2000 Speeches
Jim Albaugh

Jim Albaugh

President

Space and Communications

"Aerospace Management Challenges of the Next Century"

AIAA Global Air and Space Conference

Washington, D.C.

May 11, 2000

Thank you.

It's a pleasure for me to be here today and participate in what is always a wonderful conference. I want to congratulate AIAA for putting together another world-class event this year, with the right people talking about the right subjects. It's one I look forward to every spring.

And I'm sure that folks in the government also look forward to it, since every company president, vice president or program manager in the industry will be trying to get an appointment to see you-since "we just happen to be in town."

Now, I know it's right after lunch, you're probably feeling kinda full and sleepy, you might even be thinking about nodding off. That's okay, I guess... But, you know, I read the other day that medical researchers have found that the most likely time to have a heart attack is on a full stomach, sitting upright.... So don't stay awake on my account....

Seriously, though, I think many of the remarks we've heard in the past day touch on the question of if... and how... the aerospace industry will become part of the so-called new economy.

While there is much being said about the new economy regarding what it is, how long it will last and what it means to the future, the simple truth is that the U.S. economy is the envy of the world.

But despite the good news for the economy overall, the aerospace industry is at a crossroads.

Will we continue to be an industry of imagination, invention and innovation? Or will we become a secondary player in the Information Age, with only the government as a customer, having a difficult time competing for human and financial resources?

Frankly, the answer to these questions will depend on how we address many of the changes going on in the world today.... Changes in business, national defense, globalization and geopolitics.

Let's taIk briefly about some of those changes.

First, if you look at business today, businesses are not rewarded for asset-heavy endeavors.

At Boeing, many of our businesses are transformational, old-economy type stuff, like launch, satellites and airplanes, consuming large amounts of assets. In other words, the kind of asset-heavy, capital-intensive businesses that aren't rewarded in the marketplace today.

That's really what the Industrial Revolution was all about -- transforming raw materials into finished products. But as we've moved out of the Industrial Age into the Information Age, businesses no longer are rewarded for transforming raw materials into finished goods.

Today businesses are rewarded for transforming raw information into usable data... and for increasing the efficiency of so-called transactional activity -- searching for information, coordinating events and monitoring performance. This kind of business is inherently asset-light, and it's very different from many of ours.

Second, let's look at defense of our country.

Conflicts of the future will be less platform-centric and more information-centric. The real discriminator, the real force multiplier, will be who has the better information... can they get it to the people who need it... and can they safeguard it... not who has the bigger standing army.

If anyone questions how critical this issue is... just look at what those kids in the Philippines did last week with the "Love Bug" virus.... They brought down systems worldwide and did some $10 billion in damage.

So, in this age of Information Dominance, the question becomes: Are those of us in this room the right ones to provide what our government needs in this area? Are they the people who are here at AIAA in Washington, DC this week? Or are they the ones currently in Istanbul at the World Radio Conference? (I'm hedging my bets with folks in both places....)

Third, let's look at Globalization.

I read the other day that if we could shrink the world's population to a village of precisely 100 people, it would look like this:

I may be in the minority, but I'll be the first to say I don't completely understand the implications of these statistics, other than that massive changes in market dynamics can and will occur. From a global market standpoint, the last several years have been sobering for The Boeing Company.

In the airplane business, for many years we didn't have to focus so much on the customer because we thought we had a virtual monopoly. Then, for the first time, last year Airbus booked more orders than we did. The global marketplace gave us a real wake-up call.

The same thing is going on in space. Look at Galileo, where we see the Europeans building their own GPS system-something we consider a heritage product.

And look at EADS and BAE Systems. Both are huge defense consortia that will have a tremendous say in the marketplace of the future.

So the world will be different, more diverse, more global.

Finally, what are the implications of the U.S. as the single superpower: What does that do to government defense funding? Will it cause resentment from other countries? Will we see blocs aligning against us? Will the U.S. be responsible for simply our national defense or global well-being?

I could go on and on with the changes we, as companies, are facing....

