Category: Boeing

Understanding of the case

An evaluative look at the author’s write-up regarding the case study (Boeing’s e-Enabled Advantage) shows that the author demonstrates a good understanding of the case.

Here, it is worth noting that the author reviews the case relative to the company’s background, market situation, changes in leadership/management strategies, and new innovations/opportunities in a precise, coherent, and accurate manner (Applegate et al., 2006).

However, it is equally evident that the author limits the case review to matters concerning the company’s background, new opportunities, and competition at the expense of other important issues such as changes in company leadership/management strategies and the new vision, which played a greater role in shaping the current status of the company (Applegate et al., 2006, p. 187).

Moreover, the case review takes a descriptive approach as opposed to an analytical approach, which might have given the readers an opportunity to see the case from the author’s perspective.

Further, regarding the e-Enabled Advantage, the author is single-sided when elaborating on the impact of this concept on the company’s business environment.

Here, it is recommended that the author should have provided both the positive and negative (ethical implications) sides of the concept in Boeing’s business model just in case the reader wishes to evaluate its practical implications from a wider perspective.

Logical flow of arguments

Relative to the arguments presented by the author, it is certain that the logical flow of arguments in the write-up is moderate.

Here, the author presents arguments that flow from the beginning to the end by discussing the background of the company through major changes the company has undertaken to the conditions that lead to the company’s decision to implement a new business strategy (Applegate et al., 2006).

However, it is important to note that the author presents some vague arguments in the middle of the discussion, which need extensive elaboration.

For instance, by stating that ‘…with all the changes and even the purchasing of additional airline services….the company still faced cultural challenges’, the author leaves the reader hanging considering that the subsequent discussions are not logically relevant to the foregoing statement.

Therefore, it is recommended that the author should have provided a logical explanation of this statement in order to bring the reader into perspective of what these cultural challenges are.

Furthermore, the author mentions that besides Boeing becoming a potential competitor of IT companies such as Oracle and IBM, it also faces competition from Airbus. In this case, by the author failing to show the connection between these companies, there is the risk that this statement remains vague to many readers.

Critical Thinking

As mentioned earlier, the author takes a descriptive approach in reviewing the case, and thus the level of critical thinking applied in this case review is just acceptable.

In this regard, the author fails to give an adequate analysis of the information derived from the case besides neglecting to apply any theoretical knowledge in supporting the arguments presented in the case review.

However, through having a good understanding of the case, the author manages to present acceptable arguments in the long run.

Overall Quality

Overall, this case review is a good one considering that the author has a good grasp of the case information, and thus, chances are that the arguments presented in the case review are based purely on the information derived from the case.

Furthermore, despite failing to apply theoretical knowledge in analyzing the case, the author demonstrates a broader understanding of the business environment under which Boeing is operating.

To this end, it is recommended that the author should ensure that the arguments presented in subsequent paragraphs should connect with preceding paragraphs besides following from topic sentences.

Moreover, the author should try as much as possible to apply knowledge from outside sources in order to make the case review more analytical rather than descriptive.

Reference

Applegate, M.L. et al. (2006). Case 807-011: Boeing’s e-Enabled Advantage. USA: Harvard Business School.

Abstract

The given paper presents itself as a strategic posture of Boeing Company. It incorporates the basic aspects of these companys functioning and revolves around the opportunities for the further rise. The work describes the companys overall direction and the major corporate strategies that are needed to attain outlined goals and contribute to the improved outcomes. Furthermore, the parenting strategy peculiar to the company is also investigated in terms of the given paper. Altogether, Boeings main aspects of strategic planning are discussed and analyzed. At the end of the paper, conclusions related to planning and the further actions needed to improve the companys functioning are given. Finally, different types of strategies that are implemented are also discussed and researched in the given paper.

Strategy Posture for Boeing

At the moment, Boeing could be described as a leading company that is focused on the manufacturing of aircraft and its supplies to different countries all over the world. The company has stable incomes and revenues that come from the unique popularity of the brand, high quality of its products, and efficient strategy. Besides, several aspects should be analyzed to evaluate its current corporative strategy.

First, the firms directional strategy could be considered stable and oriented towards its gradual growth. Boeing devotes significant sums to create new facilities and improve its functioning. The company also sponsors the creation of new aircraft (“Boeing overview”, n.d.). Additionally, because the rapid growth of technologies preconditions the increased demands for security and technological equipment, Boeing also tries to diversify its product lines to hold its leading positions in the market and preserve the high level of interest to its aircraft. Moreover, there are no signs of a decrease in the companys level of activities or bankruptcy. Boeing remains a profitable manufacturer of aircraft characterized by great perspectives and tendencies towards further growth.

Besides, the markets in which the company competes are characterized by a high level of rivalry as there are suggestions from other companies that also manufacture aircraft. For this reason, Boeings strategy is also focused on the acquisition of a certain competitive advantage needed to win the rivalry and conquer the market. Continuing the investigation of the given sphere, it is also vital to consider other peculiarities of the market such as the threat of new entrants, risk of substitution, bargaining power of buyers and suppliers. Applying these concepts to the aircraft market, one could admit the complexity of its functioning and perspectives that could be explored by any actor. However, the given task is complicated by the existence of numerous rivals that also want to obtain incomes.

Furthermore, the companys parenting strategy could also be characterized by its unique efficiency. It constantly coordinates activities and transfers to cultivate capabilities and create new facilities that could help to introduce new product lines or improve the functioning of existing ones (“Airline strategies and business models”, n.d.). The companys philosophy is designed to foster superior performance from its business units and assist it in becoming the main agent on the international market.

Altogether, Boeing could be characterized by the efficient strategy that is created in a way that helps it to meet the majority of the modern challenges and obtain a competitive advantage. Additionally, there are numerous opportunities for the companys further rise as it invests in numerous facilities and is focused on the diversification of its product line.

References

Airline strategies and business models. (n.d.). Web.

Boeing overview. (n.d.). Web.

Marketing

The issues associated with the time of the production process needs to be listed among the primary concerns of Boeing Company at present. According to recent reports, the organization has been suffering losses because of the inability to meet the set deadlines (Montgomery, 2012). Therefore, it is crucial to handle the associated problems.

Among the marketing goals that Boeing will have to meet, one will have to mention the following objectives;

• Gaining an impressive competitive advantage;
• Using the company’s strengths to attract more customers;
• Designing an elaborate marketing approach that will help gain new customers;
• Introducing a new brand image and branding strategy that will help boost the firm’s popularity levels in the environment go the global economy.

Particularly, a more sensible time management framework must be introduced into the company’s environment. The first and most obvious, detailed guidelines and time standards must be set and provided to every single staff member. A rigid control over the production processes must be established so that the associated processes (e.g., transportation, information management, etc.) should be carried out in a timely and efficient manner. Otherwise, the quality of the end product and the services will suffer significantly, and customer satisfaction levels will drop steeply.

To measure the success of the changes to be made to the company’s marketing framework, one will have to consider the changes in the number of customers and orders. Thus, the general tendency can be identified. For this purpose, the use of histograms should be viewed as a legitimate measurement approach (Montgomery, 2012).

Operational

Product quality is another reason for concern at Boeing. Needless to say, the identified characteristic of the services defines the success of the company in the environment of the global economy (Montgomery, 2012). With a drop in quality levels, Boeing will inevitably suffer impressive damages by losing a huge number of its customers to the competitors. Among the current operational objectives of the organization, the following goals will need to be listed:

• Increasing the output by 10%;
• Reducing the number of defects made in the production process by 25%.

To improve the quality rates, Boeing leaders will have to reconsider the current corporate standards. Furthermore, the related values, such as Corporate Social Responsibility, must be promoted to the staff members so that they could be enthusiastic about meeting the existing quality demands. Finally, a rigid framework for consistent quality improvement, such as DMAIC, must be incorporated into the company’s design (Pyzdek & Keller, 2014). As soon as the framework is set in motion, the employees will engage in an unceasing cycle of quality improvement. Consequently, the product quality will grow exponentially. The principles of Total Quality Management (TQM) must also be included in the new quality system so that the required standards could be met.

In order to control the staff’s compliance with the identified rules, the managers will have to use regular assessments. Reports will have to be submitted so that the changes in the performance levels could be identified and that possible issues could be addressed at the earliest stages of their development. Furthermore, tools such as the Pareto chart and the Design of Experiment (DOE) framework will have to be included in the assessment strategies so that the current tendencies could be identified. Measuring the repeatability and reproducibility levels, in turn, will help determine the efficacy of the improvement tools (Montgomery, 2012).

Strategic Intent and Strategy Implementation

At present, the strategic intent of Boeing goes beyond improving the quality of the end product. Apart from working on the means of attracting new customers and compelling the staff members to excel in their performance, the organization will also strive to introduce the concept of consistent and unceasing change and improvement as the foundation for its operations. In other words, a redesign of the corporate values system should be viewed as the primary strategic intent that will have to be implemented.

