Business and Management: A case of Airbus

Business and Management A case of Airbus Introduction Globalisation describes a process in which capital, domestic product and labour markets become more integrated across national boundaries. The key drivers for globalisation are: the advances in transport and communication, the increasing level of international trade and the international mobility of labour (Anonymous, 2007). As a result of globalisation, more and more businesses are setting up or buying operations in different nations. When a foreign company invests in a country by buying commercial properties such as a building, factory or a shop it is called inward investment. Organisations that operate in several countries are known as transnational corporations (TNCs) (BBC, 2014). Airbus is an example of a TNC that has operated in different nations successfully since the 1970s. Since it first entered service in 1974, Airbus has traded more than 13,200 aircraft to over 500 clients and operators (Airbus, 2013). In 2014 it generated € 60,713 million in revenue in comparison with the revenue made in 2013 (€ 57,567 million) the revenue has increase by € 3,146 million. This is the result of delivering more aircraft than previous year (Airbusgroup, 2015a). The purpose of this paper is to carry out a strategic analysis of the aircraft manufacturer Airbus mainly using the PEST model. PEST is an abbreviation for the Political factors, Economic factors, Social-cultural factors and Technological factors. It is a method used to identify the variables in the macro-environment that are influencing any organisation, and to predict the ones that are likely to affect the business in the future (McCabe, 2009). Global business environment One of the results of globalisation is the decision makers/managers in TNCs will know have to solve more complex problems when they are understanding the current business environment, it is essential to take the changes of global economy into consideration. The changes in global economy have lead us to a situation that could not be seen a few decades ago. We are experiencing the diminishing role of some economic, political and financial conditions which have dominated the world’s economy for a very long period of time, such as the United States and the United Kingdom. Meanwhile we are witnessing the rise of other countries which were not given a chance to achieve the level of development that they have achieved today - like BRICs (Brazil, Russia, India and China) (Chitiba, Dumitrescu & Nicolau, 2014). When it comes to global business environment aircraft manufacturers are always very cautious. Any mistake could lead to delay or cancellation of contractual orders or payments for the new aircraft. Airbus and its main competitor Boeing continue to maintain a strong production network to meet the standards of performance and reliability of the new aircraft (Daniela, 2015). The market for commercial aircraft is reliant on long-term trends of the commercial airline operators. The elements that drive the long-term air traffic growth are supported by economic growth and political stability in developed and emerging markets (Boeing, 2014, as cited by Daniela, 2015). Global presence Although the headquarters are in France, Airbus has developed on its solid European roots to push ahead on an international scale with fully-owned branches in the United States, China, Japan, India and in the Middle East; engineering and training centres in Toulouse, Miami, Wichita, Hamburg, Bangalore and Beijing; spare parts centres in Hamburg, Frankfurt, Washington, Beijing, Dubai and Singapore and more than 150 service offices around the world. Airbus' key factor of business strategy is global diversity, it has more than 55,000 multi-cultured employees, which includes over 100 nationalities from different region in the world (Airbus, 2015b). Political factors Ministers from France, Germany and Britain reached an agreement in July 1967, “for the purpose of strengthening European co-operation in the field of aviation technology and thereby promoting economic and technological progress in Europe, to take appropriate measures for the joint development and production of an airbus (Airbus, 2015a).” It was the year Airbus was officially founded. Spain joined the partnership in 1971. Airbus was founded as a consortium of four European aircraft manufacturers, France owns 37.9 percent of ownership, Germany owns 37.9 percent of ownership, Britain owns 20.0 percent of ownership, and Spain owns 4.2 percent of ownership (Tong & Tong, 2003). Therefore, Airbus’s management style has always been affected by the political factors, it directs the way the organisation operates and pursues rationalise production. In 2006, despite Airbus's parent company EADS announcing launch delays to the A380 programme and a 2 billion euro cost-cutting in support for the project, the French, German and Spanish governments were still only interested in their particular interests. Oxford Analytica Daily Brief Service (2006)," Berlin has signalled its determination to resist jobs cuts and plant closures. It has linked continued funding of Airbus programmes to maintaining the level of work in German factories, Paris will seek to defend the status quo, despite several duplicated Airbus facilities, The UK facilities look safe for the time being: they are among the most efficient in the Airbus system and already have a lean supply chain." Economic factors There are two major economic factors that affect the competitive dynamics of the aircraft manufacturer industry. First, the demand for commercial aircraft is considered as very unstable. In the early 1990s the industry was in a decline and in the second half of the 1990s, the demand for aircraft increased significantly. Second, the costs of producing and developing a new large commercial aircraft are very high, this makes it more difficult for the manufacturers to reach the break-even point (Tong & Tong, 2003). In response to these challenges, the manufacturers and suppliers are utilising the preferences getting from the globalisation of the aerospace production network. However, the aircraft manufacture industry is affected by globalisation with a variety of pressures. For example, reducing cost of production, increasing workforce efficiency and global competitiveness. Outsourcing is a well-known example of FDI it is a popular method to reduce cost of production used by international organisations (Advani, 2013, as cited by Daniela, 2015). The purpose of FDI (Foreign Direct Investment) is to take advantage of low cost labour and to capture the potential large consumer markets in the developing countries (Zhao & Okamura, 2010). The changes and differences in exchange-rate have a particularly large effect on the aircraft manufacture industry. Because it is a duopoly industry, prices for aircrafts