Memorandum

To: MBA Staff

From: Corser/Curcio/Dreyer/Junge
Date: March 28, 2011
Re: Boeing Integrated Core Project

Executive Summary

Boeing is at a critical strategic crossroads: how to regain growth and how to recover eroding profit
margins. They continue to be the market leader in both the commercial jet industry and government
sectors. But, their shortsightedness on the manufacturing front continues to hamper their cost
position, and thus has impacted their ability to deliver value to their “other” customers -- their
shareholders. They no longer have the low cost position, and they now find themselves in an all out
price war with Airbus Industrie.

In the past, Boeing has been able to rely on their core competency -- innovative new models defined
by performance; models that captured imaginations, and more importantly, orders. Now,
however, they must endure the shift to a cost driven environment. Unfortunately for Boeing, they
lack the ability to deliver on the manufacturing front during a time of robust demand for commercial
aircraft.

Boeing must regain the confidence of their customers and share owners. To do this, they must
embrace and integrate all dimensions of the Value Chain, and establish a new set of core
competencies to drive them towards their stated goal of being the Global Aerospace Leader.

Boeing Strategy:
Boeing’s stated vision is: People working together as one global company for aerospace
leadership1. Based on our analysis2, 3 three main elements of Boeings strategy has emerged.

1) Lead the Global Aerospace market by delivering technology and shareholder value. The merger
of Rockwell and McDonnell Douglas allows the financial stability to weather downturns in different
segments’ business cycles. Prior to the mergers, the Boeing Corporation was focused on Commercial
craft versus military/space (by a ratio of 3:1), and today with the M&A Activity they have a ratio of
3:2. Prior strategic focus of the enterprise was to deliver high quality, superior innovation, and
complete post sale customer support. This strategy was in the absence of aggressive competition (a.k.a.
Airbus Industrie). When Airbus began to offer both price and delivery pressure to the market, the
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Boeing Corporation had to refocus on a number of fronts to accommodate their shareholders and
customer bases.

The requirements from the commercial customer base changed from wanting technical prowess
and service to wanting more efficiency for the least money4. Also, in the military sector the
pentagon budget has been shrinking during the post cold war. The company has been
transforming from a monopoly supplier of very high end commercial craft, and a player in the
“Fat” space and military supply chain, to a supplier of goods that is accountable to both
shareholders and customers. Realization of this strategy demands very efficient operations while
maintaining the established innovation and speed to market.

2) Be the leader in providing low cost access to space for both commercial and government
customers. Boeing must continue to grow the space-based sector and focus on continued profitability
of the military sector. This will allow dampening of cyclical impact of the commercial business to have
less overall share owner impact.

3) Be the first choice of our customers and employees. Amid layoffs and difficult delivery pressures,
the people of Boeing are the key to achieving the operational and cultural transformation required to
deliver the above. The unwavering commitment of management to retain and grow both the internal
talent base and the customer base is critical to maintaining market leadership. The management has
begun a self-inspection and rediscovery toward the reconstitution of the corporate culture. A widely
publicized set of desired core competencies has been posted on the Boeing public web site5:

• Detailed Customer Knowledge and Focus

• Large Scale Systems Integration
• Lean, Efficient Design and Production Systems

The depth and quality of Boeing’s public web site is also an indication of the efforts to increase both
image and communication with both employees and customers.

Background: Boeing Corporation

The Boeing Company is the largest aerospace company in the world with more than 232,000
employees worldwide and $45.8 billion in revenue in 1997. Boeing develops and manufactures
military and commercial jet aircraft, and space and missile systems. The company is over eighty
years old with a history and development that mirrors the history and development of aviation.
During the past several years, the Boeing Company has become the largest aerospace company
in the world via mergers and acquisitions. In 1996, Boeing merged with Rockwell International
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Corporation’s aerospace and defense units which were renamed Boeing North America, Inc.
And then, in 1997, Boeing and McDonnell Douglas merged to form The Boeing Company.
These mergers have transformed Boeing into a more balanced company in terms of commercial,
defense, and space capabilities.

