Competition in a Mixed Duopoly

Competition in a Mixed Duopoly Market for Boeing vs. Airbus

The global airline manufacturing industry is one of the most capital-intensive, highly competitive there is. Compounding how competitive this industry is, there is increasing pressure on its product life cycles to stay in step with consumers' changing needs and greater pressure on global supply chains to keep costs down. These market factors taken together are fueling a mixed duopoly market that has in recent years begun to fragment as regional and commuter jets including those produced by Bombardier are predicted to become the majority of jet demand by 2012 (Posey, 2008). The strategy all manufacturers in this industry are relying on is enhancing their lean manufacturing capabilities and beginning new initiatives to attain greater levels of customer-driven innovation (MIT Lean Advancement Initiative, 2010). The intent of this analysis is to evaluate how the two dominant manufacturers, Airbus and Boeing, are competing with each other using lean manufacturing and in the case of Airbus, advanced engineer-to-order and demand-driven supply chains to reduce time-to-market. The combination of energy costs, government constraints in European nations on emissions, and the significant restricting of the aircraft manufacturing value chain (Porter, 1986) have all led to lean manufacturing being the catalyst of go-to-market strategies and greater market growth. This analysis begins with an assessment of the market factors driving these changes to the industry value chain, followed by an assessment of how lean manufacturing concepts are revolutionizing manufacturing strategies and processes. The analysis concludes with an assessment of which manufacturing processes are the highest priority for commercial aircraft manufacturing companies today and in the future.

Market Assessment

The catalysts driving the market duopoly are based on the factors shown in Figure 1, Global Market Dynamics of the Commercial Aircraft Industry, in addition to the volatile, highly fluctuating price of oil as well. Manufacturing of commercial aircraft for large network carriers including support of transcontinental and transoceanic flights is a significant barrier to entry for smaller jet manufacturers, as is the production and R&D expense required. As a result, Airbus and Boeing enjoy strong barriers to entry for their areas of the commercial aircraft market. The large network carrier market of airlines has traditionally been over 70% or more of global aircraft manufacturing demand, which has continued to support Airbus and Boeing dominating global markets.

Figure 1: Global Market Dynamics of the Commercial Aircraft Industry

Source: (Based on an analysis of the MIT Lean Advancement Initiative, 2010)

Based on the high prices of jet fuel and its continued violation, coupled with new business models defined and executed with very high levels of profitability by Southwest Airlines in the U.S., the value chain of the industry is going through a fundamental realignment. The commercial airline passenger market is shifting away from large network carrier to regional and commuter airlines, when measured by airline passenger share, as shown in Figure 2, Commercial Airline Passenger Share (2000 -- 2016).

Figure 2:

Commercial Airline Passenger Share (2000 -- 2016)

Sources: (Posey, 2008) (MIT Lean Advancement Initiative, 2010)

Bombardier has redefined their lean manufacturing strategies and New product Development and Introduction (NPDI) process with the goal of leading the market for 60 -- 99 seat regional jet competition. According to research within Bombardier, this segment of the regional jet market represents the greatest growth, which can be seen in Figure 3, 20-year Worldwide Fleet Forecast. Boeing also is redefining their NPDI process, in addition to drastically changing their supply chain, sourcing and production operations to better respond to the needs of these market segments as well. Chinese commercial jet manufacturers are also developing regional jet designs, as the market for the 60 -- 99 jet configuration is expected to be $124B, representing the sale of 1,400 planes within the next ten years in that country alone (Posey, 2008) (MIT Lean Advancement Initiative, 2010). Boeing's design of the 787 is engineered for the same market requirements and customer demands that Bombardier and the Chinese manufacturers entering this market are focused on. The replacement market for the Boeing 737 is expected to continue growing through 2021, while the need for short-haul, commuter jets that have greater fuel efficiency are expected by many industry experts to be where the majority of revenue growth will occur (Posey, 2008).

Figure 3:

20-Year Worldwide Fleet Forecast

Source: www.bombardier.com/files/en/.../BCA_2009_Market_Forecast.pdf

Airbus has taken a different strategy and chosen to concentrate on the large network carriers, creating revenue opportunities for them by creating the A380, which can take 580 passengers on transoceanic flights. This is a major gamble on the part of Airbus, yet it hopes this airplane design and the revenue potential for large network carriers will lead to the consolidation of this larger, yet shrinking market.

Boeing has invested heavily in the 787 as the company believes that this is the future direction of commercial aviation. The company has made enhancements to Computer-Aided Design (CAD), re-defining and making more efficient the NPDI process, and working with suppliers through virtual collaboration have dropped the price to product the 787 beyond Boeing's internal targets (Thilmany, 2007). In addition, Boeing has created alliances with more International partners and also specified greater use of light-weight materials. Boeing has in short turned it its global supplier base as a source of knowledge and innovation to meet the unique and demanding specifications of this next generation of commercial aircraft. This approach to innovation is sustaining Boeings' competitive position in this mixed duopoly market.

