Airline Lufthansa Companies

Strategic Change and Strategic Challenge for Lufthansa

Introduction

The biggest airline in Germany- Lufthansa is one of the leading airline companies in the world, but it suffered from the danger of bankruptcy in 1991. However, the flexible strategic change programs made it survive. Thus, the implementation and effects of those programs are obviously attractive and deserve further study. Moreover, current business environment is full of opportunities and challenges, which poses Lufthansa to identify relative challenges and adopt some reaction to respond. Therefore, this report will discuss two parts: one is strategic change programs and the other is current strategic challenges for Lufthansa. In the first part, it will evaluate the strategic change programs which Lufthansa applied and also cover the effects of leadership and politics. The second part of this report will analyse the strategic challenges for Lufthansa based on current and future business environment.

I. Strategic changes for Lufthansa

Strategy is argued to be a useful tool for an organization to achieve its target in the long term, and its contribution to development of the organization is evident. However, it is impossible to use one strategy to respond the changeable demand due to the dynamic external environment, so the organization should change their strategies to adapt the market.

1. Strategic change program

According to Balogun and Hailey (1999), reconstruction is one of strategic changes for organizations, and it “may be rapid and could involve a good deal of upheaval in an organization” (Johnson and Kevan, 2002:537). Lufthansa utilized this way of reconstruction from functional structure to multidivisional structure to adapt the changing market condition (Bruch, 2000). Functional structure is based on the operational activities such as production, finance, marketing, human resources and information management. However, this structure is primarily suitable for smaller companies. It becomes inadaptable with the expansion of organization, because it neglects strategic issues which are very important for the development of an organization. It is also difficult for departments to co-ordinate and to cope with diversity. Lufthansa is persistent with the idea of multidivisional structure to break up integrated operations into smaller, self-contained units with autonomous governance and management. The multidivisional structure enhances strategy focus of each business unit and facilitates measurement of unit performance. Furthermore, it encourages general management development. Nevertheless, the structure has its disadvantages. First of all, it could be costly； Additionally, the divisions grow too large to manage. What is more, too many divisions make cooperation complex and difficult (Johnson and Kevan, 2002:425).

Apart from restructuring of organization in the case of Lufthansa, they also exploited the approach of combination of the human resources management and business strategy to implement “Strategic Cost Saving Programme”- programme 15, of which the goal was to “reduce cost ,and make staff at every level highly cost -conscious and cost effective” (Bruch, 2001:315). In the process of implementation, Lufthansa respected individual opinion, considered their willing of contribution to achieve the organizational goal. For instances, Dr. Jansen, the General manager of Programme15 considered that one of the characteristic feature of the ‘Lufthansa style’ was the specific combination of consensus orientation and persistence”, and also applied better channel to motivate line managers to dedicate through open and honest discussion (ibid, 2001:316). Because middle managers is seen to act as many kinds of roles in the process of carrying out strategic change program .e.g. role model, project manager role, mentor or coach and translator. Each role undertaken by middle managers has great influence on the behaviours and attitudes of people to adjust to change (Floyd and Wooldridge, 1994). In addition, continual control is also crucial to implement this programme 15. Lufthansa used a tight monitoring and weekly report to ensure its implementation. Control is important to identify the problems blocking the implementation of strategy through assessing the variances or deviations between actual results and budgeted outcomes.

What is more, strategy alliance is a more and more popular method of the development of new strategy. It is defined that two or more organizations share resources and activities to pursue a strategy (Lorange and Roos, 1992).With the increasing complexity of external environment, individual organization may be unable to face those problems within its own internal resources and capabilities, thus they could obtain more resources, skills, information and innovation through cooperating and collaborating with other organizations. Strategic alliance has a variety of forms, like joint ventures, consortia, networks, and opportunistic alliances. Lufthansa adopted strategic network alliance-Star Alliance. It changed their strategy, from “growth through own strength” to “growth through partnership” (Johnson and Kevan, 2002:381). Network is thought to be arrangements whereby two or more organizations work in collaboration without formal relationships, but through a mechanism mutual advantage and trust (ibid, 2002). In the case of Lufthansa, this kind of alliance demanded more coordination and communication within all partners, and required an integrated management structure for overall alliance as well as systematic process for co-coordinating the internal strategic activities of all the partners (Bruch, 2001).

