Pontifications: Lessons of the Titans: Book review

By Scott Hamilton

Dec. 14, 2020, © Leeham News: If you want a good business book to read over the Christmas holidays, get Lessons from the Titans by three analysts at the independent Melius Research Co.

The subtitle, a mouthful, aptly describes the book: “What companies in the new economy can learn from the great industrial giants to Drive Sustainable Success.”

Yes, I know. The first reaction to a “business book” is, how boring. Not so, this one.

The analysts are Scott Davis, Carter Copeland and Rob Wertheimer. They provide first-hand and often insider accounts of their coverage of some of the USA’s most significant industrial companies.

General Electric

Davis, an analyst for Morgan Stanley and Barclays, details the rise and fall of GE. His inside account of covering GE and the lengths to which it went to manipulate financial reporting to present the best face is revealing. (Last week, GE agreed to a $200m fine for past transgressions—a pittance.)

Jack Welch built the GE powerhouse. His successor, Jeffrey Immelt, destroyed it. Davis details his efforts to daylight GE’s decline and GE’s campaign to discredit him and get him fired. The rise and fall of GE from Davis’ perspective is fascinating. The story takes two chapters.

Boeing

Copeland isn’t as detailed about Boeing’s history of ups and downs. This story is told in one chapter. But he takes Boeing from its position as an engineering company to one focused more on finance than airplanes.

The 1997 merger with McDonnell Douglas gave Boeing 70% of the commercial aviation market share. Less than 20 years later, Airbus surpassed Boeing by a wide margin in the single-aisle airplane sector and reached parity in the widebody sector.

Copeland doesn’t have the rich, inside stories related by Davis. His is a rather impersonal tale of how Boeing went from No. 1 to No. 2 behind Airbus. He does, however, highlight some of the decisions that contributed to Boeing’s decline. Strong arming suppliers through Partnering for Success was one. Suppliers knew PFS as Preparing for Sacrifice. Boeing squeezed them for cost cuts and extended payments to as long as 120 days, making the supply chain “Boeing’s Bank.”

The KC-46A tanker comes under Copeland’s scrutiny, too. Anyone who follows Boeing, professionally or as an aviation geek, knows Boeing took multiple write-offs amounting to billions of dollars. Copeland points to the fact that few, including me, focused realized. At the time the book was written, Boeing took write-offs in nine of 12 quarters.

“There was no program anywhere else in the entire US defense industry with such a consistent string of negative charges,” Copeland wrote.

Then came the 737 MAX crisis.

Copeland’s view of Boeing is not a pretty one.

United Technologies

Copeland also wrote the chapter examining United Technologies, another powerhouse in aviation.

“The history of United Technologies is a story of amazing success and failure with an incentive structure built around a simple goal, ‘Grow earnings 10% per year,” at the center of the company’s rise and fall,” Copeland writes in the first paragraph.

This opening sets the stage for the tale to come.

Diversification from aviation eventually led to lower and lower margins. UTC decided to exit the engine competition for the Boeing 787, a decision that haunts the company to this day. Some division presidents, notably one at Pratt & Whitney, were pushed out after delivering bad news.

Copeland points to a subsequent decision to buy out Rolls-Royce from the joint venture, International Aero Engines, as a mistake. The reasons were complicated, but Copeland doesn’t delve into them.

UTC is now Raytheon Technologies.

Other companies

Honeywell and Transdigm, two major aviation suppliers, are included in the book, as are some non-aviation companies.

The book is worth the read. It’s available through Amazon.

49 Comments on “Pontifications: Lessons of the Titans: Book review

      • @TW

        Great link – he joins as an advisor/investor, not in any ‘leadership’ position

        Perhaps Monarch are not quite as foolish as Boeing

        • Good to know that those very few receiving Golden Parachutes for *failing upward* have somewhere to further apply their particular talents!

          AB and China are ascendent, in my view, but maybe Rob will weigh in to set us naysayer “cultists” straight.

    • If you have brought profits to a peak you have converted momentum to reach the top of a trajectory.
      Under that auspice the next guy has much less potential to work from. His failure is highly probable.

      you see this in other domains too ( and in the reverse also )
      German Chancellors Schmidt and Schröder effected changes that up front destroyed their voter base ( but boosted the economic future ) and thus massively floated the oppositions follow up administrations: Kohl and Merkel.
      While Kohl was narcissistic enough to tag this solely his achievement Ms. Merkel has acknowledged her predecessors work.