are mostly set in US dollar. Thus, Boeing is almost completely protected from the changes in exchange-rate because its costs are mostly in dollar. By contrast, Airbus always has to keep track on euro/dollar fluctuations, due to its costs are mostly in euro. Since Boeing will adjust its own prices in response to Airbus’s price changes, this makes it more challenging for Airbus when it comes to decision-making. Any price change by Airbus affects demand for Boeing aircraft. When the currency rate of dollar drops, Airbus will be forced to raise prices and give way market share to Boeing (Bénassy-Quéré, Fontagné & Raff, 2011). Airbus’s main competitor, Boeing Company was founded in 1916, it has been the world's leading manufacturer of large commercial aircrafts for several decades (Tong & Tong, 2003). However, in 2005 Airbus delivered more planes than Boeing, due to the 911 terrorist attack in 2001, and suffered a strike by workers in the manufacturing site last autumn. Between 2005 and 2004, Airbus deliveries increased by 18% to 378 aircraft, said Chief Executive Gustav Humbert. It was a new record for Airbus, it was a better outcome than the European aircraft maker's prediction (370 deliveries). On the other hand, Boeing, which has lagged behind Airbus in orders since 2001 and deliveries since 2003, only delivered 290 planes in 2005 (Michaels, 2006). Despite the victories between the years 2001-2005, competing with Boeing has not been easy for Airbus last year. According to the figure published by Airbus in January 2015, in 2014 Boeing generated $232.9 billion in revenue (represented 57% of market share) while Airbus generated $174.6 billion in revenue (represented 43% of market share) (Stonestreet, 2015). To protect its market share Airbus has implemented a strategy: engage in steep price discounts and develop a plan to eventually take the very profitable 100-seater market away from Boeing (Holmes, 1999). In April 1999 Airbus launched the A318, and delivered more aircraft than Boeing for the first time in the 100-seater market. A few years later, the A380 project was launched. With a spacious cabin it allows airlines to offer different air travel products. Its low operating costs will enable airlines to respond to growing competition and the increasing demand for air travel (Brown, 2002). Social-cultural factors Around 1% of the world's GDP is contributed by air transport (Oum et al., 2009 as cited by Zhang, Gudmundsson & Oum, 2010) but is estimated to contribute about 2–4% of global GHG emissions and 2% of the man-made contribution to climate change, which could reach to around 3% by 2050 (Intergovernmental Panel on Climate Change, 2007a as cited by Zhang, Gudmundsson & Oum, 2010). Zhang, Gudmundsson & Oum (2010),"Public concerns over the potentially significant impacts of aviation on climate have pressured regulators to control GHG emissions from air transport. Governments have so far taken both multilateral (collaborative) and unilateral actions. On the multilateral front, the Kyoto Protocol was ratified by, as of May 2008, more than 180 countries, with the participating countries contributing to about two thirds of global GHG emissions. While the Protocol does account for domestic aviation emissions, emissions from international aviation are not included. Instead, the Protocol calls for countries to pursue limitation or reduction of GHG emissions from international flights through the International Civil Aviation Organization (ICAO)." Although Airbus claimed that in the last 20 years fuel burn has been reduced from 8 Litres to 5 Litres per 100 passenger per kilometre (Airbus, 2008 as cited by Zhang, Gudmundsson & Oum, 2010), the expected growth in air transport industry will lead to the increase in GHG emissions, despite the fact that aircraft fuel efficiency is expected to be improved. Technological factors Due to the improvement in technology in past few decades, Airbus’s supply chain has become more international. The increase in concentration has resulted from association within Europe's aerospace and defence sector and from major new aircraft projects placing larger work packages with a smaller number of main suppliers. Because of the overall growth of sourcing volumes, the supply chain presence outside Europe has grown, this has been accomplished with simultaneous growth in sourcing from European suppliers. There are sourcing offices in India, China, the US and Brazil that have started to take on regional roles since 2013, extending particular responsibilities to North America, South America, the Middle East and East Asia (Airbusgroup, 2015b). As a result of the outsourcing process, aircraft manufacturers have become more dependent on the performance of their suppliers, the availability of raw materials and the productivity of foreign labour. The suppliers normally only have restricted amounts of raw materials to effectively manage their financial resources. With regard to the productivity of foreign labour, the new technique used in materials and processes for the development programs of new aircraft could result in production problems related to the quality and reliability of the materials provided (Advani, 2013, as cited by Daniela, 2015). Airbus has been focusing on reducing potential delivery delays and other performance issues, closely monitoring the suppliers and intervening when is necessary (Daniela, 2015). Conclusion The emergence of transnational corporations is one of the results of globalisation, the other result of globalisation is the increase in FDI: more and more organisations are operating globally in the purpose of maximising the profit. In response to the changing global business environment, Airbus’ supply chain has become internationalised; there are sourcing offices in North America, South America, the Middle East and East Asia. Regarding the influence of the difference exchange-rate between dollar and euro, Airbus has successfully protected its market share by launching new aircraft models (the A318 and the A380). Although the fuel efficiency of the aircraft has improved and is expected to continue improving, the amount of GHG emissions are expected to rise as the air transport industry grows ever larger. Governments have taken both collaborative and unilateral actions to pursue limitation or reduction of GHG emissions from international flights through the International Civil Aviation Organization (ICAO). Airbus has reacted to the global economic challenges through its outsourcing strategy as well as adapting its production processes and organisation. It continues to maintain a strong production network to meet the standards of performance and reliability of the new aircraft. However, powerful political interests are still playing major roles in decision-making process. References Anonymous. (2007). 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