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Boeing Final Analysis

Virgil Del Mundo | Rebecca Meyer | Daniela Nita | Constantin Sofronie | Gana Tarrant

The Boeing Company offers products from three major areas: Commercial Airplanes; Defense, Space

& Security; Shared Services Group; Boeing Capital Corporation. This analysis will focus on the

commercial airplane manufacturing business of Boeing, one of the biggest in the world. Boeing

describes itself as “…the world's largest aerospace company and leading manufacturer of commercial

jetliners and defense, space and security systems.”

The Boeing Company was established in 1916 by William E. Boeing in Seattle, Washington. Growing

from a small airplane manufacturer to the large commercial airline jet creators today, it was not always

so lonely in its market. Throughout the years, Boeing has experienced plenty of competition, in the

United States specifically, of which were companies such as Douglas Aircraft Co., McDonnell

Aircraft Corp., North American Aviation and Hughes Aircraft. Over time, these companies have

merged together to create what Boeing is today. Boeing’s main businesses are supported by nine

corporate functions: Business Development & Strategy; Communications; Engineering, Operations

and Technology; Finance / Boeing Capital Corporation; Human Resources Administration / Shared

Services Group; International; Law; Office of Internal Governance and Government Relations. With

its corporate office in Chicago, it employs over 170,000 people across the US and 70 countries.

Boeing’s largest market competitor is Airbus, a European co-op developed by France, Germany and

Britain; founded to strengthen Europe’s aviation technology.

SITUATION ANALYSIS

Industry Analysis:

Currently, Boeing and Airbus dominate the commercial aircraft industry, in what is effectively a

duopoly, with other smaller players – Brazil’s Embraer, Canada’s Bombardier Russia’s Suckhoi and

Ukrain’s Antonov- competing marginally and in niche markets (under 130 passenger capacity and

regional jets) not covered by the two.

In the near to medium term China’s ambitions to get a strong footing in this industry with its COMAC

(Chinese government aircraft manufacturer – a consortium of different Chinese state owned and

funded companies) manufacturer, will mean that the Status Quo will be challenged and COMAC will

compete for market share in the narrow body, single aisle jets, challenging Boeing’s 737 and Airbus’

A320 family of airplanes.



The commercial airline industry has been in a lull for the last couple of years, but with emerging

markets air travel expected to expand strongly in the next 2 decade, we believe there will be good

growth in the aircraft demand in the long-term (based on industry’s own forecasts as well as other

analysts forecasts). Furthermore, the renewed focus of the airlines industry globally on fuel efficiency

(fuel is one of the biggest cost for the airlines), and an aging fleet will also spur demand for

replacement aircrafts. In addition, the air passenger demand is expected to grow in the coming years.

In the near term, due to the European crisis and other economic trends, Boeing finds that its European

sales and air cargo sales will not expand in the near future. In the long term, the company’s latest

forecast and current market outlook 2012-2031, estimates that total demand in the next 2 decades to be

34,000 airplanes at a value of more than 4.4 trillion USD. Thus the number of airplanes in service will

double from a 19,890 to 39,780 airplanes, accounting for new and replacement demand. These figures

are in line with forecasts from rival Airbus as well as newcomer COMAC (the new airframe

manufacturer entrant from China). One third of this demand will come from Asia Pacific with an

estimated 12,030 new airplanes deliveries for this region and with the lion’s share to go to China alone,

with 5,260 airplanes. About ¾ of these will be single aisle airplanes (B 737 / A320 family) and

Boeing’s competition for these contracts is likely to be very stiff. Not only are the already established

airplanes manufacturers like Airbus, Embraer and Bombardier in the mix, new companies in China and

even Russia are also likely to enter and compete in the 70 to 190-seat airplane market over the next few

years. Many will also probably get subsidies from their governments.

A special note here about the partnership that the Canadian’s Bombardier Co. has set up with COMAC

since 2008. Bombardier has put intellectual property concerns aside and has agreed to give the Chinese

manufacturer design authority on major supplied parts for its newest designed, narrow body, single

aisle, airplane, the CS series. Bombardier will contribute expertise on China’s first long-haul jet, the

C919 and the two new airplanes will share a cockpit design that will make them complementary

products when they are ready for sale to airlines (1-citation from NY Times Article). This will

definitely help the Chinese speed up on the learning curve and enable them to complete their proposed

jets development sooner rather than later (as it has been 10 years in the development stages and has

seen delays after delays so far).

The commercial airline industry is affected by many external factors including oil prices, customer

buying habits affecting air cargo, passenger flight demand (both personal and business), alternate

modes of transportation, and potential emerging markets.



We analyzed how Boeing uses its influence and expertise to exploit particular characteristics of their

industry. We used Porter’s five force model of competition includes the threat of new entrants, power

of suppliers, power of buyers, the threat of product substitutes, and the intense rivalry among all

competitors.

Threat of New Entrants: The overwhelming high startup cost associated with developing,

engineering, and manufacturing new airplanes is a major prohibitive factor. New entrants in the market

must expect to invest in extreme costs. In the 1990’s developing the Boeing 777 were as high as US

5.5 billion dollars (Rodgers1996, cited in Hill, Jones & Galvin 2004).

Another prohibiting factor is the long lead-time until reaching a break-even point. A manufacturer

must sell between 400 and 1000 aircrafts at a rate of 50 sales per year in order to regain their initial

investment after developing a new airplane product. This means that companies who enter the market

must be prepared to wait for at least 10 years before showing any profit from their incredibly high

investments. (Dertouzos, Lester &Solow 1990, cited in Hill, Jones & Galvin 2004). The new

manufactures will also face the high capital requirement and a daunting task of government regulations

and permits.