      Having Airbus as counter example covered would have been really intriguing.

      • @ TW
        Thanks for that.
        The bottomless “Cup of Plenty”.
        I wonder would the “new Boeing” even be able to design and make a paperclip without screwing it up somehow?

        • That one fellow™ should be showing up soon w/ his
          Standard Refrain: “it’s the line workers’ fault!”

          wonder who pays him

          • Just to clarify, the 787 smoothness issue found here is similar to that found in the tail section. The fuselage sections involved are provided by Boeing suppliers, who have been notified.

            As with the tail section, the issue is a few thousandths of an inch in magnitude. It potentially could lessen the life of the join, so inspection and remediation will be included in the heavy maintenance schedule. The issue has been characterized as “isolated” among the airframes inspected thus far.

            Boeing is looking at the complete assembly process, in conjunction with the FAA, in order to improve quality control, so other issues like this may be found. As with the others, there is no issue of airworthiness or safety, apart from the 8 aircraft grounded in August.

          • Rob:

            We understand that [Edited] you can’t help yourself.

            Management is paid to ensure this does not happen.

            As it happens over and over and over again, Houston, We have a Management issue.

            Your quality process (if you have one) is to ensure this does not happen. How difficult it is has nothing to do with it.

            Boeing elected to go that route and their obligation they signed on the dotted line is to ENSURE they maintain it.

            Not doing so is a violation of FAA/Certification regulations.

            There are so many areas Boeing is failing in we need a spreadsheet to keep track of them.

            When to they stop screwing up?

  1. « But he takes Boeing from its position as an engineering company to one focused more on finance than airplanes. »

    This is often mentioned key factor and source of resentment against Boeing management, the neglect of everything but sending money to Wall Street, not to speak of the contempt aroused by the Max crashes

    As recently discussed it is slightly possible that WS will keep on Boeing as a pet cash poodle, the company is, at the least, a useful bargaining chip in WS negotiations with China, in which case BA will become a pet pekinese

  2. Jack Welch singlehandedly created the most self destructive and pernicious business management model of modern times.

    In his vision and practice, employees were forced into an effective death match environment, where the core corporate mantras were:
    “at all times, 10% of your employees need to be fired.”
    “the employee is the enemy”
    “stock price is all that matters”

    he along with Harvard Business School, is largely responsible for destroying the idea that employees are assets to be preserved, groomed and grown and turned that into employees are liabilities who should be discarded at the first opportunity.

    he was a horrible CEO and a horrible person and should only be credited with the destruction of the middle class that is his only real legacy.

    • Or at least he took it to the logical conclusion to the practices Corporations are now allowed.

      Maybe call it the Pol Pot of Corporation

      Not sure if Boeing is Rwanda or Edi Amin aka Ugranda.

    • Absolutely Welsh’s disciples were put in place in many Fortune 500 companies and created this environment of using the cheapest means of manufacturing. I think he said factories should be put on barges and dragged to the lowest wage countries.

    • Wow! Sounds like the “Hunger Games: The Tyranny & Terror of Neutron Jack’s Greed & Sadism”

      • Indeed. Welch being portrayed as some kind of avatar
        of goodness, truth, and beauty really shows how far
        we’ve fallen (or, more accurately: how far down we’ve
        been driven, esp since the Powell Memo).

        bilbo’s comment above is apposite.

    • I challenge you to prove that Jack Welch ever said “the employee is the enemy”.

      As for firing 10% of employees, I support that rough estimate though it will vary with the organization – there are sluggards and sleazers in most organizations, they should be fired for the benefit of good employees and the organization.

