How the wrong side won at Boeing

https://backofmind.substack.com/p/how-the-wrong-side-won-at-boeing

by viburnum • 2 years ago

77 71 2 years ago

backofmind.substack.com

I recall hearing "If it's not Boeing, I'm not going" maybe 25 years ago.

Consolidation in the aircraft industry has failed the country. We've got no other vendors.

I'll also admit to working for McDonnell Douglas Aerospace, 1984-86. Sandy McDonnell was CEO, and John McDonnell III had been an engineer in various divisions and disciplines for a while, and was waiting in the wings. McDonell Douglas was a family company. I had to get a manager's signature to get office supplies, Sandy was so thrifty. If, as this article claims, MD accounting based culture was the problem, it hadn't been in place too long before the 1997 Boeing acquisition.

anonacct37• 2 years ago

I'm not sure if I follow but it does occur to me that being thrifty and changing from a aerospace engineering company to a financial engineering company can be two different things that might end up categorized as "accountants are in control".

colechristensen• 2 years ago

I’m increasingly of the opinion that companies flat should not be able to buy each other, though I’m not exactly sure how that would work.

_heimdall12• 2 years ago

Removing legal and financial protections, not to mention the concept of "too big to fail", would help quite a bit.

Consolidating companies into a few massive corporations centralized power, but it also centralizes risk. They'd be more careful, and may even be unwilling to risk the treadmill of endless acquisitions if each addition adds more risk and liability.

smolder• 2 years ago

Yeah, over-consolidation leads to fragility, and to market abuses, and together those make it not really worth the efficiency gains of shedding "redundancies". Redundancies are often good for robustness...

_heimdall12• 2 years ago

Consolidating industry is always a failing strategy. There are often short term gains, but eventually the system breaks.

ryukoposting2• 2 years ago

Now you have me thinking back to the big(-ish) companies I've worked for. One in particular was a global patchwork of smaller firms, assembled through acquisition. They were never integrated together all that tightly, though. They shared a C-office, a board, and a logo, and not much else. Working with other arms of the company was a lot like working with an outside firm, except everything was priced at cost and you got priority over truly-external clients.

This probably sounds woefully inefficient to the average American business mind, but it seemed to work great. Each sub-firm had their own way of doing things that was tailored to maximize efficiency on a local level. Sure, inter-division communication could be wonky sometimes, but eventually you learn how to iron out those wrinkles.

Sure, there's redundancy in some parts of the business. Those costs are easy to calculate. What's much harder to calculate is the cost of taking 14 manufacturing firms scattered 4 continents, stripping them of their current internal processes, and replacing them with a unified system.

lostlogin• 2 years ago

Does industry consolidation ever make things better?

There must be counter examples but I can’t think of any.

Regulation can help, and it broke up the single telecom where I am and really improved things (just wondering if I can justify a 8gbps connection…).

dartos• 2 years ago

It does sometimes, specifically with utilities.

That’s why many utility companies in the US are government sanctioned monopolies.

panick21_3• 2 years ago

Its because you cant see the effects. Consolidation is good lots of times. In the US they had an insane banking system regulation that resulted in the US haveing 10000s of banks. This lead to a lot of issues and was incredibly inefficent.

I can name lots of examples. Before 1982 there were like 20+ companies who wanted to produce video game console.

Did we need 10 different commercial unixs.

Also, the consolidation results in companies that have the capital to invest. Having LM, MC, Boeing and Airbus all making widebodies didnt make sense and resulted in issues for both tri-jet producers. Airbus was the winner in that situation because neither company could invest in twin-jet widebody.

The idea that the economy would be awesome if there were only small companies doesnt really hold up.

So just saying consolidation bad 100% doesnt really hold up.

The telecom are special because they were all state owned then privatized, they are mostly not the result of consolidation.

daedrdev• 2 years ago

I heard second hand that the MD managers who got promoted in Boeing after the merger decided to not build any new modules in house at Boeing. They were able put a lot of pressure on their new suppliers who were small compared to Boeing and made a lot of money. Over time many Boeing suppliers lowered their quality to stay in business and others failed outright.

