McKinsey: How did Bombardier get where it is today?

Beaudoin: As someone who has been part of the company for 34 years, I find that difficult to answer. To me, the history of Bombardier has been more like a process of evolution than any sudden change.

I joined in 1963 at the request of my father-in-law, Joseph-Armand Bombardier, who founded the company in 1942 to make snow-going equipment for industrial and commercial use. Having trained as a chartered accountant, I came in as a financial controller, but after six or seven months I found myself doing just about everything. I was 25 years old. At that time, we had a new product that my father-in-law had invented, the Ski-Doo snowmobile, and the market was booming. The company was not all that big—it employed about 700 people and had about $10 million in sales—but it was successful, with profits of about $2.5 million.

A year later, in 1964, my father-in-law died. My brother-in-law Germain took over from him, but left the company in 1966 for health reasons. I then became general manager. Those early years were a learning experience. The snowmobile industry was developing rapidly, and we had to put together a whole new team of people who all needed to be trained, motivated, and got up to speed.

These people transformed the company. They propelled our growth so fast that sales reached $200 million by 1970. We were very profitable, too. We were the leader in the snowmobile industry, and the prospects looked good—until the energy crisis struck in 1973. The industry sold 500,000 units in 1972; by 1974, industry sales were down to 250,000.

After all the years spent building up Bombardier's workforce, resources, and manufacturing capacity, we were confronted by a shrinking market. The energy crisis pulled the rug from under our feet. We were forced to look for something else to do. There were many industries we could have entered, but we resolved to diversify only into a business where we could put the skills we had developed to good use.

We found our opportunity in an unexpected place. A few years earlier, in 1969, we had acquired Rotax, the company that built the engines for our snowmobiles. As we were using virtually all its capacity, and its engine was the heart of our machine, we felt that this was an activity we had to control. Part of the acquisition package was Rotax's holding company, Lohner Werke, which built trams in Vienna. We didn't really want to buy it—at the time, trams didn't seem to have much of a future—but we had no choice. As it happened, owning a piece of a mass transit business was no bad thing for us.

What happened?

The energy crisis got people talking about alternative and public forms of transport. Cities that already had tramway lines began to consider expanding them and replacing their old fleets. As the owners of Lohner Werke, we had some understanding of the skills required in this industry. And then in about 1974, when the city of Montreal was planning to acquire new cars for its subway system, some officials asked us if we would be interested in bidding to build the cars. They had only one bidder, and they wanted competition.

In the beginning, we weren't interested. But then we thought about what we were trying to achieve: to develop a product or enter an industry that would react to an event like the energy crisis in a very different way from our main business, the snowmobile. In other words, we wanted something that would be counter-cyclical to our existing product line. So we decided to go ahead. After all, we had some experience in trams, and the skills required—manufacturing, assembly, metal forming, welding—were ones we already possessed.

We put together a taskforce of people whom we were in the process of letting go because of the downturn in our core business, and asked them to prepare our bid. We bought the technology for rubber-tired subway cars from the French, and in the end we won the contract. I never dreamed that buying an engine business in Austria would take us into mass transit, but it turned out to be a fortuitous move. Instead of shutting down one of our facilities, we were able to reorganize the snowmobile operation, concentrate it in one facility, and free up another to build subway cars.

We were fortunate to win that first contract; we developed a whole business from it. In essence, we got where we are today by being practical, having good people, being able to look at the opportunities that fit our organization, and not being afraid to take risks. Having said that, we always try to use the skills we have developed; we don't go into fields of activity where we can't bring any added value.

How did you incorporate the transit business into your organization?

It didn't take long to discover that we couldn't manage transit out of the snowmobile business, which ran everything at that point. I recommended to our board that we bring in an interim CEO to be responsible for setting up the corporate office, which gave me the time to continue turning around the snowmobile operation. We put in place a specialized man-agement team for the transit business, and that was the beginning of Bombardier's diversification.

How risky was the move into transit at the time?

