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"I Like A Challenge -- And I've Got One"


When W. James McNerney Jr. was named Boeing Co. (BA) chairman, president, and CEO on June 30, Boeing's shares soared 7%. George Shapiro, aerospace5 analyst for Smith Barney Citigroup (C), explains investors' jubilation: "[McNerney] has been the top choice for years, has proven operating skills, [and] an aerospace and defense background."

True enough. But Boeing's new pilot faces daunting tasks: restoring the Chicago company's tarnished image, squeezing more profit out of existing businesses, and setting up the $51 billion aerospace goliath for future growth.

Currently, Boeing's two main divisions -- commercial airplanes and integrated defense systems -- are generating plenty of operating profit. That will give McNerney some time to get his bearings. But defense spending has leveled off, and it's expected to fall beginning in 2007 as political pressure to make cutbacks grows. What's more, despite strong orders for Boeing's new 787 jet, there are questions about how long the commercial airplane recovery will last. As a former Boeing director and CEO of General Electric's (GE) aircraft-engine division, McNerney knows better than most what lies ahead. "This job will test more things about me than almost any job I can think of," McNerney told BusinessWeek. "I like a challenge -- and I've got one."

For McNerney, cleaning up Boeing's toxic culture is Job One. Yes, the company has made progress improving relations with the Defense Dept. and key congressional leaders following a string of procurement scandals. But insiders say a bureaucracy that stifles innovation, resists change, and tolerates rule-bending remains largely intact. Adds Lehman Brothers aerospace analyst Joseph F. Campbell Jr.: "This is the Boeing that tolerated behavior that led to sexual harassment suits, debarment, and criminal prosecution."

ARROGANCE

Boeing's dark side has cost both its commercial and defense businesses dearly. Arrogant execs badly underestimated Airbus, whose market-share gains Boeing has only recently pushed back with the game-changing 787. Critics also accuse Boeing of winning defense contracts by overpromising and underbidding. Case in point: the Future Imagery Architecture contract, a spy-satellite program worth an estimated $10 billion over 10 years. Boeing won the business by pledging major leaps in technical performance at a much lower cost than its rivals could match. The company insists all its defense contracts are on track, but Loren B. Thompson, a senior defense analyst for the Lexington Institute, a Washington (D.C.) defense think tank, believes hanging on to them poses "the biggest challenge McNerney will face."

Boeing also will have to execute flawlessly on its two bet-the-company initiatives: the 787 jetliner and the complex networking system for the U.S. Army known as Future Combat Systems. While Boeing has streamlined planemaking, a major production snafu in '98 still hangs over the company. Boeing can ill afford missed deadlines or big cost overruns on FCS -- a $22 billion program with fat margins.

Ultimately, McNerney will have to figure out how to increase growth over the long term. With sales expected to slow in both the commercial plane and defense businesses, McNerney may need to shop for acquisitions, including perhaps a foreign aerospace company such as BAE Systems PLC (BAESY) or a networking-communications outfit. McNerney says he isn't a big fan of buying for growth, blaming Boeing's recent troubles in part on "banging together a lot of acquisitions," including Hughes Space & Communications and McDonnell-Douglas Corp. (BA). But he may have no choice if growth drops off sharply in the coming years.

In the meantime, McNerney will have to nurture the culture of innovation inside the company, tap into the reservoir of engineering talent, and instill management accountability. If he achieves all that, then Boeing's new pilot will have more than earned his $1.75 million salary.

By Stanley Holmes in Seattle


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