Boeing's Critical Success Factors - Case Study Example

1. Introduction While Boeing had lost its position to Airbus, in the past five years it has regained the lost position because of certain critical success factors. Product differentiation is the main factor that gives a product competitive edge. The second factor is the weakening of the dollar and aggressive cost reducing efforts undertaken by Boeing (Aerospace & Defense, 2005). Even during the downturn, they could maintain their gross profit margins as they cut down costs substantially. Thirdly, it is important to understand and satisfy customer demands and needs. Boring has been able to understand the needs of the market and make suitable changes in the product. Fourthly, sustained profit is equally important and Boeing has been able to meet this even though they do not give priority to financials over product development. However, Boeing has been facing certain challenges. 2. Critical Success factors 2.1 Product In the widebodies market, Boeing has an edge as it gives higher value and higher margins. Moreover, Asia is a very fast growing market and Boeing is able to capture market share from this region (Aerospace & Defense, 2005). This is because many carriers have mixed widebody fleets with different aircrafts to suit different routes. Low cost carriers prefer the Boeing aircrafts and the global trend is towards low-cost carriers. Boeing 777 model offers several advantages – lower maintenance cost and higher speed. Thus, Boeing targets the mid market because this translates into lower operating costs, better fuel efficiency, and longer maintenance intervals. Boeing 737s is also highly reliable and economical commercial jet planes for short-haul travel (Brackenbury, 2007). Its 777 model is also being used as a freighter extensively. This product of Boeing also has distinct advantages over other models and aircrafts. It can carry ten-foot high loads and has superior twin-engine operating economics (Dahl, 2006). Even for its other freighter models, Boeing has substantial demand and confirmed orders. 2.2 Process Outsourcing is the main strategy that Boeing has adopted in the past five years. While they do outsource to Russia and India for their high technical skills and cheap wages, they also outsource for reasons other than these. For instance, Boeing outsources manufacturing to India and China in exchange for aircraft sales. This is technically known as an offset agreement (Businessweek, 2006). China is the biggest airplane market in the world today and such an agreement allows it the fastest access. Boeing’s strategy is to have the best technology, the best intellectual capability, and the best manufacturing capability in order to have the competitive edge. They have the best patterns in terms of quality, cost and capability. Outsourcing strengthens their competency and they believe that people who design the parts should also build the parts. The aircraft suppliers do the detailed engineering designing. Their main competitors are the Airbus and for this they need top engineering talent from around the world. Their engineers engage in collaborative effort and their strategy is also to maintain a stable workforce. They also rely on Russian engineers to fill the demand during workload. Their strategy is to focus on large-scale integration and use the best talents in the world. About 6000 engineers around the world jointly design and engineer their aircrafts. They use the latest technology and software and insist that their suppliers and partners are trained in using that software (Duvall & Bartholomew, 2007). This ensures an integrated quality product where all aspects are takes care of. They even control the software version across partners so that discrepancies do not occur. Because of this they have been able to reduce the time and the costs it takes to develop a new plane. Their 787 Dreamliner is a commercial product designed around customer needs. Their success lies in listening to the customer needs and satisfying them. 2.3 Emerging markets Boeing has about 120 suppliers located in India, China and Russia. These countries are expected to purchase roughly 3500 planes which translate into 15% of the global demand over the next two decades (Bédier, Vancauwenberghe & Sintern, 2008). Thus, these countries also want to be suppliers of high quality components in exchange for placing orders for planes. Despite the complexities in coordination and in mitigating supply disruption risks, the costs in India and China still work out 20 to 25% cheaper than other countries. Despite the benefits, McKinsey study finds that only 3% of the output originates from these areas. India and China have been supplying vital components and engineering services for Boring, Airbus and Bombardier. China does have the potential to be a major supplier of advanced aerospace components which is supported by the government’s aggressive prioritization of the aerospace industry in the last five-year plan. India has no such aggressive plans or supply chain but because they have ordering new planes, the government could demand that the Western OEMs should source the components from the Indian suppliers. Bombardier and Embraer have been transferring their manufacturing activities to the emerging markets. Moreover, there are new competitors, new partners and greater specialization will be changing the dynamics of the industry. Asia-Pacific is more than half the business for Boeing. India provides lots of oppurtunities for fighter business (Military Technology, 2010). India-US relationship has strengthened and their Medium-Multi Role Combat Aircraft campaign is ongoing. They have also had success in Korea and Singapore in fighter business. There is strong potential in Vietnam and Philippines. 