boeing vs airbus - 21
TRANSCRIPT
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Founded in 1917, Seattle
Washington the world's largest aircraft and
aerospace manufacturer . the second-largest defense
contractor in the world $ 21 billion in revenues (2004) the world's largest civil aircraft
manufacturer in terms of value(49 % of orders and 45% of deliveries) 2005
the largest exporter in theworld.
BOEING
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AIRBUS Airbus (S.A.S) was established in
1970 as a European Consortium of French, German, and later Spanishand U.K. companies.
In 2001, it became a singleintegrated company.
The European Aeronautic Defenceand Space Company (EADS) andU.K. based BAE Systems are theowners of Airbus (80%/20%respectively.)
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Airbus Versus Boeing Aerospace is a global industry
Buyers are global R&D costs are extremely high
Industry increasingly defined by two firms Airbus(EU) and Boeing (USA) Companies rely on government subsidies to help fund R&D
costs Contention over amount and types of subsidies each
government gives to their aerospace companies led toseveral WTO complaints
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Airbus Versus Boeing (contd)
What would it take to attract a new entrant into theglobal aerospace industry?
Access to substantial funding to cover development
costs on average $37 million for each aircraftmanufactured Management would have to
Love a challenge Be ambivalent towards profits Be a glutton for punishment Be clueless about what they were getting into
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Launch of Airbus A380
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A3XX: Capacity and Range
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A Large-Scale Capital Project
On June 23, 2000, Airbus Industries Supervisory Board approved an Authorizationto Offer the A380, a proposed super jumbo jetthat would *+ have a list price of $216 millionand cost $13 billion to develop.
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Case Framework
Consider a Large Capital Investment and MarketExpansion
Competition Market Size, Costs & Benefits Regulatory and Other Issues
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Competition
Who is the main competitor? What is the likely competitive response?
What is Airbus market appeal? What is Airbus market power?
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Boeing
The only competition for VLA (Very LargeAircraft)
Reputable provider over the decades Boeing 747: Paragon of wide-body aircraft
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Boeings Possible CompetitiveResponses
Enhance 747 Launch a new model
Lower prices on 747 Ignore Airbuss A380
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Enhancement of 747Unlikely Response: Could plan a larger and more spacious enhancement of the
747 to compete with A380
Rationale: Boeing previously backed out of a similar project due to lack
of customer interest We were starting to spend a lot of money (but) we just did
not see customers showing the interest. - Ronald Woodard,
Head of Boeing Commercial Airplane Group Projected at $4 billion in 1999
Triggered 1.7% decline in Boeings Stock
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Launch a New Model
Response: Could create a competing VLA
Drawback: Too much of a financial risk Previously A380 was a joint venture between Boeing and
Airbus
Boeing unwilling to invest $13 billion only to share the marketwith Airbus
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Lower Prices
Response: Could cut the price of the 747 and divert sales from
the A380 or even deter launch
Drawback: Significant loss of profits Ignores problem of the 747s unappealing older
technology compared to the newer A380
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Ignore the A380
Response: Ignore the potential competitive threat
Drawback: A380 would increase its market power Boeing would lose its monopolistic hold on the VLA
market Lose ability to cross-subsidize of other products
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Game Theory and Strategy
Some key points on strategic commitment:
Always give attention to how your competitorsreturns vary under different strategic scenarios;
It is important to communicate the commitmentto the other firms (for both competition andcooperation);
Sunk cost investments can be used to pre -commit to a certain strategy and, thus, influencecompetitor response; and
Understand what strategic investments areimportant in your business and how sunk thoseinvestments are.
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16.3 GAME THEORY
The Duopolists Dilemma Each firm has two strategies. It can produce
airplanes at the rate of: 3 a week 4 a week
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16.3 GAME THEORY
Because each firm has two strategies, there arefour possible combinations of actions:
Both firms produce 3 a week (monopoly outcome). Both firms produce 4 a week. Airbus produces 3 a week and Boeing produces 4 a
week. Boeing produces 3 a week and Airbus produces 4 a
week.
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16.3 GAME THEORY
The Payoff Matrix
the payoff matrix asthe economic profitsfor each firm in eachpossible outcome.
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16.3 GAME THEORY
Equilibrium of theDuopolists Dilemma
Both firms produce 4a week.
Like the prisoners, theduopolists fail to
cooperate and get aworse outcome than theone that cooperationwould deliver .
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16.3 GAME THEORY Collusion is Profitable but Difficult to Achieve The duopolists dilemma explains why it is difficult
for firms to collude and achieve the maximum
monopoly profit. Even if collusion were legal, it would be
individually rational for each firm to cheat on acollusive agreement and increase output.
In an international oil cartel, OPEC, countriesfrequently break the cartel agreement andoverproduce.
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16.3 GAME THEORY Repeated Games
Most real-world games get played repeatedly. Repeated games have a larger number of
strategies because a player can be punished fornot cooperating.
This suggests that real-world duopolists might finda way of learning to cooperate so they can enjoymonopoly profit.
The next slide shows the payoffs with a tit -for-tat response.
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16.3 GAME THEORY
Week 1: Suppose Boeingcontemplates producing 4planes a week.
Boeings profit will increasefrom $36 million to $40million and Airbuss profitwill decrease from $36million to $30 million.
Week 2: Airbus punishesBoeing and produces 4planes a week.
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16.3 GAME THEORY
But Boeing must go back to 3planes a week to induceAirbus to cooperate in week3.
In week 2, Airbuss profit is$40 million and Boeingsprofit is $30 million.
Over the two weeks, Boeingsprofit would have been $72million if it cooperated butonly $70 million with Airbusstit-for-tat response.
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16.3 GAME THEORY
In reality, where a duopoly works like a one-playgame or a repeated game depends on the number
of players and the ease of detecting and punishingoverproduction.
The larger the number of players, the harder it isto maintain the monopoly outcome.
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