The significance of the strategic intent for Boeing can hardly be underrated. A detailed and well-thought-out strategy will allow making the leadership approach more efficient. As a result, the goals of the organization, particularly, the ones concerning the improvement of the products and services will be attained within a relatively short amount of time. Indeed, according to Montgomery (2012), there is a direct link between leadership and strategy: “Good strategies are never frozen – signed, sealed, and delivered” (Montgomery, 2012, p. 14). Therefore, it is imperative that strategic intent should be set clearly.

The strategy will be implemented by focusing on changing the organization’s values and mission, making it more people-oriented. As soon as the needs of all stakeholders are taken into account, it will be easier to shape the approaches required to motivate the staff members and, therefore, improve the current quality levels. Furthermore, the introduction of principles such as Corporate Social Responsibility, the Total Quality Management model, and the DMAIC framework, will have to be considered.

In order to implement the suggested framework and produce the expected changes, one will have to consider the assistance of managers, as well as the leader of the organization. While managers will set the standards that the staff is expected to follow and observe the outcomes, the leader will represent the model behavior that the employees will have to follow. Thus, the foundation for a consistent improvement can be created.

In order to implement the suggested strategic recommendations, one will have to consider the adoption of Kotter’s 8 Step Change Model. Particularly, the urgency for the change will have to be built by raising awareness among the staff members about the need to meet new quality standards and improve in the areas of communication, product quality, and time management. Afterward, the levels of engagement and motivation must be increased among the personnel. The identified goal can be achieved by providing the employees with incentives and benefits that will encourage them to excel in their performance. For instance, financial rewards for the delivery of outstanding results should be viewed as an example of a financial incentive. As far as benefits are concerned, the current package must be expanded by introducing the benefits for a diverse population. Specifically, the options for parental leave and the improvement of the retirement benefits will have to be viewed as an option.

As soon as the foundation for the change is created, a new vision must be designed. To be more accurate, Boeing will have to focus on the idea of consistent quality improvement as the new corporate philosophy. In addition, the significance of catering to the needs of all stakeholders involved must be viewed as an integral part of the corporate philosophy.

The process of communicating the necessity to change should be viewed as the next essential stage on the way to improvement. For this step to be carried out successfully, the leader of the organization must detail the new strategy, the expected outcomes, and, most importantly, the opportunities for personal and professional growth to the staff members. Detailing the way in which the change will occur will also be necessary. The emphasis on collaboration and information sharing should be placed as the basis for efficient data and time management. Next, by offering training and career opportunities, the company will empower the staff for the change. As soon as short-term goals are introduced, and the strategy for maintaining the new approach is integrated into the environment of the organization, Boeing will be ready to implement the change.

Naturally, it is expected that some of the employees will be unwilling to alter their organizational behavior and, therefore, will resist the change. Thus, it will be obligatory to introduce incentives that will boost the employees’ motivation and encourage them to accept the new corporate values, standards, and principles. For the staff members to collaborate successfully, one will have to consider the organizational structure known as the matrix structure. As a result, the distribution of roles and responsibilities, as well as the focus on product quality improvement, will become a possibility.

Evaluation and Control

To improve the company’s time management, one will have to consider reducing the amount of waste (i.e., defects) made in the course of the production process, as well as addressing the information management issue. Kaplan and Norton suggest that the vision and strategy of an organization must be based on carrying out financial stewardship, meeting stakeholders’ needs, managing internal business processes, and exploring the organizational capacity (see Fig. 1) (Montgomery, 2012).

As a result of implementing the suggested strategy at Boeing, a significant improvement in the financial perspective is expected since fewer resources will be wasted. The drop in the waste levels and, therefore, the number of expenses will serve as the foundation for reconsidering the current strategy for managing financial resources. Particularly, the enhancement of the R&D department’s work and the production of new and innovative decisions must be viewed as an option. Similarly, a more elaborate approach toward the assessment of the company’s performance can be designed by introducing new and improved tools for controlling and assessing the end products and services. The assessment of the financial progress can be conducted by comparing the performance of the company in different time slots.

Furthermore, the internal perspective will also win because of the rise in the quality levels. By addressing the issues associated with the quality management processes and compelling the staff to develop new skills, one will be able to reduce the number of defects produced in the process. In order to assess the identified aspect of the company’s operations, one may have to consider using a correlational analysis between the numbers of defects per 100 items. Thus, an objective evaluation will be possible.

The customer perspective will also be addressed since satisfaction levels will rise among buyers. As soon as the new principles of production process management are set, the speed of service delivery will rise exponentially. As a result, customers will have a more enjoyable experience. To measure the alterations in the customer perspective, one will have to consider comparing the changes in the number of customers, the frequency of purchases, etc.

Learning and growth will be achieved as well since the employees will acquire new knowledge and skills, thus, receiving a powerful impetus for further development. Therefore, the prerequisites for consistent knowledge acquisition and lifelong learning can be created. Learning can be assessed by evaluating the abilities of the staff.

The Strategist

One might assume that Boeing simply offers a chance for people to go to a specific state and reach the destination within a shorter amount of time than it would take if using a different mode of transportation. However, in reality, the opportunities that the organization brings are much more profound than that. My organization brings the opportunity for people to travel across the globe and, therefore, communicate efficiently. As a result, Boeing makes a difference in the way in which people converse. The identified change is crucial as it affects positively people’s personal growth and organizations’ economic success.

The identified difference allows for a significant improvement. Sharing experiences and understanding different cultures better serve as the foundation for gaining new knowledge and skills, as well as exploring new options. Thus, the premises for consistent development are built. The firm offers its staff members a chance to engage in the process of lifelong learning by prompting them to acquire new skills and knowledge on a regular basis. Furthermore, the incorporation of the latest technologies serves as the basis for further growth among the staff, allowing them to develop new competencies.

The extremely broad product line is, perhaps, the characteristic that is the most difficult to imitate. Boeing offers a vast variety of services and products. For instance, the organization has a vast number of plane families, each possessing a unique characteristic and aimed at meeting the needs of a particular set of customers. The fact that the company has been focusing extensively on the reduction of noise and negative environmental effects should also be brought up as one of the primary advantages of the organization. The same can be said about the services offered by Boeing; they are numerous and very efficient. For example, the support system provided by the firm is outstanding. Boeing strives to reach every customer and manage the emerging problems in a manner as efficient and expeditious as possible. Therefore, it has a powerful competitive advantage. With the emphasis on R&D and the active use of the latest technology, Boeing will be able to use its competitive advantage to reach the top of the global market. To be more specific, more options related to the enhancement of sustainability levels should be explored.

Even though the company has been showing perfect results, it needs to focus on innovation and improvement better. Thus, the opportunity to matter not only today but also tomorrow will open for Boeing. Herein lies the significance of redesigning the current system of values and improving corporate philosophy. Even though the competitive advantage of the organization is impressive at present, Boeing will have to explore innovative options so that it could remain relevant and maintain its position as one of the most influential airplane corporations in the world.

References

Montgomery, C. (2012). The strategist: Be the leader your business needs. New York City, NY: HarperBusiness.

Pyzdek, T., & Keller, P. (2014). The Six Sigma handbook (4th ed.). New York, NY: McGraw-Hill Education.

Selecting a Company

Boeing Co. is listed on the New York Stock Exchange (NYSE). The company has a market capitalization of $95.36 billion, and an average volume of 5.22 million stocks (“Boeing Co. NYSE: BA” table). It paid shareholders dividends at a rate of $0.73 per share at the end of 2013. The major competitor is Airbus Group. It has a market capitalization of $56.39 billion (“Airbus Group N.V. ADS” table). Airbus has earnings per share of $0.62 compared with $6.03 for Boeing.

Economic Analysis

The U.S. economy is moving upwards with key economic indicators showing improvement. The real GDP improved by 3.2% above the values that were recorded at the end of 2012. The seasonally adjusted GDP stood at $17,102.5 billion for the fourth quarter in 2013. Civil unemployment declined by 6.6% (FRED table). A higher real GDP and lower unemployment show that consumption is likely to increase. A higher GDP will result in higher aggregate demand, which will affect most industries positively. Real GDP and employment affect the operations of the company through its stock, and demand for products. Companies demand more goods and services when the economy improves. Optimism increases the stock prices by creating a higher demand in the stock exchange. People purchase more goods when they expect economic conditions to remain favorable. People save for precautionary purposes when they expect difficult economic conditions.

Higher interest rates indicate the cost of raising capital for expansion has increased. The long-term interest rates are higher in 2013 than they were in 2011 and 2012. The graph of the 10-Year Treasury bills shows that the long-term interest rates have increased (Figure 1). The 10-Year Treasury bill has a constant maturity rate of 2.76 (FRED table). The increase in interest rates for the long-term Treasury bills is an indication that other investment options are providing a higher rate. It is also an indication of increased demand for finances which is a sign of more opportunities. The 3-Month Treasury bill has a rate of 0.04%.

