Dear Fellow Industry Strategerists,
A handy phrase to understand companies: Culture eats strategy for breakfast. At Boeing, this phrase took a very literal turn this month. CEO Dave Calhoun, perpetuator of a dysfunctional culture, dissolved the company’s strategy department. Chief Strategy Officer Marc Allen, a 17-year Boeing executive, announced his departure. In a letter to employees, Calhoun said that instead of a company-wide strategy unit, Boeing would have “strategy teams directly joining the business units they support.”
Devolving strategy to the business unit level is incredibly ill-advised. It’s one thing to do that if you’re a horizontal conglomerate, like GE before the breakup, or even Textron, today. But Boeing is an aircraft company. It should have a company-wide strategy department (in addition to business unit strategy departments). Specifically, a company strategy function provides three things:
1. Corporate strategic intent and vision. A strategy department analyzes why and how a company’s collection of businesses, products, capabilities, IP, and technologies – working together – create a sustainable competitive advantage and add shareholder value. It also assesses where the company wants to be in five and ten years, and how macro forces might impact that vision.
2. Resource allocation. A strategy department allocates scarce capital amongst the demands of competing business units (who always want more than their fair share). It also allocates talent; the Dreamliner was rescued, in part, by people shifted over from the defense side of the house. And it recommends acquisitions and divestitures – M&A activity impacts the entire company, not just individual units.
3. Coherent product development and technology development roadmaps. This involves bringing a strategy/market perspective to Engineering to other functions. It’s one thing for business units to plan product roadmaps; it’s another thing for the CEO to understand why one roadmap should enjoy priority for resources over another, particularly when the company has fallen far behind its competitors. Also, Boeing people used to point to technologies – autonomy, digitization, materials, and many others – that were being developed and applied between business units. They won’t be doing that any more.
Given how useful these things are, what’s Calhoun’s rationale for abolishing the company-wide strategy department? Cost-cutting is an obvious explanation. Per my December 2019 letter, the longer Calhoun stayed the longer it would become clear that shareholder returns was his sole focus. At the four-year mark, that is all too dismally obvious (to be fair, much of the damage began during the Jim McNerney years; Calhoun simply followed the same path).
But it might be worse than cost-cutting. Consider the strategic picture (ironically) from the top. Boeing’s share price hasn’t budged over the past three years, despite a remarkable unexpectedly strong jetliner market recovery, and despite the strongest global defense spending environment in over three decades. Boeing’s peers, by comparison, have done great. But for Boeing, that shareholder focus hasn’t worked very well. This is because the two primary business units are not in great shape on a fundamental level:
Defense and Space. Hemorrhaging cash on multiple large and small programs, and unlikely to stop bleeding for another four or five years. Calhoun blames contracts signed by previous executives, and there’s some truth to that, but the last four years, with their chronic underestimates of resource requirements, happened on his watch. There have been some positive developments on E-7, and AH-64, but everything else is grim. Most of all, we’ll know in the next few years if they’ll get anything from the NGAD, F/A-XX, and CCA decisions. If they don’t, there’s no real future for BDS.
Commercial. Where to start? After years of beating up their supplier base (another gift from Jim McNerney that keeps on giving), building jets is a problem for some reason. The production ramp has been a series of disappointments. Worse, Calhoun continues to deny that they need a new jet anytime this decade, which means every airline on the planet has no choice but to get in line for an A321neo (5,530 sold, or about the same as all MAX variants together). As a result, they’re heading from a 50-50 market share with Airbus to 65-35. The absence of a new jetliner also means they’re at risk of losing their engineering core; they haven’t launched a clean-sheet design since 2004.
In short, the two units have much in common: they’re both under-resourced relative to requirements and badly losing market share to competitors.
With this dismal business unit outlook, and with the company’s share price seemingly glued in place, Calhoun and co. may be out of ideas. Their playbook isn’t all that deep. Or maybe they don’t want any other ideas. They might have decided to break up the company.
To be clear, this would be a very bad idea. It would be bad for the US defense industrial base. It would be bad for US commercial aircraft industry competitiveness, and indeed for the broader US economy. It would also be difficult. Calhoun and co. come from GE, which, as a horizontal conglomerate, was relatively easy to break up. But again, Boeing is not that. There’s a lot to be said for a strategy to return Boeing to its lost status as the world’s biggest and most important aircraft company. But strategy has been eaten for breakfast. In its place might be a well-worn breakup playbook.
For the business units, all is not lost in a breakup scenario. They’d find eager buyers (antitrust and other regulatory concerns notwithstanding), or, in BCA’s case, perhaps, eager investors as a standalone company. If nothing else, at the end of the process they’d get new management, which is badly needed most of all.
Yours, Until Boeing RemainCo Comprises Four Dreamlifters and a Gift Shop,
Richard Aboulafia