boeing strategic report
TRANSCRIPT
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Boeing Strategic Analysis Report
Professor Jiang Bus 189
Matt Fong
Karolyn Vong Kenneth Wong
Vivian Li Jae Woo Chae Joseph Eslao
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Assessing the Industry
Each year the strong economic growth of the U.S. has led to sustained high oil and fuel
prices. Between 2003 and 2007, jet fuel expenses have increased dramatically by 15 percent to
more than 30 percent of operating cost. Because of this, many airlines are demanding new
aircraft that are fuel efficiency in order to help reduce their operational costs. The current trend
of increasing fuel prices plays a key role in increasing the current demand for new aircraft or
commercial airplanes that are more fuel-efficient. In addition, the rising fuel prices have taken a
big effect on the economy. As fuel prices affect consumer goods and spending, leisure travel is
expected to decrease, thus affecting the airline industry's bottom line. Furthermore, since the
economy has gradually moved into a recession from the effects of rising fuel prices, many
airlines that are struggling to stay out of bankruptcy, are looking for more ways to become cost
effective. Thus, further fueling the demand for new commercial aircrafts to become more fuel-
efficient (2007 Annual Report).
In order to save on costs so that Boeing can provide lower prices to its customers,
Boeing and its competitor, Airbus, have both turned to outsourcing. Outsourcing has allowed
Boeing to become more competitive. Furthermore, the option of outsourcing also allows Boeing
to share risks and focus on their relationship with marketing and suppliers. However there is a
down side when Boeing decided to outsource. Engineers feel that outsourcing is not a great idea
for the company (Hit, Ireland and Hoskisson: 52). One of the reasons why engineers are against
outsourcing is because they feel that their job is at stake and the company has lost sight for
bigger interests. People feel that outsourcing is not only about people losing their jobs, but also
competing efficiently in a global industry.
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Furthermore Boeing believes that outsourcing these components to suppliers would give
the suppliers an ultimate control over manufacturers. The newest trend came into the production
of new aircraft; an example of the new trend is the 787 Dreamliner. About 70 percent of its
components of a given airplane are outsourced because the company can save more money and
cost when outsourcing outside the country and to generate sales. China and India are one of
Boeing’s main focuses on countries because they can deliver excellent products at a very cheap
price. “Offset Agreement” is where Boeing can obtain aircraft sales in return for manufacturing
work and this will give Boeing an advantage to gain more power of the fastest and biggest
growing airplane markets which is India and China (Hit, Ireland and Hoskisson: 52).
In addition, Boeing’s global presence continues to provide access to markets, higher end
technologies and talents, as Boeing continues to provide an excellent industry solution to their
customers. Currently, most of Boeing's sales come from related international sales. Boeing’s
777-200LR has became the first India –based operator to deliver non-stop flights from the United
States to India. Other countries such as United Kingdom, Canada, and Australia had requested
for special airplanes (Hit, Ireland and Hoskisson: 53). Over the next couple of years, commercial
airplanes are expected to involve international customers and international sales of Boeing
defense products. Depending on Boeing’s success, the ability to provide their customers with the
right services and products are being viewed a strategic collaboration with their partners and
suppliers to meet various needs of the customers. The significant 787 model is part of the next
generation of airplanes. With the 787-model technology, Boeing is working hard with the
world’s leading organization to leverage their research and development and enlist their expertise
to provide the best cutting edge technology solution available. Boeing is viewed has a global
business company, but at the same time they work to the benefit of the local communities.
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Furthermore, the industry has been affected by the circumstances of September 11 and
the Global World on Terror (GWOT), the U.S government has set limitation their budget
spending. This will be a disadvantage for Boeing's Integrated Defense System unit because the
company will not have enough financial support or resources to build new airplanes due to
budget cuts. In addition, over the past years, emergency supplemental request has been used
toward to Global War on Terror (Hit, Ireland and Hoskisson: 54). The United States government
is spending their entire budget on war rather than allocating their budget for airline industries.
Because of this problem, aircraft manufacturers like Boeing will have to cut and slow down in
delivering newer aircraft technologies. Until now, the government is requesting more money to
spend on GWOT (2007 Annual Report).
However, there is a positive outlook for Boeing's commercial airplanes division.
According to industry analysts, the 20-year forecast for airline traffic is projected to grow for
passenger traffic will be 5% per year, while cargo traffic growth will be 6%. This is
an important factor since the industry future revenues are affected by the demands in aircrafts,
which is directly linked to airline traffic (2007 Annual Report). Still the largest shares of the 6.8
billion airline passengers are expected to come from the Asia-Pacific
Region. As emerging economies countries like China and India will continue to grow at
a progressive rate, many people (new passengers) will be able to have access to affordable,
direct, and efficient air services. All this will provide an opportunity for Boeing to enter into the
Asia-Pacific region market. Essentially, all of this will contribute to future demands for Boeing
products and services, thus helping boost Boeing future sales revenues.
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Boeing Background (History)
William Edward Boeing was born in Detroit to Wilhelm and Marie Boeing in 1881. His
father Wilhelm Boeing had moved from Holhenlimburg, Germany to the United States in 1868
when he was 20 years old. Young Wilhelm started work as a farm laborer but soon joined his
father-in-law. He bought timberland, built a large home and became the director of Peoples
Savings Bank. He was the president of the Galvin Brass and Iron Works, and a shareholder in
the Standard Life Insurance Company. He also bought land in Washington State and timberland
in California. Unfortunately, he died of influenza in 1890 when he was 42 years old and had left
his wife Marie and his three children behind. Marie remarried at that time and became Marie M.