Despite all the obstacles for new entrants, Boeing now is facing the threat of a new entrance by the

Chinese aircraft manufacturing company, COMAC. Through partnerships, technology transfer and its

own R&D, COMAC will acquire the know-how and capabilities to eventually manufacture large

passenger planes that will compete with both Boeing and Airbus. As of November 2012 their two jets

in development the ARJ-21(a twin engine, single aisle, 70-105 passenger short range) and the C919 (a

twin engine, single aisle, 150-190 passenger short to medium range) have been plagued by delays but

will eventually attack head on sales of the B 737 and A320 family of single aisle, narrow body

airplanes, which are the biggest sellers for both Airbus and Boeing. In their latest presentation at the

Zhuhai Airshow (November 13-18, 2012) the Chinese company has officially unveiled the C919 with

100 firm orders and plans to have the aircrafts designed, built and rolling off the assembly line to a

launch airline partner by the year 2016 or early 2017. The emergence of a strong Chinese manufacturer

could loosen Boeing’s unprecedented lock on the commercial jet aircraft market. Thus the competition

in the airplane industry will only intensify in the future (medium-long term).



Threat of Substitutes: The competitive threat of substitutes in commercial transportation is

moderately low. There are several travel alternatives available such as cruise liners, trains, buses,

privately owned cars, or choosing not to travel at all.

The failure to meet scheduled delivery times and the Asian Economy, gave birth to a new substitute,

The World Aircraft Leasing Industry. Airlines Companies started to switch to Airbus claiming to have

a more technologically advanced Fleet. Their older aircrafts were sold to other smaller airlines or to

the leasing company. This trend threatened Boeing’s bottom line as the competitive leasing companies

started to grow in the Asian marketplace. An analysis reveals that the portfolio size of leased aircraft

reached $115.42 billion in 2004, and is has advanced to $143.93 billion by 2008. Surface

transportation, especially by rail, also raised important substitution issues. While air transportation

requires vast airports located away from the metropolitan centers, railways can provide city center

arrivals and departures. Switching from airlines to the bullet train or high-speed railway could threaten

Boeing’s aircraft manufacturing demand.

Bargaining Power of the Suppliers: In this industry, the bargaining power of the suppliers is low.

Though the OEM suppliers are few in numbers in the industry, this leads Boeing to have a high degree

of control over the suppliers. Typical are those who provide a multitude of different components for

the airplane industry alone, starting from exterior to interior parts for the aircraft to whole subassembly

parts of planes . However, for most of these suppliers there are no other buyers for their unique

manufacturing service but Boeing. Thus their bargaining power is low. On the other hand since

Boeing serves a variety of different markets, they have a diverse supply chain. Boeing has to depend

solely on these suppliers. So, with expansion of Boeing’s production capacity and ramp up in

production, it is likely to affect and be affected by the capacity of the suppliers’ production, financial

power and investment capacity for retooling and expansion. Hence, this could be a problem for

Boeing to lose its established bargaining power. The bargaining power of the aircraft buyer is

considered low, on a scale of 1 to 10, it is ranked as 3.

Bargaining power of the customers: Both Boeing and Airbus’ aircrafts are designed and manufactured

with the “family concept.” It then becomes convenient for airlines to maintain and retrofit their fleet of

airplanes. (Cohen n.d., cited in Hill, Jones & Galvin 2004).) While both aircraft suppliers employ the

family plan, each is unique and different to the other. If an airline company wishes to change from one

of these major players to the other, it is difficult at best.



Of notable importance is the airplanes’ control system. These systems serve as functionally giving the

pilots complete in flight and ground control of the airplane. Even though these control systems do the

same thing, they are designed and manufactured in completely different ways. Each system is unique

to the aircraft company’s individual design and manufacturing specifications. They are for all practical

purposes, completely different. If an airline that has been using Boeing’s aircrafts has decided to

switch over to Airbus, they would require each and every pilot to attend three weeks of extensive

technical and hands on training. Another consideration is the pilot’s years of service with a

fundamentally different airline operational control systems. This onsite training is very expensive and

must be calculated into the costs and expense associated with changing aircraft manufacturing

suppliers. As the change of aircraft suppliers by an airline company can be very costly, it will affect

the bottom line for some time to come. This should be factored into any corporate recommendation or

decision.

One practical solution for a change in aircraft suppliers is to purchase a whole new fleet of competitive

aircrafts. Many off the additional training and implementation costs could be wrapped up in the

purchase agreement. For these reasons, the purchase of a few new aircraft from a competitive

manufacturer would not prove to be very cost effective. 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: Even though, Boeing and Airbus have in effect a

duopoly status and define most of the big airliners market, while on the much smaller markets for

regional jets (50-140 seats), and business jet airplanes they marginally compete with Brazilian

company Embraer and Canadian company Bombardier, the rivalry Airbus presents is considered very

high and is ranked 9 on a 1 to 10 scale. This intensive competition with Airbus in the cargo and

commercial aircraft market could threaten Boeing’s bottom line and pressure its profitability. The loss

of market share can cause a major impact on Boeing’s performance and its future development as the

commercial aircraft production business is critical to Boeing because as it covers more than 65% of its

total income.

In the late 90’s and early 2000s Airbus made a strategic decision to pursue market share (at any cost -

discounted sales prices that resulted in razor thin margins or even losses) while also making a bet on a

super jumbo airplane (A380 - the biggest in the world). So far Airbus’s drive for market share at the

expense of profits has had a measurable impact: its sales are up, but profits are down, (with net losses

for 5 out of the last 6 years) while Boeing’s airplanes sales and earnings have flat lined (2-citation



Seeking alpha). On the R&D front, Airbus has been making great efforts in collecting market research

and pursuing development of new products. For example, Airbus organized customer focus groups to

generate customer friendly design for the super jumbo A380. They spent 5.9% of their total revenue

on R&D in 1999 and have continued that direction through the current year. But so far their A380

super jumbo jet has seen anemic sales and the jury is still out on its commercial success.

In Contrast, Boeing’s R&D average yearly expenditure has been 2.3% for more than a decade, but

watch over the hugely successful and highly profitable 777, as well as the introduction of its new 787

Dreamliner – raking up sales of almost 1,000 units since its official launch, even though delays in

production capabilities and increasing delivery rates are still a challenge for the new 787.

Furthermore, Boeing’s commercial airplanes division margins in 2011 were 9.5% compared to 1.7%

for Airbus.

