Thursday, March 21, 2024

Boeing & Economics

by Allen Laudenslager

In a January 30th 2024 article written by Chis Isidore on CNN’s news website titled: “Boeing was once known for safety and engineering. But critics say an emphasis on profits changed that”[1], United Airlines said it now expects its fleet of Boeing 737 Max 9 jets to remain grounded through the end of this month, and that the company will report a first quarter loss in the range of $116 million to $262 million. Potentially more than the $138 million loss already forecast by analysts surveyed by Refinitiv.

This is where the economic model taught in most colleges proves its failure to include all the moving parts of the real world!

The idea of both Supply and Demand and Shareholder Profits as the guiding principals at the highest levels of business decision making, at least in the economic sense breaks down. 

The concepts break down because the “control” mechanisms are lagging indicators and in most cases the lag between decisions and the indicator displaying the results is so long that business can be in an unrecoverable situation by the time they recognize the problems.

Any economic model or measure not founded on the product side of your business will, sooner or later, lead you into bad decision making. As Steve Jobs famously stated “If you keep your eye on the profit, you’re going to skimp on the product. But if you focus on making really great products, then the profits will follow.[2]

Look at the history of any business in the United States and chart their profits. There is an almost direct correlation between product focused management and economics focused management. When business began shifting their management focus from product centered managers to economics centered managers there is the expected initial bump in profits. Generally this is created by first removing the slack or inefficiencies that creep into any process over time. That bump is inevitably followed by a reduction in quality as the attempt to reduce inefficiencies cuts beyond the slack. In a well run business the excessive cuts are corrected and the business oscillates toward its stable condition.

In the 1971 novel about the American auto industry titled: “Wheels”[3], Arthur Hailey wrote about a fictional car company that made the economic decision not to make the frame of a new model car slightly stronger to save a few dollars per unit that would result in millions more profit. When the cars were built they had a vibration at speed that could only be solved with an additional brace. The brace cost more than double the cost of the stronger frame that engineering had designed.

While fictional example it was designed by the author to illustrate the flaw in economics only decision making it is illustrative of the flawed thinking of many managers..

Unfortunately as in this fictional example, the Boeings damage might already be done. The quality issues in the Max may have eroded customer trust to the point that no recovery is possible. We can’t of course know if Boeing has passed the point of no return for years yet but the leading indicators are plain for anyone to see.

Boeing’s management decisions over the years have created a culture at succeedingly lower levels within the company that have lead directly to their current problems.

Once again quoting Steve Jobs about Apples fall and recovery: “So, yeah, I mean we enjoyed making a profit, but the purpose of making a profit was so we can make the best computers in the world. Along the way somewhere those two got reversed. The goal is to make a lot of money and well, if we have to make some good computers well ok we'll do that... 'cause we can make a lot of money doing that. And, it's very subtle. It's very subtle at first, but it turns out it's everything. That one little subtle flip... takes 5 years to see it, but that one little subtle flip in 5 years means everything.”

What can Boeing do now? What can the other companies in the United States do to avoid the potential slide into the same problems?

The first step is to recognize that all the economic “theories” are designed to eliminate hard to monetarily quantify variables. Things like how will this decision affect the local economy and workforce quality of life? How will the decision affect the future profits of the company if we do or do not make specific engineering choices. Are we relying on the experts to make the correct decision in the foundational design and engineering choices or are we allowing people without the depth of product knowledge to control these critical decisions?

American automobile companies used to hire engineers and rotate them through production, design, finance, and the sales and marketing departments to give them the breadth of experience they would need as they progress upward to senior decision making roles. Yes, not every engineer wanted those senior roles and they stayed in one of the departments for their entire career. Some were just not able to master those department outside of their specialty.

Ah, but the few who could master those other areas became the most senior decision makers because they had developed the necessary level knowledge in all the disciplines to make well founded decisions balancing the competing requirements.

The simple cure is to stop making that last percentage of profit the measure of management’s success. The real measure is how well our product functions to fill the customer’s needs. We do have to understand that the customer’s needs may include things beyond the merely functional and hard to describe aesthetic values must be included.

Managers who came from the product side who included customer satisfaction from the sales and marketing viewpoint as well as the engineering side historically lead the most successful companies in the past. We would do well to go back and put the economist where they truly add value. As the financial managers and not as the final decision makers.




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