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Boeing Strategic Analysis Report

Professor Jiang
Bus 189

Matt Fong
Karolyn Vong
Kenneth Wong
Vivian Li
Jae Woo Chae
Joseph Eslao
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Assessing the Industry 


Each year the strong economic growth of the U.S. has led to sustained high oil and fuel

prices. Between 2003 and 2007, jet fuel expenses have increased dramatically by 15 percent to

more than 30 percent of operating cost. Because of this, many airlines are demanding new

aircraft that are fuel efficiency in order to help reduce their operational costs. The current trend

of increasing fuel prices plays a key role in increasing the current demand for new aircraft or

commercial airplanes that are more fuel-efficient. In addition, the rising fuel prices have taken a

big effect on the economy. As fuel prices affect consumer goods and spending, leisure travel is

expected to decrease, thus affecting the airline industry's bottom line. Furthermore, since the

economy has gradually moved into a recession from the effects of rising fuel prices, many

airlines that are struggling to stay out of bankruptcy, are looking for more ways to become cost

effective. Thus, further fueling the demand for new commercial aircrafts to become more fuel-

efficient (2007 Annual Report).


In order to save on costs so that Boeing can provide lower prices to its customers,

Boeing and its competitor, Airbus, have both turned to outsourcing. Outsourcing has allowed

Boeing to become more competitive. Furthermore, the option of outsourcing also allows Boeing

to share risks and focus on their relationship with marketing and suppliers. However there is a

down side when Boeing decided to outsource. Engineers feel that outsourcing is not a great idea

for the company (Hit, Ireland and Hoskisson: 52). One of the reasons why engineers are against

outsourcing is because they feel that their job is at stake and the company has lost sight for

bigger interests. People feel that outsourcing is not only about people losing their jobs, but also

competing efficiently in a global industry. 


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Furthermore Boeing believes that outsourcing these components to suppliers would give

the suppliers an ultimate control over manufacturers. The newest trend came into the production

of new aircraft; an example of the new trend is the 787 Dreamliner. About 70 percent of its

components of a given airplane are outsourced because the company can save more money and

cost when outsourcing outside the country and to generate sales. China and India are one of

Boeing’s main focuses on countries because they can deliver excellent products at a very cheap

price. “Offset Agreement” is where Boeing can obtain aircraft sales in return for manufacturing

work and this will give Boeing an advantage to gain more power of the fastest and biggest

growing airplane markets which is India and China (Hit, Ireland and Hoskisson: 52).


In addition, Boeing’s global presence continues to provide access to markets, higher end

technologies and talents, as Boeing continues to provide an excellent industry solution to their

customers. Currently, most of Boeing's sales come from related international sales. Boeing’s

777-200LR has became the first India –based operator to deliver non-stop flights from the United

States to India. Other countries such as United Kingdom, Canada, and Australia had requested

for special airplanes (Hit, Ireland and Hoskisson: 53). Over the next couple of years, commercial

airplanes are expected to involve international customers and international sales of Boeing

defense products. Depending on Boeing’s success, the ability to provide their customers with the

right services and products are being viewed a strategic collaboration with their partners and

suppliers to meet various needs of the customers. The significant 787 model is part of the next

generation of airplanes. With the 787-model technology, Boeing is working hard with the

world’s leading organization to leverage their research and development and enlist their expertise

to provide the best cutting edge technology solution available. Boeing is viewed has a global

business company, but at the same time they work to the benefit of the local communities. 

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Furthermore, the industry has been affected by the circumstances of September 11 and

the Global World on Terror (GWOT), the U.S government has set limitation their budget

spending. This will be a disadvantage for Boeing's Integrated Defense System unit because the

company will not have enough financial support or resources to build new airplanes due to

budget cuts. In addition, over the past years, emergency supplemental request has been used

toward to Global War on Terror (Hit, Ireland and Hoskisson: 54). The United States government

is spending their entire budget on war rather than allocating their budget for airline industries.

Because of this problem, aircraft manufacturers like Boeing will have to cut and slow down in

delivering newer aircraft technologies. Until now, the government is requesting more money to

spend on GWOT (2007 Annual Report).


However, there is a positive outlook for Boeing's commercial airplanes division.

According to industry analysts, the 20-year forecast for airline traffic is projected to grow for

passenger traffic will be 5% per year, while cargo traffic growth will be 6%. This is

an important factor since the industry future revenues are affected by the demands in aircrafts,

which is directly linked to airline traffic (2007 Annual Report). Still the largest shares of the 6.8

billion airline passengers are expected to come from the Asia-Pacific

Region. As emerging economies countries like China and India will continue to grow at

a progressive rate, many people (new passengers) will be able to have access to affordable,

direct, and efficient air services. All this will provide an opportunity for Boeing to enter into the

Asia-Pacific region market. Essentially, all of this will contribute to future demands for Boeing

products and services, thus helping boost Boeing future sales revenues.
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Boeing Background (History)

William Edward Boeing was born in Detroit to Wilhelm and Marie Boeing in 1881. His

father Wilhelm Boeing had moved from Holhenlimburg, Germany to the United States in 1868

when he was 20 years old. Young Wilhelm started work as a farm laborer but soon joined his

father-in-law. He bought timberland, built a large home and became the director of Peoples

Savings Bank. He was the president of the Galvin Brass and Iron Works, and a shareholder in

the Standard Life Insurance Company. He also bought land in Washington State and timberland

in California. Unfortunately, he died of influenza in 1890 when he was 42 years old and had left

his wife Marie and his three children behind. Marie remarried at that time and became Marie M.