Since then there has been a lot of consolidation of the suppliers of Boeing, to the point where Boeing has much less leverage than it once did and often has only one option left for many of the parts in needs. I'm not sure how much this has contributed to its current issues, but it seems a systematic issue that Boeing doesn't make its own planes anymore and has to rely on suppliers who are scraping every ounce of margin out of their production processes.

ummonk• 2 years ago

Thriftiness to the extent of requiring a manager’s signature for getting office supplies is actually a great example of an accounting focused culture that inhibits good engineering.

bediger40003• 2 years ago

I honestly don't think MDAC was thrifty to the point of counterproductiveness in 1985, but you raise a good point.

magnetowasright• 2 years ago

Depending on the costs of office supplies, manager wages, and worker wages, it could be an accounting focused culture that inhibits good accounting. Talk about penny wise pound foolish.

KerrAvon• 2 years ago

Good post; tl;dr these sentences at the end:

In my notes, there’s a phrase which really stuck in my mind – “understanding the numbers has to come from understanding the business. People go badly wrong when they try to do it the other way round”. But that’s what they do, far too often

goodSteveramos• 2 years ago

People who are good at “business itself” without being good at any particular business are really just reckless profit extractors willing to cut corners because they have friends in high places to bail them out when it all inevitably goes wrong.

Terr_• 2 years ago

A useful related term is "McNamara Fallacy" where quantitative factors are given too much emphasis.

But when the McNamara discipline is applied too literally, the first step is to measure whatever can be easily measured. The second step is to disregard that which can't easily be measured or given a quantitative value. The third step is to presume that what can't be measured easily really isn't important. The fo[u]rth step is to say that what can't be easily measured really doesn't exist. This is suicide.

-- Daniel Yankelovich, "Interpreting the New Life Styles", Sales Management (1971)

dave4420• 2 years ago

Aka “the map is not the territory”.

danesparza• 2 years ago

Archive link: https://archive.ph/z221C

ethanbond4• 2 years ago

People digging into Boeing's specific history are likely doing themselves a huge disservice. It's too easy to say, "Oh well I won't acquire a company like McDonnell Douglas!" But that's not the issue. The issue is a culture (nationally/globally) of financialization. You're vulnerable to it even if you don't acquire MDA, or if you don't acquire anyone at all.

The fundamental issue is simple: Mistaking side-effects of the system for the goals of the system. The goal of a company shouldn't be to make number-on-spreadsheet go up. The goal is to produce excess value, capture some amount of it, and pass the rest onto your customers. The amount that you capture will affect the spreadsheet, but the real goal of the organization must be to produce that excess value and pass on a meaningful portion of it to your customers!

The whole meme that companies exist to maximize shareholder value is just that: a meme, and a recent one at that. Boeing is the natural outcome of believing it like a zealot.

Etheryte• 2 years ago

In an ideal world, yes, but we live in a world where making the spreadsheet number go up is the ultimate goal for a lot of people, especially if it's your own personal spreadsheet. For these kinds of people, customers with wishes and demands are often an inconvenience that stands in their way.

ethanbond4• 2 years ago

Well I hope they kill fewer people en route to their own self-destruction than Boeing has (and likely will).

_heimdall12• 2 years ago

The whole meme that companies exist to maximize shareholder value is just that: a meme, and a recent one at that. Boeing is the natural outcome of believing it like a zealot.

Admittedly I've only been in the workforce for a couple decades, but isn't this precisely what large, or at a minimum publicly traded, companies operate on?

I've worked for multiple public companies and this is a universal theme among any I've worked with or for. Legally they're even required to do what is best for shareholders, nothing more.

galangalalgol• 2 years ago

I'm too old to think market forces can solve everything, but I don't understand why shareholders are ok with such things. I don't want my Boeing stock to go up for one quarter or one year so I can sell it and repeat with the next stupid company, I want my great grandchild to get good income on a stock I purchase today. I can see why leadership gets shortsighted, but not shareholders in general. If we take the scotus' view of a corporation as a person, these corporate persons need to figure out how to incentivise their cells not to go cancerous and shorten their lives.

JKCalhoun• 2 years ago

Legally they're even required to do what is best for shareholders

Been googling and it looks like that is not true.

At the very least, it should be obvious that "best for shareholders" can mean almost anything. Boeing's latest problems, Volkswagen's lying on emissions ... long term these have been decidedly bad for shareholders but probably some bean-counter though they would maximize profits at the time.

reissbaker3• 2 years ago

Yes and no. If you take shareholder money, you are required to operate in the interests of the shareholders. However, what exactly that means can vary. For example, Amazon is famously "customer obsessed" — not shareholder obsessed — with the idea that focusing on creating customer value creates a better business (which in turn benefits the shareholder).

