Lincoln University Graduate School of Business Marketing Management Team Project Case 3: Boeing Company Team – 8 The five elements group: Derek Dellape : 7551 Synopsis As the largest aerospace company in the world, the Boeing Company employees more than 153,000 people in some 67 countries. The great dominance of Boeing is due to its 1997 merger with McDonnell Douglas Corporation, an aerospace manufacturer, and its 1996 purchase of the defense and space units of Rockwell International Corporation, an aerospace contractor.
The corporation is the world’s number one maker of commercial jetliners and military aircraft with more than 9,000 commercial planes in service worldwide, including the 717 through 777 families of jets and the MD-80, MD-90, and MD-11. In the defense sector, the company makes military aircraft, including fighter, transport, and attack aircraft; helicopters; and missiles. Moreover, Boeing is the nation’s top NASA contractor and the leader of the U. S. industry team for the International Space Station and directly involved in commercial space projects such as satellite networks.
History The Boeing Company was founded by William Edward Boeing and his colleague George Conrad Westervelt in 1916, in Seattle, Washington. The first plane built by Boeing and Westervelt was a “B & W” seaplane and it was sold to the government of New Zealand which employed the plane for mail delivery and pilot training. The enterprise was expanded due to opportunities in the airmail businesses which lead to development of an extremely versatile and popular airplane called the Model 40.
This airplane could carry 1,000 pounds of mail and a complete flight crew, and still have room enough for freight or passengers. In the years leading up to World War II Boeing led the way in developing single-wing airplanes. They were constructed completely of metal to make them stronger and faster, more efficient aerodynamic designs were emphasized and finally, directional radios were installed which enabled better navigation and nigh flying. At this point, Boeing had established itself as the leading manufacturer of airplanes.
During the 1950’s and 1960’s, Boeing was allowed to use the government-owned B-52 construction facilities for the development of a new civilian/military jet. This new jet, the B-707, first rolled off the assembly line in 1957. Boeing enjoyed a large degree of success and profitability with the 707. The company devoted its resources to the development of a number of other passenger jet models, including the 720 (a modified 707) and the 727 introduced in 1964, which was able to carry 143 passengers. During this time the company also recognized a demand for a smaller 100 passenger jetliner for shorter routes.
As a result, Boeing developed the 737 model which was considered to be a very technological advanced jetliner. Meanwhile, Boeing expanded its involvement in the defense market through the 1960 acquisition of Philadelphia-based Vertol Aircraft Corporation, a maker of military helicopters. During the Vietnam War, Boeing Chinook and Sea Knight helicopters were heavily utilized by American forces. The 1960’s also saw Boeing active in the NASA contracting sector. As the Cold War continued, Boeing was selected to develop the Minuteman intercontinental ballistic missile system.
In addition, Boeing was heavily involved in NASA’s Apollo project of the 1960’s, beginning with its production of several Lunar Orbiters as well as the Lunar Roving Vehicle, which was used to explore the moon in the early 1970’s. During the 1970’s, Boeing tried to diversity its business by entering the metro-rail business, manufacturing mass transit systems for Boston, San Francisco, and Morgantown, West Virginia. The systems were modern, computerized, and efficient but prone to frequent breakdowns. After fulfilling its obligation to rectify the systems (at great cost), Boeing decided to discontinue its ground transport business.
As the dominant aircraft manufacture for over three decades, Boeing began to experience a decline in its earnings and stock price during the middle of 1980’s even though it remained profitable. Unfortunately, Boeing jets were involved in four fatal air accidents from December 1988 to March 1989, and the company missed its first delivery deadline in two decades when the 747-400 experienced production delays. These internal problems were exacerbated by increased competition from Airbus, which was heavily subsidized by a consortium of European companies and governments.
Furthermore, worldwide orders of all aircraft by the airliners declined from 1,662 in 1989 to 439 in 1991. Fortunately, in 1993 NASA selected Boeing as the prime contractor for the International Space Station, which was called the largest international science and technology endeavor ever undertaken. Boeing was also becoming increasingly involved in commercial space projects and in December 1995 ten commercial space satellites were produced and launched from a floating platform at sea.
