Boeing Company is a leading manufacturer of military, aerospace and commercial aircraft based in the United States. Despite decades at the helm of the global airframe manufacturing industry, in the early 2000s, the company encountered a major threat to its grip on the market due to competition from Airbus, a European-based aircraft manufacturer. The competition between the two corporations intensified with Airbus undertaking to build the world's largest commercial plane, A380 that could not only carry more passengers but could also fly further distances and significantly reduce the operation costs. The Boeing responded by approving the construction of a mid-range aircraft Boeing 787 that would consume less fuel and would be cheaper to operate than Airbus' midrange plane at the time.
While Boeing was driven by the need to increase manufacturing efficiency, cut costs and reduce the prices, Airbus focused on constructing larger more expensive planes designed to reduce congestion in airports. The two corporations continue to dominate the aircraft manufacturing industry to date due to some competitive advantages. This paper seeks to analyze the external environment of Boeing Company and the airframe manufacturing industry and to conceptualize the forces that drive the sector (Cederholm, 2013)
External Factors
External factors refer to the industrial trends that influence Boeing’s decisions aimed at improving its competitive advantage in the industry. Since the aircraft manufacturing industry is directly affected by the airline industry, the factors affecting the two industries are interdependent. The external factors influencing Boeing Company are classified as the natural, physical, societal, and task environments.
Natural Physical Environment
The airline industry is often affected by weather and climatic conditions which could lead to flight cancellations depending on the severity of the situation. One climatic factor is the increasing global temperature which has resulted in increased expenditures on fuel causing planes to emit more fuel gases (Magill, 2015). Other weather conditions that often lead to flight cancellations include snow, winds and freezing rain, (Elliot, 2013). Heavy rains affect landing and departure by making it difficult for the pilot to maintain a centerline position on the runway without skidding. This reduces the tolerance for crosswinds making it dangerous to land or take off. Heavy snowfall accumulation and freezing rain also affect plane operation. Despite the efforts of aircraft manufacturers to design modern aircrafts that withstand wind and snow, extreme weather conditions still affect their operation especially at the points of landing and takeoff. These natural forces have similar effects in other parts of the world.
Societal Environment
The societal environment comprises the economic, technological, political and socio-cultural factors affecting the Corporation. These are elaborated below:
Economic factors
The economic health of an economy as indicated by the gross domestic product and disposable incomes are main determinants in the airline industry. The US economy has recorded growth in both its GDP and the disposable incomes and incomes per capita. Despite the recent economic slowdown, the airline industry has not been adversely affected by the economic cycle since most of its orders were made by new entrants looking to replace old jets with new more efficient versions as opposed to customer reactions. Also, the fall in global oil prices has led to cheaper jet fuel, and most airlines are using the windfall profits from cheaper fuel to upgrade their fleet by purchasing new planes (Why the plane market is unlikely to crash, 2016). Major United States airlines include the American Airlines, Southwest Airlines, Delta Airlines, JetBlue Airways and United Continental.
Technological factors
Advancement in technology is the primary driver of airlines' improved operational efficiency. The application of technology has enabled the industry to innovate to increase connectivity and enhance customers' travel experience (Schmidt, 2015). Technology has been used to economize on fuel consumption by the planes, increase the distance of travel and the carrying capacity of aircrafts. Additionally, Boeing has adopted modern technology in manufacturing cheap planes with lower operational costs without comprising on quality (Cederholm, 2013).
The need to innovate by using the best technology is closely tied to demographic factors since the travelers are drawn toward certain amenities; this pushes the airlines to require the same from the manufacturers. Firms in this industry need to respond quickly to the changing industrial needs to avoid losing market share in the competitive industry (Wright, 2016).
Political-legal
The airline industry is heavily regulated through tax policies and international trade restrictions. A recent regulation is the consolidation of the US aviation industry to nurture a competitive environment
Political factors impacting on the industry include terrorism and the outbreaks of diseases like Ebola. Terrorism has a profound effect on the aviation sector as indicated with the 2001 9/11 attacks that saw the industry's revenues decline by 6%, a decline that took three years to recover.
Examples of political issues that have dogged the corporation include a dispute in which China protested the decision by Boeing to sell planes to Taiwan. It is worth noting that China is the largest stakeholder in Boeing and is Boeing’s biggest buyer (Wright, 2016). Additionally, there are plans by the United States government to reduce expenditure on military equipment, a move that will adversely affect Boeing
Socio-cultural factors
The industry is currently geared towards the need to be eco-friendly. The commercial, defense and aerospace industries are increasingly focusing on reducing environmental pollution through the emission of gases. Therefore, the manufacturers have to respond by reducing the gas emitted by the planes. Boeing has focused on increasing its manufacturing efficiency so as to reduce its environmental pollution. The 787 dream liner, one of Boeing’s newest planes is designed to save on fuel and is built using composite materials.
On the social front, social trends have shown an increased demand for air travel over the years, and there is an indication that the latest generations have a higher preference for air travel. This presents an opportunity that can be tapped into (Cederholm, 2013)
Boeing’s current opportunities include;
Growing demand in Europe, Asia-Pacific, South America and Africa
Growth in orders and a strong backlog- the company has experienced a growth in orders in the recent past and the trend is projected to continue.