Owsley. William E. Boeing was the eldest of the three children and had claimed that he did not

get along with his stepfather and got sent to school in Vevey, Switzerland. Boeing left Vevey

after a year and moved back to the United States to continue his education in public and private

schools. He studied at Yale but did not graduate and eventually left college to start his new life

in Grays Harbor, Washington, where he learned to start a business with lands that he had

inherited from his family. He began to buy more timberland, adding to the wealth he already

had, and moved to Seattle in 1908 to establish Greenwood Timber Company. (Boeing.com -

History / Biographies)

William always had an infatuation with airplanes. In 1910, he arrived at an aviation meet

in Los Angeles, where he tried to get a ride on one of the boxy biplanes. Unfortunately, that did

not happen. In 1914, Thomas Hamilton, later found of Hamilton Metaplane Company,

introduced Boeing to the U.S. Navy Lieutenant G. Conrad Westervelt. He and Boeing became

good friends and took a ride on flier Terah Maroney’s Curtiss-type hydroplane. They both

concluded that they could build a better airplane. Being told that there was a definite future in
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aviation, Boeing showed an extreme interest in building aircrafts. With a group of technical

assistants, work had begun to design the first Boeing plane. His very first airplane was the B&W

Seaplane, which stood for Boeing and Westervelt. It was 25.5 feel long and flew 900 feet. His

determination is what brought him today to his airplane manufacturing company. Thus, Boeing

Airline Company was established on that day, July 15, 1916. It was originally known as Pacific

Aero Products Company because Boeing incorporated many of the products into the company’s

work.

However, a year later, it was renamed to Boeing Airplane Company. On April 8, 1917,

U.S. President Woodrow Wilson declared war on Germany. At that time, Edgar Gott, William

Boeing’s first cousin was the president of the company. He helped obtaining contracts with the

military during the WWII and ultimately became the powerhouse due to orders of B-17

Bombers. However, after the war ended, the Bomber orders were canceled as well which led

Boeing to diversify its product offerings in hopes to bring sales back. It made furniture,

phonograph cases, and fixtures for a corset company. Later, the company started to show profit

from repairing military aircraft. Through many ups and downs, Boeing had become a leader in

commercial jet manufacturing with its 707 in 1945. With its continuous improvement with the

720, which allowed a faster speed than the 727 and to fly a longer route. On the other hand,

Boeing continued to run his timber business until 1954 when his health began to fail

(Boeing.com - History/Biographies).

In 1967 and 1968, under the leadership of William A. Allen who was the president at that

time, helped Boeing had reached its further success with the development of 737 and 747. The

737 had become the best-selling while the 747 would hold the passenger seating capacity record

for 35 years, allowing 524 passengers on board each time. Unfortunately, Allen passed away in
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1985. With the new president Thorton William in 1986 and Malcolm T. Stamper in 1972, they

came out with the single-aisle 757 and larger twin-aisle 767, Boeing continued to manufacture

and improve its products along with the help of technology. In 1994, Frank Shrontz took over

and helped Boeing develop 777. It was the first aircraft that was designed entirely by computer.

In 1996, Philip M. Condit became the president but forced to resign due to mismanagement. He

made a huge mistake for underestimating Airbus’s ability to compete with Boeing and the

company suffered greatly from manufacturing and accounting problems. (Boeing.com - History /

Biographies)


Mission and Objectives/ Characteristics


Every company has its own mission and objectives. It is indeed very important for the

company to follow through their vision for continuous improvement to achieve its ultimate goal.

Even though Boeing has changed CEO many times throughout its life, however, there is only

one purpose for the existence of Boeing. As explained in its mission statement, it is “working

together as one global enterprise for Aerospace leadership.” Boeing values team work and

collaboration. It recognizes that its strength and competitive advantage will always come from

its human resources. It encourages cooperation at every level and in all activities because it is

believed that sharing ideas and knowledge will help everyone learn. Boeing collaborated with

many partners to design and develop the 787 in hopes to develop faster and reduce costs. Also,

spreading the costs would build global relationships that may help the company sell its planes

overseas in return. As Scott Griffin, the vice president and CIO of Boeing said, “The company is

no longer just a manufacturer, but also a high-end systems integrator. We are a technology

company.” This move is very critical to Boeing since it would bring a competitive advantage to
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the company and also helps it lock in a global battle for market leadership with its biggest

competitor Airbus.

However, the success of the 787 in the future years is not clear but a new level of global

collaboration is definitely established.
Innovation and competitiveness are also the biggest

priorities of Boeing. It continues to expand its product line and services to compete with its

competitors and exceed quality, customer satisfaction and needs. Boeing also has the ability to

think differently, allowing the company for change. The new Boeing 787 Dreamliner that they

are developing is a mid-sized, wide-body, twin-engine jet airliner. Its capacity is between 210

and 330 passengers and will have more standing room, larger windows and bathrooms. Most of

all, it will be more fuel-efficient than any of the Boeing airliners developed and also the first

major airliner that uses composite materials for most of its construction. Boeing is trying

something that is almost completely different from its previous work. From the materials and

electronics that are used to build the plane to the technology uses during the design and many

other processes, Boeing is said to be undergoing a big transformation as it comes to building its

“next-generation jet” as a new way of doing business. Indeed, Boeing does a very impressive

job in achieving its goals. As a major service provider to NASA, Boeing is now the world’s

leading aerospace company and the largest manufacturer of commercial and military aircrafts by

revenue, orders and deliveries; doing business in more than 90 countries. Boeing designs,

assembles and supports commercial jetliners. It is the world’s premier commercial jetliner

manufacturer because it offers many different services to its customers, allowing them to fly to

where and when they want to. Commercial Airplanes is headquartered in Renton, Washington.

Boeing also designs, assembles and support defense systems, which are military transports, such

as helicopters, fighters, tankers, etc.

