Boeing Case

170 PART 2 Scanning the Environment
Ending Case for Part Two

BOEING BETS THE COMPANY accomplishment, given that the A380 was so large that
the modifications needed to accommodate it at airports
The Boeing Company, a well-known U.S.-based manu- would cost $80 to $100 million.
facturer of commercial and military aircraft, faced a Even though defense sales now accounted for more
dilemma in 2004. Long the leader of the global airframe than half of the company’s revenues, Boeing’s CEO re-
manufacturing industry, Boeing had been slowly losing alized that he needed to quickly act to regain Boeing’s
market share since the 1990s to the European-based Air- leadership of the commercial part of the industry. In
bus Industrie—now incorporated as the European Aero- December 2003, the board approved the strategic deci-
nautic & Space Company (EADS). In December 2001, sion to promote a new commercial airplane, the Boeing
the EADS board of directors had committed the corpo- 787, for sale to airlines. The 787 was a midrange air-
ration to an objective it had never before achieved—tak- craft, not a jumbo jet such as the A380. The 787 would
ing from Boeing the leadership of the commercial carry between 220 and 250 passengers but consume
aviation industry by building the largest commercial jet 20% less fuel and be 10% cheaper to operate than its
plane in the world, the Airbus 380. The A380 would competitor, EADS’ current midrange plane, the smaller
carry 481 passengers in a normal multiple-class seating wide-body A330-200. It was to be made from a graphite/
configuration compared to the 416 passengers carried epoxy resin instead of aluminum. It was designed to fly
by Boeing’s 747—400 in a similar seating configura- faster, higher, farther, cleaner, more quietly, and more
tion. The A380 would not only fly 621 miles farther than efficiently than any other medium-sized jet. This was
the 747, but it would cost airlines 15%–20% less per the first time since approving the 777 jet in 1990 that the
passenger to operate. With orders for 50 A380 aircraft in company had launched an all-new plane program. De-
hand, the EADS board announced that the new plane velopment costs were estimated at $8 billion over five
would be ready for delivery during 2006. The proposed years. Depending on the results of these sales efforts, the
A380 program decimated the sales of Boeing’s jumbo board would decide sometime during 2004 to either be-
jet. Since 2000, airlines had ordered only 10 Boeing gin or cancel the 787 construction program. If approved,
747s configured for passengers. the planes could be delivered in 2008—two years after
Boeing was clearly a company in difficulty in 2004. the delivery of the A380.
Distracted by the 1996 acquisitions of McDonnell The Boeing 787 decision was based on a completely
Douglas and Rockwell Aerospace, Boeing’s top man- different set of assumptions from those used by the EADS
agement had spent the next few years strengthening the board to approve the A380. EADS top management be-
corporation’s historically weak position in aerospace lieved that the commercial market wanted even larger
and defense and had allowed its traditional competency jumbo jets to travel long international routes. Airports in
in commercial aviation to deteriorate. Boeing, once the Asia, the Middle East, and Europe were becoming heavily
manufacturing marvel of the world, was now spending congested. In these locations, the “hub-and-spoke”
10%–20% more than EADS (Airbus) to build a plane. method of creating major airline hubs was flourishing.
The prices it asked for its planes were thus also higher. Using larger planes was a way of dealing with that con-
As a result, Boeing’s estimated market share of the com- gestion by flying more passengers per plane out of these
mercial market slid from nearly 70% in 1996 to less than hubs. EADS management believed that over the next
half that by the end of 2003. EADS claimed to have de- 20 years, airlines and freight carriers would need a mini-
livered 300 aircraft to Boeing’s 285 and to have won mum of 1,500 more aircraft at least as big as the B747.
56% of the 396 orders placed by airlines in 2003—quite EADS management had concluded that the key to con-
an improvement from 1994, when EADS controlled trolling the future commercial market was by using larger,
only one-fifth of the market! This was quite an more expensive planes. The A380 was a very large bet on
that future scenario. The A380 program would cost EADS
almost $13 million before the first plane was delivered.
In contrast, Boeing’s management believed in a very
This case was written by J. David Hunger for Strategic Management and
Business Policy, 12th edition and for Concepts in Strategic Management different future scenario. Noting the success of Southwest
and Business Policy, 12th edition. Copyright © 2008 by J. David and JetBlue, among other airlines in NorthAmerica, it con-
Hunger. Reprinted by permission. References available upon request. cluded that no more than 320 extra-large planes would be
CHAPTER 5 Internal Scanning: Organizational Analysis 171
sold in the future as the airline industry moved away from 쏋 Reduce final assembly time to three days (compared
hub-and-spoke networks toward more direct flights be- to 20 for its 737 plane) by having suppliers build
tween smaller airports. The fragmentation of the airline in- completed plane sections. Could this many
dustry, with its emphasis on competing through lower suppliers meet Boeing’s exacting deadlines?
costs was the primary rationale for Boeing’s fuel-efficient 쏋 Use new, lightweight composite materials in place
787. A secondary reason was to deal with increasing of aluminum to reduce inspection time. Would the
passenger complaints about shrinking legroom and seat plane be as dependable and as easy to maintain as
room on current planes flown by cost-conscious airlines. Boeing’s aluminum airplanes?
The 787 was designed with larger windows, seats, lava- 쏋 Resolve poor relations with labor unions caused by
tories, and overhead bins. The plane was being designed
downsizing and outsourcing. The machinists’ union
in both short- and long-range versions. Boeing’s manage-
would have to be given a greater voice in specifying
ment predicted a market for 2,000 to 3,000 such planes.
manufacturing procedures. Would Boeing’s middle
Additional support for the midrange plane came from
managers be willing to share power with an antago-
some industry analysts who predicted that the huge A380
nistic union?
would give new meaning to the term “cattle class.” To
reach necessary economies of scale, the A380 would Which vision of the future was correct? The long-
likely devote a large portion of both of its decks to econ- term fortunes of both Boeing and EADS depended on
omy class, with passengers sitting three or four across, two contrasting strategic decisions, based on two very
the same configuration as most of Boeing’s 747s. different assessments of the market. If EADS was cor-
Boeing’s strategy to regain industry leadership with rect, the market would continue to demand ever-larger
its proposed 787 airplane meant that the company would airplanes. If Boeing was correct, the current wave of
have to increase its manufacturing efficiency in order to jumbo jets had crested, and a new wave of fuel-saving
keep the price low. To significantly cut costs, management midrange jets would soon replace them. Which com-
would be forced to implement a series of new programs: pany’s strategy had the best chance of succeeding?
쏋 Outsource approximately 70% of manufacturing.
Could it find suppliers who could consistently make
the high-quality parts needed by Boeing?

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170 PART 2 Scanning the Environment

Ending Case for Part Two

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