- [Petter] Until the mid-1990s, Boeing was the aviation
engineering company that everyone was looking up to. - Major announcement today
in the world of aviation. Boeing is... - But when they merged
with McDonnell Douglas in 1997, the pairing of the
two management teams was described like hunter killer
assassins meeting boy scouts. So why was that? And what happened
to Boeing's exemplary focus on engineering excellence after the McDonnell
Douglas bosses moved in? Stay tuned. (playful chime) This episode is the second
in my series where I'm looking at the history of Boeing
and the changes to its culture which got them to where they are today. In the previous video,
I looked at the early days of the company and the
genesis of the company's spirit which turned Boeing into the powerhouse that it was during the second
half of the 20th century. And today, I will take a
closer look at Boeing's merger with McDonnell Douglas and
its immediate after-effects. But before we get that far,
we have to have a look at what led up to
that merger in the first place. Back in 1994, when the
time came for the rollout of the first ever Boeing 777, Boeing commissioned
a company called Dick Clark Corporate Productions to organize the event. That's the same company that organizes the New Year celebrations in New York Times Square every year. So, obviously, this rollout
was a very public affair, held in front of the world's press, Washington state officials and, of course, a
lot of airline representatives. But Boeing's focus in
this program and eventually, the whole show, was actually
on their own employees. Their motto during the
777's whole development had been Working Together
and with this party, Boeing was highlighting
how its designers, engineers, management
and everyone else in the company had all truly been doing just that in order to make this beauty a reality. That first Boeing 777 also had Working Together written
under the cockpit windows, which still remained there when it took its first flight later
on in the same year instead of the names of the test pilots, which was the norm back then. Now, initially, the engineer in charge of the development of the 777
was a man called Phil Condit and he was later
replaced by Alan Mulally when Condit became
Boeing president in 1992. Four years later, Condit
also became the CEO and that was the way that Boeing
typically did things back then. Top engineers started by learning the ins and outs of making airplanes before finally taking on
the reins of the company. Now before I go
any further I should explain that in this video, I am going to be... Well, more than a little bit critical of certain managerial styles, so I think that I should give
you a bit of a context first by quickly returning to something that I skipped over in my previous video. You see in there I might
have painted a very rosy picture of how Boeing worked during their heyday in the 1950s and 60s. That's when they designed and launched the true giants of that generation, the Boeing 707, 727,
737 and the Boeing 747. Before that period, Boeing
had been number three, behind the two biggest historical players in the airliner world,
Douglas and Lockheed. But with the launch of the 707 and all of the other
icons that followed, Boeing basically made the
jet age their own age. But the bit that I kind of
skipped over in my last video was how this fantastic period ended, which wasn't very pretty. Bill Allen, the Boeing
president who had turned the company into the commercial
aviation giant it became, retired in 1968, just before the first
flight of the Boeing 747. He had overseen a record
number of new jet designs during his reign, including
the Queen of the Sky, but the thing was, those
quick aircraft launches had been driven, to a large extent, by the rapid advance in aircraft and engine technologies during that era, which, just as rapidly, made
all their planes obsolete. But now, by the late 1960s, those technological leaps had started to slow down significantly. What that meant for the
airlines was that they could keep their existing airplanes
in service for longer, which obviously led to the sales of new aircraft quickly slowing down. And that happened just
as Boeing was introducing the 747 into service, with the 737 also being almost brand new
and the 727 not much older. Development costs for
both the 737 and the 747 had been much higher
than previously estimated, so the slowdown in new orders came at the worst possible time for Boeing and hurdled them into
a deep economic crisis. By the middle of 1969, Boeing had lost almost
12,000 employees, mainly through attrition,
and to cap that all off, in 1970, the US Senate voted against the continuation
of funding for the SST, the supersonic airliner
which Boeing was working on in order to compete with the Concorde. This forced Boeing