The increase in demand for defense products- this is created by the rising tensions between countries.
An increase in demand for satellite also creates opportunities for the company. (Schmidt, 2015)
Boeing can utilize the above opportunities to improve its performance in the industry.
Boeing’s threats include:
Intensified competition in the regional and global market. There is the threat of competition from global and regional players such as Airbus, Embraer and Bombardier
US government cuts in defense spending- continued reduction by the government on defense is likely to adversely affect the profitability Boeing’s defense arm
Boeing has the challenge of tackling the above threats if they are to stay afloat in the industry (Cederholm, 2013).
Global advancement in technology is an opportunity for Boeing since the success of firms in this industry is heavily dependent on their ability to use technology to innovate and improve the quality and efficiency of their services. The Boeing 787 Dreamliner, the company's most fuel-efficient plane is a product of innovative technology by Boeing. Moreover, the aircraft makes it possible to change engines from one manufacturer to another and has bigger windows for an improved view of the horizon. The plane makes it possible for airlines to open new routes
Companies need to understand the factors that impact on profitability in the industry they are operating in so to make practical decisions. Below are forces that drive industry competition in the aircraft manufacturing sector
Threat of new entrants
There is a low threat of new entrants in the aircraft manufacturing industry given the high entry costs and the dominance of the players in the industry. The costs of entry include an enormous capital investment, high level of technological know-how and significant research and development budgets. The top players such as Airbus and Boeing have strong customer loyalty which increases their grip on the market. The threat of entry varies from country to country, for instance, preferential treatment offered towards aircraft manufacturers by the Republic of China lowers the cost of entry for firms in the country. Similarly, the cost of entry for companies operating at the regional level could be low leading to a high threat of new entrants. Examples of smaller companies operating in niche markets include Embraer in Brazil, Bombardier in Canada and COMAC in China (Why the plane market is unlikely to crash, 2016).
Bargaining power of buyers
The buyers are the airlines who purchase the planes. Planes are usually purchased through long-term contracts which lower the bargaining power of the purchaser. Similarly, high switching costs from one seller to another, due to technological factors lowers the bargaining power. However, buyers buying in bulk could influence prices. Hence, the bargaining power of buyers is medium (Schmidt, 2014).
Threat of substitute products
Aircrafts are preferred for their high speeds; hence, there are no substitutes for them. Possible alternatives include advanced bullet trains and cars that could present competition to airframe manufacturing in the future. There is a low threat of substitute for aircraft manufacture (Wright, 2016)
Bargaining power of suppliers
Boeing sources the various aircraft parts from different suppliers spread around the world. Due to their large numbers, the suppliers’ bargaining power is low. On the other hand, the aircraft manufacturer can negotiate for the prices since it is buying in bulk. Thus, the suppliers have a low bargaining power (Cederholm, 2014)
Rivalry among competing firms
There is high rivalry among competing firms due to the sluggish industry growth and the high barriers to exit. The high rivalry can also be attributed to the dominance of the industry by two firms, Boeing and Airbus, which are in constant competition for the market share (Cederholm, 2014).
Relative power of unions, governments, special interest groups
Governments have a relatively high influence in aircraft manufacturing firms since the firms are heavily dependent on government subsidies. In the past, the American government has been found culpable of handing improper subsidies to Boeing. Similarly, the European Union offered loans to Airbus at below market rates. Since the unions, governments and special groups are the principal financiers of the firms they wield a relatively high power over them.
The Key factors affecting the Boeing include;
Competition- Boeing is operating in a highly competitive environment. The competition posed by its main rival, the Airbus and other players in the industry forces the company to continuously innovate to increase its market share
A proposed cut in spending on military equipment by the US government
Growing demand in Europe, Asia-Pacific, South America and Africa
Growth in orders and a strong backlog- the company has experienced a growth in orders in the recent past and the trend is projected to continue.
References
Cederholm, T. (2014). External factors that influence the airline industry. Market Realist. Retrieved 19 March 2016, from http://marketrealist.com/2014/09/pestel-framework-analyzes-industrys-external-environment/
Schmidt, A. (2015). A SWOT Analysis of Boeing. Market Realist. Retrieved 19 March 2016, from http://marketrealist.com/2015/04/swot-analysis-boeing/
Why the plane market is unlikely to crash. (2016). The Economist. Retrieved 19 March 2016, from http://www.economist.com/blogs/economist-explains/2016/01/economist-explains-10?zid=293&ah=e50f636873b42369614615ba3c16df4a
Wright, R. (2016). Boeing grapples with production challenges. Financial Times. Retrieved 19 March 2016, from http://www.ft.com/cms/s/0/dfd86e3c-c545-11e5-808f-8231cd71622e.html
Elliott, C. (2013). Storm Warnings: How Do Airlines Know If It's Safe to Fly in Bad Weather?.News.nationalgeographic.com. Retrieved 19 March 2016, from http://news.nationalgeographic.com/news/2013/11/131126-storm-airlines-travel-shutdown-weather-air-safety/