The 3-Month Treasury bill rate has remained fairly constant since 2010 (Figure 2). The low-interest rates are a result of the monetary policy seeking to create a favorable business environment. Boeing and Airbus are in an industry that relies on debt. Low rates on short-term loans mean the companies can obtain overdrafts for their cash account at a lower rate. The companies can also service their long-term debt at a lower cost compared with historical rates.

A higher inflation rate reduces aggregate demand. A low inflation rate indicates that the purchasing power of the national income has been maintained. The CPI is a measure of inflation. The consumer price index (CPI) for all urban consumers averaged 233.109 in 2013 (FRED table). In the first month of 2014, it stood at 234.933. The 1982-84 prices have been used as the base year. There is a difference of 1.824. It shows an increase of about 1.8% between the two years. The producer price index for all commodities has changed with a small margin. It was 203.4% in 2013 (average), and 203.5% in 2014 (first month) (FRED table). It shows a difference of 0.1%. It indicates that the cost of production does not change rapidly. It is good news for manufacturing companies such as Boeing, and Airbus. A low inflation rate means demand for products will either increase or remain the same.

A high consumption level creates investor confidence because they indicate companies will be able to generate high revenues. Personal consumption expenditures were 105.926% in 2013 (average) when 2009 is the base year at 100%. It was 106.47% in 2014 (first month) which shows that there is an improvement (FRED table). Increased consumption is favorable for manufacturing companies because it increases the chance of converting revenues into profits. The price level of government consumption was 1.69403 in 2011 when 2005 is considered the base year at 1.0 (FRED table). It shows that consumption has reached levels higher than the pre-financial crisis. Government consumption is important because the U.S. government is one of the major consumers of aerospace products.

Considering the measures discussed above, the U.S. economy is favorable for the aerospace industry. There is increased aggregate demand for products based on a higher real GDP, low inflation rate, and low-interest rates.

Industry Analysis

Nature of industry

The industry relies on a global market for engines and planes. Outsourcing has become a common feature because of competitive pricing. Companies seek to manufacture different parts in different countries and assemble them in one country. For example, General Electric has been manufacturing engines for Boeing airplanes since 1996 (Thurber par. 2). The industry can be analyzed using Porter’s five forces. There are very many competitors which show that there is an intense rivalry. Entry is barred by accumulated knowledge and the size of capital. Most of the companies have operated for several decades. They have accumulated knowledge and expertise. Some of the examples include Bombardier Aerospace (since 1942), Cessna (since 1927), Dassault (entered U.S. market in 1963), and Hawker Beechcraft (since 1937) (Thurber par. 5).

All these companies rely on accumulated knowledge. The cost of the planes is high. For example, Airbus’ A319 initial price was $35 million (Thurber par. 1). As a result of the high prices, the customers would be few and large. However, the global market opens up an opportunity for many customers. They include airlines, governments, and rich individuals across the globe. The high number of countries and airlines shows that there are many customers. It reduces their bargaining power. There are few substitutes for airplanes such as high-speed trains. There are many suppliers as mentioned in the outsourcing of parts. Suppliers have low bargaining power because of their high number. The five areas are the summary of the industry under Porter’s five forces.

The U.S. aerospace industry generated $86 billion in export as revenues in 2011 (Select USA par. 2). Exports in the aerospace industry exceeded imports by $47.1 billion. The sale of commercial planes is projected to grow at a rate of 3.5% annually for the next 20 years (Select USA par. 3). There is potential for growth and investment in the industry.

Major competitors

Boeing has developed a reputation for making large-cabin planes. Boeing partnered with General electric in 1996 to develop a new generation 737 known as BBJ. BBJ2 and BBJ3 (2005) followed the same trend of large size business jets. Boeing large-sized jets include the 737, 747-8, and the 787 (Thurber par. 2).

Airbus entered the business jet segment in 1997 with its versions known as the Airbus Corporate Jet (ACJ). It has been able to capture a large market by receiving boosts from customers in the Middle East, and Asia Pacific (Thurber par. 1).

Embraer has been recognized as the fourth largest commercial airplane maker. It mainly relies on small-cabin and mid-sized jets to maintain its market share (Thurber par. 6).

Cessna Aircraft has dominated the industry over the years. Thurber (2011) explains that of the 16,000 business jets used across the globe, a third of them have been produced by Cessna. Cessna produced the Mustang. It was considered the fastest business jet in 2011 (Thurber par. 7). It mainly focuses on light jets and their speed.

Importance of technological developments

Important technological developments include fuel-efficient engines such as the pusher-turboprop Piaggio Avanti in the 1970s. There is a need for lower-cost aircraft. There are customers who are looking for jets that provide the highest speed such as G650 by Gulfstream Aerospace. It goes at a maximum speed of Mach 0.925 (Thurber par. 8). Customers are also looking for the size of the cabin such as commercial planes developed by Airbus, and Boeing. There are planes designed to go for a long-distance without refueling such as the G650 by Gulfstream. It can fly 7,000 nautical miles without the need to refuel (Thurber par. 6). There is a demand for comfort, and automated aerodynamics. Companies capture their market share based on these developments.

Economic forces with the most impact

The industry relies on a global market. It is reliant on the global economy as a result of the global market. The global economy relies on the EU economies, the U.S., and other advanced economies. The industry relies on the level of consumption. The level of consumption is boosted by a higher real GDP, and lower unemployment. When people have high expectations of employment, they reduce their precautionary balances by engaging in more consumption. A higher GDP creates investor confidence. Investment by firms results in more consumption. Companies are the main customers in the industry. The industry relies on exports as indicated in the nature of the industry. It means global levels of consumption are important.

Company Analysis

Liquidity ratios

Current ratio = current assets/ current liabilities

Boeing ($)

2013 = 65.07B/ 51.49B = 1.26 times

2012 = 57.31B/ 44.98B = 1.27 times

Airbus (Euros)

2013 = 47, 098M/ 48,581M = 0.97 times

Quick ratio = (current assets – inventory) / current liabilities

Boeing ($)

2013 = (65.07B – 42.91B) / 51.49B = 0.43 times

2012 = (57.31B – 37.75B) / 44.98B = 0.43 times

Airbus (Euros)

2013 = (47,098M – 25,060M) / 48,581M = 0.45 times

The current ratio shows that Boeing has a higher ability to clear its current debts than Airbus. The Airbus quick ratio is higher than the Boeing’s quick ratio. It indicates that Boeing holds a larger inventory than the competitor. The firm has maintained its current ratio and quick ratio over the two years.

Cash ratio = cash/ current liabilities

Boeing ($)

2013 = 9.09B/ 51.49B = 0.18 times

2012 = 10.34B/ 44.98B = 0.23 times

Airbus (Euros)

2013 = 7,765M / 48,581M = 0.16 times

Sources: “Boeing Co. NYSE: BA” (table) and “Airbus Group N.V. ADS” (table).

Boeing improved efficiency in holding cash in 2013 by reducing the amount it holds to match its major competitor. There is an opportunity cost of keeping cash that is not needed. Airbus appears to have more efficient cash holdings.

Financial leverage ratios

Total debt ratio = (total assets – total equity) / total assets

Boeing ($)

2013 = (92.66B – 15.0B) / 92.66B = 83.8%

2012 = (88.9B – 5.97B) / 88.9B = 93.3%

Airbus (Euros)

2013 = (93,311M – 11,054M) / 93,311M = 88.2%

Debt/ Equity ratio = total debt/ total equity

Boeing ($)

2013 = 77.67B/ 15.0B = 517.8%

2012 = 82.93B/ 5.97B = 1389.1%

Airbus (Euros)

2013 = 82,257M / 11,054M = 744.1%

Equity multiplier = total assets/ total equity = 1 + debt/ equity

Boeing ($)

2013 = 92.66B/ 15B = 6.18 (using the second formula = 1 + 5.17 = 6.17)

2012 = 88.9B/ 5.97B = 14.89

Airbus (Euros)

2013 = 93,311M / 11,054M = 8.44

Sources: “Boeing Co. NYSE: BA” (table) and “Airbus Group N.V. ADS” (table).

Both firms use leverage to a very large extent. The debt levels in both companies exceed equity several times. Boeing reduced the total debt ratio and debt-equity ratio in 2013. Reduction in the proportion of debts is good for investors because it reduces risk. Both companies are risky to investors because of the high debt ratios. There is reduced profitability as a result of servicing debts. There is a reduced ability to retain equity in case of bankruptcy.

