edward tenner is visiting scholar in the Rutgers Department of History and a distinguished scholar in the Smithsonian Institution’s Lemelson Center for the Study of Invention and Innovation. His latest book is The Efficiency Paradox: What Big Data Can’t Do.
Published October 28, 2019
Sometimes a crisis reveals long-term structural changes in organizations that are otherwise hard to discern. Technical complexity and issues of responsibility when critical systems fail often serve to obscure the weaknesses of the organizational machinery. But thanks to ongoing revelations from a pair of recent airline catastrophes, we can get some insight into a long-developing tension between two iconic corporate models: the flexible organization and the deep organization.
The airline disasters, of course, both involved Boeing’s midrange 737 MAX, the aircraft that was expected to be the company’s bread and butter for a decade to come. But by summer 2019, Boeing was widely seen as one of American’s most troubled mega-corporations, with its historic pre-eminence over its European rival, Airbus, in play.
Two brand-new 737 MAXs, one operated by Lion Air of Indonesia and the other by Ethiopian Airlines, crashed in a span of less than five months, killing a total of almost 350 passengers and crew. The plane was subsequently grounded worldwide, disrupting global airline schedules and leading to a slew of canceled orders. Yet, even as Boeing engineers scrambled to fix the software and sensor issues thought to have been responsible for the aircraft’s runaway behavior, they discovered other problems that threatened to further delay the planes’ return to service until 2020. Airlines that had bet heavily on the 737 MAX because its similarity to older models of the plane would simplify the training of pilots who were already certified to fly 737s were forced to pare flights and in some cases discontinue routes.
Litigation is likely to continue for years after the jets return to service. Some analysts have suggested that using a baked-in software module to prevent stalls — the 737 MAX’s Maneuvering Characteristics Augmentation System (MCAS) — is no substitute for an inherently robust design that is more forgiving of pilot error. Others have faulted Boeing’s failure to insist on simulator training for pilots already familiar with older 737 models.
Boeing’s attorneys, for their part, are likely to probe for lapses in training by the airlines that would allow the company to share the blame. It’s worth noting, for example, that co-pilots for some foreign carriers got only 240 hours of training time in the 737 MAX rather than 1,500, as pilots in the United States do. Meanwhile, critics of Washington’s new anti-regulatory regime question the wisdom — or even common sense — of delegating some of the FAA’s certification procedures to airlines’ own technical staffs.
There is still a gap between the short-term damage to Boeing’s reputation among pilots and travelers and the market’s judgment of the company’s long-term prospects. In June 2019, America’s most revered pilot, Chesley “Sully” Sullenberger (who had landed a disabled USAir Airbus 320-214 in the Hudson River a decade earlier), testified before the House Aviation Subcommittee that the MCAS of the 737 Max is a “fatally flawed” system that “should never have been approved.” And at least one next of kin of the Ethiopian crash, who lost his wife, three children and mother-in-law in the accident, has been calling for a criminal investigation of Boeing executives.
Yet Boeing’s share price has been remarkably resilient. After the Lion Air crash, it fell below $300, but rebounded to an all-time high of $440 just before the March crash. It was trading above $330 — close to its precrash 2018 levels — in early August 2019 despite canceled orders and the prospect of delayed 737 MAX certification.
Boeing stock’s strength in the face of humiliation reflects policies going back nearly two decades, to the company’s decision to relocate its headquarters from its historic home in Seattle to Chicago. In March 2001, The New York Times quoted Boeing’s chairman and chief executive, Philip M. Condit, calling for a “leaner corporate center” providing more “flexibility to move capital and talent to the opportunities that maximize shareholder value.”
Flexibility meant, among other things, the freedom to establish new plants under labor rules and tax regimes more generous than those of the State of Washington. In 2009, Boeing illustrated this flexibility by departing from the conventional high-technology wisdom of choosing manufacturing locations with the deepest pools of skilled labor. Instead, attracted by generous tax breaks from the state of South Carolina and a relatively inexperienced (and largely nonunion) work force, it built a factory to assemble 787 Dreamliners in North Charleston.