Boeing and its subsidiaries develop and manufacture a very broad and diversified product line.
Most of the products germane to this analysis and discussion are the commercial and business
jets, namely the 700 Series and the MD series. In the area of military aircraft and missiles,
Boeing manufactures products such as the F-18, AH-64D Apache Longbow, C-17 Globemaster
III, and the Minuteman III. Boeing’s products for space and space exploration are also broad
and diverse. Boeing is a major contractor to NASA in the areas of the space shuttle and the
international space station. Additionally, Boeing manufactures the Delta family of rockets and is
developing Global Positioning Satellites for the US Air Force.

Industry Structure and Competitive Landscape

The Boeing Corporation consists of three organizations, serving two, largely separate industry
sectors:

• Boeing Commercial Airplane Group

• Information, Space & Defense Systems
• Shared Services Group

The Information, Space & Defense Systems comprise all military aircraft systems and tactical
missiles, space vehicles, rockets and engines, aircraft information systems and advanced research
and development. The Boeing Commercial Airplane Group comprises all commercial
transports, from the 737 to the 777 and the MD jets built by the Douglas Products Division. The
new Shared Services Group provides computing, telecommunications and other support services
throughout the company.

As pictured in Exhibit 1, Boeing exists in a typical manufacturing structure between suppliers

and customers. Points to note concerning the industrial and competitive structure are:

• The Commercial Airplane Group generates 60% of Boeing’s revenue.

• Boeing has approximately 60% of the commercial transport market and their main
competitor is Airbus Industrie.
• Boeing is vitally linked to a multi-tiered supply chain that also supplies its
competitors.
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• The Information, Space and Defense Systems Group generates 40% of Boeing’s
revenue, and competes against a much larger group of competitors which include:
Lockheed Martin, Northrop Grumman, and General Dynamics.

Market Outlook
In the area of commercial airplanes, the outlook is favorable. Air travel growth is driven
primarily by economic growth, and the long-term economic outlook for the world is healthy.
Worldwide air travel growth is projected to average 5% per year over the next 10 years. Boeing
projects the industry demand for new commercial transports to be approximately 7,600
airplanes, which equates to $520 billion of industry revenue over ten years6.

The aggregate market for information, space and defense systems is relatively flat. Defense
budgets have stabilized with a possibility of modest growth after years of decline. Boeing is the
largest contractor for NASA, and NASA’s budget is not expected to grow significantly in the
near future. The brightest spot may be the industry forecasts of up to 2,000 communication
satellites that will need to be launched within the next 10 years, indicating a potential growth
opportunity for Boeing.

Financial Background and Recent Highlights

For many years, making commercial jets has been profitable for Boeing. Historically, Boeing’s
profit margin for commercial jets has been 10%. In 1997, Boeing posted its first annual loss in
fifty years. The net loss was $178 million which was due to $3 billion in pretax charges A large
part of the charges resulted from production problems in the commercial aircraft business. In
the past two years, unexpected charges and low margins in commercial aircraft business have
negatively impacted Boeing’s stock price (see Exhibit 2). Profit margins in Boeing’s space
and defense operations are expected to remain flat at about 7.6%. Some of the main reasons for
the low margins in commercial aircraft, and hence the decline in Boeing’s stock price are:

• Boeing is in a price war with Airbus Industrie.

• Boeing’s overhaul of assembly line practices remains behind schedule.
• Asia’s financial crisis continues to hurt orders of wide-body aircraft.

As a result of the factors mentioned above, profitability is a major concern and new found focus
for Boeing employees and stockholders.

Strengths and Weaknesses

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Boeing has several strengths, but none as important as their reputation of being an innovative
company. They have built the image of being a company repeatedly capable of delivering exciting
new models that meet the stringent demands of their many and widely varied customers. A second
strength is their successful participation in multiple, diverse market segments. Not only are they
the market leader in the commercial jet industry, they have increased their share of the military and
space markets, through the mergers with McDonnell Douglas and Rockwell. Lastly, the multiple
markets allow for synergy between these businesses.

