BOEING ASCENDANT

Six years into its transformation, the company forges ahead to become a more diverse and global enterprise

BY PAUL C. PROCTOR

Fittingly, one of the pivotal moments in Boeing's transformation story occurred on what was once a new frontier.

At a 1996 meeting of top aerospace business leaders at the A Bar A Ranch near Saratoga, Wyo., Phil Condit and Harry Stonecipher, chief executive officers for Boeing and McDonnell Douglas, found themselves leaning up against a fence, talking business. Although previous discussions over a possible merger of the two aerospace firms had faltered, Stonecipher reasserted to Condit, "These companies fit together so well. I think it would make one unbeatable company. This is the right thing to do."

And, according to Condit, "That led us to try again, and make the merger happen."

The $13.3 billion pact, finalized in August 1997, created a Boeing that today remains the largest, broadest-based and most capable aerospace enterprise in the world:

• A Fortune top-15 powerhouse and global icon with projected 2002 revenues of approximately $54 billion.
  
  
• A company that is challenging itself to redefine the boundaries of aerospace with bold innovations that include pilotless military aircraft, wide-band communications services on mobile platforms, passenger jets that fly at the brink of the speed of sound, and space vehicles that autonomously service and repair satellites.

It's also a company that's running healthy core businesses in its traditional markets of commercial airplanes, defense, and space and communications. Add a profitably growing financing business and 178,500 skilled and educated employees, and the picture begins to come into focus.

Boeing's ongoing transformation - from an admittedly "ponderous" industry leader dependent on commercial aircraft for as much as 80 percent of its revenues to an agile, financially balanced global aerospace enterprise - is nowhere more evident than on today's Chicago skyline. The new home to Boeing World Headquarters on the western edge of the city's famed business Loop - its backlit Boeing logo on top visible for miles at night - went operational on-schedule on Sept. 4, 2001, only 117 days after a site selection competition that captured headlines worldwide.

The decision to establish a new headquarters surprised company insiders and outsiders alike. Not only had Boeing kept its intentions from leaking to the media, but the break with tradition seemed uncharacteristic for the plane-making giant based for decades in the scenic Pacific Northwest.

To Condit, however, it was a strategic and logical decision about what was best for the long-term health of the company.

"As we grew, it became clear that our headquarters needed to be in a location central to - but separate from - our existing operations, yet convenient to customers and the financial community," Condit said. "When the headquarters is located in proximity to a principal business - as ours had been in Seattle - the corporate center is inevitably drawn into day-to-day business operations." And that's not where Condit wanted to focus his energies and those of the corporate center.

As a result, Boeing World Headquarters in Chicago is home to a lean staff approaching 400 people who are chartered with crafting global strategies, allocating people and other resources across the corporation, developing intellectual capital, and making the best use of the Boeing brand and reputation - efforts all aimed at the company's number one objective, increasing shareholder value.

Capability and opportunity

Although highly visible, the World Headquarters move was but one milestone in a series of strategic steps orchestrated by Condit and Vice Chairman Harry Stonecipher since the two joined forces. In fact, the corporate office relocation was part of a larger decision in March 2001 to reshape Boeing's corporate architecture. The leaders of Boeing's three major business units were elevated to chief executive officers in the process and were awarded broader latitude and accountability for running their businesses.

Condit called the restructuring a key element of the transformation strategy and said it was designed to sharpen the focus on operational performance and ensure the company was investing capital wisely in new growth opportunities. "Simply put," he said, "We intend to run Boeing as a business that has the flexibility to move capital and talent to the opportunities that maximize shareholder value."

A year prior to the re-architecture, Boeing began positioning itself for long-term growth in so-called "adjacent markets" by breaking out Connexion by Boeing, Air Traffic Management and Boeing Capital Corporation as stand-alone business units. The company also unveiled the Chairman's Innovation Initiative, which joined the Boeing Ventures organization in its efforts to create new growth opportunities fueled by the innovative and entrepreneurial talent of the company's employees.

The quest for new growth outside the company's traditional markets is a recognition that these markets alone will not provide sufficient growth to generate the level of returns Boeing shareholders expect. With core commercial airplane and defense markets forecast to grow only at about 5 percent annually, "We know we need to be in additional markets going forward," said Chief Financial Officer Mike Sears. "We intend to capitalize on our technology and intellectual resources to find these new markets and develop the products and services with which we will compete."

In doing so, Boeing is focusing on lower-risk "next square" opportunities - described in more practical terms as the leveraging of new technology into markets the company knows well, or the insertion of existing, familiar technology into adjacent markets.

The Chairman's Innovation Initiative alone has received more than 540 ideas for new business concepts, product innovations and major process improvements. The best are being evaluated and refined, with an initial few successfully launched, according to Chief Technology Officer Dave Swain.

"This company is going to continue to grow," said Swain. "That's the goal of our transformation strategy. Connecting the visionary ideas of our people with technology and marketplace needs is one path to help us get there."