Owsley. William E. Boeing was the eldest of the three children and had claimed that he did not
get along with his stepfather and got sent to school in Vevey, Switzerland. Boeing left Vevey
after a year and moved back to the United States to continue his education in public and private
schools. He studied at Yale but did not graduate and eventually left college to start his new life
in Grays Harbor, Washington, where he learned to start a business with lands that he had
inherited from his family. He began to buy more timberland, adding to the wealth he already
had, and moved to Seattle in 1908 to establish Greenwood Timber Company. (Boeing.com -
History / Biographies)
William always had an infatuation with airplanes. In 1910, he arrived at an aviation meet
in Los Angeles, where he tried to get a ride on one of the boxy biplanes. Unfortunately, that did
not happen. In 1914, Thomas Hamilton, later found of Hamilton Metaplane Company,
introduced Boeing to the U.S. Navy Lieutenant G. Conrad Westervelt. He and Boeing became
good friends and took a ride on flier Terah Maroney’s Curtiss-type hydroplane. They both
concluded that they could build a better airplane. Being told that there was a definite future in
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aviation, Boeing showed an extreme interest in building aircrafts. With a group of technical
assistants, work had begun to design the first Boeing plane. His very first airplane was the B&W
Seaplane, which stood for Boeing and Westervelt. It was 25.5 feel long and flew 900 feet. His
determination is what brought him today to his airplane manufacturing company. Thus, Boeing
Airline Company was established on that day, July 15, 1916. It was originally known as Pacific
Aero Products Company because Boeing incorporated many of the products into the company’s
work.
However, a year later, it was renamed to Boeing Airplane Company. On April 8, 1917,
U.S. President Woodrow Wilson declared war on Germany. At that time, Edgar Gott, William
Boeing’s first cousin was the president of the company. He helped obtaining contracts with the
military during the WWII and ultimately became the powerhouse due to orders of B-17
Bombers. However, after the war ended, the Bomber orders were canceled as well which led
Boeing to diversify its product offerings in hopes to bring sales back. It made furniture,
phonograph cases, and fixtures for a corset company. Later, the company started to show profit
from repairing military aircraft. Through many ups and downs, Boeing had become a leader in
commercial jet manufacturing with its 707 in 1945. With its continuous improvement with the
720, which allowed a faster speed than the 727 and to fly a longer route. On the other hand,
Boeing continued to run his timber business until 1954 when his health began to fail
(Boeing.com - History/Biographies).
In 1967 and 1968, under the leadership of William A. Allen who was the president at that
time, helped Boeing had reached its further success with the development of 737 and 747. The
737 had become the best-selling while the 747 would hold the passenger seating capacity record
for 35 years, allowing 524 passengers on board each time. Unfortunately, Allen passed away in
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1985. With the new president Thorton William in 1986 and Malcolm T. Stamper in 1972, they
came out with the single-aisle 757 and larger twin-aisle 767, Boeing continued to manufacture
and improve its products along with the help of technology. In 1994, Frank Shrontz took over
and helped Boeing develop 777. It was the first aircraft that was designed entirely by computer.
In 1996, Philip M. Condit became the president but forced to resign due to mismanagement. He
made a huge mistake for underestimating Airbus’s ability to compete with Boeing and the
company suffered greatly from manufacturing and accounting problems. (Boeing.com - History /
Biographies)
Mission and Objectives/ Characteristics
Every company has its own mission and objectives. It is indeed very important for the
company to follow through their vision for continuous improvement to achieve its ultimate goal.
Even though Boeing has changed CEO many times throughout its life, however, there is only
one purpose for the existence of Boeing. As explained in its mission statement, it is “working
together as one global enterprise for Aerospace leadership.” Boeing values team work and
collaboration. It recognizes that its strength and competitive advantage will always come from
its human resources. It encourages cooperation at every level and in all activities because it is
believed that sharing ideas and knowledge will help everyone learn. Boeing collaborated with
many partners to design and develop the 787 in hopes to develop faster and reduce costs. Also,
spreading the costs would build global relationships that may help the company sell its planes
overseas in return. As Scott Griffin, the vice president and CIO of Boeing said, “The company is
no longer just a manufacturer, but also a high-end systems integrator. We are a technology
company.” This move is very critical to Boeing since it would bring a competitive advantage to
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the company and also helps it lock in a global battle for market leadership with its biggest
competitor Airbus.
However, the success of the 787 in the future years is not clear but a new level of global
collaboration is definitely established.Innovation and competitiveness are also the biggest
priorities of Boeing. It continues to expand its product line and services to compete with its
competitors and exceed quality, customer satisfaction and needs. Boeing also has the ability to
think differently, allowing the company for change. The new Boeing 787 Dreamliner that they
are developing is a mid-sized, wide-body, twin-engine jet airliner. Its capacity is between 210
and 330 passengers and will have more standing room, larger windows and bathrooms. Most of
all, it will be more fuel-efficient than any of the Boeing airliners developed and also the first
major airliner that uses composite materials for most of its construction. Boeing is trying
something that is almost completely different from its previous work. From the materials and
electronics that are used to build the plane to the technology uses during the design and many
other processes, Boeing is said to be undergoing a big transformation as it comes to building its
“next-generation jet” as a new way of doing business. Indeed, Boeing does a very impressive
job in achieving its goals. As a major service provider to NASA, Boeing is now the world’s
leading aerospace company and the largest manufacturer of commercial and military aircrafts by
revenue, orders and deliveries; doing business in more than 90 countries. Boeing designs,
assembles and supports commercial jetliners. It is the world’s premier commercial jetliner
manufacturer because it offers many different services to its customers, allowing them to fly to
where and when they want to. Commercial Airplanes is headquartered in Renton, Washington.
