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2006 Speeches
W. James McNerney, Jr.

Jim McNerney

Chairman, President and Chief Executive Officer

The Boeing Company

"Innovation and the Global Economy"

Distinguished Lecture Series in International Business

Busch Student Center Ballroom

St. Louis University

May 16, 2006

It's a real pleasure to be here at Saint Louis University and to have this opportunity to speak to students and business people -- including quite a few Boeing people -- who share an interest in global commerce and world-changing, or world-shaping, events.

One such event -- the Lewis and Clark expedition -- was occurring about 200 years ago. Homeward-bound on this day, two centuries ago, Lewis and Clark were camped along the Clearwater River in Idaho. Only now, in mid May, was winter beginning to turn into spring. Two years and two days since having left St. Louis, Lewis was feeling homesick. You can hear that in his words: "I am pleased at finding the river rising so rapidly," he wrote. "It no doubt is attributable to the melting snows of the mountains -- that icy barrier which separates me from my friends and country."

In just five more months, Lewis and Clark returned to St. Louis -- welcomed back as national heroes. They had paved the way for opening a new frontier and had forged relationships between differing cultures. We will celebrate the bicentennial of the completion of their journey on September 23rd.

This morning I am going to talk to you about "Innovation and the Global Economy" and the latest ways that people and companies are forging relationships among different cultures -- same principle, different time. Globalization has been described as "the death of distance." Like it or not, in certain ways, globalization means: You really can't go home again -- not if home is taken to mean a safe, secure, unchanging place.

As Tom Friedman wrote in "The World is Flat," globalization has "accidentally made Beijing, Bangalore and Bethesda next-door neighbors." Inside this accidental, virtual neighborhood, we -- as Americans -- sometimes see a threatening environment. But my strong view is that we have gained far more opportunities. And more of us need to think that way. Having said that, we have found that we no longer have an automatic lock on many of the best jobs. Employers may hire qualified chemists, engineers, physicians and other highly trained people in India, China or other places at a fraction of the cost of such people in St. Louis, Chicago, or any other U.S. city. Even half way around the world, these other candidates are just a "mouse-click" away. By the same token, the competition in our finest colleges and universities has become truly international as well.

For companies, being global means more than just selling to customers outside America. And it means more than doing certain kinds of work in low-cost areas of the world. Low cost and market customization/localization will be necessary -- but not sufficient -- going forward. Yes, it may be necessary to improve your competitiveness by moving certain kinds of work to lower-cost areas of the world -- but that's not a sustainable advantage. Everybody else will be doing the same thing, and your competitors will eventually catch up. At the end of the day, therefore, your products, your services, your people and their values must appeal to your customers more than your competitors' do. And that takes innovation -- same old formula, but on a global scale.

Which brings me to my central point: To benefit from globalization -- whether as an individual, a community, a country, or a business -- there are two things that you must do:

While seeking, attracting and retaining the best people in this more competitive world, we at Boeing are pleased to have a major presence in a city that is home to two dominant universities which are globally oriented in their curricula and thinking and in their ability to draw first-rate talent from around the world. And we are proud to support and encourage all of that through the Boeing Institute of International Business at the John Cook School of Business. To us, that's a huge plus.

Our Commercial Airplanes business is completely global in scope -- serving airlines in every part of the world. And while our Integrated Defense Systems business is primarily focused on serving the U.S. Armed Forces, it, too, has a broad international customer base and significant partner relations with industrial firms throughout the world.

One of my primary jobs is to make sure that Boeing continues to grow and continues to renew itself. While, at Boeing, we are looking to accelerate growth in adjacent market spaces (near our core) with medium and small-sized acquisitions, our priority is organic (or internal) growth. We see the most sustainable growth as coming from inside our company, which requires our own innovation... with our own people depending on each other to make it happen... and a bedrock of productivity to fund it (a subject for another day). So how do we capture... how do we cultivate... innovation?

I think the best place to begin is by exploding some of the popular myths that have grown up around it over the years. From personal experience, I have seen how these romantic but misguided notions can lead to dysfunctional behavior -- serving more to discourage than to encourage innovation and productivity... and creativity. So here are my five great myths about innovation:

Just as war is too important to be left only to the generals, innovation, I submit, is too important to be left only to the inventors and researchers -- no matter how brilliant they may be. So here is my version of the facts about innovation, derived from my past experiences and, hopefully, applicable to all our futures:

Sometimes, an eminently successful project -- through fantasy or legend -- can become a destructive myth. That happened at 3M with Post-it Notes. The legend that had grown up around Post-it Notes incorporates many of the myths that I mentioned. Reportedly, 3M scientist Art Fry -- one of the best product developers in 3M's 105-year history, by the way -- had his "eureka" moment when a loose scrap of paper that he was using as a bookmark slipped out of his hymnal in a choir loft. The myth: Seized with the idea of fixing a place-holding adhesive to the back of similar pieces of paper, he engineered the product and then led a solo crusade to overcome management skepticism.

