Bombardier Case free essay sample

The Problem Bombardier is the global leader in business and regional aircraft manufacturing and in recent years has been improving their performance. Their strategic objective has always been to be global leaders in both their aerospace and transportation divisions. However, there have been frequent leadership changes since the diversification era ended in 1999, and many analysts and investors have been questioning what their long-term strategy in the aerospace industry is, especially since the postponement of the CSeries launch. Their regional jet product line is a concern with the aging technologies of the CRJ and Q-Series models. And the threat of the Chinese, Japanese and Russians entering the market is imminent. It remains clear that Bombardier now faces the challenge of having to carefully assess its strategic direction for the future in order to hold its competitive advantage in regional jet market. External Analysis Bombardier is part of the Aerospace and transportation industries, but the focal industry in question is the regional aircraft industry. We will write a custom essay sample on Bombardier Case or any similar topic specifically for you Do Not WasteYour Time HIRE WRITER Only 13.90 / page In order to conduct an external analysis, Porter’s 5 Forces Model will be used. Threat of New Entrants: is moderate. If the Chinese and Russian projects don’t follow through (since they would be the direct competitors to the CRJ1000 and CSeries), it would be extremely difficult for other competitors to enter the market because the costs associated are relatively high. For example, the initial cost of Bombardier’s CSeries project reached $100 million as of April 2007, and the estimated cost of the entire project is $2 billion (All figures are presented in USD). Also, there are very powerful firms established in the industry and for a new firm to enter they would have to compete with firms already on the lower end of the learning curve (See Exhibit 1). Bargaining Power of Suppliers: is moderate. There is no threat of suppliers lowering quality because of the high standards set by industry regulators. However, there is always risk of price increases. There aren’t a vast number of suppliers in the industry, and their parts are extremely important in the manufacturing process. Furthermore, Bombardier has integrated technologies and components with their suppliers that are specific to their requirements. As a result, the switching costs would be extremely high, and the availability of substitutes is almost nil. Bargaining Power of Buyers: is moderate to high. Passengers’ preferences changed over time from comfort to low price. Since the passengers are the end users in this industry, airline companies must meet their needs. Therefore, passenger preference is the deciding factor when choosing which aircraft to purchase. The fact that there are several competing manufacturers to choose from adds to this power. Also, the switching costs are low since airline companies deal with many manufacturers regardless of what they have previously purchased. What is important for buyers is to acquire aircraft that will meet their customers’ needs and leave them with low operating costs. Threat of Substitute Products: is low. There are alternatives to planes, such as cars, trains, and buses. However, there is no replacement when it comes to traveling large distances in short periods of time. Rivalry Among Existing Competitors: is moderate to high. Bombardier’s main competitor in this industry is Embraer, however there are several countries (China, Russia) attempting to enter the market. The intense rivalry already exists between Bombardier and Embraer since they’ve both been introducing many new products over the past decade. Also, the low profit margins are a result of this intense competition. Furthermore, governments play an important role because they support their national manufacturers to protect them from foreign competition. Strategic Implications of Analysis Results: Currently, Bombardier is in a favorable position. They are the leaders for business and regional jets. Though, the aging technology of the CRJ and Q series models is a problem that needs to be addressed. Fuel-efficiency is a big issue with the rising price of oil and in order to maintain their competitive advantage, they need to develop new products that will make them the most energy-efficient and have the lowest operating costs. As for the future of the regional jet market, the demand is moving towards aircrafts with 100 to 150 seats and the global market is shifting toward BRIC countries. In this emerging market, Bombardier must continuously be innovative to stay ahead of the potential competition coming from China and Russia. Internal Analysis The VRIN model has been selected to evaluate the potential core competencies (resources, capabilities) Bombardier may have, resulting in a competitive advantage (see Exhibit 2). *Potential Core Competencies 1. Relationships with manufacturers of major components, suppliers of important parts, and repair and maintenance companies, resulting in strategic partnerships. 2. Diversified portfolio of products in the Business Jets Segment and Regional Jets Segment. 27% and 51% market share respectfully (See Exhibit 3). 3. CRJ’s reputation for being energy-efficient and the most popular regional aircraft series in history. 4. Unique design and engineering, resulting in aesthetically appealing aircraft with market leading fuel-efficiency and low operating costs. 