Brooklyn College Boeing Company & 737 MAX Crisis Management Discussion Please assist with the question below. The response should incorporate references from the attached readings.
What is crisis management? What distinguishes crisis management from management during ordinary business conditions? What are some principles for leading companies effectively during a crisis? What are some specific lessouture business leaders?ns that can be drawn from The Boeing Company and the 737 MAX crisis that would be beneficial to f FAILURE BY DESIGN:
THE BOEING 737 MAX CRISIS1
This is a crucial time for Boeing, wrote David Calhoun, president and chief executive officer
(CEO) of The Boeing Company.2 It was Monday, January 13, 2020, and it was Calhouns first day on
the job. I see greatness in this company, he said, but I also see opportunities to be better. Much
better.3 Outside observers of Boeing were inclined to agree. Within the last two years, two separate
Boeing 737 MAX airplanesone operated by Lion Air, the other by Ethiopian Airlineshad crashed,
killing 346 people and leading civil aviation authorities to ground the plane worldwide. Something was
terribly wrong with Boeings best-selling plane.
Calhoun, 62, was a former executive at The Blackstone Group and had been a member of
Boeings board of directors since 2009.4 Calhoun had been named chairman of Boeings board in
October 2019 after conflict erupted between Boeing and the Federal Aviation Administration (FAA)
over the grounded 737 MAX.5 Calhoun and another board member had fired former Boeing CEO
Dennis Muilenburg on December 22, 2019. Now Calhoun was the incoming CEO, and many urgent
issues required his immediate attention. Boeing stock had lost $50 billion in market value. With the
grounding of the 737 MAX, current and future orders for the airplane were now in question. Congress
had launched multiple investigations, investors and crash victims families had sued, and airlines
worldwide along with the flying public had lost confidence in the companys flagship airliner. Boeing
was in a global crisis.
The Boeing Company
In 2020, the Boeing Company was a major multinational corporation that designed,
manufactured, and marketed commercial jetliners, military aircraft, and defense, space, and security
systems. Until losing its market position to the European consortium Airbus in 2019, the U.S.-based
Boeing was the largest aerospace company in the world. With headquarters in Chicago, it employed
153,000 people in 65 countries, including 137,000 in all 50 U.S. states. Boeing also had a major impact
on the U.S. economy through its supply chain. In 2016, transactions with Boeing were estimated to
have generated $45 billion for more than 13,600 businesses, in turn supporting 1.3 million additional
jobs in the United States.6
Boeing was comprised of three business units, based on market sector, and a wholly owned
financial subsidiary. The Commercial Airplane unit manufactured aircraft for passenger and cargo
Draft for classroom use only. Not for quotation or distribution without permission of the authors.
Copyright © 2020 by Anne Lawrence, Randall Harris and Vanessa Hill. DRAFT DATED JUNE 13, 2020.
Calhoun, D. (2020, January 13). President & CEO David Calhouns email to employees. Retrieved at
Executive Biography of David L. Calhoun. Retrieved at www.boeing.com.
Tangel, A. & Cameron, D. (2019, Dec. 23). Boeing CEO Pushed Out as Company Reels from 737 MAX
Debacle. Wall Street Journal. Retrieved at www.wsj.com.
Boeing in Brief: http://www.boeing.com/company/general-info/ captured February 29, 2020.
transportation. The Boeing Defense, Space & Security unit manufactured military aircraft as well as
spacecraft, satellites, and related systems. The Global Services unit provided aftermarket support for
aircraft including maintenance, repairs and training. A wholly owned subsidiary incorporated in 1968,
the Boeing Capital Corporation, provided loans for commercial and military customers to purchase
aircraft and supporting technology in installments.
The first 737 MAX crash, Lion Air Flight 610, occurred in October 2018. Dennis Muilenburg
began 2019 as the Chairman, President and Chief Executive Officer for The Boeing Company.
Muilenburgs senior leadership at Boeing consisted of Executive Vice Presidents for each of the three
major units of the company: Commercial Airplanes, Defense, Space & Security, and Global Services.
These four key executives were supported by an Executive Council of 10 additional executive officers.
The second 737 MAX crash, Ethiopian Flight 302, occurred in March 2019. The Board of Directors was
led by Mr. Muilenburg until October 2019, when he was stripped of the Chairman role and replaced by
David Calhoun. Muilenburg was fired as Boeing CEO and left the Boeing Board in December 2019.