Boeing also designs, assembles and support defense systems, which are military transports, such
as helicopters, fighters, tankers, etc.
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Lastly, it designs and assembles satellites and launch vehicles, providing the largest
amount of commercial and military satellites. The factory is headquartered in El Segundo,
California. It manufactures the body-stabilized Boeing 601 and 702 satellites. The Boeing 702
satellites are the most powerful communications satellite in the world today. Boeing’s mission
statement also states that one of its core competencies lies in “detailed customer knowledge and
focus.” Only the customers know what’s “preferred.” They have the choice of purchasing new
or used planes. If Boeing does not know what customers need and be able to deliver them
flawlessly, it would lose the customers to its competitors. Therefore, Boeing has to know who
its target market is and how to attract customers. For example, half of the orders for the Boeing
787 Dreamliner are from Asia-Pacific clients due to the economic growth in China and India. In
early 2004, Boeing experienced low sales because Airbus’s A-320 had superior technology,
which ended up stealing many of Boeing’s contracts. In this case, customers see technology as a
more important factor when it comes to deciding which planes to buy.
When doing business, the highest standards of ethical business conduct are expected from
all of its employees. “Boeing will conduct its business fairly, impartially, in an ethical and
proper manner, in accordance with the company’s values and Code of Conduct, and in full
compliance withal laws and regulations. In the course of conducting company business, integrity
must underlie all company relationships, including those with customers, suppliers, and
communities and among employees” All employees are expected to follow the guidelines at all
times. In addition, Boeing has ethics and compliance programs to promote and inform its
commitment to integrity to ensure that everyone is complying with the laws and regulations.
Managers are responsible for creating a fair and equal working environment for employees.
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External Analysis of Boeing
Boeing is in a duopoly when it comes to being in the large commercial aircraft industry,
which means that there is one other major company that is competing with them directly in the
same market and that would be Airbus Industries. Nevertheless, Boeing was the first to be in the
large commercial aircrafts industry until Airbus came along. McDonnell Douglas used to be
another competitor to Boeing until the two companies merged. Airbus entered the market with
the help of “launch aid”, a form of government subsidies that helps a company compete and
survive in industries that already have giants with established distribution networks and
economies of scale (Hit, Ireland and Hockessin: 52). Airbus capitalized the market by making
planes that addressed the needs of their buyers, which were midsize cost efficient planes. This
plane was the A-320, which competed with the Boeing 737; both are the best selling planes for
each company in the same category.
Airplanes are grouped into families based on size, range, and technology (Hit, Ireland and
Hoskisson: 50). Both companies have competed neck to neck on building the most effective
planes to meet their customer’s supply and demand. In order to advance their position, Boeing
needs to rethink their strategy and work with their suppliers. Boeing’s strategy in 2004 was to
move up the value chain, meaning that they are going to focus less on details and more on their
core competence, integration, and assembly. By doing so, Boeing has consolidated their list of
suppliers to a select few and to those that provide quality products with the best value. Instead of
assembling the aircraft in-house, Boeing began to outsource some of their operations in
assembly.
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Outsourcing the assembly of parts of the airplane was a major step Boeing has taken to
reduce cost and control capacity at its main plant. They have outsourced to countries such as
China and India, where labor is much cheaper. In return, they have obtained aircraft sales from
these countries, which is also two of the largest and fastest growing airplane markets in the
world. Boeing has called this an “offset agreement”. Japan also helped with building the newest
Boeing 787 Dreamliner. One of the key reasons for establishing strategic partnerships is the
ability to distribute some of the risk associated with large investments required in building an
aircraft. Outsourcing has given Boeing more flexibility, control, and a better flow of cash.
Outsourcing may be better for the company, but in return angers some of their engineers at
home, which feel that their jobs are at stake. Eventually, hopefully they will understand that
outsourcing is more about competing efficiently in a global industry and is required for success
in the future. One risk Boeing is taking by outsourcing is giving away technology to third
parties such as foreign aerospace companies. Japanese suppliers may use the knowledge
acquired from their work to begin creating a company of their own. If this occurs, it would be a
huge threat to Boeing and Airbus because they are in a position to capitalize on the flourishing
Asia-Pacific markets. Therefore, Boeing must rethink their value chain logistics in order to
prevent this from happening.
Another external factor that has an effect on Boeing is their customers. Boeing has two
types of customers for their two separate divisions. For Boeing’s commercial division, the
airlines of the world are their customers and for the defense division, the government would be
their major buyer. Boeing has been focusing on capitalizing on the flourishing Asia-Pacific
markets because of their rapid growth in air traffic as the economy there is growing at a steady
pace. Most U.S. airlines are flying Boeing airplanes except for a few noticeable ones such as Jet
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Blue and Virgin America, which has decided to use Airbus models in order to offer something
different to their customers in America (Hit, Ireland and Hoskisson: 53). Airbus models have
offered wider seats, extra legroom, and more overhead storage space for their customers. Airbus
was the manufacture in 2004 when they consistently priced their products below Boeing prices.
This had allowed Airbus to sign contracts previously held by Boeing’s customers. But due to the
product delays from Airbus, Boeing has regained their position as the airline leader the past few
years. The delays have frustrated Airbus’s customers and have caused them to cancel their
orders and switch over to Boeing product line.
Government has played a huge part in success for both Boeing and Airbus. Without the
government’s assistance, both companies wouldn’t have existed today. Airbus was born because
of a so-called “launch aid”, which their parent company EADS established. This was
collaboration from several European Union to aid the creation of Airbus to compete directly with
Boeing. Boeing’s aid from the government is in the form of federal research and development
contracts from NASA and the Pentagon. Until recently, Boeing even received a tax break from
their own state, which also help supported them financially. Both companies have filed suits
behalf of each other with the WTO, but the outcome is yet to be determined since both
company’s practices are deemed illegal in terms of receiving extraterritorial income from
government subsidies (Hit, Ireland and Hoskisson: 54).