From the above analysis, we conclude that the aviation industry overall is attractive to Boeing, who is

in a good position to compete and develop. However, as Airbus’s push for market share gains while

Boeing’s focus on profitable orders and operations has defined their relation for the last decade, the

next decade will see the threat of China’s COMAC entry into the marketplace and that, could become

the threat to Boeing’s leading market position in the future as well as put pressure on its profitability.

Airports and Airlines – influencing demand

With over 900 airlines in operation Boeing is still the main manufacturer with 50% of the in-service jet

fleet. The provenience of the airlines is quite diverse including commercial and cargo carriers from

North America but also a growing number originating outside the US.

If we look at the airlines strategies and business models it is easy to determine the types of airplanes

that they will purchase and, as a consequence, the types of airplanes manufacturers such as Boeing

should and will produce.

Single-aisle airplanes still comprise an overwhelming majority of the fleet that airline companies have,

the number having gone from 4,000 airplanes to 12,600 over a period of 34 years (1977 to 2011). Over

the next period approximately 23,240 airplanes, which represent 68% of new deliveries, will be single-

aisle airplanes, delivered mostly to emerging markets such as China and other low-cost carriers

throughout the world. 36% of these airplanes will replace older, less efficient airplanes and 64% will

go towards expanding the current fleet. These airplanes will benefit airlines and passengers alike and

will contribute to stimulating growth in emerging markets.



Reacting to the market pressures and higher fuel expenses airlines are optimizing airplane utilization

more closely to seasonal demand fluctuations, keeping the passenger load factors remain at high levels.

The industry is forced to constantly adapt to a variety of market forces from fuel price to infrastructure,

economic development regulations, other means of transportation and emerging markets. Each of these

forces can have both positive and negative influences upon the industry. As a negative result of the

rising fuel prices the airline costs are also going up. However this has also promoted manufacturers

such as Boeing to produce more fuel-efficient airplanes as the 787 and 737 MAX.

Commercial airlines have seen many declines in the demand for air travel, however, in 2011 air traffic

rose 6% above the level recorded in 2010 and it is expected that will continue to grow at a steady rate

of 5-6% over the next 20 years.

Travelers show a certain amount of resilience when a disruptive event occurs. Over the past decade the

commercial airlines have suffered through unexpected Black Swan events such as the terror attacks of

September 11, or skyrocketing prices for fuel, debt restructuring in Europe and the United States and a

global recession. The role air travel plays in how society reacts to such events is crucial. The Internet

and social media have become a growing part of how we research, plan and book our travel,

Furthermore, improved airplane technology and efficiency are now allowing airlines to make air travel

more reasonably priced, so airfares generally represent a smaller portion of total trip costs.

Constant investment in aviation infrastructure will continue to remain a very important part in being

able to grow commercial aviation. There is a common effort between airports, national airspace

management agencies, and airlines to share these challenges and opportunities of aviation growth.

A Boeing analysis indicates that projected commercial air traffic growth will increase congestion at

some of the airports around the world as demand for takeoffs and landings reaches or surpasses airport

capacity over the next 20 years. The world's busiest airports, such as London's Heathrow, have already

reached their limits for hourly airplane movements, even with slot controls.

Many of the airports already have the capacity to meet projected traffic growth. Others are able to

handle demand efficiently during off-peak hours, but are have difficulties during peak hours of travel

for takeoff and landing. Continuing to invest in the infrastructure is more so important in regions, such

as China, Northeast and Southeast Asia, India, and Latin America, where aviation growth outpaces

planned infrastructure development.



Airport authorities around the world are investing in large capital projects, including new or improved

runways, terminal expansions, and completely new airports. These investments can significantly

increase airport capacity, but are substantial, and development times typically extend more than a

decade from initial planning to completion of construction.

Airlines have already set in place certain measures in order to manage airport crowding. They have

replaced smaller airplanes such as regional jets with larger single-aisle airplanes, helping to ease

demand for takeoff and landing slots during peak periods. Creating secondary hubs and expanding

service to secondary airports also can ease congestion at the busiest airports. Airline alliances have

proven effective in allowing airlines to expand route systems without duplicating services that would

add to congestion.

The FAA Aerospace Forecast Fiscal Years 2007-2020 predicts 768 million passengers to be flying this

fiscal year, more-than one billion passengers by 2015, and 1.2 billion by 2020. The forecast also

predicts 62.5 million takeoffs and landings at the nation’s towered airports this fiscal year. By 2020,

that number is expected to reach 81.1 million operations, growing by an average of 1.4 million per year

during the forecast period.

The number of passengers carried by U.S. commercial air carriers is on track to hit the one billion

mark by 2015, according to the report. Certain key hubs, such as Washington Dulles (68 percent), New

York Kennedy (59 percent), Los Angeles International (54 percent), and Atlanta Hartsfield (38

percent), will see significant growth in the number of takeoffs and landings.

RESOURCE ANALYSIS - Boeing’s Operations

Boeing maintains its leading market position with a highly controlled operations system. Commercial

airplane manufacturing main operations involve everything from proper materials, to assembly, to fleet

services for all who will work with the aircrafts as well as successful supply chain management.

Timing and availability are an important part of this process.

Assembly and Manufacturing operations are located in three major locations, Everett, Washington;

Renton, Washington and a new factory in North Charleston, South Carolina. In these sites, the

commercial airplanes are either manufactured or assembled. With more than 17,500 suppliers

worldwide, providing different components of each airplane, no aircraft is entirely made in the US.



Materials services is an operation that focuses on keeping their customers’ airplanes ready to fly by

having the crucial parts, material and expertise available in a timely manner. Within this operation

there are 3 subdivisions which focus on:

Parts – having the right part, at the right place and the right time.

Solutions – tailored solutions for every customer since every fleet is unique

Support – being able to reach Boeing 24/7, 365 days a year, Boeing strives for excellent

service.

Fleet Services are different maintenance support to help keep the aircrafts in safe flying conditions.

There are also three subdivisions which are Maintenance and Engineering, Maintenance Execution &

Modifications.

Flight Services train people of all aspects of the industry from training pilots to fly, ground crew on

maintenance and even air traffic management for air traffic controllers.

Information Services helps provide customers with information management, real-time operations,

internet and eCommerce Servcies, aviation software solutions and professional Services.