In the middle of 1990’s, Boeing began its plan of acquisitions and in 1996 it paid $3. 2 billion for the aerospace and defense holdings of Rockwell International which was responsible for the Space shuttle and International Space Station programs, as well as activities in launch systems, rocket engines, missiles, satellites and military airplanes. Furthermore, in 1997 Boeing completed a $14 billion acquisition of McDonnell Douglas which was the world’s number three maker of commercial aircraft.
The acquisition increased Boeing’s share of the world market for large commercial jetliners to more than 60 percent and left it with just one major competitor in that sector, the European Airbus which held about one third of the world market. Unfortunately, 1997 turned disastrous for Boeing for reasons wholly unrelated to its acquisition spree. Attempting to take advantage of the upswing in airplane orders, which was in part caused by the aging of the airliners’ fleets, Boeing committed to doubling its production over an 18 month period.
The eagerness of Boeing to increase its revenue lead to production delays, including the wholesale shutdown of some production units and reducing its workforce from 238,000 at year end 1997 to between 185,000 and 195,000 by the end of 2000. If the delays and reduction of workforce weren’t bad enough for Boeing enterprise, the contract awarded to Boeing by the Air force to undertake the Evolved Expandable Launch Vehicle program (EELV) was canceled due to allegations of cheating to win the Air force contract. Today Boeing is undertaking a major project, Boeing 787 Dreamliner which will provide a super-efficient airplane apable of flying long ranges with less fuel. However, Walter James McNerney, the CEO of Boeing Corporation, will have to deal with many issues such as competition, value chain and ethics in order to dominate the aircraft industry in next future. Analysis Competitive Rivalry between Existing Players: The commercial aircraft business is very important for Boeing because it covers more than 65% of its total revenue. In this market, losing market share can cause big impact on the performance of Boeing and its future development.
The competition from Airbus is considered extreme and on the scale between 1 and 10, it can be ranked as 9. The level of competition between the two aircraft manufactures is very clear as it is shown in Figure 1. Figure 1. Graph of market share (%), gross orders between Airbus and Boeing from 1994 to 2006. The level of rivalry between Airbus and Boeing shown in Fig. 1 depicts Boeing as the market share leader from 1994 to 1998. However, Airbus took the market share from Boeing in 2001 and kept its position as the market share leader until 2004.
Even though the number of orders was more superior with Airbus in 2004, the total revenues of Boeing was still much higher than that of Airbus. While the revenue of Airbus in 2004 was $40 billion, Boeing had the revenue of $55 billion. This is due to the fact that Boeing gained profit from other activities such as military aerospace, defense, and space business. 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 1980’s.
Nevertheless, Airbus has gained ground and expanded its market share very successfully by making great efforts in doing market research and development of new products. While Airbus spent 5. 9 percent of its total revenue on research and development in 1999, Boeing only spent 2. 3 percent. Therefore, it means that Airbus is now a big threat to Boeing and may take over its market leader position soon if Boeing doesn’t take any serious action to protect itself. Threat of New Entrance: It is not easy for new companies to enter the market of manufacturing large ommercial 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 1990’s. Furthermore, aircraft manufactures 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 which enter the market must be prepared to wait for around 10 years before showing any profit even though there is no guarantee that they will become profitable.
For that reason, the threat of new entries is considered very low on the scale of 1 to 10, it is ranked as 1. Nevertheless, 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 airplanes. The plan is to have jets designed and built in China 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.
Since Boeing and Airbus have been outsourcing most of the technical and engineering jobs to China, barriers of technology requirement to enter the industry can be overcome by the Chinese. As a matter of 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. For that reason, China is now in advantageous position to build passenger aircraft due to its tremendous wealth, technological strength and a huge home market.
Therefore, once China starts manufacturing aircrafts, it could also become a significant player in the world of passenger plane market and take part of the market share away from Boeing and Airbus. Nevertheless, the Chinese ambition to enter the aircraft industry is not a short run threat to Boeing because it may take at least 15 years to China begin to develop its airplanes. Despite its goal of eventually challenging Boeing, the Chinese will have to produce large jets which are able to meet only a small part of domestic demand while Boeing will continue to claim a big chunk of the Chinese market.
Value Chain Analysis: For the past several years, Boeing has been grappling with problems in launching its latest major passenger airplane, the Boeing 787 Dreamliner at a cost of $178 million each. Airlines around the world preordered over 900 787 airplanes before they ever took a test flight based on its projected fuel efficiency, passenger comfort, low maintenance costs, flexibility, and other major design elements. However, the first test flights for the plane were delayed, largely because of supply chain issues.
