Harry C. Stonecipher
President & COO
The Boeing Company
"Prospering in Lean Times: Lessons Learned In Restructuring the U.S. Defense Industry"
Prime Minister's Jubilee Business Summit
October 14, 1998
When I think of the difficult issues facing us today in the area of defense production and procurement, I am reminded of an old story. It is the story of Joseph in the Bible.
As you will recall, Joseph is summoned by the Pharaoh to interpret a pair of troubling dreams. One is of seven beautiful cows which are set upon . . . and devoured . . . by seven foul-looking creatures of the same species; the other is of seven healthy ears of grain . . .which are swallowed up by seven parched and withered ears.
"They are the same dream," Joseph tells the Pharaoh. "They mean you can expect seven years of rich harvests . . . followed by seven more . . . of the most devastating famine." Joseph suggests a policy of laying up a tremendous store of corn . . .through the good years . . . so that people will still be able to eat . . .when the land is scorched by famine. So impressed is the Pharaoh that he lifts Joseph out of slavery . . . and puts him in charge of restructuring the Egyptian economy.
Would that all of us were as wise as Joseph . . . both in divining the future . . . and in taking timely and appropriate action!!!
Unfortunately, our foresight is not equal to that of Joseph's. And even if it were, none of us enjoys the total authority . . . that Joseph was given . . . in commanding and directing the resources of an entire populace.
But we must do our best . . .with what we have.
Over the past seven years -- what I am going to call the lean years for our industry -- the U.S. defense procurement budget has fallen by nearly a quarter. Hundreds of big and small companies have left the defense business, and the number of prime contractors has been reduced from eight to just three.
Nevertheless, the U.S. economy as a whole has hardly missed a beat as a result of distress in our industry. And, though smaller, the U.S. defense industry is very much alive. In fact, profit levels within the industry are higher today than they were several years ago.
We must have done something right!!!
Here is my view of six lessons learned from the recent restructuring of the U.S. defense industry. I believe they are relevant to all of you who are concerned about the approach of hard times in the Israeli defense industry.
Lesson Learned #1:
There is a need for mutual understanding and respect between industry and government during a time of downsizing and consolidation. Restructuring is a tough job; government and industry shouldn't make it any tougher than it already is by beating up on each other.
Beginning in the early part of this decade, the Bush Administration made a clear decision to enable the defense industry adjust to a period of falling demand by permitting the consolidation process to proceed more or less unhampered . . . with the series of mega-mergers and acquisitions that created today's Lockheed Martin . . . as well as the new Boeing Company, which includes the old McDonnell Douglas and the aerospace and defense businesses of the old Rockwell.
The hands-off approach that began under President Bush has been largely reinforced and extended under President Clinton. Three successive administrations have taken the view (the wise view, in my belief) that it is our business -- and not the business of government -- to determine our own destinies in the midst of changed circumstances. We have not been subjected to elaborate (and, in my view, foolhardy) "defense conversion" schemes cooked up by outside planners or social engineers.
Lesson Learned #2:
Acquisition reform can be and should be accelerated during a period of downsizing . . . for the good of all parties. The U.S. Department of Defense has shown that it is possible to push streamlining and commercial practices while paring the budget and encouraging contractors to lower costs and prices. If the point is that we must learn to do more with less -- as surely it is -- contractors must have the opportunity to earn a bigger profit by building a better product at a lower cost.
I can't overstate the importance of profitability to the future of this (or any other) industry. Even in lean years, defense companies must have the profits . . . the seed corn, if you will . . . to plant for next year's harvest.
Lesson Learned #3:
. . . Consolidation, on its own, is not synonymous with restructuring.
You do not solve a problem of excess capacity simply by reducing the number of players through mergers and acquisitions. Consolidation must be accompanied by the elimination of excess facilities and, yes, excess employment.
To deny that, or to delay and procrastinate, is to be -- in Shakespeare's phrase -- "unkindly kind." The faster restructuring occurs, the faster people move on to more productive jobs, which is better for them . . . and better for everyone else.
Lesson Learned #4:
The adjustment process may be easier . . . and more humane . . . than some people would have you believe.
In the early 90s, many "experts" predicted that the U.S. economy would be shaken to the core by the sudden downsizing that was occurring in the defense sector. Those fears were greatly exaggerated, to say the least.
I don't want to minimize the difficulties of people who -- through no fault of their own -- are forced out of jobs. But even in plant cities where we have been obliged to make major reductions in the workforce, local economies have continued to flourish . . . and the vast majority of our former employees have gone on to find gainful employment . . . either by joining other companies or setting up their own businesses.
This leads me to Lesson Learned #5.
Don't underestimate the power of the private sector to make the adjustments that are necessary to match people who want work with jobs that need to be done.
Just as we do in the U.S., you have a strong and growing private sector here in Israel.
Our representative in Tel Aviv has told me that Israel is second only to the U.S. in having the most new company start-ups per capita of any country in the world. I also know that Israel has been up among the world leaders in GNP growth.
This brings me to my final lesson learned in this age of consolidation. No company -- no matter how big, or how self-sufficient it may seem to be -- is an island . . . complete in itself. To varying degrees, each is vitally dependent upon a mix of suppliers. That may be a plus . . . or a minus.
At The Boeing Company, we feel that the excellence of our suppliers and partners represents a major . . . long-term . . . global . . . competitive advantage.
We aim to be the best customer . . . of the best suppliers . . . around the world.
We have placed over $1 billion in orders with Israeli companies in recent years. Two out of Boeing's 11 Gold Medal suppliers worldwide are Israeli . . . along with two Silver Medal suppliers. Israeli companies rank #1 and #2 in dollar volume among airframe suppliers to the F-15 program.
Intellectual capital represents another form of seed corn. It is grown and nurtured over a period of time . . . taken from one year's harvest . . . passed to another year's planting. Your companies possess some of the world's best engineering, technical and manufacturing talent. We are proud of our role in helping to develop that. We see it as a resource for the future . . . something that will serve our customers . . . our company . . . and the larger family of Boeing suppliers and partners, of which you are a part . . . for many years to come.
In closing, let's return for one moment to the Biblical Joseph.
As the Pharaoh's economic czar, he had seemingly unlimited powers. But consider this. He was dealing with one of the most rigidly hierarchical societies in human history. Restructuring the economy . . . in such a society . . . must have been like turning a battleship. Maybe that's why it took him all of seven years to do it.
To the leaders of business and government in this room, I say to you: If change is what is needed, how can you possibly fail??? You have what every leader wants. You have a vigorous, dynamic and forward-looking people who have proved . . . again and again . . . that they are afraid of nothing.
You will succeed. I am sure of it!!!