But, of course weaknesses exist as well. In a commercial industry that is largely cyclical, Boeing has
clearly displayed its inability to predict the cycles, and successfully ramp up production in anticipation
of increased sales -- in short, an inability to forecast and a lack of communication exist. There is a
disconnect between the sales force taking the orders, and the operational personnel making the
products. Boeing’s poor manufacturing practices compound this weakness. An antiquated IT
infrastructure is used to drive a highly complex, manufacturing enterprise within a very diverse
supply chain. Possibly the worst aspect of the computer system is the fact that it is comprised of
several sub-systems incapable of “talking” to each other. Lastly, Boeing has hired 32,000 workers in
an 18-month period7, indicating a relatively in-experienced work force exists. As stated in the,
Boeing hired. The combination of “green” workers and “million part” machines has led to many
mistakes and increased manufacturing costs due to rework, as well as production bottlenecks.

Opportunities and Threats

Opportunity does exist for Boeing, albeit at this juncture, the opportunity is limited. The biggest
opportunity is to reclaim market share from Airbus. Airbus’s inability to reduce costs at the back
end of the Value Chain8 provides Boeing an avenue to regain this market share. Airbus’ multi-
national arrangement translates into an inability to manage suppliers, buy in bulk, or reduce costs by
rationalizing manufacturing. Boeing, on the other hand, is not constrained in this manner. That is not
to say that Boeing has ironed out its supply chain -- it has not. But, by improving the supply chain,
specifically better inventory practices and supplier relationships, costs can be greatly reduced.

0Unfortunately, the threats are numerous. Clearly one of the biggest threats in the commercial sector
is the existence of a unique duopoly between Airbus and Boeing. Unlike traditional duopolies,
Boeing and Airbus have found themselves in a price war, as they compete to maintain (Boeing) or
rapidly gain (Airbus) market share. Other significant threats include:

A tilted playing field -- Airbus and Boeing play with different rules. Airbus, operating on a
different continent, is often handed generous subsidies. Equally important, it appears Airbus
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is not being held to delivering a profit. Thus, they may be able to low ball their price to the
customers.
Regulatory issues or controls dictated by the Federal Aviation Administration. Unexpected
safety regulations lead to rework and increased costs. For the aviation industry, the PONC
(price of non-conformance) is very high.
The Asian financial crisis, as well as potential deterioration of relations with China, could
result in reduced ability to execute sales in the Pacific Rim.
Reduced government and military spending negatively impacting the military and space
system market segments.

0Porter’s Five Forces Analysis

0As seen in Exhibit 3, a thorough analysis of Porters five forces gives a good picture of the unique
industry dynamics. The components are as follows:

0Threat of New Entrants. This is very low in the aerospace industry. There is a very large start up
cost. The only real players on the commercial side are Boeing and Airbus, and the only reason that
Airbus was able to enter the marketplace was through European government subsidization. This
allowed them to compete even though their volume was much smaller than Boeing, and Boeing had
economies of scale. Lastly, a trend toward industry consolidation further diminishes the threat of
new entrants.

0Bargaining Power of the Suppliers. With the demand for airplanes at a high in the commercial
sector, and a shortage of production parts (specifically for Boeing), the power of the suppliers is
quite strong. Many integral parts such as doors, sensors, and critical materials, are made by only one
supplier, which gives them great bargaining power. The suppliers are exerting this power in a few
ways: 1) increased prices and 2) demand for long term contracts. During the down time in the
cyclical airplane market, Boeing cut off many of its suppliers and completely severed the relationships
that they had. Now they need those suppliers, and the suppliers have the position of power as Boeing
tries to reestablish those lost relationships. Another way suppliers exercise power is through sales
contracts that Boeing signs with foreign governments -- these governments demand that certain
suppliers from that region are used to supply parts.