Everyone recognized it was risky—especially when our core business was hurting—but we knew we had to do something. So when the subway bid came up, we prepared extremely thoroughly before taking the plunge. We studied all the aspects of a transit system—business, technical, operational—and costed everything to be sure we knew what we were doing. The French company that sold us the technology for rubber-tired subway cars reckoned the project would cost $60 to $70 million. However, when we put everything together, our total came to more than $100 million. We thought we might be way off track, so we checked the numbers, but they still seemed right. In the event, our bid came in second at $118 million.

The bid that was below ours didn't meet the project specifications. They stipulated a coupling that was very expensive, but the other bidder had used a cheaper alternative. When it costed in the right coupling, its price went up to $1.5 or $2 million over our bid. That tells you how close we were with our pricing.

This first experience was good for us. It gave our people confidence in their ability to enter a new industry. After that, we won a few small bids in the United States, and then in 1982 we bid for the billion-dollar New York subway project, which we won. But it took from 1974 to the early 1980s to master not just the technology but the industry, and to understand all its different dimensions.

What was it that enabled you to cost the Montreal bid so accurately at your first attempt?

In the late 1960s, we had developed a manufacturing engineering process for our snowmobiles, and we had always been very good at understanding our products from the cost and manufacturing points of view. So it was a matter of applying what we already knew to the transit business. The principles are the same. Manufacturing is manufacturing: developing products, having a complete materials list, knowing all your costs. That's where you start no matter what business you are in. If you don't understand your costs, you'll have problems.

Operational capability seems to be central to all the businesses you are in.

Yes—that, and having the right product. Product development is critical. But we have to be able to manufacture our products at a competitive cost. As I say to my colleagues, we don't make money in the office, we make it on the shop floor.

If you are involved in manufacturing, either you are highly cost-efficient or you have to find the best way to buy. It's a continuous process of evaluation: should we make or should we buy? The answer has shifted over the years.

In the 1960s, the snowmobile operation was vertically integrated. The business was growing so fast that we couldn't secure supplies of many of the components; the only way was to make them ourselves. Take the rubber track. Mr Bombardier wanted an endless track with no joints, and when he couldn't find anyone willing to make it for him, he developed his own molds, and we ended up in the rubber business. It was the same story with plastic, fiberglass, and steel. We manufactured all the parts.

But as the industry evolved, we needed to specialize more and more in rubber, and plastics, and steel. We had to keep up with the technology and support a range of specialist skills while at the same time continuing to develop our products. We started to look outside for suppliers so that skills and technology would become their business rather than ours. In the late 1970s, we sold off all the small units that made parts. Today, we manufacture the frame of our snowmobiles and control their final assembly; everything else is bought in.

The problem with being vertically integrated comes when there is a fall in the market. When you are hit by a dollar on the top line, you are hit all the way down. You can't react quickly enough, because as well as your main business, you have all these small ones that also have to be reorganized when their main customer gets into trouble.

So we now rely on external suppliers, and by adopting just in time techniques, we have cut our asset base drastically in the motorized consumer products group. What we now try to do is control only the technology, the development of the product, the assembly, and the distribution. Everything else is outsourced.

Does this approach to outsourcing apply to all your businesses?

Aerospace is more integrated. We still make some of the major components, but we are looking at how we can do less and just control the final assembly. Aerospace has always been a business where the manufacturer of the airframe did everything. It bought engines and avionics and so on from other suppliers, and it shouldered all the risk. We are trying to do things differently.

With the Global Express, our new long-range aircraft, the suppliers of the engine, the electronics, the landing gear, and the wing are all partners in the program, and their engineers took part in the planning. Among them are Rolls-Royce, BMW, Honeywell, and Mitsubishi. As our partners, they get their money when we get paid by our clients. This is a more efficient way to develop a new aircraft—especially one like the Global Express, which calls for heavy investment to give it a clear edge over the competition.

By using this approach, we have developed an aircraft that can go further, and faster, than any other business aircraft in the world. Our flight test center in Wichita—one of the activities we do control—has just confirmed that the Global Express will have a range of 6,700 miles. This means that our clients can fly from New York to Tokyo without refueling—and travel at almost nine-tenths the speed of sound.

