Product Differentiation

Cessna has a large product line and has differentiated itself very broadly throughout its history.  While venturing into the LSA market was not as successful as initially imagined (covered in my last post), the rest of Cessna's products cater to several different markets and therefore can protect itself against several different threats.

For Cessna, this helped protect the company during the downturn of the 1980s-90s.  During this time period, piston aircraft sales nosedived from a high of over 14,000 units in 1978 to less than 1,000 in the late 1980s.  The numbers have never fully recovered, mostly due to increased operating costs, but Cessna was forced to discontinue its flagship piston aircraft, the 172, for over a decade (1986-1998).  If the company was focused just on small piston aircraft, it likely would not have survived this extended slump.  However, with since it had differentiated its products, Cessna was able to survive and reintroduce a much beloved aircraft.

Learning Curves and Failed Designs

The learning curve in business can certainly play into how smoothly a product launch goes.  As a company becomes more comfortable with the life cycle of its products, costs and economies of scale will benefit.  While Cessna was quite experienced in aircraft manufacturing from both a business jet and small piston aircraft standpoint, the company had some challenges expanding its product line into the newer Light Sport Aircraft (LSA) category.

The LSA category of aircraft was developed in response to the sport pilot certificate developed in 2004.  This new pilots license allowed aspiring individuals to get in the air with fewer hours of training and less scrutiny of their medical history.  Training was overall less expensive; however, pilots with this new type of license were limited in the type of aircraft they could fly and how they could fly them.  The new weight (<1320 lbs) and speed (<138mph/120 knots) restrictions meant that Cessna would have to develop a new product if it wanted to capture this market.  While the company used to manufacture a smaller and slower training aircraft (the 150/152), even these models were too heavy for the LSA category.

The solution to this was the 162 Skycatcher.  First delivered in 2009, the newest model Cessna was approximately half the cost of a new 172.  It was a completely new design, which required significantly more time and resources than redesigning an existing aircraft.  While the company missed its target price of less than $100,000, initially there were several orders for the new smaller trainer.  This price target was not achievable and rose significantly through the product's life cycle, up to a staggering $149,000 in 2011.  This caused many who initially placed order to cancel them, as the price point was significantly higher than the competition.  In a market of mostly cost-conscious buyers, a major price change pushed many away.  Cessna stopped production in 2013, and of the 262 aircraft registered, 92 of them are to Cessna itself, meaning only 170 had been sold.

Other companies that were more experienced with lighter aircraft excelled in this market, and some new models can be obtained for less than $100,000 to this day.  Cessna ventured into a market it didn't have much experience in, and it didn't fare well against those with more experience.

Evaluating Cessna's Resources

I have been a bit lax in updating this blog, mostly due to things picking up substantially at work.  As the semester is getting close to ending, I will be updating much more often and probably putting in some late nights.  Please accept my sincerest apologies if some things don't make sense, as sleep deprivation can be a wild ride.

In this installment, I want to take a look at a resource-based analysis of Cessna and its internal strengths and weaknesses.  This can easily be done with the VRIO framework.  Below, we will look at Value, Rarity, Imitability, and Organization to determine how strong or weak the company is looking.

Value - The main question to ask here is Do Cessna's resources and capabilities enable it to respond to environmental threats or opportunities?  Cessna is has significant capabilities and experience in the aircraft manufacturing business and can easily respond to a changing environment.  The company has longstanding relationships with organizations, and has recently negotiated with the Civil Air Patrol to provide them with 21 new aircraft.  Agreements such as this will help provide a baseline number of aircraft sales even if the economy puts many individual buyers out of the market.

Rarity - Is a resource currently controlled by a small number of firms? I don't see Cessna as controlling many resources in the raw materials sense.  The company may be able to negotiate lower prices due to its sheer size.

Imitability - Do firms without a resource face a cost-disadvantage in obtaining or developing it?  I see Cessna as having somewhat of an advantage in this area.  Cessna does have a subsidy, McCauley Propellers, which gives the company a cost advantage in producing a key component to many of its aircraft.

Organization - Are Cessna's other policies and procedures organized to support the exploitation of its valuable, rare, and costly-to-imitate resources?  I think that Cessna is certainly able to exploit its resources.  Being a division of much larger Textron gives the company significantly more power as both a buyer and a supplier of resources and finished products.  Cessna can offer many products at competitive prices and still maintain a high quality product.

Evaluating Environmental Opportunities

Cessna has a fair number of environmental opportunities that the company is already taking advantage of.  In a relatively mature domestic industry, Cessna has focused on service, integrating itself into flight schools across the nation.  The company also has conducted vertical integration to decrease costs, integrating with McCauley Propeller Systems to supply both their own aircraft lines as well as others.

With a growing demand for airframes abroad, Cessna has established itself in the global marketplace already.  Between 2011 and 2012, the company saw a 50% increase in sales of its aircraft in China.  The opportunities abound for the aircraft industry, and Cessna is certainly taking advantage of many of them.

The External Environment of Cessna

The aircraft market is rife with competition, and along with that comes threats and potential opportunities.  The largest threats to Cessna's business are from other companies focusing on the same product lines Cessna produces.  For example, Cirrus has entered the market as a new competitor for the general aviation market, with stunning success.  Their entry-level aircraft is priced similarly to a new Cessna 172S ($359,900 vs $307,500) but comes with a longer range, faster cruise speed, and an emergency parachute.  This is quite an enticing offer over a base 172.  Cessna still resonates as the primary dealer in the flight school market, which makes up a good portion of new aircraft customers.

Another potential threat that could be an opportunity on the horizon for Cessna and other aircraft manufacturers are the long-anticipated changes to Part 23, the regulations that govern certification of new aircraft.  The aviation industry has long prided itself in the safety and reliability of its machines, and many planes built several decades ago are still flying.  Heck, the majority of my flight training was done in a plane that rolled off the assembly line in 1967.  However, with the industry reeling from lower sales and basic aircraft that cost over a quarter million, many are challenging the amount of regulation required to bring a new or amended design to market.  Even small changes to an aircraft have to be thoroughly tested before they are given a pass rating, and going through all this red tape brings the costs up significantly.  The proposed changes to Part 23 encourage faster development cycles while ultimately lowering the cost for pilots to purchase a new aircraft, and at the same time maintaining a high level of safety in the industry.  While this will decrease barriers for new competitors to enter the market, and result in stiffer competition among established brands, the powerhouse that is Cessna can capitalize on this new change and potentially offer an entry-level plane at a reasonable price.

Competitive Advantage of Cessna

Cessna aviation has been producing aircraft for various uses since 1926 and has become a hugely competitive force in the aviation manufacturing market. They have achieved competitive advantage by significant horizontal integration to several different markets.  Many pilots start their training in a Cessna aircraft, and their 172 Skyhawk model is the most produced general aviation aircraft in history.  However, the company also produces Citation business jets in various sizes as well as turboprop aircraft, which are in use by various commercial operations, from skydiving centers to humanitarian organizations, all the way to worldwide delivery services.  In the 2013 General Aviation Statistics Databook, Cessna is one of two manufacturers with products in every fixed-wing aircraft category listed, and it has by far the highest production numbers from year to year.  In addition to offering several product lines, Cessna also has made partnerships with flight schools, many of which potentially draw in extra business by being a Cessna Pilot Center.  The flight school gets a pre-built curriculum and students get taught in a standardized manner.

Getting Started

This is the kickoff post for my blog where I'll be following company events for at least the next few months.  Stay tuned for the reveal ceremony next week!

-Chris