Andrew Penrose Economics 11-23-11 Dr.

Damooei

Application of the Five Forces Model for Industry Analysis: Boeing

Boeing is a multinational corporation founded in 1916 in Seattle. Since its conception Boeing has grown exponentially. Boeing now has revenue of over 64 billion dollars. The Company operates in five segments: Commercial Airplanes, Boeing Military Aircraft (BMA), Network & Space Systems (N&SS), Global Services & Support (GS&S), and Boeing Capital Corporation (BCC). Boeings other segment includes the activities of engineering, operations and technology (EO&T), and shared services group (SSG) (The Boeing Company). I will apply the five forces model for industry analysis as it pertains to BMA, more specifically Boeings commercial division. When the commercial aerospace industry is at an all time low Boeing should consider the five forces model to establish a new plan to generate more revenue and develop sustainable practices in order to profit when the economy begins to upswing. As the market stands now Boeing only has one large competitor, Airbus, these two companies together hold almost all the market share, Boeing in the U.S. and Airbus in Europe. At face value

this seems to be the only large difference but upon further research these seemly similar companies are quite different. This is most apparent in the in the competing design of the Boeing 787 Dreamliner and the Airbus A380. These two companies are differentiating their product in two totally different ways. Airbuss 380 will be the largest commercial jet to date with the promise to haul 500-800 passengers depending on seating. Airbuss main marketing point is they will have two decks complete with a lounge area and gym, and also will have sleeping quarters. At this point it seems that airlines will likely pass on the amenities in favor of flying more passengers similar to what happened with Boeings 747 and their first class upper deck. Airbus is trying to sell flight travel as an enjoyable experience. This contrasts sharply with Boeings plan for the 787. Boeing is designing a jet that will be most fuel efficient while offering smaller comforts in comparison to the amenities offered by Airbus. Boeings designs include bigger bathrooms, more head and feet room, bigger more comfortable chairs, humidity control of the cabin, and better back of the seat technology i.e. internet, TV, movies, charging stations for electronics. The aim was to create a more efficient jet that would not need to make stops. It is unlikely that there would be any new entrants to the market for several reasons. The labor, engineering, and capacity necessary to compete are huge obstacles for any company to overcome. Boeing employs 165,000 people all over the world and has operations in 70 countries (Boeing). The

commercial sector in itself generated in excess of 31 billion (Boeing). Similarly Airbus posted revenue of over 40 billion dollars (Airbus S.A.S. Company Profile). High fixed cost and long production development is likely to dissuade any new entrants. It is unlikely that any company can penetrate and compete in this market as a whole, a relatively smaller company, Embraer Air based in Brazil has been competitive in the smaller regional jet sector. Embraer can make gains against Boeing in new emerging markets such as China. Embraer has already made some progress in this area. Through the first three quarters of 2011, Embraer delivered 122 planes [to China]. What's interesting, however, is that the company is sticking by its target of 220 planes for the year. That will mean a busy fourth quarter of 100 deliveries if it is to meet that goal (Kramer). If Embraer continues to grow in developing markets it will only be a matter of time until Embraer develops the resources necessary to compete with Boeing. Boeing can combat the emergence in one of two ways, they can choose to out compete them in the open market or buy them out similar to what they did in 1997 when they bought their long standing competitor, McDonald Douglas, for 13 billion dollars (Knowlton). The Chinese government might also add pressure in the future through its support of a nationalized commercial aircraft manufacturer. This project is still in its infancy put it has potential to radically change the market in the same way China has changed other manufacturing markets. Chinese leasing firm, BoCom Leasing, will

purchase 30 domestically developed C919 passenger jets to expand its fleet because of China's rapidly growing demand for air servicesCOMAC is a newcomer seeking to compete with commercial aircraft manufacturers Airbus and Boeing and gain inroads to the international aviation marketThe C919, which seats about 150-170, is designed to compete with Boeing's 737 and Airbus's A320 in the single-aisle passenger aircraft segment. Test flights for the C919 are scheduled for 2014, with deliveries planned from 2016(Chinese). Boeings immense market share creates relatively weak pressures from their suppliers. Boeings major hurdle in this area is [their] global supply chain [that] is among the most complex and geographically dispersed in manufacturing. The company annually purchases more than $40 billion in goods and services from approximately 28,000 suppliers employing more than 1.2 million workers around the globe (Boeing). The major supplier types are; aerospace support, avionics, common aerospace commodities, electrical/hydraulic/mechanical standards, interior, major structures, and propulsion. For most of the 28,000 suppliers Boeing is the major source of revenue as their sole buyer. The suppliers with the most bargaining power are the suppliers of the propulsion systems; these suppliers include General Electric, Pratt & Whitney, Rolls Royce, and CFM. Boeing has negated most of the bargaining power because their jets are now designed to house either or all of these engines, thus creating more competition between the suppliers.

