The Painful Story of Boeing

One of the greatest assets of any company is the trust of its clients. If your clients no longer trust your company, you will find it difficult to survive. The focus of this article is to highlight the business leaders’ role in managing the trust relationship between the company and its clients.

 

In an unprecedented move, Emirates Airlines president Tim Clark told the Financial Times this week that Boeing was in the “last chance saloon” after the recent Alaska Airlines incident in which a door plug blew off a Boeing plane mid-flight. He said Emirates would send its engineers to observe the production process of the company’s 777 plane, of which the airline has an outstanding order of 95 units.

 

Clark left no doubt as to the root cause of his action to oversee the Boeing production process: a lack of trust in Boeing’s management and processes. “This would not have been sanctioned in the old days,” he told the paper. “You know, we trusted these people implicitly to get it done.”

 

These are just the latest in a string of unfortunate and sometimes fatal incidents, including two deadly crashes involving Boeing 737 MAX planes, which have all served to undermine public confidence in Boeing.

 

This once-great company has recently been stumbling from crisis to crisis. But how did it get to this point? It started in 1997 when Boeing and McDonnell Douglas merged. Although Boeing was the senior partner, it was the McDonnell Douglas focus on the bottom line that started replacing the Boeing culture of engineering and quality. The result was that Boeing’s idealistic engineering team ended up being run by McDonnell Douglas hard-bitten veterans. These were accountants, financial controllers and other managers obsessed with cost savings and used to running things on a shoestring budget. They were also very sensitive to shareholder wealth.

 

Harry Stonecipher was the pre-merger CEO of McDonnell Douglas and then became the president and COO of the merged Boeing company.  In 2005 he resigned because he had had an affair with a subordinate. But he had totally altered Boeing from the proud engineering culture to a focus on the bottom line. Stonecipher was a Jack Welch acolyte who had earned his spurs at GE. Like Jack Welch, his style was to cut costs and fire people.

 

To replace Stonecipher, Boeing appointed another Jack Welch GE acolyte, Jim McNerney. McNerney was the CEO of 3M before joining Boeing. At 3M he had deployed the Jack Welch model of cutting costs, firing people and consequently succeeded in destroying the innovation culture of 3M. However, he did manage to increase the company’s stock price to ensure that upon his departure from 3M his equity was worth a small fortune.

 

At Boeing, McNerney duly implemented the Jack Welch cost cutting model, firing people and outsourcing production. He destroyed the proud heritage of engineering and design culture and replaced it with a bottom line focus.

 

In 2011, McNerney received a call from the CEO of American Airlines (AA) to inform him that AA was about to switch a decades long Boeing loyalty to competitor Airbus. McNerney hastily decided to extend the life of the 737. But, the Boeing under his stewardship no longer had the commitment to an engineering and quality approach. The outcome was the death of 346 people in two horrible crashes and Boeing was on the ropes.

 

McNerney retired in 2015 and didn’t stick around to witness the fallout from his decision to extend the 737 life. In true Jack Welch style, Boeing stock had surged in the final years of his tenure, thanks largely to the massive buyback and dividend campaign he had orchestrated. Upon retirement, McNerney’s shares were worth about $250m.

 

The practice of reliance on partners and subcontractors, implemented by the three ex-GE leaders,  resulted in the shortfall of skilled personnel and hands-on experience and thus the competence in the actual design and building of aircraft was lost.

 

Furthermore,  Boeing underestimated what it took to scale up and run a global supply chain partner network, delivering the hundreds of thousands of parts and subassemblies each plane needed. Working with foreign partners and design centres presented unique and unexpected challenges.

 

Dennis Muilenberg was appointed as  CEO of Boeing in June 2015. He was a seasoned Boeing engineer. In December 2019, Boeing announced that Muilenburg resigned as the CEO and board director, in the aftermath of the two crashes of 737 MAX aircraft. Although he forfeited stock worth $14.6m, Muilenburg was contractually entitled to receive $62.2m in stock and pension awards.

 

Muilenburg was replaced by another Jack Welch-era GE veteran Dave Calhoun.

 

“Now is not the time for financial performance forecasts,” he said in a letter to employees last week, reported by Barron’s. “We will simply focus on every next aeroplane while doing everything possible to support our customers…and ensure the highest standard of safety and quality in all that we do.”

 

Calhoun, who has co-written a book on business, “How Companies Win,” says being candid is part of being a leader, an approach which many critics say was absent from Boeing’s initially guarded approach to concerns about the 737 MAX.

 

Now, Calhoun must repair frayed relations with regulators, continue to manage a cash squeeze from the crisis and bring to market the new 777X jet at a time of tough regulatory scrutiny.

 

Good luck Dave. The whole world will be watching your performance!

 

 

Sources:         

The man who broke capitalism. David Gelles

Forbes web pages

Leader.co.za newsletter, February 2024

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