Boeing’s Supply Chain process is designed to improve aircraft availability and reduce costs. To ensure

effective supply chain services and to provide maximum benefit for each customer, Boeing utilizes the

following procedures: (boeing.com)

Timely and accurate information sharing between Boeing and the customers.

Online, real-time, integrated information systems that are based on Web-architecture designs and are

interfaced with comprehensive databases.

Reliability-based logistics and trigger-based asset management; this practice improves and identifies

potential cost-reduction opportunities based on parts life-cycle so that aircraft fleet managers can make

informed trade-offs between inventory levels and costing--enabling them to optimize the relationship

between aircraft readiness to affordability

Use of superior warehousing practices, shipping practices, and innovative asset-sharing agreements

with commercial airlines and component manufacturers which ensures that the right part, is at the right

place, at the right time anywhere in the world.



Design/Engineering/IT: Boeing’s design and engineering is largely focused on increasing fuel

efficiency, reducing costs, and a continuous collaboration with governments and regulations that affect

the commercial airline industry. Boeing continually strives to outperform its competition. Its design

focuses to improve environmental performance by creating more fuel efficient aircrafts, including an

effort to develop more sustainable biofuels. Its engineering also focuses on noise reduction, ways to

optimize revenue for clients, and collaboration with governments and industry partners to increase

efficiency of current air traffic systems. “Aircrafts entering today's fleet are 70 percent more fuel

efficient than early commercial jet airplanes, consuming about 3.5 liters per passenger per 100 km.”

(boeing.com)

Design also revolves around what Boeing’s clients are looking for. Safety is a standard. Information

technology is a large component of design as Boeing continuously looks for ways to develop aircrafts

with more range, faster speeds, higher reliability, and other ways it can create added value to its

potential customers. A good example of this added value, is finding ways customers can generate

more revenue with Boeing aircrafts.

The most recently launched aircraft is the new model 787 Dreamliner. The Dreamliner is built to have

either an additional 72 seats compared to the previous model, or, an additional 24,500lbs of revenue

cargo space. Boeing’s newest 777 model received an upgraded design approval from the FAA in late

2011, which granted the aircraft the ability to make longer flights without stopping. This longer range

feature benefits customers looking to continually minimize costs. It allows customers to make flights

with less stops, therefore reduced costs. Efficiency is at the root of all new design.

The other side of the engineering comes from the engineers themselves. Boeing’s culture focuses on

“people working together.” They find that their competitive advantage is the people in their

workplace, and the knowledge and ideas they share. Boeing highly recruits engineer graduates from

many engineering schools around the US and the world, including the prestigious, MIT (Massachusetts

Institute of Technology).

Competition also helps drive design. Airbus has been a large name in the commercial airline industry

for the past 40 years. With Airbus’ top engineers and every-changing designs, Boeing strives to beat

out its competition in all new technology and designs. It has to, to maintain relevancy in the market.

Another way Boeing creates relevancy in the market is through its marketing strategy. Boeing wants

to be known as a company that cares about the environment, who uses the most advanced technology



and designs for their aircrafts. For the company’s potential customers, fuel efficiency is one of the

most important factors as regulations become stricter and because this is what will return more

revenue.

Marketing: Its marketing strategy focuses around this concept not only in terms of economic benefits,

but also by showing the “human” side of the company. Its corporate citizenship program seeks to

create a positive change through both their products and services, but also the way they operate their

business and how they exist as an organization. All over the world, Boeing has partnered with

community organizations focusing on five strategic areas: health and human services, education, arts

and culture, civic awareness and environment.

Boeing has established itself as a company that is part of our communities through its environmental

actions and commitments, progressive technology, constantly working on reducing its environmental

footprint and creating a better future for the public.

Boeing recognizes the talent and commitment of its employees by featuring them in their TV ads. With

a campaign entitled “That’s why we’re here” the company uses employees to tell the Boeing story

capturing the character and commitment of the people working in the background.

Whether it is to communicate internally to its employees or advertise externally to its potential

customers, Boeing relies heavily on electronic communication.

Boeing also uses this form of communication when targeting new potential suppliers.

When the company is looking to communicate a certain type of belief or opinion, it will use

institutional advertising. Through this type of promotion Boeing will promote its ideas and political

opinions, support for music art or education. This plays an essential role in Boeing promotional and

communication policy.

Given the nature of the business, the use of mass media is limited for Boeing. Multi-million dollar

airplanes are not sold through TV, radio or press advertisements, as it is unlikely the company would

reach its target market using these channels. However, this may have effect when using specialized

press, where they advertise technical specifications of its commercial airplanes to existing or potential

corporate clients. A very efficient form of advertising for Boeing is using its own logo and name on all

aircrafts. Whether United, American Airlines or KLM uses them; it will always show its name and



model number. Overall, the marketing and advertising spend have little impact on the financials of the

business.

Finance: Boeing is a financially sound company, with positive cash flow that, as all companies, aims

to please its investors. Referencing Boeing’s 2011-12 financial reports; we see that in 2011, year over

year, The Boeing Company has been able to grow revenues from $64.3B to $68.7B. Most

impressively, the company has been able to reduce the percentage of sales devoted to selling, general

and administrative costs from 5.67% to 4.96%. Also they were able to sort out the twists of the 787

development and production and eliminate the 2009 spike in these costs as well as the increased R&D

expenses related to 787 development that were almost double in 2009 (6.5$ billions) compared to

previous and following years (3.8 - 4.1 $ billions). This was a driver that led to a bottom line growth

from $3.3B to $4.0B. Boeing has steadily increased its revenues YoY since 2007 except for 2010.

Earnings guidance for 2012 has been established at between $4.05 and $4.25 per share reflecting solid

core performance and higher pension expense. Cash and investments in marketable securities totaled

$11.3 billion at year-end (Table 3), up from $9.2 billion at the beginning of the quarter. Debt was

unchanged in the quarter. Revenue guidance for 2012 is between $78 and $80 billion and operating

cash flows of over 5$ billion. For the commercial airplane division it targets deliveries of 570 to 600

units, revenues of 47.5-49.5 (representing 60-62% of total revenues), and operating margins of 8.5-

9.9% for 2012. For the full year, revenue in the commercial airplane division increased by 14 percent

on higher delivery volume, increased services revenue and mix. Operating margin was 9.7 percent,

reflecting improved mix and lower R&D partially offset by higher period costs and the dilutive impact

of initial 787 and 747-8 deliveries.