Profitability ratios

Profit margin = net income/ sales

Boeing ($)

2013 = 4.58B/ 86.62B = 5.3%

2012 = 3.9B/ 81.7B = 4.8%

Airbus (Euros)

2013 = 1,475M / 59,256M = 2.5%

The two companies have low profitability because of the high cost of goods sold (COGS). It can be seen in the small difference between COGS excluding depreciation and amortization (71.35B) and sales (86.62B) for Boeing in 2013. Depreciation and amortization are about 3.5B in 2013. It shows that COGS is the main cause of the low-profit margin. The situation is similar to that of Airbus.

Return on assets (ROA) = net income/ total assets

Boeing ($)

2013 = 4.58B/ 92.66B = 4.9%

2012 = 3.9B/ 88.9B = 4.4%

Airbus (Euros)

2013 = 1,475M / 93,311M = 1.6%

Return on equity (ROE) = net income/ total equity

Boeing ($)

2013 = 4.58B/15B = 30.5%

2012 = 3.9B/ 5.97B = 65.3%

Airbus (Euros)

2013 = 1,475M / 11,054M = 13.34%

EBITDA Margin = EBITDA / Sales

Boeing ($)

2013 = 8.25B/ 86.62B = 9.5%

2012 =7.94B/ 81.7B = 9.7%

Airbus (Euros)

2013 = 2,607M / 59,256M = 4.4%

Sources: “Boeing Co. NYSE: BA” (table), and “Airbus Group N.V. ADS” (table).

The profitability ratios are used to show the efficiency of the firm in generating income from assets and equity. Boeing is more profitable than Airbus. Boeing uses assets more efficiently than Airbus. Boeing’s use of assets improved in 2013.

Measures of efficiency

Accounts receivable turnover = net sales/ net accounts receivable

Boeing

2013 = 86.62B / 6.62B = 13.08 times

2012 = 81.7B / 5.76B = 14.18 times

Airbus

2013 = 59,256M / 7,239M = 8.19 times

Accounts receivable turnover indicates that Boeing has shorter times to wait for receivables than Airbus, considering its higher frequency. Boeing’s efficiency in managing receivables reduced slightly in 2013.

Inventory turnover = cost of goods sold/ inventory

Boeing

2013 = 73.19B / 42.91B = 1.71 times

2012 = 68.56B / 37.75B = 1.82 times

Airbus

2013 = 50,895M / 25,060M = 2.03 times

Airbus manages inventory more efficiently than Boeing. Boeing efficiency in managing inventory reduced in 2013.

Accounts payable turnover = COGS/ accounts payable

Boeing

2013 = 73.19B / 9.39B = 7.79 times

2012 = 68.56B / 9.39B = 7.30 times

Airbus

2013 = 50,895M / 10,372M = 4.91 times

Accounts payable turnover shows that Airbus is able to delay payments longer than Boeing, which is an advantage in managing the cash account. Boeing’s efficiency reduced in 2013.

Fixed asset turnover = Net sales/ net property, plant, equipment

Boeing

2013 = 86.62B / 10.22B = 8.48 times

2012 = 81.7B / 9.66B = 8.46 times

Airbus

59,256M/ 15,925M = 3.72 times

Boeing utilizes fixed assets more efficiently than Airbus. Boeing efficiency improved between the two years.

Estimating Beta

Filling data into Excel

The expression can be expressed as a function of X as shown below.

• 14X = Y – 3953
• X = (Y/14) – (3953/14)
• X = 0.07Y – 282

The same equation can be written as X = 0.07Y – 282 since X standards for the values of Boeing stock. It would indicate that 7% of the Boeing stock prices are influenced by shifts in the entire market.

The monthly return of the stock and market index is represented as a change from the previous month.

Estimating beta using regression

The beta can be estimated by finding the slope of the Yi and Xi values. In Excel, it involves selecting ‘SLOPE’ on the formula bar, and then the range of Y and X values. The result is 14.22. It is similar to the value ‘b1’ obtained by the long method. The market indices used are for the NYSE 100. The R-squared, which is 0.39, indicates that more than half the points fall outside the regression line.

Estimating Intrinsic Value of Stock

Boeing paid its shareholders $0.485 as dividends on a quarterly basis in 2013 (“The Boeing Company (BA): Yahoo Finance” table). It adds up to $1.94 for the year. The company paid $0.44 on a quarterly basis in 2012. It paid $0.42 between 2009 and 2012 (“The Boeing Company (BA): Yahoo Finance” table). The current profitability levels indicate the company will maintain the level of growth in dividend issued. It cannot afford rapid growth in dividends because of low profitability. The average dividend growth rate between 2009 and 2013 is 3.9% (((= 0.485 – 0.42) / 0.42)) /4 years). The dividend growth rate in the coming years may grow by a value slightly higher than 3.9% annually because the global economy has recovered. The years 2009 and 2010 were immediately after the global financial crisis (GFC). Low consumption and less profitability followed the GFC. I project an upper limit of a 4.5% dividend growth rate in the coming years because of favorable economic conditions.

Expected return

CAPM

Rf = risk free rate = 8%

Rm = market risk premium

Βi = beta of the stock

Ri = Rf + βi X (Rm – Rf)

Ri = 8% + 14.22 (12% – 8%) = 8.57%

Constant growth dividend valuation model

The price of stock = Dividend in the coming period/ (Discount rate – growth rate)

P₀ = Div₁/ (R – g)

Div₁ = Div₀ (1+g)

P₀ = $1.94* (1+4.5%) / (8.6% – 4.5%)

P₀ = 2.813/ 4.1% = $68.61

Conclusion and Recommendation

Conclusion

The U.S. economic conditions are more favorable than they were a few years ago. There is increased consumption, reduced unemployment rate, and real GDP growth. The producer price index is favorable for manufacturers because it shows a very small change in the cost of raw materials. The profitability of the firm will improve at a slow rate because of the high COGS associated with the industry. Dividends are likely to increase at a higher rate than in the past years. The intrinsic value of the stock is lower than the market price of the stock in Dec 2013 ($68.61 compared with the adjusted close of $135.72). It shows that investors have overestimated the value of its stock.

Recommendation

The investor should sell the stock because the growth opportunities of the firm are low considering its low-profit margins, and low return on assets. There is no need to hold the stock because the returns are lower than the risk-free rate.

Works Cited

Airbus Group N.V. ADS 2014. Web.

Boeing Co. NYSE: BA2014. Web.

FRED 2014, Federal Reserve Economic Data: 212,000 US and international time series from 62 sources. Web.

Select USA 2013, The aerospace industry in the United States. Web.

The Boeing Company (BA): Yahoo Finance 2014. Web.

Thurber, Matt 2011, The major airplane manufacturers at a glance. Web.

Introduction

As I learned from the article by Dahlgaard, Chen, Jang, Banegas, and Dahlgaard-Park (2013), the business excellence models (BEMs) have gained popularity in the last twenty years. However, it is noted that many organizations have faced challenges when trying to implement BEMs due to the complicated evaluation criteria, too much paperwork, and burdensome procedures. Thus, a business excellence framework (BEF) is suggested, and its adaptation on an empirical case of Boeing Aerospace Support is demonstrated.

Main body

There are three arguments most commonly mentioned when talking about the limitations associated with self-evaluation in the current BEMs: they are non-prescriptive, not convincing enough, and do not provide instruction for unification. A conventionalized 4P excellence model, which is aimed at reaching organizational excellence, comprises the following elements: individuals, teams, work processes, and services.

To reduce the limitations of the current BEMs, a new BEF is proposed. It includes three elements that are expected to improve the existing BEMs: organizational culture, organizational characteristics, and the integrity of management techniques and the BEM. The primary aim of BEMs is to lead the company towards BE. The secondary goal is performing the evaluation of the organization’s work.

Conclusion

The analysis of the Boeing case indicates the following findings. The company employs a BEM along with a number of management techniques and tools. Apart from these options, Boeing makes use of unique programs that help to develop excellence and organizational culture. The case study has shown that each of the three dimensions of the suggested BEF had been employed in the company with the aim of reaching the productive application of the BEM with the inclusion of all workers in the process.

However, it is crucial to understand that while the suggested BEF model is rather flexible, it is necessary to understand each of the dimensions along with their internal relationships. Thus, the suggested BEF is considered a fail safe mechanism for enforcing BEMs.

Reference

Dahlgaard, J. J., Chen, C.-K., Jang, J.-Y., Banegas, L. A., & Dahlgaard-Park, S. M. (2013). Business excellence models: limitations, reflections and further development. Total Quality Management & Business Excellence, 24(5), 519-538.

Disclosure of financial information is an important component of accounting practices. In some cases, companies time the release of the information in an attempt to manipulate stock prices. The following paper discusses the violation of the full disclosure principle by Boeing.

Based on the information from the case study, it is possible to identify three main groups of stakeholders. The first group includes the stockholders of McDonnell Douglas, who received payment in Boeing stocks issued to pay for the acquisition. The second group includes the management of the Boeing company as well as all employees associated with the decision to withhold financial information. The third group includes the stockholders of Boeing stocks who obtained them prior to the acquisition of McDonnell Douglas.