2.4 Challenges However, Boeing has been having development problems with 787 and they have not leant from the mistakes of Airbus. In 2008 they adjusted their development plans three times for 787 to the extent that they are unable to predict how man airplanes they would be able to deliver and when (Aviation Week & Space Technology, 2008). No doubt 787 has engineering and production challenges but the timelines were too compressed. Boeing did realize that there was a demand for midsize jet but it started marketing its new air plane – the Dreamliner to the public. Managers too have been blind to the warning signs which allowed the crisis to mount. Boeing could not address the failures in its supply chain. The leadership and management failed to listen to the salesman about the market demands. The airlines have to draw up their schedules of network decision and maintenance investments based on the supply of the aircrafts, which they are unable to, as Boeing is unable to give them supply schedules. Boeings new 787 program claims to be the fastest commercial model to reach 500 orders but the company has to execute to near perfection and meet the expectations of the customers. Their past missteps in the production of 737 and 747 programs gives rise to anticipations about the success of 787 aircrafts (Holmes, 2007). Everyone in the industry is watching how Boeing would handle this order. This is an acid test for the company. Its global supply chain is another challenge that relies on partner suppliers for designing and building parts such as fuselage sections and wings. It suppliers have also caused delays by three months. 3. Porter’s Generic strategies To gain competitive advantage, Porter has defined three generic strategies – cost leadership, differentiation and market leadership (Gurău, 2007). In cost leadership the company can offer the product at the lowest cost but to maintain profits, it must have a relative high market share. This translates into high investments in R&D and manufacturing, as well as aggressive pricing. While Boeing has been investing in R&D, they are not trying to focus on cost leadership. They have been attempting to achieve differentiation. Market leadership is a strategy pursued by small firms that lack the level of resources to develop cost leadership or a differentiating advantage. Differentiation can be achieved if the organization has any specific competence or skill in comparison to others. Differentiation should not arise through cost leadership but through superior quality or service. If an organization can maintain differentiation as well as create price loyalty, then it is possible to create entry barriers for direct competitors. Moreover, the buyers have limited choice as no comparable substitutes are available. Boeing has certain resources and capabilities that gives it differentiation. The key resources and capabilities at Boeing include its leadership style and organizational culture. Leadership is not a position on the organizational chart. People lead from wherever they are. Leadership is demonstrated through a commitment to each other’s success and the overall success of the organization (Laurin, 2010). Boeing realizes that their people have to be treated well and equipped with tools and resources. The products and processes would automatically be in order. This strategy has helped to generate high volume of business. The organizational culture is people-centric. They recognize that culture contributes to sustained competitive advantage. The culture fosters and rewards creativity, inventive thinking and generates bright ideas. The strategy and vision from the top level is immediately communicated to the people who work on it. The employees are encouraged to ask questions and challenge viability. Employees thus develop vision that goes far beyond the confines of their organization. At Boeing they have also been able to replace the flailing political structure with a democratic model. The reward structure also varies across the levels of employees. A typical worker needs monetary rewards but a manager would experience a different reward when promoted. The employees like challenges and they are rewarded for taking risks. Boeing focuses on flight technology advances over financial success (D’Intino, Boyles, Neck & Hall, 2010). They believe in visionary leadership as it provides clear and compelling directions. Visionary leadership requires repetition, representation and assistance. Boeing possesses the ability to replicate past successes with a focus on future endevaours. Whether in the case of fighter planes or commercial jets, Boring has demonstrated visionary leadership. The leaders have the have the willingness to develop the vision and create the future. They focus on innovation and product quality that fetches them long-term success. They have consistency in their style of decision making and this has been present in the organization through out its history. They have been able to build path-breaking airplanes by engaging in risky propositions. They have always given preference to the product over financial benefits. The management too never focused on individual wealth but on the next airplane. 