In 1997, Boeing acquired McDonnell Douglas, including its CEO Harry Stonecipher who became COO of Boeing. In 2003, Stonecipher became CEO of Boeing and, as reported in Fortune Magazine recently, quickly set an aggressive goal of reaching an after-tax profit margin of 7%, a mark Boeing had not hit since the 1970.
When Stonecipher retired in 2005, his replacement Jim McNerney followed the “Profit First” plan religiously, and when he retired in 2015, the new CEO, Dennis Muilenburg did as well. Net, since 2003, the company has lived with the Stonecipher approach, as characterized by a famous quote from him: “When people say I changed the culture of Boeing, that was the intent, so that it’s run like a business rather than a great engineering company.”
So…what have the results been over that roughly 20 year period?
Profit – The Singular Focus –In 2005, revenue was $54 billion, R&D spending was $2.5 billion, and the profit margin was 4.4%. In 2018, revenue was $101 billion, R&D spending was $2.2 billion, and the profit margin was 10.1%. No doubt the shareholders were happy, but the following shows the impact of the severe cost squeeze.
The 787 Fiasco - Boeing’s 787 Dreamliner program, which began in 2003, saw management push to save money by outsourcing development of critical components to suppliers, many of which proved not up to the task, leading to repeated breakdowns and delays. When the jet finally flew in 2011, it was three years late and $25 billion over budget. In 2013, after the plane was in service, electrical fires broke out in batteries on two 787’s, prompting regulators to ground the plane for a month.
The Mid-Market Plane Fiasco – Ten years ago it became obvious to Boeing and Airbus that a mid-market plane (a single aisle plane carrying about 250 people about 4,500 miles) would be the key aviation need over the next 25 years. This project was annually delayed by Boeing due to the 787 mess and desire for higher profit margins, and then was put aside again in 2016 in a very public manner when the new goal was announced to move profit margins from the 10% level to the mid-teens. Meanwhile, Airbus did the opposite and developed the plane and it is available now: the Airbus 321XLR and 321LR.
The 737Max Fiasco – I don’t need to go into detail here. Readers are hit with the latest bad Max news daily. The killer was to adamantly demand that the airlines be told that no costly simulator training would be required, even though clearly Boeing didn’t do adequate testing of the plane’s big changes.
Net, an engineering giant of the past has been brought to its knees by shortsighted leaders who sought terrific financial gains to the exclusion of all else. The above Stonecipher quote says it all. Stepping back, we need to always remember the customer and the soundness of the product are always the first priorities. You can get away with ignoring these rules for a while, but eventually you will pay for it!