The Boeing Company: The Deviation from its Strategic Flight Path
- Forward Thinking
- Jan 9, 2020
- 4 min read
In 2019, The Boeing Company was put into the spotlight. One of the major news story of the year was that Boeing and the FAA allowed the Boeing 737 Max -8 and -9 aircrafts to fly without properly informing airlines or pilots of a new automated system meant to counteract the flight issues caused by an upgrade in the plane's engines. This resulted in two plane crashes, within a half a year of each other, with 300+ deaths and the grounding of the Boeing 737 Max -8 and -9 aircrafts (Understand what caused the crashes here).
"Southwest Airlines’ pilots union slammed Boeing late Wednesday for what it calls a rush to return the grounded 737 Max to service and urged the airline to buy planes from other manufacturers." - Courthouse News Service, Pilots Urge Southwest Airlines Not to Buy Boeing Max
And in grounding the planes, Boeing has severely suffered in terms of finances, brand image, and leadership.
Boeing's troubles stem from the firm making a conscious decision to stray from its strategy, which composed of a virtuous cycle of doing things differently and better than its main competitors, such as Airbus SE.
Its strategy is to build up a backlog of orders, for both commercial and military aircraft, while reducing its supply chain to both improve margins and maintain business during good and bad times. The strategy can be seen in the virtuous cycle below:
According to Chairman and CEO Dennis Muilenberg, the firm wants to remove cyclicality out of its business units by building a large backlog of orders that will reduce the effects of any downturns in the market. For instance, one method Boeing has chosen to do this is by reducing its supply chain and by manufacturing parts in house through the Global Services unit, which allows 1) allows the company to sustain business when times are bad because customers are not buying new planes but are rather maintaining aircraft using Boeing's parts and 2) allows the firm to cut costs by not buying parts from suppliers. Another instance of the strategy in play is Boeing's effort to build up loyalty for its military aircraft in overseas markets; this allows the company to not be as dependent on the Pentagon or US military spending.
Combined with the tailwinds of 1) the growing global defense spending and 2) strong passenger growth, Boeing has been able to do well, in general, since Muilenberg became CEO in terms of stock price, backlog, and deliveries (Find commercial backlogs here).
However, the section of the virtuous cycle that Boeing has recently made a disastrous mistake in is improving advanced aircraft well. For quite a long-time, Boeing has done this (Improving advanced aircraft well) by using a competitive advantage of simply updating/upgrading the planes rather than creating a completely new aircraft (Such as with the 737 or the 777 family). The competitive advantage, that fits into the improving advanced aircraft well, provides two major benefits:
Airlines don't have to heavily invest in training pilots and mechanics to learn something completely new.
Boeing can save money re-certifying updated/upgrading planes compared to building a completely new plane (Which was costly for the new 787 family; find costs here).
In 1) wanting to beat Airbus's A320 Neo to and in the market and 2) making upgrades/updates to just the engines, the cabin, and few other components, Boeing made a mistake in improving the aircraft well as it did not focus on great craftsmanship and safety:
Boeing performed low quality craftsmanship in improving the engines on the 737 Max -8 and -9. It did a shoddy workaround that compromised safety, which was further compounded by the fact that Boeing did not alert airlines or pilots of the potential safety issue.
Boeing's 737 Max -8 and -9 still depended on a manual rather than the industry standard of an electronic alert system; the manufacturer failed to improve its safety features well.
As a result of all of mistakes in improving its advanced aircrafts, Boeing has positioned itself into a precarious situation with the FAA, the airlines, and general flying public.
"The plane’s low-slung frame was a benefit for airlines and airports in developing countries. Workers there could load bags by hand without a conveyor belt and maintain the engines without a lift, Mr. Morton said. In the decades that followed, the low frame repeatedly complicated efforts to fit bigger engines under the wing... 'Nobody was quite perhaps willing to say it was unsafe, but we really felt like the limits were being bumped up against,” he added.'" - New York Times, Boeing’s 737 Max: 1960s Design, 1990s Computing Power and Paper Manuals
Because the firm has made the mistake of breaking its virtuous cycle, which bolstered a strong strategy, Boeing must recorrect its actions to reinstate the virtuous cycle. More specifically, Boeing has to get good at making improvements to its planes while holding itself to the gold standard of safety and engineering. Considering the crashes and the grounding of 737 Max -8 and -9, Boeing needs to do the following:
Focus on the gold standard of engineering: Fix both the MCAS software that caused the two aircraft crashes and the microprocessor hardware that has been causing issues in flight simulations. Also, install new sensors to cross-reference the MCAS software.
Focus on the gold standard of safety: Collaborate with the FAA and international aviation organizations to get the 737 Max -8 and -9 re-certified; this includes having the FAA inspect each aircraft individually. Train airlines and pilots on how to properly interact with the MCAS software. Explain to both pilots and the general public the new safety features that will prevent accidents from happening ever again for the same reason. Perhaps even perform a change management move within Boeing's culture to ensure safety is ahead of profit.
So, as always, what's the so what?
If you have a virtuous cycle and are known in the industry for a certain trait (Watch Warren Buffet explain how brands create an economic moat here), don't deviate from them. In the short-term, earnings might be better but the long-term implications can be disastrous.
For long-term success, make sure the culture of your firm revolves around what the customers care about (In Boeing's case safety) before the firm's profits (Watch Jeff Bezos talk about focusing on the customer here). For profits will eventually come.
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