Meanwhile Costco views employee culture as not only the most important thing, but "the only thing" [1] that creates a strong business, and has a strong track record of growing employees internally: the current CEO started out as a forklift operator at the company, and the previous CEO started as a warehouse manager. This culture of strong employee growth and retention, in Costco's theory, creates a better business and is thus justifiable (and desirable) for shareholders as well.

1: https://www.inc.com/justin-bariso/in-a-world-dominated-by-am...

istultus• 2 years ago

It is, like many an intellectual technological innovation, currently the Churchillian "worst, except for all the other options."

Once a company is traded publicly, the market, over a long time horizon [1], usually gives a good value estimate to the company. In the short-run you have to contend with the different ways to juke the price, such as share buybacks just before the CEO is to get a bonus etc. Heck, even in Boeing's case, the market corrected for the stock price (especially if you consider inflation) once planes started falling out of the sky, and the company started to change. Now only doors are falling out of the sky! It's still a price we shouldn't be willing to pay for a market correction - and that's where efficient regulation comes into play, itself a very fraught tool to get right. All in all, we suck at forecasting, understanding, and learning from outlier events. Maybe it's an inherent problem.

[1] with the usual caveat that the market can remain irrational longer than the plane can remain airborne

TuringNYC• 2 years ago

> Admittedly I've only been in the workforce for a couple decades, but isn't this precisely what large, or at a minimum publicly traded, companies operate on?
> I've worked for multiple public companies and this is a universal theme among any I've worked with or for. Legally they're even required to do what is best for shareholders, nothing more.

Yes, in the long term. Not in the short term. The problem becomes when corporate Managers go from being long term greedy to short term greedy.

I'll share a, perhaps, controversial opinion. Google and Facebook and OpenAI share and give away enormous excess value. Their give-aways help grow these companies in the long term and the strategy has been super-successful. Google and Meta and OpenAI are examples of good long-term shareholder value creation.

- Example look at the vast array of things Google gives away freely. Colab. Open source projects. Chrome. Transformer research. All of it eventually benefits Google but plenty is excess value given away and creates much downstream value.

- Look at the vast amount of software and AI research Meta gives away. My entire startup was based on their software. If I had relied on Matlab, I would have been fleeced of all my operating cash.

- Example, look at OpenAI giving away ChatGPT 3.5 for free. Yes, it is an act of long-term greed, but in the short term they are giving away huge value. Imagine how Oracle would have done this -- you would have started the login screen with a credit card entry.

The problem happens when you get short-term finalcial-engineering focused managers running a company. They try to juice remaining value, load up with debt, press on customers, squeeze workers, and eventually kill the company.

findor0• 2 years ago

Boeing decided to put in charge the CEO of McDonnel Douglas. Boeing dealt with MDA as if this was a merger. It was a case where the bad leadership was influential in the change of culture.

AdrianB1• 2 years ago

You are only partly right: if I am an engineer and you are the CEO, my job is to do my engineering part and your job as CEO includes (but not only) to maximize shareholder value. If your job becomes the problem, the focus and the constraint for everyone, including me as an engineer, then you get to Boeing situation. It is nothing wrong for the company leaders to be interested about shareholder values, but it is wrong to make it the only purpose in life for all employees.

eep_social• 2 years ago

Yet another framing of Goodhart’s Law, “when a metric becomes the target, it ceases to be a good metric.” If the metric is “number on spreadsheet”, you eventually get Boeing.

NotYourLawyer2• 2 years ago

The whole meme that companies exist to maximize shareholder value is just that: a meme, and a recent one at that.

Nah, stakeholder capitalism is a way more recent idea than shareholder primacy.

llamaimperative• 2 years ago

Nope. The shareholder obsession can be traced back directly to the 70s/80s. It’s a memetic hiccup. A failed experiment. Immediately preceding that was managerial capitalism which explicitly included employees and local communities in their considerations.

Prior to that, most businesses were owned and operated by the same people. Talk to any founder — especially familial legacy businesses - and you know they don’t run it purely to maximize “shareholder” value. Partly because it’s exceptionally hard to do without destroying the real company — the thing behind the spreadsheets.

basicallybones• 2 years ago

Amen.

qrian• 2 years ago

Mistaking side-effects of the system for the goals of the system.

