Harvard Case - The Boeing 7E7
"The Boeing 7E7" Harvard business case study is written by Robert F. Bruner, James Tompkins. It deals with the challenges in the field of Finance. The case study is 23 page(s) long and it was first published on : Jul 29, 2004
At Fern Fort University, we recommend that Boeing proceed with the development and launch of the 7E7 Dreamliner, taking into account the following strategic considerations. This recommendation is based on a comprehensive analysis of the case study, including Boeing's financial position, market opportunities, and potential risks. The implementation of this recommendation will require a robust financial strategy, effective risk management, and careful execution of the development and launch process.
2. Background
This case study focuses on Boeing's decision to develop and launch the 7E7 Dreamliner, a new generation of long-haul, fuel-efficient aircraft. The decision was made in a challenging economic environment with rising fuel costs and increased competition from Airbus. Boeing faced significant financial risks, including the potential for cost overruns, delays, and a lack of customer demand. The main protagonists in this case are Alan Mulally, CEO of Boeing, and the company's leadership team, who had to weigh the potential benefits of the 7E7 against the risks involved.
3. Analysis of the Case Study
This analysis utilizes a framework combining strategic, financial, and operational perspectives to assess the decision to develop the 7E7.
Strategic Analysis:
- Market Opportunity: The global air travel market was experiencing growth, with a strong demand for fuel-efficient aircraft. The 7E7 was positioned to capitalize on this opportunity, offering airlines a competitive advantage in terms of operational costs and passenger comfort.
- Competitive Advantage: Boeing's 7E7 offered several advantages over existing aircraft, including improved fuel efficiency, reduced noise pollution, and a more spacious cabin. These features were key differentiators in a competitive market.
- Risk Assessment: The development of the 7E7 involved significant risks, including cost overruns, technical challenges, and potential delays. Boeing needed to carefully assess these risks and develop mitigation strategies.
Financial Analysis:
- Capital Budgeting: Boeing had to invest heavily in the development and production of the 7E7. A thorough capital budgeting analysis was essential to ensure that the project was financially viable.
- Financial Forecasting: Accurate financial forecasting was crucial to assess the 7E7's potential profitability and to secure financing from investors.
- Risk Management: Boeing needed to develop a robust risk management strategy to address potential financial risks, including cost overruns, delays, and market volatility.
Operational Analysis:
- Manufacturing Processes: Boeing had to develop new manufacturing processes to produce the 7E7 efficiently. This included adopting innovative technologies and collaborating with suppliers.
- Supply Chain Management: A strong supply chain management system was essential to ensure the timely delivery of components and materials.
- Launch Strategy: Boeing needed to develop a comprehensive launch strategy to ensure a successful market entry for the 7E7.
4. Recommendations
Boeing should proceed with the development and launch of the 7E7 Dreamliner, implementing the following recommendations:
- Secure Funding: Boeing should secure sufficient funding for the 7E7 project through a combination of equity financing, debt financing, and potential partnerships. This will require a well-structured financial strategy, including a detailed capital budgeting analysis and a clear understanding of the project's financial requirements.
- Risk Mitigation: Develop a comprehensive risk management plan to address potential cost overruns, technical challenges, and delays. This plan should include contingency measures and robust monitoring systems to track progress and identify potential issues early.
- Strategic Partnerships: Explore strategic partnerships with airlines, suppliers, and other stakeholders to share the financial burden and leverage expertise. This could include joint ventures, supply chain agreements, and marketing collaborations.
- Innovation and Technology: Invest in research and development to ensure that the 7E7 remains technologically advanced and competitive. This includes continuous improvement of fuel efficiency, cabin design, and other key features.
- Marketing and Sales: Develop a comprehensive marketing and sales strategy to effectively communicate the 7E7's value proposition to airlines and passengers. This should include targeted campaigns, customer relationship management, and a strong focus on building brand awareness.
5. Basis of Recommendations
These recommendations are based on the following considerations:
- Core Competencies and Consistency with Mission: The 7E7 aligns with Boeing's core competencies in aircraft design, engineering, and manufacturing. It also supports the company's mission to provide innovative and reliable aircraft solutions to the global aviation industry.
