The Boeing Corporation is the leader in the industry of aerospace. Moreover, it is known for the manufacture of military and commercial airplanes as well as satellites, missile defense, and launch systems. Therefore, it is the biggest manufacturer of both commercial and military planes. The corporation has five major divisions: Global services, military, business services and capital Corporation, network and space systems. However, its primary objective is to lead the industry continuously while creating new innovative aircraft to fulfill the growing needs of the customers.
On the other hand, the Lockheed Martin Corporation is known for its ability in research, design, manufacturing, and integration of systems of technologies. Similar to Boeing, Lockheed has four divisions: electronic and information systems, global services, space, and aeronautic systems. However, this corporation is dealing mostly with the government of the United States. Its main goal is to make improvements to the world security for its clients. Consequently, all products and services of Lockheed are made to act upon the achievement of the above aim. This paper will analyze the risk areas for Boeing while acquiring Lockheed Corporation.
Threat of new entrance
The manufacturing industry of aerospace is well established with few but big players. Since the cost of the acquisition of an aerospace manufacturing company like Lockheed is very high, Boeing will experience a low threat for the new entrance. However, the countless sum of money has to be invested by the parent company, Boeing to achieve the economies of scale. It is risky to enter the market with an existing company that has operated on cost and differentiation strategies like Lockheed. Additionally, the threat of entering into the commercial airspace industry particularly the level of engine manufacturing is low.
The parent company should know that acquiring new airplane companies such as Lockheed need an extreme investment that is accompanied with great risk and the inability to attain a positive return on such investment for several years. On the other hand, the threat of entering at the level of aircraft manufacturer is reduced by many other factors. This is because the industry has a long learning curve as a result of its complexity during assembling and testing operations, and the high content of the workers that perform some complicated duties. Therefore, Boeing will only understand this experience curve after many years of constant investment in research and development. It may be forced to look for grants from the government, and military contracts to acquire Lockheed successfully.
Bargaining Power of Suppliers
The suppliers of Lockheed Corporation may influence the process of the acquisition either through the ability to raise prices or reduce the quality of goods and services that are purchased. However, the bargaining power of the suppliers in aerospace is not always strong because there are some who can make a selection. Similarly, all key suppliers are forced to offer completion with each other for the same market share. Therefore, when buyers in the aerospace manufacturing industry such as Boeing are looking to make any acquisition, it will be an expensive purchase and the price will be the main factor in the decision of the buyer. However, as a buyer, Boeing, may possess major technologies that Lockheed do not have. Thereby, the Boeing will choose from several contractors within the industry.
The suppliers’ power is high in the aerospace industry, and Boeing has completely lost the effective control over its suppliers. This has been illustrated by the delay of the 787 Dreamliner in 2008 (Collins, 2013). Moreover, Boeing has blamed its suppliers in several occasions in the past for delays while delivering the commercial planes. In case Boeing expands the capacity of its products in future, there may be some issues for the corporation regarding the loss of bargaining power. However, it may be assumed that the bargaining power will increase significantly as the company undergoes acquisition. But the power of the suppliers is somehow balanced because Boeing is always entering into separate negotiations with the suppliers of the engine to determine the engine choice for its planes. Airplanes are usually designed for more than one type of engine, and it requires fuel efficiencies and increased reliability. Therefore, Boeing should look for large body suppliers to enter into joint development plans.
Bargaining Power of Buyers
The bargaining power of the buyers is always high in the aerospace manufacturing business. Consequently, the airline firms such as Boeing are forced to cutthroat competition among the manufacturers of aircraft. Boeing Airlines are known for large orders of planes, and it combines such orders to state-run airlines. This will press the astonishing discounts from the major contractors. Therefore, buyers will be in a valuable place to demand price predictions during the acquisition. The switching costs for the planes and engines are low, and this will increase the power of the buyers. While acquiring the Lockheed, Boeing may experience huge losses on most airlines, and this might make them be more desperate and reduce costs, a factor that has a direct influence on the airplane and the prices demanded by the airlines.
Intensity of Rivalry among Competitors
According to Michael Porter, the extreme rivalry is related to the number of competitors, the rate at which the industry is growing, characteristics of products and services, the amount of fixed costs, the exit barriers, and the diversity of the rivals (Porter, 2008). In the aerospace industry, there is a limited number of contractors with fierce competition for the above reasons. The Boeing Corporation is desperately seeking to get large orders from the airline industry to recover its increasing fixed costs, and huge investments that are needed to improve new aircrafts and engines. The process of acquisition is balanced with little differentiation in the product lines that increases the intensity of competition.
System crash risks
The perception of risk within the parent company is personal in the sense that it is always facilitated by human psychology that depends on a favorable balance of risk and reward. There are high chances of fear for flying as compared to the fear of driving. Since the plane crashes are more severe that motor vehicle crashes, then it is simple to form a skewed perception of the perspective risks that may be involved in the acquisition.
Corporate sabotage
The investors that may consider the aerospace industry should make careful consideration on the challenges as well as the opportunities that may be presented by the industry. Moreover, the aerospace companies such as Boeing are always associated with the sector of defense; therefore, it faces similar challenges. Many investors always choose to minimize risk by spreading their investment across multiple firms with the ETF investments. Since the government is the key corporate investor in this sector, many corporations will rely on the state contracts, and they will be vulnerable to cut in the spending of the government. Due to the sensitive nature of competition and defense in Boeing Corporation, mergers and acquisition will be difficult and costly. By reducing the corporate costs, it will be more challenging for the parent company in this sector than any other industry.
Terror attacks risk
Planes are at risk as they are entering the airport due to some electronic systems. For instance, they begin to share information, and this will lead to several problems. Moreover, some fliers may be nervous about the smuggling explosives of terrorists. Similarly, the cyber-crime attacks are also becoming the most significant threat to the aircraft passengers. The Boeing cyber security scare of 2008 where the 787 Dreamliner passenger jet got a serious weakness on its onboard computer networks that were meant to allow the passengers to take control of their plane (Collins, 2013). However, Boeing claimed that such issues had been fixed before the issue of the official report. Consequently, the terror attack threats may make the parent company to limit the acquisition another company in the same industry.
References
Collins, N. (2013). Cyber terrorism is 'biggest threat to aircraft'. Telegraph.co.uk. Retrieved 28 May 2016, from http://www.telegraph.co.uk/finance/newsbysector/transport/10526620/Cyber-terrorism-is-biggest-threat-to-aircraft.html
Porter, M. (2008). The Competitive Forces that Shapes Strategy of a company. Harvard Business Review.