The main ethical issues are related to the decision to withhold Boeing’s financial information. According to the case study, production line inefficiencies have resulted in significant cost overruns (Kimmel, Weygandt, & Kieso, 2015). The disclosure of this fact was considered a major threat to the company’s valuation on the market. By extension, the decline of stock prices will require the revocation of a major deal, which is highly undesirable for Boeing. In other words, Boeing management’s decision can be considered unfair practice aimed at the concealment of important information from its stockholders in order to avoid the expected complications.

The main accounting principle relevant to the case is the full disclosure principle. According to it, a business is required to provide all of the financial information necessary for financially informed stakeholders to make respective decisions. The disclosure is made through one of the established information channels, such as a financial statement or a dedicated section in the company’s annual report. Importantly, the principle also requires the disclosure to be timed in accordance with predefined schedules. Understandably, the nature and amount of information considered necessary can change over time. Nevertheless, failure to comply with it in order to mislead the stakeholders is considered a violation.

It is important to note that the information in question was eventually released, resulting in the anticipated decline in the price of stocks. However, the time chosen for the announcement made it impossible to revoke the deal with McDonnell Douglas. Such an approach is unethical for two reasons. First, it compromises the integrity of the acquisition by allowing the management to keep the price of stocks high artificially. Second, and, perhaps, more importantly, it relies on emotional and psychological aspects of human perception. In the example above, one of the factors expected to reduce the adverse effects for the company was the funeral of a public figure. From this perspective, it can be considered an attempt to manipulate human emotions for financial gain, which is unethical from a humanitarian standpoint.

Considering the information above, it would be more appropriate for the CEO of Boeing to disclose the information once it becomes available to the company’s accounting department and acknowledge its implications for the recent acquisition. Admittedly, such a strategy would not help to avoid the revocation. However, in the long term, it would have a positive effect on the company’s reputation.

Finally, it is important to identify possible implications of the decision for investors and analysts. It is possible to assume that Boeing’s top management’s actions did not violate any obligations. However, it constitutes an example of unfair business practice and, by extension, suggests that similar unfair practices might be used by the company in the future. As a result, the market valuation of Boeing can be considered unrepresentative, repelling potential investors and, by extension, inhibiting growth.

As can be seen, Boeing management’s decision is ethically flawed. In addition to violating the full disclosure principle, it compromises the trust of its stockholders. Such actions are known to have adverse long-term effects and are to be avoided.

Reference

Kimmel, P. D., Weygandt, J. J., & Kieso, D. E. (2015). Financial accounting, binder ready version: Tools for business decision making (8th ed.). Danvers, MA: John Wiley & Sons.

Introduction

When Boeing considered its options of cities for relocating its headquarters in 2001, it mainly viewed three cities, namely Chicago, Denver, and Dallas-Fort Worth. Schmeltzer and Hilkevitch (2001, www. Jessejacksonjr.org)) in their now historical report in the Chicago Tribune clearly mentioned that Boeing’s Chairman Condit considered a city offering more economical transportation costs, decrease in overall cost of operations, with a gain in incentives and which would help create a growth and value-driven enterprise, as the city of choice. Obviously the company bosses wanted to improve the stock value of the enterprise. Condit was also quoted by the report as having stated his choice of a city that would be culturally diverse, provide ready access to global markets, have a strong business environment, and would also facilitate easy operations for the aeronautical major. However, it is worth examining how far classical location theory, agglomeration issues and externalities relating to the chosen location, viz Chicago, actually influenced the relocation decision of the company. The following is an attempt to do just that.

Discussion on Boeing’s Reasons for Relocating in Relation to

Classical Location Theory

Arguably the location of an enterprise’s corporate headquarters is of great significance not only to the enterprise itself, but also the state that hosts that enterprise. The earliest theories in explaining the location of firms or enterprises have origin in the economic models due to Ricardo and Adam Smith. Adam Smith viewed the firm’s location as necessitated for optimizing production. Ricardo had similar views, but in his case, the model considered comparative advantages in production that a location granted the business enterprise. Both these models thus considered production firms. But such theories were simplistic. They did not consider various market distortions like controlled wages, market monopoly, etc. A later model due to Heckscher and Ohlin (1933), also called factor endowment model, explained the location preference of production firms in places where the costs of production were lower (as per existing factor prices).

In contrast, Krugman (1979: pp. 469-479, 1980: pp. 950-959) explained the location preferences of firms on the basis of technological differences, varying economies of scale of operations, etc. Krugman stated that firms try to concentrate their production activity near their markets so that they can lessen transportation costs and gain economies of scale. Harris (1954, pp. 315-348) had even earlier stated that production firms were driven to locations where they had greater access to markets. But perhaps the most well known of the models is that by Weber (1929), who argued that firms operating in fixed markets, using existing inputs and fixed population were constrained to locate their production activity in places where the costs of transportation and production were minimal. Variation of inputs and location was later attempted and built upon Weber’s model by Moses (1958, pp. 259-272), Hoover (1937), Greenhut (1956), and Isard (1956). Location theory has mainly attempted to develop formal mathematical models to predict the optimal location of industry when transportation costs are known. It has been found that firms usually try to locate near markets or near raw material sources.

Boeing’s decision to relocate to Chicago may be examined in the light of the above theories. However, it is notable that only the headquarters and not the entire production units, shifted to Chicago. As per the statements made by the Chairman of Boeing, Mr Condit, the company hoped to have access to larger and nearer markets. The company also wanted to lessen its transportation costs and ensure economies of scale. It could also carry on its production elsewhere at the existing levels and better control the activities of the production and operating units which were dispersed spatially. Both Ohlin’s model and Krugman’s theories appear to be confirmed by the action of Boeing in such relocation of the company headquarters.

Even the theories by Harris and Weber do relate with Boeing’s selection of Chicago as the headquarter host state. Perhaps the statements of the company top bosses immediately preceding the relocation announcement are ample indication as to the objectives of the company in so relocating to Chicago, in preference to either Dallas-Ft Worth or Denver. The downtown of Chicago was vibrant and may have played an important role in the ultimate decision to relocate the company there. Additionally, Chicago was viewed as a global city, had a well laid mass transport system, had a surfeit of international air linkages, was culturally diverse and was located so as to connect by air routes with greater number of international locations than either Dallas or Denver.

The workforce was also well educated, culturally diverse, and capable of working in higher corporate positions. As Klier and Testa (2001) state in an article, very few cities like Chicago in the USA provided for such facilities as legal, advertising, financial, communications, transportation, highly skilled white-collar workforce, etc (p. 1). Elsewhere in the same article, the authors argue that “Large metropolitan areas continue to have a comparative advantage in hosting headquarters of large companies. A detailed analysis of the changing location pattern of publicly traded large companies over the last decade reveals little change in the overall share of large company headquarters domiciled in the 20 largest Metro areas. When we examine the considerable growth variation among the largest metro areas, we find that population growth—reflecting a regional shifting of markets—are important in explaining observed changes during this period. In addition, industry mix and geography seem to matter” (p. 4)

Agglomeration Issues and Other Externalities

That firms tend to cluster together in certain locations have been observed over time. Studies have also found that small firms tend to cluster together based on technological externalities, while larger firms do so based on market related externalities. While traditional location theory tried to explain the location of firms based on transportation cost considerations, firms also tended to cluster together based on external economies. Hoover (1957) observed that these external economies could be either localization economies caused by firms from the same industry clustering together in the same location, or urbanization economies caused by firms across diverse economies coming together in a single location. External economies could be due to pooling of labor, knowledge economy, etc. The external economies are what are also termed as agglomeration economies. Basically, when production firms cluster in a particular location, there are advantages in the economy of operations, and these economies in turn contribute to the cluster formation. Krugman (1991, pp. 70-71) observed that while external economies are applicable at the local level, industrial agglomeration operates at regional or national levels.

Boeing’s decision to relocate its headquarters to Chicago are obviously driven by the need to have access to larger and nearer markets, high skilled population, minimization of transportation costs, and economies of scale, as previously noted. Chicago does offer a host of advantages like its business-friendly environment, easy access to North American customers and operations, nearness to global markets, a culturally diverse population, a vibrant downtown, etc. Chicago as the centre of the North American economy also provides for ease of business traveling, offers over 145 non-stop domestic air routes, has diverse facilities and skilled populace for supporting high-end sophisticated executive functions, facilitates economical costs of doing business, and also has a vast lakefront. In addition, the hefty incentives offered by the government may have clinched the deal in favor of Chicago.

