Global Strategic Management barriers to entry. The figure below shows a high level view of the key forces. • • Buyer Power is extremely high causing severe pricing pressure on aircraft manufacturers. the paper analyzes the paradox of Embraer’s rise and explores what that may imply about its home country. and how Embraer is adapting its strategy to address future market changes. rivalry and the threat of substitutes. Finally. a new entrant is at a distinct disadvantage. Because the value chain is highly integrated. highly skilled workers are required and learning curves for workers and companies are long. Despite many challenges and the fact that Embraer is based in a developing country. This paper discusses the nature of the aircraft industry and competition. it has grown into one of the world’s most successful airplane manufacturers. • Barriers to Entry are extremely high with large initial capital investments required along with extremely high fixed costs. There is a high degree of customer loyalty. corporate jet and the emerging “tiny jet” markets that impact the strategies of aircraft manufacturers. the WTO dispute with Canada. Additionally. Suppliers of certain special materials and coatings also have high power. Suppliers with proprietary technology or extremely specialized expertise have high power. supplier power. the key elements of Embraer’s strategy. coupled with very high switching costs for customers. This brief analysis does not take into account the military jet. Overview of the Commercial Aircraft Industry Using Porter’s Five Forces framework2 provides a convenient way to analyze the dynamics of the commercial aircraft industry.Introduction This case analysis examines the major issues and ideas from HBS case Embraer: The Global Leader in Regional Jets1 and identifies the key attributes and characteristics of a successful international aircraft company from Brazil. Customer preference and flying trends may help bolster the power of buyers in negotiating with manufacturers who have long development cycles and may have Page 2 of 17 . The industry often experiences periods of over capacity which puts further downward pressure on prices. buyer power. Supplier Power is variable. that is partners and suppliers work very closely with the incumbent manufacturers. Some commodity suppliers of materials and services have relatively low power. Long development lead times mean rivals can plan counter-moves well in advance and catch an emerging trend while a competitor may already be committed to a certain direction. Bombardier – Regional Jets) Cyclical Industry Intermittent Overcapacity High Switching Costs Brand identity Long Development Cycle Times (Rivals can plan countermoves) THREAT OF SUBSTITUTES No compelling or adequate substitutes for commercial jets: • Trains • Automobiles • Ships • Helicopters Customer Switching Costs are very high BUYER POWER Customers .inventory which may not meet the current trends and needs of the buyers.Bargaining leverage Buyer Power is High Buyer has transparent information Brand identity Price sensitivity Require Product differentiation Buyer concentration vs. switching costs for buyers are very high and have a fairly long time horizon . industry Buyers' incentives(option) Diagram of Porter's 5 Forces for the Commercial Aircraft Industry Page 3 of 17 . Airbus – Large Jets Embraer vs. Boeing in large jets and Embraer vs. Industry Rivalry is very high with two major duopolies dominating the industry: Airbus vs. Long development lead times mean that every new model is critical to the success of the vendor and any misstep could spell disaster. Bombardier in regional jets. On the other hand. • • Threat of Substitutes are low with no cost effective alternatives available for commercial jets. SUPPLIER POWER • • • • • Specialized Suppliers Importance of supplier partnerships Impact of inputs on cost or differentiation Lack of substitute inputs Some Threat of forward integration Ample set of technology providers • • • • • • • • • • BARRIERS TO ENTRY Very High Costs of Entry • Initial Capital Investment • High Fixed Costs Long Learning curve Government support required Skilled Engineers/Technical Brand Loyalty Customer Switching Costs Access to technology partners (Integrated Value Chain) Incumbent Retaliation Proprietary Products • • • • • • • • RIVALRY Strong rivalry between players Duopolies in 2 segments (Boeing vs. Furthermore. Christensen’s model could be represented as in the graph below: Page 4 of 17 . Vendors in this industry need to be cognizant not of economic factors that impact buyers (airlines) but also passenger preference trends. an appreciation of the role disruptive innovation may leads manufacturers to discover new opportunities and future sales. The commercial aircraft industry is dynamic and subject to the forces mentioned earlier. A keen awareness of passenger trends allows vendors to understand market dynamics and sustain or improve their current position.Another useful framework for analyzing the commercial aircraft industry is from the point of view of “disruptive technology” as introduced by Clayton Christensen 4. As applied to the aircraft industry. However. the Airbus 320 and Boeing 737 are larger aircraft and more expensive to operate. Although one would expect them to “defend” their “turf”. entering the 135 seat market is not in the