In August 1981, eleven months before the first scheduled delivery of Boeing's new airplane, the 767, Dean Thornton, the program's vice president-general manager, faced a critical decision. For several years, Boeing had lobbied the Federal Aviation Administration (FAA) for permission to build wide-bodied aircraft with two-, rather than three-person cockpits. Permission had been granted late in July. Unfortunately,
5 Copyright © 1988 by the President and Fellows of Harvard College. Harvard Business School case 688 -040.
This case was prepared by Janet Simpson, Lee J. Field, and David A. Garvin as the basis for class discussion rather than to illustrate either effective or ineffective handling of an administrative situation. Reprinted by permission of the Harvard Business School.
the 767 had originally been designed with a three-person cockpit, and thirty of those planes were already in various stages of production.
Thornton knew that the planes had to be converted to models with two-person cockpits. But what was the best way to proceed? Should the changes be made in-line, inserting new cockpits into the thirty planes without removing them from the flow of production, or off-line, building the thirty planes with three-person cockpits as originally planned and then retrofitting them with two-person cockpits in a separate rework area? Either way, Thornton knew that a decision had to be made quickly. Promised delivery dates were sacred at Boeing, and the changes in cockpit design might well impose substantial delays.
Commercial aircraft manufacturing was an industry of vast scale and complexity. A typical 767 contained 3.1 million individual parts; federal regulations required that many be documented and traceable. There were eighty-five miles of wiring alone. Manufacturers employed thousands of scientists and engineers to develop new technologies and production systems, and also to attack design problems. Facilities were on a similarly grand scale. Boeing assembled the 747, its largest commercial airplane, in the world's largest building—sixty-two acres under a single roof—with a work force of 28,600 people.
Few companies were able to marshal such massive resources. In 1981 the industry had only three major players: the American manufacturers Boeing and McDonnell Douglas, and the European consortium Airbus. A fourth manufacturer, Lockheed, left the commercial airplane industry in 1981 after its wide-bodied jet, the L-1011, had incurred losses of $2.5 billion. Boeing and McDonnell Douglas were competitors of longstanding; Airbus, on the other hand, made its commercial debut in May 1974. It was not generally regarded as a serious competitive threat until 1978, the date of its first large sale to a U.S. airline. By 1981, Airbus had sold 300 planes to forty-one airlines, and had options for 200 more. It received direct financing and subsidies from the French, Spanish, German, and British governments.
Airframe manufacturing was a business of enormous risks, for in no other industry was so much capital deployed with so much uncertainty. Launching a new plane meant up-front development costs of $1.5-2 billion, lead times of up to four years from go-ahead to first delivery, and the qualification and management of thousands of subcontractors.
Projects of this scale could put a company's entire net worth on the line. For that reason, industry executives were sometimes characterized as "gamblers," sporting participants in a highstakes game. Side bets—actual wagers between manufacturers and airlines regarding airplane performance, features, or delivery dates—occasionally accompanied purchase negotiations. The odds against a successful new product were large. According to one industry expert, in the past thirty years only two new plane programs, the Boeing 707 and 727, actually made money.7 (According to Boeing, the 737 and 747 programs have also been profitable.) If a new program were successful,
6 An airframe is an airplane without engines. Technically, Boeing competed in the airframe industry. In this case, however, the terms airframe, airplane, and aircraft are used interchangeably.
7 John Newhouse, The Sporty Game (New York: Alfred A. Knopf, 1982), p. 4.
however, the potential returns were enormous. A successful new plane could lock up its chosen market segment for as long as twenty years, producing sales of $25-45 billion and huge profits. It was also likely to bring great prestige, power, and influence to the company and managers that created it.
Success required a long-term view. Competitive pricing was essential. Pricing practices, however, contributed risks of their own. New plane prices were based not on the cost of producing the first airplane, but on the average cost of 300 to 400 planes, when required labor hours had declined because of learning. This effect, the so-called learning curve, was hardly unique to airframe manufacturing. But small annual volumes and long manufacturing cycles—even during peak periods Boeing planned to build only eight 767s per month—meant that break-even points stretched further into the future in airframe manufacturing than was typical of most other industries, where mass production was the norm.
Manufacturers were therefore anxious to build orders for new planes as quickly as possible. Buyers—primarily the fifty leading airlines around the world—used that knowledge to enhance their bargaining positions, often delaying orders until the last possible moment. Negotiations on price, design modifications, and after-sales parts and service became especially aggressive in the 1970s, when airlines that had been making steady profits began losing large sums of money. Cost savings became a dominant concern. As Richard Ferris, the CEO of United Airlines, remarked: "Don't bug me about interior design or customer preference, just guarantee the seat-mile performance."8
Boeing was the sales leader of the airframe industry, as well as one of America's leading exporters. It had built more commercial airplanes than any other company in the world. Sales in 1981 were $9.2 billion; of the total, $5.1 billion were ascribed to the Boeing Commercial Airplane Company, the firm's aircraft manufacturing division. Other divisions produced missiles, rockets, helicopters, space equipment, computers, and electronics.