Boeing subcontracted out the design and assembly of major components of the 787 to firms in Japan, Italy, China, and India but did not impose adequate coordination across these various suppliers. For that reason, subassemblies did not fit together properly, there were numerous quality and delivery issues, and countless other problems occurred. The biggest problem was that Boeing didn’t realize that integrating the supply chain and choosing the correct suppliers was much more difficult than it could have anticipated for.
In this case, Boeing outsourced the assembly of parts of the airplane to countries such as China and India where labor is cheaper so that it could reduce cost of operation. Unfortunately, outsourcing to foreign countries to save money can cause backlash from the media, current customers, as well as possible future customers. As a matter of fact, one risk Boeing is taking by outsourcing its supply chain is giving away technology to third parties such as foreign aerospace companies. For example, Chinese 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 as well as Airbus since they have plans to capitalize on the flourishing Asia-Pacific markets. Ethics at Boeing Over the years, Boeing is focused on a flood of scandals that have tarnished the company’s image. In July 2003, the Pentagon stripped Boeing of one million dollars in rocket launch business for possessing proprietary documents stolen from a competitor, Lockheed Martin. As a matter of fact, Boeing was suspended from doing business with the federal government for twenty months. In another incident, the department of defense reported that Boeing overcharged the U.
S. army by $13 million for parts opposed to a fair sale price of $10 million. Due to a lack of ethics, Boeing may lose credibility with its suppliers and customers who may think twice before signing a contract with Boeing. Moreover, Boeing lack of ethics is unfair to other companies as well as tax payers. Another ethic issue involving Boeing is that it has sacrificed American jobs for foreign government subsidies. In recent years, Boeing has sought subsidies from foreign governments and it has pushed its manufacturing overseas in order to obtain such subsidies.
For the 787 aircraft, Boeing reportedly secured a subsidy of almost $600 million dollars from the Italian government towards the manufacture of the rear fuselage of the airplane by the Italian firm, Alenia. Moreover, Boeing also reportedly obtained approximately $1. 5 billion in subsidies from the Japanese government for the same aircraft. In order to secure this Japanese subsidy, Boeing outsourced the manufactured of the wings and fuselage of the aircraft to the Japanese companies Fuji, Kawasaki and Mitsubishi.
Sadly, Boeing outsourced the sort of technology that had benefited from years of American taxpayer-funded research and development spending. As a matter of fact, Boeing lack of ethics can leave many hard working Americans without jobs. Conclusion The dominance of aircraft manufacturing business by Boeing is impressive, but Airbus and threat of new entrants could take part of the market share away from Boeing. For that reason, Boeing should spend more money in research and development so it could improve its airplanes with new technological advances.
In this market, technology is crucial because it can help differentiate one company from another; and therefore, the most advanced technological firm is more able to keep and gain more customers than its competitors. Even though technological advances are important factor that help distinguish one company from another, Boeing shouldn’t neglect the fact that supply chain is also very crucial to a company success. When Boeing outsourced its supply chain to China and India, it caused a delay on Boeing 787 Dreamliner production.
If a company wants to be the market leader, it shouldn’t outsource supply chain because it is sometimes difficult to contact with suppliers and verify quality of products being used to assemble the aircrafts, for example. In addition, Boeing shouldn’t outsource supply chain because it takes a risk of giving away technology to third parties such as foreign aerospace companies in China and India. If Boeing wants to keep its dominance of aircraft manufacturing business, it should be more ethical when doing business.
The lack of ethics by Boeing can cause a great harm to the image of the company; and worst of all, Boeing could lose credibility with its suppliers and customers who may think twice before signing a contract with it. The bottom line is that Boeing should have more consideration with its competitors as well as tax payers when doing business. Answers and Questions: 1) Discuss the nature of the market structure and demand for the Dreamliner. What are the applications of this for Boeing and customers?
A) The nature of the market structure for the Dreamliner is oligopolistic which means that the market or industry is dominated by a small number of sellers in this case aircraft manufactures. The oligopolistic market is comprised of a handful of competitors sheltered by significant barrier to entry. This means that firms are heavily restricted from entering or leaving the industry. For that reason, Boeing has the chance to take the market share away from Airbus since it has only one competitor and manufactures mid-size aircrafts capable of flying long ranges with high fuel efficiency.