0Bargaining Power of the Buyers. Ironically, this is very high. Due to the fact that there is an
incredible demand for airplanes, and the commercial market is a duopoly between Boeing and
Airbus, this should not be the case. Boeing and Airbus should be able to ensure a good profit margin
on the products that they deliver. However, in their bid to win market share, Airbus initiated a very
competitive pricing war with Boeing, and Boeing willingly participated. The buyers are now in a
very powerful position, and they are pitting Boeing and Airbus against each other -- the buyers
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are receiving their planes at a very low price. Due to the fact that many of the orders are placed for
multiple aircraft and involve long term contracts, Boeing has cut their prices to maintain market share.
This has resulted in eroding profit margins.

0Threat of Substitutes. Currently, this is low. Air travel is increasing every year, and the demand
for aircraft is increasing with it. The main airline customers of Airbus and Boeing have no other
avenue to go through to substitute for the airplanes that they need to meet their customer demand.
However, if Boeing and Airbus cannot keep up with the production demands, and do not satisfy their
customers, a ripple effect could take place. This lack of customer satisfaction could spill over to the
airlines not being able to satisfy their customers. This in turn could cause a turn to substituting other
forms of travel, like trains, for shorter trips. Or, if Boeing and Airbus decide to raise their prices, and
in turn, the airlines raise the cost of air travel, many travelers may decide to substitute air travel with
another form of transportation. Overall, these chains of events are unlikely to either unfold or
transform the fundamental demand for air travel.

0Rivalry. This is at an all time high within the market. Again, due to the fact that they are the only
two players, it should be a seller’s market. However, due to both companies' obsessions with market
share, the bidding wars have made it a buyers’ market. There is a tremendous battle being waged for
orders and long term contracts. Since Airbus has already revamped their production facilities and
processes, and is being subsidized by European government, they have been able to go match up well
with Boeing. Even though Boeing has economies of scale, their production snafus have contributed
to the intensity of the rivalry.

0
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0The Value Chain

0Boeing is suffering from an inefficient Value Chain. The entire Value Chain can be improved by
increasing and improving communication -- both internal and external. Why does the sales and
marketing team continue to promote the products, and to continue to commit to delivery dates that
they know won’t be met? Has manufacturing/operations failed to properly set expectations with their
sales and marketing counterparts? When parts' shortages existed, did the impact on production get
communicated throughout the value chain? A close look at the value chain shows problems exist at
nearly all aspects, including the external forces and support activities.

0
0Value Chain: Manufacturing

0The manufacturing enterprise is at the core of the Boeing value chain. The production/operating
expense escalated in 1997, resulting in reduced profit margins ($29 MM in 1996 increasing to $40
MM in 1997). Some of the problems that exist:

The use of a “low tech” manufacturing facility. This leads to spending too much time and
engineering costs for even the most mundane, low value activities. Why? There has been no
hyper-efficient competitor closing in, and the airlines are protected by regulation.9
Part Proliferation. The six million components appear to be far too many. With this many
components, can purchasing teams possibly keep up with accurate forecasts and inventory
levels? Additionally, this likely leads to the need to keep many suppliers, thus making
supplier management and evaluation very difficult and costly.
An antiquated parts code system coupled with non-relational databases run on stand alone,
non-interfaceable computer systems. What isn’t clear -- does this manufacturing facility
utilize any version of a MRP system, or even broader, an ERP System?
Poor inventory management. Inventory is turning over at a low rate of 2-3 times per year10
(note that in the financial data the value is reported at 5 times per year). A low turnover rate
directly translates to a higher inventory level. The result: lower asset turnover, and ultimately
lower return on investment. The ROI can be increased by over 2% if inventory turns are
increased to 12 times per year. See Exhibit 4.
Viewing canceled orders as a bright spot? The thought being conveyed in a Jan 12th Fortune
article was that the canceled orders provided some “much needed manufacturing relief”.
How can canceled orders be viewed as good? Is this the correct attitude, given the need to
focus on customer and shareholder value?
Poor Quality: loose or missing parts. Is the outdated, and admittedly poor performing
manufacturing system doing process control? It is difficult to understand if inspections
are being done, or if SQC is be used to control the process, and to investigate and correct
negative trends. And, have management and plant personnel taken on the concept of
“zero defects”?
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0Value Chain: Internal Supply Line Management

