Airframer Industry - Five Forces

Hi,

Five Force is a way of analyzing an industry. Any strategic manager creating a strategy for his/her company has to analyze the environment/industry the organization is in. This will help them assess how the industry is going to change in the foreseeable future and how well to respond to them.

According to Porter, the five forces affecting any industry are:
* Threat from New Entrants
* Threat from Substitutes
* Threat of Suppliers' Bargaining Power
* Threat of Buyers' Bargaining Power
* Threat of competitor(s)

Lets analyze these from an Airframer (Aircraft Manufacturer) Industries' point of view.

* Threat from New Entrants: Well the fact that Aircraft Manufacturing is such a capital intensive industry itself brings the threat to a very low level. Also the Brand Loyalty with the established players would be so strong that they would have to overspend on brand building measures thus reducing the efficiency of the financial spending. Moreover the 2 companies having duopoly in this industry namely Boeing and Airbus are being backed by US and EU respectively. So the threat of another player from these regions emerging is nullified. But having that fact spelled out, it opens a very large threat. The largest growth in Airline Industry is seen in Asian Countries and the fact that India and China are emerging as a formidable economy opens a large opportunity for another regional manufacturer. Last year china announced that they would manufacture a large commercial jet (http://news.bbc.co.uk/2/hi/business/6465763.stm). Looking at all these points we can conclude that the threat of new entrants to this industry, at least in the near future (10 years) is pretty low. The threat level could be 3/10.

*Threat from Substitutes: Well substitutes with respect to the whole Airframer industry are: High Speed Trains and High Speed Ships. Well road transport can really not be such a large threat for a reason that it is comparatively very slow. But the advantages with Airplane than with Trains and Ships are so high that the price factor for the substitutes are nullified. Again, we can conclude the threat from Substitutes is very low and could be scored at 1/10.

*Threat from Suppliers' Bargaining Power: There are a lot of suppliers for an Airframer Industry, from engines to the material used to build bodies to the material used in wiring the on board entertainment systems! The threat of Forward integration by the suppliers is so low because of the intensive capital investments. Also the Brand Loyalty to the established players. The Airframer industry is growing so much so that both Boeing and Airbus in their 20 year prediction have predicted that the world will require 25,000+ new aircrafts. This includes the replacements of the existing planes which will have to be retired from service. Hence the Airframers are doing bulk business which reduces the suppliers bargaining power. We can conclude that the threat from Suppliers Bargaining Power is low and be scored at 2/10.

*Threat of Buyers' Bargaining Power: The buyers for the Airframer Industry are the various Airline operators (Passenger, Cargo and Private) around the world. Their bargaining power is so much so that, today both Airbus and Boeing have special managers only to take tailoring requests made by their customer/buyers. They have high bargaining powers. A new product or technology's cost is calculated by the predicted sales of that product. So any cancellation of orders by the buyers would mean that the manufacturers are bearing the cost of under priced product. This threat is immense and can be scored at 8.5/10.

*Threat of competitors: The Airframer Industry is a duopoly, which means there are 2 major players namely Boeing and Airbus. The equations in this industry is almost ZERO sum. That means, the loss of one is the gain of the other. There is fierce competition. They have products targeting each others product lines. There is fierce price competition to gain market share. Governments are involved in legal disputes regarding the two companies. But the demand for aircraft is also increasing. There is room for both players to work in tandem. Both the manufacturers are realizing this and moving to 'Product Differentiation' strategy. This will help both the companies to compete fairly. The threat from competitors is moderate and can be score at 5/10.