Introduction
Airbus has emerged as one of the most powerful aircraft manufacturers in the world. However, it is facing a number of internal and external problems that will require fresh insights. The report will look at these issues and recommend a five year plan designed to meet those challenges.
Models and framework (Internal and external issues)
The Porter Generic Model is quite useful in analysing the external issues affecting Airbus. Five major factors are usually analysed in this model and they include: threats of substitutes, threats of new entrants, bargaining power of suppliers, bargaining power of buyers and threats of competitors.
When one considers the threats of competitors, it is evident that the aircraft manufacturing industry has relatively few players. Most of these manufacturers are internationally renowned and have built networks across the globe; they include Boeing and McDonnell Douglas. Currently Airbus and Boeing have the largest market share in the industry.
Boeing has attained this large market share through an extensive aircraft range. Boeing’s investments in technology have also contributed to its successes. The development of solutions that can contribute to cost effectiveness of airplanes has also made Boeing quite successful (Matthew, 1997). Examples here include: optimisation of seat capacities and creative wing design.
Boeing has also forged strategic alliances and initiated joint ventures with many foreign associations and forums. These and many more reasons make Boeing a force to reckon with in the aircraft manufacturing industry. Airbus caught up with this organisation but much more needs to be done for the organisation to dominate market shares.
Boeing will keep Airbus on its toes in the near future especially through its recent legal suits. The former company claimed that Airbus was not playing fair by its overreliance on government subsidies (Burgos, 2005). Airbus needs to think of other ways of securing its financial future if it hopes to compete with Boeing.
The second element in Porter’s five forces is threat of new entrants. The aircraft manufacturing industry has very long product development cycles. Furthermore, entrepreneurs must part with huge capital investments before they can establish themselves in the industry. They also require a vast pool of skilled employees before they can build or design any aircraft.
Existence of a proven track record is also another factor that needs to be taken into consideration prior to entry into this industry. All these obstacles make it such an uphill task to start aircraft manufacture.
Nonetheless some countries such as Japan and China already have the right infrastructure and trade policies needed to make it in this industry; Airbus needs to enact measures that will always keep it a step ahead of such potential threats. Military craft manufacturers may also be tempted to enter into this market once their respect markets start going down (Nichols, 2001).
Threats of substitutes in the airline industry are also another reality. Airbus deals with the manufacture of aircrafts. Any industry that can substitute airline transport is considered as a threat. Although few sectors can deliver the economy, efficiency and security of the airline industry, it is necessary to acknowledge that train services are still a very formidable force.
Some electric trains now exceed 200 miles per hour and if these rail networks are integrated in Airbus markets, then demand for the company’s products could substantially reduce. Information technology may also prove to be a substitute in the future.
It is likely that more companies will embrace teleconferencing and other technical methods of communication. This will reduce the need for air travel and would thus minimise demand for Airbus’ products.
In terms of the bargaining power of buyers, airlines have considerable clout in this industry. Most of them have been affected by the global economic downturn and many are dealing with financial challenges.
A number of them are working on optimising their operations so this will definitely affect how they purchase products from Airbus. Aircraft manufacturers have a small selection of buyers because their products cannot be sold to the mass market (Benkard, 2004). Most airlines have associations that give them a lot of power and clout in determining the prices or strategies of aircraft manufacturers.
Airbus must look for ways of coping with this strong market base either through technological or strategic advancements. Unless Airbus can deliver, it will be extremely keep such as demanding market base satisfied.
Threats of suppliers are also crucial in Airbus’ external environment. In engine manufacture, companies like General Electric and Rolls Royce have a lot of bargaining power. These engine suppliers sometimes get into joint development programs with airlines; they determine how engines for their planes will be manufactured.
The ability of suppliers to vertically integrate with other members of the supply chain makes them quite a formidable force. Airbus must also deal with the problem of regulatory institutions. All of them need to give approval to the company’s products before it can be sold.
Sometimes the firm needs to negotiate or defend itself and this may slow down business. Financial leasing institutions that purchase products from Airbus and lease them out to airlines are also another entity that adds to the strength of suppliers in this industry. Airbus must seek new ways of staying above the tide even with all these external challenges.
An internal analysis of this organisation reveals several challenges as well. The World Trade Organisation has ruled that the dependence on subsidies by Airbus is not a fair way of carrying out business (Newhouse, 2008). As a result, Airbus must now look for new ways of managing its finances by either cutting costs or creating new revenue generating streams.
This aircraft manufacturer also has some challenges in product development. Currently, the firm is trying to create a model that can match up to rival Boeing’s Dreamliner 787. It has been working on the A380 jumbo jet but the product is yet to be fully developed (Norris and Warger, 2008). Operational challenges are also worrying this organisation.
The company needs to improve its cycle times and manufacturing efficiency. At the same time, excessive inventory must be avoided in order to minimise wastage. In the process of dealing with the latter two challenges, Airbus needs to streamline its supply chain through integration of customers and suppliers into the manufacturing process. These challenges must be done in a way that delivers quality services
International strategy recommendations for 2012-2016
If Airbus is to cope with excessive competition from Boeing, it needs to cost cut, deal with operational challenges and respond to product innovation needs through implementation of an outsourcing program in the next five years.
The major aims of enacting an outsourcing program will be to address inefficiencies in operations through lean manufacturing. The company will be sure about on-time delivery and high customer satisfaction if it outsources wisely.
In the next three years, the company will be in a position to boost the quality of its products by reducing any returns that may have been instated by aircraft regulatory bodies. It will reduce lead times and thus produce aircrafts in a faster and more efficient way.