In fact, the truth: Fry had lots of help all along the way -- from the lab through marketing and learning to manufacture the product. He even recruited help; advice and input from many of the company's leaders (think "suits")! He built a huge, informal team.

The Post-It "story" was a tremendous short-term PR coup in its day... but the day went on too long. People at 3M began to mistake the legend around Post-It Notes (and some other home-run products with similar stories) for the truth. In the 1990s, the company's growth significantly slowed. It had lost its edge. It had turned inward -- relying on its mythological view of the past to find its future.

The antidote, happily, is being led by the generation of leaders who are running the company today. Here's how 3M changed its mindset in two basic ways: First was to switch the emphasis from the individual to the team, and to make the team an all-inclusive concept. Second was to move away from the thought of "Innovation for Innovation's Sake" and replace it with a disciplined focus on customer-inspired innovation.

R&D was realigned and the distance shortened between their researchers and their customers. A heightened focus on the customer -- I want to stress -- did not and does not inhibit the flow of ideas or creativity. To the contrary, through a more disciplined, customer-based approach, 3M raised the bar. And if you've seen its results this year, you know that George Buckley and his team are continuing to ratchet up the growth rate.

Now let me give you a few examples of customer-inspired innovation at Boeing. I'll begin with the F/A-18 E/F Super Hornet, which is assembled right here in St. Louis. It's the direct result of the U.S. Navy's desire to increase its overall aerial warfighting capability while reducing its aviation-related operating costs. The Super Hornet was designed with room for new technologies to be added as necessary, even if those technologies weren't available when the aircraft was being developed. At the same time, it was designed to be ruthlessly cost-effective. The operating and engineering communities at both the Navy and Boeing focused on delivering the "ilities" -- not only capability but also reliability, maintainability and producibility.

The result is that we are able to help our customer "spiral in" new technology to the Super Hornet -- so it will continue to be relevant as its operators change their approaches to how they fight -- while at the same time it actually becomes less costly for them to buy. We are able to do that by applying Lean principles to the way we and our supplier-partners design the systems and operate our production facilities.

The results are impressive: In the late 1990s, each Super Hornet cost our U.S. Navy customer about $83 million. Today, each new Super Hornet costs that same customer about $53.8 million. That's a 35 percent reduction in cost -- yet today's Super Hornets contain much more capable technologies. Those technologies include:

That's what I call innovation -- on both the growth and productivity sides.

It's the same kind of customer-inspired innovation that works so well in our Commercial Airplanes business (or any business) and that's made the Boeing 787 Dreamliner the hottest commercial airplane that we've ever had.

Let me give you a little background on the 787. A few years ago, as you may recall, Boeing was being criticized heavily in the press for choosing not to develop a commercial jetliner bigger than the 400-plus seat 747 to counter the newly launched Airbus A380 super-jumbo -- a plane that, in some configurations, will seat between 700 and 800 people. There were even people who believed that our reluctance to build a super-jumbo was a sign that we were thinking of giving up the commercial airplane business altogether.

The facts were that we had looked at the market potential for an airplane that large (we even conducted a joint study with Airbus), and we -- Boeing -- decided that that market was too small to justify the multi-billion-dollar investment required to make it a reality. Based on our analyses and conversations with our customers, we concluded that the real sweet spot in the market was for a mid-size airplane that could fly more direct, non-stop flights between more cities throughout the world. We had arrived at a view of the future of air travel that was very different from that of our competitor, who envisioned a future dominated by big airplanes flying lots of people to big airports, where they then get on smaller airplanes to fly to the smaller airports and their ultimate destinations.

So we continued investing our time and energy into technologies that would enable smaller airplanes to fly longer range -- taking people from where they are... directly to where they want to go. We call it point-to-point travel, versus the hub-to-hub routes flown by the bigger airplanes.

While developing this set of enabling technologies, we continued discussing with customers the best way to specifically apply those technologies to bring value to their businesses and their customers. Ultimately, it came down to a choice of whether to apply them to an airplane that flew non-stop to more city pairs faster than ever before (an airplane concept we called the Sonic Cruiser) or one that flew non-stop to more places more efficiently than ever before. That was the airplane we called the 7E7, with the E standing for efficiency.

