The commercial aviation is largely dominated by two companies, that is, Boeing and Airbus. The two companies have been competing for the global market since their inception. The companies have maintained a competitive advantage over each other through innovation and technology. For instance, every time one of the companies comes up with a new aircraft model, the other one follows by launching a rival model. This paper analyzes Boeing and the factors that have given it a competitive advantage over its rivals, and the future challenges the company faces.
Final Case Analysis: Boeing
William Boeing founded the Boeing Company in Seattle in the year 1916. The founder took a huge risk when he decided to establish a company that manufactured large planes that could be purchased by the military as air tankers and by commercial airlines as passenger jets. The first planes Boeing manufactured were known as Dash 80 planes, and had four jet engines with swept-back wings (Hill, Schilling, & Jones, 2015-2017). The company invested 16 million dollars in the initial venture that amounted to two-thirds of the profits that the company made in the years after the First World War. The Dash aircraft came in 2 models that included the Boeing 707 and the KC-135; and the 707 was the pioneering successful commercial airline (Hill, Schilling, & Jones, 2015-2017).
After the 707, Boeing manufactured other jetliners that were equally successful and they included the 727 produced in 1962 and the 737 manufactured in 1967. However, the airliner that established Boeing as a successful brand was the 737 jumbo jets that were considered a high-risk venture. The aircraft was created in response to the desire by the Pan American airline to own commercial jests with a carrying capacity of 400 passengers, and that could fly for 500 miles (Hill, Schilling, & Jones, 2015-2017). The airline needed the jets to meet the growing demand for transcontinental services. Boeing spent 400 million dollars in developing the 737, which was a big financial burden for the financial resources of the company. In order to make a profit, the company projected that it had to sell 400 units of 737 (Hill, Schilling, & Jones, 2015-2017).
The competition from companies such as McDonnel Douglas and Lockheed that were developing jumbo jets with a carrying capacity of 250 passenger further complicated things for Boeing. The next commercial jet developed by Boeing was the 777, which was a two-engine aircraft that could fly for 800 miles with a seating capacity of 400 passengers. The aircraft was produced in 1990, and was seen as a response to the competition by Airbus that had manufactured A330 and A340 aircrafts that were successful. Boeing spent an estimated 5 billion dollars in developing the 777 (Hill, Schilling, & Jones, 2015-2017).
In the last 30 years, Boeing and its main competitor Airbus have accused each other of unfair benefits from the government. For instance, up to 2001, Airbus was functioning as a conglomerate of four aircraft manufactures in Europe, that is, Britain with a stake of 20 percent, Germany with a stake of 37.9 percent, France with a stake of 37.9 percent, and Spain with 4.2 percent. Boeing, in the 1980s and early 1990s accused Airbus of benefiting from subsidies from the governments of the aforementioned countries (Hill, Schilling, & Jones, 2015-2017). A study done by the United State Department of Commerce indicated that Airbus was awarded up to 13.5 billion dollars as subsidies between the year 1970 and 1990. Most of the subsidies were in the form of tax breaks and loans advanced at rates that were below the bank rates (Hill, Schilling, & Jones, 2015-2017).
The U.S governments and the countries that owned Airbus in the E.U reached an agreement that saw Airbus repay the loans it obtained from the government with an interest rate of 17 percent. However, trade disputes reemerged in 2004 when Airbus was launching its first version of the A350 as a competition to Boeing’s 787 (Hill, Schilling, & Jones, 2015-2017). Airbus had announced that it would apply for an aid amounting to 1.7 billion dollars to assist in the launching of the aircraft. The U.S considered the aid too much, and this made the U.S to issue a statement that reminded Airbus about the 1992 agreement on subsidies that nullified the practice. Airbus responded by accusing Boeing of receiving huge subsidies amounting to 12 billion dollars from NASA (Hill, Schilling, & Jones, 2015-2017).
In 2005, both the EU and the U.S government signed an agreement that would stop direct subsidies of aircraft manufacturers. Nevertheless, by May 2005 reports indicated that Airbus had applied for subsidies from the government to assist with the launching of the A350, and the British government had agreed to give 700 million dollars to help Paris Air Show by June 2005 (Hill, Schilling, & Jones, 2015-2017). The EU agreed to reduce the aid that it would give for the launch of A350 by 30 percent but the U.S government was still dissatisfied. The U.S government decided to file a case with the World trade Organization requesting the UN agency to help in solving the subsidy dispute (Hill, Schilling, & Jones, 2015-2017).
