Boeing’s current travails about safety issues with the 737 MAX 9 can be traced to the company’s weak corporate culture. Recent research by financial economists provides important insights for analyzing cultural strengths and weaknesses, both in general and specifically in the case of Boeing.
The insights involve three components, which are as follows: organizational processes for addressing the propensity to succumb to psychological pitfalls, decisions about “make or buy” decisions, and shared norms and values that reside within a company’s boundaries. Below I discuss each component in turn.
Psychological Pitfalls
Companies with weak corporate cultures are prone to exhibit psychological pitfalls. Four of the main pitfalls are excessive optimism, overconfidence about ability, confirmation bias, and aspiration-based risk taking. Excessive optimism involves underestimating the likelihood with which unfavorable outcomes occur relative to favorable outcomes. Overconfidence is about overestimating own ability. Confirmation bias is about underweighting information that goes against a particular position. Aspiration-based risk taking is about taking high risk, possibly imprudent risk, in order to achieve a particular goal.
Over time, I have documented instances in which Boeing has exhibited all four pitfalls: in 2008, 2013, 2018, 2019, and 2021. Fifteen years have passed since 2008. Corporate culture does not change quickly or easily. This is why companies with weak cultures are associated with excessive long term risks.
My book Ending the Management Illusion, which was published in 2008, gives examples of three types of companies. One type features weak corporate culture: BP is an example. A second type features strong corporate culture: Ford is an example. A third type is mixed: Southwest Airlines is an example.
Consider what happened to each of these companies after 2008. In 2010, BP experienced the Deepwater Horizon catastrophe, the worse environmental disaster in U.S. history. In that same year, Ford completed a turnaround of its culture, under CEO Alan Mulally, and became the most profitable automobile manufacturer in the world. In 2011, the roof on a Southwest Airlines flight opened in mid-air, a risk I discussed in my 2008 book. This, despite Southwest had consistently been among the most profitable U.S. airlines.
I am making a point about predictability being related to the strength or weakness of a company’s culture. Cultural strength and the ability to avoid unnecessary risk are positively related. They go together, and are causally related.
Boundary Issues
Companies’ executives and boards routinely confront make or buy decisions and ask the following types of questions: What to produce in house? What to outsource? When to acquire other firms? When to divest divisions?
In respect to make or buy decisions, companies that buy components base their decisions on cost and quality; and these features are central elements in formal supply chain contracts. Companies that make components, instead of buying them, rely less on formal contracts and more on organizational processes whose execution reflects the company’s culture. This means that a company with clear shared norms and values provides the basis for efficient communication among its members. The stronger the culture, the greater the tendency to make instead of buy.
In a rational world, a company’s board and managers are able to deduce, correctly, which activities are best accomplished as buy and which are best accomplished as make. Activities at the borderline, meaning that the decision to make or buy can go either way, are said to define the boundary of the company.
Before Alan Mulally was Ford CEO, he was a Boeing executive. In that position, he argued that Boeing needed to divest some of its divisions, and thereby pull in its boundary. As a result, Boeing divested carved out its division for making fuselages. That division became the company Spirit AeroSystems. Notably, Spirit produced the fuselage for the Alaska Airlines MAX 9 whose door panel came away in flight, thereby leading to the current situation.
Boeing’s decision to pull in its boundary meant that it lost oversight of fuselage quality. Loss of oversight increases the risk of Boeing overlooking a decline in quality of the components Spirit shipped.
There is an argument to be made that psychological pitfalls at Boeing interacted with its boundary decisions. This means that Boeing’s executives were excessively optimistic and overconfident in their divestment decisions, and as a result took on imprudent quality risk. On the last point, four successive years of negative earnings has placed Boeing’s executives psychologically in the domain of losses. To the extent that quality problems have been plaguing the company for years, and have not been properly addressed, Boeing has exhibited confirmation bias.
Norms and Values
Boeing’s rival Airbus also relies on outsourcing. However, Airbus appears to be much more proactive than Boeing in monitoring its suppliers. This is according to The Wall Street Journal, which reports that Spirit’s production process is plagued by faulty production.
Psychological safety is an important part of having a strong corporate culture. Organizations with strong cultures create environments in which workers feel comfortable reporting the presence of problems. There is strong evidence that the norms and values at Spirit do not strongly embody psychological safety. Instead, The Wall Street Journal states that workers on the assembly line feel pressure to be restrained about reporting all the quality problems they observe.
Concluding Remarks
Corporate executives routinely complain about weaknesses in their companies’ cultures. Weaknesses in Boeing’s corporate culture have been in evidence for at least fifteen years. Weak corporate culture increases the tendency to make bad boundary decisions and take on imprudent risk. Is it any surprise that there is yet one more crisis involving a Boeing plane?