Airbus Replaces CAD-CAM with Virtual Reality Technology

Case Type: business operations strategy.
Consulting Firm: Roland Berger Strategy Consultants 1st round job interview.
Industry Coverage: Software & Information Technology; Airlines.

Case Interview Questions #00086: Your client Airbus is a major commercial airline manufacturer. It is the aircraft manufacturing subsidiary of EADS (FWB: EAD, Euronext: EAD), a European aerospace company. Based in Blagnac, France, near Toulouse, and with significant activity across Europe, Airbus produces around half of the world’s jet airliners.

Recently, the head of the IT department of Airbus suggests that a new virtual reality technology can replace the current CAD-CAM (computer aided design and computer aided manufacturing) system for designing airplanes. How would you frame your analysis in trying to come up with a recommendation for Airbus?

Possible Answers:

Me: I would like to structure this strategy case using the 3C’s framework – Customer, Company, and Competition:

Customer – Our client Airbus’ clients are people who buy commercial aircraft. They are likely concerned with price and with quality. They would also likely be concerned about how long it takes us to respond to design change requests and new designs for airplanes as well.

I would ask the following questions. Will this new technology save us in production costs, allowing us to sell planes for less money while making more money? Will the new technology allow us to bring planes to market with fewer bugs/defects, improving quality in the eyes of our clients? Will this technology enable us to shorten our production cycle and bring a product to market faster?

Company – Is this Virtual Reality technology viable today or in the near future? Are there competing technologies? Will the companies that we will be buying the new technology from be around next year or in five years? How reliable is the technology? Can we produce the new system in-house? Can we produce a small scale, less expensive model first to see if we can really make this work? Will this technology be able to be copied rather easily by our competitors? Can we make this a proprietary technology and hold on to this competitive advantage longer?

Is the market for commercial aircraft stable or unstable? If it’s stable then there may be no need for new aircraft designs in the near future. Our capital might best be used elsewhere if this is the case.

Competition – How will our competitors respond? Will they hire their own consulting company and produce a competing system? How long will this take them to do? Are they focusing on different issues such as fuel consumption or weight and strength of the metal alloys used to manufacturing? Are these more appropriate places for us to focus our attention?

After answering and quantifying these questions, I would look at the cash flows resulting from this project. I would come up with a best-case scenario, a worst-case scenario, and a likely scenario.

Interviewer: How would you incorporate risk into the equation?

Me: In the interest rate that I would use to discount the future cash flows.

Interviewer: Could you be a little more specific about how you would go about determining the proper discount rate?

Me: Sure. If Airbus had alternative uses for the capital, I would analyze those alternatives. Let’s say the alternatives are investing in treasury bonds at 7% or investing in additional parts and labor to help reduce our production backlog. Let’s say we calculate that this second alternative would return 11% over the same time horizon as the new technology project. I would use 11% as the discount rate.

Interviewer: Good. Can you foresee any problems with the company’s suppliers if we decide to go with this project?

Me: Thanks for the help. If we are going to dramatically reduce our cycle time in bringing new designs to market, we will require our suppliers to design and produce the necessary parts more quickly as well. Perhaps we could share our technology with our suppliers in an effort to help them do this. If ultimately our suppliers could not respond to the new time frame, then we might be investing in great technology that will yield us no benefit whatsoever. This should certainly be considered when analyzing the options.

Interviewer: Great! Let’s stop there. Do you have any questions for me?