The general external environment consists of six factors (see Exhibit 1) in assessing how a firm operates. These are the industry trends that cause Boeing to make strategic decisions that have an impact on their business. Some examples of the current external environmental factors affecting companies in the Aerospace and defense industry are discussed as follows. The economic factor consists of issues involving the current recession. During a recession the amount of leisure, optional and business travel decreases significantly. This affects the airlines and ultimately affects Boeing. It affects Boeing because if the airlines are not able to make a profit then they hold off or cancel plane orders. The Socio-cultural trend right now is geared towards being environmentally friendly. Many industries including the aerospace and defense industry is looking for ways to not emit gas or other pollutions to preserve the environment. In fact, Boeing has been working on their latest commercial plane the 787 dream liner. It is said to be "the most fuel efficient and world's first commercial plane made with composite materials". (Wikipedia 2010) The technological factor addresses concerns with being able to innovate using the best technology found through advanced research and development. Currently, Boeing is looking for technological changes to create a competitive edge for their newest project, the 787 dream liner, to outperform their leading competitor, Airbus. Legal and Political factors being discussed is Boeing not being able to sell to all countries and the possibility of some of the U.S. military programs being cancelled. "Boeing is looking to sell aircraft to Taiwan and china does not like the idea of this happening since they are the largest stakeholder to both the United States and Boeing (Cohan 2010)". Recently U.S. defense secretary Robert Gates announced that "the U.S. is proposing to revise spending on military equipment" (Shalal-Esa 2010).
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The demographic trends coincide with the technology factor because buying patterns of travelers establish the need for these technological changes in the industry. Customers that spend money for the first class amenities or that rather purchase a plane ticket with an airline that offers more, are the reason why airlines request these changes from Boeing. Also, Boeing has very demanding customers. The airlines are the customers in Boeing's industry and if they do not get what they ask for they look elsewhere to satisfy those needs. Firms need to ensure that they adjust to these trends before the change occurs. Failing to react in time and ignoring these factors could cause a firm to lose out to other firms that have already adjusted. Understanding and achieving success in the external environment will definitely make Boeing an idolized corporate leader among their customers and other competitors. The aerospace and defense industry is the major industry Boeing is apart of. In this industry there are many changes in how it operates. The consumers who Boeing and the industry are trying to sell to are the large airlines who are still trying to recover from the 9/11 attacks and a slumping economy. You have to be able sell planes as cheap as possible without sacrificing quality and keeping costs low. The current industry dynamics are addressed in the general external factors above. All of these are a concern for the industry and some companies are adjusting to these changes and some are not. If a company does not make the necessary changes and ignore these new trends then they may find themselves not being able to attain profitable returns. Those firms who do make changes will have a competitive advantage and will be profitable, compared to their competitors.
The opportunities in the aerospace and defense industry are Global expansion, Technological advances, and the growing demand in the commercial airplane market. The aerospace and defense industry is not an industry that can be entered easily. As a result the ability to expand in the United States and globally presents itself as an opportunity. One of the ways they have expanded is by taking over existing companies. Boeing has acquired several companies in recent years but the two major acquisitions are McDonnell Douglas and North American Aviation. Before being acquiring by Boeing, McDonnell Douglas which was dubbed Boeing's archrival, manufactured commercial airplanes since 1967. Their other major acquisition, North American Aviation manufactured military aircraft and had been doing so since 1928. (Wikipedia 2010)
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In the continuing effort of expanding they have been trying to expand by increasing their presence in other countries such as china, and India. According to the Economic Times "has set up an research and technology (R&T) centre in Bangalore, which now coordinates the work of more than 1,500 engineers working on projects across various programs (Ghosh 2010).
