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The five forces analysis gives a clear description on how Boeing is able to exploit and influence the features of the industry. It operates in a duopoly kind of market structure with its major competitor being Airbus. This analysis brings out clearly the competitive rivalry that exists, whereby irrespective of Boeing being the market leader, Airbus has managed to secure impressive development. A case in point is the successive bid to supply A340 to Iberia after a tough bid war with Boeing. Even after Boeing merging with McDonnell Douglas in 1996 Airbus was able to secure 50% of total commercial orders. However this brings the question on how the buyer is able to influence the market. Boeing has two types of customers: government for defense division and airlines for commercial division. These customers posses immense powers in determining the prices of bids as illustrated in the Iberia case. Due the rivalry between Airbus and Boeing they are left at the mercy of the customers. Dupuy, the Iberia’s chief financial manager advocates for deal that would cause a 50% discount on the suppliers’ price offers. This is incredibly high but they end up bridging the gap to get to Iberia’s target price. This makes Boeing to lose the tender after being pushed to the threshold.
It’s absolutely true that once unsatisfied with one supplier the airlines may opt for a different suppliers. The challenge in this assertion is that, airlines experience some barriers in doing so. This may relate to the core product that the consumers need, the switching costs and prices. The aircraft designs and control systems from Boeing and Airbus are different. This means that if an airline that uses Boeing’s aircrafts wants to buy a single Airbus aircraft, it will have to incur a lot of cost in training their pilots. It would therefore be observed as a prudent move if they want a fleet of airplanes rather than one. Pricing threats are demonstrated in the bid to provide 200 aircrafts to Iberia. Mr. Leahy, sales manager in Airbus, thought that after having supplied 100 planes from 1997, he had an upper hand to win the bid over Boeing. However, this does not come that easily. It turns to be a war using designs and prices. This indicates that despite having a used client, there is still a chance of losing.
Government effect on Boeing’s operations cannot be underestimated. In its effort to provide employment for example it has benefited from tax abatement and subsidies. Government has also contributed in form of federal research and development provided by the Pentagon and NASA. Boeing has to observe the foreign trade regulations and antitrust regulations. There are also copyright and patent laws and environment laws that it needs to observe. Among the major legal responsibility that Boeing has, relates to the security and safety of the passengers. It has an obligation of paying compensatory damages when airplane crash occurs.
The number of customers in the industry is few consisting of governments and airlines. Their purchasing powers are high and they have different tastes. This means that the cost structures for aircrafts are high. This is because the companies have to invest in research to establish how to meet the customers’ different needs in the most efficient way. For example due to challenges experienced in the development of 787 Dreamliner with respect to inputs supply, Boeing bought Vought Aircraft Industries Inc.’s 50% stake to reduce reliance on suppliers who were unable to increase their supplies as demanded. Airplanes themselves have high cost e.g. the Dreamliner 787-8 cost US$193.5 million (2011) while 787-9 costs US$227.8 million (2011). This means high fixed cost and hence demands long term relationships with clients because economies of scale can’t be realized from many customers but rather in technologies. The costs are also affected by sensibility of the fuel prices and provisions have to be made due to price variations. Marginal costs are also high due to making use of new technologies being developed from researches to meet the differentiated needs. Other sources of high cost are from intellectual property rights and the requirement to provide compensation to victims of airplane crashes. The challenge however, has been on how to maintain low cost due to market situations without compromising the quality.
Players missing in the five forces analysis
Government is a major player that’s not given adequate attention. Government may have policies that reduce both fixed and operational costs. U.S. government may provide subsidies to help Boeing to price competitively or reduce tax liability through tax abatement. It is the government that enacts laws relating to environmental regulation, copyrights and liabilities to the passenger. Advancement in telecommunication acts as a greater substitute through reduced business travels due to techniques such as real-time video conferencing. This is based on broadband ISDN services. Rising cost of fuel may also leading to rising cost of travel and this makes people shun from using the expensive means of transport. This may make air travels to fall especially in short distances.
Possibility of new entry
Boeing has embarked on technologies that would help it provide excellent services to the passengers while improving in its efficiency of their products e.g. efficiency use of fuel and producing lighter planes. This is in the quest to increase the cost barriers to new entry, something that it seems to overemphasize. However, the market situations do change. Assuming that a basic airframe technology has matured and that we will be building most planes as in 30 years much like we do today, then there is no much threat from new entrance. This is because the fixed cost would be high and the period for which such technology would be used is only 30 years. But with the assumption that a new technologies, e.g. use of carbon fiber, in future is likely to lender the current technology, e.g. use of aluminum, then it would be relevant view new entrants as a threat. This is because Boeing will have to start from scratch to learn and incorporate the new technology just as the new entrants would do.
Permanently high fuel prices may not be good for 787 sales
In building 787 a one-piece fuselage is used eliminating; 1500 aluminum sheets and around 40000-50000 fasteners. This makes it light and can be able to carry heavier weight at a lower fuel consumption rate. Ideally, it consumes 20% less fuel per seat compared to a similar sized airplane. This means it can withstand high cost of fuel but mostly only in short run. Though doing better than other airplane under high fuel prices, in long run other alternatives are likely to take over e.g. bullet trains. This means that, unless there is recovery of the fuel price over time, the high price will not be god for the 787.
Investments in the 787 and A380 may be hinged on future fuel forecast
Currently the cost per barrel of fuel is around $130. Though we may not be able to tell with certainty, the cost of fuel will have risen in 20-30 years to come. Statistical analyses of past trends in prices of fuel can be used to predict the prices and hence determine the likely demand of the airplane. This can be used to determine the current investment in 787 and A380 and even the technologies to pursue e.g. lighter plane designs.
Beneficiaries or losers in case of subsidies
Provisions of subsidies to the airline manufacturers have the effect of reducing the cost of production. This may lead to a higher profit hence benefiting the shareholders, also better performance may lead to capital gains. It enable them to price their products competitively hence creating a strong barrier to new entrants. The suppliers from U.S. and Europe, e.g. for engines, may benefit as a result of increased sales. Depending on the policy used, more jobs may be created. The competitiveness of the competitor reduces hence incurring loss of market share. This may hurt even their employees as it tries to restructure to reduce costs. Additionally, there is always a tradeoff between subsidies and public goods hence the general public may lose too.