David Calhoun assumed the Boeing CEO role in addition to being Chairman in January 2020. Exhibit 1
details the Boeing Board of Directors as of April 2019.
Total revenues for The Boeing Company had been on an upswing leading into 2019. Sales for
the company increased sharply from 2017 to 2018, in particular, from $93.4 billion to $101 billion.
2019, however, had seen a precipitous slide in the companys revenue stream. Revenues in 2019
declined to $76.7 billion, a 24.9% decline in 2018. The company booked a loss of $636 million in 2019.
The worldwide grounding of the 737 MAX airplane in March 2019 had also created tremendous strain
on the companys balance sheet and cash flow. Company inventories in 2019 had swelled to $76 billion,
largely tied to undelivered 737 MAX airplanes. Total long-term debt had also ballooned to $27 billion in
2019. Net cash flow from operations in 2019 had also turned negative. Exhibit 2 presents selected
financial information for The Boeing Company from 2015 to 2019.
History of The Boeing Company
The Boeing Company was an American success story, a product of ingenuity and innovation.
The firms story began with its founder and namesake, William Boeing. The son of a wealthy timber
baron, banker, and industrialist who died when he was a child, Boeing dropped out of college in 1908 to
launch his own company, Greenwood Timber, in his hometown of Seattle, Washington. He later
diversified into shipbuilding, using wood from his mills.
Boeings interest in airplanes was sparked after attending an aviation conference in Los Angeles
in 1910. He took flying lessons and bought an airplane for his personal use. He later recounted:
The machine was delivered to me in October of 1915 and being convinced that there was a
definite future in aviation, I became interested in the construction as well as the flying of the
aircraft. Enlisting a group of technical assistants, less than a dozen men in all, work was begun
in designing the first Boeing plane. At that time our combined factory and seaplane hangar were
housed in a small building on the shores of Lake Union, and it was there that I made the initial
test flight of the first Boeing plane.7
Executive Biography of William E. Boeing: http://www.boeing.com/history/pioneers/william-e-boeing.page,
captured March 1, 2020.
Working with a friend, U.S. Navy Lieutenant G. Conrad Westervelt, Boeing converted his shipyard on
the Duwamish River into a manufacturing facility for airplanes and established his corporate offices
nearby in downtown Seattle.
William Boeing had a reputation for being a perfectionist. While visiting the factory in 1916,
company legend had it, Boeing observed a set of improperly sawed spruce ribs. He swept the ribs onto
the floor and stomped on them until they were broken and no longer useable. During the same visit,
Boeing spotted a frayed aileron cable. (Ailerons, hinged surfaces on the top of wings, were used to
control lateral balance.) I, for one, will close shop rather than send out work of this kind, Boeing had
By the time Boeing retired in 1934, he had left an indelible mark on the organization. Boeing had
established a strong culture focused on a commitment to quality, leading the industry in cutting-edge
design of commercial and military aircraft.
Innovation in aircraft design would continue to be the companys hallmark as it expanded under
the founders successors. After World War II, Boeing executives moved further into the commercial
aircraft market. Early passenger jetliners produced in Europe had structural problems that resulted in
tragic accidents, dampening public enthusiasm for commercial jet travel. Boeings then-CEO William
Allen and the board approved an investment of $16 millionalmost all the profit earned during the
warin the development of a large-capacity passenger jet. The resulting Boeing 707, marketed as
comfortable, reliable, and safe, could accommodate up to 181 passengers and their luggage. The first
successful commercial jetliner, the 707 remained in service for more than three decades. 8 Allen rolled
much of the profit from the 707 into the development of the Boeing 747, the largest civilian aircraft in
the skies when it entered service in 1970. Dubbed The Incredibles, a team of 50,000 Boeing
employees took 747 from design concept to market in just 16 months.9 Other commercial models
developed in the postwar period included the 727, 737, 757, 767, and 777 series aircraftthe last of
which was introduced in 1994.