Boeing’s Actual Search and its Relation to the Standard Model

Boeing’s search for the city for housing its headquarters does relate to the classical models of location theory. The company’s major consideration appears to have been the need to minimize transportation costs of raw materials and finished products. Classical location theory hypothesizes that firms tend to locate to places where the transportation costs are minimal as also enable economies of scale. The company also attempted by means of the relocation to be near to its markets, inputs, etc. By operating from headquarters at Chicago, the company hoped to successfully control its national and international operations, minimize travel time of its chief executives, access the services of skilled population, and also assume a central position in North America that Chicago afforded it. In other words, both location theory, in its simplest form, as also the influence of external economies in a heterogeneous environment like urbanization, population, business environment, etc, that contribute to industrial agglomeration or regional development, stood substantiated by the relocation of Boeing to Chicago.

Evaluating the Economic Impacts of Boeing’s Relocation on Chicago

While the advantages in locating a firm like Boeing in Chicago played a key role in the relocation of that airline major from Seattle, it is also true that such relocation played a strong role in enhancing the business and economic value of Chicago. The most immediate result was that Boeing employed around 500 personnel, although most appeared to have been brought over from the Seattle HQ. Yet it could also be argued that Chicago gained a host of agglomeration economies by bringing in Boeing HQ to its fold. For one thing, the entry of such a major firm like Boeing meant the gain of knowledge spillovers. Boeing, in the course of its operations, had to deal with various local firms and businesses, and its highly knowledgeable and skilled personnel interacted with the personnel from these smaller local firms and businesses.

Those local personnel thus gained vital knowledge and skills. The most benefit was to law, advertising and marketing firms which began to function better with increasing exposure to the Boeing operations. Thus the economy grew in strength and made Chicago more attractive to investors and new businesses in the short and long run. Also, production costs tended to decline further, thus catalyzing inflow of further business and hence enhancing the city economic growth. The increase in private capital as contributed by continuing HQ operations, as also development of human resources could step up the growth in the local economy and also enhanced the positive global perception of the city. Added to this were the obvious welfare benefits and quality of human life brought in by major companies and their top executives.

Public Subsidies and their Influence on Boeing’s Relocation

Public subsidies and tax incentives are often offered by host countries or cities to incoming business enterprises. While governments may have their considered reasons for the same, yet it cannot be denied that the action in providing extra benefits to the company or firm has an impact on the country or city and its common people on whom the entire taxation and subsidy are ultimately incident. In case of Boeing Corporation’s relocation decision, the Chicago government offered the company a high $ 63 million tax incentive. The company was also exempted from paying property taxes on the prime property forming its local headquarters in Chicago. This worked out to a rough $ 40 million over the twenty-year period. Additionally, Boeing was to get state income-tax credits under the EDGE program (of Illinois) for as many as 15 years, and the total worth of such credits worked out to about $ 22 million in the 15 year period. Also, the company was granted a waiver from the regulatory prohibition in force in the state on exhibiting company logos on top of buildings.

The question that is sought to be addressed here is whether or not the provision of such massive tax and other subsidies by the Chicago local government as offered to Boeing played a role on the company decision to actually relocate from Seattle, where it had been set up from inception. Perhaps the answer to this can be found in the observations and comments made by Boeing top bosses like Condit. While the company executives all along attempted to keep their venture and most details a secret as much as possible, the way in which and the time within which the whole transfer operation was executed (in only 167 days), proves that intense planning was involved and also that strong lobbying went on behind the scenes between the Boeing officials, including Condit, and the Chicago government representatives like Mayor Ryan. In fact, Condit himself give his objectives for such a relocation decision away when he says during the annual address to the company shareholders while presenting the Annual Report 2001, “When the headquarters is located in proximity to a principal business-as ours had been in Seattle-the corporate center is inevitable drawn into day-to-day business operations. We don’t want to meddle. Our function is to concentrate on vision and strategy. We are focused on where we are going and how fast, how to allocate capital and resources across the corporation, how to make the best use of the Boeing brand and how best to develop our intellectual capital.” (2001, p. 5).

This statement when taken with the proposed strategic repositioning of organization top hierarchy as also the downturn in commercial aircraft industry during this period provides pointers as to what may have motivated Boeing actually to relocate to Chicago. Obviously, the company wanted to separate its administrative and production units over a geographical distance. Also, the market trends mandated it to adopt strategies for controlling costs (transportation costs, mainly), harness and develop intellectual capital and also try and succeed in giving the company a new direction, as distinct from its past. Still more obvious is the profit objective of the company which can be inferred from the statements of Conduit and others from Boeing. Thus while Chicago did offer some advantages that were absent in the case of both Dallas and Denver, it also offered a host of hefty incentive packages that could have clinched the deal in Chicago’s favor. The company wanting to maintain a lean production team and also a lean corporate office perhaps substantiates the major reasons for such relocation of the company to Chicago.

Conclusion

Boeing had relocated to Chicago from Seattle based upon the company’s changes in management strategy. The Chairman Condit wanted to make the production units autonomous as also divide the company into three distinct business operations, each lead by an independent rank equivalent to a CEO. A company always wants to minimize its operating costs and enhance its profits, and hence shareholder value. That Condit had an eye on the stock markets was pretty evident. The markets were actually close to Chicago. However, the city of Chicago offered a host of other benefits, including a knowledgeable and diverse workforce, a vibrant and business-friendly city culture, presence of major banks, communications points, air links, rail routes, etc. The city could also help the company manage its operations better. The company bosses could also save time and money in the course of their frequent travels to and from Chicago since their routine involved numerous travels and official visits to places far and near. And, additionally, perhaps, the offer of hefty subsidies and benefits from the Chicago government did clinch the issue in favor of Chicago as the global HQ of the world’s best known aeronautical company.

References

Annual Report (2001), Boeing Corporation, Chicago.

Greenhut, Melvin L. (1956), Plant location in theory and in practice, Chapel Hill: University of North Carolina Press.

Harris, C. (1954), “The market as a factor in the localization of industry in the United States”, Annals of the Association of American Geographers, pp. 315-348.

Hoover, Edgar M. (1937), Location theory and the shoe and leather industry, Cambridge, MA: Harvard University Press.

Isard, Walter. (1956), Location and space-economy, Cambridge, MA: MIT Press.

Klier, T. and Testa, W., (2001), “Headquarters wanted: Principals only need apply”, Chicago Fed Letter, The Federal Reserve Bank of Chicago, Special Issue, No. 167a, pp. 1-4.

Krugman, P. (1979), “Increasing returns, monopolistic competition and international trade”, Journal of International Economics, pp. 469-479.

Krugman, P. (1980), “Scale economies, product differentiation and pattern of trade”, American Economic Review, pp. 950-959.

Krugman, P. (1991), Geography and Trade, Cambridge, MA: MIT Press, pp. 70-71.

Moses, L. (1958), “Location and the theory of production”, Quarterly Journal of Economics, pp. 259-272.

Ohlin, B. (1933), Interregional and International Trade, Cambridge: Harvard University Press.

Schmeltzer, J., and Hilkevitch, J., (2001), “Chicago in bidding to be Boeing’s home”, Chicago Tribune, 1A, 21A.

Weber, A. (1929), Über den Standort der Industrien, Tübingen: J.C.B. Mohr [Translated from German by C. Friedrich, Theory of the Location of Industries, Chicago: University of Chicago Press].

Introduction of the Project

Based in the United States, Boeing Australia Limited (BAL) is a worldwide subsidiary of the Boeing Company whose main activities are establishment, upgrading, and general maintenance of military aeroplanes, apparatus, and space communication. The company has met multifarious challenges during procurement processes since its establishment in 1996. This situation has resulted in customer dissatisfaction since the current procurement processes have failed to satisfy the company’s clients. More challenges have emerged during deliberation on whether the company should add on features on the existing procurement system or conduct an overhaul of the entire system.

Although some procurement managers advocate for temporary enhancements on the present procurement system, the company has insufficient funds to finance purchase temporary upgrades and pay off the maintenance personnel. The main areas of the procurement system that need adjustment include supplier amalgamation, two-way feedback, and internal management. This project seeks to examine the limitations of BAL’s current procurement processes with a view of highlighting effective ways of managing customers, suppliers, and internal organisational systems by using e-procurement platforms.

Objective Advantage and Disadvantages in regards BAL’s Current Procurement Process

One of the advantages of BAL’s current procurement system is its ability to support one-step single human interface that reduces manual data transactions. The current procurement system suits the size of the company since it does not restrain its budgetary allocations for procurement. However, its suitability is only for short-term goals and is unbecoming for a technologically evolved world. The current limitations exhibited by the current procurement system outweigh its advantages. The current procurement process at BAL poses impending managerial, financial, technical, and market risks and uncertainties to the company.

This state of affairs can lead to decline of the company’s reputation and competitive advantage. In addition, BAL’s procurement approach has lagged the company behind procurement technology. As a result, the company has faced operational redundancies that have in turn resulted in deteriorated productivity and wastage of time. The company has attempted to match the standards of modern procurement through introduction of short-term improvement plans. This choice has become very costly for the company as it involve scrupulous decision-making processes that necessitate additional operational and development costs (Xu 2011).

