BoeingsStrategicPartnershipsforthe787Dreamliner, MKTU 640, feldmanj

Running head: BOEING᾽S STRATEGIC PARTNERSHIPS FOR THE 787 1

Boeing’s Strategic Partnerships for the 787 Dreamliner

Joseph Feldman

Brandman University

Seminar in International Marketing

MKTU 640

November 23, 2014

BOEING᾽S STRATEGIC PARTNERSHIPS FOR THE 787 2

Boeing’s Strategic Partnerships for the 787 Dreamliner

Introduction

The purpose of this paper is to identify the advantages and disadvantages of Boeing’s market

entry strategy use of strategic partners in the building of the 787 Dreamliner. Boeing had formed

a strategic partnership with 27 companies across numerous countries that resulted in a three year

delay and then had further problems as two planes had battery explosions. The strategic

partnership reduced Boeing’s financial risk as it gave greater responsibility to its tier 1 strategic

partners. Traditionally, Boeing had designed their airplanes and then contracted with suppliers to

fulfill parts orders. The Boeing 787 Dreamliner is dubbed by some researchers as the largest

project that involved numerous strategic partners. In the near term the outcome was disastrous as

Boeing’s cost went up and the delay resulted in order cancelations.

Boeing and the 787 Dreamliner

“Boeing is the world's largest aerospace company and leading manufacturer of commercial

jetliners and defense, space and security systems” (Boeing, 2014, para. 1). In 2013 the company

posted $86.6 billion in revenue of which nearly $53 billion came from their commercial airplane

division (Boeing, 2013, p. 17). The company was in a race to stay competitive with competitor

(e.g. Airbus) as they envisioned the building of the Boeing 787 Dreamliner that would be a

lighter plane, hold more passengers, and be twenty percent more fuel efficient (Huffington Post,

2011, p. 1). In an attempt to lower the production cost and save time “Boeing decided to develop

and produce the Dreamliner by using an unconventional supply chain new to the aircraft

manufacturing industry” (Tang & Zimmerman, 2009, p. 77). This ended in disaster as the Boeing

787 Dreamliner faced design and supply issues, two major malfunction battery explosions, and a

three year delay in selling the planes.

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The Problem

Boeing encountered design and supply issues as the company created “risk sharing

partnerships” with over 27 different companies in numerous countries. The following chart

describes the major Tier 1 partnerships Boeing created in building the 787 Dreamliner (The

Sacramento Bee, 2013, para. 8):

Prior to the 787 Dreamliner, Boeing had relied on their in-house engineers to draw and

construct the components that had gone into their commercial airliners. The 787 Dreamliner

design called for replacing the body and wings from aluminum to carbon-fiber composites.

Boeing reduced the amount of components they would make to 30% and increased the amount of

parts suppliers would make to 70% (Stone & Ray, 2013, para. 6). Traditionally Boeing had

outsourced 60% of its airplane components (Epstein & Crown, 2008, para. 6). “Half a dozen

BOEING᾽S STRATEGIC PARTNERSHIPS FOR THE 787 4

main suppliers were put in charge of building big sections of the plane that were to be flown,

fully completed, to Boeing’s factory in Everett, Wash., then snapped together in three days and

delivered to customers” (Stone & Ray, para. 6). According to James Allworth (2013) a major

downfall of the 787 Dreamliner is that Boeing had not solved putting all the parts of the puzzle in

creating the 787 Dreamliner, and “[a]sked the suppliers to create their own blueprints for parts”

(para. 8).

Pros and Cons

At the time Boeing thought strategic partnerships with multiple companies in numerous

countries would benefit the operation in many ways. This new role that Boeing was assuming

would transform their 787 Dreamliner operation from being a manufacture into an integrator.

Potential advantages of strategic alliances Boeing could realize includes shorter development

time, lower development costs, reduction of financial risks, increased production, expertise from

suppliers, and international companies helping with marketing in their respective countries.

“Under the 787 program, Boeing instituted a new risk sharing contract under which no strategic

suppliers will receive payment for the development cost until Boeing delivers its first 787 to its

customers” (Tang & Zimmerman, p. 78). The following chart illustrates Boeings Dreamliner

supply chain (Tang & Zimmerman, p. 77):

BOEING᾽S STRATEGIC PARTNERSHIPS FOR THE 787 5

This arrangement placed an emphasis on the Tier 1 strategic partners to concentrate on “raw

material procurement and early component subassembly” (Tang & Zimmerman, p. 78). Boeing

expected all of the components to be sent to their U.S. assembly plant where the 787 Dreamliner

would be built in three days. “Relative to the 737 supply chain, this drastic reduction in cycle

time would in turn increase Boeing's production capacity without incurring additional

investments” (Tang & Zimmerman, p. 78).

