| With $14bn in sales, McDonnell Douglas was one of the US’s largest defence companies. It had done a good job of turning around the C-17 transport plane program, which a few years earlier was nearly cancelled by the Air Force over technical flaws and delays. However, its commercial aircraft arm, Douglas Aircraft, was a disaster, caught in the tailwinds of Boeing and Airbus. In 1994, McDonnell Douglas’s board shocked investors by bringing in an outsider – a brash, controversial former GE executive, Harry Stonecipher – as CEO. At first Stonecipher insisted that the firm was committed to building passenger airplanes. At one point he said the business was so good that if Douglas wasn’t already in it, ‘we would be looking for a way to get in’. Unfortunately, years of under-investment had resulted in planes with little imagination, and Douglas would need to spend billions to catch up. Ultimately Stonecipher wasn’t willing to make that investment, preferring to focus on short-term stock performance. This involved the reduction of discretionary spending on things such as research and development, training and better production equipment. There was also a closer control of costs. During his tenure as CEO, McDonnell Douglas’s stock quadrupled (Stonecipher carries a laminated copy of the stock chart in his briefcase), but critics say the failure to invest in R&D would have been disastrous eventually. ‘This is a company that would have gone out of business in five years’, says Richard Aboulafia, an analyst at Teal Group, an aviation research firm. ‘It was headed to oblivion.’ Eventually, McDonnell Douglas merged with Boeing. What planning horizon would you expect a firm in this industry to follow? What factors in the competitive environment, pressure from investors or his personal incentive package could explain the incoming CEO’s short-term approach to strategy? Answer to the Case Study: An aircraft manufacturer should have a long-term planning horizon because the development of a new aircraft will take up to a decade and, given their huge capital costs, will need to remain in service and be fitfor-purpose, for over twenty years. An example of this is the Boeing 747 Jumbo Jet which is still in service and being made, having first flown in the 1970s). The short term focus could have come from several causes: That the style of the CEO was better at cost cutting and stealing assets than longer term strategic thought, i.e. he did not have ‘the mind of the strategist’. That the CEO realized the shareholders would not support growth because all the remaining shareholders required a dividend from their holdings in a mature business. That it was a deliberate strategy to increase the value of stock ready for takeover by a large aircraft manufacturer in an industry characterized by increased concentration. That the CEO was incentivized by the value of stock (e.g. he held stock options, or had bonuses related to earning per share growth, share price growth or level of ROCE). |