cards for Embraer as this would mean “jumping into the big dogs’ market”. after privatization. according to Embraer CEO Botelho. he would prefer to diversify into the defense market and expand in the business jet market. Based on the previous Porter analysis. Embraer could choose to compete with the Airbus 320 and Boeing 737 in some sectors. a reference to Airbus and Boeing 8. With superior operating margins. the Brazilian government continued to provide subsidies in the form of loans to Embraer to provide capital funds to start new Page 5 of 17 . Core Elements of Embraer’s Strategy Embraer’s core strategy can be summarized by the following bullets: • • • • • • • Interdependence with Brazilian Government Focus on Regional Jet Market “Family” Approach to Product Development Cultivate relationships and risk share with technology partners and parts suppliers Focus on “Intelligent Systems”. Engineering Project Management Risk Partner and Supplier Strategy “Intelligent Systems” Interdependence with Brazilian Government Embraer was founded by the Brazilian government and the company is a source of national pride. In 1994.From the analysis. the reaction of the incumbent vendors must be considered. Embraer presents a compelling case for airlines to consider Embraer aircraft to assemble lighter and more efficient fleets. Rather. Embraer provides aircraft that are less expensive to produce and operate than its main competitor. Airbus and Boeing make larger aircraft and do not compete in the regional jet market. Their claim is that the 70 to 110 seat plane fills a void for customers. Embraer’s campaign points out inefficiencies of flying planes that are too large for regional flights or too small to handle the increase in demand for regional flights. create/identify the market. we have to make profits. home country to its largest customers. Product Families Page 6 of 17 . Embraer produces planes exclusively for the Regional Jet market.html. they have developed roomier planes with innovations such as the “double-bubble” design8 that allows more head room and larger cabin space for passengers. Another part of Embraer’s strategy is to use larger regional jet aircraft to replace the aging fleet of planes that may be too large to operate on the increasing number of short-haul routes. but their approach is subtle. In a sense. fill a void and replace aging aircraft that are going to be retired. Embraer not only provides less expensive planes. Bombardier.com/main/index.ruleof70to110. As quoted by CEO Botelho at the end of the case study. “We want to keep on being the technological and industrial arm of the Brazilian government. although of course. is not going to provide the type of the support that Brazil will. In the past few years. Focus on Regional Jet Market In the commercial aircraft market.initiatives.”1 Embraer recognizes the role its home country plays and the fact the United States. Embraer has updated its strategy to focus on the 70 to 110 seat market as portrayed on their website: www. Embraer is preparing to compete with Airbus and Boeing. Embraer designs it products based on platforms than can be scaled to larger or smaller capacities allowing for parts reuse and reduction of learning curves for it staff. Embraer’s strategy can be broken in three parts6: • • • Choose Technology Areas aimed at product innovation and fulfilling the needs/requirements of customers Identification of risk partners for supply of parts and subsystems (“technology packages”) Cultivation of local subcontractors for engineering services. allowing Embraer aircraft to be introduced in less than half the industry standard time that new plane projects require6.Embraer’s method of managing its product lines is based around “families” of aircraft. Most of the risk partners are located outside of Brazil but collocate engineers in São José dos Campos. The risk partners are enlisted to supply key components of the aircraft and are required to invest their own funds for development. chemical coatings. milling and other specialized aircraft technologies Strategic Partnerships For key technology areas. thereby taking on some of the risk of the project. marketing and technical services coordinating the risk partnerships. The platform approach to product management works hand in hand with Embraer’s strategic partnership strategy. Local subcontractors are used extensively Page 7 of 17 . but rather the company leverages its core capabilities in systems integration. it is not important that Embraer manufacture every key technology. The platform or family approach to product management reduced time to market by two to three years. Partners are rewarded if the project is successful in supplying primary components and spares for the life of the new aircraft. Rather than developing a single model. This strategy keeps cost low and improves time to market. resulting in an aircraft industry “cluster”. Many of the local firms were founded by former Embraer employees. The commercial aircraft industry is dynamic and subject to the effects of Porter’s five forces as described earlier. and coatings.6 The decision to focus on the fuselage was driven partly because this technology could not be easily sourced outside of Brazil and thus it provided a good area for Embraer to develop its own expertise. fuselage and systems integration. Embraer has chosen to