Boeing |1

Boeing Strategic Analysis Report

Professor Jiang Bus 189 Matt Fong Karolyn Vong Kenneth Wong Vivian Li Jae Woo Chae Joseph Eslao

Boeing |2 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 fuelefficient (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.

Boeing |3 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 Boeings 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, Boeings 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. Boeings 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 Boeings 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 worlds 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.

Boeing |4 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.

Boeing |5 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 Maroneys Curtiss-type hydroplane. They both concluded that they could build a better airplane. Being told that there was a definite future in

Boeing |6 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 companys 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 Boeings 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

Boeing |7 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 Airbuss 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

Boeing |8 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 worlds 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 worlds 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.

Boeing |9 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. Boeings mission statement also states that one of its core competencies lies in detailed customer knowledge and focus. Only the customers know whats 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 Airbuss A-320 had superior technology, which ended up stealing many of Boeings 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 companys 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.

B o e i n g | 10 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 customers supply and demand. In order to advance their position, Boeing needs to rethink their strategy and work with their suppliers. Boeings 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.

B o e i n g | 11 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 Boeings 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

B o e i n g | 12 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 Boeings 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 Airbuss 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 governments assistance, both companies wouldnt 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. Boeings 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 companys 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 Boeings competitive advantages is its core competencies, which help develop Boeings resources into strong competitive advantages in the airline manufacturing industry. Boeing also has operational strength internally, which allow them to

B o e i n g | 13 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 Boeings 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 Boeings 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 worlds largest space and communications

B o e i n g | 14 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. Boeings 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 companys 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

B o e i n g | 15 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. Porters Five Forces Model of Competition Porters 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.

B o e i n g | 16 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 Boeings lock on the commercial jet market.

B o e i n g | 17 How can they overcome the barriers of technology and capital requirements described in the threat of new entrance? The people leading Chinas 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 Boeings 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. Chinas 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

B o e i n g | 18 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 Boeings 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

B o e i n g | 19 schedule. In addition, in 2007, the future of commercial aviation Boeings 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 couldnt 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 aircrafts 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 Boeings 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

B o e i n g | 20 2004). Furthermore, the control systems of the airplanes produced by the two major companies are different. If an airline that has been using Boeings 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 Porters 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 Boeings 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 Boeings highly competitive environment, the companys ability and understanding of their value chain model is crucial to the companys 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 Boeings 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, Boeings ability to provide a onestop 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 Boeings 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. Boeings 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 Boeings Alteon Aviation Training system, which is designed to enhance customer training of the Boeings aircrafts. The Alteon system offers advanced computer-based training facilities and full-flight simulators to its customers crew training. Again, this is a valuable resource Boeing provides to its customers (Commercial Aviation ServicesBoeing.com). Another value added system is Boeings 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 Boeings 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 ServicesBoeing.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 Boeings regional distribution center near the airline's point of use

B o e i n g | 24 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 Boeings 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 Boeings commercial airplanes business unit. This increase comes from higher commercial airplane orders and higher commercial aviation support activities. However, Boeings 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 managements 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 Boeings financial management has been greatly impacted, which are reflected in the debt equity ratio. In 2006, the companys 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 companys debt to asset ratio has also reduced .847 from .909. Furthermore, a huge part of the Boeings growth is also attributed to Boeings 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, Boeings 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 Boeings new 787 fuel-efficient commercial airplanes, which are expected to begin delivery in early 2009. Also triggering strong demand for Boeings 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, Boeings 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). Boeings 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 todays 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 competitors market share. Another strategic recommendation would be not only to promote the idea of point-topoint 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 Bibliography "787 Dream Liner POWER ON." Boeing.com 1 July 2008 http://www.boeing.com/ 2007Annual Report. Boeing.com. 15 Jun 2008 <http://www.envisionreports.com/boeing/2008/15fe08006m/index.html?voting=true> "Boeing's executive faults some 787 suppliers." Seattlepi.com http://seattlepi.nwsource.com/business/337793_boeing02.html Commercial Aviation Services:Lifecycle Solutions and Support . Boeing.com 15 Jun 2008<http://www.boeing.com/commercial/aviationservices/index.html> "Core Competencies". Boeing.com. Jun 2008 <http://www.boeing.com/aboutus/culture/index.html> Edward Cone. "Boeing: New Jet, New Way of Doing Business." CIO Insight. 6 Mar. 2006. Ziff Davis Enterprise Holdings Inc. 1 July 2008 <http://www.cioinsight.com/c/a/CaseStudies/Boeing-New-Jet-New-Way-of-Doing-Business/1/>. "Global strategy". Businessweek.com. 30 Jan 2006 <http://www.businessweek.com/magazine/content/06_05/b3969417.htm> Hill, C.W.L., Jones, G.R., Galvin, P. (2004), Strategic Management: An Integrated Approach, John Wiley, Sydney Hit, Ireland,Hoskission. Strategic Management: Competitiveness and Globalization:8th Ed. South-Western: 2009 "History." Boeing.com 1 July 2008 http://www.boeing.com/. Mendes, Pablo, 2002. Cabotage in Air transport Regulation. Martinus Nijhoff Publishers, Spain Parker, Tim, 2007. Technology today in Tourism. Journal of Adventure Education and Outdoor Leadership 12 (1): 8-23. Porter, Michael. 1980. Competitive Strategy: Techniques for Analyzing Industries and Competitor. The Free Press, New York Shaw, Stephen, 2004. Airline Marketing Management. 5th edition, Ashgate Publishing Ltd. Ohio.