Analyzing The Boeing Company Essay

Introduction:

Boeing Company is the US Aerospace Company incorporated in 1916, headquartered in Chicago working with six different segments of Commercial Airplanes, Aircraft and Weapon Systems, Network Systems, Support Systems, Launch and Orbital Systems 1, and Boeing Capital Corporation 2. The relevant segments produce relevant aircraft and provide aviation support, aircraft modifications, spares, training, maintenance documents, research, development of improved processes and the creation of new products.

Research Methodology:

There are two broad areas that will be covered in the assessment. The First segment of this Research proposal will be examined to provide a theoretical basis for the study and the Second segment of this proposal should involve the application of Boeing Company as to gain a more accurate measure along with data presentation. The Research Questions should be analyzed are as –

1)         a) What factors must Boeing consider when making the decision to produce a new  family of airplanes like the 777?

b) What would be the expected cash inflows, and what would be the expected cash outflows and to categorize the outflows into two types: one-time outflows and annual
1              It is the launch exploration, and satellite products and services sector of Boeing Company

2              It provides financing solutions for the space and defense markets.

 Outflows.

2.         a)  The costs of developing a new family of airplanes are enormous. Why would      Boeing argue to incur these costs when it is able to continue producing older   model planes like the 747 and the 767?

b) Framing this discussion in terms of a capital budgeting decision evaluating the opportunities in terms of cash inflows and cash outflows.

Analysis:

1-a)

The Boeing Ethics and Business Conduct Office has revised. Boeing Company’s ethics procedures and practices throughout Boeing and as a result of comparing the best practices of their heritage companies, the ethics policy and its related procedures have been revised. The recent Ethical Business Conduct Guidelines 3  deliberate the decision making to produce a new family of airplanes like the 777, are as follows-

Leadership
Boeing Company consider that they are the world- class leader in every aspect of their business in developing their team leadership skills at every level; in their management presentation; in the way Boeing Company design, build, and support their products; and in their financial results.
3   Mentioned in Boeing Company’s Corporate Governance

Integrity
Boeing Company will always take the high road by practicing the highest ethical standards, and by honoring their commitments. It will take personal responsibility for their actions, and treat everyone fairly and with trust and respect 4.

Quality
Boeing Company will strive for continuous quality improvement in all that Boeing Company do, so that Boeing Company will rank among the world’s premier industrial firms in customer, employee and community satisfaction 5.

Customer Satisfaction
Satisfied customers are essential to their success. Boeing Company would achieve total customer satisfaction by understanding what the customer requires and delivering it flawlessly.

Technology
As Technology driven business unit requirements, it looks for the technology programs that can meet multiple business needs. Technology Planning and Acquisition identifies what capabilities are being sought, Boeing’s senior technology executives allocate resources based on the value of the technology — that is, how much more in revenues, cost savings or profits this innovation might generate — and on the ability of multiple business units to transition this technology.
4              Mission 2005

5              Mission 2005

Cost Derivatives:

The structure of the commercial aircraft industry resembled that of pyramid with a few airframe integrators at the top, dozens of primary subcontractors at the middle, and thousands of secondary subcontractors at the base. Subcontracting of aircraft production had grown in importance as aircraft components became more and more complex. In the 1930s, subcontracting made up less than 10 percent of the industry’s operation; in the 1950s 30-40 percent; and by the 1970s subcontractors fabricated between 60 and 70 percent of the value of American airframes. As aircraft production became increasingly more risky, subcontracting became associated with risk sharing. Over time, aircraft manufactures extended subcontracting throughout the world, partly as a result of the demand made by foreign customers and their governments. As overseas carriers brought aircraft, their governments required airframe integrator to share design work and production with overseas firms.

Risk Factors

Another entry barrier was the need to establish learning curve and achieve economies of scale. To break even on an entirely new aircraft, it took sales of 400 to 500 and a minimum 50 sales per year. Not only it was necessary it for a company to wait up to 10 years in order top reach the break even point, As one group of industry analyst concluded, ‘Economic failure is the norm in the civil aircraft business.’