to make massive lay-outs from all levels of the company, and this is what was later
referred to as the Boeing Bust. Line workers, engineers, managers and people from all of the
various levels in the company suffered the consequences
from this crisis. And from a high of 140,000 employees in Washington State
alone in the mid 1960s, Boeing fell to below 40,000 by 1970. This meant that, at the time when the US average
unemployment rate was sitting at around 4.5%, unemployment in the Seattle area
actually reached 13.8%. This horrendous fact
famously caused a couple of real estate agents erecting a billboard near the airport saying, "Will the last person leaving
Seattle turn out the lights?" This was obviously
an incredibly painful time for the company,
and it was soon also followed by the Yom Kippur War
which caused a big oil crisis in 1973, further damaging the industry. But Boeing did eventually
begin to recover, and with that, they also started to return their employee numbers to what they had had before. This happened in the
early 1980s, thanks, in part, to some military orders
they managed to secure, but also due to the rising demand
for more efficient airliners. That is why Boeing's first priority when their recovery got underway was to start working on
what would soon become the 757 and the Boeing 767. And this meant that even though they were going through
this horrible crisis, Boeing still continued
to design new airplanes. And the reason I'm telling you this is because it taught Boeing's management a very important lesson. You see, up until the Boeing Bust, bringing new jets to market
ahead of the competition had been super, super important. That's why launching Boeing 747
had been such a priority. It was needed in order to compete with McDonnell Douglas's DC-10 and the Lockheed TriStar. But in this new era, where airlines kept their jets for much longer
and where efficiency was king, well, then the new jets
that were produced could be sold for much longer, as long as they were efficient and trouble-free enough, of course. And that meant that being
the first to enter the market with a new aircraft
model wasn't actually that important anymore, instead it was more
important to focus on quality. An example of this was the Boeing 767, which Boeing launched quite a while after the Airbus A300
had already entered the market. But even though that was the case, the 767 still ended up
outselling the Airbus with quite a large margin. This fact also meant
that new aircraft models could still be successful even if its development
went a bit over-budget, since the model would
likely stay in service for a really long time if the
airlines ultimately liked it. Again, the 767 is
a great example of that, since it has now been in
production for over four decades, with very few upgrades
and updates needed. All of these lessons,
which shaped Boeing's philosophy around their aircraft design,
ended up being in sharp contrast with how their competitor,
McDonnell Douglas, did things. And yet, they still ended up merging, and I will explain
why that happened after this... So Boeing should have
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Now let's continue. McDonnell Douglas was,
above everything else, primarily a military contractor. And with military contracts,
manufacturers tend to bake in the plane's development costs
in their bill for the customer, which is usually the country's military. This fact had shaped the way that McDonnell and later,
McDonnell Douglas, did all of their business. They had learned to
factor in the design costs of any new airplane and
then bid for a contract at the lowest possible
price to make sure that they would actually secure the order. After that, came the really hard part, which was fighting tooth
and nail to keep the costs low, since development costs
always tend to balloon upwards, especially if there was
any delays being introduced. So that way of thinking,
cut-throat control of costs and complete focus
on financial indicators was what formed the way
that McDonnell Douglas' board and higher leadership
was actually reasoning. Another factor was that
General Electric's Jack Welch was either a mentor or an inspiration to many of the higher-ups
at McDonnell Douglas. This included Harry Stonecipher who had become the
McDonnell Douglas CEO around three years
before the Boeing merger. Jack Welch had pioneered
policies like the idea of firing the bottom-performing 10% of GE's managers each year while rewarding those at the very top. In a similar fashion,
GE would also spin off any underperforming parts
of its non-core business and ruthlessly cut staff
wherever it was possible. - People call that Darwinism. - Why is that Darwinism? - Well, the survival of the fittest. - But it's not survival.