Boeing faced many types of risks when they entered into strategic partnerships for the 787

Dreamliner. A few of these risks includes process, labor, management, and demand risks. In an

attempt to reduce risks Boeing implemented the use of Exostar software to track suppliers’

progress. Tim Opitz, director of 787 Production and Support Tools in Boeing Commercial

Airplanes states “[Exostar gives] the ability to have a common view with our partners of real-

time, supply chain performance reduces risk, improves cycle times and ensures compliance with

agreed processes” (Exostar, 2013, p. 2). The following describes how Exostar software could

help in Boeing’s supply chain arrangements with their strategic partners (Exostar, 2013, p. 3):

Collaborate on planning schedules

Issue purchase orders

Track purchase order changes

Exchange shipping information

Manage returns

Track shipments

Unfortunately for Boeing the strategic partnership did not work out as exactly as planned.

Prior to the two malfunctioned battery explosions that was previously discussed, Boeing had

issues with their supply partners. One example of a lack of transparency came when “[o]ne of the

BOEING᾽S STRATEGIC PARTNERSHIPS FOR THE 787 6

Tier-1 suppliers, Vought, hired Advanced Integration Technology (AIT) as a Tier-2 supplier to

serve as a system integrator without informing Boeing” (Tang & Zimmerman, p. 79). In some

cases Tier 1 suppliers and Boeing had difficulties in responding to Tier 2 and Tier 3 suppliers in

a timely manner because of culture differences. “Due to cultural differences, some Tier-2 or

Tier-3 suppliers [did] not often enter accurate and timely information into the Exostar system”

(Tang & Zimmerman, p. 80). In another instance Boeing workers (who saw increased

outsourcing) in 2008 went out on strike as they were concerned about job security. Spirit

Aerosystems (Spirit), a key supplier of Boeing, reacted by reducing their workforce. “Spirit

anticipated that the strike at Boeing would trigger order cancellations and delivery delay of

certain Boeing aircrafts” (Tang & Zimmerman, p. 80).

The Opportunity

Despite Boeing’s setback with the 787 Dreamliner, it may benefit the company to push

forward with their strategic partnership agreements. Customers are looking for better travelling

experiences and the airline companies look towards ways that they can reduce costs. The 787

Dreamliner offers a quieter ride, more carry on space, more cabin space, larger windows, better

lighting, and a better smell. According to CNN (2011) “it is 60 percent less noisy than other

planes of its size and capability” (para. 7). In addition to high efficiency particulate air filters, the

787 Dreamliner are “equipped with gas filters designed to remove odors, ensuring that

passengers don’t have to endure the smell of unpalatable airline meals for too long” (CNN, para.

26).

Airline companies are attracted to the 787 Dreamliner’s sustainability and fuel efficiency.

There is less scrap metal as major components of the 787 Dreamliner are constructed of carbon

BOEING᾽S STRATEGIC PARTNERSHIPS FOR THE 787 7

fiber composite material (Air Transport Action Group, n.d., para. 3). “Composites, which make

up 50% of the aircraft’s structure, are lighter, stronger, more resistant to impact, as well as more

resistant to corrosion and fatigue than aluminum alloys” (Air Transport Action Group, para. 4).

In addition, the 787 Dreamliner is expected to “reducing fuel consumption and greenhouse gas

emissions by 20%” (Air Transport Action Group, para. 1).

According to John Heimlich, chief economist at Airlines for America (a major airline industry

lobbying group in Washington) “fuel costs make up about 35 percent of airline operating costs”

(Yamanouchi, 2012, para. 4). It appears that during the last twenty years the total consumption of

fuel (measured in gallons) has been about the same from year to year, but the cost of fuel has

skyrocketed. The following charts illustrate the consumption of fuel in the U.S. and the costs

from 1993 through 2013 (Bureau of Transportation Statistics, 2014, para. 1):

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This data suggests that airline companies will have a strong desire to acquire fuel efficient

commercial airplanes now and in the future. Savings from fuel costs will most likely help Airline

companies be more competitive and increase future revenues and profits.