The Boeing Company was founded in 1916 by William E. Boeing, the son of a wealthy timber man who had studied engineering at Yale. In its earliest days, the company built military aircraft for use in World War I. It began to prosper in the 1920s and 1930s, when the civil aviation market expanded, primarily because of the demand for mail carrying. At about that time, William Boeing issued a challenge that has remained the company's credo:
Our job is to keep everlastingly at research and experimentation, to adapt our laboratories to production as soon as possible, and to let no new improvement in flying and flying equipment pass us by.
To meet this challenge, Boeing originally relied on extensive vertical integration. It not only manufactured entire planes itself, but also provided engines through its Pratt & Whitney subsidiary, and bought and flew planes through its United Air Lines
8 Seat-mile performance is the cost of operating a plane divided by the product of miles flown and the number of seats available.
subsidiary. A government mandate separated the three entities in 1934. As the costs of developing and producing new aircraft grew ever larger, the company became even more focused. By the late 1970s and early 1980s, Boeing no longer assumed all development costs itself, nor did it fabricate entire airplanes. Instead, it carefully selected partners, some of whom participated on a risk-sharing basis, who were then subcontracted portions of each plane and developed and built parts and subassemblies that Boeing later assembled. The primary exceptions were the nose section and wings, which Boeing continued to build in-house. One manager summarized the situation in the 1970s by saying: "Today Boeing is an assembler who makes wings."
In part, such efforts to limit up-front investment and reduce risks were prompted by Boeing's near disastrous experiences with its first wide-bodied jet, the 747. In 1969, when the company was introducing the 737 as well as the 747, management problems, declining productivity, steep development costs and unanticipated problems with the engine, plus cutbacks in commercial and government orders, produced a severe cash crunch. Boeing was close to bankruptcy. In the next three years, the company's work force fell from 150,000 to 50,000; unemployment in Seattle, Boeing's home base, rose to 14 percent. Eventually, such belt tightening, plus efforts to resolve problems with the 737 and 747 programs, carried the day, and Boeing emerged from the crisis leaner and stronger, but with a renewed sense of the inherent risks of major development programs.
Ever since the 707 was introduced in 1955, Boeing had competed by selling families of planes. Each new generation of aircraft was created with several variations in mind, drawing on the same base airframe concept. By 1987 the 747, for example, was being offered in eleven varieties, including the 747-100B (standard), 747-200B (long range), 747F (freighter), and 747C (convertible to either passenger or cargo configurations). Flexible designs with inherent growth potential were essential to this approach. Modifications such as a stretched fuselage to increase capacity had to be accommodated without wholesale revisions in design or the need to start up entirely separate development programs.
A more efficient design and development process was only one benefit of the family of planes concept. There were manufacturing benefits as well. A common family of planes, produced on a common assembly line, ensured that learning was not lost as new models were added. Experience accumulated rapidly, as Thornton observed:
We're good partly because we build lots of airplanes. And each new plane absorbs everything we have learned from earlier models.
One result of this approach was break-even points that were reached far earlier than they would have been without shared designs.
Other cornerstones of Boeing's strategy were expertise in global marketing, technological leadership, customer support, and production skills. Large centralized facilities were coupled with sophisticated manufacturing systems and tools for project management. The result, according to informed observers, was the industry's low-cost producer. Or as one aerospace analyst summarized the company's reputation: "If someone hired me to rebuild the Great Pyramid, I'd ask . . . Boeing to assemble it."9
9 John Newhouse, The Sporty Game (New York: Alfred A. Knopf, 1982) p. 139.
Boeing managers believed that the company had a distinct corporate identity. Teamwork was especially valued, as was interfunctional cooperation. According to Dexter Haas, a manager in corporate planning:
At Boeing, employees are expected to be both competent and capable of working as members of a team. We feel that technically brilliant but uncooperative individuals can do as much harm to a program as cooperative but mediocre team members.
Such concerns were especially acute on new plane programs, which were a prime vehicle for management development. Programs required close cooperation among managers for five to ten years, often under intense time pressures and 60-70 hour work weeks. To make these programs work, Thornton commented, "You don't necessarily select the best people, you select the best team."
Once selected, teams were granted considerable autonomy. But a disciplined decision-making process was expected, as was detailed planning. Both were viewed by managers as characteristic Boeing traits. According to Fred Cerf, director of systems and equipment:
A part of Boeing's culture is absolute dedication to commitments—from individuals within the company and from suppliers. We expect people to honor their commitments and adhere to plans. We don't regard plans as exercises, but as forecasted events.
Meeting schedules was an especially high priority for managers. A variety of tools, several of them unique to Boeing, were used to develop realistic schedules and monitor them over time. Among them were a Master Phasing Plan, which mapped out the entire development cycle, including critical milestones, for each new plane program; parametric estimating techniques, which estimated costs and established relationships between critical sections of a schedule, such as the time at which engineering drawings were released and the start-up of production, by using historical data drawn from earlier plane programs; and a management visibility system, which was designed to surface problems before they became serious enough to cause delays. Regular communication was encouraged, even if it meant bringing bad news. According to John Schmick, director of planning:
Early exposure of problems is not a sin at Boeing. We tend not to kill our managers for taking that approach. Here, it's much worse if you bury the problem.
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