Before Boeing became a flexible organization, it was a deep organization. Depth is not just a matter of corporate size or scale. It is an attitude of public responsibility.
This decision compounded the company’s embarrassment in the wake of the 737 Max crashes after an investigation by The New York Times revealed many cases of shoddy work in the South Carolina plant — including manufacturing debris left in finished aircraft. Within weeks of the Times report, the executive in charge of the plant had resigned and was relocating back to his native Australia. And in June, Bloomberg revealed that some key software of the Boeing 737 MAX had been developed by $9-an-hour programmers outsourced abroad, the rationale being that aircraft design was now a “mature” industry in which the skills of elite engineers were no longer necessary.
Meanwhile, a report in The New York Times of July 28, 2019, focused on the FAA’s delegation of some essential monitoring tasks to Boeing employees — a policy originally praised 15 years ago by the Government Accountability Office for its flexibility as well as questioned for its risks.
Run Silent, Run Deep
Before Boeing became a flexible organization, it was a deep organization. Depth is not just a matter of corporate size or scale. It is an attitude of public responsibility. Executives of a deep organization may strive for the highest possible profits — but only in the context of a perceived essential role in the social order.
The gospel of flexibility, rooted in business-school doctrines of the primacy of shareholder value (as expressed by Condit in Boeing’s headquarters move to Chicago), seeks to preserve freedom of short-term optimization and cost reduction. By contrast, the gospel of depth has been mainly a tacit one, based on the idea that a dominant organization has a distinct role in the social order. It seeks to serve multiple stakeholders, to provide safety and security to consumers even if it raises costs and to plan for its long-term future.
Deep organizations have often subscribed to what has been called welfare capitalism, providing impressive health, educational and recreation services for employees, expecting exceptional loyalty and higher productivity in return. Many, though not all, deep organizations have government ties and semi-official roles. John D. Rockefeller’s Standard Oil was not a deep organization in this sense; AT&T before the breakup of Ma Bell was.
The best way to understand the relative shift from depth to flexibility is to compare the launch of the 737 MAX with Boeing’s iconic 747 — completed in February 1969 almost exactly 50 years before the crash of the Ethiopian Airlines 737 MAX. Boeing had a rare opportunity. A key customer, Juan Trippe of Pan American World Airways, envisioned an aircraft with two and a half times the passenger capacity and more than double the range of Boeing’s workhorse 707, hoping to spark a new era of inexpensive global travel.
A deep organization, like Boeing in the 1960s and 1970s, has not only a reservoir of professional skills, but an esprit de corps that can resist policies that threaten the mission.
Now, in 2019, the post-crashes modification of the aircraft design is requiring months of software fixes and retesting. In 1968, construction of the first 747 from scratch, a plane that was radically different than any existing aircraft, was completed in only 29 months.
Boeing had to build an entirely new factory (the world’s largest) to produce it. But the company already had the asset on hand that mattered most, a staff of some 50,000 experienced engineers, technicians and managers known within the company as “the Incredibles.” In contrast to the trial and error of many engineering projects, the 747 was completed with such remarkable precision that the head of the project, Joe Sutter, could predict exactly where on the runway the plane would take off — and test pilots lauded its handling from Day 1.
A deep organization, like Boeing in the 1960s and 1970s, has not only a reservoir of professional skills, but also an esprit de corps that can resist policies that threaten the mission. At one point in the project, Boeing senior management wanted to cut 1,000 of the 4,500 engineers assigned to the 747. But at the risk of his own job, Sutter walked out of the meeting at which the proposal was made; Sutter prevailed.
We should not necessarily blame Boeing’s current problems on management shortsightedness. The 747 was a masterpiece, but it was designed to fly efficiently on very long, densely traveled routes. At first, it solidified Pan Am’s position as the flagship global airline. Later, it became a burden.
Pan Am survived for decades by selling its government-protected right to fly intercontinental routes, yet it could not establish profitable new domestic ones. The 747 proved a magnificent flying machine — but an inflexible one, ill suited to the evolving mission of serving less dense routes.