  3. Further comments on Airbus versus Boeing and what Boeing can or can not do to catch up with Airbus comes from a new report from the respected analyst Dhierin Bechai at the Aerospace Forum at Seeking Alpha

    « Airbus is progressing with its Airbus A321XLR development.
    The aircraft should be extremely capable and fits even better in a pandemic-struck market that’s recovering.
    It’s unclear what Boeing will do and on what timeline.
    Boeing needs to follow up with a new design in the 150-250 seat market or else it risks losing the entire marketplace to Airbus.
    «
    Please comment @Rob

    https://seekingalpha.com/article/4394354-airbus-develops-new-boeing-blow?utm_medium=email&utm_source=seeking_alpha#alt2&mail_subject=ba-airbus-develops-new-boeing-blow&utm_campaign=rta-stock-article&utm_content=link-0

  4. As long as ex-CEOs like Muilenburg can continue to get away with ruining companies without having to face severe consequences, there’s little hope of any improvement.
    Many — if not most — executives nowadays have a policy of “keep the ship floating” without bothering too much with the question “is the ship actually going anywhere?” As long as it doesn’t actually sink, the execs will continue to get their fat benefits.

    • Its no one CEO. Its all of them now that are corrupted.

      The solution is legislative not appeal to their better natures, they don’t have one. Morph to the Wizard of Oz and the Tin Man with no heart.

      They are as cold blooded as an Iguana at the South Pole in the middle of their Winter.

      • Laisez faire politics, trickle down economy. As we speak, Biden’s trade advisors are resurrecting a TPP type document.

      • @Transworld,

        Sadly, it goes beyond the CEOs, perhaps better illustrated by the influence McKinsey & Company exerted to deadly effect as they “advised” Purdue Pharma in how best to promote the widespread use of OxyContin despite the trail of addiction, misery or even death, all in the name of putting profits over health, safety and life itself, per The New York Times report at the link below:

        https://www.nytimes.com/2020/11/27/business/mckinsey-purdue-oxycontin-opioids.amp.html?referringSource=articleShare

        I’ve also included a link to NPR’s report in case The NY Times’s article is behind a paywall:

        https://www.npr.org/2020/12/09/944563257/mckinsey-apologizes-for-helping-purdue-pharma-turbocharge-opioid-sales

        However, for those who can access the NYT report, the impact McKinsey & Company had in marketing a highly addictive and deadly drug hardly differs from the impact they or other “advisors” have on many companies, with Boeing merely being just another cash cow to be milked until it runs dry before moving on to the next cow to drain – kinda like the “bust out” of the “Bamboo Lounge” in Martin Scorsese’s class movie, “Goodfellas”.

        It’s all so sad, tawdry and shameful how these “advisors” could care less about the companies (or lives) they destroy as long as there’s a big payoff to be had.

        But, as badly managed as Boeing is, its “advisors” are hardly blameless – and probably should be added to any discussion of “what’s wrong with McBoeing?”

      • > The solution is legislative not appeal to their better natures

        Are the legislators, [and judiciary branch, and so on] not in the same compromised position as said CEOs?

        turtles all the way down..

  5. I hope that during my lifetime the people who buy and use aerospace-grade products (airlines and their passengers) rank higher in importance than the traders on Wall Street. I can dream.
    Scott, thank you for this review and also your review of my Flight Failure book some months ago.

  6. Does the Book have an proposed remedies or does it just think you can give people unlimited power and not have them corrupted by it?

    We need solutions not repeats of history. Those who ignore history and do not legislate remedies are doomed to repeat it.

  7. My wife was in an Executive track program at Boeing (Expo) when the merger occurred. To her, the problems with Boeing at the time went beyond a focus on finance. It extended to what might be thought of a more lavish lifestyle modeled by BCA Executives–premium hotels, business jets, etc. The Pacific Northwest sensibility that was a characteristic of the company changed. She personally thought that Boeing lost its focus as why it was a business. There was no sense of purpose as to why the company was even in the business that it was in. As an engineering manager that is not the reason why one shows up to work every day. For her, the best decision was to leave the company, which she did.

    • Good for her. While I was a tech grunt, the last 15 years I did not have that option so I had to survive it.

      I did survive, left them with no notice and took 40 years of experience with me as well as many individual task process they had not a clue on and never gave me someone to pass them onto.

      Their loss, my gain. Free at last. Not even a raise the last 10 years despite stellar work.

      Its a reason I don’t blame Welsh specifically, he was just the worst of the worst. I worked for one of the Fortune 500 directly, another one was a client. As sub contractors, we were treated like dirt by the client (they got the bonuses we did the work) and my own company was rife with Toxicity.

      It was funny to see one of those Initiatives fall flat on its ass like PFS.

      They were guaranteed 10 millions saving the first year (sub department of a the bigger company) . After they lost 6 million in the first 6 months they buried it and we never heard of it again. It always was good to poke the client with.

