The aerospace industry includes organizations that are involved in the designing and production of aircrafts. The following section elaborates the competitive landscape of the aerospace industry using porter’s five forces model.
Threat of New Entrants
The threat of new entrants is low in the aerospace industry. The rationale behind this inference is that this industry is characterized by being capital intensive. The facilities and equipment required to manage the designing, testing and production of aircrafts requires a lot of investment which can only be managed by firms that have a strong financial base (Materna, Mansfield and Walton, 2015). As a result, the barriers to entry become significantly high. Therefore the new companies do not find this industry as an appealing option for market entry, unless they have a sound financial background. The presence of large scale companies such as Boeing that retain a significant market share (Hitt, Ireland and Hoskisson, 2012) make it even more difficult for the new entrants to establish themselves in the aerospace industry. Even if the new entrants are able to generate the needed funds to initiate the production, the dynamics of the industry and high risk makes it a impractical choice for new companies that can’t sustain the level of investment and have some buffer against risks and threat of failure.
Threat of Substitute
The substitute products in case of the aerospace industry are the parts and equipment that is used to manufacture an airplane. A company may decide to purchase these items from another firm that has offered a more favorable price, thus indicating the way substitution can occur. However when it comes to the end product, there is a low probability of finding a substitute as the main producers of aircrafts dominate the aerospace industry (Niosi and Zhegu, 2005). The airlines when making purchases of the aircraft consider a product that matches their requirements and the criterion outlined by government and aviation administration. The purchase decision is made on the basis of the ability of a manufacturer to adhere to these requirements, further lowering the risk of substitute products as the leading players who deliver high quality aircrafts secure the purchase contracts. Therefore it can be seen that the threat of substitute products is low in the aerospace industry.
Bargaining Power of Buyer
The bargaining power of buyers in the aerospace industry is another area which is affected by the presence of few large scale suppliers of aircrafts. The airline companies have few suppliers to choose from, however, their purchase decisions are made with a long term perspective. In addition, the buyers are seeking quality assurance form the manufacturers of aircrafts (Speciale, 2003). These requirements can be met by the large scale manufacturers which may not give a great deal of leverage to the buyers. Therefore, it can be suggested that the bargaining power of buyers is medium.
Bargaining Power of Supplier
Since there are few manufacturers in aerospace industry, this gives more power to the suppliers and they can shape the product price according to their profitability objectives. In addition, the manufacturers of aircrafts are dependent on the supply of material by first tier and second tier suppliers, which is then used to create the final product. The manufacturers have to bargain with the suppliers of materials and in turn equate that in their profit margins. Nevertheless, the companies buying aircrafts make the purchase deals by analyzing the technological competence and adaptability of the supplier with company needs (Hitt et al., 2012). The focus on selecting a supplier that fulfills these needs makes the suppliers more open to price negotiation as they seek long term supply contract. On the basis of this analysis it can be seen that the bargaining power of suppliers is medium.
Competitive Rivalry
There are few organizations that have been involved in the production of aircrafts, which are supplied to the airlines in the international market. A few of these players in the aerospace industry are Boeing, Airbus, Cessna, and Raytheon Bombardier, and Spirit (Peng, 2016). Even though there are few large scale manufacturers of aircrafts in this industry, they compete for gaining long term supply contracts with the airlines, creating moderate level of competitive rivalry among the exiting firms.
References
Hitt, M.A., Ireland, R.D. and Hoskisson, R.E., 2012. Strategic management cases: competitiveness and globalization. USA: South-Western Cengage Learning.
Materna, R., Mansfield, R.E. and Walton, R.O., 2015. Aerospace Industry Report. USA: Lulu. com.
Niosi, J. and Zhegu, M., 2005. Aerospace clusters: local or global knowledge spillovers?. Industry & Innovation, 12(1), pp.5-29.
Peng, M.W., 2016. Global business. USA: South-Western Cengage Learning.
Speciale, R., 2003. Aircraft Ownership: A Legal and Tax Guide. USA: McGraw Hill.