November 28, 2006

Fewer Sales = Greater Sustainable Growth

Airplane maker Boeing just said "no" to one of its best customers when Southwest Airlines asked to buy more planes. Boeing suggested they buy some second-hand aircraft instead.

What gives? The linked New York Times article describes the method to Boeing’s seeming madness – how Boeing has discovered that discipline and self-imposed constraints are the drivers of sustained growth. In sort: too much of a good thing is not a good thing.

“Boeing, which is based in Chicago, is trying to avoid mistakes of the past. In the last aviation boom, in 1997 and 1998, Boeing gorged itself on orders, but its production lines could not keep up and ground to a halt.”

“Nevertheless, the company flooded the market with too many planes and ultimately had to sell them at cut-rate prices. Boeing’s write-offs came to more than $4 billion in 1997 and 1998, executives were sent packing and 20,000 workers lost their jobs. Boeing’s stock plunged, as did profits, and many wondered whether Boeing would ever regain its footing.”

“Today, having learned its lesson, Boeing is adopting a polar opposite strategy as it faces a new wave of orders that, if not managed right, could swamp the company again.”

“ ’In this hot market, it would be easy to be consumed with the desire to sell anything to people walking through the door who want to buy and push our production system to the point where you could break it,’ said Scott E. Carson, the chief executive of Boeing Commercial Aviation. ‘It’s much harder to say, I’m sorry, we’re sold out.’ ”

“He added: ‘We have to communicate that openly with customers and suppliers to be sure they understand why this is good for the industry. The role of the industry leader is to demonstrate discipline and restraint in the marketplace.’ ”

Boeing made a tangible demonstration of this anti-bigness strategy when it cut in half the number of planes it offers and suppliers it uses. The company has also sharply reduced its workforce, outsourcing much of the plane manufacturing so it can focus only on the work of design and final assembly.

Building airplanes has always been a roller coaster industry. Hopefully flattening the peaks will also level-out the dips, and make for a longer and steadier ride. That's mature growth.


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