“Strong fourth-quarter operating performance, record revenue and backlog, and expanded earnings and

cash flow capped a year of substantial progress for Boeing in 2011,” said Jim McNerney, Boeing

chairman, president, and chief executive officer. “Major accomplishments of our team during the year

included certifying and delivering the first 787s and 747-8s, winning the U.S. Air Force Tanker

program, and launching the 737 MAX.”

Boeing rely on preorders with firm contractual obligations to gage it potential future cash flow from

operations. Potential problem here are costs overrun in production as well as delays in production that

can eat away from its revenues as it will pay penalties for delays in delivery. Thus their focus is on

delivering on the preorders in a timely manner. This reflects their concentration on improved



operations and a continuous focus on efficiency in their production and operations while paying special

attention on how to improve on cost and get efficiency gains throughout Boeing’s operations.

Preliminary Recommendations

Overall, Boeing’s strategy focuses on streamlined operations and continuously improving product

design. Boeing as a whole is a giant, due to its combined commercial airline arm and

government/military defense arm combined. Although a leader in its industry, what Boeing lacks in its

commercial airplane division is a strategic differentiator. Boeing and Airbus are producing many

similar aircrafts and both focusing heavily on R&D on engineering, but Boeing does not outwardly

have a focus that allows them to outshine the competition. With the potential threat of new entrants,

this could become a growing weakness. The first recommendation for Boeing is to choose a Value

Discipline to focus on. Of the three disciplines, (operational effectiveness, product leadership,

customer intimacy) Operational Effectiveness is the best choice. The second recommendation would

then be for Boeing to improve its suppliers, mostly by reducing the number of them. With many

suppliers, this could possibly be slowing down the supply chain. Many suppliers find Boeing to be

putting a lot of pressure on them to reduce prices and increase quality. By strategically reducing the

number of suppliers, better costs could be found through scales of economy and better relationships

can be built. The third recommendation is for Boeing to improve the efficiency of its maintenance by

increasing efficiency in the number of hours spent on maintenance, and the quality of work done to

make sure the work provided will last a sufficient amount of time. These areas of focus create the

steps to begin a focused area of business in which Boeing can claim, and sell to its current customers

and potential new ones. Staking claim in effective operations will both reduce expenses and time

spent/lost on Boeing’s side, but do the same for its customers to. Optimized supply chain and

manufacturing leads to a more efficient turn-around, which eventually leads to an improved bottom

line for customers and investors alike.

A Closer Look

More questions surfaced after Boeing’s preliminary recommendations had been found. It is

understood that Boeing has to go beyond the strategy above, and continue to plan for the

aforementioned threats of new entrants and potential loss of market share, but also of a potential

engineer shortage. Future opportunities in the industry must also be addressed such as new product



development and new markets. Further recommendations of short, mid and long-term strategies

follow.

Short Term Strategy - Focus on Engineer Shortage

Nationwide, aerospace companies anticipate a need of 129,350 workers over the next five years. As the

world’s largest aerospace company and an employer of more than 150,000, Boeing is preparing for

about two-third of its workers to retire within the next ten years. The company is looking at how it can

use its facilities for employee retention and attraction tool. It is a daunting fact that twenty-two percent

of Boeing workers could retire at any moment. They’ve already reached the company’s eligible

retirement age of 55.

Boeing representatives say that the company has committed to building 396 new airplanes valued at

around $37 billion. Boeing has also received orders for about 10,000 other 737s (Lockhart, 2012).

However, Boeing says it will not be able to meet these commitments unless it can hire new highly

skilled workers. Over the next decade, experts anticipate a need for 21,000 aerospace workers to

replace the tide of Baby Boomers that will be retiring and to satisfy industry demand. Part of the

problem, according to Boeing, is that available workers are not skilled enough to compete with

international manufacturers like Airbus. Corporation worldwide faces increasing pressure to juggle

seemingly conflicted priorities, such as attracting and retaining the next generation’s work force, while

managing the soaring costs of health care and other associated benefits

There is also growing concern about the availability of the technical talent in the labor market pool to

meet the future employment requirements. Boeing is facing the challenge of how to make rigorous

courses in the math, science and technology curriculum appealing to students.

Nationwide, the United States isn’t graduating enough engineers for aerospace, especially given that

some projects at companies like Boeing require their employees to have security clearances.

America is falling dramatically behind other countries in its science and engineering college programs.

These same programs are expanding ten times faster in China than the United States. The lagging

technology skills of our graduating student employee pool will create a great deal of pressure on the

US companies to look overseas for talent or fall behind in the available engineering and science

expertise.



Many of the US competitive companies are looking for the same technology skills and are offering

comparable salaries and benefit packages. Young people across the nation are either not interested in

aerospace careers or don’t have the math and science skills for it. This unique problem doesn’t start in

college curriculums. Typically, only 8 percent of Washington high school students expressed an

interest in engineering as a career when they took the SAT in 2008.

This lack of interest also could be attributed to the apparent “bad image” of the aerospace industry as a

whole, according to the Interagency Aerospace Revitalization Task Force. Layoffs, labor strife and

outsourcing have tarnished aerospace’s reputation over the years. The current economic downturn has

discouraged some aerospace workers from retiring.

Robin Johnston, a composite repair mechanic, has worked at the Boeing Co. for 25 years. Johnston

turns 65 this November and plans to retire next year. He is waiting to turn 65 to retire to be eligible for

the health benefits. With older workers holding out longer for retirement, aerospace companies aren’t

hiring and training young workers. This could backfire and potentially create an even worse gap in the

skilled and unskilled workers.

Government initiatives

Both state and national governments are lining up their own initiatives to promote the success of the

aerospace industry. In 2006, Congress formed the Interagency Aerospace Revitalization Task Force to

begin exploring ways to solve the problems of anticipated aerospace worker shortages.