focus on key aircraft technologies while building core expertise in aerodynamics. This became part of Embraer’s determination not to outsource the aircraft cockpit nor “anything that was not integral to its longer term strategy of concentrating on the provision of ‘intelligent systems’”1. milling. Embraer’s recognition of the fact that increasing its competency in systems integration is more important than the ability to create or manufacture all of the technologies in an aircraft. Intelligent Systems Instead of attempting to build an entire aircraft and develop all technologies within Brazil. Disruptive Innovation? Another useful framework for analyzing the commercial aircraft industry and Embraer’s strategy is from the point of view of “disruptive technology” as introduced by Clayton Christensen4. Vendors in this industry need to be cognizant not only of economic factors that impact buyers (airlines) but also of passenger Page 8 of 17 .for engineering services. provided it with a realistic approach to competing globally. Embraer could choose to compete with the Airbus 320 and Boeing 737 in some sectors. A keen awareness of passenger trends allows vendors to understand market dynamics and sustain or improve their current position. Christensen’s model could be represented as in the graph below: From the analysis. an appreciation of the role disruptive innovation may lead manufacturers to discover new opportunities and grow future sales.preference trends. Based on the previous Porter analysis. Embraer presents a compelling case for airlines to consider Embraer aircraft to assemble lighter and more efficient fleets. Furthermore. With superior operating margins. the reaction of the incumbent vendors must be Page 9 of 17 . As applied to the aircraft industry. he would prefer to diversify into the defense market and expand in the business jet market. according to Embraer CEO Botelho. Embraer formed strategic relationships with technology partners. Embraer participates in competition for defense business in Brazil and globally. the Airbus 320 and Boeing 737 are larger aircraft and more expensive to operate. Embraer has always faced difficulties with respect to funding projects. Although one would expect them to “defend” their “turf”. Alliances and Partnerships – A new strategic direction or logical outgrowth? From the beginning. Other technology came from the Brazilian Aeronautical Technical Center’s (CTA) Institute of Research and Development (IPD). to the WTO dispute. entering the 135 seat aircraft market is not in the cards for Embraer as this would mean “jumping into the big dogs’ market”. In addition to the regional jet market. The first Embraer jet trainer licensed technology from the Italian firm Aermacchi for a product to be used by the Brazilian Air Force. Rather. Embraer learned to incorporate technology from different sources while strengthening core competencies in intelligent systems. Based on Embraer’s past with the turbulent Brazilian economy of the early 1990’s to Botelho’s restructuring in the middle 1990’s. The use of risk partners not only benefits Embraer from a technological point of view. systems integration and project engineering. a reference to Airbus and Boeing8. but also from a financial and capital structure point of view. Page 10 of 17 . While Botelho would like to expand Brazil’s share of the defense business his success has been limited.considered. However. One could argue that Embraer has already eaten into some of the market share that would have been been attained by Airbus or Boeing by filling the 70 to 110 seat void with lower cost aircraft. Embraer implemented much of the IPD technology to its advantage but created its own methods of technological innovation and internal learning to carry it forward. and allows expansion into defense systems for naval and ground support1. Embraer is Page 11 of 17 . 45 for the ERJ-145) 6. only companies can do that. An alliance is also a good alternative to being acquired which would most likely be defeated by government veto. The US defense market had proven difficult to break into. An alliance could provide extra capital funding.The 1999 announcement of a strategic alliance with a group of French aerospace companies was a logical outgrowth of Embraer’s overall strategy of risk partnerships. The new alliance provides the capability for Embraer to transfer in technological know-how for supersonic aircraft. this move was consistent with Embraer’s core strategy to develop “Intelligence Systems”. capital funding sources. and acquisition of new technological capabilities. the alliance is a good fit and is consistent with Embraer’s core strategy. Embraer had already embarked on an effort to work with fewer key suppliers on the ERJ170/190 (only 26 vendors vs. Embraer can credit part of its success to “government- sponsored institutional and technological developments dating back to the 1950s”6. Also. “Government cannot create competitive industries. technological resources and credible partners to bolster business in this important sector not subject to WTO restrictions. in terms of diversification in product lines. this translates to “Intelligent A Global Leader from an Emerging Economy According to Porter. Defense Systems”1.”7 In the case of Embraer. Overall. the role of government is to act as " a catalyst and challenge”. In the defense