Blue Ocean Strategy: The Boeing 787

1. Blue Ocean Strategy:The Boeing 787 INDE 599 November 1st, 2009

2. Situation Pre 787 Launch • Duopoly with Boeing and Airbus commanding 100% market share in large commercial aircraft. • Boeing had just recently lost its title at “the world’s largest supplier of commercial aircraft” to Airbus and needed a game changer to gain back control. • Aircraft in pre 787 times were comprised of over 50% aluminum material and only 12% composite material. • Operators were plagued by costly eddy-current inspections of rivets and structural joints. • The 767 airplane program is reaching the end of its 20 year design life cycle and slow sales may indeed doom that production line as the airframe and technology has become obsolete. Boeing has no other offering in the medium capacity jet market. • Perception of Boeing by its customers was down as Boeing displayed an arrogance towards revolutionary changes in their product line and structure. It was currently more important to increase share holder value instead of forming long term strategic plans to combat the rise of Airbus. • Aircraft were not designed with the passenger in mind. Reducing Noise levels and vibration standards, along with addition of in-flight entertainment systems and passenger comfort accessories were an after though as focus was on functionality for the operator.

3. SWOT Scorecard

4. Porter’s Five Forces Model: Threat of New Entrants • Low • Threat of new entrants in the aerospace industry is small as new startups in commercial aviation require billions of dollars to design, build, and certify products for commercial use. • New companies would need to create revenues on the order of $50+ billion dollars annually to compete with either Boeing or Airbus across their multiple platform aircraft offerings. Boeings total revenues in 2002 and 2003 were $54 and $50 billion dollars repectively. • Another major roadblock to entry are government regulations which control every facet of every part of the business. New entrants would not be given FAA/EASA delegation for aircraft certification as Boeing and Airbus have. Boeing and Airbus have both established a long history in regulatory agency certification of products.

5. Porter’s Five Forces Model: Power of Suppliers • Low • Supplier power at the time of the 787 program launch was low as it was perceived that multiple suppliers across the world had capability and capacity to supply system parts for the aircraft. • Boeing employs a massive supplier management organization and suppliers are forced to meet a vast quantity of requirements before they are even considered for a contract. • Boeing also forces suppliers to share in any cost savings that are derived from a supplier’s wish to reduce their delivered produce cost by redesign or lean manufacturing techniques. • However it should be noted that once a supplier is chosen for a contract the switching costs are extremely high for Boeing to seek out a second source for product due to the massive qualification effort that must take place to certify a product for commercial aerospace use. So in this instance the supplier have tremendous power, but again is it offset by the cost savings sharing requirements that I described above.

6. Porter’s Five Forces Model: Power of Buyers • Extremely High • Simply put the customers in the aerospace industry are securing multi billion dollar contracts with Boeing and Airbus and have unbelievable negotiating power because of such. • This instance is further exacerbated for so called “launch” customers who are the initial customers placing the first orders for a new airplane product. Often these launch customers demand specific functionality and emotion with their wanted product and usually have quite a bit of control during the aircraft configuration phase of a program. • Buyers also weld extreme power over Boeing and Airbus as they are purchasing products with 20 year design life cycles. This means that buyer can demand a bargain price also on ground service equipment, spare parts, and support for these products. • The switching cost for a buyer to go from an Airbus product line to a Boeing product line is also low forcing these companies to cut prices for large orders to get buyers to change over to their product. Many of the product offerings from Boeing and Airbus use common ground service equipment and airport gate equipment.

7. Porter’s Five Forces Model:Threat of Substitute Products • High • Because are truly only two aerospace giants and the cost of development to create a competing product is massive the threat of substitutes products is high. • Simply put Airbus (outside of the freighter market) has an offering that comes close to, matches or even exceeds the performance characteristics of any Boeing offering.

8. Porter’s Five Forces Model:Rivalry Among Existing Competitors • Extremely High • Boeing and Airbus have competed as the only two makers of large commercial aircraft since the 1997 Boeing/McDonald Douglas merger. • As recently as the year 2003 Airbus took the lead as the largest producer of commercial aircraft after deliveries of there products exceeded Boeing’s for the first time ever. That tread has continued throughout this decade.

9. Strategy Canvas Pre Launch

10. New Strategy Canvas

11. Four Actions Framework

12. “6 Paths” Framework • One basic strategic idea within the aerospace industry is the idea of an aircraft ‘family’ line of offerings. Aircraft families are basically the same offering of the aircraft, just in different stretch sizes. Most often the wings and body design are identical, just extra body stations are added to increase capacity of a certain model. This allows aerospace companies to achieve cost savings through parts commonality and allows potential buyers to save on spare parts, ground service equipment, and employee training thus creating value for potential buyers. • Also by looking at the chain of buyers, Boeing realized that the end user isn’t the operator, it’s the passenger. The 787 design was conceptualized to reduce passenger fatigue and overhaul the stereotypes of airline travel. This allows one to look into all forms of improvement for the passenger such as larger windows, increased cabin humidity, mood lightning, and inflight entertainment. This creates emotional value to the passenger and thus value to the operator.

13. “6 Paths” Framework Cont. • When looking at complementary offerings one thing stands out. All of the offerings at the time were comprised of more than 50% aircraft aluminum and were assembled in smaller sections using rivets that had to be inspected over the life of the aircraft. Value can be created by building an aircraft from composites with larger major join sections therefore reducing inspection and maintenance costs. • Increased trends in in-flight entertainment options and ergonomics allow for a better passenger experience which in turn creates perceived value to the operator.

14. Risk Analysis • Creating an aircraft from start to finish is a huge risk mostly due to the simple fact that capital cost is massive and the support costs for a airplane program are even higher. • The total Boeing 777 Program Non-recurring Cost to date is over $120 Billion. • One could expect much the same or even more to an entirely new aircraft designed with new composite materials and a host of other new technologies.

15. After Launch… • It can be clearly shown that Boeing has failed in its attempt to streamline operations through the use of its supplier network. Simply put, suppliers did not have the capability or the capacity to undertake such a challenge. Given this fact Boeing is now over two years behind on the 787 program. • On a positive note, even given the two year delay, the launch of the 787 has been the most successful in commercial aviation history. • Currently orders stand at ~850 aircraft from over 57 different operators across the globe. • What remains to be seen is whether Boeing can deliver on their lofty performance promises for this new aircraft. Only Flight Testing can prove this.