Roots of transformation

Visionary ideas were what launched Boeing on its transformation in the first place. In the early 1990s, then-Boeing Chairman Frank Shrontz formed a "brain trust" of key Boeing leaders with the express purpose of taking a hard look at the company's position in the aerospace and business world. There was no pre-established agenda for the plan, said Condit, only the premise that the world was changing at an accelerating pace and that markets and technology were continuously evolving. A long-term, adaptable and responsive strategic plan was needed. Boeing and its employees and product lines no longer could afford to just "go along for the ride" and rest on their laurels, Condit said.

The Boeing strategy planning team "really went to work" in 1995 and formed a basic direction, according to Condit, who was team leader. The resulting plan, backed by the Boeing Board of Directors, was unveiled to Boeing top managers during the company's 1996 Spring Managers Meeting in Seattle.

In essence, this vision outlined a transformation of Boeing into a more agile, geographically diverse, more broadly based company less dependent on the highly cyclical commercial jetliner market.

Key to the vision: That Boeing must become a knowledge- and resource-sharing company that excels in the design, manufacture and support of commercial aircraft, defense and space systems. That it would continue its global leadership in core competencies such as the integration of large, complex systems, with detailed customer knowledge and focus and operating lean and efficient systems. These ideals later evolved into Boeing's Vision 2016 statement.

Even more crucial, perhaps, was the idea and desire that Boeing would evolve into a "learning company" that expeditiously and continuously adapts to rapid changes in the market and technology.

The first major milestone, Boeing's $3.2 billion acquisition of Rockwell International's aerospace and defense assets, was completed in December 1996. Acquisition "was a very different path than the one we had been on," Condit said. Virtually all prior growth at the company had been internal. The Rockwell purchase was the result of "a very conscious decision by the Board of Directors," Condit said. "We needed to be a broader-based company. But there was no way we could grow fast enough internally."

The Rockwell acquisition brought to Boeing new or expanded expertise in space transportation, rocket engines, satellite systems and missile defense. The company also gained critical communications, guidance, and navigation capabilities, including Global Positioning System acumen. Adding Rockwell also positioned Boeing as a supplier to more than one launch vehicle program.

Incorporating the Rockwell assets, Boeing quickly blossomed into one of the world's strongest aerospace companies.

All-star cast

The merger with McDonnell Douglas, announced in late 1996 and completed seven months later, was truly a gamechanger. It brought together an all-star cast of aerospace talent and made the combined company - called Boeing to capitalize on the brand's strength - the world's largest aerospace company and a major market power. As Fortune magazine commented at the time, "It was at bottom a truly strategic merger" with "the potential to be fabulously successful."

The merger created a combined entity with 1997 sales of approximately $48 billion and locations in 26 U.S. states, plus international offices. To Boeing's strong commercial jet product line, McDonnell Douglas brought extensive military helicopter and missile product lines, the Delta rocket family, F/A-18 and F-15 fighters, and the C-17 short- and rough-field military transport, among other capabilities.

These new defense businesses would help Boeing counterbalance the cyclical commercial airplane business, satisfy a Pentagon desire for a more efficient defense industrial base and give Boeing the size it needed to be a formidable international competitor.

Most importantly perhaps for the long term, the marriage of the two companies provided opportunity for the cross-seeding of technology, design and program expertise. This sharing of technology and intellectual capital is being led by Boeing's Phantom Works research and development organization, along with a network of company-wide functional process councils. Collectively, these organizations are credited with making significant improvements to existing processes and product lines, as well as improving capabilities and competitiveness for future projects.

Skilled and motivated team

The Boeing-McDonnell Douglas merger also reinvigorated Boeing's commitment to lifelong learning for its employees. As details of the landmark pact were being ironed out, the melding of the two companies' training and education programs was the subject of a negotiation "that took a matter of seconds," Condit said. Simply put: Boeing should always be developing its employees.

Mirroring this point today, the key thrusts of Boeing's human resource strategy include developing "a skilled and motivated global team, employee involvement and engagement, and developing leadership strength and depth," according to Laurette Koellner, newly appointed Chief People and Administration Officer.

Indeed, the Boeing Leadership Center outside St. Louis has become the centerpiece of a company-wide, top-to-bottom training continuum. Boeing's training budget of more than $250 million annually ranks fifth among major U.S-based corporations, following IBM, Accenture, Ford and Intel. To date, almost 8,000 Boeing executives and managers from all levels have successfully completed intensive training courses at the center. Other company training programs provide thousands of hours of instruction annually.

Boeing's "Learning Together" tuition reimbursement program has helped more than 6,500 Boeing employees earn college degrees since 1998. About 15 percent of all Boeing employees participate in the program.