Despite - or maybe because of - these dramatic changes, I see tremendous opportunity in the future of this industry and its people. We should not have an insecurity complex.

At the same time, I'm particularly aware of the unique management challenges facing us.... I believe that there are three:

First, leadership... At times of great change like this, leadership becomes paramount. To start with, let's not confuse leadership with management.

Traditionally, we've worked hard to train people to do the same thing tomorrow as they did yesterday... We created great managers. People who thought a strategy was knowing when the next RFP [request for proposal] was coming out... as opposed to anticipating where the market was going and what the customer wanted.

When you look at how the financial markets determine the capitalization value of a company, it's by measuring three things: assets; the net present value of future earnings; and the (perceived) quality of the leadership team.

The mark up for that last one - leadership - can be significant. The market puts great value in knowing a company's leadership can anticipate and respond to changes in the market and in customer expectations.

Take General Electric, for example.... GE has a price-to-earnings ratio of 53, partly based on its substantial assets and future earnings, but largely on the quality of its leadership. Leadership that has shown it can adapt to change.

Aerospace companies, on the other hand, get very little mark-up for perceived leadership. We are not seen as people who can adapt and change.

Over the last several weeks, I've been reading a book called Blur, written by a couple of guys from Ernst & Young. They suggest a new model for corporations... That maybe companies should be viewed in the same way as - get this - bacteria.

Now that might sound funny, but stay with me for a moment.... Bacteria was on Earth long before we were and it will thrive long after we're all gone. And the simple reason is that bacteria doesn't get set in its ways. It changes every time it comes in contact with another organism.

This same organic model can be applied to companies. Every day companies come in contact with customers, competitors, suppliers, partners, employees, even analysts. They are the organisms that we must adapt to, if we are going to survive.

Now, I don't want this to become known as "the bacteria speech." But the point is, we have to do a better job at evolving and reinventing ourselves.

To me, that's a big part of what leadership is all about.

Recently, there's been a lot of criticism about the leadership initiative Faster-Better-Cheaper... and certainly, we've been plagued by a number of failures - like Delta III and Sea Launch. As a result, many people say we ought to go back to the old ways, the good old days....

I reject that. Maybe we didn't get it right with the changes we've made... maybe we didn't reinvent ourselves quite right, but going back isn't the answer. We must learn from our mistakes and move on. (Besides, if we think about it critically, those days weren't really so good, and the costs associated with doing business the old way just aren't acceptable to our customer today.)

There's a Michael Porter quote I use with my staff: "Change is an unnatural act, particularly in successful companies; powerful forces are at work to avoid it at all costs."

That certainly holds true for aerospace companies. We've done some phenomenal things. Aerospace companies helped win the Cold War, put a man on the moon, revolutionized telecommunications and made air travel affordable. . . .

But that's our job... to convince people, despite our success, that it's in the company's and their personal best interest to go in a different direction.

The second challenge facing us today, I think, is... People.

You know, we talk a lot about "the value of a company," the value of our products and services to the customer.

But the real value of any company is in its intellectual capital.

Certainly, Return on Sales, Return on Net Assets and Shareholder Value are important--extremely important--to the value of a company....

But they're a result. The result of its people.

Over the past few months I've had a lot of people ask me about Boeing's acquisition of the Hughes Space and Communications business and if I think we might have paid top dollar for a satellite factory?

Well, I find that line of questioning puzzling. In part because I think that even if that were all we were buying, it'd still be a pretty darn good deal. But mostly because it completely misses the mark.

The real value of the Hughes acquisition isn't that we're acquiring a world-class satellite manufacturing capability-though that's a big bonus, clearly. The real value of the deal is the knowledge, the human resources, and the engineering know-how of the Hughes team...know-how that will enable us to go after programs and markets we couldn't have captured otherwise... programs and markets that will help us profitably grow our company.

I think you'll continue to see acquisitions based on the intellectual capabilities of the employees, as opposed to assets....