0Unfortunately, manufacturing does not have a monopoly on value chain problems. An equally big
problem exists with the suppliers and the management of the suppliers -- of course, this is closely
connected with manufacturing. If manufacturing does a rapid ramp up of production rates, it should
not be assumed that the suppliers will be able to do this -- at least not on very short notice. As
discussed in a Wall Street Journal article11, Boeing’s all out production boost is taking its toll on their
suppliers. Boeing has no supplier flexibility, having reduced the number of suppliers in an attempt
to get to “lean” manufacturing12. Additionally, Boeing has traditionally been brutal on their suppliers
when problems existed, while providing no positive feedback or rewards for good performance. Why
would a supplier choose to go to any extreme for Boeing?

0The supply end (the suppliers) of the value chain plays a critical role in allowing the manufacturing
to run smoothly. For Boeing, it is not apparent that they have firmly grasped some of these key issues
that involve suppliers. For example, has Boeing engendered a supplier evaluation program? For non-
unique parts, have they rated the supplier base on items such as:

Delivery capability. If Boeing’s production needs were rapidly increased, can the supplier in
question keep up, or at least have the ability to spend capital and increase capacity?
Quality of the parts. If Boeing must return parts, not only could it disrupt the flow of the
work, it could lead to costly rework if the parts get used before being found defective. Does
the rating system, if it exists, evaluate the process capability of the individual suppliers?
0A specific example: Boeing experienced production delays due to the inability of a supplier to

deliver seemingly common parts, such as bearings and tie rods. Why didn’t Boeing have multiple
suppliers making these components? And, was Boeing utilizing the best supplier of these bearings?

0The two items above play a big part in the Price of Non-Conformance (PONC). In choosing
suppliers for simple, seemingly minor parts, did Boeing consider that failure of these low priced parts
could have a much bigger cost impact? Did Boeing realize the importance of buying their parts based
on total cost, not lowest cost? All of these items play a key part in rating and selecting suppliers.

0But, the process of rating and selecting suppliers is even more critical for unique, not easily

manufactured items. For unique items, there may be no alternate supplier to fall back on. Assuming
there is a supplier evaluation/rating process, Boeing must also include into the mix the cost to switch
suppliers. If the supplier of a critical item fails to deliver the part as needed, what will go into
developing another supplier capable of delivering that item? One key example of this is the inability
of Precision Machine Works to deliver the engine strut. This key component is difficult to make, and
thus represents a high value item, which undoubtedly carries a significant amount of switching costs
-- of course that assumes some other supplier could even make it to the design specifications.
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0
0Value Chain: Strategic Supplier Alliance
0Has Boeing utilized the Portfolio Analysis Approach to set their supplier strategy? In conjunction
with utilizing a supplier evaluation program mentioned earlier, Boeing must also determine where
their suppliers fit into the quadrants of the matrix shown in Exhibit 5. For those components
determined to be critical or of high value, Boeing must begin establishing long term contracts (parts
where multiple suppliers exist), and strategic alliances (parts where few suppliers exist).

0A good candidate for developing more than a standard buyer/supplier relationship is Precision

Machine Works (PMW). In short PMW delivers a critical, unique item where they are likely only
one of a few suppliers. Yet, Boeing has done a poor job of treating them as anything more than a
supplier. PMW’s president, John Gazecki, discusses that while Boeing has become more astute at
working together with suppliers, Boeing still needs to make decisions faster13. Further emphasis of
the lack of closer, more strategic relationships:

Gazeki had to bankroll a new machinist-training program at a local vocational school. If

Boeing had a strategic alliance in place, they might be willing to assist with this.
Gazecki used a management team to interview immigrants. This is an extreme measure
that could be avoided. In fact, maybe Boeing has some ex-workers who could fit into PMW
faster.
Gazecki having to spend $2 million in capital on grinding machines with no real
commitment from Boeing for future orders.
The lack of insight on the long lead times for some of the titanium forgings. Again a closer
relationship might not reduce the lead time, but it may allow for a better understanding of
what the suppliers go through. This might force Boeing to be more cognizant of and
disciplined about forecasting large changes in the market demand.