Family Concept 7 :

Needs to control the costs has given rise to the “Family Concept” in aircraft design. Producing
7              Hitt M. A. Ireland R.D. ; Hoskisson R. E. ,  “Strategic Management Competitiveness and Globalization Page c-152

families of planes rather than single models, Boeing Company manufactures built flexibility into the design of aircraft so that fuselage could be stretched in the future to add more passengers seat and cabin. Pioneered by Boeing models stretching did play an important role in enhancing aircraft.

These are the factors that must Boeing consider when making the decision to produce a new family of airplanes like the 777.

1-b) Part-1:

The expected cash inflow of Boeing Company $54,845 million where the net income is $2,572 million 8. Boeing’s cash and liquid investment balances as of June 30 totaled $7.9 billion. Cash flow builds this balance. Boeing’s second-quarter operating cash flow was $2.7 billion. The company expects operating cash flow to exceed $6 billion this year and to top $5.5 billion in 2006.  The four metrics are revenue growth, net margin, operating cash flow as a percentage of sales, and return on net assets (RONA).

Specifically, over the long-term, Boeing wants to achieve –

·         Strong revenue growth.

·         7 percent after-tax net margins.

·         Strong operating cash flows greater than 10 percent of sales.

·         Greater than 20 percent RONA
8        Fiscal Year-2005

These metrics, collectively known as the Enterprise Financial Targets (EFT), provide a common set of financial goals that encourage everyone at Boeing to focus on increasing and sustaining value. In addition, they’re measures that are commonly understood by the financial community. That lets Boeing use the same terms to talk with external and internal audiences 9.

1-b) Part-2

To categorize the outflows into two types, one-time outflows and annual Outflows we have to consider the Boeing’s outlooks to drive future growth through a balanced approach that involves improving revenues, earnings, cash flow and return on net assets.

Boeing people traditionally use Economic Profit as an important financial measure to assess how the business is faring. But as part of an evolution of the financial management of the enterprise, Boeing is moving toward a more balanced approach that involves four performance metrics, rather than just one 10.

The Enterprise Financial Targets are quantitative, company-level targets in four key areas that demonstrate what success looks like for Boeing in terms of overall financial performance. The new targets are an evolution of the disciplined approach we already have to running our business

9           Boeing  News Archive 2006

 10           Third- Quarter 2006 Performance Review, page 5

today, and they provide a balanced approach for how we’ll grow it tomorrow. They’re intended to ensure we have absolute focus on what we need to do to drive behavior that results in sustained value creation through top shareholder returns.

Boeing Looking Ahead for strong growth in 2006 and 2007. Their businesses are well positioned in growing markets they are relentlessly committed to highest standards of integrity, Business execution, Driving performance to new levels of Growth and productivity 11.

2-a)

Product development in the commercial aircraft industry had long been the preferred growth strategy undertaken by competing manufacturers. The occasional development of a new

11            Third- Quarter 2006 Performance Review, page 6-8

family of planes was essential for securing market share in the future, and accordingly, both Boeing and McDonell Douglas undertook such a strategy in thee 1990s. Yet, only Boeing managed to deliver the new product.

Entry into the business of manufacturing large commercial aircraft had always being very limited. One barrier to entry into the industry was the high and increasing cost of product development. The Boeing 747, for example, cost $ 1 billion to develop, the Boeing 767 cost $ 1.5 billion, the Airbus A320 cost $ 2.5 billion, and the total cost of developing the Boeing 777 in the early 1990s was in excess of $ 5.5 billion.

Condit led the 777 programs to completion. Condit’s role in developing the 777 paved his way to the top. Midway through the 777-development program, Boeing’s board of directors elected Condit as president and gave him a seat on the board. Four years later, in 1996, the board promoted Condit to CEO 12.

Launching he 777 in 1990, Boeing management sought to ensure the company’s future. “This is an offensive, not a defensive strategy,” Condit noted, predicting that the 777 families would remain in production for 50 years. A wide- body aircraft with two gigantic jet engines (“the most power ever built”), the 777 went into service two years after Airbus had introduced its own new wide-body models: the two-engine A320 and the four-engine A340 13.