Internal Analysis of Boeing Boeing has many strong competitive advantages, and internal resources that help define
its core value. The main source of Boeing’s competitive advantages is its core competencies,
which help develop Boeing’s resources into strong competitive advantages in the airline
manufacturing industry. Boeing also has operational strength internally, which allow them to
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better manage and sustain their competitive advantage in the market. Boeing has a strong set of
competitive advantages at which it uses to market share and the airline industry, as we will
analyze Boeing’s unique competitive advantages in the airline industry.
Core Competencies
Core competencies are unique, in that they retain value, are rare, expensive to imitate,
and cannot be substituted. One core competency Boeing contains is its repeated effort to meet
the customer demands and needs (Core competencies-Boeing.com). Boeing commits to
understanding and responding to what its customers would like in an aircraft; and designing and
implementing specific needs or demands. One of Boeing’s unique business structures is to
design the product according to customer wants, and have it waiting for them to buy. This builds
a strong competitive advantage, as it notifies the customers that Boeing will design aircrafts
according to their needs, and allows them to build stronger relationships with their customers.
Another core competency Boeing has is their ability to implement large-scale
implementation systems (Core competencies-Boeing.com). Boeings extensive research and
development is a strong core competency, with its unique knowledge of wing technology and
new lightweight composites being one of its stronger manufacturing core competencies. Boeing
has begun to build stronger bonds with its suppliers, as they are beginning to research with their
suppliers to integrate and design better aircrafts. With some of their research and development
being done outside the company, they are able to design and build better aircrafts.
The last core competency Boeing has, is its unique contracts and agreements with both
NASA, and The United States Air Force. The strategic partnership with both of these two
organizations allowed Boeing to become the world’s largest space and communications
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company, as well as helped it become a large leader in the aircraft manufacturing market. These
two partnerships allow for Boeing to grow into the aerospace industry, and allow Boeing to have
a wider range of products for a wider range of customers.
Operational Strengths
Boeings operational strengths include its unique level of management, as the managers
are able to allow the company to run smoothly. Boeing is able to implement a strong
management force with its unique and strong culture (Core competencies- Boeing.com). Boeing
is seemingly more efficient than its competitor, Airbus, as it has found ways to be more
productive, without spending large sums of money. Already, Airbus has been known for going
over budget when designing and creating new designs for aircrafts (Hit, Ireland, Hoskission:
54). Boeing has thus attained a lower cost in building and designing aircrafts than Airbus, and
found a lower cost structure so they can hopefully sell aircrafts cheaper than Airbus.
Boeing’s management has also provided and given the company a strong sense of central
leadership, and has focused the company toward meeting the needs of the company’s various
customers. Boeing has implemented a central strategy well, and has set well-defined goals, and
identified their potential challenges and possible struggles in the future well. Boeings strong
knowledge of the market driven approach, and allowing suppliers and customers work together
to help meet the demands of the market, allows Boeing to better serve both its suppliers and
customers, making them a very powerful company in the industry.
Competitive Advantages
Boeing has a long list of competitive advantages that it uses to gain an advantage over its
competitors, mainly Airbus. One aspect of the airline industry that is highly regarded is market
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share, which Boeing has consistently had an advantage of. One of the main reasons Boeing has
most of the airline manufacturing industry market share is due to its long history of excellence in
designing aircrafts for over 90 years. Boeings strong name and brand allows for a strong hold on
the airline manufacturing industry, which has now become a duopoly between Boeing and
Airbus.
As one can see, the culmination of both Boeings core competencies and operational
strengths allow it to build upon different competitive advantages in the airline industry. One of
Boeings greatest competitive advantages is its unique strategy to work more with both its
customers and suppliers, to design and build the best aircrafts on the market. One of Boeings
largest competitive advantages include its unique research and development departments which
are able to design and implement better aircrafts without incurring large amounts of costs. This
would allow the company to produce better aircrafts more efficiently with fewer costs than the
competition, giving Boeing a strong competitive advantage over its competition.
Porter’s Five Forces Model of Competition
Porter’s model is based on the insight that a corporate strategy should meet the
opportunities and threats in the organizations external environment. Based on the information
derived from the Five Forces Analysis, we can decide how Boeing influence or to exploit
particular characteristics of their industry. The five forces model of competition includes the
threat of new entrants, the power of suppliers, the power of buyers, the threat of product
substitutes, and the intense rivalry among competitors.
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Threat of New Entrance:
It is not easy for new companies to enter the market of manufacturing large commercial
aircraft. The high cost of developing airplanes is a major factor in prohibiting new entrants to the
market with costs as high as US$5.5 billion to develop the Boeing 777 in the 1990s (Rodgers
1996, cited in Hill, Jones & Galvin 2004). Another prohibiting factor is the long lead-time till
reaching break-even point. Manufacturers must sell between 400 and 500 aircraft at a rate of 50
sales per year in order to regain their investment after developing a new product. This means that
companies who enter the market must be prepared to wait for around 10 years before showing
any profit, with no guarantee that they will become profitable even then (Dertouzos, Lester &
Solow 1990, cited in Hill, Jones & Galvin 2004). Therefore the threat of new entries is
considered low and on the scale of 1 to 10, it is ranked as 1.