0Boeing had supply chain problems in the 80’s, and they have apparently learned nothing from their
previous mistakes. Boeing continues to miss “the boat” on developing solid relationships with key
suppliers. It is hard not to wonder if Boeing has even considered that key suppliers such as PMW
could forego supplying to Boeing, and supply to Airbus instead. Then, Boeing may really have a
supplier problem.

0
0Value Chain: Sales and Marketing

0Another key facet of the Value Chain is Sales and Marketing. Pricing has been a big contributor
to the downward spiral at Boeing. Though they are the industry leader and have a vast amount of
experience in the commercial aircraft business, they cracked under the pressure from Airbus.
Obsessed with maintaining their market share, Boeing allowed themselves to be pulled into a
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price war, in a market with only two players. This duopoly should have never given the customers
the upper hand, but Boeing allowed it to happen. They drastically cut prices to compete with
Airbus, cutting commercial aircraft margins from 11% in 1997, to 4.8% in 199814. Not only did this
pricing war affect the bottom line, but it eroded their central, long time advantage: dreaming up
innovative new models that captured their customers’ minds and orders15. An example of how out of
hand this price war has gotten can be seen at Southwest Airlines. In the contract, SWA not only gets
an unbelievable price on their 737’s, but they have a clause that gives them a rebate of the difference
every time Boeing sells a plane for less than they paid. This pricing has led to increased orders,
but not increased profits. On top of that, Boeing cannot maintain production to fill the
increased orders. Realizing that the price wars are destroying them, Boeing has now increased
prices by 5%, and refocused on profits over market share16. However, increased prices will not
affect the financial statements until the year 2000, due to bottlenecks in the production line slowing
down delivery.

0
0Value Chain: Human Resource

0In light of the recent demise in profitability, Boeing has implemented a variety of new human
resource policies. At the heart of these new policies is a cultural revolution centered on a new
vision for the company: People Working Together as One Global Company for Aerospace
Leadership. This is the vision that the Boeing executives would like all employees to aspire to. The
change in culture that accompanies this statement is an overthrowing of the family culture and
developing of a team culture. This new culture is built on a desire to increase productivity, and it
demands results from all employees at every level. It stresses a team approach, and puts together
people who will work well together and produce synergistic results. Essentially, there will be a
tremendous increase in holding people accountable for the work that they perform.
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0Some of the policy changes that will drive this Cultural Revolution are:

Deployment of employees to satisfy changes in the marketplace. As a result of the

merger with Rockwell and McDonnell Douglas, commercial aircraft accounts for 60% of the
business and information, space and defense accounts for 40% of the business. Deployment
between divisions will allow Boeing to diminish the enormous layoffs that have always
occurred due to the cyclical nature of the industry. This will contribute to increasing the
morale of employees.
Increased employee interest and support of shareholder value. Boeing wants to ensure
that a goal of employees is to increase shareholder value. To help encourage this, they will
issue stock options to executives and management as part of their evaluation and
compensation package.
Increased employee accountability and performance. Boeing will evaluate every
employee on his or her performance and value, and will reward for exceptional performance
and penalize for lack of performance. As part of this evaluation, focus will be placed on both
internal and external customer services, and leadership skills we be developed and evaluated
at every level.
Development and implementation of team building training programs.
Educational development of employees. Boeing will provide financial support for the
continuing education of their employees at any level, regardless of whether it pertains to their
current job.
Recruitment of potential employees. Boeing has developed the Techprep program that
recruits high school students who excel and provides them with three years of internships and
support for college education, and introduces them to the culture of Boeing, developing
possible future employees.
0These policies will contribute to the development of a new culture within Boeing. A culture, which
encourages teamwork toward a common goal, provides opportunities for success and advancement,
and holds every employee accountable for their performance and leadership.
0
0Value Chain: Information Technology

0Boeing has clearly experienced many of the hidden costs of IT including: large training demands