What role do licensing and acquisition play in your technology strategy?

Let's take an example. The transit business is all about adapting technologies to clients' specific applications. You can't develop a new product and say, "With this product I will get this market." It doesn't work like that. Basically, every customer has a new requirement; every customer wants its own tailor-made cars. There is no such thing as a generic product. The market is virtually a market of one.

What you have to do is identify the opportunities—the projects that will materialize—and determine what kind of technology the customer needs in terms of car size, weight, number of doors per car, and so on. Then you have to control the technology for the material you are using: steel, aluminum, or stainless steel. You also have to control the technology related to the specific product: a subway car, a tramway car, an intercity car, a high-speed rail car. They are all different.

It was in mass transit that we learned to assemble technologies. Whenever we got a request in the early days, we would try to find a company that built that kind of car, and buy its technology. After we bought the French rubber-tire technology for the Montreal project, we were able to bid for the same kind of subway car in Mexico. With the New York subway, we bought the stainless steel technology from the Japanese, even though we were bidding against them. For some years now, we have developed our own technologies; our tilting train is a good example. Another of our strengths lies in introducing a customer to new technologies and building up its ability to use them.

How did you come to be in the aerospace business?

In 1986, we were approached about buying Canadair, a manufacturer of large business jets which the Canadian government was preparing to privatize. We had been approached before, in the early 1980s, and had said we weren't interested, but circumstances had changed. At a board meeting in 1985, we had decided to diversify along a third leg; we were ready for it and, thanks to the New York subway contract, we could afford it. So I took a good look at Canadair.

As I studied the business, I saw that it was not so very different from what we already did. From a management point of view, the processes were the same: developing products, manufacturing them, and dealing with highly specialized markets. Although aerospace was a different type of market, we felt we had the skills to manage the operation, so we decided to give it a try.

After the acquisition, I soon found out that aerospace is a very small world. There aren't many players, and you get to know everybody in a matter of weeks. As in our other enterprises, we made a point of understanding the competition and the potential for new business. Then we made further acquisitions to reinforce what we were doing.

In manufacturing, the issues were familiar enough, but the mindset was different. Traditionally, aerospace people did not focus much on cost. An airplane can be a very emotional product. Engineers get tears in their eyes when an aircraft they have built makes its maiden flight. But this kind of attachment can get in the way of making money.

To introduce modern manufacturing methods and stimulate new ideas, we brought in people from outside aerospace, mainly from our transit operation. They didn't replace the existing staff: rather, their role was to work with the engineers and manufacturing people and show them that the approaches we had developed elsewhere in the organization could be applied to aerospace. Once people realized that building planes is like building subway cars in terms of pace and volume, and once we had applied the system we use in mass transit, we began to make major gains.

As with transit, we have tried to eliminate many of the components that used to be made in house, but I believe the business is still too integrated. If we could start again from scratch, we would keep the main assembly—the assembly of the wings and the major components—but buy in all the rest. We would control only the key functions: design, assembly, and marketing. If we want to keep on top of our costs in this industry, we have to outsource a lot more, be more efficient, and get our asset base down.

You started in business jets and then diversified into regional aircraft. How did that come about?

Business and regional aircraft are quite different. With business aircraft, you sell them as you build them; with regionals, you are more likely to have a backlog of orders. From the financial point of view, business aircraft are upfront cash transactions, while commercial aircraft are financial packages with wings. It's rather like the difference for a real estate agent between selling a house and selling a shopping center.

Then there are differences in usage. A business aircraft might be flown for 400 to 500 hours a year; regional aircraft are typically run for 2,500 to 3,000 hours. The level of customer service and support expected for a commercial aircraft with over 99 percent dispatch reliability is an order of magnitude higher than for a business aircraft. So to acquire Canadair and then expand into regional jets was not a natural evolution.