2. Role of leadership

Leadership has enormous influence on performance in organizations, and it is “the process of influencing others to work willingly and to the best of their capabilities towards the goals of the leader” (Kevin and Bob, 1997:527). Leader would expect or request subordinates to do certain things. According to followers’ behaviours, leader would reward or punish them in order to motivate them to do their best to achieve the goals. Therefore, whether to achieve the goal of the organization or not mainly depends on the decisions of the leader.

Firstly, the leader, whose main job is to formulate mission, is on behalf of the organization, so leaders must have strategic vision to provide mission which will provide guidance and direction (Senior and Fleming, 2006:281). The leaders must be able to work under the pressures of a competitive environment. Therefore, leaders should use business strategic judgment by objectively and professionally to investigate each component of the organization’s internal and working environment so that organizations can make the most of resources they own. The leadership of Lufthansa was very successful due to the following reasons: At first, the leader of Lufthansa recognized the need to change strategies, structures and styles. When the crisis arose, the leaders of Lufthansa faced it positively by changing the strategic program; they carried out several strategies to achieve the turnaround. Secondly, good new products and services were developed, for example, Lufthansa provided a series of services including technical services, catering and so on. Finally, new values were added to the organization through the change, Lufthansa had a “Changed Soul”.

Furthermore, the leaders should know how to motivate the employees to do their best to achieve the goals, which is because motivation is one of the main factors determining the level of individual performance at work. If they are motivated, there is a willingness to exert high levels of effort to reach organizational goals (Robbins and Coulter, 1999:482). Lufthansa learnt to count on people when the crisis arose, it made this by spending some time in communicating with the subordinates, through this, leaders can share the information with people and leaders can get feedback on plans and strategies. The way they communicate with subordinates would influence employees’ performance. When employees involve in the communication, employers would understand more about the employees’ thinking, then gaps and misunderstanding in activities among individuals and organizations will be reduced. During the turnaround Lufthansa, leaders developed a certain style of involving people in strategic business processes and networks, Wolfgang Mayrhuber, CEO Lufthansa Technik AG and former member of the OPS Team said: “We learned to count on people and we got to know that the same people can behave very differently in different situations.” (Bruch, 2001:321)

3. Role of politics

The role of politics is as important as that of leadership, and it is very necessary to examine the effects of politics on the business performance. First of all, politics may be required to stimulate necessary change that is blocked by the more legitimate systems. Different from culture, politics promote necessary change, which is rooted in the past and hard to change (Mintzberg et al., 1998:244). Additionally, many decisions are typically affected by political environment, although the importance will vary in different firms, most organizations attempt to maintain good relations with government. Some senior managers may view political factors beyond their control and do little more than adjusting the company’s strategies to accommodate changes in those factors, but Lufthansa took more proactive steps, at the outset of the turnaround, Lufthansa forwardly negotiated with the government to privatize the airline, and it became fully privatised in 1997.

What is more, according to micro power, organizations have to deal with external environment (ibid,1998:248), the faster pace of environmental change and the greater degree of environmental uncertainty are two issues which link all types and sizes of organization（Robbins and Coulter, 1999:62）. Therefore, an organization should always match its capabilities with the demands of the environment. Here, it will analyze how the leaders of Lufthansa took steps to adopt the environment from two aspects: First of all, in the majority of markets, competitors play very important roles in an organization’s task environment. The decisions of the competitors usually influence the firm’s success and failure that is because products in one industry are usually closely related to those in other industries. Moreover, the relationship between an organization and its competitors tends to change from time to time (Wilson and Gilligan, 2005:241). In addition, buyers change enormously over time, but customers are a critical part of all organizations, without them no company can survive, so leaders should change the developing strategy and innovate to catch the customers’ values, tastes, and needs in order to gain an advantage over other companies (ibid: 174). The managers of Lufthansa formulated lots of strategies to improve customer service, such as Passenger Service.