Generally it is not possible for a commercial aircraft building company to come up
overnight. In some industries, new entry is difficult or impossible. Therefore the threat of new
entry is very low against airplane manufacturing industry because of high capital requirement
and government barrier. It is not surprising that only Boeing and Airbus are d in the airplane
industry. However Boeing now has been faced the threat of new entrance by China. The Chinese
government has officially approved the launch of China Commercial Aircrafts, which will
manufacture large passenger planes. The plan is to have jets designed and built in China rolling
off an assembly line by 2020. Asian Airlines are expected to buy nearly 10,000 new planes by
2025, with more than 2,200 of those going to Chinese airlines. The emergence of a strong
Chinese player could loosen Boeing’s lock on the commercial –jet market.
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How can they overcome the barriers of technology and capital requirements described in
the threat of new entrance? The people leading China’s push into the commercial-jet business
has gained much of the technical and engineering know-how they need by cooperating with
Boeing and Airbus. In fact, A consortium of Chinese companies known as China Aviation
Industries Corporation produces components for Boeing’s 747 and 787 wide bodies and operates
a final assembly line for the Airbus A320.
However there was no indication in the media report about when the company would
build its first plane, although analysts said China would need at least 15 years of development.
Despite its goal of eventually challenging Boeing, the global giants of commercial aviation,
fulfilling the ambition will take time, said Jin Zhuanglong, president of the new aerospace group.
“China’s jumbo jet program will not pose a threat to Boeing, at least in the coming 20 years," Jin
said in Monday's China Daily, an English-language paper whose readership is aimed at the
foreign community. "Even when China has the capacity to produce large jets it would be able to
meet only a small part of domestic demand. Boeing will continue to claim a big chunk of the
Chinese market."
Substitutes:
The threat of substitute is moderately low. There are several substitutes available like
cruise, buses, cars, trains or not traveling at all. The failure to meet the scheduled delivery time
and Asian Economy flu, it gave birth to new substitute, The World Aircraft Leasing Industry.
Airlines Company started to switch to Airbus and claiming to have the technologically advanced
fleet while their old crafts were sold to amongst airlines or to the leasing company. The trend
threatened Boeing and the leasing companies started to grow in Asian market. An analysis
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reveals that the portfolio size of leased aircraft reached $115.42 billion in 2004, and is projected
to reach $143.93 billion by 2008.
The other substitute is the railroad transportation. Surface transport, especially by rail, also raised
important substitution issues. Unlike airlines, railways can provide city center to city center
travel, and have been shown to severely impact the business travel market once these city center
to city center journey times can be brought down to below three hours. Switching airlines to the
bullet train or high-speed railway has been decreased the demand of Boeing’s manufactured
airplanes.
The Bargaining Power of The Suppliers:
In this industry, the bargaining power of the suppliers is low. Though the suppliers are
less in number in this industry so Boeing have high degree of control over the suppliers like
those who provides different components starting from exterior to interior and parts for aircraft.
The company started as an engineering based company that provided the suppliers with a unique
feature to decorate the crafts and supply parts. But then again there are no other buyers than
Boeing. Since Boeing serves different market they have a diverse supply chain hence sometimes
they have to depend solely on the suppliers. So with expansion of Boeings production capacity it
is likely to affect the capacity of the suppliers. Hence this could be a problem for Boeing to loose
the bargaining power.
Additional changes in production implied by government agencies forces Boeing to
retrofit their crafts. So sometimes this might affect the suppliers allowing Boeing to cut cost on
its margins even. With expansion sometimes Boeing is highly dependent on suppliers. Like in
1997 they were in shortage of parts of 2000 to 7000, which made Boeing miss their delivery
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schedule. In addition, in 2007, the future of commercial aviation Boeing’s 787 will have to wait
a little longer, as Boeing announced a delay in the roll-out of its revolutionary 787 line of
passenger jets. There was various reason to be delayed and one of the main issue was supply
chain couldn’t keep the 787 on schedule.
Boeing executive vice president Scott Carson, the CEO of the company's commercial airline
division, says delays stemmed in part from "unplanned rework for sections delivered to us. Parts
availability from remaining structural pieces to fasteners to other small parts has affected the
sequencing of the work in the factory, compounding these delays." A Boeing representative says
the company has been "very engaged over the last several months with each one of our major
structural suppliers and further down in the supply chain. I think we clearly have learned some
things about how we could do this job better in the future. We have taken steps to make those
corrections. "In unusually blunt language for a top executive of The Boeing Co., Mike Bair, who
was recently replaced as head of the troubled 787 program, said some suppliers have let the
company down. "Some of these guys we won't use again," Bair said Wednesday in a speech to
the Snohomish County Economic Development Council. The first 787 deliveries were originally
planned for May 2008 but have now been pushed early 2009. Boeing has blamed delays on
problems with the aircraft’s extended global supply chain.
Bargaining power of the customers: Low
Although there are two major commercial aircraft suppliers in the world that airlines can change
their supplier if they are not happy with the existing one. However, it is not that simple.
Because both Boeing’s and Airbus’ aircrafts are designed with family concept, which is
convenient for airlines to maintain their airplanes (Cohen n.d., cited in Hill, Jones & Galvin
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2004). Furthermore, the control systems of the airplanes produced by the two major companies
are different. If an airline that has been using Boeing’s aircrafts and want to buy one new
Airbus’ one, they have to send their pilots for about three weeks’ training and it is very
expensive. Therefore, unless the airline wants to buy a whole fleet of new airplanes, it is not
worth for them to change supplier. The bargaining power of buyer is considered moderate to
low and on the scale of 1 to 10, it is ranked as 3.
Competitive Rivalry between Existing Players:
The commercial aircraft business is very important for Boeing because it covers more than 65
per cent of its total revenue. Therefore losing market share in this market can cause big impact
on the performance of Boeing and its future development. The rivalry from Airbus is considered
very high, on the scale of 1 to 10 it can be ranked as 9.