4. Financial highlights The strategic choices made by Boeing have enabled the company to attain sustained competitive advantage. During the downturn in 2009, Boeing and Airbus both were struggling with government budget cuts but Boeing has reported fourth-quarter net income of $1.3 billion (Financial, 2010). They had higher commercial deliveries and growth in Defense, Space & Security. Earnings per share declined but the difficult year ended on a high note as their first Dreamliner flight took off. Their operating cash flow is higher than the strike-affected period a year ago. Plane deliveries had increased in 2009 over 2008 by 28 percent. This was in line with forecast. The first quarter net income in 2010 is $500 million on revenue of $15.2 billion (Air Cargo World, 2010). The company’s financial highlights demonstrate that they have solid operating performance and lower volumes (Centerforaviation, 2010). They also continue to invest in development programmes. They expect that 2011 revenue would be higher than 2010 because of their 787 deliveries. The global economic outlook has improved which implies that 2010 would be a better year than 2009 for Boeing. Shares are trading at $61 per share against a 52-week low of $39 per share (Wallman, 2010). 5. Future Competition and winning strategy The winning strategy shall be assessed against three factors: Strategy Suitability Acceptability Feasibility Accept/Reject 1. Focus on emerging markets Huge demand from the emerging economies but offset agreement is necessary. The emerging economies, specially China and India have the capability to deliver quality products and services. Reject 2. Focus on product Very essential as competition from Airbus and Bombardier is high. Product differentiation becomes essential. Product innovation is an ongoing challenge due to technological advancements taking place on a daily basis. Competitors are equally innovative, and in the past Boeing has failed to deliver. Reject 3. Focus on leadership and culture This automatically decides the direction to be taken. The focus should change as the situation demands and hence it could be on emerging markets now and on the product a year later. The right leadership and the organizational culture can direct the decisions to be taken. This is the most feasible proposition because it would help the organization to respond to the situation at short notice. Boeing has the necessary resources and capabilities and the employees are encouraged to be innovative. Accept 6. Justification for recommended strategy The organization should focus on leadership and culture. It is because of their visionary leadership that they could steer the company bacl to the top position. Technology changes by the day and so does the global economy impact the business. Thus, leadership at Boeing being innovative, they would be able to steer the company in the right direction. By focusing on emerging markets, the other developed markets cannot be ignored. Moreover, offset agreement may not always be beneficial to keep pace with technological developments. References Aerospace & Defense. (2005). Boeing vs. Airbus: The Pendulum Begins to Swing Back to Boeing. Black Book - Aerospace & Defense: Commercial & Defense Cycles Align for Growth; May2005, p38-45 Air Cargo World. (2010). Boeing reports profit as 747-8 moves to California. Retrieved online 25 June 2010, from http://www.aircargoworld.com/News/April-2010/Boeing-reports-profit-as-747-8-moves-to-California Aviation Week & Space Technology. (2008). A Critical Opportunity Missed To Learn From Airbuss Mistakes. 168 (3). Bédier, C., Vancauwenberghe, M., & Sintern, W. (2008). The growing role of emerging markets in aerospace. The Mckinsey Quarterly. Retrieved online 25 June 2010, from http://www.mckinsey.it/storage/first/uploadfile/attach/140142/file/grro08.pdf Brackenbury, M. (2007). HAS INNOVATION BECOME A ROUTINE PRACTICE THAT ENABLES COMPANIES TO STAY AHEAD OF THE COMPETITION IN THE TRAVEL INDUSTRY? OECD. Retrieved online 25 June 2010, from http://www.oecd.org/dataoecd/55/34/34267968.pdf Businessweek. (2006). Boeings Global Strategy Takes Off. Retrieved online 25 June 2010, from http://www.businessweek.com/magazine/content/06_05/b3969417.htm Centerforaviation. (2010). Boeing’s net profit down sharply, but shares gain on guidance. Delta 787 order in jeopardy. Retrieved online 25 June 2010, from http://www.centreforaviation.com/news/share-market/2010/04/22/boeings-net-profit-down-sharply-but-shares-gain-on-guidance-delta-787-order-in-jeopardy/page1 Dahl, R. V. (2006). Boeing, Boeing. Florida Shipper; 1/2/2006, Vol. 31 Issue 1, p8-77 D’Intino, R.S., Boyles, T., Neck, C.P., & Hall, J.R. (2008). Visionary entrepreneurial leadership in the aircraft industry The Boeing Company legacy. Journal of Management History. 14 (1), 39-54 Duvall, M., & Bartholomew, D. (2007). PLM: Boeings Dream, Airbus Nightmare. Retrieved online 25 June 2010, from http://www.tgstech.com/releases/BoeingsDream_AirbusNightmare.pdf Financial. (2010). Boeing Swings To 4Q Profit, Issues 2010 Guidance. Retrieved online 25 June 2010, from http://www.finchannel.com/news_flash/Travel_Biz_News/56929_Boeing_Swings_To_4Q_Profit,_Issues_2010_Guidance_/ Gurau, C. (2007). Porter’s generic strategies: a re-interpretation from a relationship marketing perspective1. The Marketing Review. 7 (4), 369-383 Holmes, S. (2007). Sky-High Expectations for Boeing. BusinessWeek Online, 4/4/2007 Laurin, C. (2010). Something "Fishy" About Boeing. THE JOURNAL FOR QUALITY & PARTICIPATION. 33 (1), 25-27 Military Technology. (2010). "Asia-Pacific is More than Half the Business for Boeing". Military Technology • MILTECH • 2/2010 Wallman, L. (2010). Boeing expects 2010 profit to soar, even without Dreamliner. 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