Week 1 Case: Philip Condit and the Boeing 777
From Design and Development to Production and Sales
Submitted by: Group E members
During 1988 Boeing realized that to remain competitive in the aircraft manufacturing industry, it was necessary to either upgrade their existing aircraft product family or develop an entirely new aircraft. This action was specially needed to react to Airbus, their strongest competitor. Airbus had deployed two new airplane models and was poised to take Boeing’s market share.
Phil Condit, then Executive Vice President, met with a number of Boeing customers to seek guidance. These strategic review sessions led to the bold decision to embark on the design and production of the most technologically advanced commercial airplane in the market place, the Boeing 777.
With the 777, its seventh commercial jetliner, The Boeing Co., Seattle, set a new standard for designing and building a major aircraft. The result of the $6.3 billion investment and efforts of nearly 10,000 employees assigned to the development program looks much like other two-engine jetliners. So what makes the 777 truly one of the industrial achievements of the 1990s? The answer is in the new flight technologies used in the 777, and in the design-engineering revolution that stormed through Boeing. To design the 777, about 30 integrated-level teams at the top and more than 230 cross-functional "design build teams” were responsible for specific products. The team in charge of the 777 project was led by a group of five vice presidents, headed by Phil Condit. The teams used 2200 terminals and the computer-aided three-dimensional interactive application (CATIA) system to produce a "paperless" design that allowed engineers to simulate assembly of the 777. The system worked so well that only a nose mockup (to check critical wiring) was built before assembly of the first flight vehicle, which was only 0.03 mm out of alignment when the port wing was attached.
Boeing understood that for the project to succeed, the stakeholders had to be involved.
By the end of the project, achievements in airplane interior flexibility, aircraft design improvements, and manufacturing speed and efficiency stood out and cemented the company’s position as the world leader in the design, development, and manufacturing of commercial airplanes.
With the enormous risk of failure, the large commercial jet makers had been reduced from four in the early 1980’s to two in the late 1990s. In the 1970’s, the Boeing 747 program helped them solidify its position as the industry leader for years to come. At this point, Lockheed Corporation exited the industry, leaving McDonnell Douglas and Airbus far behind. In the late 1980’s, Airbus had just launched two new 300-seat wide-body models. They did this in order to compete with Boeing Corporation. In August 1997, Boeing completed its acquisition of McDonnell Douglas. The primary rationale for the acquisition was to make Boeing more diverse and thus less vulnerable to the cycles of the commercial jetliner market. Yet an important secondary rationale was to bolster Boeing's position in that market, relative to arch-competitor Airbus.
The return on investment period in the industry is very long and the required investment is extremely large. Aircraft manufacturers can expect initial investments of up to $15 billion, lead times of up to 6 years, and cash drain throughout the development phase. Even after successfully completing a new product line, about 400 airplanes need to be sold with sustained annual sales of at least 50 airplanes just for the company to break even.
The dynamics of competition are also impacted by the fact that one airplane component, the engine, can take longer to develop and cost as much as the entire aircraft. Known engine manufacturers are General Electric, Rolls Royce, and Pratt & Whitney. Without engines, not only are airplanes unusable, but the very survival of the airplane manufacturer can rest on the ability of their engine manufacturing partners to deliver. Boeing experienced this pain during the early 1970s when according to T. A. Heppenheimer “The Company went deeply into debt to fund its development and initial production (of the 747 model). But it couldn't deliver the early models, because their engines were not ready. Then the nation went into a recession, and orders dried up. Boeing came close to going bankrupt, but survived by selling improved versions of earlier jets, including the 707 and 727”.
In this industry, being competitive and innovative is very important. With the high cost of production and research, the aircraft manufacturing companies need to match their competitor’s products to succeed. Most importantly, they need to satisfy customers needs and expectations. They must also anticipate environmental changes such as increasing fuel prices, need for added security, increasing government regulation, etc. As history has proven, many companies can not compete.
This project was basically an “all in” situation. A failure of the 777 project would have eroded investor’s confidence, reduced shareholder’s value, and threatened the survival of the company. We believe Boeing did an excellent job in limiting risks. Following are some examples:
Although this project has proven to be a HUGE success for Boeing they still had some weaknesses/ problems with the project.
· Unlike Airbus, Boeing was not able to implement lean manufacturing strategies with its suppliers to reduce inventory management and administration costs.
We believe these weaknesses are not indicative of a project in trouble or failing but rather an by-product of the level of difficulty such large-scale endeavor entails. In spite of its weaknesses, the company was able to complete the project, leapfrog the competition, and solidify its position as a world leader in the commercial aircraft manufacturing industry.
Boeing needs to continue to face the competition head on and develop a “paranoid” mentality regarding the survival of the company. They must not let Airbus continue to distinguish itself by incorporating the most advanced technologies into its planes. By not taking a technology leadership role, the company is highly vulnerable. During 1999 and 2000 research and development spending decreased considerably. Instead, the correct strategic move is to invest in research and development with the explicit objective of once again surpassing their competitors.
As we have learned, a competitive advantage only exists when other companies have tried to duplicate specific processes and have been unable to do it. Boeing must duplicate Airbus lean production manufacturing system techniques to reduce inventory, reduce cost, reduce manpower, and improve lead-time in order to neutralize this current vulnerability.
Boeing was lucky in that they were able to sell over 300 airplanes from 1996 thru 2000 before world events drastically changed the dynamics of the airline industry and hence, the aircraft manufacturing industry. To reduce environmental conditions vulnerabilities, the company has diversified it’s holdings, acquired companies in new markets, and increased their participation in defense and space spending allocations.
Ultimately, this article is a testament to the vision and will of a strong leader, Philip Condit, and his ability to change a company. The fact that he later became Boeing’s CEO attests to his accomplishments. He made brilliant strategic decisions and ensured his customers would be very satisfied with the end product. He set out to change an ingrained and outdated culture and he made great strides towards it. He introduced new leading edge technologies and supported the changes as they matured.
Presently, he continues to successfully lead the company. According to Boeing’s website “Under Condit’s leadership, several mergers and acquisitions have transformed the company into a broad-based, global enterprise. The acquisition of Rockwell Aerospace, the merger with McDonnell Douglas and the addition of Hughes Space & Communications has established a company with great strength and breadth. Today, Boeing is strongly positioned in commercial airplanes, defense, space, information technology, financing, and communications”.
On the good news side, the company reports that during the second quarter of 2003 it:
But on the bad news side, on July 23rd, 2003 the company “reported a net loss for the second quarter of 2003 of $192 million, or $0.24 per share, on revenues of $12.8 billion. This compares with net earnings of $779 million, or $0.96 per share, on revenues of $13.9 billion for the second quarter of 2002”.
Which side will ultimately win? Time will tell. But if history is an indicator, Phil Condit and the 160,000 employees of Boeing will manage to survive and succeed.
The Boeing Co. website pages used for reference: Retrieved on August 30th, 2003.
Heppenheimer, T. The U.S. Aircraft Industry - An Overview. Retrieved from centennialofflight.gov on August 30th, 2003. http://www.centennialofflight.gov/essay/Aerospace/AeroOV1.htm
Hitt, M., Ireland R., and Hoskisson, R. (2003). Strategic Management: Competitiveness and Globalization (Concepts and Cases) 5th edition. Mason, OH: South-Western. C.63-C.77