Boeing and a dramatic change of direction

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John used to teach students that Europe could never regain supremacy in civil aircraft manufacture. He was mistaken. What went wrong with Boeing’s strategy?

I used to teach students that no dominant position was so entrenched as Boeing’s grip on civil aviation.

The theory is that incumbent companies can see off even potentially stronger competitors through three strategic advantages: economies of scale (lower costs from larger output); sunk costs (historic expenditures that yield future benefits); and economies of scope (cost or revenue advantages from operating in related markets). Boeing had all three.

It had scale economies in plenty – its Seattle facility (like the Airbus assembly plant at Toulouse) is reputed to be the largest single structure in its continent. It had a powerful experience curve – the cost of producing any particular line of aircraft falls as cumulative output increases – and Boeing has more than 30 years’ experience of constructing 747 jumbo jets. And the company shares overhead costs and technology with military production for its largest single customer, the US government.

But although most of the aircraft you see at Heathrow or Kennedy Airport are Boeings, that reflects the past rather than the present or future. Airbus has won an increasing share of the market and today the European company has larger orders and more exciting new aircraft.

My account failed to recognise another vital factor. Sustained dominance depends on complete commitment to a market and market leadership. The commitment that once characterised International Business Machines and today characterises Microsoft. The commitment you see at Philip Morris, Coca-Cola or Disney. Their priority is to win and their concern is only secondarily with profits.

Boeing was once the archetype of such companies. Bill Boeing was an engineer who loved aircraft. But the architect of the modern company was a lawyer, Bill Allen, chief executive from 1945. Boeing, Mr Allen said, “is always reaching out for tomorrow. This can only be accomplished by people who live, breathe, eat and sleep what they are doing.” When Crawford Greenwalt, a non-executive director, asked for information about expected returns from the 747, Boeing’s largest and riskiest project, he was rebuffed.

Robert Serling, in his history of Boeing*, writes: “Greenwalt just put his head down on the table and muttered ‘My God, these guys don’t even know what the return on investment will be on this thing’.”

Boeing bet the company on the 747 and it was a close-run thing. The first model was delivered to Pan Am in 1969, just before the oil shock of the early 1970s. But world airlines then resumed sustained growth. With little competition to the 747 for two decades, very little discounting was needed. We still do not know the ROI but it was probably several hundred per cent.

This changed in the mid-1990s, when Boeing acquired McDonnell Douglas and a new management team of Harry Stonecipher and Phil Condit. Mr Condit proudly talked of taking the company into “a value-based environment where unit cost, return on investment, shareholder return are the measures by which you’ll be judged”.

Boeing’s recent strategy has been increasingly sceptical of large investment in new aircraft, dropping plans for a sonic cruiser and a stretched jumbo jet. The company’s focus has been on meeting the growing needs of the US military. Airbus, like the old Boeing company, was about aircraft first and money second: it came into being as a technological flagship rather than a commercial venture. But, as for Boeing, aircraft have proved highly profitable.

We shall never know whether Boeing could have made more money for its shareholders with a different approach. In an uncertain world the prospective ROI on the 747 could never have been meaningfully calculated.

But we do know Mr Condit’s refocusing of Boeing failed in its own terms – the stock price when he resigned was 20 per cent lower than when he was appointed. And we know I was mistaken when I told classes that Europe could never regain supremacy in civil aircraft manufacture.

* Legend and Legacy: the story of Boeing and its People, St Martin’s Press, 1992

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