      Bottom line, we are (was) cannon fodder and they could care less.

      • PFS always seemed to me like a one-time gimmick to create short-term cash to permit paying the dividend and to complete promised stock buy-backs for institutional investors. It doesn’t make financial sense for Boeing to impose higher borrowing costs on suppliers who have to draw upon a line-of-credit for the 120-day payment period when Boeing has access to much lower borrowing rates. I’d be interested in hearing if others have the same perspective.

  8. Boeing is still having 737 fuselage ‘splits’ this year, its the 737-700 not the classic series . And its Southwest again
    https://www.bloomberg.com/news/articles/2020-03-13/southwest-air-737-fuselage-crack-pressure-loss-probed-by-faa

    Ominously, 2 more faults on 2 other planes were found during routine inspections.
    Southwest exited its remaining 737-300s very quickly after the much earlier mid air fuselage ruptures. [Flights 1380 and 812] and scoured the used market , with Boeings help, for replacement 737-700s

    As usual its downplayed by Bloomberg as a ‘manufacturing defect’ when the real issue is design fault. And this isnt even the same area as the picklefork ‘manufacturing defect’

    Boeing is just one catastrophic mid air breakup away from having the 737NG fleet grounded.

    • The article did not say how old the -700s were, or how many cycles were on the planes. I wonder if Southwest is like Delta/Northwest – they must have flown some DC-9s and B727s for 25 – 30 years. The B727s would have had the same fuselage as the B737-700, or like noted, maybe Boeing made a change between the Classic and the NG. I never heard of a fuselage problem on the 9. They made a movie about a -200 losing half it’s roof in Hawaii.

      • 737-700 type has only been in service since Dec 1997 ( SWA was launch customer)
        The previous fatigue ruptures on SWA 737-300 they were built in mid 90s and had 40k+hrs and 40K and 50K cycles.
        So not at the very high end of cycles for this type of plane. The rumours earlier in the year about Southwest looking at the A220-300 may be based on the 737-700 problems. The other likely solution maybe a bulk buy of Max 7 when they are available

        • With all that has happened, it would seem a little strange if SW bought the Max7, but even money would suggest that is what they could do.

    • Just to clarify, the causes of these incidents are well-understood and are different for each case.

      The 2011 incident fuselage had an improper replacement of a misaligned skin panel in 1996, between manufacture at Wichita and assembly at Renton, which lowered the fatigue life along a row of rivets in a lap joint. After 15 years of fatigue cycles, the panel slipped the rivets.

      The 2020 fuselage had a hoop-stress fatigue crack in a chemical-milled pocket of the skin crown (no joint). Pockets are designed for cracks to propagate around the pocket perimeter, so as not to enter the structural material. Aircraft had 20 years of fatigue cycles.

      Previously this had been observed on high-cycle Classic models (an incident in 2009). The NG models have improved construction and fatigue life, but inspections are still required every 1500 cycles. This crack was missed on inspection which had occurred 500 cycles earlier. No FAA action resulted.

      Notably these are not rupture events and the structure is not compromised (no mid-air breakup). Skin fatigue is common on aluminum airliners and cracks found are routinely repaired.

      Flight 1380 was a 2018 blade-out event, in which a restraining latch at the bottom of the cowling, was struck directly by the departing blade and projected into a cabin window behind the wing.

      • super.

        Any thoughts on BA repeatedly and inaccurately *blaming the pilots* for the 737 rudder issues in the 90s, which caused two all-fatalities crashes, and very nearly a third; caused, in fact, by faulty rudder-actuation PCUs? No similarity at all to the MCAS issues, and BA’s claims in the latter instances, of course..

        https://en.wikipedia.org/wiki/Boeing_737_rudder_issues

        No pattern to see here; move along, folks..

        • > Unlike other twin-engine large transport aircraft in service at the time, the Boeing 737 was designed with a >single rudder panel and single rudder actuator< .[2]:14 The single rudder panel is controlled by a single hydraulic Power Control Unit (PCU).[2]:13 Inside the PCU is a dual servo valve that, based on input from the pilot's rudder pedals or the aircraft's yaw damper system, directs the flow of hydraulic fluid in order to move the rudder.[2]:19 The PCU for affected Boeing 737 aircraft was designed by Boeing and manufactured by Parker Hannifin.[2]:20

          • Just to clarify, the 737 rudder issue was not initially understood by Boeing or the NTSB or the FAA. Boeing does not write the accident reports or make the cause determinations.

