Lufthansa Case Going Global how to manage complexity?
As Lufthansa move to operate internationally, new challenges and uncertainties are inevitable and these would make it difficult for them to operate and manage. Analysis of the external environment using PESTLE and PORTER’s five forces framework have illustrated the uncertainties arising from consumers, suppliers, market, competitors and its acquired companies.
The airlines industry being services-oriented, challenges Lufthansa to adjust its strategies to meet the needs of its international consumers. The increasing affluence of these passengers demand a higher international standard of service and if they find their service unsatisfactory, they can easily switch to other airlines. Competitive rivalry is also relatively high due to the increase in popularity for low cost travel carriers across nations. Moreover, Lufthansa have no control over fuel prices and its suppliers have high power as there is no substitutes for oil.
Next, competing in the international market will expose Lufthansa to greater worldwide cyclical fluctuations in flight demand as it is no longer protected within its national boundaries. Given the increase in new aircraft orders, increasing overcapacities in many market segments is expected in future and a slowdown in the economy would aggravate this trend. Introduction of the “Open Skies” between the EU and USA which favour the US airlines would create more competition and put pressure on flight prices which may drive their profits down..
Moreover, Lufthansa has to address the political, economical and social impact of foreign markets that influence its demand, especially in the under-performing markets that they have entered. The economy recovery in aviation industry is uncertain and may lead to continued decline in flight demand. Expanding overseas would also bring about difficulties in terms of insuring aircraft against terrorist attacks that are not within their control. In addition, the acquisitions of airlines such as SWISS, Germanwings and Australian Airlines have all been affected by the economic crisis and may not be a profitable investment in the long run. Furthermore, if these airlines are not stable they may lose their position in their home markets. If weak demand continues , it challenges Lufthansa to build up its flexible production capabilities so that they can respond to fluctuations, i.e. Lufthansa’s business segments need to regularly evaluate their capacities and cost structures and alter them to fit the respective markets.
Besides, uncertainties may also arise from international competitors. Due to price competition and increasing rivalry, Lufthansa has to achieve greater cost efficiency in its operations in order to compete against its international competitors. Moreover, Lufthansa’s financial independence would be threatened if their financial structure is unable respond to the weaker finances of their acquired companies. Political instability within any of the homes of its acquisitions or partners would also pose additional challenges which includes economic risks and uncertainty from government regulations, conflicting legal authorities or corruption and the possible acquisition of Lufthansa’s asset by those countries.
The implementation of business-level cooperative strategies with Star Alliance may present potential risks to Lufthansa. However, it is important to note that implementing cooperative strategy in the airline industry is reasonable because of the high uncertainty of the industry and risk associated with pursing growth opportunities independently.
The risks of cooperative strategy includes the risk of opportunistic behavior. The supposed strategic alliance could fail due to a false perception of trustworthiness in its members. Lufthansa is thus exposed to entrepreneurship and industry-specific risks by competitors , partnerships and alliances which can result in a partner acting opportunistically. This can happen if contracts fail to prevent this action or when alliances are based on false motives and notions. The commitment to form as an alliance to exploit core competencies, synergies can actually be a mask for a firm to try and gain as much insider knowledge as possible from its alliances.
Other competitive risks may comprises of misrepresentation where members of Star Alliance may fail to fully disclose its competencies, especially common if partner’s contributions is in the area of intangibles. For instance, superior knowledge of local airline conditions is one intangible asset that members often fail to deliver. With regard to Lufthansa and its compromises made over the years counter to standards and its culture, has presented challenges to Lufthansa. An important example of was the IT infrastructures, and the belief that the customer interfacing with electronic check in completion was less than desirable. With cooperative strategy, collaboration of Star Alliance IT infrastructure would rob Lufthansa IT systems of their customers (Hitt, 2009). Alliance partner may fail to make available its resources and capabilities that should be brought into the cooperative strategy so as to protect its own interests. This will ensure that they will not be at the losing end as they will gain more than they give. However, this does not maximize the benefits from the cooperative strategy. Another risk can also arise if one of the partners does not contribute the necessary investments to make the development of a service or product for the purpose of the alliance. It will be important for Lufthansa Group to continue with certain requirements and conditions with regards to searching for suitable partners in order to improve their position in key markets.
Lastly, cooperative strategy could lead both internal and external risks. Internal risks consist of strategic, process and cultural conflicts within the Star Alliance. Strategic conflicts arise from clashes between Lufthansa and Star Alliance’s strategies due to differing interest. Process conflicts refer to failure to integrate internal processes of Lufthansa with Star Alliance’s. Cultural conflicts would be differing views on issues such as operational standards between Lufthansa and the Star Alliance. External risks which involves complexities due to customers and other alliance members includes overlapping routes and reputational risk. Overlapping routes are inevitable and would create competition between members. Moreover, the inclusion of new alliance members would further increase the overlapping of existing routes. Reputational risks results from inconsistency in service standards by other alliance members which would tarnish the reputation of the Star Alliance and Lufthansa. To maximize gains, Lufthansa can minimize its costs by tapping on the Star Alliance’s value chain. It can also integrate processes within Star Alliance and reduce expenses through economies of scale and joint operations. An example would be the integration of the company’s marketing and loyalty points programme. Lufthansa should integrate with the competencies of other airlines which will add value to its operations. To minimize risks, Lufthansa can reduce its internal risks by aligning its business objectives, product delivery process and infrastructure with those of Star Alliance. Strategic and cultural conflicts can be reduced by establishing a common mission and vision that align with business objectives. Process conflicts can be resolved by aligning its product delivery process and common infrastructure through shared knowledge of processes. This would allow both Lufthansa and Star Alliance to better appreciate each other’s operations and infrastructure such as IT networks and joint facilities which will help reduce any process conflicts due to incompatibility. An example would be Lufthansa sacrificing its advance IT systems for the integration with the systems of Star Alliance. External risks can be resolved with relationship management with other alliance members and taking a proactive stand in the Star Alliance. Though certain conflicts such as competition cannot be solved, relationship management can help to better strengthen the relationships between alliance members. With the increased benefits of the cooperative strategy with Star Alliance , I strongly believe that Lufthansa is on its road to success.