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Boeing Strategic Analysis

In: Business and Management

Submitted By jrutherf5
Words 3175
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INTRODUCTION

This case discusses the history of Boeing and salient forces affecting the global aircraft industry, along with the key strategic issues driving Boeing’s competitive strategies.

Boeing and Airbus dominate the global aircraft industry, but have very different visions of the future of commercial air travel. Consequently, the strategies they have devised to manage the competitive environment are disparate. The case provides a unique opportunity to explore these differences, how functional strategies support the overall competitive strategy, and the critical decisions now faced by both competitors.

The objective of the case study is to evaluate current industry conditions and to make corrective recommendations to improve Boeing’s strategy. The shortcomings of the company’s functional strategies should also be examined in search of measures to improve organizational performance.

* Compare the two competitor's strategies. Based on the industry environment, what conclusions can be drawn? * Since Boeing made its decision to pursue a product strategy based on the point-to-point airline business model, what new market conditions have developed? What impact are they likely to have on the company’s success? * Evaluate the pros and cons of Boeing's outsourcing strategy. Is there adequate support for the company's decision to "offload" parts production? * Consider the status of commercial aviation globally. Do Boeing's international strategies position the company to benefit from the most promising opportunities in foreign markets?

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ANALYSIS

* Compare the two competitor's strategies. Based on the industry environment, what conclusions can be drawn?

Each company monitors market signs to determine its next competitive moves. Forecasts are based on uncertain variables that make accurate projections difficult, and the competitors have adopted views of future trends in domestic and international air travel that are in great contrast. As a result, Boeing and Airbus have taken very different pathways in hopes of increasing their market shares (which is the major determinant of success in the aircraft production industry). The table on the following page highlights the dissimilarities between the companies’ strategies.

Strategy Comparison | Boeing | Airbus | Growth platform | Point-to-pointIncreased fragmentation in travel to appeal to travelers and solve airport congestion | Hub-and-SpokeExpecting growth in travel between major hubs, with an emphasis on Asian markets | Aircraft requirements | SmallerHighly efficient | LargerFuel efficient | Carrier benefits | Increased route flexibilityOperational efficiencyFuel efficiency (27% < A380) Significantly less costly than Airbus's comparable product | Allows movement of 10 million more passengers/year between major hubs with no new flightsLower operating costsExtra seats on long-haul routes | Product development Functional product differentiation | 787 DreamlinerObjective to offer passengers the most comfortable point-to-point travel experience with minimal intermediate stops - more standing room, larger windows and bathrooms, ambient light settings in cabin adjust to the time of day, and higher cabin humidity levels | A380 - superjumbo The largest in the world, holding 550 passengers - emphasis placed on comfort, more space per passenger, fresh air, natural light, reduced noise - can only fly into the largest airport facilities (some have had to invest in upgrades) | Other Features | Eco-friendly, light-weight composite materials, simple to operate, long-haul capabilities, reduced hazardous materials and emissions, recyclable end-of-life materials, speed to Mach 0.85 | Largest civil airline in service (35% larger than the 747) - can be configured with bars and specialty boutiques - “Commonality” contributes to airline efficiency | Release date | Mid-2011 (3 year delay) | 40 out by end of Dec. 2010 | Supply chain logistics | Moving up the value chain - internal focus on integration and assembly - component outsourcing | Tighter control over shared knowledge - efficient JIT programs with supplier alliances | Investment in new models | $18 billion | $14 billion | Advantage | Distribution networksGlobal economies of scale | “Launch aid” Market shareSensitive to market needs European suppliers/backers | Airbus, once considered a small player, swiftly emerged as an industry giant by focusing on the needs of the market, a standard product line, efficient production methods, and successful marketing ploys.

