BOEING BETS THE COMPANYThe Boeing Company, a well-known U.S.-based manufacturer of commercial and militaryaircraft, faced a dilemma in 2004. Long the leader of the global air frame manufacturingindustry, Boeing had been slowly losing market share since the 1990s to the European-basedAirbus Industries—now incorporated as the European Aeronautic& Space Company (EADS). InDecember 2001,the EADS board of directors had committed the corporation to an objective ithad never before achieved—taking from Boeing the leadership of the commercial aviationindustry by building the largest commercial jet plane in the world, the Airbus 380. The A380would carry 481 passengers in a normal multiple-class seating configuration compared to the 416passengers carried by Boeingâ€s 747—400 in a similar seating configuration. The A380 would notonly fly 621 miles farther than the 747, but it would cost airlines 15%–20% less per passenger tooperate. With orders for 50 A380 aircraft in hand, the EADS board announced that the new planewould be ready for delivery during 2006. The proposedA380 program decimated the sales ofBoeingâ€s jumbo jet. Since 2000, airlines had ordered only 10 Boeing747s configured forpassengers.Boeing was clearly a company in difficulty in 2004.Distracted by the 1996 acquisitions ofMcDonnell Douglas and Rockwell Aerospace, Boeingâ€s top management had spent the next fewyears strengthening the corporationâ€s historically weak position in aerospace and defense and hadallowed its traditional competency in commercial aviation to deteriorate. Boeing, once themanufacturing marvel of the world, was now spending10%–20% more than EADS (Airbus) tobuild a plane. The prices it asked for its planes were thus also higher. As a result, Boeingâ€sestimated market share of the commercial market slid from nearly 70% in 1996 to less than halfthat by the end of 2003. EADS claimed to have delivered300 aircraft to Boeingâ€s 285 and to havewon56% of the 396 orders placed by airlines in 2003—quitean improvement from 1994, whenEADS controlled only one-fifth of the market! This was quite an accomplishment, given that theA380 was so large that the modifications needed to accommodate it at airports would cost $80 to$100 million.Even though defense sales now accounted for more than half of the companyâ€s revenues,Boeingâ€s CEO realized that he needed to quickly act to regain Boeingâ€s leadership of thecommercial part of the industry. In December 2003, the board approved the strategic decision topromote a new commercial airplane, the Boeing787, for sale to airlines. The 787 was a midrangeaircraft, not a jumbo jet such as the A380. The 787 would carry between 220 and 250 passengersbut consume20% less fuel and be 10% cheaper to operate than its competitor, EADS†currentmidrange plane, the smaller wide-body A330-200. It was to be made from a graphite/epoxy resininstead of aluminum. It was designed to fly faster, higher, farther, cleaner, more quietly, andmore efficiently than any other medium-sized jet. This was the first time since approving the 777jet in 1990 that the company had launched an all-new plane program. Development costs wereestimated at $8 billion over five years. Depending on the results of these sales efforts, the boardwould decide sometime during 2004 to either begin or cancel the 787 construction program. Ifapproved, the planes could be delivered in 2008—two years after the delivery of the A380.The Boeing 787 decision was based on a completely different set of assumptions from those usedby the EADS board to approve the A380. EADS top management believed that the commercialmarket wanted even larger jumbo jets to travel long international routes. Airports in Asia, theMiddle East, and Europe were becoming heavily congested. In these locations, the “hub-andspoke†method of creating major airline hubs was flourishing. Using larger planes was a way ofdealing with that congestion by flying more passengers per plane out of these hubs. EADS management believed that over the next20 years, airlines and freight carriers would need aminimum of 1,500 more aircraft at least as big as the B747.EADS management had concludedthat the key to controlling the future commercial market was by using larger, more expensiveplanes. The A380 was a very large bet on that future scenario. TheA380 program would costEADS almost $13 million before the first plane was delivered.In contrast, Boeingâ€s management believed in a very different future scenario. Noting the successof South westand JetBlue, among other airlines in North America, it concluded that no more than320 extra-large planes would be sold in the future as the airline industry moved away from huband-spoke networks toward more direct flights between smaller airports. The fragmentation ofthe airline industry, with its emphasis on competing through lower costs was the primaryrationale for Boeingâ€s fuel-efficient787. A secondary reason was to deal with increasingpassenger complaints about shrinking legroom and seat room on current planes flown by costconscious airlines. The 787 was designed with larger windows, seats, lavatories, and overheadbins. The plane was being designed in both short- and long-range versions. Boeingâ€smanagement predicted a market for 2,000 to 3,000 such planes. Additional support for themidrange plane came from some industry analysts who predicted that the huge A380would givenew meaning to the term “cattle class.†To reach necessary economies of scale, the A380 wouldlikely devote a large portion of both of its decks to economy class, with passengers sitting threeor four across, the same configuration as most of Boeingâ€s 747s.Boeingâ€s strategy to regainindustry leadership with its proposed 787 airplane meant that the company would have toincrease its manufacturing efficiency in order to keep the price low. To significantly cut costs,management would be forced to implement a series of new programs:_ Outsource approximately70% of manufacturing. Could it find suppliers who could consistently make the high-qualityparts needed by Boeing?Reduce final assembly time to three days (compared to 20 for its 737 plane) by havingsuppliers build completed plane sections. Could this many suppliers meet Boeingâ€s exactingdeadlines?Use new, lightweight composite materials in place of aluminum to reduce inspectiontime. Would the plane be as dependable and as easy to maintain as Boeingâ€s aluminum airplanes?Resolve poor relations with labor unions caused by downsizing and outsourcing. Themachinists†union would have to be given a greater voice in specifying manufacturingprocedures. Would Boeingâ€s middle managers be willing to share power with an antagonisticunion?Which vision of the future was correct? The long-term fortunes of both Boeing and EADSdepended on two contrasting strategic decisions, based on two very different assessments of themarket. If EADS was correct, the market would continue to demand ever-larger airplanes. IfBoeing was correct, the current wave of jumbo jets had crested, and a new wave of fuel-savingmidrange jets would soon replace them.Study Question: (5 marks)Question -Which companyâ€s strategy had the best chance of succeeding?
