When compared to the general environment of aerospace manufacturing, the industry environment often has a direct effect on the firm’s strategic actions. Our textbook discusses Porter’s five forces of competition in most industries. However, in analyzing the Aerospace manufacturing Industry, not only do we cover the five forces model which includes (1) the threat of new entry, (2) the power of suppliers, (3) the power of buyers, (4) product/service substitutes, and (5) the intensity of rivalry among competitors, we are adding the sixth force of another stakeholder group – the Unions.
1.Threat of New Entrants
The aerospace manufacturing industry is very well established. There are only a handful of big players in the industry. Since start-up costs for an aerospace manufacturing company are extremely high, the threat of new entrants is low. A great sum of money must be invested to attain the economies of scale, and it is difficult to enter the market with existing firms already operating on cost and differentiation strategies.
The threat of entry into the commercial aerospace industry at the aircraft or engine manufacturer level is quite low. New airplanes and engines require extremely high investments accompanied with great risk and the inability to get a positive return on that investment for many years. However, the threat of entry at the aircraft or engine manufacturer level is further reduced by several other factors. Aerospace manufacturing has a long learning or experience curve due to its complex assembly and testing operations and its high content of labor performing complicated tasks. Companies can only understand this learning curve after many years of continuous investment in research and development. Companies may require government subsidies, either directly through grants-in-aid or indirectly through military contracts, to enter the industry. It is estimated that one of the leaders in the industry Airbus received over $10 billion from European governments so it could get to a level where the company can survive on its own. Now the worldwide aerospace industry has well-established firms with an abundance of resources to react against any potential entrants.
The barriers to entry are less for potential manufacturers of components or subsystems, but they are still quite high in comparison to many industries. During the past decade the aircraft and engine manufacturers have been drastically reducing the number of suppliers, which makes it even more difficult to enter the industry even as a manufacturer of components or subsystems.
2.Bargaining Power of Suppliers
Suppliers can affect an industry through their ability to raise prices or reduce the quality of purchased goods or services. The bargaining power of aerospace suppliers is really not that strong. There are several suppliers to choose from and all the major suppliers are forced to compete with each other for market share. When buyers in the aerospace manufacturing industry are looking to make a purchase it is indefinitely going to be an expensive purchase and price will be a key factor in the buyer’s decision. But there are exceptions where a supplier may possess key technologies that another firm does not. In general, the prime contractors in the aerospace industry have several suppliers to choose from.
3.Bargaining Power of Buyers
Bargaining power for buyers is fairly high in the aerospace manufacturing industry. Airline companies often force cutthroat competition between the aircraft manufacturers, Boeing and Airbus. Airlines ordering a large number of planes like countries like China, who combines orders from state-run airlines, can press for astonishing discounts from the prime contractors. These orders are a relatively large percentage of the aerospace prime contractors' total sales, so buyers are in a valuable position to demand price reductions. The switching costs for aircraft and engines are very low, which increases the buyers' power. Airline pilots and mechanics can quickly be trained on other planes and engines. The huge losses of most airlines in the early 1990s made them more desperate to reduce costs, which had a direct impact on the airplane and engine prices demanded by the airlines.
4.Threat of Substitute Products/Services
Prime contractors in the commercial aerospace industry like Boeing, an airframe manufacturer and Pratt & Whitney, an engine manufacturer face almost no threats of substitute products because of an airplane's uniqueness in speed and ability to travel over water. For short distances over land, airplanes may sometimes compete against automobiles and trains.
The threat of substitute products exists at the part/component level and is moderately high in the aerospace industry. For example, new materials and /or new technology can make obsolete the materials previously in common use in the construction of airplanes and engines. Part of the industry involves changing with the latest and greatest technological advances.
For example long ago, towards the end of the 1920s, spruce was displaced in favor of duralumin. After the Second World War, titanium displaced some uses of aluminum and medium strength steels and more recently carbon composites have disrupted the balance yet again. Apart from the possibility of resurgence in the use of natural wood as the ultimate in sustainable manufacturing of aero structures, this leaves the three major material categories of aluminum, titanium and carbon still trying to achieve an optimum balance. Changes like these are always being made to keep current and competitive within the industry.
According to Porter, intense rivalry is related to the presence of several factors, including; the number of competitors, rate of industry growth, product or service characteristics, amount of fixed costs, capacity, height of exit barriers, and diversity of rivals. Although the aerospace industry has only a limited number of prime contractors, competition is fierce for the reasons discussed above. Aerospace firms desperately seek to win large orders from airlines to try to recover their high fixed costs and their large investments required to develop new aircraft and engines. The industry's prime contractors are equally balanced and have very little differentiation in their product lines, which increases even more the intensity of the competition.