            Eventually the cause was found to be thermal shock between the hydraulic fluid and the control valve, that caused the valve to malfunction. This occurred only in specific circumstances, that were not obvious until the cause was understood. Boeing worked with NTSB, FAA, and the valve manufacturer to discover the cause, and then worked with the manufacturer to correct the design.

            Once the cause was found, previous rudder accidents were re-evaluated and most were found to have similar conditions, and likely resulted from the same cause. Boeing did not oppose or disagree with those findings.

            Boeing also participated in the technical review board subsequently established to consider other possible rudder failure modes, that had not occurred in flight. That resulted in further design improvements that Boeing voluntarily undertook and funded.

          • The rudder issue was early identified as a probable cause.

            Boeing refused to consider it and they had regulatory capture even back then, so the FAA discounted it as well.

            Frankly you are lying about the context. They had numerous reports of rudder problems.

            None are so blind as those who REFUSE to consider they were wrong. Rudder design was a failure, failure to accept it was a killer.

            No one saw the flaw before the issues came up, they did once they occurred and Boeing simply refused to admit or even consider that they had a mistake. Once you go past that point, then you are criminality negligent .

            Much like a truculent two year old, they were dragged kicking and screaming to take their bath.

            Their job is to look for flaws not hide them.

            If they don’t want the responsibility they should get out of the business.

            Working people refer it it as:

            They Want All the Glory But Can’t Stand the Pain.

            Or, they want all the money but none of the accountability.

      • @Rob

        Your technical posts are indeed useful, baseline comments are a sounding board for diversity

        Please comment on the topic in question – one must assume that Boeing management do not agree with the themes and thesis of the book that Scott reviews

        But what is their attitude? Calhoun famously claimed not to be an insider – do you think that that notorious era is now truly extinct and that BA once again will be a company to make America proud?

    • I you level all risks to get away from exposed “peaks” the situation is in a way optimal but if the bottom gets exposed it is large areas in one go.
      I think that is what we see these days. Mechanics whose workings could be observed in the GFC blow up.
      ( just before land is dry the resident acolytes are still talking about “easily walking on water” 😉

  9. Why are there ‘Titans’, per the title here; and is it good *for most people* for said entities to exist?

  10. Interesting, but ‘driving’ terminology suggests hackneyed approach.

    There are success stories, such as Branch Bank &Trust, whose ‘culture’ document from http://www.bbandt.com is great.

    Edwin A. Locke and graduate students surveyed attributes of successful leaders and reported results in The Essence of Leadership. (Spoiler: ‘charisma’ is not high in theirlist.)

  11. Jack Welch fired almost 100,000 employees within just half a decade, 1981-1986, in his relentless pursuit of profits & growth while GE’s top line & market capitalization skyrocketed, propelled by acquisitions worth $13 billion. The leadership model he created and institutionalized at Crotonville under the ‘GE Way’ could be directly traced as the cause of Boeing’s leadership & cultural issues in the 21st century. In fact, 3 of 5 Boeing CEOs over the past 2 decades have been ex-GE guys schooled right under Jack Welch in the 1980s decade. The first one, Harry C. Stonecipher, created a replica of GE’s Crotonville Leadership center within Boeing in 1999 to execute DNA level changes with the center also being run by ex-GE guys. The second, James McNerney, was Jack Welch’s protege and even competed with Jeffrey Immelt for the top job. McNerney executed the GE model flawlessly within Boeing for a decade (2005-2015) with Boeing doling out almost $60 billion to shareholders in returns over 2011-2019. Boeing’s current President & CEO, David Calhoun, too, has been a GE product designed & developed in the same Jack Welch decade of the 1980s!

    Fair Winds & Following Seas to Boeing…

    Read the complete analysis in the last Chapter of Book 1: https://www.amazon.com/Airbus-vs-Boeing-Strategy-Perspective/dp/B08NJM93N5

  12. Correction: Jack Welch did not create Crotonville centre but rather leveraged it to execute cultural changes within GE. The centre had been established way back in the 1950s.

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