Boeing Case Analysis Essay Research Paper On

Boeing Case Analysis Essay, Research Paper

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 growth strategy by manufacturing companies. Developing a new family of planes was necessary to secure future market share.

. General Agreement on Tariffs and Trade: Limited the amount of government subsidies available to both Boeing and Airbus.

. Airbus Industrie: A consortium of four countries pooling their resources together. Boeing/McDD and Airbus created a duopoly in the industry, characterized by intense competition to increase or protect market share.

Defense and Space

The US government was by far the largest single customer for non-commercial aerospace products and services. This meant that all sales were strongly determined by political considerations. Foreign military sales were determined by foreign policy, while domestic sales were determined by Congress. debates on the budget. This created a favorable environment because there were neither excessive risks nor volatile changes in market demand. Contracts with the military spanned many years and were paid under a .cost reimbursement. plan starting in the early 1990.s.

On the other hand, the shrinking defense budget led to large-scale mergers and acquisitions among defense contractors and a growing consolidation in the industry. This left only four remaining defense conglomerates, Lockheed Martin, Boeing-McDD, Raytheon and Northrop Grumman. The defense budget stabilized in 1997 at about $250 billion and was expected to increase moderately between 1998 and 2003.

Because contracts for the military and NASA were extremely technically demanding in many fields, all manufacturers were intertwined in a web of subcontracting. Although a single contractor would win a bid to assemble and deliver the final product, a majority of the components would be subcontracted to competitors. A subcontractor could also be the technological leader in the assembly of any one component and thus manufacture a large portion of the total without winning the primary contract.

Post-Merger Internal Analysis

With the acquisition of McDonnell Douglas, Boeing became the world.s largest producer of military and commercial aircraft and the second largest supplier to the US Department of Defense. This was a very related diversification strategy, since both industries have many engineering, technology and manufacturing commonalities. This merger had two major benefits;

1) Knowledge transfer: between military and commercial divisions. Experience in the commercial division would give Boeing the cost discipline necessary to win government contracts, while technical knowledge in military aircraft could be transferred over to develop better commercial aircraft. This knowledge transfer had historically played a key role in giving Boeing technological leadership as it employed its knowledge from the defense industry into developing jet commercial aircraft, and achieving market leadership. Even the competition acknowledged knowledge transfer to be an enormous advantage.

2) Risk Pooling: The merger was also supposed to lessen the effects of the deep business

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