There are many benefits of a global supply chain, such as a highly competitive. Boeing is able to keep more stock on hand with out incurring all the costs by having a small amount of stock held at each of their suppliers warehouses. A global supply chain operates 24/7 365 because of the time changes and cultures do not all share the same holidays and finally it allows for the possibility of growth during poor economic times. Although there are many benefits to a global supply chain, it is very fragile and must be strictly monitored and managed. Boeing has seen its share price drop because of their delayed production of the 787 Dreamliner according to US Today Boeing will once again delay the first delivery of its hot-selling, but problemplagued 787 Dreamliner. The company says it has problems with a new engine from Rolls Royce, one of two engine makers involved in the project. The 787, the first commercial plane built mostly with weight- and fuel-saving composite materials instead of aluminum, was originally scheduled to be delivered to its first customer, ANA of Japan, in May 2008. But repeated delays in the design, production and flight-testing phases of development pushed that back several times. Most recently Boeing was targeting first delivery in late 2010 (Reed). While this is not Porters standard definition of pressure from suppliers it can still have a huge impact on the company and their economic future. Since the commercial airline business buys its jets from a duopolistic market they find it hard pressed to apply pressure mainly because of the

shear cost. It would cost the airlines countless hours and millions of dollars to change their jet provider from Airbus to Boeing or vice a versa. Each company while provides almost an exact product in terms of the service it provides are built very differently, also they share very little in the way of common suppliers. Their pilots would have to be retrained because the electronics operate differently. The top 5 airlines operate with a mixed fleet of Airbus and Boeing but a vast majority of their fleet is Boeing, with the exception of Southwest, which operates strictly with Boeing giving them some additional leveraging power. In January of this year Southwest used some of this power according to the Financial Times Southwest Airlines would consider buying Airbus aircraft for the first time if Boeing chooses not to develop a more fuel-efficient version of its leading single-aisle jet, the chief executive of the low-cost carrier has implied. The suggestion will raise the pressure on Boeing to upgrade its popular 737 family of aircraft with a new, more fuel-efficient engine, rather than put its efforts into creating an entirely new version of the jet that could take substantially longer to bring to market. If consummated the move would be a significant coup for EADS, the European conglomerate that owns Airbus. Southwest has a fleet of more than 500 aircraft but has stuck with a single type of Boeing jet for most of its history. A unified fleet helps it reduce maintenance and operating costs (Lemmer).

There are no substitutes to air travel that match it in speed and convenience but since the recession people are traveling less for vacations and corporation that once used to fly people for meeting are looking more to telecommunications. U.S. airlines may carry 37,000 fewer passengers a day this Thanksgiving as more expensive tickets and a slowing economy discourage leisure trips. About 23.2 million passengers are expected during the 12- day peak travel period bracketing the Nov. 24 holiday, a decline of about 2 percent from last year, according to the Air Transport Association of America, the trade group that represents the biggest U.S. carriers.

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Kramer, Hilary. "Three Brazil Stocks Ready for a Comeback MarketWatch."MarketWatch - Stock Market Quotes, Business News, Financial News. Web. 23 Nov. 2011. <http://www.marketwatch.com/story/three-brazil-stocks-ready-for-acomeback-2011-11-02>. Lemmer, Jermey. "Southwest Warns on Switch to Airbus." World Business, Finance, and Political News from the Financial Times - FT.com. 20 Jan. 2011. Web. 28 Nov. 2011. <http://www.ft.com/intl/cms/s/0/c9ebe8c4-24d7-11e0-a91900144feab49a.html#axzz1f34SH7Zc>. Reed, Dan. "Delivery of Boeing 787 Dreamliner Delayed Again USATODAY.com."Travel News & Guide: USA TODAY Travel Network USATODAY.com. Web. 28 Nov. 2011. <http://travel.usatoday.com/flights/2010-08-27-boeing-dreamliner-deliverydelays_N.htm>.