But we have always been a growth company, so when we realized that Canadair had plans to develop a 50-seat passenger jet, we asked a taskforce to look at it. Once we were satisfied with its findings, we pulled out some of the best engineers from Canadair, set them up in a separate building, and asked them to develop a regional jet. We invested some $250 million on development—about half of the company's market capitalization at that time. Fortunately, the Challenger's cabin was wide enough to seat four abreast, so our main task was to stretch the fuselage and the wing. When everything worked out, it gave us a lot more confidence in our ability to take bold steps.

Today, the Canadair Regional Jet is a great success. We have sold over 200 jets to more than a dozen airlines around the world, including Lufthansa, COMAIR, Atlantic Southeast, Tyrolean, and Air Littoral. Our plans for a 70-seat model are well advanced.

What else did you do to grow the aerospace business?

Just over a decade ago, we had no presence in aerospace at all. Today, we are the third largest aircraft manufacturer in the world. In 1996, our share of the regional aircraft market was close to 50 percent.

We differentiated ourselves from other regional aircraft manufacturers by offering a family of products with capacities from 30 to 70 seats in turbo-props and 50 to 70 in jets. That raised the bar in terms of what competitors need to offer to compete with us. By using a range of different aircraft from the same family, an airline can match the size of a plane to the needs of a particular route, while saving money through standardized training, maintenance, and parts.

In addition, we have launched a fractional ownership program with American Airlines. Business JetSolutions allows corporations or individuals to buy as little as one-eighth of an aircraft, thus lowering the cost of entry into business jet aviation. By providing pilots trained by American Airlines and planes that we, the original manufacturer, maintain, this program offers security and convenience. It has introduced a whole new group of people to the advantages of private aviation: over 75 percent of the customers have never owned a business jet before.

We are also increasing demand for business aircraft in other parts of the world through joint ventures. We have a business jet charter operation with Lufthansa in Germany, and one with China Southern Airlines in China. We are always looking for ways to grow our business.

Your growth in aerospace has been largely fueled by acquisitions. How do you get all the various companies to work together as part of Bombardier?

Acquisitions certainly played a major role between 1986 and 1991. However, over the past five years, 70 percent of our growth has come from new products and market share gains.

Each of the aerospace businesses we acquired had a strong identity and reputation: Canadair, Short Brothers, Learjet, de Havilland. Each still has a distinct role of its own, as well as playing a role within our aerospace group. Take Short Brothers, which we acquired in 1989. It no longer makes complete aircraft, but it is a major supplier within Bombardier of nacelles, fuselages, and horizontal stabilizers. Thanks to its deep expertise, it is also our center of excellence in composite materials.

Learjet produces the Learjet aircraft, of course, but it also operates a world-class flight testing center where all our test certification programs are carried out. Not only do we reap the benefits of economies of scale, but we can boast a group of people who are at the leading edge of flight testing. When we launch a major program like the Global Express, all these different entities come together and bring their expertise to bear on designing and building a new aircraft. Our aerospace group is in the process of evolving from a collection of separate businesses with very strong identities to an integrated and coordinated aerospace company.

Is there a Bombardier approach to acquisition?

We don't pursue opportunities unless we believe they can help us strengthen our competitive position. We never view acquisition candidates as financial plays. We must be convinced that a company has valuable products that can be extended either in their own right or through some form of integration with our own products. We pride ourselves on doing a thorough job when we study target companies so that we don't have to rely on divestment to make an acquisition pay off.

When we are thinking of buying a company, we examine its performance and try to understand its potential for growth. In manufacturing, almost every organization has its own way of doing things. We don't want to destroy that; indeed, we hope we can learn from it. But we also have to be sure that we can put in place the Bombardier Manufacturing System in due course. We strive to eliminate waste and turn around underperforming assets by using our tried and tested management approaches.

We are very Canadian in the way we handle acquisitions. We hardly ever lay people off. Experience has shown us that if we treat them well and give them the right opportunities to grow, they will be productive and create jobs for others. Our acquisition record is such that we always get workers' support; they know we will invest in new products and thus protect jobs. It is our belief that great organizations achieve exceptional results by getting all their members to perform at extraordinary levels.

