February 1, 2024

Boeing Made a Change to Its Corporate Culture Decades Ago. Now It’s Paying the Price. (TPL Insights #207)

By Rob Andrews

In 2012, I began a formal study of what I then called “peak performing organizations.” The formal study is an extension and expansion of my observations of great leaders over five decades. Recently, I’ve replaced the word organizations with the word leaders. Organizational cultures, which drive performance and are, in my opinion, the only sustainable competitive advantage, are incredibly perishable. Just a few examples include what happened to:

  • Home Depot when Bernie Marcus, Arthur Blank, and Ken Langone stepped down.
  • Save A Lot Food Stores when Eric Claus stepped down and turned the reigns over to a new owner.
  • Randalls when Bob Onstead left to run his new acquisition, Tom Thumb.
  • Continental Airlines when Gordon Bethune retired.
  • Target after Gregg Steinhafel left.
  • Hewlett Packard after Mark Hurd left.
  • Apple when Steve Jobs left the first time.
  • General Electric when Jack Welch retired.
  • Microsoft after Bill Gates stepped down.

Some of these companies that experienced declines after their CEO left have recovered somewhat, but not all of them have. The article below describes what I hope is a temporary decline in Boeing’s culture and standing as an iconic brand:

We often use the word “iconic” to describe companies such as Xerox, U.S. Steel and General Electric when we really mean “no longer great.” And Boeing no longer is.

That company’s already turbulent reputation suffered another jolt this month when a door plug — a fake door that replaces a real one in some airline configurations — on an Alaska Airlines Boeing 737 Max 9 blew out at about 16,000 feet. The gaping hole in the fuselage terrified passengers, but the pilots calmly landed the aircraft. Max 9s with that configuration were grounded temporarily, and Congress demanded answers. Investigations have commenced into the 737 Max 9, a fairly new jet freighted with Boeing’s penchant for producing flawed aircraft.

With flights already full, the system can ill afford the grounding of 171 737 Max 9s. Neither can Boeing, which is now paying the price for a shift in its corporate culture made decades ago.

Aerospace was the West Coast’s original geek technology: Hughes Aircraft, Douglas Aircraft, Northrop, North American, Lockheed and others in California and Boeing in Seattle. These companies thrived during World War II, churning out aircraft for the military. The postwar era was also kind, with the Cold War, the space program and the expansion of commercial aviation providing ample customers. But by the 1970s, aerospace was being supplanted by semiconductors, and the military business sagged after the Vietnam War ebbed. Hughes, Douglas, and North American disappeared in acquisitions and mergers.

Boeing survived and thrived, sustained by an engineering culture steeped in designing superior aircraft built to demanding tolerances. Its airplanes were industry changing. The 707 in 1958 replaced prop engines and led the early jet age; the twin-deck, 360-seat 747, the industry’s first wide-body, democratized overseas air travel in 1970. The 737, introduced in 1967, is arguably the most successful short-haul airliner in aviation history. This stubby, single-aisle original proved so reliable that it got stretched, repowered, and redesigned repeatedly.

By 2020, Boeing itself had in a way been stretched, redesigned, and repowered in a series of corporate restructurings that each yielded its own defects. Since the mid-1990s, the company has bought out McDonnell Douglas, a domestic rival, moved its headquarters twice, shifted some assembly to the East Coast (which allowed the company to sidestep the unions) and changed chief executives the way you would planes in Atlanta.

What got lost in all this shuffling is a corporate culture that once prized engineering and safety, replaced by one that seemed to be more focused on delivering profits over perfection. The Boeing community in Seattle has been vocal about attributing this slide to the acquisition of McDonnell Douglas, whose leaders took over Boeing’s top jobs and reshaped the culture around cost control.