Boeing's assessment of carrier objectives and market conditions identified that airlines are seeking lower costs, expanded networks, more flexibility, and the use of smaller airplanes at regional airports. This reflects a shifting focus on profits over market share and appears to be an accurate read of maturing market needs. In the U.S., no orders have been placed for the larger A380 plane. Meanwhile, there is a backlog of 166 orders for the new 787. Both manufacturers strive to satisfy forecasted market demand by producing airplanes that match the size, range, fuel efficiency, and technology requirements of their customers. The table below outlines product categories in the civil aviation industry based on these characteristics. Absent from the product listing are any newly-designed fuel efficient aircraft for the low-end “cash cow” portion of the market. Disregard for the needs of this segment have exposed a vulnerability that has attracted new manufacturers of single-aisle commercial jets.

Market Segments | Boeing | Airbus | Seating | Notes | Low-end: single-aisle planes | 737 | A320 | 190 | 44% of all commercial jets flown40% of sales and 2/3 of production at BoeingTogether Boeing and Airbus produce 70 per monthMost profitable segment | Middle market: medium-sized aircraft | 757787 New | A330-200A350 New | 200-300 | | High-end: jumbo airplanes | 747-400 | A380 New | 300+ | Long-range flight capabilities, maximum use of technology |

The case material describes an intense rivalry between the two global producers of commercial and military airplanes. This rivalry is expected to continue as the competitors seek ways to recoup investment costs and to grow their businesses.

* Since Boeing made its decision to pursue a product strategy based on the point-to-point airline business model, what new market conditions have developed? What impact are they likely to have on the company’s success?

Boeing is counting on the 787 Dreamliner to enable the company to surpass Airbus in total sales and to regain its market leader status. Both companies have spent billions of dollars in development to meet the changing demands of customers. Both have experienced delays and have gone over budget. However, it is Boeing’s 787 that has proven to be the industry’s new plane of choice. A comparison of 2010 open orders is outlined below.

787 Dreamliner 846 orders 56 customers Delivery mid-2011 A380 234 orders 17 customers Dec. 2010 40 in use

The unprecedented popularity of the 787 Dreamliner has Airbus scrambling to revise its product strategy. The A350 XWB has been designed to compete directly with the 787. By the end of 2010, Airbus had already established an impressive order log for the smaller model. A350 550 orders 34 customers Delivery 2013

Introduction of the A350 poses a real threat to Boeing’s product success. The A350 matches the Dreamliner’s fuel efficiency claims and flight range, promises low noise and emissions, and is made of 53% composite materials (compared to 50% in the 787). During the 5-year development period for the 787, Boeing received 120 order cancellations and provided Airbus a window of opportunity to self-correct and imitate its advantageous strategy. Because the design of the A350 is based on technologies developed for the A380, Airbus has a good shot at meeting its 2013 delivery date. If production can outpace Boeing’s, Airbus has an opportunity to capture some of the unfilled 787 backorders and to satisfy market demand. While the two aircraft manufacturers were fighting to implement their new product strategies and to address key supply chain concerns, airlines were confronting a global financial crisis, international concerns about sustainability, air traffic congestion, and industry pressure to minimizing greenhouse gas emissions. These conditions influenced customer needs for higher fuel efficiency, advanced air transportation management systems, and new ways to cut costs to restore industry profitability. Commercial carriers had to take drastic measures to respond to market realities, and a leaner airline industry emerged. Perhaps most importantly, international competitors gained entry into the lucrative narrow-body single-aisle commercial aircraft segment, which was overlooked because of the duopoly’s myopic focus on larger planes.

* Evaluate the pros and cons of Boeing's outsourcing strategy. Is there adequate support for the company's decision to "offload" parts production?

Few organizations possess the resources and capabilities required to achieve competitive superiority in all primary and support activities or to develop all of the technologies that might yield a competitive advantage. Outsourcing can increase flexibility, mitigate risks, reduce capital investments, and yield potential supply line efficiencies. Today’s competitive landscape demands that firms examine their value chains across international borders rather than in a domestic-only context, particularly activities associated with supply chains.