In 2008, Gov. Chris Gregoire called for the formation of a state aerospace council, which will

coordinate the state’s educational efforts from the universities and community colleges to the aircraft

industry and beyond. The expected worker shortage is of concern to local governments as well. A few

years ago, Snohomish County, together with the Aerospace Futures Alliance, founded the Washington

Aerospace Training and Research Center in Everett. This is a center that is receiving funds from all

levels of government to promote local education and training.

People feel that aviation is no longer a highly attractive career, because that does not come with a suit,

office hours & executive frills preferred by the college graduates. Yet another refrain of we need more

young engineers falls on the ears of legions who heeded the call only to have their careers abbreviated

by cyclic layoffs, massive project cancellations, corporate neglect, and far more lucrative career

options. The cyclical nature of corporations dependent on government funding is certainly a deterrent



to choosing an aerospace engineering degree. The allure of software and computer engineering:

dynamic, ever-changing, direct rewards – is more attractive to the current generation of students, who

are also influenced by the instant gratification theme of our times.

Strategy on Boeing employee shortage

Boeing should initiate a project or task force to address all aspects of their engineer shortage issue:

Compensation packages that will allow them to retain current employees

Recruiting strategies to attract new engineers

Review engineer positions to see if some of their responsibilities can be leveraged to other

employees

Review their design and other business processes to see if they can be accomplished more

efficiently.

These tasks can be further divided into at least one hundred tasks that can be done in 80 hours period.

Due to limitation of page number of this assignment, we here illustrate few examples of tasks that can

be accomplished during the project duration. Acceptance criteria can be established based on each

deliverables once all requirements and tasks are detailed.

Recruiting strategies to attract new engineers:

Initiate small campaign to change parents and children’s perception and increase the image of

the engineer is low. Boeing could start internally and promote a program among employees and

their children. The program aims to persuade current employees and attract their children to

study math and science and become engineer.

Boeing can pay education expenses of chosen children and make promissory contracts that

secure a work at Boeing upon graduation. Boeing spends approximately 1.4 billion on

education.

Recruit talents from abroad.

Collaborate with USCIS; explore H-1B visa type and decrease waiting period to process H-1

visa and increase the number of approved foreign employee per year.

Increase partnership with community colleges and universities and increase employee

awareness of K-12 programs.



Create K-12 teacher recognition system and career development. The Welliver Faculty

Fellowship program is a unique program that involves approximately 150 universities and

colleges.

Define clear intention of Boeing expectation and desires from colleges and universities

Involve engineering faculties and increase involvement of executive focals.

Explore the possibility of launching own school. (Airbus and Embraer of Brazil have its own

engineering school. This has been a very successful program where we attract people who have

no possibility perhaps to go university. )

Increase the frequency of giving presentations in universities to attract students.

Conduct a survey to determine how many of retired engineers are willing to be involved in

spreading positive image and give presentations to colleges.

Fuel Efficiency / Design Improvements

Boeing has made Fuel Efficiency and reducing their environmental impact their top priorities when it

comes to improving the design and performance of their aircrafts, therefore resulting in 70% more fuel

efficient and 90% percent quieter than planes of the past. Their most recent innovations on their newest

airplanes in production that can be seen are the Variable Area Fan Nozzle which help reduce noise by

deflecting the sound away from home and an Adaptive Trailing Edge which deflect wind which helps

increase fuel efficiency.

Some improvements that passengers will not see or notice are improvements in the navigation system

that can plan a more direct route or avoid severe weather that can ultimately improve fuel efficiency.

Improvements on overall design of aircrafts to make them lighter and more aerodynamic have also

contributed to fuel efficiency. An example of innovative design is using lighter and manufacturing

one-piece fuselage which makes the B 787 lighter by reducing the use of 1500 aluminum sheets and

40000 fasteners.

Aside from Boeing’s own efforts, they also are obtaining from suppliers more efficient engines and

putting them on their aircrafts to better align with their overall goals of having the most fuel efficient

aircrafts in the market.



Our group has some recommendations to further improve on what has already been laid out. We

suggest revisiting some alternate energy sources to ease the use of fossil fuels, like solar power. Why

don’t planes utilize especially when on the tarmac? Airports do not have tall buildings that block the

sun. When already in the air and above the clouds, there is nothing to stop the plane from getting all

the free energy. This idea was brought about Airbus’ idea of using hydrogen fuel cells to power non-

propulsion systems to reduce fuel usage in unnecessary instances.

Another alternative energy source that can be utilized is the Wind. Aircrafts are in the air and when

they are flying wind is a free source of energy and it is abundant. Is there no way to put a wind turbine

to generate electricity to power some of the aircrafts system? Maybe a small air duct on the belly of the

plane that will lead to a turbine?

Bullets: Test how much power can be generated by one solar panel or wind turbine and multiply that

by how many can be installed on a full size plane. This way we can see if the energy that is produced is

enough to run some systems and if the weight increase can be offset by the lesser fuel consumption.

Mid-Range Strategy – Changing Market

For Boeing to remain true to its vision of “People working together as a global enterprise for

aerospace leadership”, all this facilities and people working, need to be integrated and work well

together, creating the best managed global supply chain in the industry.

The increased demand for more cost-efficient and innovative aircraft, coupled with breakthroughs in

the development of lighter composite materials produced the Dreamliner success and the fastest order

log build up ever, while initiating the current unprecedented backlog of customer orders at Boeing. But

instead of deliveries on these orders, delays and cancelation have plagued the production because of

the initial management stumbles in managing the complexity of production and this new paradigm of

its global supply chain. Thus, we believe, Boeing and its suppliers will continue to be challenged with

large scale multi-year production ramp-up needs, while continuing to deal with engineering and

production challenges.

Boeing CEO Jim McNerney “In retrospect, our 787 game plan may have been overly ambitious,(and

risky we might add) incorporating too many firsts all at once -- in the application of new technologies,

in revolutionary design-and-build processes, and in increased global sourcing of engineering and

manufacturing content,”



The 787 has about 50 tier 1 suppliers (the”787 international team”, at www.Boeing.com ) from United

States and the rest of world that manage hundreds of Tier 2 and 3 suppliers. The Dreamliner isn’t just

groundbreaking in its composite form; Boeing is using the airplane to do a new kind of aerospace

manufacturing. Instead of designing and testing all of the parts itself, Boeing pushed much of that work

to its suppliers. Boeing asked many suppliers to design the components using their internal capabilities.

