Talking Strategy

Developing Informed Perspectives for Successful Strategy
By Dr. Fariba Alamdari

American poet Theodore Roethke once wrote, “In a dark time, the eye begins to see.”  Certainly, we would all agree that the current global financial crisis can be described as “a dark time.”  But, as Roethke’s phrase suggests, this is also an opportunity to really see—to see and better understand the way the global economy works and how we can work more effectively within it.

This is especially true when we’re talking about business strategy.  As important as it is when times are good, sound strategy plays an even more critical role when times are difficult.  It is during such tumultuous times that we must sharpen our focus and truly understand what’s going on as we struggle to survive and surmount our problems.  And when we intensify our efforts during such dark times, we do indeed begin to see.

Research, information and analysis all play a critical role in the development of business strategy.  In discussing this role at Boeing, it’s useful to consider four questions:

•    What are the pillars of our strategy?
•    What kind of information do we collect and analyze in formulating strategy at Boeing

Commercial Airplanes?
•    How does this information specifically influence our strategy?
•    What are some of the challenges encountered in developing strategy for BCA?

Every company wants to be as successful as possible.  But as we all know, while there is always an element of chance and luck involved, success is not an accident.  It is the logical result of a thoughtful, planned approach to the business.  A well-conceived and properly executed strategy is an essential core element in this approach.

A business strategy can be based on many different things.  But an effective business strategy begins with information and understanding.  This information and understanding comes from comprehensive research, study and analysis of several factors, including:

•    Well informed perspective of business environment
•    Detailed customer knowledge and focus
•    Market-driving products and services
•    A skilled and motivated team

To more precisely explain what “developing an informed perspective for a successful strategy” means, let’s turn to that second question:   What kind of information do we collect and analyze in formulating strategy at Boeing Commercial Airplanes?

One major area of focus is the business environment.  We have identified many near-term challenges in this environment.  Some of the key challenges we are carefully considering right now as we continue to develop and refine our business strategy include:

•    Recessionary world economy
•    Financial market crisis
•    Volatile oil prices
•    Traffic growth slowing
•    Environmental pressures
•    Infrastructure congestion

Leveraging Strengths
The world economy’s expansion has lost most of its momentum since the second quarter while most of the weakness is concentrated in advanced economies of United States, European Union and Japan.  Emerging markets are slow as well as commodity prices fall and exports slow. Moreover, the global economy will continue to face major headwinds from the advanced economies’ spreading housing crisis and credit squeeze for at least the next 12 months as financial institutions continue their de-leveraging by tightening lending standards and reducing assets. World GDP has decelerated sharply over the past 12 months, from a robust annualized growth rate of 4.3% in the third quarter of 2007 to only 0.9% in the third quarter of 2008—sharply below the global economy’s long-term annual trend rate of 3.4%.

International trade, which has been a key supporting pillar for the global economy in general and raw-material exporting economies and countries with undervalued currencies in particular, can no longer be counted upon to hold up world growth. 2009 could see trade contract.

There is considerable stress on the global financial system.  It is in its greatest crisis since the 1930s, causing bank failures, “shot gun marriages” and nationalizations.  Confidence has evaporated, leading to a flight to liquidity and safety.  Inter-bank and corporate liquidity has been curtailed, with credit spreads sharply higher.  There have also been sharp worldwide equity market corrections and sharp exchange rate adjustments.

Both Europe and the U.S. are now attempting a more systemic approach in the de-leveraging of the financial system.  These efforts have met with some success but still have a long way to go.  Significant uncertainty remains in financial markets due to economic recession and fears of additional insolvencies, and further actions may be necessary.

The increasing likelihood of a prolonged global economic downturn continues to dominate market perceptions, putting downward pressure on oil prices. The condition of the global economy and production decisions by members of the Organization of Petroleum Exporting Countries (OPEC) are expected to remain the crucial factors driving world oil prices in the near-term. The EIA projects oil to average $100 per barrel in 2008, and $51 per barrel in 2009. Although the recent retreat of oil and other commodities prices is providing a relief for both consumers and businesses, price levels are likely to return to historically elevated levels when global growth resumes.

Collectively, these various factors make up the business environment in which Boeing competes.  Based on a thorough understanding of these and other factors, the company formulates a strategy or set of strategies to guide decisions in many areas, including:

•    Actions on existing products and development of future products
•    Customer relationships
•    Supplier relationships and processes
•    Business and manufacturing processes
•    Expertise, talent and skills needed
•    Creating a company culture and environment that will attract the right people and support the goals and objectives of the company.

Besides understanding the business environment, we must also maintain detailed customer knowledge and focus.  Among the areas we study is airline profitability.  IATA forecasts industry losses in both 2008 and 2009.  Due to the weakening economy, air traffic and revenue forecasts have been revised down.  Larger losses are forecast in most regions, including Europe and Asia-Pacific in 2009, while US airlines are forecast to make small profit due to very substantial capacity and cost cutting measures, and lower fuel hedging positions.

This means that for our customers, capacity growth is slowing because of traffic and revenue uncertainty.  Increased airline collaboration is also likely to lead to near-term reduced capacity demand (but a more robust industry in the long-term).  Meanwhile, our customers cannot afford to lose focus on the expectations of their passengers.