- Sink or swim, you know? - In the end, if they don't
improve, they can't-- - They're out of here. - Now this might sound
heartless and it is, but those type of moves help
push up key financial indicators like market capitalization
and return on net assets or RONA. And all of that, would
later become very relevant to what happened to Boeing. But why did Boeing
and McDonnell Douglas even want to merge
when their organizations and philosophies were so far apart? Well, it turns out that
the answer was very similar to why Douglas and McDonnell had merged into McDonnell Douglas about 20 years earlier. Basically, both companies
wanted to diversify and increase their foothold in each other's segments
of the aviation industry. For years, Boeing had wanted to bolster their defense
and space side of the business, where McDonnell Douglas still had a good portion of the market. And it's also really
important to remember that the 1990s was a time
of extreme consolidation among military contractors
due to the end of the Cold War, and this meant that
defense contracts, obviously, were getting
thinner and thinner. This was actually the
reason that Boeing also, one year before the merger, bought the old North American
from Rockwell. Anyway, from the other side, McDonnell Douglas wanted this merger because their own
commercial aircraft programs weren't doing that well. The MD-80 family was
beginning to show its age and the MD-11 hadn't really been
selling that well for a while. But more importantly,
McDonnell Douglas also needed the merger because their entire
viability as a company was actually in question. Scott Hamilton, in his
excellent book "Air Wars", explained that Harry Stonecipher, the last McDonnell Douglas CEO, had basically been brought
in to sell the company. So that set the scene
for the now infamous merger, which happened in August of 1997. The deal between the two companies was what's known as a stock swap,
where shares of Boeing were exchanged for shares
in McDonnell Douglas. This was great news, especially for the McDonnell Douglas shareholders, whose investments, through that,
became much more secure. In hindsight, many critics
say that McDonnell Douglas basically bought Boeing
with Boeing's own money, and the fact that the new Boeing logo looks basically
like a simpler version of the old McDonnell Douglas logo seems like a symbolic
confirmation of that assessment. But what we really want to know here is, what did this mean in practice? How did the management
of McDonnell Douglas practically end up taking over Boeing? Well, the answer to that is,
it didn't happen all at once. To start off, Phil Condit... Remember the engineer
who became Boeing president and CEO during the 2007 development? Remained a CEO after the merger, and by all accounts, Condit
was a great engineer. But as a CEO, a lot of people thought that his managerial style was just a bit too adverse to confrontation. Also the fact that Condit
was an engineer meant that it made perfect sense to him to listen to the opinions
of other experienced professionals, especially those with more
specific business backgrounds. Obviously, that ended up being a lot of former McDonnell Douglas executives, and Condit apparently also
admired GE's Jack Welch, so he felt that he had good reason to take advice from the many
old McDonnell Douglas executives who had worked
directly under Welch before. This meant that the leadership style and company culture in Boeing
now slowly started tilting over towards the old McDonnell Douglas focus of shareholder profits
and quarterly earnings. Inevitably, these changes
also started introducing tensions between the company's management, its engineers and the
rest of its workforce. And it was actually
because of those tensions that Condit decided to move
Boeing's headquarters away from Seattle in 2001, after having been in the
same place for over 85 years. Now to say that that
was a controversial move would be a massive understatement. Boeing's Working Together motto, which Phil Condit himself had introduced during the 777 development days,
now really started to crack. Condit's reasoning for the move was that it would allow the management to spend more time thinking
of the strategic side of things, rather than the day-to-day or how-to-design-an-airplane
stuff as he put it. But before everyone
collectively starts smacking their forehead, there is actually
a kind of justification here. Because it is a common
pitfall for managers to lose the big picture
of running a company by getting absorbed in
the daily grind of things, but normally that's a
danger for smaller operators, with much fewer people involved, less so for giants like Boeing. And, of course, the downside
of isolating the management in a glass tower far away
from the realities of production is that it also removes
them from the feelings and concerns of their employees, and it rarely solves any problems, as Boeing has since clearly found out. Condit ended up resigning as CEO after a military contract scandal which he wasn't directly involved in, but felt that he ultimately
had to answer for anyway. And who do you think
came in as his replacement? Yeah, Harry Stonecipher, the
last CEO of McDonnell Douglas. Now that appointment
obviously just accelerated the tendencies that was already
happening to the company, and Boeing was now really pivoting away from a focus on being
a world-class aircraft manufacturer into being a really nice
company for financial investors. Speaking about this
period in later years, Stonecipher said, "When
people say I changed the culture of Boeing,
that was the intent so that it was going to
be run like a business rather than a great engineering firm. It is a great engineering firm,
but people invest in a company because they want to make money." Again, the obvious background to this were the lessons of GE's Jack Welch, which had by then become
the gospel in the business world. - More than 400 Boeing suppliers
in the area will be impacted. - In that same spirit,
