Boeing Case Analysis

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Boeing Case Analysis

On December 1996, the Boeing Company purchased McDonnell Douglas for a premium of 21% over the price of its stock. This move gave Boeing the opportunity to increase its value by transferring its knowledge across business units, both commercial and defense aircraft. But in the two years after the merger, Boeing’s stock lost one third of its value due to increased inefficiencies and costs associated with the merger. Would this merger really add value to Boeing or would the costs outweigh the benefits gained.

The Aerospace Industry

Commercial Aircraft

The commercial aircraft industry had experienced a significant change during the deregulation of domestic airlines in 1978. The deregulation resulted in an increase in air travel, intense airfare competition among carriers, the entry of low-cost and low-capacity airlines. This increased competition shifted the focus of aircraft manufacturing from performance to low cost and from service to price.

Other significant characteristics of the commercial aircraft industry are:

· High barriers to entry: These were due to the very high and increasing costs of

product development, the need to establish long learning curves and achieve

economies of scale, no guarantee that the company would ever break even. This

meant that a company had to wait for at least a decade to reach break-even

point, and hope that the technology would not be obsolete by that time.

Economic failure was the norm instead of the exception in the aircraft industry.

· Deep cyclical movements between booms and busts

· Subcontracting: Grown in importance as aircraft components became more and more

complex. This was seen as way of sharing the risk associated with a project,

where the most efficient subcontractors would win bids to provide part of the

assembly to a larger contractor.

· Risk taking is rewarded: Although very large investments had to be made to

develop unproven technologies, these were rewarded by capturing market share

quickly and becoming the most profitable aircraft models.

· Production around families of planes: To reduce manufacturing costs and increase

an aircraft’s future lifespan with affordable fuselage changes.

· Product Development: Had been the preferred growt...

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...nsiderable investments by the subcontractor into specialized assets.

2) Increase R&D spending to regain technological leadership. Although Boeing commercial aircraft group will benefit from R&D spent in the defense group, it should at least match its pre-merger commitments to R&D because regaining technological leadership is more expensive than maintaining it.

3) Embark on new, riskier projects that will revolutionize the commercial aircraft industry, such as its aborted supersonic commercial jet. Besides sparking new demand and creating a new market, this project would also be a competitive weapon against Airbus’s entry into the jumbo jet market.

4) Although Boeing’s next CEO should be someone who has been created within the organization, the company should still strive to have more directors from the outside. The CEO should be and engineer who has grown to best understand the industry. Directors brought in from other companies and industries will give Boeing the proper business discipline by bringing in new ideas and break groupthink.

Bibliography:

from Textbook "strategic management an integrated approach" Charles W. Hill, Garreth R. Jones. fifth edition

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