Short-Term Improvement

BAL has faced many challenges in the process of upgrading and maintaining its procurement processes that have compelled it to initiate short-term procurement strategies to meet consumer demands. Russell Menere who joined the company in 1999 as the new procurement manager was charged with the responsibility of finding new means to improve the procurement system. The procurement manager had to ensure improved productivity whilst minimising operational costs.

As a result, he initiated short-term procurement plans that include rationalisation and management of suppliers, implementation of credit card purchasing system, and introduction of electronic order processes (Sen, Sen, & Basligil 2010). Moreover, Russell formed BAL’s materials management council to facilitate the company’s procurement process. However, these short-term improvements have had various advantages and disadvantages for the company. Noticeably, the greatest advantage of the short-term procurement improvements is that the company has by any means managed to satisfy the demands of its vast client base.

However, integrating short-term improvements with BAL’s current legacy system has disadvantaged the company due to emergence of operational inefficiencies that have retarded its accomplishment of set goals. Lastly, short-term changed owing to spontaneous improvements has led to reshuffling of employees to fill new positions depending on their expertise. According to Henry, Garbarino, and Voola (2013), short-term improvements have increased resistance to change as employees fear losing jobs in case BAL’s management decides undertake an overhaul of the procurement system.

Rationalisation and Management of Suppliers

Through its short-term improvement strategies, Boeing Australia Limited (BAL) has maintained considerable rationalisation and management of suppliers to gain competitive advantage. Successive procurement managers have strived to rationalise the prevailing supplier networks with a view of improving BAL’s business operations. To achieve this objective, the present procurement manager has maintained various delivery modes to BAL’s consumers.

This strategy has upheld a high reputation for the company. According to NSW Aerospace Directory (n.d), BAL has a vast range of suppliers both in Australia and in other parts of the world. The expansion of the company since its establishment has realised a proportional increase in the number of suppliers. Therefore, rationalisation of the supplier base has greatly leveraged spending trends within the organisation (Johnsen, Miemczyk, & Howard 2014).

The company has also upheld high-end supplier relationship management to enhance its supply chain. A critical aspect of rationalisation of client base is that it ensures that suppliers have the appropriate competence to meet the needs of the company. However, rationalisation and management of suppliers at BAL is a short-term strategy to fulfil immediate client demands. This situation has led to poor visibility of impending supplier pools and expenditure profiles. According to Kalwani and Narayandas (1995), a sound visibility plan is a crucial instrument for managing highly differentiated businesses such as BAL. This situation necessitates the company to initiate organisational change with reference to its existing procurement strategies.

Introduction of Credit Card Purchasing

The introduction of credit card purchasing has improved the procurement processes significantly. The use of credit card purchasing has enhanced BAL’s management of its financial accounts as the company conserves cash whilst ensuring constant supply of production materials and workforce to sustain the business operations. Credit card purchasing has enabled both suppliers and consumers to track expenditure trends (Henry, Garbarino, & Voola 2013).

Consequently, suppliers have gained substantial purchasing power to maintain constant availability of production materials. In addition, the introduction of credit card purchasing has enabled BAL to gain control over employee spending. This characteristic of credit cards a created a framework that sets expenditure limits. Generally, the credit card trend has led to development of reputable financial management practices in the company.

With the increased efficiency and availability of low value goods owing to the use of credit cards, BAL should integrate a robust software solution to supplement the electronic card systems. Although this strategy is a short-term improvement at BAL, automation of payments to the suppliers has eased the procurement process for the company. Nonetheless, there is a need to integrate this payment system with improved procurement software to make the system more efficient (Henry, Garbarino, & Voola 2013).

Formation of Materials Management Process Council

The formation of a materials management process council as a short-term improvement strategy has enabled the company to procure materials at reasonable market prices. This council conducts logistic functions within an organisation to maintain quality control and reputable inventory management.

Being a large corporation, BAL requires a materials management process council to monitor business logistics of both physical products and intangible services. Material management will enable the company to track the companies merchandise within its various parts of operation. Through the jurisdiction of the materials management council, BAL has gained the power to deliver high quality products. The council has also ensured standardisation of materials to ensure constant supply of value products.

Nonetheless, the materials management process is part of the procurement processes. At BAL, holistic materials management requires the execution of modernised procurement processes to substantiate the overall operational efficiency of the company (Simon, Smith, & West 2010). The authors reveal that materials management has a vital function of improving productivity. Loss of production materials can result in tremendous losses at BAL. Therefore, the council should ensure integration of materials management processes with the e-procurement platform to enhance storage and monitoring of materials.

Recommendations

I recommend BAL to execute an e-procurement system to facilitate operational effectiveness. The e-procurement system has the capability to interface with BAL’s current legacy system (Jaffeux, Perret, & Wieser 2013). According to the authors, information technology is crucial for the management of the company’s production processes and distribution channels. The expansion of the company has led to increased client base as different consumers come from around the world to seek BAL’s services. Therefore, it is time for the company to integrate more versatile and holistic procurement systems with its legacy system to improve efficiency and enhance consumer and supplier satisfaction.

In addition, there is a need to prepare BAL’s employees for the change process. The company has experienced technological resistance, especially proposals for implementation of e-procurement system, because of insufficient leadership over its years of development. According to Simon, Smith, and West (2010), BAL’s management should conduct regular training and initiate incentive programmes for the workforce to improve the relationship between the management and the other employees. Training is a crucial stage of preparing a company’s workforce for organisational change.

Furthermore, BAL should focus on a long-term strategy that can fulfil the company’s goals and objectives. Since the company has a reputable legacy system that covers all its four main divisions and twelve functional sites, the company has a rich background to establish robust procurement systems to maintain autonomous functionalities across all its areas of operation. This strategy ensures that BAL’s identification and execution of functions without the prior presence of a manager or even an immediate supervisor. However, the workability of an autonomous system demands for an e-procurement platform that will ensure spontaneous monitoring and measurement of performance (Paun 2014).

Therefore, the only way for the company’s success is implementation of a robust e-procurement system to enhance operational effectiveness. BAL should place more emphasis on management control. Management control subsystems that are integrated in the e-procurement system automatically gather, scrutinise, and present results that provide reliable information for decision makers. Consequently, long-term strategies will reduce both operational and developmental costs because of increased overall efficiency.

E-Procurement Strategies

E-procurement is inevitable for multinational companies such as Boeing Australia Limited owing to the complex nature of their operations. The integration of information technology in other systems of BAL has increased the need for e-procurement system to monitor purchasing and measure performance of the other systems of production (Tang & Zimmerman 2013). Generally, various barriers such as poor leadership, resistance to change, lack of a universal procurement system, and general complexity of the company’s organisational structures have hindered the implementation of e-procurement strategies at BAL.

However, overcoming these challenges by preparing the employees for change will facilitate the implementation of the e-procurement platform. According to McHugh (2011), e-procurement will enhance labour productivity at BAL. The system also comes with rewards such as provision of better services to clients and suppliers, cost and time effectiveness, and procurement transparency among other virtues. Therefore, the implementation of the e-procurement system at BAL will improve the company’s organisational efficiency. A survey conducted by Oh, Yang, and Kim (2014) to assess the influence of e-procurement system deployed in similar companies revealed that the system enables an organisation to reduce administrative costs.

The authors concluded that e-procurement ensures that businesses implement cost-effective processes. Cost-effectiveness is brought about by the system’s ability to rationalise and computerise purchasing processes. In addition, the implementation of an e-procurement system at BAL will distribute the purchasing power amongst the potential clients owing to standardisation of purchasing techniques.

Conclusion

The business environment has increasingly become competitive in spheres of operation from production to the end consumer. Unending advancement in information technology has heightened business complexity. As a result, companies have to find ways to solve complex business issues. However, traditional procurement processes have failed to favour modern businesses since their operations have become differentiated. Therefore, there is a need for large corporations such as BAL to implement procurement systems that are more robust to leverage transaction costs. Research has indicated that companies that have adopted e-procurement systems have a higher percentage of operational efficiency as compared to those, which have assumed long-established procurement approaches.

The success of the company will significantly depend on the integration of a powerful e-procurement system with its outstanding legacy system. The increasing use of credit card purchasing has improved procurement processes for many companies. Suppliers have gained access to this easy mode of payment; hence, on-demand delivery of materials has become the norm for many suppliers. The strategy increases operational effectiveness that results in achievement of organisational targets.

References

Henry, P, Garbarino, E, & Voola, R 2013, ‘Metacognitions About Consumer Protection and Individual Responsibility in the Credit Card Domain’, Journal of Public Policy & Marketing, vol. 32 no. 1, pp. 32-44.