II Strategic challenges for Lufthansa

These days, the world’s airline industry is full of opportunities and challenges that pose airline companies to face a number of strategic challenges. Admittedly, some unexpected factors and fierce challenges may affect policies and strategies of companies. At the same time, companies will also benefit themselves from handling those challenges effectively. The following discussion will focus on the main strategic challenges for Lufthansa from four aspects: strategic alliance, customer service, global environment protection, and economic impact and emergencies.

1. Challenges from Management of Strategic Alliances

The airline industry has already come into the alliance times. Strategic alliances which always used to develop global markets play an important role in the current global airline business which can affect the airlines in different aspects (Blythe and Zimmerman, 2005:113). Strategic alliance can occur not only in the single industry just like airlines cooperating with each other, but also exist among different industries such as airline and IT, airline and logistics service and so on. Strategic alliances are the key factors of the market which will reduce the cost and risk for their members.

a. Airline alliance

Airline alliance growing rapidly in popularity belongs to the network alliance and thus it was the result of the development and severe competition of global airline industry (Johnson and Scholes, 2002:381). These days, the three largest airline alliances of the world are Star Alliance, SkyTeam and Oneworld which were established in the late of 1990’s (Airline alliance survey, 2007). Nowadays, the airline alliances bring more convenience for travellers during the international fights because it can help them save money and time by using single ticket to fly on different frequent flight programs, and provide them with more departure times and destinations. Airline alliances can also reduce the cost and get more profit for the alliance members.

However, that how to manage the airline alliance is still the strategic challenges for the members of the alliance. First of all, as the informal alliances, the members of airline alliance do not need to joint management and they just need to make technology, R&D capability and so on together informally(Aaker and Mcloughlin, 2007:218). Moreover, any members still remain independent after establishing the alliance and therefore all the members are comparatively easy to separate from the airline alliance without any harm(Blythe and Zimmerman, 2005:113) (Johnson and Scholes, 2002:382). In 2007, the three largest airline alliances have already controlled 70% of world market. As the largest airline alliance, Star Alliance takes the 28% of the world market. (Xiong, 2007) How to keep the advantage is the main task in the future work. Under these circumstances, the members of Star Alliance should communicate well among members at all levels of organization, negotiate the agreement carefully and cooperate with other members to institute the suitable strategy for the Star alliance (Czinkota and Ronkainen, 2004). All airline alliances hope to enlarge themselves and control more market share. In order to enhance capacity of competition, Star alliance should attract some new partners. But at the same time, the more important factor is that Star alliance needs to develop the good working environment for the original members to keep them having the expectation of continuous cooperation and keep them making sure that they work with reliance from others. Otherwise, some of them may quit from the Star alliance and join the other alliance which will bring potential risk for the Star Alliance (Blythe and Zimmerman, 2005:114). From Lufthansa’s side, it needs to show its “trust and respect” to other members of this service network alliance (Johnson and Scholes, 2002:455). Without trust, no alliances will be successful.As the key point of success, trust is consisted of two elements: one is “competence based”, and the other is “character based” (ibid, 2002:383).The Lufthansa Aviation Group has already been one of the excellent airlines in the world especially in the year of 2007. Though Lufthansa places the leading role in the whole airline industry, which has more advantages in technology and service, it still needs to trust other members who have the capability to fulfil their task in the alliance and respect their decision making and approaches to motivation (Lufthansa, 2007). Moreover, Lufthansa should also trust and respect others’ attitudes and behaviours and keep good long-standing social relationships with others in order to develop the alliance and give itself the bright future.