Boeing’s decision not to develop a new aircraft had far-reaching implications on the company’s long-term competitive advantage. Historically, the aviation industry had rewarded risk taking.
12               Annual Report 2005

13               Annual Report 2005

On the eve of the jet age, Boeing upstaged Douglas with the 777, gambling the entire company on the success of jet technology. In the 1970’s, Boeing revolutionized air travel with the introduction of the 747, taking another huge risk, and leaving McDonnell Douglas further behind. At the dawn of the 21st century, Boeing suddenly turned conservative. Not only was the company reluctant to develop a new family of planes, but its R&D budget was shrinking: Between 1998 and 2000, Boeing’s research and development spending was projected to decline from &1.9 billion to as low as &1.5 billion.

As Boeing expands beyond its traditional markets of aircraft design, manufacturing and service, employees must adjust to the ways of life in these new marketplaces. Case in point: Connexion By Boeing. Because Connexion’s marketplace features products and services with shorter lifecycles and faster development processes than Boeing’s historical markets, the business unit sought individuals who had experience in industries where accelerated product development is the norm, such as the communications business 14.

Globalization is a cornerstone of Boeing’s long-term growth strategy. And technology is the engine driving that growth. Budding entrepreneurs work with mentors and experts who act as coaches on technical, finance, marketing and other relevant issues to develop and focus their ideas and create a business plan. Each concept must go through a rigorous, gated development process. This is why Boeing argues to continue producing older   model planes like the 747 and the 767 though the costs of developing a new family of airplanes are enormous.
14         Boeing Press Release, Oct. 25 2005

2-b)

Capital budgeting decision evaluating in terms of cash inflows and cash outflows Boeing’s cash and liquid investment balances as of June 30 totaled $7.9 billion. Cash flow builds this balance. Boeing’s second-quarter operating cash flow was $2.7 billion. The company expects operating cash flow to exceed $6 billion this year and to top $5.5 billion in 2006.

Although cash flow may not be as commonly cited as other metrics such as earnings, cash flow as a concept is straightforward: It reflects the money coming in and going out. All things being equal, if more money comes in and/or less goes out, a company has more to invest in its future 15.

Technically speaking, operating cash flow is cash received from or used by the operations of the business driven by cash earnings and changes in working capital (see chart below).

Some financial analysts believe operating cash flow provides a better measure of a company’s
15         Third- Quarter 2006, Performance Review (Boeing)

profits than earnings. The reason is a business can show positive net earnings on its income statement and still not be able to pay its debts. Cash flow pays the bills and keeps the operating engine of Boeing running. That’s in part why operating cash flow as a percent of revenue was established as one of four Enterprise Financial Targets by which the company measures its overall financial performance. This year Boeing will likely exceed its 10 percent goal for this metric. The challenge will be to achieve such performance year after year.

Boeing has clear priorities for its cash, including funding growth programs such as the 787 and Future Combat Systems, continuing to repurchase company stock, paying dividends to investors, and repaying maturing debt, company officials said. Options for cash use also include supporting pension plans. Boeing’s retirement plans are secure and well funded in part because of $4.4 billion in discretionary pension contributions during 2004 and $1 billion so far this year. Another $550 million contribution is expected before year’s end, according to a recent Boeing filing with the U.S. Securities and Exchange Commission 16. A large, strategic acquisition is not currently a high priority. Chief Financial Officer James Bell recently told analysts and media that “we haven’t seen any larger targets yet that we felt made sense…. Having the cash is just half of the story. You’ve got to have the right place to put it, and we’re going to be disciplined in how we go through making those determinations.”

Although the members of the Finance organization keep the closest tabs on cash flow, every employee can help improve cash flow-and generate the money that will expand Boeing’s global aerospace leadership. Actions that can boost cash flow include negotiating better contract terms and improving billings and collections.
16         SEC Report 2006

Reference:

            1) Hitt M. A. Ireland R.D. & Hoskisson R. E. ,  “Strategic Management Competitiveness and Globalization”, Edition 4th,   South-West Thomson Learning, 2004.

            2) < http://www.boeing.com/companyoffices/aboutus/ethics/pol2.pdf>

            3) < http://www.boeing.com/news/frontiers/archive/2002/july/cover.html>

            4) < http://www.boeing.com/corp_gov/charter_audit_comittee.html >

            5) < http://www.lonestarsteakhouse.com/SECDocs/2005%20Annual%20Report.pdf>

            6) < http://finance.yahoo.com/q/pr?s=ba>

            7) <http://www.boeing.com/news/frontiers/archive/2005/september/i_fof.html>