While many airlines were initially excited about the prospect of going faster, they were unanimous in expressing an ultimate preference for efficiency as the place to apply our enabling technologies to create the next breakthrough in air travel.

So, instead of trying to satisfy our critics, our team waited to make sure we provided what the airline customer really wanted from the latest technology: a mid-sized airliner that flies higher, faster, farther, more comfortably, and less expensively than any competing airplane.

And just a little over two years ago, we launched the 7E7 as the 787 Dreamliner. While the super-jumbo market is still struggling to take off, the 787 has become our most successful new airplane launch in history. Based on current orders and commitments for 393 airplanes, the program is essentially sold out from 2008 -- when the first deliveries will be made -- through 2011.

I wish that all of you could visit Seattle where the 787 is beginning to take shape. There, you would see real teamwork on a global scale -- with our engineers working together, virtually, with others from across the United States and from Japan, Italy, France, the United Kingdom, Germany, Russia and many other countries. Here, the focus is on teaming and innovative design and manufacturing processes that not only will reduce the unit cost to build it, but also will boost quality and manufacturing efficiency to the highest levels.

Made primarily with composites rather than metal, the 787 is the first big jetliner designed and built to take full advantage of this advanced material that provides both light weight and great strength. In part as a result, the 787 will use 20 percent less fuel and will be 30 percent less expensive to maintain -- just as the customer wanted. To put this in context, this is an industry where three, four, or five percent is a breakthrough.

Listening to our customers is equally important in our Integrated Defense Systems business, known as IDS. IDS is based here in St. Louis, along with our Phantom Works research-and-development activities and a number of important programs, including the Super Hornet that I mentioned earlier, Future Combat System for the U.S. Army and our work on unmanned aerial vehicles. All this and more are here.

In part as a response to 9/11 and the smaller, lighter, asymmetrical threat it represented, our military customer embraced transformational change -- wanting to become lighter, more agile and more economical in the use of firepower, but with no loss of lethality.

To cite a possible scenario: Suppose you have a convoy crossing a bridge in Afghanistan, and an unmanned aerial vehicle spots terrorists on a nearby mountainside poised to launch an attack with rocket-propelled grenades. Ideally, that information is seamlessly and instantly communicated through a commander on the ground to the nearest strike fighter circling nearby -- who knows exactly what to do to remove the threat without harming the convoy, only a few yards away. We now have that kind of super-surgical capability.

Under Jim Albaugh's leadership at IDS, we have had continuing success in winning critical competitions and building the biggest backlog of any defense contractor. As Jim would tell you, that's not strictly because our technology is that much better than anyone else's -- as good as that technology is. It's more because we made a strong commitment to stay close to the military customer... not just in top management, and not just in the area of R&D, but at many different levels of the organization. It's something we work hard at -- all the time.

I began this lecture with a reference to Lewis and Clark and the anniversary of their great journey. Let me end by mentioning two other inspiring figures who helped to make St. Louis a true Gateway city.

The first is Charles Lindbergh. The Lone Eagle called his monoplane the "Spirit of St. Louis" for the good reason that St. Louis businessmen and bankers provided him with the backing that he needed to make his historic flight across the Atlantic.

Lindbergh inspired many people. Among them was a brilliant young engineer, pilot and self-made businessman by the name of J. S. McDonnell. "Mr. Mac" had lived in several different cities, and he decided to locate his company in St. Louis only after careful consideration of other possible sites. That was in 1939, on the eve of World War II. And that company was McDonnell Aircraft, which later became McDonnell Douglas, now of course a Boeing "heritage" company.

Two of his considerations were strategic. Here -- and this hasn't changed -- was (and is) a major urban area with a plenitude of skilled workers. And with other big airplane manufacturers located on the east and west coasts, it made sense, he thought, to build a great airplane enterprise in the Midwest, where it would be less vulnerable to attack.

And then again, "Mr. Mac" admired the way St. Louis leaders had led the way both in supporting his hero, Charles Lindbergh, and in building one of the first municipally owned airports. So he figured this had to be a forward-looking community.

From my perspective -- 67 years later -- I have to say that Mr. Mac was right about St. Louis... just as he was right about a lot of other things.

Mr. Mac was also a strong supporter of higher education. I'm sure he would be extremely impressed by what Father Biondi and all of you have done and are doing here at St. Louis University.

We at Boeing are proud to be a major part of your community. And we wish the leaders of this city every success in building for the future -- through your investments in biogenetics, life sciences and other centers of innovation, and through your continued support for... and interest in... what we are doing in the aerospace arena.

Thank you.

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