

The emerging markets are of particular interest for airliners. Airbus has predicted 8.7%, 7.2% and 6.9% growth of air travel in India, China and Middle-east in the next 20 years respectively (http://www.airbus.com/en/presscentre/pressreleases/press-release/detail/airbus-foresees-demand-for-some-25000-aircraft-in-the-next-20-years/news-period/1251756000/2591999/archived/news-category/press_release/). Boeing has predicted that the demand for airliners from Asia will rise from 42% to 55% of the global demand by 2029 (http://www.boeing.com/commercial/cmo/market_developments.html). The rapid development in the region and the rise of middle class population in the region can be identified as the main reason for the demand. Both manufacturers, upon identifying the opportunities in the market have focused on identifying and promotion to their strategic customers. The strategic customers for A380 are operators in large hubs who focus on providing luxurious travelling for passengers. Airbus has already signed deals for supplying A380’s to India’s Kingfisher Airlines, China’s Southern airlines along with Emirates, Qatar and Etihad airlines in Middle-east (http://www.airbus.com/en/corporate/orders-and-deliveries/). On the other hand Boeing’s strategic customers consist of operators who aim at providing fast and direct connections to distant destinations with their 787. They’ve been able to secure orders from national carriers in the regions such as Air India, Air China and Gulf Air who fit in with their target markets (http://active.boeing.com/commercial/orders/index.cfm).

When analysing the current strategies of Airbus and Boeing, it can be understood that Airbus is pursuing a differentiation strategy (Bowman and Faulkner, 1995) with all their aircrafts as their focus is on providing added value to customers through cost minimization and luxury especially through A380. Boeing on the other hand can be said to be following a hybrid strategy (Bowman and Faulkner, 1995) which focus on providing both comparatively low prices for their products, including 787 and also differentiation of service in terms of super long haul flights and speed. These strategies can be said to be fulfilling the success criteria of suitability, acceptability and feasibility (Johnson, Scholes and Whittington, 2008) as they have generated the expected results for the manufacturers.

When considering the strategic capability (Zhara and Nielson, 2002) of both manufacturers to make these strategies a success, it can be identified that both manufacturers utilize threshold resources such as market research, R&D and relationships with overseas manufacturers which are required in meeting increasing customer requirements. Boeing says 65-70% of the production is offloaded to Japan, China and Russia while Airbus employs European partners in Germany, France, England and Spain. Therefore they employ threshold competences such as efficient financing, value chain management and supplier integration in order to provide customer value and ensure sustainability of operations. Unique resources for Boeing and Airbus come in terms of technology insights which combined with the expertise, training and motivation of workforce act as core competences.

5. Would it be possible for a third company to enter this industry as a competitor to Airbus and Boeing?

As it was discussed in the industry structure analysis, the airliner industry is highly attractive for new entrants due to sales potential but at the same time is highly risky due to heavy R&D investment involved. There are added barriers to entry from the duopoly and the hypercompetitive conditions existing in the market. The following will argue the ability or inability for a company to achieve success under the current duopoly.

The arguments that go against the competitor will mainly be based on the strategic capabilities of both Airbus and Boeing. The ability of the competitor to achieve the required technological advancements in the short term is highly doubtful considering the high R&D investment required and the stringent economic climate experienced by financial institutions after the recession which would determine ability to secure finance. In addition, the ability for a new entrant to achieve advantages through outsourcing and value chain management is highly dependent on the ability of them to find and contract offloading partners. The selection can be highly risky due to high compliance requirements in the airline industry and due to specialized skill required from partners. Another aspect that requires attention is the customer switching costs, which in this case can be high due to maintenance and sales agreements entered into by flight operators and manufacturers. Finally it has to be noted that the airliner industry is in a shake-out phase of the industry life-cycle which especially highlights the financial and managerial strength of the two manufacturers which is not an easy task for a competitor to match.

In the meantime, there may be possibility for a third competitor to be successful under the hypercompetitive conditions (D’Aveni, 1995). A successful strategy which can be employed is repositioning which enables the competitor to align their products specifications with the customer expectations. In the current economic conditions, a strategy which is mainly based on low pricing would be recommended due to appeal it creates for customers. But at the same time the implication of this would be reduced margins and high pressure on reducing costs which is not feasible. An alternative would be to create disruption to competition (Gibbons, 1992) in terms of making alliances with new entrants to strengthen their competitive positions. Although this may be a feasible option, the inferior position of competitors requires a conglomerate of multiple competitors to achieve a noticeable market position which may also lead to administrative problems later.

Based on the above, it can be said that the possibility for a competitor to achieve a position of market challenger in the short term is less when considering the dominant positions of Airbus and Boeing.

Conclusion

In concluding the analysis, it can be said that the dominant position held by both Airbus and Boeing will continue to create barriers for new entrants to the market but there is a possibility of competitors emerging as market challengers in the long term.

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Competitive factors in the Aircraft Manufacturing Industry (Airbus: Challenger to Market Leader)