Adding strength

On Oct. 6, 2000, Boeing officially added the space and communications businesses of Hughes Electronics Corp. to its operations. The purchase brought to Boeing a tremendous source of intellectual capital and the world's leading capability in commercial geostationary satellites. These businesses had 1999 revenues of about $2.3 billion and brought a backlog of more than $4 billion to Boeing. At the time of the joining, the combined revenues of the new Hughes operations and Boeing's Space and Communications business totaled nearly $10 billion, adding more balance to the company's financial picture. The deal boosted Boeing's space and communications revenues by roughly 35 percent last year. (See related story.)

The Hughes acquisition also gets credit for positioning Boeing to compete more strongly in key developing markets such as integrated battlespace management, air traffic management and related systems. Industry forecasts project space and communications markets will grow significantly over the next 10 years.

In between the big-name deals, Boeing also has been enhancing its business portfolio and core competencies through a series of smaller acquisitions and partnerships. These include:

• Hawker de Havilland, a designer and manufacturer of commercial and military aircraft aerostructure components, and The Preston Group, which provides airport and air traffic control planning software, from Australia. With these additions, Boeing now has about 3,000 employees in Australia.
  
  
• Continental Graphics Corp., with expertise in parts-related information management services, and SBS International, a top supplier of crew-scheduling systems and ground support personnel planning services to the world's airlines.
  
  
• AeroInfo Systems Inc., a Canadian based provider of advanced maintenance software applications for the airline industry.
  
  
• Jeppesen Sanderson, which has about an 85 percent global airline market share for its core navigation services such as aeronautical charts and electronic navigation data. Jeppesen employs about 1,400 worldwide and has facilities in Australia, Germany, China, and the United Kingdom.
  
  
• Autometric, Inc., one of the premier geospatial information technology companies in the U.S.
  
  
• FlightSafetyBoeing Training International, a new aircraft and maintenance training company created by Boeing and FlightSafety International. This joint venture is the leading airline pilot- and maintenance personnel-training organization in the world, with 70 full-flight simulators in operation or soon to be delivered. Its 21 locations worldwide include four training centers in the United Kingdom; facilities in China, Korea, Mexico, France, South Africa and Spain; and several U.S. sites.

'Global marketplace' inevitable

Boeing signaled a new phase in its strategic globalization efforts in January 2001 by hiring Thomas R. Pickering as senior vice president, International Relations. Pickering, a former U.S. ambassador and Under Secretary of State for Political Affairs, is focusing on strengthening the company's international relationships, including those with foreign governments, and transforming 'country' offices in key markets from business unit entities into enterprise-wide offices representing the entire Boeing company.

In the past year, Pickering and his team have positioned new Boeing "country presidents" in Italy, Japan and Spain - adding a full-time, high-level Boeing presence in these key markets and augmenting the company's existing international network. These executives will focus on strengthening ties with host governments and expanding Boeing's in-country business activity and revenue-growth opportunities. They also will develop comprehensive country strategies and support business unit sales and marketing activities.

Additional appointments are forthcoming, placing more Boeing executives "on the ground" in key countries and regions. Boeing's increased global emphasis also has included well attended "technology summits" in Tokyo, London, Paris and Madrid. And late this spring, it will open a research and technology center in Spain.

A global footprint provides Boeing access to emerging technologies, key markets and the "diversity of thought" of talented international workers, officials say, also maintaining that the key to future jobs at home is also active integration in markets and economies worldwide.

No limit to change

Indeed, Boeing today is a different company than it was just a few years ago; it likely will be a very different company five years from now, driven by its commitment to transform itself to meet new market challenges and capture new opportunities.

The most recent change: In March, Boeing expanded the Office of the Chairman to include three additional members, a move with the stated goals of sharpening the company's focus on resource allocation, leadership development, strategic direction, internal technology transfer, growth and shareholder value. It also was Condit's way to address the retirement next month of Vice Chairman Harry Stonecipher, as well as this month's retirement of People leader Jim Dagnon, and the planned July retirement of Chief Administrative Officer John Warner.

Joining Condit in the Office of the Chairman are Sears, Swain, and Koellner, all seasoned company veterans and leaders with diverse career experience. While they retain their functional jobs, each has been assigned specific additional responsibilities as a member of the Chairman's office. Condit has set the chinning bar high for their performance, describing the Office as "a core team with the strengths we need to continue to lead Boeing's corporate transformation."

Testing evolution

And so, six years into his strategy to create a better Boeing, Condit is as determined as ever to continue pushing the company forward. Only now he'll be doing it without the man who stood alongside the Wyoming fence with him in 1996, dreaming the big aerospace dream.

With a newly modeled company and an expanded front office, Condit is convinced that strong corporate and divisional strategies, buttressed by great execution and an involved, engaged workforce, will give Boeing the "chance to dramatically outperform the market in the next couple of years."

And that may be exactly what the outside world looks to for proof that the company's transformation strategy has taken root fully. (See related story.)

Condit enjoys quoting Charles Darwin when describing the Boeing strategy: "It is not the strongest of the species that survives, not the most intelligent; it is the one that is most adaptable to change."