VS.

QUESTION

1

WHAT ARE THE DRIVERS OF VALUE CREATION AND VALUE CAPTURE IN THE AIRLINE MANUFACTURING INDUSTRY ?

Airline Manufacturing IndustryMarket Share of Manufacturers in 1992

7% 20% 57% 16%

Boeing Airbus McDonnel Douglas Others

The global aviation industry was sized at $100 billion as of 1992 Largest Segment : ($40 billion in 1992)Manufacture and Sales of large commercial aircrafts The 3 main players : Boeing Airbus McDonnel Douglas

Value Creation and Value Captured

Key drivers for Value Creation Relationships with Suppliers : Impact the Cost to Firm and WTP Development of new planes required huge investment and technical expertise Some suppliers with long standing arrangements bore 10% -20% of these costs ( Boeing)

Usage of better technologies : Impact the WTP Each new aircraft demanded heavy investment in specific parts, tools, training of personnel Manufacturers had to consider the amount of new technology that is needed by the airlines Fuel efficient planes in demand Too little : Model would turn obsolete and impact the WTP Too Much : Plane would lose commonality with Siblings

Contd.. Relationships with customers : Impact the WTP Sales people dedicated to individual accounts Typical delivery time : 2-5 years from the date of order Functions : Building Contacts, Keeping track of fleet requirements, Monitoring shifts of executive power

Government policies : Impact the Cost to the Firm High value deals are escalated to Government for clearance Regulations, Fuel Prices, Subsidies, Indirect support etc.

Demand for commercial aircrafts (Pull) : Impact the WTP General market conditions : Recession, Boom Passenger growth Profitability of the airline industry Infrastructure of airports and air traffic control

Key drivers for Value Captured Usage of better technologies : Impact the Cost to Firm Automatic riveter; Super Guppies : Airbus Airbus targeted the completion of manufacturing the aircrafts in 9 months from the existing 2 years

Competition : Pricing strategies : Impact the Price Paid Walk away lease plan, Deferred Seat Plan : Airbus Hence, each plane was sold at $30 million instead of $ 41 million

Government Policies : Impact the Cost to Firm Supplier Relationships : Impact the Cost to the Firm

Conclusion Value Creation Supplier Relationships Technology Relationship with Customers Government Polices Demand for commercial aircrafts

Value Captured Supplier Relationships Government Polices Competition Government Policy Supplier Relationship

QUESTION

2

WHICH IS DOING BETTER IN 1992, BOEING OR AIRBUS?

Boeing vs AirbusTotal Sales30000

25000 22271 20000 20540

24084 20568

15000 13705 10000 7702 5000 4294 4683 7647 8437

Boeing Airbus

0 1989 1990 1991 1992 1993

Boeing vs AirbusBoeing 767 vs Airbus A-300&310 ( 220 + Passenger)4500 4000 3734 3500 3000 2500 2000 1500 1000 500 0 1989 1990 1991 1992 1993 2164 1987 2000 2432 2589 2542 Boeing 767 Airbus A-310 & A-300 3420 3384 3982

Boeing vs AirbusBoeing 737 vs Airbus A-320 ( 140 + Passenger)7000 6461 6000 6036

5000 4596 4000 3697 3000 2233 1740 1000

4820

4608

4716

Boeing 737 3021 Airbus A-320

2000

0 1989 1990 1991 1992 1993

Customers

V-Net model

Long term relationship Market leader Economies of scale

PartnersInternational contacts

RivalsBoeingLate entrants Less bargain Fewer contacts No EOS

SuppliersLong term relationship Economies of scale

Long V-Netrelationship model Customers Market leader Technology Economies of scale

Customers

International More reliability contacts on Government

Partners Partners

RivalsBoeing AirbusLate entrants Boeing Market leader Less bargain Fewer pockets Deep contacts BetterEOS No reach

SuppliersLong relationship 500 + Industrial Economies of Partners scale

CustomersTechnology

Rivals PartnersMore reliability on Government

Airbus

Boeing Market leader Deep pockets Better reach

SuppliersFewer Better bargaining power

Conclusion

Boeing is in a better competitive position than Airbus, in 1992

QUESTION

3

WHAT WILL BE THE VALUE OF THE NEW VLCT TO BOTH THE COMPANIES?

Value of VLCT to either company Common pool of clients Greater EoS Douglas would be eliminated as competition and entry barriers for future entrants would be very high Key airports are congested VLCT might be the solution of the future in an industry of a lead time in years.

Co-Development: Possibility Lack of trust amongst traditional competitors with history of cannibalization Airbus might see this as Boeing s way of infiltrating Airbus Scope for Opportunism: Airbus s fuselage technology would cease to be an edge Boeing has the clout to develop advantage and then defect

To produce or not to produce Airbus and Boeing can choose to produce If both produce VLCT s to maintain market shares, they have to price competitively and hence would incur losses on the immense R&D cost If only one produces, there is clear competitive advantage, but according to game theory, reactive judgment of competitor would force copy-cat behavior

Subsidies: Balance tippler If Europe offers better subsidies than the US, Airbus and Boeing both developing VLCTs, Airbus can go for Cost Leadership in the VLCT market segment. If US government decides to reinstate subsidies in retaliation, then both developing would entail loss for both companies.

Co-operation: Value Addition Greater concentration in FI w.r.t Suppliers Greater bargaining power as a near-monopolistic leader Risk of R&D cost would be shared Airbus s technological edge + Boeing s collaborative process Cost effective practices Possibility of arbitrage benefits due to differences in financial climate of US and Europe

QUESTION

4

IF YOU WERE AIRBUS, HOW WOULD YOU RESPOND TO BOEING? SHOULD AIRBUS COLLABORATE WITH BOEING IN THE DEVELOPMENT OF THE VLCT?

How strategic alliance creates value? Risk/ Cost Sharing A full scale new development could cost anywhere from $5 billion to $20 billion depending on the size and level of technology. Time taken would range from 4 to 10 years A firm in a strategic alliance is also subject to the risk of being cheated by its partner (apart from the usual risks).

The VLCT GameAirbus Boeing Develop Super Jumbo Develop Super Jumbo Don t Develop Super Jumbo

High Risk (Boeing Risk/loss (market too loses 400+ monopoly, small, dominance market too small) Boeing) Profit/loss (400+ monopoly unchallenged)

Don t Develop Loss/ risk (dominance Super Jumbo Airbus, market too small)

Boeing vs. Airbus Boeing's payoff for leaving the new market untapped was positive, Airbus's payoff was negative. Boeing's best interest is slow development of other jets in the 400-plus category, while Airbus's interest is to end Boeing's jumbo monopoly Bringing a new jet with 400-plus seats to the market is always a risky enterprise but, game theory tells us, it is far riskier for Boeing than for Airbus. The best strategy for Airbus is to develop a super jumbo by itself.

Scenario 3 Instead of developing a new VLCT, Boeing should acquire McDonnell Douglas the second largest player. This would increase Boeing s market share substantially. Boeing already has its 400-plus category in the market, so it should focus on acquiring the competitor and then, slowly develop VLCT.

Thank You