Finally, we never pay more than we should for a company. We don't pay for an owner's past mistakes. Above all, we are never afraid to walk away from an opportunity.

When you go into a new business, do you have a time period in mind, such that if things don't work out, you cut your losses and move on?

Not usually; we are not that kind of operation. We are industrialists, and if anyone can make a business profitable, we have to find out how. If we can't, we need to work out what's going wrong and what we can do about it. It may be weak management, or poor organization, but there is always a reason.

Sometimes we have had to be very patient. We invested in snow grooming for almost twenty years before we were close to being the industry leader. Perhaps we didn't have the right product, or understand exactly what customers needed, or realize what kind of support would persuade them to buy. Something was missing, and it took us many years to find the answer.

There are a few businesses where, for reasons outside our control, we haven't been able to do that. We have to decide what to do with these businesses. Normally, we set out to be the leader or a member of the leading group for every industry we are in: motorized consumer products, regional aircraft, business aircraft, and transit. In each of our businesses, we look at what we can do to play a really important role.

Looking to the future, do you think your current profile of businesses will be enough to sustain your growth, or will you need to go out and find a new leg of business?

That's something we have to assess all the time: whether a segment we are in today is a segment we want to stay in for ever, or whether it is changing, so that we might decide to get out of it and find another where we could be more successful. At the moment, our five operating groups offer good potential for growth over the next five years. But we are always willing to look at new opportunities that arise.

How did the idea to form a capital group and a services group originate?

Back in the 1970s, snowmobile dealers found it difficult to get financing. No bank or finance company would touch the product, because they didn't know how to assess its resale value. What is a snowmobile worth after you have sold it once? If you have to repossess it, can you get your money back? This was a whole new world for them.

So we started the capital group as a means of offering wholesale financing to snowmobile dealers. It took us many years to develop expertise and put in place efficient systems, but we were eventually able to extend our operations to a wide range of manufacturers as well as dealers. We now have 4,500 dealers in Canada, the United States, and Europe on our books, and close to 400 manufacturers.

A couple of years ago, we received offers for the capital business, and had to decide whether to sell or expand. We decided to expand. We started to offer retail financing on the same products for which we already provided wholesale financing to dealers. Recently, we entered the manufactured housing mortgage business, as well as niches in the asset-backed financing business. Today, the financing of Bombardier products represents less than a quarter of the capital group's business.

The services group began in a similar way. In a sense, it complements our other businesses. It tends to require less capital than our product businesses, and it is less cyclical. During a downturn, an airline might not buy new planes, but it will still have to maintain the ones it has.

Several of our customers in transportation and aerospace had been asking us to provide long-term maintenance and service support. We already carried out some service activities—we have maintained the Canadian Air Force's fleet of CF-18s since the 1980s—but they were integrated into the existing groups. They didn't have the profile and support to grow. We decided to take them out and create a dedicated group that could gradually build a role for itself.

In its first year of existence, the services group has focused on getting organized and pursuing opportunities in areas where we have an established competence. We have just announced a NATO flying training school in Canada in conjunction with the Canadian Armed Forces, for instance. Our involvement in training military and civilian pilots goes back some time, and years of work for the armed forces of Canada and Great Britain have earned us a strong reputation for delivering cost-effective service. We are even familiar with the British Aerospace Hawk Trainers we intend to use, having maintained them for the Kuwait and UAE governments.

We are now ready to look at broader opportunities. Take regional airlines. They actually spend much more money on supporting an aircraft over its lifetime than they do on buying it in the first place. Some of them would like to contract out maintenance and servicing to a reliable supplier so that they can concentrate on flying the planes.

We are looking at a concept where we would offer to take care of all this. With two or three centers across North America, say, we could maintain most of the regional fleets. The airlines would sell the tickets and fly the planes, and we would provide full maintenance for a fixed rate per hour of flying time.

With this approach, the airlines will know exactly what their costs are. What's more, we can provide specialists to service their fleets—after all, who knows a product better than its original manufacturer? The prospects look good. We are starting slowly, but we hope eventually to offer a full service.