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Lastly, it designs and assembles satellites and launch vehicles, providing the largest

amount of commercial and military satellites. The factory is headquartered in El Segundo,

California. It manufactures the body-stabilized Boeing 601 and 702 satellites. The Boeing 702

satellites are the most powerful communications satellite in the world today. Boeing’s mission

statement also states that one of its core competencies lies in “detailed customer knowledge and

focus.” Only the customers know what’s “preferred.” They have the choice of purchasing new

or used planes. If Boeing does not know what customers need and be able to deliver them

flawlessly, it would lose the customers to its competitors. Therefore, Boeing has to know who

its target market is and how to attract customers. For example, half of the orders for the Boeing

787 Dreamliner are from Asia-Pacific clients due to the economic growth in China and India. In

early 2004, Boeing experienced low sales because Airbus’s A-320 had superior technology,

which ended up stealing many of Boeing’s contracts. In this case, customers see technology as a

more important factor when it comes to deciding which planes to buy. 


When doing business, the highest standards of ethical business conduct are expected from

all of its employees. “Boeing will conduct its business fairly, impartially, in an ethical and

proper manner, in accordance with the company’s values and Code of Conduct, and in full

compliance withal laws and regulations. In the course of conducting company business, integrity

must underlie all company relationships, including those with customers, suppliers, and

communities and among employees” All employees are expected to follow the guidelines at all

times. In addition, Boeing has ethics and compliance programs to promote and inform its

commitment to integrity to ensure that everyone is complying with the laws and regulations.

Managers are responsible for creating a fair and equal working environment for employees.
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External Analysis of Boeing


Boeing is in a duopoly when it comes to being in the large commercial aircraft industry,

which means that there is one other major company that is competing with them directly in the

same market and that would be Airbus Industries. Nevertheless, Boeing was the first to be in the

large commercial aircrafts industry until Airbus came along. McDonnell Douglas used to be

another competitor to Boeing until the two companies merged. Airbus entered the market with

the help of “launch aid”, a form of government subsidies that helps a company compete and

survive in industries that already have giants with established distribution networks and

economies of scale (Hit, Ireland and Hockessin: 52). Airbus capitalized the market by making

planes that addressed the needs of their buyers, which were midsize cost efficient planes. This

plane was the A-320, which competed with the Boeing 737; both are the best selling planes for

each company in the same category. 


Airplanes are grouped into families based on size, range, and technology (Hit, Ireland and

Hoskisson: 50). Both companies have competed neck to neck on building the most effective

planes to meet their customer’s supply and demand. In order to advance their position, Boeing

needs to rethink their strategy and work with their suppliers. Boeing’s strategy in 2004 was to

move up the value chain, meaning that they are going to focus less on details and more on their

core competence, integration, and assembly. By doing so, Boeing has consolidated their list of

suppliers to a select few and to those that provide quality products with the best value. Instead of

assembling the aircraft in-house, Boeing began to outsource some of their operations in

assembly. 

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Outsourcing the assembly of parts of the airplane was a major step Boeing has taken to

reduce cost and control capacity at its main plant. They have outsourced to countries such as

China and India, where labor is much cheaper. In return, they have obtained aircraft sales from

these countries, which is also two of the largest and fastest growing airplane markets in the

world. Boeing has called this an “offset agreement”. Japan also helped with building the newest

Boeing 787 Dreamliner. One of the key reasons for establishing strategic partnerships is the

ability to distribute some of the risk associated with large investments required in building an

aircraft. Outsourcing has given Boeing more flexibility, control, and a better flow of cash.

Outsourcing may be better for the company, but in return angers some of their engineers at

home, which feel that their jobs are at stake. Eventually, hopefully they will understand that

outsourcing is more about competing efficiently in a global industry and is required for success

in the future. One risk Boeing is taking by outsourcing is giving away technology to third

parties such as foreign aerospace companies. Japanese suppliers may use the knowledge

acquired from their work to begin creating a company of their own. If this occurs, it would be a

huge threat to Boeing and Airbus because they are in a position to capitalize on the flourishing

Asia-Pacific markets. Therefore, Boeing must rethink their value chain logistics in order to

prevent this from happening.


Another external factor that has an effect on Boeing is their customers. Boeing has two

types of customers for their two separate divisions. For Boeing’s commercial division, the

airlines of the world are their customers and for the defense division, the government would be

their major buyer. Boeing has been focusing on capitalizing on the flourishing Asia-Pacific

markets because of their rapid growth in air traffic as the economy there is growing at a steady

pace. Most U.S. airlines are flying Boeing airplanes except for a few noticeable ones such as Jet
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Blue and Virgin America, which has decided to use Airbus models in order to offer something

different to their customers in America (Hit, Ireland and Hoskisson: 53). Airbus models have

offered wider seats, extra legroom, and more overhead storage space for their customers. Airbus

was the manufacture in 2004 when they consistently priced their products below Boeing prices.

This had allowed Airbus to sign contracts previously held by Boeing’s customers. But due to the

product delays from Airbus, Boeing has regained their position as the airline leader the past few

years. The delays have frustrated Airbus’s customers and have caused them to cancel their

orders and switch over to Boeing product line.


Government has played a huge part in success for both Boeing and Airbus. Without the

government’s assistance, both companies wouldn’t have existed today. Airbus was born because

of a so-called “launch aid”, which their parent company EADS established. This was

collaboration from several European Union to aid the creation of Airbus to compete directly with

Boeing. Boeing’s aid from the government is in the form of federal research and development

contracts from NASA and the Pentagon. Until recently, Boeing even received a tax break from

their own state, which also help supported them financially. Both companies have filed suits

behalf of each other with the WTO, but the outcome is yet to be determined since both

company’s practices are deemed illegal in terms of receiving extraterritorial income from

government subsidies (Hit, Ireland and Hoskisson: 54).

