Case 32 AIRBUS INDUSTRIE: Coping with a Giant CompetitorI. CASE ABSTRACT Airbus Industrie, a consortium of businesses from Germany, Spain, Britain, and France, is a newcomer to the commercial jet transport industry, having been formed in 1970. However, it initially selected a narrow aircraft niche which was unfilled at the time by either Boeing, McDonnell Douglas, or Lockheed Aircraft: a wide-body, twin engine passenger plane to seat 250 people. Airlines around the world purchased this fuel-efficient, medium-range Airbus A300. Additional aircraft designs were developed to directly compete with Boeing and McDonnell Douglas: the A319/320/321 series and the most recent A330 and A340 "jumbo jets". The battle for market share had been joined. After Bill Boeing formed his company in 1916, it became the world's largest manufacturer of commercial jet aircraft and a benchmark company in the industry. With a broad product line originating with its Boeing 707 through the leviathan Boeing 747-400, Boeing offered a state-ofthe-art aircraft for every size and range capability required by the world's airlines. Airbus was fighting for market share against Boeing and McDonnell Douglas when, in late 1996, Boeing's CEO announced McDonnell Douglas had agreed to be acquired by Boeing for $14 billion. This shook the industry, but most of all Airbus, who now found its two competitors working together to Airbus' disadvantage. A new Airbus strategy was necessary. This case may be utilized in classes in business policy (strategy), international business and/or public policy at the graduate (MBA) level, or with senior undergraduate students. Decision Date: 1997 1996 Turnover: $7,710,000,000 1996 Net Income: $408,000,000
II. CASE ISSUES AND SUBJECTS Aircraft Industry Geopolitical Issues Super-jumbo Jets Boeing's Acquisition of McDonnell Douglas Core Competencies Distinctive Competency Technology Strategies Consortium/Ownership Financial Management Corporate Governance Marketing Strategies Growth Strategies Global Markets Porter's Industry Analysis Issue of Antitrust
Case 32 Airbus Industrie ____________ Copyright 1999 by Thomas L. Wheelen and J. David Hunger. Reprinted by our permission only for the 7th Editions of (1) Strategic Management and Business Policy and (2) Cases in Strategic Management.
III. STEPS COVERED IN STRATEGIC DECISION-MAKING PROCESS (see Figure 1.5 on pages 20 and 21) Strategy Evaluation & Strategy Formulation Implementation ControlReview MBO & Mission 5B Perform ance Corporate Governance Strategic Alternatives 6 Strategic Factors 5A Strategic Posture External Factors 3
Internal Factors 4
O O X O O X O = Emphasized in Case
O X = Covered in Case
IV. CASE OBJECTIVES 1. To discuss the competition between Airbus and Boeing for global airline dominance. To discuss Porter's Industry Analysis in the airline industry with two manufacturers (suppliers) of aircraft and over 200 airlines as customers. To discuss what core competencies Airbus has, if any. To discuss what distinctive competency Airbus has, if any. To discuss the merger of Boeing and McDonnell Douglas. 6. To discuss the benefits and impact on Boeing. To discuss the impact on Airbus.
3. 4. 5.
To discuss what strategies Airbus must develop and implement to become #1. To discuss what strategies Boeing must develop to remain #1.
To discuss the risks to Airbus to develop a super-jumbo jet, and the risks not to develop a super-jumbo jet. To discuss how Airbus can improve its profit situation in the future.
V. SUGGESTED CLASSROOM APPROACHES TO THE CASE 1. The consortium form of organization and management is totally new to the students. Once consortium is explained, the problem is resolved. We suggest the placement of this case in the middle or toward the end of the course. This case works very well as a written individual case analysis or exam. This is an excellent case for a team presentation.
Does not work well for teams larger than four members.