Culture Shift after the McDonnell Douglas Acquisition
A pivotal figure in Boeings history, Philip Condit became CEO and chairman in 1996. A pilot
and aeronautical engineer with an M.S. in management from M.I.T., Condit was a career Boeing
employee. Unlike his predecessors, Condit believed the company had taken undue financial risks in the
design and production of new aircraft. By contrast, his strategy was to acquire other firms and assimilate
their products into Boeings portfolio while maintaining a steady revenue stream from updates of
In 1997, Boeing acquired its competitor, McDonnell Douglas, a leader in the defense market.10
Boeing retained many McDonnell executives, transferring several into key leadership positions. Former
Boeing 707/720 Commercial Transport, Historical Snapshot:
A Century in the Sky, Boeing & The Atlantic: https://www.theatlantic.com/sponsored/boeing-2015/a-centuryin-the-sky/652/.
Boeing Plays Defense, Creswell, Julie, Fortune, April 19, 2004. V. 149, 8 p. 90 98.
McDonnell CEO Harry Stonecipher was installed as Boeings president, bringing with him the strategic
priorities and management style that had characterized McDonnell. (Stonecipher later served as
Boeings CEO.) Prior to the McDonnell Douglas acquisition, for 80 years, Boeing had operated as an
association of engineers.11 Many Boeing executives had been intimately involved in aircraft design,
held patents, and spoke the language of engineering and safety as a mother tongue.12 Stonecipher and
his former McDonnell executives, by contrast, were focused on affordability, cost cutting, and
Traditionally, Boeing had held investors and analysts at arms length. By contrast, Condit,
Stonecipher, and their management teams actively sought their approval, prioritizing revenue and
shareholder returns over research and development. Before the McDonnell Douglas acquisition, Boeing
had avoided share repurchases, or buybacks. (These occurred when a company bought its own shares
on the stock market, reducing the number of outstanding shares. This boosted the market value of the
remaining shares and annual dividends distributed to shareholders.) Within a year of the McDonnell
merger, buybacks had become a key component of Boeings strategy.13 At the same time, the company
reduced R&D spending, which dropped by 20 percent in three years. For the first time in four decades,
Boeing had no plans in development for a completely new plane. Rather, its strategy was to continue
modifications and revisions of existing models, with an emphasis on cost effectiveness.
Pushing the envelope of aircraft design higher, faster, farther gave way to the slogans, Were in
business and Were managing for value, used by the management team to communicate Boeings
new priorities to its employees. As one senior manager described the change, Were not selling
airplanes just for the fun of it. Thats the big cultural change. Were running it as a business.14
Nothing confirmed the shift in focus more than the decision to relocate Boeings corporate
headquarters to Chicago, Illinois in 2001. This move put 1,700 miles between Boeings engineers and
manufacturing facilities, which remained in Seattle, and its senior management. While analysts extolled
the wisdom of Boeings new culture, employees were increasingly disillusioned. Charles Bofferding of
the Engineers Union observed, People arent seeing the vision the company is talking about. Instead
they see in Boeings recent movesthe executive firings, the drive to outsource, the push into
servicesnot the creation of a vibrant new business culture but the dismantling of one of the most
successful engineering cultures of all time.15
The only new airplane Boeing designed after the mid-1990s was the 787 Dreamliner, a fuelefficient twinjet widebody the company started work on in 2003. To cut costs, Boeing outsourced the
design and production of critical components to suppliers. Many of these contractors did not pay the
same attention to quality that Boeing had in the past, and flaws in components led to repeated delays.
The 787 was three years late and $25 billion over budget when it entered commercial service in late
How Boeing Lost Its Bearings: https://www.theatlantic.com/ideas/archive/2019/11/how-boeing-lost-itsbearings/602188/
Jerry Useem, Boeing vs. Boeing, Fortune, October 2, 2000. V. 142, #7, pg. 148 160.
The forces behind Boeings long descent, Dan Catchpole, January 20, 2020 Fortune:
How Boeing Lost Its Bearings: https://www.theatlantic.com/ideas/archive/2019/11/how-boeing-lost-itsbearings/602188/
Boeing vs. Boeing Jerry Useem, Fortune 10/2/2000 Vol 142, #7, pg. 148 160.
2011. Just months later, U.S. regulators temporarily grounded the 787 in 2013 due to the risk of
electrical fires caused by faulty lithium batteries.16
Despite these setbacks, Boeing continued its practice of buybacks, averaging $6.2 billion
annually. When the Dreamliner was finally profitable in 2016, Boeing management decided to allocate
100 percent of the free cash flow from the plane to shareholder dividends rather than invest it in R&D.17
Exhibit 3 shows Boeings investment in research and development, dividends, and share
repurchases from 2010 to 2019.
