Commercial aircraft industry is one of the most consolidated industries in the entire world. The nature of business has a very deep impact on this industry structure, which we will discuss in detail later. The main factors which contribute to the industry dynamics are driven by economic factors such as economies of scale. This capital intensive industry does not only require capital but heavy investments in human resources and technology. The technology factor can be analyzed from the heavy spending on Research & Development by the two main players. The dynamics of this industry are defined not just by economics. As can be seen in industries which become an icon for nations, there are strong sentiments attached with the commercial aircraft manufacturing industry. This factor is a very dominant contributor to industry dynamics and strategic shape of the industry. The strategic importance of national sentiments attached to some companies is explained by Lou Gerstner in his very famous book ‘Who says elephants can’t dance?’ According to Gerstner one of the major reasons he took up to task of bringing IBM back from brink of bankruptcy was the cultural significance and sentiments attached with IBM of both American businesses and people. The same cultural significance lies with the dominant players of the commercial aircraft manufacturers. This factor is significant for both Boeing and Airbus and holds a very significant importance in determining the analysis provided below.
The best method to understand the dynamics of any industry is through the porter’s five forces analysis. This model gives a comprehensive analysis of the different forces functioning in the industry and determines industry’s strategic positioning. This model is also very useful in providing a comprehensive analysis of the individual analysis and more importantly contribution to determining the overall positioning of the industry. The model is used for this example is as follow:
Bargaining Power of customers
The most important factor for any industry is the bargaining power of customers. This is a very economics driven phenomenon. This is because the customers function as a whole on factors of demand and supply. The demand factors for an industry determine the power of firms operating in the industry. The substitutability of a product is the key to bargaining power of customers. The elasticity of demand for aircraft manufacturers is very low. This is because we must understand the customers here are airliners and not travelers. The travelers can use other means of transport but airliner such as JetBlue and British Airways have no other choice but to buy commercial jets. Therefore we can easily say that bargaining power of customers is low because the industry is consolidated.
Bargaining Power of Suppliers
The bargaining power of suppliers is again very limited in most areas. The bargaining power of suppliers can be determined by two main factors contributing to industry dynamics that must be taken into account. The power of suppliers is reduced because there are thousands of suppliers in the market which produce aircraft parts and a very small number of customers (aircraft manufacturers). However here we must take into account the specific type of technologies being used by these suppliers. In many cases the bargaining power of suppliers is very high because of their technological expertise. Therefore we can say that the bargaining power of suppliers is medium.
Threat of substitutes
The threat of substitutes basically refers not to different types of commercial aircrafts but rather different modes of air travel. We will analyze two main areas for determining the threat of substitutes i.e. which travel as fast as airplanes and mode of travel is air. There is still no progress on the later as there is still no other technology which can travel by air. The first threat however has materialized as the new bullet train has achieved very fast speeds and is a potential substitute to commercial aircrafts. The technology to build these bullet trains is still very expensive and is limited to a few nations. Therefore we can stay that threat of substitutes in this industry is low.
Threat of new competitors
There are many barriers to entry in the aircraft industry. The primary barriers are driven by capital intensiveness. Billions of dollars are needed to develop an aircraft manufacturing facility. The technological barriers are even worse. The technology to build aircrafts is still limited to developed nations of the world and is primarily controlled by Boeing and Airbus.
Intensity of competitive rivalry
The competitive intensity of Aircraft industry is dependent on the sustainable competitive advantage of the industry. The competitive advantage in the airlines industry is mostly technology based. The main competitive advantage is vested in the technological innovation of the industrial rivals. A very prominent example is of the two present rival Boeing and Airbus. Airbus has developed its competitive advantage through competition on size and has developed the world’s largest Aircraft A-380. Boeing has developed their own competitive advantage by developing longer and sleeker aircrafts. The competitive intensity for the industry is therefore low.
This factor is very significant for the industry. The government continuously intervenes in the aircraft manufacturing industry. The aircraft manufacturing industry has received government support over the years. This support has been more dominant for Boeing which receives billions of dollars in subsidies yearly from the government.
The aircraft manufacturing industry is directly linked with economic growth. This is because the main customers are the airliners. The growth and profitability of these airliners directly affects the growth of manufacturers. The airliners are affected directly by international and national economic conditions. This is because a large component of air travel is for luxury purpose. As we can see that the recession has severely affected the profitability of airliners such as British Airways and JetBlue.
The cultural factors hold importance in this industry as mentioned above. This has increased the significance of social factors in the aircraft manufacturing industry. The Europeans have strong sentimental attachment with Airbus and America has a strong sentimental attachment with Boeing.
The technological factors are of great importance in the environment analysis. This is because this is a technology intensive industry. The high rate of technological change is significant in this industry as aircraft manufacturers are always leveraging their technology to improve designs and speed of their products.
Industry Life cycle
If we look at the industry life cycle we can see that aircraft manufacturer industry is in the mature stage of industry life cycle. This is because the market has complete information and knowledge of the products. The industry basically functions on differentiation and low profit margins. The players have no new markets to enter and there is linear growth in existing markets.
The consolidation in aircraft manufacturing industry is one of the most extreme in the entire world. The famous Airbus started as a consortium of different European manufacturers brought together to compete against the Boeing. Another example is the MIT airlines industry consortium which has established a network of suppliers, researchers and infrastructure providers.
Critical Success factors
If we analyze the industry analysis we can conclude that success factors for the aircraft manufacturing industry are as follow:
* Large capital investments, as the machinery and manpower required to operate aircraft manufacturing facility is large. This would mean that any players entering in the market must ensure that they have financial muscle to fund and finance the equipment and machinery required for a commercial airliner manufacturing facility.
* The technological investments to keep building a sustainable competitive advantage. This is because as the competitive advantage is built on technology therefore continuous R&D investments are necessary to make find new ways to improve performance and differentiate in a mature market.
* Association of brand with culture to ensure a strong government backing and strong customer base. The backing of the government is a necessary element as has been seen in the past. This is because primarily a national attachment would create reliability and a customer base; also because government in itself is a large buyer.
* Continuous differentiation and improvement in design and technology. Innovative designs and technology are required for both existing players and new players entering the market.
* Vertical integrations to ensure increased gross margins in a low margin industry. A low profit margin environment would become profitable if the margins of suppliers are taken over by the manufacturer.