Reminds me of the saying 'The purpose of a system is what it does'[1], which offers a viewpoint that if the side-effects and the goals conflict often, the side-effect itself should be considered as the goal.

[1] https://en.wikipedia.org/wiki/The_purpose_of_a_system_is_wha...

hayst4ck2• 2 years ago

financialization

I think you are totally right, but particularly nationally.

Ray Dalio's Principles of a changing world order explains the macro forces around Boeing. He predicts we are headed for civil unrest as the rich get richer and the poor get poorer, and that we are definitely creating the conditions for world war particularly with China.

This is Principles in video form (45min): https://www.youtube.com/watch?v=xguam0TKMw8

I find the video prescient and directly relevant to so many HN posts. I have found no video that better explains the general state of America.

erispoe• 2 years ago

Boeing is destroying shareholder value.

ethanbond4• 2 years ago

Exactly, which is why the whole “fiduciary duty to maximize profits for shareholders” is a totally meaningless/unenforceable/zero-information idea. Shareholders have many many different interests on different time horizons so business operators naturally and necessarily have broad discretion in how they satisfy their fiduciary duties.

jimkleiber• 2 years ago

John Kay talks about Boeing in his book Obliquity (and before in this essay) [0]

ICI is not the only company for whom greater emphasis on corporate financial goals led to less success in achieving them. I once said that Boeing’s grip on the world civil aviation market made it the most powerful market leader in world business. Bill Allen was chief executive from 1945 to 1968, as the company created its dominant position. He said that his spirit and that of his colleagues was to eat, breathe, and sleep the world of aeronautics. “The greatest pleasure life has to offer is the satisfaction that flows from participating in a difficult and constructive undertaking,” he explained.
Boeing’s 737, with almost 4,000 planes in the air, is the most successful commercial airliner in history. But the company’s largest and riskiest project was the development of the 747 jumbo jet. When a non-executive director asked about the expected return on investment, he was brushed off: there had been some studies, he was told, but the manager concerned couldn’t remember the results.
It took only 10 years for Boeing to prove me wrong in asserting that its market position in civil aviation was impregnable. The decisive shift in corporate culture followed the acquisition of its principal US rival, McDonnell Douglas, in 1997. The transformation was exemplified by the CEO, Phil Condit. The company’s previous preoccupation with meeting “technological challenges of supreme magnitude” would, he told Business Week, now have to change. “We are going into a value-based environment where unit cost, return on investment and shareholder return are the measures by which you’ll be judged. That’s a big shift.”
The company’s senior executives agreed to move from Seattle, where the main production facilities were located, to Chicago. More importantly, the more focused business reviewed risky investments in new civil projects with much greater scepticism. The strategic decision was to redirect resources towards projects for the US military that involved low financial risk. Chicago had the advantage of being nearer to Washington, where government funds were dispensed.
So Boeing’s civil orderbook today lags that of Airbus, the European consortium whose aims were not initially commercial but which has, almost by chance, become a profitable business. And the strategy of getting close to the Pentagon proved counter- productive: the company got too close to the Pentagon, and faced allegations of corruption. And what was the market’s verdict on the company’s performance in terms of unit cost, return on investment and shareholder return? Boeing stock, $48 when Condit took over, rose to $70 as he affirmed the commitment to shareholder value; by the time of his enforced resignation in December 2003 it had fallen to $38.

[0] https://www.johnkay.com/2004/01/17/obliquity/

carabiner• 2 years ago

Since then the HQ has been moved to DC for better lobbying.

hayst4ck2• 2 years ago

The author of this article would enjoy this speech by Admiral Rickover, who was deeply experienced with the problems Boeing is experiencing. Admiral Rickover was the father of the nuclear navy.

https://govleaders.org/rickover.htm

Every paragraph is a bomb lobbed directly and accurately at Boeing. Almost every analysis of Boeing is directly spoken to by one of those paragraphs or something else Rickover has said.

To maintain proper control one must have simple and direct means to find out what is going on. There are many ways of doing this; all involve constant drudgery. For this reason those in charge often create “management information systems” designed to extract from the operation the details a busy executive needs to know. Often the process is carried too far. The top official then loses touch with his people and with the work that is actually going on.

How the wrong side won at Boeing

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