(they under estimated the amount required), implementation and design complexity, and systems
maintenance for the full breadth of requirements. The recent Implementation of new DCAC/MRM17
was intended to improve the design for manufacturing processes and to control the shop floor
information -- yet many of the key benefits still have not been realized. A key problem was the
lack of re-engineering processes subsequent to implementation, or even design, of the information
systems to support the operations. Barriers to automate not withstanding, Boeing has demonstrated
considerable commitment to IT, with all the layoffs, budget cuts and reengineering there is still the
funding and commitment to IT to follow through on automating the operations.18

0
0Value Chain: Overall integration
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0As already discussed the sales organization has been poorly coordinated with the logistics and
supply lines as orders were accepted without manufacturing capacity and capability in place. In
addition the sales force has allowed complexity to increase dramatically by way of the customer
variations and therefore the proliferation of unique parts without a consistent manufacturing strategy
in place. The information processes and systems and the linkages to suppliers necessary to manage
this level of complexity was, and currently is, not in place to handle the raw volume of changes and
special variations. Overall there is little connectivity between different aspects of the supply
chain. This problem precipitated the complete shutdown of the production facilities for one month to
“re-sync” the assembly line and, as a result produces a very high unit cost. Many efforts that are
underway to streamline the information systems are absent the fundamental process
improvements that are required with increased automation; (i.e.,“if you automate a mess you’ll have
an automated mess”). Boeing currently has 400 independent computer systems in operation. The
current IT reengineering effort is consolidating into 4 platforms. This simplification is an excellent
thrust, but has occurred with bad timing -- transformation of entire IT platform (or in some cases,
introduction of IT) while doubling production ramps. There is little product costing knowledge
supported by an outmoded financial reporting system19. This can easily result in mis-pricing products
and selling the unprofitable plane while shutting down Profitable lines, a very dangerous game with
adroit competitors and fickle customers.

0
0Conclusion
0Boeing must make changes to their value chain -- right now. The analysis shows that Boeing must
alter their Value Chain activities in order to achieve better alignment with their strategy. As
discussed, Boeing’s upper management realizes this need to change and improve, and changes in the
way Boeing does business are occurring. Boeing is making needed changes to their manufacturing
methods and techniques, and as importantly, they are making a strong push to upgrade and better
integrate their IT systems. Additionally, Boeing is making changes to their supply chain. For
example:

Trying to give their suppliers more information on production rates. (Industry Week - January
5th, ’98).
Expanding the network of people working with suppliers. (Industry Week - January 5th, ’98).
0Another recommendation that would compliment the changes already in process: establish strategic
alliances. On the surface, these alliances appear non-existent. By establishing one or two key
alliances, Boeing may gain a competitive advantage by:

Reducing cycle and delivery times.

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Lowering costs and creating higher quality.

Leveraging the supplier’s capabilities.
Managing the development of materials before the actual product manufacturing.
Gaining capacity and efficiency through outsourcing.

To assist in this process, Boeing may choose to establish a protocol similar to Exhibit 6 (Decision
Tree for Alliances).

Alignment of their Value Chain will be critical to the future success of Boeing. With a Value Chain
in-sync with their strategy, Boeing will be able to push closer to achieving their vision of “People
working together as one global company for aerospace leadership.”
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Exhibit 1: Airline Industry Structure

Boeing’s Industry Structure

Suppliers

Boeing Co. Airbus and other competitors

Commercial US and Foreign

Airlines Governments,
NASA

Commercial Airplane Group Information, Space &

(60% of revenue) Defense Systems
(40% of revenue)

Commercial Airlines US Government NASA Foreign Governments

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Exhibit 2: Boeing Stock performance

Five year weekly chart of Boeing Co.