No Business Like Show Business
As commercial air travel spread beyond the elites in the developing world, a greater proportion of orders came from newer, rapidly growing, cost-conscious airlines in Asia. As noted earlier, the 737 MAX promised not only economy but also greater flexibility because it did not require pilot retraining on simulators. This was especially important because Boeing faced competition from new models offered by its only global rival, the European Airbus consortium. Indeed, it was the announcement of a fuel-saving variant of Airbus’s A320 that galvanized Boeing into modifying the 737 rather than investing billions in a true next-generation replacement.
This raises an institutional issue — the first of several that have challenged deep organizations: antitrust. In the 1920s and 1930s, the large Hollywood film studios were classic deep organizations. The vertical integration of most of the giants with theater chains (Columbia was the exception) ensured distribution of a steady supply of films, a mix of ambitious wannabe hits and B movies to fill voracious public demand. In his 1989 book The Genius of the System, the film scholar Thomas Schatz celebrated the masterful hierarchies of the studios at their best — their ability to organize thousands of the most diverse talents from script evaluation to scandal suppression. Like other deep organizations, the studios were not just factories but ecosystems.
With the rise of Netflix and proliferation of new productions, the Writers Guild has argued, agencies have been profiting at the expense of many of their clients.
But independent exhibitors, unable to freely choose what they played, argued that the integration of production with theatrical distribution was a restraint of trade, and the courts ultimately agreed. Paramount set a pattern in 1948 in signing consent decrees separating production studios from theater chains and limiting studios’ rights to withhold the films the theaters wanted unless they agreed to show the dogs and cats, too.
While studios managed to retain some of their market power, they increasingly embraced the flexibility of assembling a new team for each project, substituting mixed-and-matched groups of smaller firms and individual specialists for in-house depth. By 1995, the business writer Joel Kotkin and the environmental lawyer David Friedman would write an article in the small-business magazine Inc., “Why Every Business Will Be Like Show Business,” celebrating “the network of flexible small businesses that make up Hollywood’s entertainment industry.” The new flexibility had spawned entrepreneurial specialist companies working together to achieve higher quality films in a more competitive global environment.
A more critical historian, Ronny Regev, in her 2018 book on the industry’s labor relations, Working in Hollywood, acknowledged that the highly integrated studio system could stifle originality and that the rise of independent production sparked the film renaissance of the 1970s. But she argued that it also magnified the winner-take-all quality of Hollywood culture.
More recently, other drawbacks to the new flexibility have appeared. The major talent agencies, which were once focused on advocacy on behalf of actors and writers, have begun to take the place of the imperious studio moguls. With the rise of Netflix and proliferation of new productions, the Writers Guild has argued, agencies have been profiting at the expense of many of their clients.
What is clear is that antitrust litigation against deep organizations may only substitute new bosses for old. The Paramount decree unintentionally became a harbinger of the future gig economy.
Other deep organizations were almost forced to dissolve by technology. AT&T was for decades a comfortably regulated monopoly, subsidizing local consumer telephone service (especially rural lines) with profitable business and long-distance charges. Arrogant as it could be — it notoriously dubbed handsets made by unauthorized third parties and other consumer-installed equipment as “foreign” — the company had a strong commitment to continuity of service.
In the 1930s, its own vacuum tubes lasted 10 times as long as generic radio tubes of the era. And, in the 1950s, handsets designed by the renowned Henry Dreyfuss and manufactured by its own Western Electric subsidiary, were rated to stand decades of punishing use. One result was the Bell System’s astonishing reliability rate of 99.999 percent call completion. In 2011, a senior Google executive acknowledged that the web had yet to achieve reliability even remotely as high.
The emergence of personal computers, satellite transmission and mobile telephones — not to mention the rising tensions created by the price distortions inherent in cross-subsidies among phone customers — made it increasingly difficult in both political and economic terms to sustain the Bell System’s hegemony. The regulated monopoly was broken up in 1984.
Without the financial support of the broader company, Bell Labs, a remarkable fount of science and technology, never found a new sustainable role. Its confidence in a rising star, Jan Henrik Schön, to regain its prestige backfired when the German physicist was discovered to have fabricated data. By 2008, having become part of a new entity called Alcatel-Lucent, it discontinued its flagship fundamental physics program, which had won six Nobel Prizes before the Schön affair.