The case author's four teaching objects are cited below. 5. Research the intensity of rivalry in the commercial aircraft industry, where market share is a requirement of profitability. 6. Determine the effects of Airbus Industrie's position in the European Union and how that position might affect the pending acquisition. 7. Evaluate how Boeing has internationally outsourced major airframe components into key countries to facilitate the sale of their product to the international airlines in those countries. 8. Determine what strategy Airbus Industrie might utilize to compete against the merged American companies. 9. SUGGESTION FOR DAILY CLASS PARTICIPATION We have found it is difficult to get quality daily participation from our students. We suggest the following: 1. Have the class members prepare--individually or as a team--(a) EFAS, IFAS, and SFAS or (b) just a SFAS for the assigned case. *We have 1 or 2 individual students of a team bring their EFAS, IFAS, and SFAS or just their SFAS on a transparency. We have found in this 75-minute class that SFAS alone as a transparency works most effectively. 2. We compare the students work with that of the team or individual students making the presentation to the class. *We also discuss how the WEIGHTS and RATING were developed and the Weighted Score for the case under discussion. 3. We ask each student at the beginning of the class to write down his/her Total Weighted Score for the case under discussion and pass it in. *You can use the results to call on students, whose scores seem to be out of line with the case. **It allows for a discussion of the Total Weighted Score as his/her overall evaluation of how the management of the company is managing the companys internal and external environment. ***We ask the students whether they would buy stock in this company. Then the Total Weighted Score seems to have real meaning. VI. DISCUSSION QUESTIONS 1. 2. What are the strengths and weaknesses of Airbus? What are the opportunities and threats facing Airbus?
3. 4. they? 5. it?
What are the strategic factors facing Airbus? Does Airbus have any core competencies? If 'yes,' what are If 'yes, what is
Does Airbus have a distinctive competency?
The case author provided the seven excellent discussion questions and answers. 6. What are the benefits to Boeing? How will Boeing benefit from the acquisition of McDonnell Douglas? Boeing is already a large company, so what are the most important benefits it will receive from a liaison with McDonnell Douglas? Customer loyalty in the purchase of aircraft is quite high, since an airline's flight training, maintenance, and FAA compliance is facilitated by utilizing aircraft of one, rather than multiple, sources of manufacture. During a press conference, McDonnell's CEO stated that in the future a customer who wanted a McDonnell Douglas airplane would be sold one, and one who wanted a Boeing plane would be sold one of those. However, it is clear that these two (previously competitors) will no longer need to compete on the basis of either price or service to fill these customer needs. In addition, different companies in the aircraft industry have experienced major peaks and valleys in workloads, resulting in massive employment swings. At the present time, Boeing's workload exceeds its labor resources, whereas McDonnell Douglas' is just the opposite. The acquisition provides more cost-effective personnel utilization than either company might achieve separately. Finally, Boeing achieved only marginal success in US government contracts (outside the airframe business), whereas McDonnell Douglas has achieved a higher level of success in government contracts than in commercial airframes. The weaknesses of both companies are complemented by the other's areas of strength. 7. What are the benefits to McDonnell Douglas? How will McDonnell Douglas benefit from the acquisition? What does Boeing's ownership offer it that it cannot garner on its own? McDonnell Douglas was starting to suffer from lack of orders. Only a few loyal previous customers were purchasing the MD-11 jumbo jet, and with the defense spending cutbacks of the 1990s, the firm had excess personnel which would certainly have required a costly reduction in force. Industry experts estimated it could remain viable for only two to four years. Boeing's near-immediate use of skilled engineers, scientists, and labor force will preclude this costly downsizing. In addition, Boeing's excellent financial position would allow McDonnell Douglas to undertake a new aerospace program which would be marginal under McDonnell's own balance sheet. 8. What is the impact on Airbus Industrie?
Why is there a difference between competing against the aircraft of two separate companies and competing against them together as one company? What is really changed? Without the acquisition, McDonnell Douglas might have withdrawn from the commercial aircraft market within two to four years, since it lacked the critical mass to be a viable market force. If/when that occurred, McDonnell Douglas' former customers would no longer be able to order replacement MD-80s or MD-11s. Airbus would then have had the opportunity to participate in these replacement aircraft orders. 9. Is there a geopolitical issue of antitrust? Are political organizations, such as the European Union, affecting global business? Absolutely. The geopolitical influence on business is increasing rather than subsiding, especially in such global industries as aerospace. General Electric, manufacturing jet engines primarily in the USA, acquired SNECMA, the French jet engine manufacturer, primarily to have a manufacturing presence in a European Union (E.U.)