Sunday, October 22, 2006

Boeing's 737 Replacement Opportunity: Schumpeter's Theories In Action

This past Wednesday's Wall Street Journal featured Holman Jenkins' weekly column, this time focusing on Boeing's opportunities, as Airbus self-destructs.

The Journal carried a noteworthy article back in June, about which I wrote
here. It emphasized how Boeing had done the basic work of determining customer needs, and designing, then building, the Dreamliner 787.

Now, we learn that Airbus' replacement CEO of this past summer is already out. Jenkins does an excellent job describing that firm's self-inflicted wounds of the past few years, and the resultant disasters in the A380 and A350 programs.

What particularly drew my attention, however, was the last third of Jenkins' piece. He wrote of Boeing's alternatives, in the face of the Airbus meltdown. How, despite the former's incredible luck of its competitor's travails, combined with its own successes, it still faces significant risk.

This is Schumpeterian thinking in its sparest, clearest setting. A capital good manufacturer/marketer, who must make each large, long-term product development decision reasonably well, or risk failure and bankruptcy. Boeing began its jet era by betting the company on the 707. It continued this process with the 747, 757 and 767.

Now, as Jenkins depicts the competitive landscape facing Boeing, one sees that they are, at last, moving to replace the venerable short-haul 737. The article mentions Southwest Airlines clamoring for the replacement, and potential engine provider Pratt & Whitney perfecting the "geared turbofan" jet to achieve the kind of leap in operating efficiency Boeing is said to require in any 737 successor.

Jenkins concludes his article by opining that, as Airbus goes to the sovereign-funding well once more, to bail itself out, Boeing may have to live with a non-decision by the WTO, and, thus, provide its own response to Airbus in the form of a new jet to replace the 737.

This is very appropriate, as Schumpeter would easily see the need for Boeing to cannibalize its own installed base of jets, before another competitor, perhaps from China, does so first. Just because Airbus is faltering in no way means Boeing is about to experience its own version of Rome's infamous "Punic Curse." It's likely that, with the severe consolidation in global commercial aircraft production and marketing, Airbus' demise or crippling will simply provide an entry point for some up and coming third-world or Far Eastern country to step in and selectively begin to challenge Boeing's dominance.


Thus, Jenkins is correct to predict that Boeing should continue on with its product development as if Airbus is still a viable and threatening competitor. Because, as Schumpeter clearly explained, once a company stops innovating to stay ahead of existing or potential competitive offerings, it has, in effect, resigned itself to being swept away by a real competitor in the near future.

A corporate mindset of comfort and complacency in a competitive product/market sector, whether merely national, or truly global in scope, typically leads to the firm's unanticipatedly acclerated decline. An attitude of fear and the need to lead in innovation are vital if a company like Boeing is to retain its recently-attained consistently superior total return and revenue growth performance in the years to come.

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