The Bargaining Power of Buyers in the Aerospace & Defense Industry

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Kelly Mann ECN 2020-84250 Competitive Forces Paper December 6, 2010
The Bargaining Power of Buyers in the Aerospace & Defense Industry
The United States aerospace and defense industry is the largest of its type in the world.In 2009, United Press International, Inc. reports the aerospace and defense industry achieved a record $700 billion in spending. The defense market has experienced significant economic growth over the last decade due to large U.S. security spending in hopes to impact or end the global war on terrorism. The 9/11 attacks on the U.S. increased demand in the defense market while causing a decline in the airline industry. Airlines have suffered due to new security guidelines and a downturn in the U.S. economy. The future of the defense market lies in the U.S. government budget. United Press International, Inc. reports President Obama plans to cut $100 billion in spending from 2012 – 2016 from the defense budget.

Firms use economist Michael Porter’s Five Competitive Forces Model to gage the profitability and competitive position in a given market. The five forces are:
1.Rivalry amongst existing competitors 2. Threatofnewcompetitors 3. Threatofsubstituteproducts 4. Bargainingpowerofbuyers
5. Bargainingpowerofsuppliers
The bargaining power of buyers force is unique in the aerospace and defense industry. Firms supplying defense products outfit one main buyer, the U.S. government’s Department of Defense. The power of buyers is defined as the impact that customers have on a producing industry. The Department of Defense and Defense

1|PageIndustry relationship is near to what economist term as a monopsony. The definition of a monopsony is a market in which there are many suppliers and one buyer. In a monopsony, the buyer sets the price.

One element of buyer power is the number of buyers. The Department of Defense (DOD) has been identified as the key purchaser for the defense industry. DOD has significant power and influence over the many firms in the market. Only a few of the firms in the defense industry are dual-hatted as major firms in the aerospace industry. The U.S. airline industry purchases from U.S. firms Boeing which is the largest, Northrop Grumman, and Lockheed Martin. Some European firms have entered the U.S. market as well. Britain’s BAE Systems is a firm that has acquired U.S. assets. France’s European Aeronautic Defense and Space Co. declared its strong interest in the U.S. aerospace and defense sector (Holman, 2008). There are many firms competing for the U.S. government and airline industry to purchase their product or service. Sales to foreign investors by U.S. firms are regulated by the U.S. government for security purposes.

Another element of the bargaining power of buyers is the size of the buyer. The huge U.S. defense budget offers a compelling reason for firms to enter the industry though anticipation of budget cuts may lead to deterrence. A recent report noted “the U.S. defense and aerospace industry remains the largest in the world” (Security Industry, 2010).

The purchase quantity is another factor affecting buyer power. When buyers purchase large quantities of a supplier’s output, it exercises more power over the supplier. In the aerospace and defense industry, the purchasing power of defense

contracts is vast. An example is the procurement of the new generation of aerial refueling tankers which is a $35 billion contract with the United States (Carter, 2009).
The U.S. government relies heavily on competition in its procurements with the private firms. The intent is to ensure the best value for government expenditures. While this is intended to be a competitive market, many of the characteristics are oligopolistic. There are only a few major firms competing for the major, multi-billion dollar government contracts....
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