It’s a model similar to the auto industry, whereas this is the highly complex aerospace industry where

collective, “tribal knowledge” contributes a lot to the knowhow that enables the innovation and

development process to successfully build airplanes. Instead, Boeing outsourced much earlier in the

development phase than usual, even before prototyping. Furthermore to make a 787 fly, Boeing needs

to get the entire ready to assemble parts to its factory in US from all over the world - from small

components like nuts and bolts, to big things like an aircraft wing or fuselage. That makes Boeing,

essentially, just the final assembler of the airplane. The process cuts costs and, theoretically, should

improve efficiency, but doing this also made them dependent on their suppliers for designing,

developing and manufacturing of various parts to assemble 787, in effect outsourcing even some of

their core competencies and ceding control of the manufacturing process.

Another challenge to this nouveau manufacturing and supply chain that Boeing has been pioneering is

the communication difficulties with the suppliers. Distributed teams of engineers and designers, with

language barriers and different time zones just made things worse. Imagine designing an aircraft wing

in Japan by looking at raw drawings and then sending a prototype to US to make sure it fits with the

rest of the body, then making changes to it and repeating the process again. The result is a slow process

and therefore, a slower supply chain. In essence, component innovation has its limits when sourced to

its suppliers. This is also a very elaborate supply chain, in which even Boeing main suppliers don't

necessarily control where parts are being made, or their availability. It's a very complicated network of

work being done globally, that's not so easy to fix when there's a problem.

Boeing needs to take steps to ease these issues and build a cohesive design and manufacturing process

that involves constant communication between Boeing and its suppliers, as well as supplier’s

collaboration and building good relationships (Boeing should have people and reps around the world

and around the clock to answer questions and solve problems). This will make for a supply chain that

is nimble and responsive that should employ an integrated architecture and real time communication

and sharing of information and data, including better production forecasting available to suppliers (for

a better planning and production scheduling). The use of RFID (as Wal-Mart does), with smart

http://www.Boeing.com/



tracking software and instant updates should be considered. Also its supply chain management should

better integrate Boeing’s own design, development and manufacturing processes with its suppliers.

In addition contracts with its suppliers should include clear financial charges/ penalties related to any

protracted manufacturing capacity and production costs – as delay have prompted penalties and

charges to Boeing from its own clients. In addition Boeing should do a better screening of their

suppliers and anticipate potential problems with their supplier’s fabrication processes, also reduce their

sheer numbers thru elimination of the unreliable ones while purchasing key components from more

than one supplier (reducing risks of shortages), as well as the encouragement of consolidation among

them, financing or outright buying them (to improve the suppliers’ financial and investment resources

abilities, necessary for the increasing in production and to enable expanded supplier capability and

increased investments in production capability)

These, would improve Boeing’s operations efficiency and would go a long way in addressing problems

and further interruptions in Boeing’s assembly lines, thus enabling it to increase production rate to

meet the current and future estimated demand for its airplanes (a really healthy backlog of over 4000

orders –more than 12 years’ worth of work at current production rates of about 530 units/yr. -2012),

which in return will generate earnings growth for the company (pleasing its investors).

We believe that a careful analysis of what works and what not with this new approach to

manufacturing should be done by Boeing at all levels by management. We think that a decision should

be made to bring back in house more of the design process as well as the airframe manufacturing

processes, to regaining control of their production. A new- emphasis on Boeing’s lineage of excellence

in design and innovation as well as engineering and manufacturing roots will also help the company

focus on what we think should be a strategic goal: keep being the best aerospace company in the

world.

Supply Chain Services are one segment of Boeing's integrated program of aerospace support

services. The objective of Supply Chain Services is to improve aircraft availability and reduce

costs according to customer-defined preferences.

Boeing must consider increased investments in their service supply chain capabilities including

deeper product lifecycle management integration and supply chain intelligence, collaborative execution

and supply chain control tower concepts. This includes on-board and self-communicating diagnostics



providing early warning to operating issues, more responsive networks of service parts and service

depot suppliers as well as highly networked maintenance facilities.

As proven by Boeing’s past experience, the long-term rewards for a robust service supply chain are

lucrative, but the product lifecycle management, information and supply chain challenges (for the new,

innovative airplanes being now developed and the new material they incorporate, along with the older

ones still in use or being sold today), are complex and require pioneering approaches. The service

supply chain should no longer take a back seat to the product-driven supply chain; it will be

instrumental in fulfilling long-term revenue and profitability business objectives.

Long-Term Strategy - New Markets

Boeing should consider long-term opportunities outside commercial airline manufacturing. Although

forecasts predict a rise in aircraft sales now, through 2030, there is no guarantee that this is an accurate

forecast and that it will be steady beyond 20 years from now. A rising trend in air travel has moved

beyond destinations on Earth, and the idea of space travel has slowly transformed from a far-away

vision into a near reality. Companies like Virgin Galactic and SpaceX have been developing ways to

provide commercial trips to the space station and moon. Virgin Galactic currently has over 500

reserved tickets at a $200,000 deposit per ticket for when this technology is available. In what was

considered a long-term plan, Virgin Galactic recently acquired The Space Company which designs and

manufactures its current space aircraft. Boeing has the technology already created to fulfill this need.

According to boeing.com, “Boeing is the prime contractor to NASA for the ISS [International Space

Station]. In addition to designing and building all the major U.S. elements, Boeing also is responsible

for ensuring the successful integration of new hardware and software -- including components from

international partners -- as well as for providing sustaining engineering work.” It’s unknown if this

will be a viable market in the future but with Boeing’s space division technology and its commercial

airline know-how, they have the right tools and infrastructure to offer spacecraft in a major way. With

about 10 other products in development, Boeing could potentially beat all of them with the supplier

relationships that already exist. This will most likely be a niche market that Boeing can cater to, which

could offset any potential decline in the commercial aircraft market. It would allow plants and

engineers to stay productive even if commercial aircraft manufacturing is reduced. The opportunity

here is to become the supplier for companies like Virgin Galactic, or SpaceX, or any company that is

developed faster in the years to come. Because Boeing already has the infrastructure and the know-

how of the spacecraft development and the commercial interior design element of travel, they are an



excellent candidate to supply these models. The existing infrastructure can only help to benefit Boeing

and its potential space travel customers by keeping manufacturing costs relatively low, so as to be

competitive in the market. This is a new market Boeing can easily get into using its current assets.