Internal Analysis of Boeing

Boeing has many strong competitive advantages, and internal resources that help define

its core value. The main source of Boeing’s competitive advantages is its core competencies,

which help develop Boeing’s resources into strong competitive advantages in the airline

manufacturing industry. Boeing also has operational strength internally, which allow them to
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better manage and sustain their competitive advantage in the market. Boeing has a strong set of

competitive advantages at which it uses to market share and the airline industry, as we will

analyze Boeing’s unique competitive advantages in the airline industry.


Core Competencies

Core competencies are unique, in that they retain value, are rare, expensive to imitate,

and cannot be substituted. One core competency Boeing contains is its repeated effort to meet

the customer demands and needs (Core competencies-Boeing.com). Boeing commits to

understanding and responding to what its customers would like in an aircraft; and designing and

implementing specific needs or demands. One of Boeing’s unique business structures is to

design the product according to customer wants, and have it waiting for them to buy. This builds

a strong competitive advantage, as it notifies the customers that Boeing will design aircrafts

according to their needs, and allows them to build stronger relationships with their customers.

Another core competency Boeing has is their ability to implement large-scale

implementation systems (Core competencies-Boeing.com). Boeings extensive research and

development is a strong core competency, with its unique knowledge of wing technology and

new lightweight composites being one of its stronger manufacturing core competencies. Boeing

has begun to build stronger bonds with its suppliers, as they are beginning to research with their

suppliers to integrate and design better aircrafts. With some of their research and development

being done outside the company, they are able to design and build better aircrafts.

The last core competency Boeing has, is its unique contracts and agreements with both

NASA, and The United States Air Force. The strategic partnership with both of these two

organizations allowed Boeing to become the world’s largest space and communications
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company, as well as helped it become a large leader in the aircraft manufacturing market. These

two partnerships allow for Boeing to grow into the aerospace industry, and allow Boeing to have

a wider range of products for a wider range of customers.

Operational Strengths

Boeings operational strengths include its unique level of management, as the managers

are able to allow the company to run smoothly. Boeing is able to implement a strong

management force with its unique and strong culture (Core competencies- Boeing.com). Boeing

is seemingly more efficient than its competitor, Airbus, as it has found ways to be more

productive, without spending large sums of money. Already, Airbus has been known for going

over budget when designing and creating new designs for aircrafts (Hit, Ireland, Hoskission:

54). Boeing has thus attained a lower cost in building and designing aircrafts than Airbus, and

found a lower cost structure so they can hopefully sell aircrafts cheaper than Airbus.

Boeing’s management has also provided and given the company a strong sense of central

leadership, and has focused the company toward meeting the needs of the company’s various

customers. Boeing has implemented a central strategy well, and has set well-defined goals, and

identified their potential challenges and possible struggles in the future well. Boeings strong

knowledge of the market driven approach, and allowing suppliers and customers work together

to help meet the demands of the market, allows Boeing to better serve both its suppliers and

customers, making them a very powerful company in the industry.

Competitive Advantages

Boeing has a long list of competitive advantages that it uses to gain an advantage over its

competitors, mainly Airbus. One aspect of the airline industry that is highly regarded is market
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share, which Boeing has consistently had an advantage of. One of the main reasons Boeing has

most of the airline manufacturing industry market share is due to its long history of excellence in

designing aircrafts for over 90 years. Boeings strong name and brand allows for a strong hold on

the airline manufacturing industry, which has now become a duopoly between Boeing and

Airbus.

As one can see, the culmination of both Boeings core competencies and operational

strengths allow it to build upon different competitive advantages in the airline industry. One of

Boeings greatest competitive advantages is its unique strategy to work more with both its

customers and suppliers, to design and build the best aircrafts on the market. One of Boeings

largest competitive advantages include its unique research and development departments which

are able to design and implement better aircrafts without incurring large amounts of costs. This

would allow the company to produce better aircrafts more efficiently with fewer costs than the

competition, giving Boeing a strong competitive advantage over its competition.

Porter’s Five Forces Model of Competition

Porter’s model is based on the insight that a corporate strategy should meet the

opportunities and threats in the organizations external environment. Based on the information

derived from the Five Forces Analysis, we can decide how Boeing influence or to exploit

particular characteristics of their industry. The five forces model of competition includes the

threat of new entrants, the power of suppliers, the power of buyers, the threat of product

substitutes, and the intense rivalry among competitors.

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Threat of New Entrance:

It is not easy for new companies to enter the market of manufacturing large commercial

aircraft. The high cost of developing airplanes is a major factor in prohibiting new entrants to the

market with costs as high as US$5.5 billion to develop the Boeing 777 in the 1990s (Rodgers

1996, cited in Hill, Jones & Galvin 2004). Another prohibiting factor is the long lead-time till

reaching break-even point. Manufacturers must sell between 400 and 500 aircraft at a rate of 50

sales per year in order to regain their investment after developing a new product. This means that

companies who enter the market must be prepared to wait for around 10 years before showing

any profit, with no guarantee that they will become profitable even then (Dertouzos, Lester &

Solow 1990, cited in Hill, Jones & Galvin 2004). Therefore the threat of new entries is

considered low and on the scale of 1 to 10, it is ranked as 1.

