Embraer: The Global Leader in Regional Jets
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Home Country Features
Below are some of the competitive advantages (or factors which led to competitive advantages) I identified in the case:
- History of the company; founded and supported by the Brazilian government. Also, probably a well-known brand in the Brazilian market - given its market presence in both the military and commercial spaces, and its neighboring markets. The three aviation business units (passenger, defense and special purpose aircrafts) the company entered must also led to, in one or another way, synergies and value-added know-how across businesses.
- Privatization and human capital; the shift in ownership and human capital, change of organization structure and strong and "willing" investors were key factors of the success. Without the empowerment which followed by the shift in ownership and the change to "clock-builders", ready to take moderate risks, from "time-tellers" the company would not have been able to capitalize on the huge market opportunities.
- Brand nationality; Brazil, the largest country and economy in South America, definitively helped the company to move in to Uruguay and Chile.
- Home market; had a huge and pivotal role in the company's success. Not only was the market large enough (both in terms of land and population) to support and serve as a launching pad (in terms of both economics and customer preferences/diversity), but also increasingly demanding for new products.
- Product features; without superior cost advantages and meeting consumer (airline) demands/preferences e.g. Brasilia, the company would not have been able to enter other markets such as the US. Customer focus became a cornerstone of the strategy of the company e.g. design and "robust". Stayed away from the more profitable market e.g. larger carrier market dominated by Boeing and Airbus.
- Political and regulatory market factors; worked in the favor of the company. Without strong support, protected home market, and subsidies (also in the form of favorable tax) from the Brazilian government, the company would have faced fierce competition and might not have survived in the initial years, and would definitively not get a good head start as it did.
Supplier Country Features
There were several key areas, the company addressed immediately:
- Work force and productivity; the company drastically cut both work force and wages (indirectly by slowly replacing senior people in the organization with younger people). Even though this dramatically event would create huge tensions elsewhere, it actually had opposite effect since, the remaining work force felt much more energized (partly due to the new incentive system and the bottom-up approach).
- Outsourcing; the company refocused on its core activities by spinning of some of the activities such as basic supplies and manufacturing. Core activities were now defined as design, project direction, engineering of navigational systems, final assembly and customer support. All key components such as engines, wings etc. purchased from supplier. Many activities were spun off to former employees, which certainly helped to ease the public opinion regarding the lay off policy. As result, the company showed increased quality and, more importantly, increased response to market e.g. lead time cut by 8 months between 1995 and 1997.
- R&D and market focus: again the company employed a superior R&D center combined with strong market focus, both supported by the new market intelligence department, e.g. three abreast seating and introduction of complete new family etc, enabling the company to launch successful products in the Americas.
- External supplier partnership; the company was very successful in its risk sharing partnership concept/creation, in which the suppliers not only shared financial risks but also integrated in the product development at sites such as Virtual Reality Center, as well as overcoming any cultural/management differences. I believe the location of the company played an integral part in this creation.
Customer Country Features
The company successfully acknowledged the following (other factors such as elasticity, income, distribution, society & culture etc. are less important since an airplane is an airplane and what matters are safety, design, operations/maintenance cost and after-sales service);
- Customer preferences and knowledge; as per discussed earlier, the company was very successfully meeting and forecasting customer needs partly because visionary and responsive management, customer focus, product know-who, and excellent in-house market analytics division etc.
Partner Countries Features
If the company would like to remain a player in the defense space then it makes sense to pursue the partnership with the French group. A few key take aways:
- Complementary products/technology/capabilities; the French group can offer all these to the "falling" defense business of the company, including scales of economies. These features make it very interesting for the company to go forward in the more profitable defense business. The company can expect advantages such as scale, advanced know-how (bring products quicker to market and new product knowledge such as supersonic aircrafts), as well as other resources and capabilities (e.g. market knowledge and access to new markets) of the French Group.
- Overall strategy of the company; this partnership is in line with the overall strategy of the company to increase its presence in the more profitable defense space (also Brazilian government looked to buy new military aircrafts).
- Legal factor; not affected by the threatening WTO restriction
Competitor Countries Features
The airline industry is not specifically limited to country boundaries, thus I believe the company was almost from the very beginning competing against the very best in the industry (at least ever since it made its inroad to US market with its very successful "Brasilia". Going head to head with the best in the industry as well as competing for the limited numbers of clients (airlines) have only strengthened the company made it always look to improve product features and economics to stay abreast of consumers and competitors.
Future of Embraer
Given all the factors and implications described above, my recommendations for the company going forward are;
1. Solve the WTO issue as soon as possible - this needs to be addressed and solved immediately. A WTO restriction could, and most likely would, hurt the company/Brazil tremendously.
2. Fully engage in the French group proposal, but not because of the military defense space (though it has higher profit margins, but in the long term military aircrafts will not be as needed as passenger aircrafts it is hoped, because mankind will realize war and defense are not the solution to problems). The company should focus on its core value/business passenger aircrafts supporting evidences are growing GDP in the developing countries and globalization in general. Through the partnerships with the French group it would leverage scale, know-how, access to market but also potentially build its brand beyond the European borders e.g. look into Asian market. Given the population size and many countries in both Europe and Asia there a hundreds of "smaller" airlines that serves both the national and regional markets. These are the ones the company should focus on and where it has its core strength (medium size aircrafts).
However, evidences that are speaking against my recommendation are that the military spending increases for each year, the military defense space are becoming increasingly consolidated, and existing passenger aircrafts are kept in service longer than ever before being replaced by newer ones (due to remodeling etc.). So if the company believes in the military defense space then it would be a great opportunity to capitalize on the French group's capabilities/resources e.g. barriers to entry are extremely high, R&D is a must (scale is a real advantage) and brand matters in the military defense space. Either or, the partnership would be fruitful no matter what road the company decides to take it is just a matter to keep being a "clock-builder".