The competition from Airbus industry is getting more and more threatening to Boeing in the
commercial aircraft market. Boeing has been the market leader since 1980s. However during
the last decade, Airbus has been expanding their market share very successfully. In 1990,
Boeing booked 45 per cent of the total industry orders while Airbus got 34 per cent and
McDonnell Douglas had 21 per cent. In 1996, when Boeing announced the merger with
McDonnell Douglas, Airbus obtained nearly 50 per cent of the total commercial orders and
delivered shipment for 33 per cent (Cohen n.d., cited in Hill, Jones & Galvin 2004). And three
years later, Airbus surpassed the new Boeing in order booking and got 55 per cent of total
industry orders and Boeing only got 45 per cent. This means Airbus is now a big threat to
Boeing and may take over its market leader position soon if the latter does not take any serious
action to protect themselves.
B o e i n g | 21
Airbus has been making great efforts in doing market research and development of new
products. For example, in order to design a super jumbo A380 successfully to match the market
desires, Airbus organized customer focus groups from around twenty airlines to discuss what
such a plane should be like. They spend 5.9 per cent of their total revenue on R & D in 1999
while Boeing only spent 2.3 per cent.
Conclusion from Porter’s Five-force analysis:
From the above analysis, the aviation industry is overall attractive to Boeing, which is in a good
position to compete and develop. However, the major competitor Airbus and the threat of China
has been increasing their market share and forming a big threat to market leader position of
Boeing. Furthermore, the flow of its supply is also important for Boeing’s production. Boeing
should have held all systems and suppliers close to their assembly lines to facilitate cooperation
between suppliers and Boeing.
Value Chain Analysis
Due to the nature of Boeing’s highly competitive environment, the company’s ability and
understanding of their value chain model is crucial to the company’s profitability. For Boeing,
the focus on adding value-creating activities to their core competencies is a vital part of their
corporate-level strategy. In addition to providing the basic primary activities and support
activities in their value chain model, Boeing continuously tries to establish new value-creating
activities for their customers. One of those value chain activities is Boeing’s establishment of
Boeing Capital Corporation (BCC), a financing subsidiary, which provides financing to its
customers for commercial airplanes as well as its Integrated Defense Systems purchases. This
business unit is a value-creating service since customers would not have to go through other
B o e i n g | 22
financial institutions to secure a loan for their purchase. Thus, Boeing’s ability to provide a one-
stop shop to its customers and hence capitalizing the financial segment of the market adds value
and thus allows them to add to their core competencies. The BCC division at the 2007 financial
year-end has a portfolio holding of approximately $6.5 billion (2007 Annual Report).
Another value chain activity is Boeing’s after-sales services called, Advancing Aviation
Performance Program, in which Boeing established a system to provide to its customers is their
24x7 global customer support. Boeing’s commitment to customer service provides assurances
and resources availability to their customers in the aviation and transportation industry so they
can enhance their profitability. With this type of dedicated service, customers can be assured if
anything goes wrong, they will be supported long after their purchase. In addition, Boeing's goal
is to provide worldwide service infrastructure and a network operations center to resolve
technical issues and deliver vital spare parts to their customers when it is needed. In doing so
Boeing implemented the AOG Incident Recovery and Repair Services System, which provides
engineering, logistics, maintenance assistance, and technical support to its customers for repair
or after any incident so their customers can get back to operability as soon as possible. Another
value added service is Boeing’s Alteon Aviation Training system, which is designed to enhance
customer training of the Boeing’s aircrafts. The Alteon system offers advanced computer-based
training facilities and full-flight simulators to its customer’s crew training. Again, this is a
valuable resource Boeing provides to its customers (Commercial Aviation Services-
Boeing.com).
Another value added system is Boeing’s online information system, MyBoeingFleet Web
Portal, which provides technical information, applications, and services to its customers to
maintain and operate their fleets. Still, the most important software that Boeing designed to assist
B o e i n g | 23
their customers in operational efficiency is the Global Airline Inventory Network System, which
is designed to track and management costly inventory inefficiencies for the airline industry.
According to Boeing, it is estimated that the airline industry consumes $7 billion a year in spare
parts for Boeing’s airplane maintenance (Commercial Aviation Services-Boeing.com). With the
implementation of this system, Boeing and its customers can improve its supply chain
management and they will see significant cost savings and inventory efficiency. Under Global
Airline Inventory Network System, the highlights are (Commercial Aviation Services-
Boeing.com):
A supply-chain management system will be established by Boeing to serve as the
"command center"
Inventory holding costs will be greatly reduced and savings will be passed on to both
Boeing and its customers
Boeing will take the responsibility of monitoring airline inventory use, allowing suppliers
to better forecast demand and plan production
Boeing will be responsible for the purchasing, inventory management, and logistics for
an airline's airframe parts
All airframe parts will be distributed by Boeing’s regional distribution center near the
airline's point of use
B o e i n g | 24
Financial Analysis
In spite of the surging fuel prices affecting the economy and competitive environment the
company faces, 2007 was still a good year for Boeing as the company manages to increase its
revenue by 8% from its 2006 revenues ($61,530 million to $66,387 million). Although it is not
as high as the expected growth in comparison to 2006 revenues, which grew by 15% from the
2005 revenues (Appendix 1). Accounting for the majority of this increase was Boeing’s
consolidated operational revenues, which grew by $4,857 million in 2007. 2007 earnings from
operation increased significantly by 93% as a result of the undertaking of various management
growth strategies (2007 Annual Report).