Generally it is not possible for a commercial aircraft building company to come up

overnight. In some industries, new entry is difficult or impossible. Therefore the threat of new

entry is very low against airplane manufacturing industry because of high capital requirement

and government barrier. It is not surprising that only Boeing and Airbus are d in the airplane

industry. However Boeing now has been faced the threat of new entrance by China. The Chinese

government has officially approved the launch of China Commercial Aircrafts, which will

manufacture large passenger planes. The plan is to have jets designed and built in China rolling

off an assembly line by 2020. Asian Airlines are expected to buy nearly 10,000 new planes by

2025, with more than 2,200 of those going to Chinese airlines. The emergence of a strong

Chinese player could loosen Boeing’s lock on the commercial –jet market.
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How can they overcome the barriers of technology and capital requirements described in

the threat of new entrance? The people leading China’s push into the commercial-jet business

has gained much of the technical and engineering know-how they need by cooperating with

Boeing and Airbus. In fact, A consortium of Chinese companies known as China Aviation

Industries Corporation produces components for Boeing’s 747 and 787 wide bodies and operates

a final assembly line for the Airbus A320.

However there was no indication in the media report about when the company would

build its first plane, although analysts said China would need at least 15 years of development.

Despite its goal of eventually challenging Boeing, the global giants of commercial aviation,

fulfilling the ambition will take time, said Jin Zhuanglong, president of the new aerospace group.

“China’s jumbo jet program will not pose a threat to Boeing, at least in the coming 20 years," Jin

said in Monday's China Daily, an English-language paper whose readership is aimed at the

foreign community. "Even when China has the capacity to produce large jets it would be able to

meet only a small part of domestic demand. Boeing will continue to claim a big chunk of the

Chinese market."

Substitutes:

The threat of substitute is moderately low. There are several substitutes available like

cruise, buses, cars, trains or not traveling at all. The failure to meet the scheduled delivery time

and Asian Economy flu, it gave birth to new substitute, The World Aircraft Leasing Industry.

Airlines Company started to switch to Airbus and claiming to have the technologically advanced

fleet while their old crafts were sold to amongst airlines or to the leasing company. The trend

threatened Boeing and the leasing companies started to grow in Asian market. An analysis
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reveals that the portfolio size of leased aircraft reached $115.42 billion in 2004, and is projected

to reach $143.93 billion by 2008.

The other substitute is the railroad transportation. Surface transport, especially by rail, also raised

important substitution issues. Unlike airlines, railways can provide city center to city center

travel, and have been shown to severely impact the business travel market once these city center

to city center journey times can be brought down to below three hours. Switching airlines to the

bullet train or high-speed railway has been decreased the demand of Boeing’s manufactured

airplanes.

The Bargaining Power of The Suppliers:

In this industry, the bargaining power of the suppliers is low. Though the suppliers are

less in number in this industry so Boeing have high degree of control over the suppliers like

those who provides different components starting from exterior to interior and parts for aircraft.

The company started as an engineering based company that provided the suppliers with a unique

feature to decorate the crafts and supply parts. But then again there are no other buyers than

Boeing. Since Boeing serves different market they have a diverse supply chain hence sometimes

they have to depend solely on the suppliers. So with expansion of Boeings production capacity it

is likely to affect the capacity of the suppliers. Hence this could be a problem for Boeing to loose

the bargaining power.

Additional changes in production implied by government agencies forces Boeing to

retrofit their crafts. So sometimes this might affect the suppliers allowing Boeing to cut cost on

its margins even. With expansion sometimes Boeing is highly dependent on suppliers. Like in

1997 they were in shortage of parts of 2000 to 7000, which made Boeing miss their delivery
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schedule. In addition, in 2007, the future of commercial aviation Boeing’s 787 will have to wait

a little longer, as Boeing announced a delay in the roll-out of its revolutionary 787 line of

passenger jets. There was various reason to be delayed and one of the main issue was supply

chain couldn’t keep the 787 on schedule.

Boeing executive vice president Scott Carson, the CEO of the company's commercial airline

division, says delays stemmed in part from "unplanned rework for sections delivered to us. Parts

availability from remaining structural pieces to fasteners to other small parts has affected the

sequencing of the work in the factory, compounding these delays." A Boeing representative says

the company has been "very engaged over the last several months with each one of our major

structural suppliers and further down in the supply chain. I think we clearly have learned some

things about how we could do this job better in the future. We have taken steps to make those

corrections. "In unusually blunt language for a top executive of The Boeing Co., Mike Bair, who

was recently replaced as head of the troubled 787 program, said some suppliers have let the

company down. "Some of these guys we won't use again," Bair said Wednesday in a speech to

the Snohomish County Economic Development Council. The first 787 deliveries were originally

planned for May 2008 but have now been pushed early 2009. Boeing has blamed delays on

problems with the aircraft’s extended global supply chain.

Bargaining power of the customers: Low

Although there are two major commercial aircraft suppliers in the world that airlines can change

their supplier if they are not happy with the existing one. However, it is not that simple.

Because both Boeing’s and Airbus’ aircrafts are designed with family concept, which is

convenient for airlines to maintain their airplanes (Cohen n.d., cited in Hill, Jones & Galvin
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2004). Furthermore, the control systems of the airplanes produced by the two major companies

are different. If an airline that has been using Boeing’s aircrafts and want to buy one new

Airbus’ one, they have to send their pilots for about three weeks’ training and it is very

expensive. Therefore, unless the airline wants to buy a whole fleet of new airplanes, it is not

worth for them to change supplier. The bargaining power of buyer is considered moderate to

low and on the scale of 1 to 10, it is ranked as 3.

Competitive Rivalry between Existing Players:

The commercial aircraft business is very important for Boeing because it covers more than 65

per cent of its total revenue. Therefore losing market share in this market can cause big impact

on the performance of Boeing and its future development. The rivalry from Airbus is considered

very high, on the scale of 1 to 10 it can be ranked as 9.