With the advantages of outsourcing in mind, Boeing formulated a functional strategy of systems integration to achieve its new product strategy. The company believed that by focusing on the activities in its operations that create value and by offloading parts production to end-use markets, Boeing would be most competitive globally. By positioning the company higher along the value chain, management was attempting to strengthen a smaller number of capabilities and to maximize the advantages correlated with its core competencies. Boeing expected to distribute some of the risk associated with the large investments required to produce airplanes and to focus its efforts on value-creating activities, like marketing and managing supplier relationships.

Some of the disadvantages that Boeing measured when deciding to outsource parts production include the potential loss of critical technical expertise, engineering and manufacturing jobs, crucial innovative capabilities, and a share of the profit. Concern about the transfer of knowledge vital to national defense and commercial competitiveness was also an important consideration.

Perhaps the company was unprepared to adopt its new supply chain approach with the production of the 787 Dreamliner (which was Boeing’s first new commercial aircraft in 15 years and the first to be made with lightweight composite materials). Outsourcing significantly changes the nature of internal operations. To execute the strategy, Boeing did not simply need to build a capable and reliable supplier network, the company needed to establish vertical complementary strategic alliances which share resources from different stages of the value chain to cultivate new and sustainable competitive advantages. In addition, the managers administering its outsourcing programs needed to be qualified in new skill sets, including the ability to manage change and to resolve employee resistance that accompanies significant change efforts. They needed to be able to oversee and appropriately govern relationships with contract suppliers. International supply relationships are especially prone to misinterpretations of contractual terms or trust-based expectations, and given the strategic implications of aerospace to national governments, the risk of opportunistic behavior should not be underestimated.

In great part, the significant problems Boeing has experienced with the development and production of the 787 Dreamliner can be traced to the decision to outsource. The company is 3 years behind schedule and has yet to deliver on a single 787 order. Seven major delays can be attributed to parts shortages, manufacturing mistakes, poor workmanship, the need for extensive design modifications, and untimely engine failures. The process of managing a vast network of suppliers was complicated by design complexity and component interdependence. In its oversight role, Boeing failed to closely monitor its supply network, which would have exposed supplier investment delays and deficient standards of quality. These failures resulted in additional development costs in excess of $12 billion. Earnings and margins have suffered, and cash flows will be at risk until the suspension of deliveries is ended.

Without full estimation of long-run strategic implications, Boeing made a critical decision to offload the design of its wings and parts of its fuselage to Japan. Even major assembly work was sent to a new factory in Handa, Japan to build the center wing section with partner Fuji Heavy Industries. These actions involve sharing key technical expertise that has been considered a competitive advantage and was closely guarded in the past, introducing the risk of Japanese suppliers using technology shared by Boeing to design their own airplanes. In fact, the Japanese government and its heavy industrial firms have been seeking to establish Japan as an aerospace power. A successful Japanese aerospace giant would pose a major threat to both Boeing and Airbus, especially because of likely political and trade ties with flourishing Asia-Pacific markets.

In support of Boeing’s aggressive outsourcing strategy, an argument can be made that the company has weathered the storm and that the trouble is behind it. Recognizing that too much design and production work was given to suppliers, Boeing has brought some of the work back inside the company. To further reduce risks in the supply chain, the company has implemented new technological tools designed to increase visibility and coordination among suppliers. And it has acquired partner resources to establish domestic facilities for final assembly. If no further delays ensue, Boeing has ample financial flexibility and sufficient 2011 cash flow to secure a market advantage before Airbus delivers the A350 in 2013.

On the other hand, there is sound evidence that Boeing failed to properly identify activities, strengths, and resources necessary to execute its strategy and may need to devise an entirely new functional strategy to compete or reach its objective of overtaking Airbus’s leadership position in the marketplace.

* Consider the status of commercial aviation globally. Do Boeing's international strategies position the company to benefit from the most promising opportunities in foreign markets?