5. Productivity and operational effectiveness. For 2006, Bombardier Aerospace’s gross profit per employee was $24,444 compared to direct competitor Embraer’s gross profit per employee which was $40,142 (See Exhibit 4). Strategic Implication of Analysis Results: It is clear that their diversified portfolio, the CRJ reputation, and unique design and engineering of their aircrafts are the factors that give Bombardier a competitive advantage over their competitors. This demonstrates how Bombardier is unique and how they differentiate themselves from their competition. With the operational costs being the main factor for airline profitability, Bombardier holds a solid position in the marketplace and it is these competencies that will allow them to thrive. However, the relationship with their manufacturers and suppliers, and their productivity and operational effectiveness result in a competitive disadvantage and below average returns. If they are to sustain their competitive advantage, they must reduce their cost of revenues which is clearly hurting their profits (See Exhibit 4). Moving Forward Alternative 1 Proceed with the status quo. That would mean dropping the CSeries project and ontinuing to improve the CRJ model to eventually have capacity within 100-150 seats. Bombardier would be able to compete with its core competencies of a diversified portfolio, great reputation of the CRJ, and their unique design and engineering allowing them to be leaders in energy-efficiency. Pros: * Save time and money by not pursuing the CSeries project ($2 billion ). * Allow them to invest their resources in improving the CRJ model. * The CRJ is already the most popular regional jet model in history and offering an aircraft of 100-150 seats would address the future market demands. Cons: Lost time and money already invested in the CSeries ($100 million). * Doesn’t address the fundamental issue of the aging technologies in the CRJ and Q-Series models. * Confusion of the long-term strategy of the firm. * Not much innovation, not adapting to change. Alternative 2 Bombardier can further differentiate themselves by proceeding with the CSeries project to address several issues of the future. The CRJ1000 provides an immediate solution for higher capacity and comfort at lower operating costs. The CSeries would be specifically targeted for the 100-150 seats market of regional aircrafts. Pros: Address the fundamental issue of the aging technologies in the CRJ and Q-Series models. * Set the long-term strategy and goals of the firm, and provide stability for a firm that analysts believe to have a blurred vision and strategic uncertainty. * Fill a gap in the marketplace by replacing older generation planes of the same capacity and provide more comfort and efficiency. * Meet the future needs of the market for regional aircraft which is moving towards aircraft of 100- 150 seats (See Exhibit 5). Cons: * Significant investment ($2 billion) needed. * Uncertainty of market response to brand new line of regional jets. Unforeseen technological issues may arise (i. e. quality and after sale service required) * Will it provide good profit margins and satisfy shareholders and analysts expectations? Final Recommendation (Best Alternative) The future of the aerospace industry is changing. Geographically because of the emerging markets in the BRIC countries, representing 35% of global demand in 2005, and by category of aircraft, because of the increase in short and mid-range routes of regional airlines. Furthermore, airline companies’ profits are directly tied with operating costs making cost-effectiveness extremely important. The European Union put in place the Emissions Trading Scheme beginning in 2011, which will further increase the demand for fuel-efficient aircrafts. With both alternatives presented above, Bombardier would hold an advantage over its competitors, more so in alternative 2 with the launch of the CSeries (which would be the leader in fuel-efficiency). In order to select the best alternative and solution to the problem, a number of other factors must be analyzed. Firstly, the regional jet product line is a main concern since the technologies of the CRJ and Q-Series models are aging. With the demand for regional aircraft shifting towards jets with a capacity of 100 to 150 seats, Bombardier would need to provide an aircraft within that range. Alternative 1 could work if they develop a CRJ model that would meet the demand for that market, but it would not address the aging technologies. Alternative 2 would be best to solve this problem because developing a new generation of aircrafts with new technologies that are specifically targeted towards that market will allow Bombardier to maintain its competitive advantage and global leadership. Secondly, the aircraft industry is a cyclical industry. Therefore, planes within the range of 100 to 150 seats that were purchased many years ago will need to be replaced. Since the new trend is energy-efficiency, the airline companies will be looking meet this need. Currently, there are no aircrafts that would specifically meet the capacity needs of regional carriers. With the Chinese and Russians attempting to enter this market, the window of opportunity is getting smaller. Alternative 1 would not provide a direct solution to this problem because the aging technology of the CRJ (if Bombardier were to develop a model to meet the capacity) would not be able to compete with the new technologies of the Chinese and Russian models. Alternative 2 on the other hand, would provide the best solution to this problem because it would specifically meet the capacity and energy-efficiency needs of the market. In conclusion, alternative 2 is far more attractive than alternative 1 for all the reasons discussed. Additionally, it would provide Bombardier with a long-term strategy in the aerospace industry and allow them to maintain their competitive advantage and continue to fulfill their strategic objective, which has always been to be a global leader. Bibliography Source: Taleb, A. , Hebert, L. (2011). Bombardier Aerospace: The CSeries Dilemma. London Ontario: Ivey Publishing. Exhibit 1 LEARNING CURVE Source : http://hsimonis. wordpress. com/2010/07/26/building-fighter-aircraft/ Exhibit 2 VRIN MODEL *Potential Core Competencies| Valuable| Rare| Inimitable| Non-Substitutable| 1| Yes| No| No| No| 2| Yes| Yes| Yes| Yes| 3| Yes| Yes| Yes| Yes| | Yes| Yes| Yes| No| 5| Yes| No| No| No| Exhibit 3 BUSINESS AND REGIONAL JETS SEGMENT MARKET SHARE FOR 2006 Source: Taleb, A. , Hebert, L. (2011). Bombardier Aerospace: The CSeries Dilemma. London Ontario: Ivey Publishing. Exhibit 4 PRODUCTIVITY amp; OPERATIONAL EFFECTIVENESS, GROSS PROFIT MARGIN FOR Y/E 2006 Source: http://www2. bombardier. com/en/7_0/pd f/annual_report_2007. pdf Source : http://www1. embraer. com. br/relatorios_anuais/relatorio_2007/english/ Exhibit 5 DEMAND FOR REGIONAL AIRCRAFT lt;100 SEATS Source: Taleb, A. , Hebert, L. (2011). Bombardier Aerospace: The CSeries Dilemma. London Ontario: Ivey Publishing.