We also spend considerable time researching and understanding environmental issues.  Obviously, global concern and momentum about the need to address climate change and other environmental threats is growing.  Boeing is taking the lead in working toward a more environmentally progressive industry by holding product performance to stated commitments.  Customers are validating our leadership by choosing our products and services.  Boeing also has the active support of key stakeholders in these efforts.  Ultimately, Boeing favors adoption of preferred global solutions.

Changing Gears
The global economy, financial system challenges, fuel prices, profitability, our customers and the environment are just some of the major areas of focus for us right now.  And as we focus on these areas and assess what is happening, our product strategy both reflects and is validated by these significant challenges.  That brings me to the third question:  How does this information specifically influence our strategy?

We know we should work with our customers to help them reduce fuel consumption, manage their life cycle costs, and reduce their environmental footprint at and around airports and up in the sky.  Airlines must also, of course, successfully serve passenger preferences.

Given these preferences and the challenges and constraints of the business environment, the product strategy we’ve developed focuses on certain key requirements.  We recognize the critical importance of designing and building fuel efficient airplanes, with the long range, speed and reliability airlines need.  We also offer complete market coverage with the operational commonality to reduce costs and improve efficiency.  Of course, we know that our airplanes and service solutions must be environmentally progressive.  Our products must give airlines low operating costs, including standardization to further reduce costs and simplify fleet decisions and operations.  An optimized passenger experience is more important than ever.  And we recognize that we must continue to invest in the technologies and innovations that alleviate constraints to growth and profitability.

Environmental leadership is another area where our strategy, based on research and analysis, is playing out in how we approach the business.  Boeing is keenly focused on improving environmental performance of all our products throughout the product life cycle.  This includes setting specific, aggressive environmental goals, and making strong progress toward these goals.  As a technology leader, Boeing is striving to pioneer environmentally progressive products and services.  Each new generation of commercial airplane will be 15 percent more fuel-efficient than the airplane types they replace.

Our newest aircraft programs clearly illustrate and reflect our strategy as we strive to support our customers’ needs.  The 787 Dreamliner features 20 percent better fuel efficiency, a completely redefined passenger experience, and significant reductions in CO2 and noise.  And by serving the passenger preference for point-to-point travel, Boeing airplanes support the most efficient way to travel, further reducing environmental impact.

Finally, Boeing is orchestrating significant industry cooperation to improve aviation’s environmental profile by exploring alternative fuels, improving air traffic management, and leading joint industry commitments to work toward carbon-neutral growth and the aspiration of a carbon-free future.  Boeing also actively participates in the Aircraft Fleet Recycling Association, the first aircraft dismantling and recycling association in the world.  We continue to pursue new ways to improve the environmental performance of current fleets

Both our product development decisions and our environmental initiatives illustrate how extensive research, study and analysis forms the basis for our strategy at Boeing.  Of course, strategy never goes perfectly according to plan.  This raises the fourth question mentioned at the outset:  What are some of the challenges encountered in developing strategy for BCA?

Production realities are certainly one consistent challenge to strategy development.  We have experienced program delays, for example, with the 787 due to the typical “growing pains” associated with both a new airplane and a new way of building it.  We also periodically face workforce disruptions, most recently the Boeing Machinists strike.

Unpredictable exogenous shocks can derail or change a business strategy.  Some recent examples that dramatically affected the commercial aviation industry include 9/11, SARS, war, hurricanes/tsunamis, and severe economic cycles.

Our strategy is also strongly affected by transcendent industry issues.  Commercial aviation collectively must address major infrastructure issues and plan for expected growth.  These challenges are urgent given the current industry-wide problems of deficient Air Traffic Management, constrained system capacity, and airport congestion.

As mentioned, many of our customers are currently plagued by a lack of profitability.  Even when product and business strategies are theoretically sound, airlines are not always in a position to make the decisions they would otherwise make to stay competitive.

Finally, there are profound people issues that can affect the development and pursuit of strategy.  Effective execution of strategy requires having the right people in the right positions. In our teams we strive to ensure diversity of thought, nationality and gender.

These are just a handful of the challenges that we encounter as we work to develop a sound, information-based strategy at Boeing.  And while such challenges are often difficult and frustrating, the careful development of strategy remains a worthwhile endeavor.  In our business—in any business—there is no substitute for an informed, thoughtfully reasoned perspective in the development of an effective strategy.  And an effective strategy is the key to a successful business.

German philosopher and poet Friedrich Nietzsche once said “The future influences the present just as much as the past.”  In part, these words capture what we’re striving to accomplish in developing informed strategies.  If we can accurately assess what’s likely to happen tomorrow, we are in a better position to develop good strategy today.  The future influences the present.  And by developing an informed perspective for strategy, we are in a position to add a corollary to Nietzche’s statement—if we are disciplined and thoughtful in our study of the present, we are better able to influence the future.

About the Author
Dr. Fariba Almadari is the Market and Value Analysis Group Boeing Commercial Airplanes and participated at the MAP Convention which recently took place in Karachi, Pakistan.