Technological advances are an opportunity for a company that is in such a dynamic industry. Being technologically innovative is what will make the product better and more efficient. As aforementioned, an opportunity is for Boeing is new and innovative technology. Boeing is currently working on the 787 dream liner. According to Wikipedia, the 787 dream liner is "the company's most fuel-efficient airliner and the world's first major airliner to use composite materials for its construction. The aircraft will allow airlines to open new routes to cities not previously served. Boeing claims the 787 will be near to 20% more fuel-efficient than older models". Also "it will allow for Engine interchangeability this makes the 787 a more flexible asset to airlines, allowing them to change easily from one manufacturer's engine to the other's if required". (Wikipedia 2010) As stated by Wikipedia, "Other features of the 787 are that the cabin windows are larger with a higher eye level, so passengers can maintain a view of the horizon. Also, the windows are "auto-dimming" which reduces cabin glare while maintaining transparency. Standard cabin lighting uses (LED)in three colors instead of fluorescent tubes allowing the aircraft to be entirely 'bulbless' and have 128 color combinations. (Wikipedia 2010)
Boeing as mentioned before also manufactures Defense aircraft. In their corporate website it states that the cutting edge technology on the military aircraft named airborne laser test bed which is "A military airplane armed with a high-power laser. it detects a missile seconds after launch from an offshore vessel. The aircraft tracks the target and measures atmospheric conditions. It then fires the laser, zapping the missile out of the sky at the speed of light". (Boeing Website)
Another opportunity is the fact that commercial airplane market is expected to expand. According to data monitor the commercial airplane market is expected to grow $2.8 trillion. Also, the number of planes that airline carriers have is expected to double by the end of 2011.The passenger traffic would grow at 4.8% annually. The largest market will be the Asia-pacific region. ( Data Monitor)
Several threats in the aerospace and defense industry are military defense, current economic conditions, industry competition and unpredictable global events. Boeing receives a substantial amount of funding from the US government and if they were to lose some of this funding it will definitely be a threat to the future of the company. Stated In an article written on Reuters' news site, "US defense secretary Robert Gates proposed the realigning of defense spending to better address unconventional threats". In the proposal Gates calls for the "cancellation of $87 billion in ground vehicles being developed for the Army's Future Combat Systems modernization program, as well as a $1.4 billion cut in funding for missile defense, and the halt in production of the Lockheed Martin Corp (LMT.N) F-22 fighter jet, one-third of which is built by Boeing"(). Jim Albaugh told Reuters in an interview, "International sales should also help offset any decline in U.S. defense spending". (Shalal-Esa 2010)
The current economic conditions are threatening to Boeing. The ongoing recession impacts Boeing because if the airlines are not able to keep prices down due to fuel costs. People who usually take several trips on vacations or for holidays either stop taking the trips or decide to take other means of transportation. Business travel also decreases as companies are tightening their belt to save on costs. If this happens then airlines usually hold off or cancel ordering new planes and as a result loses revenue.
The economic downturn is the reason why Boeing laid was forced to lay off employees as a means to cut costs. According to Bloomberg Business week "In 2009 Airplane maker Boeing Co. cut about 4,500 jobs this year due to the global economic slowdown. Many of the cuts will be in areas directly associated with aircraft production". (Weber 2009)
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Their competitors pose as a threat because they take a big chunk of market share. United Airlines and American Airlines usually buy an equal amount of planes from Airbus and Boeing. Airbus which is a European based manufacturer is their main competitor. Many of the large airlines have already ordered as much Airbus A380's as they did the 787 dreamliner's. The A380 is Airbus' version of the dream liner. The difference is that the Airbus A380 has two decks each with dual isles and a total carrying capacity of over 520 passengers. The A380 family is designed for longer trips and more passengers, seeking fuel-conservation by consolidation. (Wikipedia 2010). Bombardier which is out of Montreal, Canada is a threat because they compete with Boeing by making the regional planes. They make commercial planes for 100 to- 150 passengers which are similar to the American eagle planes. Embraer which is from Brazil is very similar to bombardier in that they both compete with Boeing in the regional jet segment. It makes larger planes and defense aircraft but mostly commercial.
There are certain events that can happen that are threats and are usually unexpected. These are in a way an indirect threat. They are a threat because these events are big enough to cause the airlines to suffer. United Airlines and American Airlines still have not recovered from 9/11 and had to be bailed out by the U.S. government. Epidemics such as the swine flu slowed travel but were not as big as 9/11.The recent volcano in Iceland caused hundreds of flight cancellations. Their biggest customers are airlines across the world and if the airlines fail then Boeing cannot ensure that they can stay afloat. Income from producing and selling military aircraft would still be coming in but it will not be as much as what they would lose from commercial customers.
Forces Model Analyzed
Michael Porters Five Forces Model will be used to discuss Boeing's environment (see Exhibit 2). The threat of new entrants to compete against Boeing is difficult. Boeing has been in operation for decades and is in an industry that is very costly to enter. Boeing has mastered high production differentiation, has decades of experience, and customer loyalty because of their name, and reputation. The bargaining power of suppliers does not really threaten their operations. Boeing has been known to have very good relationships with their suppliers. In fact they were recently given awards by Boeing as a result of being such good partner-suppliers. The bargaining power of buyers is where Boeing is most powerful. Boeing purchases in bulk and in millions of dollars at a time so this is a huge plus for the supplier since the industry does not have too many other buyers. The threat of substitute products for Boeing can be a difficult task. A substitute product can be the train, the bus, or travelling by car. However this is an indirect threat. Boeing's customers are the airlines but the airlines' customers are the travelers. In some cases these substitute products are not even possible. Someone who is travelling from Chicago to Beijing cannot take the bus or train. Boeing's customers which are governments and airlines also cannot really rely on substitute products. Companies who fly planes cannot buy trains since this will not technically serve the same purpose as the plane. As far as governments, they cannot buy military aircraft from upstart manufacturers if the safety of the country is at stake. The threat of rivalry amongst their competitors includes Airbus, Embraer, and Embardier. There are many other upstart manufacturers but the previous three are the biggest competitors. This poses as a threat because their competitors can take market share from Boeing if they are not able to compete efficiently and effectively.