- External Customers and Internal Clients: The 7E7 addresses the needs of airlines seeking fuel-efficient and passenger-friendly aircraft. It also creates opportunities for Boeing's employees and suppliers.
- Competitors: The 7E7 positions Boeing to compete effectively against Airbus and other aircraft manufacturers. It offers a significant competitive advantage in terms of fuel efficiency, passenger comfort, and technological innovation.
- Attractiveness ' Quantitative Measures: The 7E7's potential profitability and return on investment (ROI) were attractive, considering the projected growth in the global air travel market and the aircraft's fuel efficiency.
6. Conclusion
Boeing's decision to develop and launch the 7E7 Dreamliner was a strategic move that aimed to capitalize on the growth in the global air travel market and to secure a competitive advantage in the industry. The project involved significant financial risks, but the potential rewards were substantial. By implementing a robust financial strategy, managing risks effectively, and leveraging strategic partnerships, Boeing could successfully develop and launch the 7E7, solidifying its position as a leading aircraft manufacturer.
7. Discussion
Alternatives:
- Delaying the 7E7: Boeing could have delayed the development and launch of the 7E7, waiting for a more favorable economic environment. However, this would have allowed Airbus to gain market share and potentially solidified their position as the leading aircraft manufacturer.
- Focusing on Existing Models: Boeing could have focused on improving its existing aircraft models instead of developing a new one. This would have been a less risky approach, but it may have limited Boeing's ability to compete effectively in the long term.
Risks and Key Assumptions:
- Cost Overruns: The development and production of the 7E7 could have resulted in significant cost overruns, impacting profitability and potentially delaying the launch.
- Technical Challenges: Technical challenges during the development and testing phases could have led to delays and increased costs.
- Market Demand: The success of the 7E7 depended on the demand from airlines. A decline in demand or a shift in customer preferences could have negatively impacted sales.
8. Next Steps
- Secure Funding: Secure funding through a combination of equity financing, debt financing, and potential partnerships within the next six months.
- Risk Management Plan: Develop a comprehensive risk management plan within the next three months, including contingency measures and monitoring systems.
- Strategic Partnerships: Initiate discussions with potential partners within the next six months to explore opportunities for collaboration.
- Innovation and Technology: Invest in research and development to continuously improve the 7E7's technology and features.
- Marketing and Sales: Develop and implement a comprehensive marketing and sales strategy within the next twelve months.
These steps will ensure that Boeing is well-positioned to successfully develop and launch the 7E7 Dreamliner, achieving its strategic objectives and maintaining its leadership position in the global aviation industry.
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Case Description
In 2003 The Boeing Company announced plans to build a new "super-efficient" commercial jet called the "7E7" or "Dreamliner." This was a "bet the farm" gamble by Boeing, similar in magnitude to its earlier introductions of the 747 and 777 airliners. The technological superiority of the new airframe and the fact that it would penetrate a rapidly growing market segment argued for approval of the project. On the other hand, the current market for commercial airplanes was depressed, reflecting terrorism risk, war, and SARS, a contagious illness resulting in global travel warnings. Boeing's board of directors would need to weigh these considerations in granting final approval to proceed with the project The task for students is to evaluate the 7E7 project against a financial standard, the investors' required returns. The case gives internal rates of return (IRR) for the 7E7 project under base case and alternative forecasts. The students must estimate a weighted-average cost of capital (WACC) for Boeing's commercial-aircraft business segment in order to evaluate these IRRs. As a result of this analysis the students identify the "key value drivers" and distinguish, on a qualitative basis, the key gambles Boeing is making. The general objective of this case is to exercise students' skills in estimating a weighted average cost of capital and cost of equity. The need for students to estimate a segment WACC draws out their abilities to critique different estimates of beta and to manipulate the levered-beta formulas. Boeing competes in both the commercial aircraft and defense business; thus, deriving the appropriate benchmark WACC for the 7E7 project requires isolating the commercial aircraft component from Boeing's overall corporate WACC. In doing so, students engage the concept of value additivity.
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