The increase in revenue resulted mainly from the high growth in Boeing’s commercial
airplanes business unit. This increase comes from higher commercial airplane orders and higher
commercial aviation support activities. However, Boeing’s Integrated Defense System unit
revenues decreased by $359 million (Appendix 2).
Summary of 2007 Sales Revenue by Division:
Commercial Airplanes Unit: $33.4 billion
Integrated Defense System Unit: $32.1 billion
Boeing Capital Corporation: $815 million
Return on equity (ROE) for 2007 was 45% compared to 46% for 2006, which decreased
somewhat from last year. On the other hand, return on assets (ROA) is 6.9% compared to 2006
of 4.3%. This increase shows that management has efficiently utilized its assets for each dollar of
sales. While operating profit margins are up 2% in 2007 from 18% to 20%, return on sales or
B o e i n g | 25
profit margins for 2007 was 8.8% compared to 2006 of 4.9% (Appendix 3). Essentially, higher
operating margin percentage allows Boeing more flexibility in its competitive decisions making
process (Hit, Ireland and Hoskisson: 54). Most importantly, this allows Boeing to spend more in
research and development. For 2007, Boeing has increased its research and development
expenditure, an increase of 18% to $3.9 billion. This increase in research and development
reflected the company management’s key focus on developing its 787 and 747-8 commercial
airplanes. This will add to the future revenue growth. Additionally, Boeing reduced research and
development expenses by implementing a cost sharing payment agreement with its major
suppliers. That savings amounted to $130 million to Boeing, coming from its supplier for its 787
program.
The area of Boeing’s financial management has been greatly impacted, which are
reflected in the debt equity ratio. In 2006, the company’s debt to equity ratio was 2.01,
comparably higher than most in the industry due to heavy leveraging (Hit, Ireland and
Hoskisson: 54). However, in 2007, much improvement has been made on their debt to equity
ratio. 2007 debt to equity ratio has reduced to 0.91. In addition the company’s debt to asset ratio
has also reduced .847 from .909. Furthermore, a huge part of the Boeing’s growth is also
attributed to Boeing’s financial strategies, which included a reduction in debt of $1.3 billion has
proven to be successful. Other implementation also included the repurchasing of 29 million
common shares (2007 Annual Report).
Cash flow from operating activities in 2007 has increased by $2,085 million to $9,584
million (Appendix 2). This significant increase is due to the successful net earnings in 2007. The
increase in cash flow stems from deposit payments from the increase demand or pre-orders for
the new 787 airplanes and pre-payment on note receivables.
B o e i n g | 26
In addition, Boeing’s order backlog grew by 37% to $297 billion, with the majority of the
increase (46%) coming from demands for commercial airplanes (Appendix 3). This backlog
increases alone accounts for just contractual agreement orders. The reasons for the high demand,
which also leads to the higher backlog, are from the anticipated delivery of Boeing’s new 787
fuel-efficient commercial airplanes, which are expected to begin delivery in early 2009. Also
triggering strong demand for Boeing’s 787 is the increase in fuel prices in the global economy,
causing buyers to look for more fuel-efficient airplanes such as the 787. Furthermore, Boeing’s
analyses show the current inventory of existing commercial airplanes in the industry are aging
and will eventually be taken out of service, thus fueling an increase in demand. Still Boeing is
very bullish on its future forecasts in the commercial airplanes division, with strong forecast of
5% of passenger traffic and 6% for cargo traffic (2007 Annual Report). All of which are
expected to help boost future revenues for Boeing.
Strategic Analysis
Boeing has begun a new strategy, a global strategy that is currently beginning to take off.
Boeing has implemented outsourcing to build better and more efficient airplanes, by sharing
portions of their knowledge and research in building airplanes with Russian aircraft engineers,
and even Indian software geeks (Global strategy-Boeing.com). Boeing is taking a different
approach in building their aircrafts in order to become more competitive. By sharing their
knowledge through outsourcing, Boeing has found ways to produce airplanes at a lower cost, as
it would cost less for a Chinese worker to bend the metal for the tail of a 737 in comparison to
hiring an U.S. worker (Global strategy-Boeing.com). Boeing’s global strategy includes
combining the skills and work around the world to produce the best possible product for its wide
base of consumers.
B o e i n g | 27
Boeing has employed many strategic decisions over the past decade. One of the
important decisions they have employed is whether or not to implement their current global
strategy, at which they can be sharing some of their important trade secrets in exchange for new
knowledge from other countries (global strategy-boeing.com). Although this strategy can be
beneficial to the company, it can also hurt the company in the long run by expanding out of
house to manufacture and produce airplanes. The problem with their global strategy includes the
questions of how much they should be expanding externally for production of the aircrafts.
When does sharing some knowledge and manufacturing of aircrafts no longer benefit the
company? So far, it seemingly has started to benefit Boeing as the world is
moving towards globalization, and as other industries have also begun to globalize (Global
strategy-Boeing.com). It is still unknown if Boeing's new global strategy will be a successful
strategy, but it has shown some possible improvement as revenues have increased in 2007.
Another strategic decision involves the directions the airplane manufacturing industry is
going, with threats of Airbus unleashing larger aircraft, the A-380; this could threaten Boeing if
they do not have a large aircraft to compete with it (Hit, Ireland, Hoskission: 54). In order to
compete, Boeing is moving towards designing a new carbon fiber based aircraft that is more
fuel-efficient, the new 787 Dreamliner, which is designed to compete with Airbus’ larger
airplanes. Boeing's strategy is to develop the 787 at a very low cost, so they can implement a
price leadership strategy (Global strategy-Boeing.com). With this strategy Boeing believes it
can compete with Airbus' new Super Jumbo project. By doing so, if the airline industry is
planning to shift away from the 747-sized aircrafts to larger aircrafts, Boeing could then retain a
larger portion of the market share; as they would be able to sell the 787 at a cheaper cost than
Airbus’ Super Jumbo Jet.