Boeings Future and Why Strategic Partnership Makes Sense

Boeing’s main competitor is European based Airbus. According to Boeing’s forecast the

regions that are expected to see the largest demand of new airplanes is the Asia Pacific and then

followed by Europe (Boeing Commercial Planes, 2013, p. 6):

The 787 Dreamliner is very significant as the middle size airline segment is expected to

account for roughly twenty percent of sales over the next twenty years. A strategic alliance with

companies like Kawasaki, Mitsubishi, and Fuji of Japan and Rolls Royce of the United Kingdom

may prove valuable in obtaining contracts within the Asia Pacific and Europe. According to

(Cateora, Gilly, & Graham, 2013) “[t]he Japanese consumer has been the hardest to please; the

demanding customers are the reason that the highest-quality products and services often emanate

from that country” (p. 344). John Newhouse (2007) argues that Boeing’s role as “being a

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systems integrator means shifting the financial risks to suppliers, especially those who, like the

Japanese and Italians, are subsidized by their governments” (para. 9). Newhouse also entertains

the idea that companies who have received Boeing’s proprietary technology plans in Japan could

turn around and create their own airplane building company. Newhouse dismisses this idea

because the Japanese companies “have a lower risk and more lucrative role as subcontractors to

Boeing” (Newhouse, para. 13). Intervention on behalf of Boeing is apparent when the Vice

President of Airbus aired “we have discovered that [Mitsubishi Heavy Industries] has on

occasion pressured JAL [to buy from Boeing] when its airplane was competing against us”

(Newhouse, para. 26).

Further Analysis

Boeing’s problems with the 787 Dreamliner could be seen as stepping stone to profitable

roads ahead. It is highly probable that Boeing has learned from its mistakes and has the ability to

fix the problems as they move forward with sales of the 787 Dreamliner. The company has had a

few years to address issues that includes supplier commitment levels and transparency problems

amongst Tier 1, Tier 2, and Tier 3 suppliers. Boeing has expanded upon the technology used in

the 787 Dreamliner by creating subsequent Dreamliner models. In 2014 Boeing received

approval by the U.S. Federal Aviation Administration and the European Aviation Safety Agency

for delivery of its new 787-9 Dreamliner. The 787-9 Dreamliner is a larger version of the

original 787 that has 40 more seats. Boeing Chief Executive Jim McNerney states “the larger

787-9 now accounts for 40% of Boeing's orders for the Dreamliner, with 413 reserved by

airlines, many of which have been shifting to the larger model” (Ostrower, 2014, para. 8). In

2018 Boeing is expected to unveil an even larger 787-10 Dreamliner that will seat 320

passengers (Ostrower, para. 8). The losses that Boeing faced amounted to roughly $2.9 billion of

BOEING᾽S STRATEGIC PARTNERSHIPS FOR THE 787 10

which they ultimately wrote off as a tax-loss. While this appears to be a great deal of money, it

may be viewed in decades to come as a small price that Boeing paid in creating what the future

of the airline industry looks like.

Conclusion

Boeing’s strategic partnership of the 787 Dreamliner was viewed as a corporate disaster. The

company suffered losses as there was a three year delay. Part of the problem was that Boeing’s

strategic partners were ineffective at teaming together in designing a cohesive 787 Dreamliner.

Boeing stepped through the process with their partners and ultimately created a sellable 787

Dreamliner. Data shows that airline companies are seeking higher fuel efficient airplanes. Fuel

costs are considered the highest proportion of airline company expenses. The strategic

partnership has allowed Boeing to lessen its investment and has created an incentive for foreign

suppliers to promote the 787 Dreamliner as they have a direct stake in the sales. Boeing has

taken proactive measures (e.g. tracking suppliers through Exostar software) in securing quality

and timely production. It appears that Boeing is moving towards profitably as they introduced a

second Dreamliner model (787-9) and have plans to introduce a third model (787-10) by 2018).

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Recommendations

1. Boeing may want to consider putting together a study of how many leases they sell versus

outright sales. Data suggests that airline companies have been leasing airplanes at higher levels

over the last 10-15 years. Boeing’s Dreamliner products are seen as a product that is more eco-

friendly and has higher fuel efficiency. Could this lead airline companies wanting to keep the

planes for a longer period of time by purchasing them. This could save resources (materials,

storage space, and less airplanes to build over the next 20-30 years).

2. Possible advantages of strategic alliance partners is securing a long term relationship and

securing resources. It may be to Boeing’s advantage to have a clearer understanding of who the

Tier 2 and Tier 3 suppliers are in securing resources.

3. Boeing may want to consider integrating Latin America and Middle East suppliers as “key

part suppliers” in their 787-9 and 787-10 models. Boeing’s projections illustrate that these two

markets combined will account for approximately 80% of the North America market during the

next twenty years.

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References

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