Boeing has labeled the Alaska Air incident a “quality escape,” as if someone’s pet got loose in the cargo hold. Quality jailbreak is more like it, one that has been tied to the company’s increasing reliance on outsourced work over the past two decades — in this case, Spirit AeroSystems, which builds the 737 Max fuselage. Once part of Boeing, Spirit was formed in 2005 as a component maker and counts both Boeing and Airbus — Boeing’s chief competitor — as customers. Spirit has said that it remains “focused on the quality of each aircraft structure” and will assist with the National Transportation Safety Board’s investigation into the flight.

Internally, Boeing’s engineers had warned that quality control could slip as more work was done by other entities. Like many others, Boeing chose to outsource more and more components, based on the popular theory that companies should concentrate on core competencies and let others make the parts that they’re good at. That entails the ability to work with and closely manage a growing network of suppliers, something that Japanese firms mastered in their famed keiretsu system. American companies have their own versions of it, too.

What Boeing has missed, as it tried to dump costs and speed production, was the chance to ensure that safety was a cultural core and a competitive advantage. Corporations can choose to push back against the Wall Street-driven notion that safety equals cost and thus lower profits. In the late 1980s and ’90s, the aluminum giant Alcoa, under its chief executive Paul O’Neill, made safety the top priority, demonstrating that a culture built around safety can actually be efficient, because accidents and defects decrease when employees know the company cares about their well-being. While assembling an airframe isn’t as dangerous as working with molten metal, when employees know they’ll be supported in building the safest possible aircraft as opposed to the cheapest, the end product will benefit — and buyers will have more confidence.

Choices made by Boeing’s leaders also had consequences. In 2011 the chief executive at the time, W. James McNerney Jr., made what became a fateful decision by greenlighting the 737 Max rather than investing billions in developing a new short-haul aircraft. His decision wasn’t necessarily a bad one — there was looming competition from the Airbus A320neo — but it committed Boeing to a flight path the company proved unable to navigate.

Mr. McNerney’s decision meant rushing development of the 737 Max while managing the Federal Aviation Administration so that the certification of the redesigned jet — whose engines had been physically moved forward — would not require retraining of pilots, thus saving customers time and money. Being good at managing the agency charged with ensuring your product’s safety can put the whole process at cross-purposes. That, combined with the decline in the company’s other competencies, contributed to the two fatal crashes in 2018 and 2019 that prompted the 737 Max’s grounding for nearly two years. And even before the Alaska Airlines 737 Max 9 incident, Boeing had been having significant problems assembling its 787 Dreamliner on its South Carolina production line.

And just when Boeing needed experienced employees the most, it suffered a brain drain. In late 2022 many Boeing engineers started heading for the door to lock in pension payouts (which could be hurt by rising interest rates) they had accumulated. When full airframe production returned after the pandemic, a lot of the talent didn’t.

Safety and production problems have put Boeing well behind Airbus, which delivered 735 aircraft in 2023 to Boeing’s 528. Boeing’s chief executive, David Calhoun, has promised full transparency during the investigation into what caused the plug blowout on the Alaska Airlines flight, although the company doesn’t seem to have lost any orders. That’s because there are two major airframe makers in the world; Boeing is one of them. The company still has strengths, among them the ability to integrate complex systems — avionics, powertrain, electric, hydraulics, landing gear, flaps, elevators and even your seat-back entertainment system — into a functioning passenger plane.

Moreover, demand for passenger jets continues to gain altitude. The aviation analytics firm Cirium predicts that the world is going to need 45,200 new airliners through 2042; the current production runway could stretch for decades. Meaning that if Boeing can right itself, it can redefine what it means to be a manufacturing icon.

We believe the best defense against a cultural decline is to treat it like you do your physical health. Our proprietary Organizational Health Index (OHI) is a cost and resource effective way to quickly assess the health and climate of your culture, strengths, weaknesses, threats, and opportunities, as well as the degree to which limiting beliefs may be holding you back. Give us a call, and let’s get you on the road to optimal organizational health.

Warmest Regards,

Rob