AT&T was not the only near-monopoly to feel the winds of change. It became increasingly difficult in the late 20th century for deep organizations to be sufficiently nimble to use their R&D programs to sustain their dominance. An Eastman Kodak researcher created the first digital camera in 1975, and the company continued to invest in the technology. Yet it never led in design or marketing digital photography, as it had in film. Kodak had earlier declined to invest in the dry-photocopying process that its much smaller Rochester neighbor, Haloid, developed into the Xerox 914 machine in 1959.
Google, still an obscure academic startup in the late 1990s, is the old AT&T’s successor as a deep organization, hegemonic in the new field of online search as the Bell System had been in telecommunications.
Xerox, ironically, was soon on its way to becoming a deep organization as well; its Stanford-area laboratory, the Palo Alto Research Center (Xerox PARC) developed the graphic user interface and mouse control that transformed personal computing in the 1980s. Yet the company proved unable to look beyond its base of lucrative corporate, government and academic clients.
Like other deep organizations, it was so attuned to the needs of its core customers that it was deeply reluctant to take the next step of developing innovations to succeed commercially at much lower price points. It took a radically different culture, that of Steve Jobs’
Apple, to transform Xerox’s innovations into successful products.
By the late 1990s and early 2000s, the weaknesses of the flagship corporate research centers like PARC had become apparent. A new doctrine of “flexible specialization” developed in the 1980s proclaimed a “post-Fordist” age in which the giant organization and its mass production and distribution systems were yielding to a greater variety of niche products and a greater reliance on networks of suppliers — just as Hollywood was shifting craft work from in-house studio resources to independent specialists.
Looking back at the history of American industrial research in 1996, the historian of technology David Hounshell saw in the end of the Cold War a new era in which ideas were no longer developed internally by the former military-industrial complex. In 2001, two other historians of technology, Scott G. Knowles and Stuart W. Leslie, took a skeptical look at the “Industrial Versailles” of Eero Saarinen’s corporate research campuses, observing that these laboratories were often too disengaged with corporations’ product development.
All five of IBM’s Nobel Prizes were won by research in the company’s smaller laboratories closer to its manufacturing plants, they noted; the staff of IBM’s flagship Watson Research Center, originally headed by the physicist and champion of basic research Emanuel Piore, won none.
From the perspective of 2020, the state of deep organization in American industry is not as discouraging as it appeared a generation earlier. Google, still an obscure academic startup in the late 1990s, is the old AT&T’s successor as a deep organization, hegemonic in the new field of online search as the Bell System had been in telecommunications. In 2017, fully 16 percent of Google employees held PhD degrees, over three times the proportion at Microsoft, Apple and Amazon. If a measure of a deep organization is its efforts to plan the future privately, it is hard to think of any 20th-century corporation’s plans as ambitious (and controversial) as those of a Google subsidiary for creating a network-controlled smart city in Toronto.
General Motors, once berated for trailing innovations of European and Japanese carmakers, has been rejuvenating its historic research center, founded in 1920, to prepare for a new generation of electric and autonomous (or semiautonomous) vehicles in the 2020s.
To be sure, another 20th-century titan, General Electric, the direct descendant of Thomas Edison’s Menlo Park invention factory, has followed a reverse trajectory, from one of the most admired U.S. corporations to a case study in failure. An original component of the Dow Jones industrial average since 1896, it was removed in 2018.
Jack Welch, the late 20th-century CEO, seemed a managerial wizard who was able to take GE to new heights of profitability while cutting the company’s renowned laboratories to focus on finance. Welch’s successor, Jeffrey Immelt, rebuilt research and made new industrial acquisitions, but the wrong ones, like a $15 billion coal-fired turbine business. In summer 2019, GE was trading for only about 20 percent of its peak share price in 1999. No amount of research could offset bad strategic decisions. General Motors, in its relatively strong concentration on its historic roots, seems to have been more successful than the supposedly more flexible GE.