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However, the drawbacks of manufacturing a large-scale aircraft include the high costs of
researching and developing an aircraft of this magnitude. Airbus has already shown its struggles
in creating their Super Jumbo Jet, as it has been constantly delayed and pushed back due to
development problems (Hit, Ireland,Hoskission: 60). Additionally, Airbus' customers have
cancelled their orders and have begun to place orders for Boeing's new 787 airplanes
instead. Additionally, Airbus has gone way over budget and behind production schedule on their
A-380 Jumbo Jet. Thus, Airbus has also lost a lot of money in researching and developing their
large-scale aircraft. Learning from Airbus' mistakes of going over budget, would Boeing want to
lose money the same way Airbus is losing money jumping into the larger scaled aircrafts? It is a
risk Boeing may have to take, because if Airbus is able to launch their Super Jumbo Jet, while
Boeing still does not have a jet to compete with it, Boeing could lose market share fast (Hit,
Ireland, Hoskission: 50). If this situation were to occur, the only way to prevent it would be
taking the risk by investing into researching and developing a large-scale airplane. Boeing has
already begun developing their 787, but is it really worth the cost?
Strategic Recommendations & Conclusion
Fuel efficiency is crucial in today’s day and age, with the costs of energy greatly
increasing. As strategic advisors of Boeing, we would advise Boeing to expand their product
line by developing more fuel-efficient airplanes, as the cost of fuel worldwide had greatly
increased over the last decade. Even if it involves redesigning their current airplane product
lines, such as the 737 or 747 aircrafts, they should design it to be more fuel-efficient as airline
companies would benefit from a more fuel-efficient aircraft. Though the only drawback to this is
the high costs that will be incurred producing a large product line of aircrafts. If Boeing can find
a way to produce them more efficiently than Airbus, and sell them for a lower price, Boeing can
B o e i n g | 29
retake a large portion of the market share it once owned. In order to do so, Boeing will need to
increase their workforce to implement this plan, as over the last decade they have been
frequently cutting back engineers and employees nationwide. Even if it still manages to
implement its global strategy, it would also need to expand on its own research and development
departments in its domestic facilities. However, if the strategy works, the financial payoff would
be significant.
Since fuel efficiency is an important factor, the company's strategy should affect the
company's goals for both the short run and long run. For the long run, we would recommend
investing more money into the research and development of aircrafts that can use alternative
energy sources. Already the company has begun to look at environmental issues, as pollution
caused from airplanes can be harmful over long periods of time (2007 Annual Report).
Commercial airline companies would more than likely jump at the opportunity to buy aircrafts
that do not use expensive fossil fuels or rely on petroleum to operate. If Boeing is able to
engineer an alternative energy, that is cheaper in respects to current aircraft fuel, they can gain an
advantage over their competitors.
Whether it is to implement fuel-efficient aircrafts, or alternate cheaper fuels, Boeing should
focus on these two strategies. If Boeing can strategically market newer improved fuel friendly
aircrafts, Boeing can easily gain market share over Airbus. Even if the cost of researching and
developing new fuel-efficient airplanes is high, it could be worthwhile in the long run, both for
the airline industry and for the environment. With the constant increases in the costs of energy,
the future of the airline industry is dependent on energy efficient aircrafts. Furthermore, it also
signifies Boeing's commitment to improving the environment and in reducing global warming.
B o e i n g | 30
Currently Boeing has already begun researching into possible alternative fuels for
aircrafts, and has already begun researching bio-fuel as a possible solution (2007 Annual
Report). If Boeing is able to research and develop an alternative fuel for its aircrafts; one that is
cheaper than the costs of petroleum around the world, Boeing can win over most of the
commercial airline industries with aircrafts that take cheaper fuel. In doing so, they would be
able to capitalize on first-mover advantages over airbus, being the first aircraft manufacturer that
is able to produce aircrafts not reliant on fossil fuels, and that will be environmentally friendly.
Not only would Boeing be the only manufacturer to offer a unique aircraft, it will also build on
their already strong reputation of highly advanced aircrafts. Boeing would also be able to build
stronger brand equity in designing new alternative energy aircrafts that could bring Boeing the
larger end of its competitor’s market share.
Another strategic recommendation would be not only to promote the idea of point-to-
point travel, but also to support the strategy of Airbus, promoting hub-to-hub transportation. If
Boeing is able to implement better airplanes for both forms of travel, whether its large aircrafts
between major airports, or flying smaller airplanes between smaller airports. If Boeing is able to
cater to both concepts of travel, they can take over both Airbus’ strategy and their own. If
Boeing is able to increase productivity and their product lines to meet a higher percent of the
airline industry needs, whether its for smaller scale airports or large scale airports, it can increase
Boeing's revenues significantly.
Most importantly, if Boeing could successfully implement these strategies, Boeing could
most definitely maintain their competitive advantages over their competitors such as Airbus,
Northrup, and Lockheed Martin. Furthermore, they would also gain by becoming the marketer
leader with brand equity and a social responsibility. Essentially, they would be able to change the
B o e i n g | 31
whole airline industry and the way passengers and cargo travel via air bound, by making it more
affordable and cost effective. If successful, Boeing would create and add value to their
company, US defense sector, the airline industry, passengers (by the effects of travel costs), and
the environment.
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Appendix 1
Source: Boeing Company 2007 Annual Report
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Appendix 2
Source: Boeing Company 2007 Annual Report
B o e i n g | 34
Appendix 3
Source: Boeing Company 2007 Annual Report
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