The competition from Airbus industry is getting more and more threatening to Boeing in the

commercial aircraft market. Boeing has been the market leader since 1980s. However during

the last decade, Airbus has been expanding their market share very successfully. In 1990,

Boeing booked 45 per cent of the total industry orders while Airbus got 34 per cent and

McDonnell Douglas had 21 per cent. In 1996, when Boeing announced the merger with

McDonnell Douglas, Airbus obtained nearly 50 per cent of the total commercial orders and

delivered shipment for 33 per cent (Cohen n.d., cited in Hill, Jones & Galvin 2004). And three

years later, Airbus surpassed the new Boeing in order booking and got 55 per cent of total

industry orders and Boeing only got 45 per cent. This means Airbus is now a big threat to

Boeing and may take over its market leader position soon if the latter does not take any serious

action to protect themselves.

 B o e i n g | 21

Airbus has been making great efforts in doing market research and development of new

products. For example, in order to design a super jumbo A380 successfully to match the market

desires, Airbus organized customer focus groups from around twenty airlines to discuss what

such a plane should be like. They spend 5.9 per cent of their total revenue on R & D in 1999

while Boeing only spent 2.3 per cent.

Conclusion from Porter’s Five-force analysis:

From the above analysis, the aviation industry is overall attractive to Boeing, which is in a good

position to compete and develop. However, the major competitor Airbus and the threat of China

has been increasing their market share and forming a big threat to market leader position of

Boeing. Furthermore, the flow of its supply is also important for Boeing’s production. Boeing

should have held all systems and suppliers close to their assembly lines to facilitate cooperation

between suppliers and Boeing.

Value Chain Analysis

Due to the nature of Boeing’s highly competitive environment, the company’s ability and

understanding of their value chain model is crucial to the company’s profitability. For Boeing,

the focus on adding value-creating activities to their core competencies is a vital part of their

corporate-level strategy. In addition to providing the basic primary activities and support

activities in their value chain model, Boeing continuously tries to establish new value-creating

activities for their customers. One of those value chain activities is Boeing’s establishment of

Boeing Capital Corporation (BCC), a financing subsidiary, which provides financing to its

customers for commercial airplanes as well as its Integrated Defense Systems purchases. This

business unit is a value-creating service since customers would not have to go through other
 B o e i n g | 22

financial institutions to secure a loan for their purchase. Thus, Boeing’s ability to provide a one-

stop shop to its customers and hence capitalizing the financial segment of the market adds value

and thus allows them to add to their core competencies. The BCC division at the 2007 financial

year-end has a portfolio holding of approximately $6.5 billion (2007 Annual Report).

Another value chain activity is Boeing’s after-sales services called, Advancing Aviation

Performance Program, in which Boeing established a system to provide to its customers is their

24x7 global customer support. Boeing’s commitment to customer service provides assurances

and resources availability to their customers in the aviation and transportation industry so they

can enhance their profitability. With this type of dedicated service, customers can be assured if

anything goes wrong, they will be supported long after their purchase. In addition, Boeing's goal

is to provide worldwide service infrastructure and a network operations center to resolve

technical issues and deliver vital spare parts to their customers when it is needed. In doing so

Boeing implemented the AOG Incident Recovery and Repair Services System, which provides

engineering, logistics, maintenance assistance, and technical support to its customers for repair

or after any incident so their customers can get back to operability as soon as possible. Another

value added service is Boeing’s Alteon Aviation Training system, which is designed to enhance

customer training of the Boeing’s aircrafts. The Alteon system offers advanced computer-based

training facilities and full-flight simulators to its customer’s crew training. Again, this is a

valuable resource Boeing provides to its customers (Commercial Aviation Services-

Boeing.com).

Another value added system is Boeing’s online information system, MyBoeingFleet Web

Portal, which provides technical information, applications, and services to its customers to

maintain and operate their fleets. Still, the most important software that Boeing designed to assist
 B o e i n g | 23

their customers in operational efficiency is the Global Airline Inventory Network System, which

is designed to track and management costly inventory inefficiencies for the airline industry.

According to Boeing, it is estimated that the airline industry consumes $7 billion a year in spare

parts for Boeing’s airplane maintenance (Commercial Aviation Services-Boeing.com). With the

implementation of this system, Boeing and its customers can improve its supply chain

management and they will see significant cost savings and inventory efficiency. Under Global

Airline Inventory Network System, the highlights are (Commercial Aviation Services-

Boeing.com):

 A supply-chain management system will be established by Boeing to serve as the

"command center"

 Inventory holding costs will be greatly reduced and savings will be passed on to both

Boeing and its customers

 Boeing will take the responsibility of monitoring airline inventory use, allowing suppliers

to better forecast demand and plan production

 Boeing will be responsible for the purchasing, inventory management, and logistics for

an airline's airframe parts

 All airframe parts will be distributed by Boeing’s regional distribution center near the

airline's point of use

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Financial Analysis

In spite of the surging fuel prices affecting the economy and competitive environment the

company faces, 2007 was still a good year for Boeing as the company manages to increase its

revenue by 8% from its 2006 revenues ($61,530 million to $66,387 million). Although it is not

as high as the expected growth in comparison to 2006 revenues, which grew by 15% from the

2005 revenues (Appendix 1). Accounting for the majority of this increase was Boeing’s

consolidated operational revenues, which grew by $4,857 million in 2007. 2007 earnings from

operation increased significantly by 93% as a result of the undertaking of various management

growth strategies (2007 Annual Report).

The increase in revenue resulted mainly from the high growth in Boeing’s commercial

airplanes business unit. This increase comes from higher commercial airplane orders and higher

commercial aviation support activities. However, Boeing’s Integrated Defense System unit

revenues decreased by $359 million (Appendix 2).