Since the demand for Dreamliners is not used for personal or direct consumption but rather for its use in providing other goods and services, the demand for the Dreamliner is known as derived demand. The Airlines that purchase Boeing aircrafts want to comply with customer demand for more comfortable and luxury airplanes. Passengers will experience during their flights and great deal of comfort with higher cabin pressure and humidity which reduces common flying symptoms like headaches, dry mouth and fatigue.
At the same time, midsized wide-body airplanes will provide to airlines with unmatched fuel efficiency, resulting in exceptional environment performance while cutting costs with fuel consumption. If airlines are able to cut cost with fuel, consumers will be directly benefited with cheaper air fares. 2) What examples of the major types of buying situations of you see in this case? Discuss the implications of each in terms of marketing strategy. A) The major types of buying situations are: straight rebuy, modified rebuy and new-task buying.
In straight rebuy the buyer routinely reorders something without any modifications. The marketing strategy used in straight rebuy is based on getting high quality and low cost products, superior service, and prompt delivery from a partner seller. In fact, the buyer can save time with tedious paper work requirement since they have already ordered previously with the seller. In modified rebuy involves a business buying situation in which the buyer wants to modify product specifications, prices, terms, or suppliers.
The market strategy of modified rebuy allows buyers to look at alternative offerings within their established purchasing guidelines. In fact, they might take this step if their current supplier has let a rebuy situation deteriorate because of poor service or delivery performance. In new-task buying involves a business buying situation in which the buyer purchases a product or services for the first time. The strategy of new-task buying in marketing is to acquire goods or services by carefully considering alternatives offerings.
In fact, it is very important to a company entering a new field to search out potential suppliers, and evaluating proposals. 3) List the specific features of the Dreamliner. What customer benefits result from each? A) The Boeing 787 Dreamliner incorporates structural composite materials in the airframe instead of predominantly aluminum which offer customers a guaranteed reduction in maintenance costs. Moreover, the use of structural composites enhances fuel economy as well as travel range of the 787 Dreamliner.
This means that airlines will be able to save money with fuel so that consumers will pay less for air fares. Due to the use of composite technology, the Boeing 787 has a higher cabin pressure which helps customers have a better flight experience and reduce common flying symptoms such as headaches and fatigue. The cabin design incorporates increased legroom, and added rooms such as lounges which can benefit customers with a comfortable flying experience. In addition, the 787 Dreamliner also contains 19-inch electrochromic dimmable windows, which adds passenger comfort.
At last, the Dreamliner is environmental friendly because it is a low emission airplane. In this case, customers will benefit from an airplane which emits less carbon dioxide which can help keep the air cleaner. 4) Discuss the customer buying process for a Boeing airplane. In what major ways does this process differ from the buying process a passenger might go through in choosing an airplane? A) The process of buying an aircraft can be a complicated process due to the fact that a 787 Dreamliner can cost over 100 million dollars.
In order to buy an airplane, buyers must take in consideration costs and benefits which come with the purchase of the airplane such as long-term operating and maintenance costs. Moreover, customers will have to wait for years in order to receive their planes since the aircraft manufacturer may take years to produce them. The purchase of an airline ticket by a consumer may be classified in a few different ways. Customers traveling the same route regularly do not require them to spend a great deal of time or mental effort in arriving at the purchase decision.
On the other hand, leisure customers who travel occasionally, the purchase process would require considerably more time and effort. However, the decision of consumers to buy an airplane ticket has not as many factors to consider as in the case of an airline purchasing a 787 Dreamliner. In addition, the outcomes are more numerous and the stakes are much higher. 5) What marketing recommendations would you make to McNerney as he continues to try to resolve the problems with the 787 Dreamliner program?
A) The first problem that McNerney has to resolve with 787 Dreamliner program is improve ethics of the firm. If Boeing doesn’t have a good work and business ethic customer relationship can be compromised. As a matter of fact, Boeing could lose credibility with its suppliers and customers who may think twice before signing a contract with it. At last, McNerney should keep the supply chain in America because it is easier to contact with suppliers and verify the quality of products being used to assemble the 787 Dreamliner.