An Internal Analysis
One of the strengths of Boeing that gave the company a competitive advantage was the adoption of the lean production system used by Toyota in manufacturing aircrafts. Initially, Boeing has a weakness of producing planes parts in large volume, and then storing them in a warehouse until there was demand (Hill, Schilling, & Jones, 2015-2017). After visiting the Toyota plant, engineers realized that they were tying too much of company’s resources in inventory that did not add too much value. In addition, they realized that the specialized machines they were using utilized too much space and remained idle for long periods. This made engineers to start thinking of ways they could use to modify the equipment in order to reduce waste (Hill, Schilling, & Jones, 2015-2017).
Consequently, in 2001 Boeing established a moving assembly line in one of its plants in Seattle that manufactured 737. This system ensured that plane parts only arrived when they were needed, and workers could only install the required parts. This production plan did away with looking for tools when needed and expensive crane lifts because the tools were delivered to the workers instead of having workers look for them (Hill, Schilling, & Jones, 2015-2017). The new production system saved approximately 20 to 45 minutes per lift. In addition, the moving lines could be halted whenever there was need. The system proved very effective and by 2005, the assembly time that was needed for the 737 had been reduced from 22 days to 11 days. The time workers spent to process inventory had also been lowered by 55 percent, and the time for storing inventory by 59 percent (Hill, Schilling, & Jones, 2015-2017).
The Current Business Strategy
Towards the end of 1990s and early 2000, Boeing was faced with several ethical and production problems, which ruined the reputation of the company and led to decrease in profits. To complicate the issue, the main rival Airbus was gaining the market share, and this was evident in the fact that from 2001 to 2005 European aircraft manufacturers were receiving more orders compared to Boeing (Hill, Schilling, & Jones, 2015-2017). The company started to gain advantage over its competitors in 2003, with the launch of the 787, which was a next generation aircraft. This aircraft was mainly built using carbon -fiber composite, and it became the most fuel-efficient aircraft in the world. The aircraft was estimated to be consuming 20 percent less fuel compared to older models (Hill, Schilling, & Jones, 2015-2017).
The 787 emerged as one of the most demanded aircrafts receiving more orders. The 787 and the narrow-bodied jet made Boeing to recapture the lost market, and the company became the leader in orders for new commercial aircrafts. Additionally, in 2006 the main rival Airbus was facing production problems and poor demand for its new aircraft A380 super-jumbo. Airbus also released its rival to Boeing’s 787, the A350 to the market too late; the A350 was launched in 2012 while the 787 entered the market in 2008. This gave Boeing a significant lead (Hill, Schilling, & Jones, 2015-2017).
The Major Issue Facing the Company
One of the major issues facing the company is the development of engines that are more fuel-efficient, for example, the Pratt & Whitney developed engines that improved fuel efficiency by 10 to 15 percent. Airlines are in a constant demand for engines that are fuel-efficient. A second challenge facing Boeing is the entrance of several companies in the market that produce narrow-bodied aircrafts. For instance, the Bombardier in Canada has developed an aircraft with a carrying capacity of 110 to 150 passengers that extensively utilizes composite to lower weight. This is projected to reduce the operating cost for airlines by approximately 15 percent compared to the 737 (Hill, Schilling, & Jones, 2015-2017).
In order to address the above challenges, Boeing will have to come up with a redesign of 737 that uses new engine technologies. This is the most viable option for Boeing because some of its customers such as the South-west airline are already demanding for a new version of the 737 that would match the capabilities of the A320neo. Boeing will have to implement its 737 MAX program quickly or it risks losing customers as somehave already threatened that they will order from Airbus (Hill, Schilling, & Jones, 2015-2017).
Summary and Conclusion
Boeing has come a long way since its inception in 1916, and developed to be one of the leading aircraft manufacturers in the world. The company has also successfully dealt with the challenges that it had faced to enable it remain profitable in the market. For example, the adoption of the assembly line production model from Toyota increased productivity and profits for the company. However, currently the main challenge the company is faced with are more competitors and better fuel-efficient engines from the competitors.
Hill, C.W.L., Schilling, M.A., & Jones, G.R. (2015-2017). Strategic Management an Integrated Approach, 12th edition, Cengage Learning, Boston, MA.