it was Stonecipher who later pushed through
the sale of Boeing Wichita, which is now known
as Spirit AeroSystems, who makes the nose
sections of all Boeing jets and the entire fuselage
of the Boeing 737. He also pushed the sale
of Vought in North Charleston, South Carolina, which Boeing
later had to buy back at a really high cost
and turned into the site where the Boeing 787
is now being assembled. Now, I have explained in other videos that these sales helped push some key financial indicators up, but they also created some
other serious long-term problems, problems that, in some cases,
we are only really seeing now. In any case, Stonecipher
didn't stay on as CEO for very long because of a different,
more personal scandal, and to replace him,
many in Boeing's old guard, this time, wanted one
of their own instead. Now, a perfect candidate for that would have been Alan Mulally, the engineer who had
taken over Boeing's 777 project after Condit and it appears that Mulally also actually really wanted the job. He had been the CEO
of Boeing's commercial airplane division since 1998 and appears to have been a really
popular figure internally. He was very fond
of the Working Together motto and had tried to bring
that back to Seattle in order to inspire all of the workers. - The airplanes are so
sophisticated and so complicated and you have so
many talented people working on an airplane
that the only way to get it done is to work together. - But he had already been
passed over once after Condit resigned and now he would see himself being
passed over once again. Instead of picking Mulally
or any other engineer from inside of the
company for the CEO post, the Boeing board selected one of its own board members
instead, Jim McNerney. This was a guy who later jokingly would compare his own
management style to Darth Vader, saying that the company employees were cowering before him, if that's something to brag about. McNerney was also another
Jack Welch protege from his time at GE, so true to form, he applied some of the very same ideas that Welch had brought to GE, like firing the bottom performing
10% of managers, whether they deserved it or not. Soon after McNerney's arrival,
Alan Mulally left the company and was recruited as the
new CEO of Ford Motor Company. Just after saying his goodbyes and leaving his office in Seattle, a banner with Working Together, which had been hanging over
his office door, was taken down. Now if this was meant
as a symbolic move, unfortunately it was completely spot on. McNerney's motto as CEO,
according to author Peter Robinson, was More with Less, as he demanded more from his employees and
suppliers for less money. Except ironically, he didn't object to setting up two
separate assembly lines for the Boeing 787 project
when the time came for that, one in Everett and the
other one in South Carolina. But that was likely only done in an effort to take power away from the workers
union in Washington state. In 2014, union members
in the state were told that if they didn't accept cuts
and to give up their pensions, the then new 777X would be built in South Carolina or somewhere else. And it worked. Meanwhile, Wall Street
absolutely loved McNerney with his stock buybacks
and divestments, and that's sadly likely also the answer to why these policies won over Boeing's board and other investors. A CEO who cuts costs and stays away from risky long-term investments is seen as a good-for-business CEO or a safe pair of hands, much safer than someone
who does something crazy like launching a new
aircraft for the future. It turns out though that thinking in terms of quarterly business indicators
when dealing with an industry where a new aircraft takes
maybe seven years to develop and another seven
years to break even is maybe not the best strategy to follow. It's worth pointing out
here that during this time, Boeing was only spending
a bit over half as much on research and development as Airbus was. But McNerney would eventually
have to oversee the development of one new airliner, the Boeing 787. And not surprisingly, he
had his own ideas of how to apply the More with Less principle over there. McNerney wanted to develop the 787 faster than they had the 777, which
had taken only six years to do. His idea of how to do that
was to get their suppliers to both work and pay for
a good big part of it. You see, traditionally, when a manufacturer
designed an aircraft, they would design each key
component themselves, build a prototype or two, and then after testing
and certifying it, hand it over with the
blueprints to their supplier who would then
use it to mass produce it. But for the 787,
Boeing instead planned to have their suppliers design,
build and certify some of those parts
and also pay for all of that while also doing it faster than before. On top of that, we also have to remember that this was supposed to be done for a design that would
be using new composites for the fuselage as well as a lot more electrified legacy systems. It didn't work. The 787 ended up taking
between one and two years more than the 777 to develop
and also costing a lot more. And on top of that, it also
had a lot of infancy issues relating to some of those
new technologies like lithium battery
fires among other things. At the same time as this was going on, McNerney had also another
big project in his hands, the launch and development
of the Boeing 737 MAX, which I will cover in the next video, but I will end this one with Alan Mulally. You see, as Ford CEO, he really turned that company around after bringing the Working Together
ethos with him. Ford is still using some
form of that motto today and for me, it is profoundly sad to think that Boeing
had him in their ranks and then just lost him. What do you think? Let me know in the comments here below and please join my Patreon crew if you want to discuss these
things directly more with me in our Patreon hangouts. Also, consider buying some merch using the links here below and have an absolutely fantastic day. Bye bye!