Other Considerations - Black Swans

Aside from notable trends, Boeing will have to plan for the unexpected, the Black Swans. These could

include the chance that the commercial airline industry bottoms out completely, or that the rise of

COMAC surpasses its goal to become the third largest aircraft manufacturer in the world, but becomes

number one. COMAC could find a way to build planes at a remarkably low rate therefore taking over

the market. Boeing will must consider these possibilities and have back-up plans ready. The market

trend could move towards much larger jumbo-jets, as has been rejected up to now, and Airbus could

quickly gain that market share already having developed this product. By staying ahead of the game,

and continuing to maintain their operational effectiveness, Boeing will be more easily able to flexibly

outmaneuver these challenges.

Final Conclusion / Recommendations

The first recommendation, as mentioned in the preliminary analysis, is still for Boeing to focus on one

value discipline, that being operational effectiveness. With the single aisle passenger plane having the

largest product demand, Boeing could own this share of the market by optimizing their manufacturing

to keep the smaller new entrants (Embraer and Brombardier) from gaining share. The second

recommendation is the continued focus on recruiting engineers. It is imperative that Boeing retain and

gain knowledge to keep it a leading aircraft manufacturer and stay relevant in the years and decades to

come. The third recommendation would be for Boeing to improve its supply chain management and

its increased global sourcing of engineering and manufacturing content. This should be done by

reducing and simplifying its complex web of suppliers, encouraging consolidation among them,

eliminating the undependable ones as well as bringing more work back inside Boeing (as done with

South Carolina operations, bought from Vought Aircraft Industries one of its suppliers for the

Dreamliner) thus regaining control of its airplanes production. A cohesive design and manufacturing

process that involves constant communication between Boeing and its preferred suppliers should be

implemented. By strategically reducing the number of suppliers, better costs could be found through

scales of economy and better relationships can be built. The fourth recommendation is for Boeing to

improve the efficiency of its maintenance by increasing efficiency in the number of hours spent on



maintenance, and the quality of work done to make sure the work provided will last a sufficient

amount of time. These areas of focus create the steps to begin a focused area of business in which

Boeing can claim, and sell to its current customers and potential new ones. Staking claim in effective

operations will both reduce expenses and time spent/lost on Boeing’s side, but do the same for its

customers to. Lastly, keeping a finger on the pulse of the industry will only help to keep Boeing ahead

of the game. Looking at options, opportunities, threats, and developing answers to extreme

possibilities like commercial space travel will only prepare Boeing for what is to come. The market

could change at any time as noted above, and Boeing will have to have the flexibility to change with it,

all the while, sticking to its core operations, building aircraft.



Appendix

Currency in

Millions of US Dollars

As of: Dec 31

2008

Reclassified

Dec 31

2009

Dec 31

2010

Dec 31

2011

Revenues 60,909.0 68,281.0 64,306.0 68,735.0

TOTAL REVENUES 60,909.0 68,281.0 64,306.0 68,735.0

Cost of Goods Sold 50,129.0 56,365.0 51,683.0 55,739.0

GROSS PROFIT 10,557.0 11,741.0 12,463.0 12,868.0

Selling General & Admin Expenses, Total 3,084.0 3,364.0 3,644.0 3,408.0

R&D Expenses 3,768.0 6,506.0 4,121.0 3,918.0

OTHER OPERATING EXPENSES, TOTAL 6,852.0 9,870.0 7,765.0 7,326.0

OPERATING INCOME 3,705.0 1,871.0 4,698.0 5,542.0

Interest Expense -202.0 -339.0 -516.0 -498.0

Interest and Investment Income 241.0 249.0 267.0 278.0

NET INTEREST EXPENSE 39.0 -90.0 -249.0 -220.0

Currency Exchange Gains (Loss) -- -- -36.0 16.0

Other Non-Operating Income (Expenses) 247.0 -26.0 88.0 31.0

EBT, EXCLUDING UNUSUAL ITEMS 3,991.0 1,755.0 4,501.0 5,369.0



Gain (Loss) on Sale of Assets 4.0 -24.0 6.0 24.0

EBT, INCLUDING UNUSUAL ITEMS 3,995.0 1,731.0 4,507.0 5,393.0

Income Tax Expense 1,341.0 396.0 1,196.0 1,382.0

Earnings from Continuing Operations 2,654.0 1,335.0 3,311.0 4,011.0

EARNINGS FROM DISCOUNTINUED OPERATIONS 18.0 -23.0 -4.0 7.0

NET INCOME 2,672.0 1,312.0 3,307.0 4,018.0

NET INCOME TO COMMON INCLUDING EXTRA ITEMS 2,672.0 1,312.0 3,307.0 4,018.0

NET INCOME TO COMMON EXCLUDING EXTRA

ITEMS

2,654.0 1,335.0 3,311.0 4,011.0

-------------------------------------------------------------------------------------------------------

References

www.boeing.com

http://www.reuters.com/article/2011/01/20/us-boeing-dreamliner-idUSTRE70J2UX20110120

http://online.wsj.com/article/SB10001424052970204058404577111091095438300.html

http://seekingalpha.com/article/592001-boeing-vs-airbus-orders-and-profits

http://www.nytimes.com/2012/05/14/business/global/14iht-rav-china14.html

http://seekingalpha.com/article/592001-boeing-vs-airbus-orders-and-profits

http://online.wsj.com/article/SB10001424052970204058404577111091095438300.html

http://www.reuters.com/article/2011/01/20/us-boeing-dreamliner-idUSTRE70J2UX20110120

http://www.boeing.com/

file · web viewthe boeing company was established in 1916 by william e. boeing in...

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