Airbus, like Boeing, has a very diverse and distributed supply chain. The company relies on a consortium of nineteen nations, each of which plays a critical role in the build-to-order supply chain of each commercial jet program (Hicks, McGovern, 2009). Where Boeing has concentrated on accelerating their NPDI process to maintain and expand their leadership in the duopoly, Airbus has relied on a consortium of nations and suppliers, and is successfully using a unique approach to engineer-to-order supply chain management (Gosling, Naim, 2009). Competitors in the high growth regional jet market have yet to create an exceptional level of supply chain integration, or move in the direction of build-to-order production workflows as Airbus has done. Yet each of them, from Bombardier to the consortium of Chinese commercial jet manufacturers comprised of Shanghai Aviation, Chendgu Aircraft Factory, Xian Aircraft and Shenyang Aircraft (MIT Lean Advancement Initiative, 2010) are all focused on how to use lean manufacturing as the means to penetrate a highly duopolistic market.

Lean Manufacturing in the Commercial Aircraft Industry

Airbus and Boeing have entire departments dedicated to finding new ways of being competitive using lean manufacturing techniques. It is one of the sources of their market dominance. Bombardier and the consortium of Chinese manufacturers have smaller teams focused on lean manufacturing, yet all see this as the pivotal series of processes that will lead to greater market share over the next decade as the industry changes drastically.

Table 1: 2010 Lean Production Process Initiatives in Commercial Aviation

Source:

(MIT Lean Advancement Initiative, 2010)

Lean manufacturing seeks to drastically reduce the costs of manufacturing by minimizing and reducing altogether any activity, process or strategy that does not directly contribute to customers' needs being met or production being made more efficient (Corbett, 2007). The nineteen nation consortium of Airbus, and the decision by Boeing to rely on its network of suppliers for their insights into how best to meet design requirements shows how highly competitive duopolies have moved away from costs as the primary competitive strength and towards knowledge (May, 2005). The use of technologies that pervade Boeing's NPDI process, with heavy reliance on CAD-based approaches to sharing designs and requirements with suppliers, is accelerating the rate of change in this duopoly. In addition, Airbus now relies on CATIA, a very high end and sophisticated design and drafting application that can provide entire taxonomies of product designs within data files, which has been shown to drastically reduce production timeframes as well (MIT Lean Advancement Initiative, 2010).

Knowledge has emerged as the greatest competitive weapon in this market duopoly, and as a result, supply chain management systems and collaborative knowledge-based networks are emerging very quickly at Boeing, Airbus and throughout the regional jet manufacturing centers globally. Many of these initiatives are based on research from the Toyota Production System (TPS) and its success in creating a knowledge-sharing network across the global Toyota supplier base (Dyer, Nobeoka, 2000). At the center of the lessons learned from Toyota and the management of their supply chain through the TPS structure is the need to enable and promote tacit knowledge across broad networks of a company (Dyer, Nobeoka, 2000). Toyota requires companies to participate in their TPS program a year before they receive their first order from the auto manufacturer. The transition from costs and pricing to the value of intelligence and information begins after 14 -- 16 months in the program according to researchers who studied the program in detail at Toyota's factories throughout Japan (Dyer, Nobeoka, 2000). While Toyota today is besieged with quality problems, the TPS is not to blame. Rather, it is clear Toyota management became too arrogant for its own good, often side-stepping the most critical parts of the TPS quality management initiatives in order to make the production schedules that sent between 40,000 to 60,000 Camry autos to the U.S. For sale every month (Potter, 2010). The TPS today is actually the source of greater knowledge about how to solve their brake and recall problems. The current problems aside, the TPS has proven to be a knowledge sharing network that is very effective for competing in a market duopoly where intelligence not costs are the main differentiator (Dyer, Nobeoka, 2000).

Lean manufacturing concepts from the foundation of competitive strength of the two dominant companies that form the market duopoly. While each share this common foundation, their respective approaches to manufacturing execution vary significantly. Airbus deliberately created their organizational structure to support more of an engineer-to-order supply chain, as the decentralization of component production and R&D would reduce overall time-to-market, leading to products getting on the market sooner (Gosling, Naim, 2009). Airbus has successfully created an entire supply chain that reflects their unique approach to engineer-to-order and build-to-order manufacturing strategies, which has helped the company complete the massive A380 development project in the process (Kumar, Wellbrock, 2009). The depth of systems integration and supplier coordination across the Airbus supply chain exemplifies what industry analysts consider a best practice of turning knowledge and integration expertise into a competitive advantage (Columbus, 2003).

In a duopoly the ability to respond quickly to customer demands is highly dependent on knowledge sharing throughout the production process. This is especially true in the highly competitive 60 -- 99 seat market segments that every manufacturer globally is focused on today. For Boeing, the necessity of changing their production process began with a greater reliance on CAD-based design and collaborative development and continues today to a more modular, build-to-order process, which is shown in Figure 4.