Summary of 2007 Sales Revenue by Division:

 Commercial Airplanes Unit: $33.4 billion

 Integrated Defense System Unit: $32.1 billion

 Boeing Capital Corporation: $815 million

Return on equity (ROE) for 2007 was 45% compared to 46% for 2006, which decreased

somewhat from last year. On the other hand, return on assets (ROA) is 6.9% compared to 2006

of 4.3%. This increase shows that management has efficiently utilized its assets for each dollar of

sales. While operating profit margins are up 2% in 2007 from 18% to 20%, return on sales or
 B o e i n g | 25

profit margins for 2007 was 8.8% compared to 2006 of 4.9% (Appendix 3). Essentially, higher

operating margin percentage allows Boeing more flexibility in its competitive decisions making

process (Hit, Ireland and Hoskisson: 54). Most importantly, this allows Boeing to spend more in

research and development. For 2007, Boeing has increased its research and development

expenditure, an increase of 18% to $3.9 billion. This increase in research and development

reflected the company management’s key focus on developing its 787 and 747-8 commercial

airplanes. This will add to the future revenue growth. Additionally, Boeing reduced research and

development expenses by implementing a cost sharing payment agreement with its major

suppliers. That savings amounted to $130 million to Boeing, coming from its supplier for its 787

program.

The area of Boeing’s financial management has been greatly impacted, which are

reflected in the debt equity ratio. In 2006, the company’s debt to equity ratio was 2.01,

comparably higher than most in the industry due to heavy leveraging (Hit, Ireland and

Hoskisson: 54). However, in 2007, much improvement has been made on their debt to equity

ratio. 2007 debt to equity ratio has reduced to 0.91. In addition the company’s debt to asset ratio

has also reduced .847 from .909. Furthermore, a huge part of the Boeing’s growth is also

attributed to Boeing’s financial strategies, which included a reduction in debt of $1.3 billion has

proven to be successful. Other implementation also included the repurchasing of 29 million

common shares (2007 Annual Report).

Cash flow from operating activities in 2007 has increased by $2,085 million to $9,584

million (Appendix 2). This significant increase is due to the successful net earnings in 2007. The

increase in cash flow stems from deposit payments from the increase demand or pre-orders for

the new 787 airplanes and pre-payment on note receivables.

 B o e i n g | 26

In addition, Boeing’s order backlog grew by 37% to $297 billion, with the majority of the

increase (46%) coming from demands for commercial airplanes (Appendix 3). This backlog

increases alone accounts for just contractual agreement orders. The reasons for the high demand,

which also leads to the higher backlog, are from the anticipated delivery of Boeing’s new 787

fuel-efficient commercial airplanes, which are expected to begin delivery in early 2009. Also

triggering strong demand for Boeing’s 787 is the increase in fuel prices in the global economy,

causing buyers to look for more fuel-efficient airplanes such as the 787. Furthermore, Boeing’s

analyses show the current inventory of existing commercial airplanes in the industry are aging

and will eventually be taken out of service, thus fueling an increase in demand. Still Boeing is

very bullish on its future forecasts in the commercial airplanes division, with strong forecast of

5% of passenger traffic and 6% for cargo traffic (2007 Annual Report). All of which are

expected to help boost future revenues for Boeing.

Strategic Analysis 


Boeing has begun a new strategy, a global strategy that is currently beginning to take off.

Boeing has implemented outsourcing to build better and more efficient airplanes, by sharing

portions of their knowledge and research in building airplanes with Russian aircraft engineers,

and even Indian software geeks (Global strategy-Boeing.com). Boeing is taking a different

approach in building their aircrafts in order to become more competitive. By sharing their

knowledge through outsourcing, Boeing has found ways to produce airplanes at a lower cost, as

it would cost less for a Chinese worker to bend the metal for the tail of a 737 in comparison to

hiring an U.S. worker (Global strategy-Boeing.com). Boeing’s global strategy includes

combining the skills and work around the world to produce the best possible product for its wide

base of consumers.
 B o e i n g | 27

Boeing has employed many strategic decisions over the past decade. One of the

important decisions they have employed is whether or not to implement their current global

strategy, at which they can be sharing some of their important trade secrets in exchange for new

knowledge from other countries (global strategy-boeing.com). Although this strategy can be

beneficial to the company, it can also hurt the company in the long run by expanding out of

house to manufacture and produce airplanes. The problem with their global strategy includes the

questions of how much they should be expanding externally for production of the aircrafts.

When does sharing some knowledge and manufacturing of aircrafts no longer benefit the

company? So far, it seemingly has started to benefit Boeing as the world is

moving towards globalization, and as other industries have also begun to globalize (Global

strategy-Boeing.com). It is still unknown if Boeing's new global strategy will be a successful

strategy, but it has shown some possible improvement as revenues have increased in 2007. 


Another strategic decision involves the directions the airplane manufacturing industry is

going, with threats of Airbus unleashing larger aircraft, the A-380; this could threaten Boeing if

they do not have a large aircraft to compete with it (Hit, Ireland, Hoskission: 54). In order to

compete, Boeing is moving towards designing a new carbon fiber based aircraft that is more

fuel-efficient, the new 787 Dreamliner, which is designed to compete with Airbus’ larger

airplanes. Boeing's strategy is to develop the 787 at a very low cost, so they can implement a

price leadership strategy (Global strategy-Boeing.com). With this strategy Boeing believes it

can compete with Airbus' new Super Jumbo project. By doing so, if the airline industry is

planning to shift away from the 747-sized aircrafts to larger aircrafts, Boeing could then retain a

larger portion of the market share; as they would be able to sell the 787 at a cheaper cost than

Airbus’ Super Jumbo Jet.