context. Even with government help. For example. In applying Porter’s Diamond Framework to Embraer. we can analyze the success of the company and attempt to understand the reasons for this success. some of Brazil’s lack of endowments actually created the necessity out of which Embraer is born. However. Page 12 of 17 . Brazil has large amounts of land through difficult terrain and wide rivers but limited surface transportation infrastructure.responsible for increasing the size and capabilities of the São José dos Campos region and creating a local aircraft design cluster for Brazil. in the context of Porter’s analysis of the Competitive Advantage of Nations. Aircraft are a natural way to overcome these challenges. the appearance of Embraer in a developing country such as Brazil appears to be an anomaly. Page 13 of 17 . 2. They Page 14 of 17 . Firm Strategy. Structure and Rivalry Embraer has no domestic rivals in the aircraft business. Locally. the Brazilian Defense Force and Brazilian Airlines do not automatically choose Embraer. Embraer was founded by the government and later was privatized. Demand Conditions Embraer certainly has demanding local and global customers. There is an active aircraft industry in the local suppliers to Embraer in São José dos Campos which mirrors what the United States has in area surrounding MIT.1. strong corporate leadership and sound strategy. These local suppliers are also free to compete globally. These factors are difficult to duplicate and have lead to competitive advantage. Brazil’s domestic buyers are just as discerning as global buyers. After World War II. along with global risk Page 15 of 17 . Brazilian companies can succeed globally. 4. Implications for Brazil Embraer’s success demonstrates that with the proper mix of government support. highly skilled skilled and specialized labor was cultivated. However. the company faced adversity and was able to overcome it through strong leadership. Over time. Embraer is a great source of national pride for Brazil and an exceptional case. Embraer enjoys geographic proximity to upstream and downstream industries.must compete and win on a level playing field. 3. Related Supporting Industries In São José dos Campos. Embraer has developed core competencies and has helped São José dos Campos to grow creating specialized factors and conditions helping to foster sustained innovation and investment from overseas. Embraer never had easy access to capital or benefited from the Brazil’s infrastructure. Factor Conditions Brazil did not inherit any key factors to help them enter the aerospace business. This facilitates the exchange of information and promotes a continuous exchange of ideas and innovations. partnerships with and incentives from the government. Luis Felipe Monteiro. References 1. 2000 2. Other businesses in Brazil are equal candidates for success. Pankaj Ghemawat. Embraer: The Global Leader in Regional Jets. Designing and Implementing a New Supply Chain Paradigm for Airplane Development. Harvard Business School.mit. Yun Yee Ruby Lam.edu/handle/1721. Gustavo A. https://dspace. October 20. MIT. By adding value and leveraging technologies from other countries. As Porter points out. Armed with this knowledge. specifically satellite and fuel technologies.1/34854 Page 16 of 17 . 9-701-006. MarchApril 1979.partnerships structured to allow technology to flow into Embraer. Ultimately. 3. Managers that recognize the fact that their home nation is integral to their success will also promote continuous innovation while welcoming the formation of clusters of like competitors to create national centers of excellence. These clusters will lead to what Porter calls the “Diamond of National Advantage” which is a self-reinforcing construct that is difficult for other nations to imitate. HBR Article. national policy makers can make decisions fostering an environment conducive to supporting industries that will be able to take advantage of the lessons described above. Michael E. but only companies can create sustained competitive industries. Herrero. the government may act as a catalyst. Embraer was able to build its own core competencies and achieve global leadership in the regional jet market. Porter. How Competitive Forces Shape Strategy. nations that wish to be competitive effectively on a global basis need to realize that “only companies can achieve and sustain competitive advantage” and that the “capacity of its industry to innovate and upgrade” is essential. June 2005. New York 6. http://www. The Innovator’s Dilemma. José E. Irwin.pdf 7.dartmouth. 1990 8. UNCTAD. 2005 9. Douglas A. The Little Aircraft Company that Could. Nina Pavcnik. Airbus vs. Cassiolato. Fortune Magazine. Global Collaboration and Implementation – World Aerospace Symposium-2005. www.org/en/docs/iteipcmisc20_en. Tim Bowler. Porter.aviationweek. 2002. HBR 90211.pdf Page 17 of 17 .edu/~dirwin/airbus3. 28 August 2003. Clayton M.4.unctad. 2000. Boeing Revisted: international competition in the aircraft market. A case study of Embraer in Brazil. November 14. Transfer of Technology for Successful Integration into the Global Economy. United Nations.com/conferences 5. New York and Geneva. Christensen. Russ Mitchell. Harper Business. Roberto Bernardes and Helena Lastres. http://www. The Competitive Advantage of Nations. Michael E. Journal of International Economics.