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Founded in 1917, Seattle Washington the world's largest aircraft and aerospace manufacturer . the second-largest defense contractor in the world $ 21 billion in revenues (2004) the world's largest civil aircraft manufacturer in terms of value (49 % of orders and 45% of deliveries) 2005 the largest exporter in the world.
AIRBUS
Airbus (S.A.S) was established in 1970 as a European Consortium of French, German, and later Spanish and U.K. companies. In 2001, it became a single integrated company. The European Aeronautic Defence and Space Company (EADS) and U.K. based BAE Systems are the owners of Airbus (80%/20% respectively.)
Industry increasingly defined by two firms Airbus (EU) and Boeing (USA)
Companies rely on government subsidies to help fund R&D costs Contention over amount and types of subsidies each government gives to their aerospace companies led to several WTO complaints
What would it take to attract a new entrant into the global aerospace industry?
Access to substantial funding to cover development costson average $37 million for each aircraft manufactured Management would have to
Love a challenge Be ambivalent towards profits Be a glutton for punishment Be clueless about what they were getting into
Case Framework
Consider a Large Capital Investment and Market Expansion
Competition Market Size, Costs & Benefits Regulatory and Other Issues
Competition
Who is the main competitor? What is the likely competitive response? What is Airbus market appeal? What is Airbus market power?
Boeing
The only competition for VLA (Very Large Aircraft) Reputable provider over the decades Boeing 747: Paragon of wide-body aircraft
Enhancement of 747
Unlikely Response: Could plan a larger and more spacious enhancement of the 747 to compete with A380 Rationale: Boeing previously backed out of a similar project due to lack of customer interest We were starting to spend a lot of money (but) we just did not see customers showing the interest. - Ronald Woodard, Head of Boeing Commercial Airplane Group Projected at $4 billion in 1999
Triggered 1.7% decline in Boeings Stock
Lower Prices
Response: Could cut the price of the 747 and divert sales from the A380 or even deter launch
Drawback: Significant loss of profits Ignores problem of the 747s unappealing older technology compared to the newer A380
Always give attention to how your competitors returns vary under different strategic scenarios; It is important to communicate the commitment to the other firms (for both competition and cooperation); Sunk cost investments can be used to precommit to a certain strategy and, thus, influence competitor response; and Understand what strategic investments are important in your business and how sunk those investments are.
The Payoff Matrix the payoff matrix as the economic profits for each firm in each possible outcome.