Productivity and Cost An Analysis of Boeing's Strategic Decision
In 2000 Boeing corporation mad a decision to pay Hughes ElectronicsCorp. 3.75 billion dollars for a satellite operation meant to not only putBoeing in the satellite business but also boost them into "high-margin,space based services" including linking airline passengers via the internetand digitally delivering movies to flyers (Holmes, 2001). The decision wasbased on the idea that benefits to the company and employees would increaseas profits increased from new services potentially offered by the satellite Boeing corporation predicted that the cost to benefit ratio respectiveto this investment was positive. They also believed that an increasedoutput and better services would result from their initial investment.Though Boeing was incurring excess variable costs associated withimplementing a new technology and service to customers, the potentialincreased financial gains expected from customer interest in the product Variable costs incurred by Boeing included the need to hire morepeople to operate and maintain the satellites production and market the newservices to the public. Fixed costs included regular operations and
Like other companies, Boeing may have to engage in cutback plans in orderto ensure that they don't lose significant revenue and profitability as aresult of their investment. Why' The law of diminishing marginal productivity states in essence thatwhen the technology of production and inputs are held constant, and thequantity of a variable input increases at a continuous rate, the marginalproductivity of the variable input will eventually decline (William-King,n. In this particular case, Boeing has increased itsvariable expenses and even fixed costs and has not yet realized capitalgains that justify incurring increased costs. Productivity or outputwould have to increase at least minimally initially however for any realresults to be analyzed in this scenario. A newfixed cost introduced would be monthly payment to operate the satellitesystem. In fact many corporations like Boeing who have invested in similarprograms are now realizing failures and engaging in cutback plans withregard to their satellite programs as demand is falling and competition isrising (Homes, 2001). Now, if the satellite system was put into place effectively and theadditional services offered customers Boeing would initially realize anincrease in profits, but this increase would likely leverage off over timeaccording to the law of diminishing returns/productivity as othermanufacturers also adopted the technology. Thereality of the decision however was that economically it was a poor one forthe corporation. Other variable costs would include the number of digital servicesBoeing would eventually decide to offer clients. So in essence as variable input increases the output will alsoincrease in response but not at a constant rate; instead at a decreasingrate. Productivity has notbalanced out cost increases yet, though the company is still hopeful thatthis pattern will change in the near future. Cost can be balanced out if productivity is high enough to compensatefor increased variable costs associated with a new investment. Thus the additional cost load could be justified basedon the assumption that productivity and financial gain would increase. This may not be an issue, as thetemporary increase in output might be sufficient to balance out the costsassociated with adoption of the new technology.
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