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Exhibit 3: Porters Five Forces

BOEING CORPORATION COMPETITIVE ENVIRONMENT

Threat of New Entrants
LOW:
• Very High Entry costs - Capital, Technology
• Trends are toward consolidation, which
further impedes new entrants

Rivalry among
Bargaining Power Competitors Bargaining Power
HIGH:
of Suppliers of Buyers
• Airbus has initiated intense pricing
war, fight for long term contracts
• Airbus’ production overhaul has
eliminated Boeing’s economies of VERY HIGH:
HIGH scale
• Due to demand for aircraft, • Boeing and Airbus’ heated
parts are at a premium rivalry has given airlines pricing
and delivery power
• Suppliers demanding Threat of Substitutes
contracts and security • Obsession with market share has
LOW: lowered profits
• There is no real substitute for air travel
• In the long term, continued dissatisfaction
of airlines could have ripple effect to
airline customers choosing alternative
travel for short trips
Memo – Boeing Project - Corser/Curcio/Dreyer/Junge
February 15, 1999
Page 18

Exhibit 4: Effect of Inventory Reduction on ROI

Inventory Turns = Sales/Inventories

Asset Turnover = Sales/Total Assets
Return On Investment = Profit Margin x Asset Turnover

1997 Financial Information ($ MM)

1997 “As Is” 1997 Improved Inventory

Sales $45,800 $45,800
Net Profit ** $1,224 $1,224
% Margin on Sales 2.7% 2.7%
Total Assets $19,623 $14,473
Inventories $8,967 $3,817
Inventory Turns (turns/year) 5.1 12.0
Asset Turnover (turns/year) 2.3 3.2
ROI 6.2% 8.6%
** Exclusive of $1,400 MM special charge
Memo – Boeing Project - Corser/Curcio/Dreyer/Junge
February 15, 1999
Page 19

Exhibit 5: Portfolio Analysis Approach

High

Strategic Leverage
Value to Buyer

Acquisition Multiple

Low

Few Many

Number of Capable Suppliers

Memo – Boeing Project - Corser/Curcio/Dreyer/Junge
February 15, 1999
Page 20

Exhibit 6: Decision Tree for Alliances

Does the process or Re-evaluate per Are there many Consider an

product define your portfolio analysis suppliers? acquisition
business? NO NO

YES YES

Are there many High value defined as? Short term supply
suppliers? contracts, use a bid
YES 1 critical product NO process
2 high design
3 high $ value

NO YES

Does it support Leverage, long term

contracts
1 strategic objective NO
or
2 new technology

YES

Is management
committed and are
resources willing to be NO
dedicated?

YES
Process flowchart to assist in
Can cultural
considering a supply chain
differences be
overcome to allow for NO alliance or partnership
alignment ?

YES

Will the project exceed

internal hurdle rates
through alliance NO
formation?

YES

Will both sides of the

alliance recognize
value ? (Win-Win) NO

YES

Opportunity to
perform an alliance
exists.
Memo – Boeing Project - Corser/Curcio/Dreyer/Junge
February 15, 1999
Page 21

REFERENCES
1
Boeing Corporation Web Site, 1999, www.boeing.com.
2
Henry Mintzberg, “Crafting Strategy,” Harvard Business Review, July-August 1987, pp 70-71.
3
Michael E. Porter, “What is Strategy,” Harvard Business Review, November-December 1996.
4
Boeings Cultural Revolution, Cole, Jeff, Seattle Times, 12/13/98
5
Boeing Corporation Web Site, 1999, www.boeing.com.
6
1997 Boeing Corporation Annual report
7
Wall Street Journal, April 24, 1998.
8
Janet Guyon, “The Sole Competitor,” Fortune, January 12, 1998.
9
Ronald Henkoff, “Boeing’s Big Problems,” Fortune, January 12, 1998.
10
Ronald Henkoff, “Boeing’s Big Problems,” Fortune, January 12, 1998.
11
Wall Street Journal, September 16, 1997.
12
Wall Street Journal, September 24, 1997.
13
Wall Street Journal, September 16, 1997.
14
Wall Street Journal, April 23, 1998.
15
Wall Street Journal, April 23, 1998.
16
Business Week, July 27, 1998.
17
John S. McClenahan, “Flying High, Boeing Isn’t Soaring,” Industry Week, January 5, 1998.
18
Jaikumar Vijayan, “Boeing Layoffs Sidestep IT,” Computerworld, December 7, 1998.

Anthony Velocci, “New Production Cuts Hamper Boeing Recovery,” Aviation Week & Space Technology,
19

December 7, 1998.
0