Johnsen, E, Miemczyk, J & Howard, M 2014, Purchasing & Supply Chain Management: A Sustainability Perspective, Routledge, New York, NY.

Jaffeux, C, Perret, L & Wieser, P 2013, Essentials of Logistics and Management: The Global Supply Chain, EPFL Press, Lausanne, Switzerland.

Kalwani, U & Narayandas, N 1995, ‘Long-term manufacturer-supplier relationships: Do they pay off for supplier firms?’, Journal of Marketing, vol. 59 no. 1, pp. 1.

McHugh, N 2011, ‘What is driving commercial purchasing card growth?’, Journal of Corporate Treasury Management, vol. 4 no. 3, pp. 259-271.

NSW Aerospace Directory n.d, Boeing Australia Holdings Pty Ltd. Web.

Oh, S, Yang, H & Kim, W 2014, ‘Managerial Capabilities of Information Technology and Firm Performance: Role of e-procurement system type’, International Journal of Production Research, vol. 52 no. 15, pp. 4488-4506.

Paun, O 2014, ‘Management of Procurement and Material Resources: A guarantee for quality IV. Performance Management of the Process of procurement resources’, Quality – Access to Success, vol. 15 no.141, pp. 57-61.

Sen, G, Sen, S & Basligil, H 2010, ‘Pre-Selection of Suppliers through an integrated fuzzy analytic hierarchy process and max-min methodology’, International Journal of Production Research, vol. 48 no. 6, pp. 1603-1625.

Simon, J, Smith, K & West, T 2010, ‘Incentives and Consumer Payment Behaviour’, Journal of Banking and Finance, vol. 34 no. 8, pp. 1759-1772.

Tang, S & Zimmerman, J 2013, ‘Information and communication technology for managing supply chain risks’, Communications of the ACM, vol. 56 no. 7, pp. 27-29.

Xu, D 2011, ‘Information Architecture for Supply Chain quality management’, International Journal of Production Research, vol. 49 no. 1, pp. 183-198.

Boeing was listed on the New York Stock Exchange on 05 September 1934. Boeing common stock forms part of two widely followed indexes: The Dow Jones Industrial Average and the S&P500 (NYSE Euronext, 2012).

One year ago, at the close of trading, Boeing common stock (BA) traded at $79.31. On Friday 4 May 2012, BA common stock traded at the close at $75.84. The one-year return excluding dividends was a loss of 4.3%. If you take into account the dividend paid at $1.68/share, for a 2.1% yield at the closing price one year ago, that loss is reduced to a loss of 2.2%.

Financial highlights include the following financial data: Gross Margins are at 18.2%, Operating Margins are 8.76%, Profit Margins are 5.94% and there is a 2.32% dividend yield. The P/E is 13.19, PEG is 1.21, P/S is 0.78 and P/B is 11.30 (this is very high). The ROE is 91% (very high) (MSN Money, 2012).

The question must be, with financial highlights such as these, why has the common stock essentially been flat for a year? The answers start to reveal themselves when you dig a little deeper into the financial statements.

Revenue growth is marginal at 0.81% from 2007 to 2011. Wall St. favors strong growth companies. Further, the Cost of Goods is rising faster during the same time period at 1.13%. This indicates a weakening margin position, not what an investor wants to see.

Boeing will legitimately use the Percentage of Completion method (POC) for Revenue accounting, which is a little murky to non-accountants. The Cash Flow Statement shows that Cash from Operations is far less than Operating Income that appears on the Income Statement at 0.68. This is an accounting red flag. Essentially when the two-line entries are this far apart, the Operating Income on the Income Statement is being inflated inappropriately. That Boeing uses POC accounting, makes it difficult to truly understand possible issues here.

Further from the 2011 10K filing, it is disclosed that fully 50% of Boeing earnings originate from the Military division of Boeing, Boeing Defense, Space &Security (BDS). This is in my opinion a risk for the following reasons. Both Congress and the Senate formed a Super-committee, the purpose being to reach a solution with regard to government deficits The Super-committee failed to reach any solutions. This means that automatic spending cuts will be implemented. These spending cuts will include military spending and budgets. Boeing potentially could be at risk of reduced military spending under government contracts into the future.

The Government Accountability Office reports that;

“Over the next 5 years, the Department of Defense (DOD) expects to invest almost $343 billion (in the fiscal year 2011 dollars) on the development and procurement of major defense acquisition programs. Defense acquisition programs usually take longer, cost more, and deliver fewer quantities and capabilities than DOD originally planned. For several decades, Congress and DOD have taken steps to improve the acquisition of major weapon systems, yet some program outcomes continue to fall short of what was agreed to when the programs started. With the prospect of slowly growing or flat defense budgets for the foreseeable future, DOD must get better value for its weapon system spending and find ways to deliver needed capability to the warfighter for less than it has spent in the past.” (GAO-11-318SP, 2011, para.1).

Politifact states;

“If I went around this room to every company represented here and I asked you what is the fastest-rising expense in your business over the last decade, I dare say 100 percent of you would say it’s health care costs, and it’s exactly that way in the Department of Defense, which is taking away our ability to spend money on other quality-of-life issues and identify weapons systems to equip our men and women.” (Politifact, 2012, para.6).

In summary, the threat to Boeing, with regard to military contracts and the revenue streams that they provide, is in the near term significant. Until there is greater clarity, Boeing common stock carries significant revenue risk.

References

Government Accountability Office, (2011). Defense: Employing best management practices could help DOD save money on its weapon systems acquisition programs (GAO-11-318SP). Washington D.C., US: Author.

MSN Money: Financials, (2012). Web.

NYSE Euronext: Listings Directory. (2012). Web.

PolitiFact.com: The Truth-o-meter says. (2012). Web.

Boeing is an established company that has been working in the aviating industry for over 100 years. Table 1 presents the SWOT analysis of Boeing’s external environment and internal resources and capabilities. Firstly, it is necessary to review the external environment of Boeing, mainly the aviation industry, which is undergoing a crisis, presenting many threats for Boeing, especially considering the recent disruptions affecting air travel, supply chain, and manufacturing.

Opportunities for Boeing are connected to the increased popularity of international travel and long-distance airplane journeys. Firstly, the aviation industry has demonstrated growth in recent years, with increased consumer spending on air travel, leading to an increased demand for Boeing’s products (Boeing, 2019). Moreover, travelers and air travel companies focused more attention on long-distance journeys and international travel.

The market has demonstrated a change in consumer preferences, which allows Boeing to introduce its products to new markets and explore different options for growth (Boeing, 2019). However, the coronavirus outbreak has affected the oil prices, which was the main threat for Boeing prior to the outbreak, providing a growth opportunity for the business after the restrictions are lifted (Ntshalintshali, 2019). Moreover, the government of the United States will offer relief packages for companies, including Boeing, which should help deal with the crisis.

The main threats for Boeing emerged recently with the rapid development of the Covid-19 pandemic and the ban on international travel from many states. According to Tangel and Gryta (2020), Boeing already suspended production of its aircraft in Seattle. Since it is unclear when it will be safe to resume work at factories, this event placed a severe strain on Boeing. Apart from safety, the supply chain of Boeing is disrupted, since many companies manufacturing parts and components for aircraft are not operating (Ryan, 2020). Moreover, the airline industry, in general, has suffered from a significant loss of operational activity, as international travel has been banned by many countries, including the United States (Ryan, 2020).

This inevitable will affect the demand for Boeing’s products in the following moths. Prior to the coronavirus outbreak, Boeing was threatened by the oil price volatility. Ntshalintshali (2010) states that OPEC controls over 40% of the oil industry and, subsequently, the prices on the market, and in recent years, the future purchase orders may decrease, providing opportunities to the competitors.

As for strengths, Boeing has focused on its research and development (R&D), spending a lot in this domain. This means that the company has an advantage before its competitors in regards to new products and improvements to the old ones. Additionally, Boeing has had a stable financial outlook since prior to 2020, Boeing (2019) reported a steady growth of operations. Thus, the company is investor-friendly and, in addition, has been dominating the aircraft manufacturing industry for many years.

The weaknesses include the spending of the business on R&D, which, although it brings a significant competitive advantage, also affects the revenue and profits negatively. The fact that the customers show more interest in Boeing’s product results in a substantial labor force strain. Moreover, Boeing’s aircraft have crashed in recent years, which affected the perception of the company and raised safety concerns.

Table 1. SWOT analysis of Boeing (created by the author).

References

Boeing. (2019). Current aircraft finance market outlook. Web.

Ntshalintshali, T. (2018). Oil prices and the airline industry. Web.

Ryan, C. (2020). The coronavirus is squeezing aerospace beyond Boeing and Airbus. Bloomberg. Web.

Tangel, A. & Gryta, A. (2020). Coronavirus exacts mounting toll on industry. WSJ. Web.