U.S. Government Regulation of Aircraft Certification
In the United States, the safety of commercial aircraft such as those made by Boeing was
regulated by the Federal Aviation Administration (FAA). Created by Congress in 1958, the FAAs
mandate was to provide service with the highest degree possible of safety in the public interest. The
agency had oversight of all civil aviation, including the construction and operation of airports,
management of air traffic control, and certification of new and modified aircraft. It also oversaw the
training and certification of flight crews.
By most measures, the FAA had done an excellent job. Civil aviation in the United States was
extremely safe. In the late 2010s, around one billion U.S. passengers flew annually, with around 5,000
planes in the sky over the nations airspace at any one time. Between 1996 and 2019, the air carrier
fatality rate declined from 81 per 100 million passengers to 0.6 per 100 million passengers.18
In 2005, as part of a broader deregulatory effort, Congress had approved a process called
Organization Delegation Authorization, or ODA. This permitted the FAA to delegate authority to an
organization or individual to undertake aircraft certification tasks that previously would have been
handled solely by government regulators. As a result, companies and their employees could be tasked
with certifying their own aircraft. In such delegated roles, they were known as authorized
representatives, or ARs. Teams of FAA engineers and inspectors were created to oversee the work of
ARs and assure their work met government standards. The FAA Reauthorization Act of 2018, passed
with strong bipartisan support, doubled down on this approach, calling for the agency to make progress
towards full utilization of delegation.
Supporters of delegation argued that it was necessary to augment limited government resources,
leverage private sector expertise, and bring innovative new products to market more quickly. In a 2013
review of the certification process, Ali Bahrami, an engineer and chief of FAAs office in Seattle, 19
wrote in defense of the practice:
Official Report of the Special Committee to Review the Federal Aviation Administrations Aircraft Certification
Process, Executive Summary, January 16, 2020, p. 3.
Mr. Bahrami left the FAAs Boeing office in 2013 to become vice president for civil aviation at the Aerospace
Industries Association, a trade association and lobbying organization for aerospace and defense manufacturers. In
2017, he returned to government service as the FAAs associate administrator for aviation safety.
Given the complex nature of todays aviation products, it is virtually impossible for regulators to
have all necessary expertise in every FAA office throughout the country, especially when global
manufacturing models continue to grow.20
But others expressed caution, saying that such delegation set up a situation in which company
employees would be pressured to act in their employers interest, rather than the publics. Michael J.
Driekorn, a former FAA official and vice president for quality and compliance at Pratt & Whitney,
expressed his ambivalence about delegated authority this way:
Conceptually, yes, it makes sense because FAA cant be everywhere. But the reality is it is
flawed, [because] you have the fox watching the henhouse.21
At Boeing, this system of delegation took the form of a complex, two-headed structure. The FAA
maintained a Boeing Aviation Safety Oversight Office (BASOO) in Seattle to oversee the companys
commercial aircraft programs. BASOO was staffed in 2019 with 45 engineers and other experts,
including 6 senior engineers and 18 working-level engineers. In parallel, Boeing operated a dedicated
Organization Design Authorization (ODA) department, staffed by about 1400 ARsmore than 30 for
every FAA employee in the Seattle office. These individuals had dual roles, in that they were both
Boeing employees and authorized to act on behalf of the FAA.22 Strict procedural rules limited contact
between Boeing and FAA staff. For example, if a Boeing engineer had questions, he or she was
expected to resolve the matter internally instead of directly involving FAA staff.23
In late 2016, Boeing conducted a survey of its employees in the ODA group. (The results were
later provided to Congressional investigators not by Boeing, but by an unnamed whistleblower.) Its
purpose was to determine if Boeing ARs experienced any undue pressure, defined as unwarranted,
excessive, or unjustifiable force, coercion, or bullying of Unit Members while performing or
attempting to perform their roles and authorized functions/delegated authority.24 About a third of the
ARs responded to the questionnaire.
The survey revealed that almost all respondents understood what undue pressure was, and most
felt comfortable reporting it to management. However, 39 percent said they perceived undue pressure,
and 29 percent were concerned about the consequences of reporting it. In an analysis of open-ended
comments, the company found that the dual role of Boeing subject-matter experts who were also
authorized representatives of the FAA could cause confusion leading to potential undue pressure. For
example, some authorized representatives were responsible both for developing Boeings compliance
documents and th…
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