Airbus ought to outsource wisely; the company should not enact a radical operation as this may backfire on it (Perret, 2008). Part of the reason why Airbus has been doing so well is that clients can hold it responsible for the products it creates. If responsibility for the whole construction process is transferred to another party, then this could undermine the company’s credibility.
The first thing that Airbus must continue to do is to design the aircrafts themselves. Airplane construction consists of a series of sophisticated components that involve several specialised employees who must each take charge of separate production lines.
These separate parts must then be taken to the main line and assembled. Sometimes the tail of the plane may not even appear as it should be until months after working on it. Because of these complex production processes, Airbus must spend a lot of money on wages, operations, inventory and other operations. Handling these disjointed processes has therefore been hurting the firm’s profit margins.
As a result Airbus has been spending approximately six hundred thousand pounds per hour during the assembling process. Clearly, it would make sense if the company could cut down on some of these expenses by outsourcing. In this regard, instead of leaving the production of particular components to certain suppliers, these same vendors could create an entire section of the plane and then deliver it to airbus.
It should be noted that outsourcing is nothing new to Airbus. It has been using suppliers from various European countries and has been taking the final assembly to France. In this global strategy, Airbus will take their outsourcing to another level; they need to outsource the parts to other non European countries such as Japan and China.
The main advantage with these Asian economies is that they are low wage regions. Furthermore, their governments will be willing to provide a local market for the airplanes if the production process is in those countries. Japan’s government asserted that they were willing to offer a ready market to foreign airplane manufacturers if those processes were brought closer home, so this would be a great destination.
Not only will Airbus be guaranteed a regular market in Asia, it will also be producing its airplanes at a much cheaper price. The company will increase its profit margins substantially if it continues to do this effectively. The other country that will be an important part of this outsourcing strategy is China.
China has great prospects for the manufacture of aircrafts because its government is planning on building a mainline airliner there (Kogan, 2008). Besides, this nation is very competent in manufacturing technologies. The only challenge for Airbus will be handling the potential competition that may emanate from the collaboration.
Between 2012 and 2016, Airbus should work on construction and designs of certain components with Chinese partners. They can avoid giving away all their knowhow so that they can protect themselves from any losses to competitors. The current aircraft A380 should be a start; China should be working on twenty percent of the Aircraft while other traditional plants can work on other parts (Robertson, 2006).
In the next five years, Airbus should dedicate its efforts towards design and improvement of some of its models. It should still maintain production of essential aircraft components because these could make or break the firm.
Nonetheless, engineers and other professionals in the original production plants need to keep collaborating with the Japanese and Chinese component producers in order to ascertain that previous standards are met or even exceeded.
Traditional manufacturers like the UK should still be maintained because it has been shown that this country is an expert in wing production. Excellent plants ought to be retained but those who demonstrate otherwise need to be replaced by the Asian centres.
This strategy should also involve pushing maintenance functions further down the supply chain line. Airbus is incurring a lot of expenses during after-sales maintenance processes. Dissatisfied customers may bring the aircrafts to Airbus who must compromise on their core competences because of these needs. In the next five years, Airbus needs to change this process; it should outsource maintenance services to specialists.
They are likely to produce very effective results because their sole focus is aircraft breakdowns. Specialised third parties can even predict potential failures and thus save consumers from any costly accidents. This would free up Airbus so that it can focus on its main goal which is to manufacture airplanes; not to repair them.
Outsourcing has already been embraced by Airbus’s rival – Boeing and this explains why that player has reduced its operational costs in the short term (Irwin, 2004). If Airbus chooses this strategy, it is likely that the firm may save approximately ten billion Euros by the end of the five year period.
This will largely stem from lower overhead costs that account for about 32% of the company’s expenses. At the end of this period, the organisation should assess the success of the scheme and continue to improve it if it appears to be working. Furthermore, the A38O jumbo jet will be worked on thoroughly by the concerned organisation. It will get a chance to meet its target and will also share risks with its partners.
Conclusion
An analysis of the aircraft manufacturing industry reveals that there is immense competition, buyers are becoming more demanding, costs are increasing, product development is lagging behind especially for the A380 jumbo jet, buyer demand may go down, and countries like Japan may enter the aircraft manufacturing industry.
To respond to these challenges, an outsourcing strategy has been recommended for the next five years. It will entail component outsourcing to Japan and China and collaboration with engineers there. The strategy will save on overhead costs, improve core competencies and spread risks.
References
Benkard, C. (2004). A dynamic analysis of the market for wide bodied commercial aircraft. Economic studies review, 3(16), 45-67.
Burgos, A. (2005). US, EU to settle Airbus-Boeing dispute. Forbes magazine, p. 14.
Irwin, D. (2004). Airbus versus Boeing revisited: international competition in the aircraft market. Journal of international Economics, 64(2), 223-245.
Kogan, E. (2008). China’s commercial aviation in take off mode. Asia Times, p. 23.
Matthew, L. (1997). Birds of prey: Boeing vs Airbus, a battle for the skies. London: Four walls eight windows.
Newhouse, J. (2008). Boeing versus Airbus: the inside story of the greatest international competition in business. NY: Vintage.
Nichols, M. (2001). Airbus Jetliners: the European solution. Stanford: Key Publishing.
Norris, G. & Wagner, M. (2005). Airbus A380: Superjumbo of the 21st C. Berlin: Zenith Press.
Perret, B. (2008). Airbus looks at new strategies in China. Aviation week. Web.
Robertson, D. (2006). Airbus will lose 4.8billion Euros because of A380 delays. The Times, p. 3.