Despite GE’s woes, the deep organization appears to be alive and well in what is supposed to be the age of radical flexibility and the gig economy. In fact, a study published by the Bureau of Labor Statistics in 2018 revealed a small decline in the proportion of workers relying primarily on contract employment, from 7.4 percent to 6.9 percent. Whether or not Boeing’s outsourcing of software work had anything to do with the fatalities of the 737 MAX, the company remains a deep organization that spends $3 billion in research a year.
Safe At Air Speeds
Organizational depth may not be endangered, but it still needs defense in the age of the flexibility gospel. It may seem wasteful, but it has three great virtues that are more important than ever.
The first is safety. The steadily declining rate of aviation disasters is due to the cooperation of three kinds of deep organizations: the laboratories of manufacturers, notably Boeing; those of research universities with strong aeronautical and mechanical engineering programs; and the resources of the FAA. Understaffed, the FAA delegated 96 percent of approvals on new aircraft to Boeing staff engineers nominated by the company, and those engineers — according to a New York Times analysis — failed to brief the FAA adequately about the software of the 737 MAX’s antistall system that has been implicated in the crashes. Self-certification is certainly more flexible than duplication of oversight by government engineers. But social institutions sometimes need redundancy.
There has been a positive side to hegemony: spinoffs that eventually enrich and even help launch other companies. The most famous is the transistor, developed by Bell Labs and licensed for virtually a token fee.
Hulton Archive/Getty Images
The second is expertise. In 1989, the information scientist Michael J. Prietula and the Nobel economist Herbert A. Simon published an article in the Harvard Business Review, “The Experts in Your Midst,” on the wealth of knowledge and capabilities that underappreciated specialists in an organization possess. Theoretically, a lean, agile company might try to substitute outside consultants and temporary workers for in-house talent. Yet because in-house professionals bring years of tacit knowledge to problems, they paradoxically may be better equipped to find solutions than experts unfamiliar with the organization’s workings. The sociologist Chandra Mukerji has even argued that the government sponsors academic oceanography generously not because its findings are directly applicable to, say, Navy operations, but because its support creates a reserve army of scientific experts for urgent needs.
The third is externalities. Independent inventors are essential to technological improvements, and their conflicts with big corporations periodically make business headlines. But there has been a positive side to hegemony: spinoffs that eventually enrich and even help launch other companies.
The most famous is the transistor, developed by Bell Labs and licensed for virtually a token fee. AT&T’s Unix operating system, widely licensed, inspired a series of open-source programs, including Linux. The IBM theorist Edgar F. Codd published an idea for a relational database in a company journal. It was never patented, probably because of IBM executives’ initial skepticism, and it became the foundation of the Silicon Valley giant Oracle. And public benefits were much more widespread. As IBM’s own website puts it, “most routine data transactions — accessing bank accounts, using credit cards, trading stocks, making travel reservations, buying things online — all use structures based on relational database theory.”
Consider, too, that thousands of inventions were developed by NASA, including GPS, memory foam and the CMOS active pixel sensors used by today’s digital cameras. At least five NASA inventions were incorporated in the Boeing 777.
Flexibility is a double-edged idea. It began as a progressive critique of the manufacturing behemoths of the 1960s and 1970s. It helped spawn entrepreneurial companies and entire industries. Outsourcing, grants and contracts helped universities become the deep organizations of last resort, refuges for curiosity-based research, “the usefulness of useless knowledge,” as Abraham Flexner, founding director of the Institute for Advanced Study, put it. It also helped shift more research support to government agencies.
The troubles of the Boeing 737 MAX show the dark side of flexibility: overriding the checks and balances of strict government supervision. Boeing will struggle to regain the prestige of a time when loyal pilots’ watchword was “If it’s not Boeing, I’m not going.” Yet deep organizations can be remarkably resilient in the long run, as General Motors has been after Ralph Nader’s attack on the Chevrolet Corvair in 1965, learning to live with increased government scrutiny.
In the end, runaway flexibility, like stagnant depth, can impede both corporate and social goals. Disastrous in the short run, the 737 MAX episode gives Boeing a chance to reclaim the legacy of its depth — and its Incredibles.