International market value for commercial aviation is expected to increase to $3.2 trillion over the next 20 years. Military and commercial aircraft sales are already growing in more than 90 countries. 42% of Boeing’s revenues and 80% of its total commercial backlog are for planes sold in foreign nations. Significant opportunities exist in the complex global business environment. Closely monitoring geopolitical trends, Boeing is already taking decisive action to position the company to take advantage of expected increases in demand.

Growing regional powers around the world are challenging the economic and political dominance of the U.S. Most notably is the emergence of China as a global power. The nation has the world’s fastest growing economy. With an estimated need for 4,330 new planes valued at $480 billion, China is the largest single market (with 30% of global airplane demand) for commercial airlines over next 20 years. In the purchase of parts from Chinese manufacturers, Boeing is the Chinese aviation industry’s largest foreign customer. The company has achieved substantial entry into the fastest growing market by establishing “offset agreements” to exchange parts production with aircraft sales. (This technique is also being employed in the growing market of India and in Japan and Italy where government subsidies provide an indirect benefit). However, Airbus presents a challenge in the Chinese market with 43% more orders than Boeing.

Another significant untapped market is Russia. With falling trade barriers, a strengthening economy, and airlines planning to modernize aging fleets and adopt Western operating practices, 1000 commercial airplanes worth $90 billion are projected in sales over the next 20 years. Boeing has a 60% market share of Western-built aircraft in Russia, which it expects to maintain. The company has orders booked with government-owned airlines and has built business alliances in Russia (such as agreements with titanium producers for supply of 787 Dreamliner input materials) to facilitate the growth of sales. The Russian aerospace industry is developing new models to meet the needs of its market, but a window of opportunity remains open while development is underway. Airbus is also aggressively competing for business in Russia.

While positioning to take advantage of promising future markets, it is important to note the allocation of existing business throughout the world. Looking at Boeing’s backorders for the 787 provides an insightful perspective on current market activity. See the breakdown below.

| Region | Orders | Percent | Developed Nations | North America | 203 | 25.2% | | Middle East | 133 | 16.5% | | Europe | 96 | 11.9% | | Japan | 90 | 11.2% | | Oceania | 67 | 8.3% | Developing Nations | China | 57 | 7.1% | | India/South Asia | 43 | 5.3% | | Central/South America | 40 | 5.0% | | Africa | 30 | 3.7% | | East/Southeast Asia | 26 | 3.2% | | Russia | 22 | 2.7% | | Total | 807 | 100.0% |

This data illustrates that developed nations still dominate the global market for commercial aircraft production. Over 73% of Boeing’s booked orders are in these regions.

It is also important to note that 71% of new airplane purchases in China over the next 2 decades will be for narrow-body aircraft. While Boeing and Airbus have been neglecting this profitable segment of the market, new foreign competition has entered the industry to claim a share of the $1.58 trillion in expected sales over the next 20 years. New competitors have surfaced in China, Russia, Canada, and Brazil, where national policies and government funding are promoting aerospace programs to strengthen domestic aviation industries.

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STRATEGY

When the timeframe for new product development extends to 5 years, it is an enormous challenge to be responsive to changing industry needs. Heavy investments incurred in pursuit of new strategies cannot be easily abandoned, but while distracted with the problematic implementation of the 787 Dreamliner strategy, a new industry and competitive environment was evolving. Conclusions drawn from the analysis suggest a set of recommendations for Boeing that can improve the likelihood of long-term competitive success and future growth in an industry that is constantly changing.

