Internationalization strategies in civil aircraft engine manufacturing and global retailing

¶ … Future Trends for Civil Aviation

The importance of a viable civil aviation sector to national security has been well documented, but the aviation industry continues to struggle with skyrocketing fuel prices and highly regulated operational environment. In this setting, it is not surprising that some civil aircraft engine manufacturers have fallen by the wayside while others have prospered by achieving a competitive advantage of some sort. To identify what strategies have worked and those that have not, this portfolio explores the extent of internationalization in both global retailing and the manufacture of aircraft engines for civil aviation, followed by a review of successful and failed international strategies around the world for these industries including an evaluation of the importance of joint ventures on their respective outcomes. Finally, a summary of the research and important findings are presented in the portfolio's conclusion.

Review and Analysis

Internationalization of the Global Retailing and Civil Aircraft Engine Manufacturing Industry

The internationalization of global retailing became intensified as innovations in information and communications technology and transportation facilitated the globalization of the marketplace followed the end of World War II (Dawson 2003). One of the driving forces of global retailing has been the "globalisation of taste and the commodification of services" fueled by the proliferation of international franchise in the retail sector (Dawson 2003, p. 105).

During the period 1972 through 1991, for example, Kronemer and Henneberger (1998) report that productivity in the civil aircraft engine manufacturing sector increased 3.2%, but the overall growth rate for the industry itself began a sluggish decline during the early 1980s. This assessment is congruent with the observations made by Kister (1999) who suggests a number of factors contributed to the general decline of aircraft engine manufacturers during this period. For instance, Kister (1999) reports that at that time, "Airplane manufacturers may have overestimated their market when more than 14,000 single-engine aircraft were built in 1978. This oversaturation of the market, added to the generally poor economic conditions of the early 1980s, combined to decrease demand while supply was high" (p. 109).

Besides market oversaturation, other factors that contributed to the decline of aircraft engine manufacturers during the 1980s and 1990s that reflect the extent to which internationalization was affecting the industry included the following:

1. Increased tax burdens -- the imposition of a luxury tax and the elimination of investment tax credits;

2. Increased manufacture of homemade airplanes from kits that lessened the liability of the manufacturer;

3. The rise in the price of oil in the early 1980s;

4. The reduction of fares by the major passenger airlines after deregulation;

5. The concentration of the civil aviation industry on jet aircraft because of higher profit margins; and,

6. The aircraft built in the 1960s and 1970s were proving to be durable and made for good bargains as used planes (Kister 1999, p. 110).

In addition, the costs of flight training and the costs of the continuing education requirements needed to remain proficient contributed to further declines in civil aviation aircraft engines (Kister 1999). Besides the foregoing external factors, though, Kister (1999) suggests that there were some problems endemic to the civil aircraft engine manufacturing industry itself that were responsible for part of the decline, including decreasing productivity compared to foreign competitors and escalating labor costs, particularly in unionized facilities, with the failure of Piper Aircraft to respond to the changing times by becoming leaner and more agile as a primary example. For instance, Kister emphasizes that, "The manufacturers themselves also were part of the problem. When Piper Aircraft went into bankruptcy in the early 1990s, it was grossly overstaffed. In the late 1980s, it employed more than 1.5 indirect employees for every member of the production floor team. . . . During the period of overstaffing, Piper was losing about $30,000 on each Piper Cub sold" (p. 110). The costs that are associated with overstaffing are well documented, and are frequently compounded when the industry is heavily unionized (Tzannatos & Aidt 2006).

With respect to the underlying theory involved, Tzannoatos and Aidt (2006, p. 258) suggest that civil aircraft engine manufacturers that are unionized tend to experience a competitive disadvantage because of the following:

1. Unions prevent scarce resources from being allocated to the production of goods and services wanted and needed by consumers (for example, by affecting relative union / non-union wages between sectors and types of workers);

2. Unions prevent firms from producing the maximum output they could produce with the inputs they employ (for example, by restrictive practices that limit the productive use of workers);

3. Unions prevent the economy from growing (for example, by reducing investment or slowing down the rate of employment creation); and,

4. Unions result in an allocation of incomes that departs from that which would maximize social welfare (for example, by securing higher pay for union members than for other workers simply on the basis of their being 'insiders' or by arbitrarily changing the functional distribution of incomes between wages and profits).

These trends and constraints have not been unique to Piper Aircraft, though, and by the turn of the century, Kronemer and Henneberger (1999) suggest the same forces that were driving the internationalization of an increasingly globalized economy were have an adverse effect on civil aircraft engine manufacturers. In this regard, these authorities conclude that, "Because of the financial turmoil in the airline industry, production rates for new civilian aircraft fell in the face of decreases in new orders and cancellations and postponements of orders already on the books" (Kronemer and Henneberger 1999, p. 25).

The already significant "turmoil" in the airline industry, of course, became even more pronounced and assumed near-panic proportions following the terrorist attacks of September 11, 2001 when the entire travel and tourism industry suffered significant decreases in demand. For example, one industry analyst reports that, "The September 11 attacks against the World Trade Center in New York City and the Pentagon in Washington, D.C. expanded from being a terrorist threat to the American tourist industry to a global tourism crisis" (p. 19).

Other problems have plagued the civil aircraft manufacturing industry as well, including product liability suits that can have an enormous impact on corporate profitability (Garland, Wise & Hopkins, 1999). In response to growing concerns that these lawsuits could cause the industry irreparable damage, the U.S. Congress enacted the General Aviation Revitalization Act of 1994 ("the Act") that provided some legal protections for aircraft engine manufacturers. With respect to the specific impact on the industry, Garland and his associates report that, "The fallout of the Act has yet to be measured, except for the decision by Cessna management to resume single-engine airplane production. After 18 years the airplane and its components have proven themselves by law, barring lawsuits (immunity from product liability actions) against the manufacturer" (p. 667). Despite these protections, though, civil aircraft engine manufacturing firms face the same challenges that all globalized enterprises are encountering today, including the lingering effects of the Great Recession of 2008, rising energy costs, and increased competition for other scarce resources. Therefore, identifying optimal business processes and systems has assumed new importance and relevance, but some companies have failed where others have succeeded as discussed further below.

Conclusion

The literature reviewed for this portfolio showed that many of the same forces that have fueled the internationalization of commerce have also affected the aviation industry in general and the civil aircraft engine manufacturing sector in particular. The research showed that in an increasingly globalized marketplace, successful aircraft engine manufacturers have responded in a timely fashion to these changes by eliminating waste and adding value at every opportunity, including eliminating overstaffing. The research also showed that a number of entry strategies exist for companies seeking to internationalize their operations, including using locally hired management, forging strategic alliances with foreign distributors, engaging in direct export, creating overseas sales offices or subsidiaries, various licensing programs and joint ventures, as well as overseas manufacturing facility, direct foreign acquisitions where this alternative is available, technical alliances with foreign companies; and strategies alliances with foreign suppliers. In some cases, though, even the most enlightened strategies can backfire and fail if corporate leaders fail to perform the due diligence needed to ensure that their organizational cultures and goals are sufficiently aligned with their foreign partners.