Now, I don't know for sure when it happened - I'd guess it was in the late 70s, early 80s--but somewhere along the way aerospace engineering seems to have fallen out of favor.... Suddenly, all the really smart kids in school wanted to grow up to be Bill Gates and not John Glenn or Sally Ride.

It's a bit ironic, really, because the general public loves space. According to Lou Dobbs of space.com: five of the10 highest grossing movies of all time have an aerospace theme; there are some two dozen television programs based on space or science fiction; five of the top 15 toys introduced last year were space-themed; and U.S. consumers spend $30 billion a year on space-themed products and services.

Clearly the interest is out there.... So the question is, how can we attract and retain the best minds?

Well the dot coms do it with cold hard cash - or the promise of it. (Of course, the last few weeks we've seen volatility in the valuation of many of these companies....)

Yet, it's more than the money, too. It's attitude, it's environment, it's opportunity, a climate of empowerment versus old-style Command and Control - a whole range of things.

In fact, a quick review of exit interviews in my organization over the past 18 months shows that only about 12 percent of the folks who voluntarily resigned did so for better wages.... About 45 percent said they left for a better type of work with a better future, more desirable working hours, or more responsibility.

Every year, we do an employee satisfaction survey. . . What's really remarkable to me when I see the results come in, is that when employees are asked, "what do you want from your job?," they don't say, "more money" - well, okay, maybe a few of them do. . . . But most say they want to get involved, to have more responsibility, to make a difference, to enjoy their work, to feel that what they do is important and to know that management appreciates their efforts.

When you think about it, addressing those issues should be pretty easy to do if we start listening to our employees.

I spoke a moment ago about the proud legacy of this industry.... When I think back to the early days of aerospace, I think of folks like Dutch Kindelberger, Howard Hughes, William Douglas.... And I wonder, where are those folks today?

Sometimes I ask myself, would Bill Gates or Steve Jobs have flourished at The Boeing Company or at Lockheed Martin or Raytheon? Would Craig McCaw have survived at AT&T? I doubt it.

Let's face it, today the right people - the best people- aren't satisfied with large bureaucracies requiring them to cool their heels in certain positions for fixed amounts of time.... They want to see: promotion based on merit, regardless of age; responsibility based on competency; and reward based on performance, not just years of service.

People can get this in many of the new-economy companies, so why can't they anymore in aerospace?

Related to leadership and people is the third management challenge: Staying Competitive and Customer Satisfaction

Many of today's aerospace companies were architects of the 20th century. They pushed the boundaries. They were entrepreneurial, they wrote the rules, they constantly explored new ideas. They grew successful. They grew big. They kept doing business the way they knew how... and now some are in danger of growing obsolete....

I'm continually amazed at how my people circle the wagons when asked to reinvent themselves or do things differently.... If we spent half as much time challenging the way we do things, rather than defending them, we'd be much further along, both technically and economically.

If I look at some of the programs we've lost, they're the ones where we perpetuated past approaches, strategies and processes... and didn't listen to the customer.

And the ones we've won are ones where we used new approaches...where we changed "the way we've always done business" to "doing whatever it takes" to stay competitive... where we focused first on what the customer wanted... not on what we had in-house to give them.

Because, when you break it down, customers are a lot like employees - both have basic needs.

Customers want the best system available... with the highest reliability and quality... at the lowest cost and on schedule. . . . Again...it's not that hard.

And while we're talking about satisfying customers... I believe it is a false dilemma that we have to sacrifice customer satisfaction for shareholder value. You can have both.

Of course, that's the subject of another speech... and I've used up my 20 minutes.

Clearly, leadership, attracting and retaining the right people and ensuring customer satisfaction are some of the management challenges brought about by the new economy....

I hope I didn't come across as too negative. I love this business and I'm deeply optimistic about its future and our ability to address the challenges we face. I don't see anything we can't do if we work together and provide the necessary leadership. I do not pretend that this will be easy, and certainly today the stakes have never been so high.

Thanks again to the AIAA for this great forum. I have enjoyed being here and having the opportunity to talk with you this afternoon.