b. The alliance between airline industry and other industries

As what mentioned above shows, the competition and development bring “airline alliance” to airline industry. It still leads the airline companies to find other co-operators to help them benefit from the competition. Lufthansa needs to consider the current status to face the challenge to improve itself and increase the capability of competition and development due to the impossibility in existence of individual company with its own ability. Sometimes, they will agree to local help in some particular markets. Lufthansa may enhance itself from cooperating with some firms which have already established a dominant position in particular market (Blythe and Zimmerman, 2005:114). Making a strategic alliance with other industry firms may enable Lufthansa to involve in new technologies and gain more innovation (Johnson and Scholes, 2002:382). For Lufthansa, it has already cooperated with other industries such as logistic/technical/Catering/Ground Services industries. How to find the new business area is the critical issue for Lufthansa. For example, Lufthansa can cooperate with the toy industry which uses the brand of Lufthansa. Providing the free toy for children, it can not only win lots of customers who like this kind of service especially the parents and but also let more people familiar with the brand of Lufthansa.

2. Challenges from Customer Service

According to the World Trade Organization, commercial services place a more and more higher percentage in the world business and they are becoming a more important component of every business (Blythe and Zimmerman, 2005:155). Compared with US$1.46 billion in 2001, commercial services have increased to US$ 2.71billiion in 2006 (Diao, 2007). For airline industry, service is the main product of every firm. Service contributes the main profit for the airline industry, so how to provide the high quality service and how to innovate service are full of challenges for the Lufthansa. In 2007, many airline companies find “a good service is just a little bit more than customer’s expectation” (VLEBA: British airline, 2007) In order to provide the excellent service, we must understand our customers. Customers are served by the company and they can decide which company to be chosen. If a company wants to get profit from customers and provide the suitable service to the customers, they must satisfy customer’s requirement. (Aaker and Mcloughlin, 2007:39-45) For airline industry, providing the convenient, comfortable and personal individual services are becoming more and more important for developing the quality of service. In order to improve the service, Lufthansa tried their best in 2007. The acquisition of 19% of the equity of JetBlue Airways is the big event of Lufthansa in the year of 2007 which “links two airlines with international reputations for quality, innovation and a service culture.” (ATW Daily News, 2007) Jet Blue airways is the way for Lufthansa to enter the US market in order to provide more convenient and more powerful service for America in Logistics which will save more money and more time for the customers. According to Lufthansa’s customer research of 2007, more passengers complain that they are boring to take the long distance fighting because they feel quite tied in the economy class just using one fixed seating position( Wei, 2007). Because of serious competition among airline companies, providing the comfortable service is a key to gain more customers. If Lufthansa can make good use of A380’s space, we wish it can design the new service that it can provide the three layer bed in the economy class (see the picture below). Though the price may be high, the new service will still bring the new challenge in the future because it is suitable for the customer’ requirement and bring more benefit for the Lufthansa.

The economy class with bed (Wei, 2007)

3. Challenges from Global Environment Protection

Recently, airline companies have been confronted with enormous environmental challenges such as carbon emissions, greenhouse effects and pollution prevention. According to the latest statistic data, international aircraft are responsible for 3% global carbon dioxide emissions but the figure is still increasing fast (Scheelhaase and Grimme, 2007). At the same time, though the environmental challenge have changed during the last decades and may be different among countries and companies, necessity of environmental awareness has aroused by a number of environmental pressures from governments, stakeholders and costumers and thus those factors will possibly affect the corporate strategies (Schot and Fischer, 1993). For world’s airline industry, with regard to reduction of greenhouse gas emissions, the implementation of internationally coordinated instruments seems not to be ignored and carbon dioxide trading regulatory which airline firms should subject to has already recommended by the European Commission (BBC, 2005).Thus, the environmental programmes and policies of airline firms should be established due to both external pressures and intrinsic responsibility and awareness for global environment. According to the different characteristics and various stages of development, Petulla (1987) classified environmental management into three categories: crisis-oriented, cost-oriented, and enlightened, and he also argued that strong environmental responsibility may contribute to company’s sustainability and long-term profit. For Lufthansa, substantial management is one of their corporate objectives and they carry out their integrated global concept based on a four-pillar model for climate protection including technical progress, improvements in infrastructure, operational measures and complementary economic measures such as global emissions trading scheme (Lufthansa, 2006). However, though those policies can be implemented by introducing new technologies and optimising organisational structure and operation (e.g. Lufthansa start operation with new aircraft A380 to renew their first class concept), the performance of environmental management is still arguable due to the first three pillars – technical progress, improvements in infrastructure, and operational measures have priority in any cases at Lufthansa. Therefore, the most important factors that result in “enlightened” environmental management are: the CEO of Lufthansa has strong commitment with environmental compliance, and the firm should realise the fact that expenditure for environmental responsibility can be minimized in some level (Gupta, 1995).