We have adopted a similar idea with our business aircraft. When we bought Canadair, the Challenger plane had a poor reputation for after-sales service, so we told customers that we would guarantee all the parts and supply spares in return for an hourly fee. We developed the Smart Parts program, where we sell the service at the same time as the plane. We sign a contract to supply the customer and support the product.

How do you spend your time in a typical week or month? What are your priorities?

I spend a lot of time with the presidents of the operating groups, discussing their major concerns one on one. We explore opportunities, test ideas, consider what we should do about a particular business, ask whether there are things we could do better. Every month, we review operations and do our forward planning. Altogether, about half my time goes on working with the group presidents, and the other half on working with people at the corporate center. Some of my colleagues claim that I have a seasonal leadership style: in August and September, I focus on new products and strategies for growth and innovation, and in December, I focus on the bottom line, budgets, and capital investment plans. Given that your businesses are at different stages of evolution, do you use different measures for them?

We have to adjust the measures—and our thinking—for the type of business we are looking at. We try to get a similar level of return at the end of the day, but in, say, motorized consumer products, we have a high ratio of return on assets, and it wouldn't be realistic to expect the same performance in aerospace. The targets have to vary from business to business.

Our incentive system within the groups has also changed over time. Incentives used to be based on return on utilized assets, for which we had a target of around 20 percent. Today, we measure performance in terms of economic value creation, and our incentives are linked to this tool. It has been institutionalized across the organization and forms part of the basic training for new managers when they join Bombardier.

Where do innovation and new business generation originate—in the corporate office or within the groups themselves?

Diversification has come more from the corporate office than from the operations. But product innovation comes from the groups. It is my role to push them all the time for more innovation. Whenever we meet at strategic orientation sessions, I ask them, "What are you coming up with?" I have yet to see an operation where product development is not sustained. The flow of projects must continue.

My job is to challenge management, to ensure they are thinking about the future and making the right decisions. They have to manage their operations and deal with today's problems, but at the same time they must look forward and plan for the future. Every year they must work out what they will be doing in the next five. It's a rolling process; it never stops. There is constant dialogue between the corporate center and the groups about which products we can develop and what new business we can go into that will complement what we are already doing.

Is there much sharing across the groups in terms of innovation or skills?

Most innovation in product development occurs within the groups. The types of business we are in don't really lend themselves to a lot of sharing. But we are striving to facilitate the transfer of expertise across groups.

We developed the Bombardier Manufacturing System and the Bombardier Engineering System to capture our basic principles of design and manufacturing, for instance. Information technology is another area where we coordinate our efforts closely. Our information officers share their experiences of systems and vendors, and we are increasingly adopting company-wide formats, such as SAP for management information systems and Lotus Notes for communication. As a result, we are saving time and money.

We have a limited number of cross-group forums. Our strategic issues forum brings together 20 to 25 people twice a year to wrestle with tough strategic issues that cut across different businesses. We also have a human resources council. The corporate management council, our top-level forum, allows me to discuss corporate-wide initiatives and issues with group presidents and key corporate officers. We don't believe in a lot of meetings: none of these forums meets more than three times a year. When they do, real work gets done.

We often hold intensive corporate seminars to train our management and update them on our strategic orientation. These seminars also serve to reinforce our values and help build internal networks between managers from different businesses. When people get to know one another in an entrepreneurial setting like ours, they are quick to share ideas.

One of our goals is to increase the number of managers moving from one group to another. This happens quite a bit from transit into aerospace, but not so much from motorized consumer products into the other groups. I think this kind of management exchange creates the greatest benefit from sharing across the groups. It is an ideal way to bring in new ideas.

Having said all that, we have deliberately chosen a minimalist model—in terms of structure and staffing—for sharing knowhow. We would rather lose some synergy across the groups than hamper decision making and entrepreneurialism within them. However, if and when there is a strong need for sharing, the corporate center will intervene, and often I will get personally involved.