* In light of emerging international manufacturers of single-aisle commercial jets, it is more important than ever to for Boeing to retain its core competence in advanced technologies. * There is solid support for Boeing’s leanings toward introducing an entirely new aircraft (rather than merely re-engining existing aircraft) for the low-end, narrow-body market segment. It better meets the needs of airline customers, and by drawing on the lessons and techniques learned during the development of the 787, the company should be able to streamline the process and pursue an aggressive timeline for delivery. With recent revenue increases and growing profit forecasts, cash flow is adequate to meet capital expenditure and debt commitments for the upcoming 5 years. And unused borrowed capital is available, lending substantial financial flexibility for new development. * Boeing has sought global strategic partnerships to reduce costs and generate sales in new markets. However, there are some risks to these types of arrangements and to doing business where foreign interests are concerned. Formal contracts and partner trustworthiness are two ways to minimize these risks. * It is essential that Boeing deliver on its 787 commitments to reduce the impending threat of the A350 arriving in the market and to relieve operating cash flow pressures. 2011 deliveries can generate market “buzz”, promote market acceptance, and build momentum for Boeing’s product strategy. * Boeing’s global strategy emphasizes economies of scale and takes advantage of opportunities to integrate resources across markets. Despite the cost benefits, a global strategy is not responsive to local markets and may result in missed opportunities where a standard product does not adapt to local market needs. It may be worth considering adoption of a regional strategy where regional integration among countries is occurring. At the very least, for massive and growing markets in the Asia region (where larger-sized aircraft models are needed to meet air traffic between high-volume destination points), Boeing needs a new plane to compete against the A380.

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...Case The Boeing 777: A Financial Analysis of New Product Launch [pic] Eduardo Lioy Keya Williams Ritwik Malvi Jonas Angeles Alexis Heideck   1. Introduction/ Case Summary: The Boeing Company is an Industrial Aircraft Design and Manufacturing Firm, diversified in its offering of products for both the Defense Industry and the Commercial Airline Industry. In October 1990, CEO Frank Shrontz has announced the launch of a new product, the Boeing 777. A medium-to-large passenger aircraft, the 777 would enable the flexibility to carry passenger loads ranging from 350-390 passengers, over distances up to 7600 nautical miles. Already, Boeing has received orders from United Airlines, with delivery expected in May 1995 (p. 198). Aside from the technological advances represented in the 777, the launch of this new product promises some potential distinct strategic advantages. The launch of the 777 would provide a medium-to-large aircraft, filling a gap in Boeing’s total passenger aircraft product line. Boeing would now have a complete suite of aircrafts capable of addressing passenger loads ranging from 100-500. The 777 is specifically targeted to service routes in a high growth segment of the market, influenced heavily specifically by the high growth rate of the Asian market. The following is a financial analysis of the anticipated launch of the 777 product line. The analysis includes a comprehensive quantitative financial analysis of the projects profitability...

Words: 583 - Pages: 3

Premium Essay

Boeing

...The Boeing 777: A Financial Analysis of New Product Launch [pic] Eduardo Lioy Keya Williams Ritwik Malvi Jonas Angeles Alexis Heideck   1. Introduction/ Case Summary: The Boeing Company is an Industrial Aircraft Design and Manufacturing Firm, diversified in its offering of products for both the Defense Industry and the Commercial Airline Industry. In October 1990, CEO Frank Shrontz has announced the launch of a new product, the Boeing 777. A medium-to-large passenger aircraft, the 777 would enable the flexibility to carry passenger loads ranging from 350-390 passengers, over distances up to 7600 nautical miles. Already, Boeing has received orders from United Airlines, with delivery expected in May 1995 (p. 198). Aside from the technological advances represented in the 777, the launch of this new product promises some potential distinct strategic advantages. The launch of the 777 would provide a medium-to-large aircraft, filling a gap in Boeing’s total passenger aircraft product line. Boeing would now have a complete suite of aircrafts capable of addressing passenger loads ranging from 100-500. The 777 is specifically targeted to service routes in a high growth segment of the market, influenced heavily specifically by the high growth rate of the Asian market. The following is a financial analysis of the anticipated launch of the 777 product line. The analysis includes a comprehensive quantitative financial analysis of the projects profitability along...

Words: 582 - Pages: 3

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C-Trip

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