4. Challenges from global economic environment and unpredicted incidents

The further strategic challenge is associated with the global turbulent economic environment. Some strong impact and low probability event, which are characterised by ambiguity of cause, effect and means of resolution, may influence polices and strategies of companies (Pearson and Clair, 1998:60). For world’s airline industry, the gradually increase in oil prices have also forced the airline industry to face strategic challenges. It is forecast that high oil prices may slash global profit for 2008 by nearly $3bn (Milmo, 2007). According to the International Air Transport Association, the fuel price, which has hovered near $100 a barrel during 2007, is predicted to increase $14bn to the industry fuel cost (ibid, 2007). Obviously, high fuel expenditure may seriously impact on the profits of airline industry and slow down the growth rate of annual revenue. At the same time, some unpredictable disasters such as bird flu and terrorism attack (e.g. the event of 11^th September 2001) will also strongly impact the operation of firms. Thus, with regard to confront with this issue, global aviation will probably adopt relevant crisis consciousness and reaction plan which is associated with strategic management to avoid major disruption. Crisis management is considered as a multi-disciplinary process that not only be subjected to the place where the impact exists but also the actual management of a specific crisis for organisation (Sheaffer and Mano-Negrin, 2003). Hence, the participation of a group of managers is required by crisis management rather than being seen as the task of individual independent department (Pollard and Hotho, 2006). Moreover, that will not only highlight the commitment of senior management but also strong leadership to identify and handle the threat with the ideal of crisis management (Mitroff, 2001). For Lufthansa, they should make use of their “changed soul” and adopt flexible strategies based on teamwork to maintain competitive and cost effective. For example, In September 2001, they performed the D-Check project which enabled the management to take quick and effective decisions to cope with the emergency incident (Haetty and Hollmeier, 2003). However, those crisis management based on teamwork is challenged. If the absence of individuals happened during the design process of crisis management, it may lead to the disruption to daily business and the costs linked with that disruption (Pollard and Hotho, 2006).Furthermore, the management of company still faces more challenges from external communication. Severe time pressures, inadequate or distorted information will also pose management of company to face problems such as stress at work (Shrivastava et al., 1988).

Conclusion

In a word, this report initially assesses the method of strategic change programme which Lufthansa applied in four aspects: reconstruction from functional structure to multidivisional structure, combination of human resources management and business strategy, control in the implementation of strategy, and new network alliance. Secondly, it analysed the importance and influence of leadership on organizational decision-making and employees’ motivation. The report also covers the effects of politics of Lufthansa on negotiation with the government and external environment. Following, we examine the current business environment and point out four crucial challenges for Lufthansa in the future: It firstly highlights the management of strategic alliance through the difficulties in cooperation with alliance members and exploration in the new market; the second point mainly contributes to how to improve excellent service to satisfy with customers’ requirement; thirdly, deterioration in global environment may make Lufthansa carry out some environmental programmes; the further challenge for Lufthansa is that they should be conscious of economic environment change and some emergent events and draw out the reaction plan to respond.

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