 B o e i n g | 28

However, the drawbacks of manufacturing a large-scale aircraft include the high costs of

researching and developing an aircraft of this magnitude. Airbus has already shown its struggles

in creating their Super Jumbo Jet, as it has been constantly delayed and pushed back due to

development problems (Hit, Ireland,Hoskission: 60). Additionally, Airbus' customers have

cancelled their orders and have begun to place orders for Boeing's new 787 airplanes

instead. Additionally, Airbus has gone way over budget and behind production schedule on their

A-380 Jumbo Jet. Thus, Airbus has also lost a lot of money in researching and developing their

large-scale aircraft. Learning from Airbus' mistakes of going over budget, would Boeing want to

lose money the same way Airbus is losing money jumping into the larger scaled aircrafts? It is a

risk Boeing may have to take, because if Airbus is able to launch their Super Jumbo Jet, while

Boeing still does not have a jet to compete with it, Boeing could lose market share fast (Hit,

Ireland, Hoskission: 50). If this situation were to occur, the only way to prevent it would be

taking the risk by investing into researching and developing a large-scale airplane. Boeing has

already begun developing their 787, but is it really worth the cost?

Strategic Recommendations & Conclusion

Fuel efficiency is crucial in today’s day and age, with the costs of energy greatly

increasing. As strategic advisors of Boeing, we would advise Boeing to expand their product

line by developing more fuel-efficient airplanes, as the cost of fuel worldwide had greatly

increased over the last decade. Even if it involves redesigning their current airplane product

lines, such as the 737 or 747 aircrafts, they should design it to be more fuel-efficient as airline

companies would benefit from a more fuel-efficient aircraft. Though the only drawback to this is

the high costs that will be incurred producing a large product line of aircrafts. If Boeing can find

a way to produce them more efficiently than Airbus, and sell them for a lower price, Boeing can
 B o e i n g | 29

retake a large portion of the market share it once owned. In order to do so, Boeing will need to

increase their workforce to implement this plan, as over the last decade they have been

frequently cutting back engineers and employees nationwide. Even if it still manages to

implement its global strategy, it would also need to expand on its own research and development

departments in its domestic facilities. However, if the strategy works, the financial payoff would

be significant.


Since fuel efficiency is an important factor, the company's strategy should affect the

company's goals for both the short run and long run. For the long run, we would recommend

investing more money into the research and development of aircrafts that can use alternative

energy sources. Already the company has begun to look at environmental issues, as pollution

caused from airplanes can be harmful over long periods of time (2007 Annual Report).

Commercial airline companies would more than likely jump at the opportunity to buy aircrafts

that do not use expensive fossil fuels or rely on petroleum to operate. If Boeing is able to

engineer an alternative energy, that is cheaper in respects to current aircraft fuel, they can gain an

advantage over their competitors.

Whether it is to implement fuel-efficient aircrafts, or alternate cheaper fuels, Boeing should

focus on these two strategies. If Boeing can strategically market newer improved fuel friendly

aircrafts, Boeing can easily gain market share over Airbus. Even if the cost of researching and

developing new fuel-efficient airplanes is high, it could be worthwhile in the long run, both for

the airline industry and for the environment. With the constant increases in the costs of energy,

the future of the airline industry is dependent on energy efficient aircrafts. Furthermore, it also

signifies Boeing's commitment to improving the environment and in reducing global warming.
 B o e i n g | 30

Currently Boeing has already begun researching into possible alternative fuels for

aircrafts, and has already begun researching bio-fuel as a possible solution (2007 Annual

Report). If Boeing is able to research and develop an alternative fuel for its aircrafts; one that is

cheaper than the costs of petroleum around the world, Boeing can win over most of the

commercial airline industries with aircrafts that take cheaper fuel. In doing so, they would be

able to capitalize on first-mover advantages over airbus, being the first aircraft manufacturer that

is able to produce aircrafts not reliant on fossil fuels, and that will be environmentally friendly.

Not only would Boeing be the only manufacturer to offer a unique aircraft, it will also build on

their already strong reputation of highly advanced aircrafts. Boeing would also be able to build

stronger brand equity in designing new alternative energy aircrafts that could bring Boeing the

larger end of its competitor’s market share.

Another strategic recommendation would be not only to promote the idea of point-to-

point travel, but also to support the strategy of Airbus, promoting hub-to-hub transportation. If

Boeing is able to implement better airplanes for both forms of travel, whether its large aircrafts

between major airports, or flying smaller airplanes between smaller airports. If Boeing is able to

cater to both concepts of travel, they can take over both Airbus’ strategy and their own. If

Boeing is able to increase productivity and their product lines to meet a higher percent of the

airline industry needs, whether its for smaller scale airports or large scale airports, it can increase

Boeing's revenues significantly.

Most importantly, if Boeing could successfully implement these strategies, Boeing could

most definitely maintain their competitive advantages over their competitors such as Airbus,

Northrup, and Lockheed Martin. Furthermore, they would also gain by becoming the marketer

leader with brand equity and a social responsibility. Essentially, they would be able to change the
 B o e i n g | 31

whole airline industry and the way passengers and cargo travel via air bound, by making it more

affordable and cost effective. If successful, Boeing would create and add value to their

company, US defense sector, the airline industry, passengers (by the effects of travel costs), and

the environment.
 B o e i n g | 32

Appendix 1

Source: Boeing Company 2007 Annual Report

 B o e i n g | 33

Appendix 2

Source: Boeing Company 2007 Annual Report

 B o e i n g | 34

Appendix 3

Source: Boeing Company 2007 Annual Report

 B o e i n g | 35

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