Lufthansa Aviation group has become a worldwide leader in the airline industry with several powerful business segments, inclusive of a passenger airline component, business component, logistics, MRO catering and IT services. The aviation success has been largely due to their focus on quality, innovation, safety and reliability. Head quartered in Germany, Lufthansa has lead the pack with regard to international airline business. The Aviation Groups’ International Business Strategy has evolved to that of a corporate level transnational strategy, whereas there is a shared vision to achieve global efficiency yet effort to strengthen its local responsiveness in Germany (Hitt, 2009). Evident with the strategic alliance with Star Alliance, the development of Lufthansa Regional serves as a local response provision of a low- cost carrier, in addition to the modernizations of various traveler hubs and welcome lounges throughout the major key traffic hubs located in Germany.
This international business strategy is considered a combination of multi –domestic and global strategies (Hitt, 2009). A transnational strategy uniquely offers the benefits inherent in both global and multi-domestic strategies; under this strategy each business component of Lufthansa can successfully exercise independent innovation given its decentralized structure.
Lufthansa understood early, the benefits and advantages of international expansion evident through post WWII with travels to various countries (Lufthansa, 2010) later the formation of an strategic alliance with Star Alliance, which serves a global airline network. Star Alliance was established in 1997 with Lufthansa being one of its core founding members. Despite industry ups and downs related to international travel through the early 1980’s with the Iraq war, and then the frightening threat of terrorism post September 11, 2001, Lufthansa remained optimistic as did the rest of the airline industry, and responded to globalization appropriately. The majority responded in a like manner forming alliances in an effort to compete with the newly entered No-frills and lower cost competitive airline flights offerings.
Competition of this kind, along with slow recovery of international travelers, increase in gas prices; the constant pressure to reduce pricing order to remain competitive has taken a toll on the entire industry over the last decade. Lufthansa’s also crafted Lufthansa Regional which accounts for 50 percent of the Aviation group’s German and European flights. This Wholly owned subsidiary is entirely owned and controlled by Lufthansa the parent company, and was established to meet the need of low-cost carriers. Within Lufthansa Regional, exist Eurrowings and the partly owned City line. Through this development Lufthansa can offer a lower cost airline and reap the benefits of passengers opting for this Intercontinental airline versus going to a larger hub. Lufthansa used an acquisition strategy with the accumulation of SWISS AIR in 2005, a strategic move to prevent the competition British Airways and One World Alliance to seize the opportunity.
The strategic alliance with Star Alliance was a concerted cooperative strategy to provide customers worldwide reach and a smooth travel experience (StarAlliance,2010). This remains as a shared objective for Star Alliance, Lufthansa and the other members of this alliance. It is understood that it is relatively impossible to survive in a global network outside of an alliance. This cooperative strategy serves as a mechanism for the Aviation Group to enter the market swiftly, and with greater impact with the support of the alliance. The airline industry has historically been a standard –cycle market, the same is true with this alliance thus allowing for savings and benefits to extend across its members (Hitt, 2009). The addition of Air China and Shanghai Airlines added as members, serves as a solid example of Star Alliance’s capability to assist in global expansion for all its members; and a unique opportunity to tap into a market that would be quite challenging if attempted independently.
This strategic network serves as a valuable cooperative arrangement to take place between the 18 members within the Star Alliance. This alliance allows for the sharing of cooperative relationships with stakeholders, customers, suppliers and competitors (Hitt, 2009). Air carriers commonly participate in multiple horizontal complementary alliances; this is demonstrated with the relationship between Star Alliance and Lufthansa. However, these type of business-level cooperative strategies present challenges with perception of loyalty, and speculation of illegal collusive activities this feeds into the discussion of other risks.
Lufthansa has faced some friction with regard to making compromises counter to its culture. However; the use of the cooperative strategies such as the alliance formed with Star Alliance proves reasonable given the high uncertainty of the industry and risk associated with pursing growth opportunities independently. It is considerably important to evaluate these uncertainties and challenges when pursing business outside of the national boundaries. The risk of a network cooperative alliance such as Star Alliance carries the risk of opportunistic behavior. What may have initially been viewed as a partnership, could become compromised with potential for failure due in part to a false perception of trustworthiness amongst members. (Hitt, 2008)
Additional risk, may also include misrepresentation; full disclosure of what each member can bring to table and imbalance of alliance-specific investments as detailed with the example partnership of Disney and Pixar within the text. With regard to Lufthansa and its compromises counter to standards, these challenges were revealed in the case study and make mention of compromises made throughout the years running counter to the culture of Lufthansa. An important example of this was the mention of the IT component, and the belief that the customer interfacing with electronic check in completion was less than desirable, and not in alignment with the Lufthansa standard with response to customers. However, collaboration of Star Alliance IT infrastructure would rob Lufthansa IT systems of their customers (Hitt, 2009).
Consideration of current globalization trends and future efforts of the airline industry must be evaluated operating outside of national boundaries. An analysis of the varying social culture and institutional attributes of global markets require evaluation. Strategic leadership involves the analyzing of the environment in order to identify and an anticipate changes and trends that are likely to occur. An analysis focusing on strengths, weaknesses, threat, and opportunities (SWOT), should be conducted in order to properly evaluate the industry environment. The risks associated with operating beyond national boundaries or Germany as in the case with Lufthansa would benefit from evaluating a competitive model such as the five forces competitive model as a method of gaining knowledge about the industry inclusive of Threats of new entrants, Bargaining power of suppliers, Rivalry among competing firms, Threat of substitute product, and Bargaining power of buyers (Hit, 2009)
The evaluation of the organizations structure and controls of Lufthansa indicate a great deal of complexity that requires extensive management. Given that the organizational structure is the foundational support for the organization and specifies the organization’s formal reporting relationships, procedures controls, authority and decisions making aspects it is imperative that the structure is solid but with room for flexibility as changes arise.
The case study touches upon the six business lines within Lufthansa and the strategic mission of the organization to unite every aspect of the organization under one “strategy roof”. The Aviation Group has streamlined much of its endeavors inclusive of the dissolving of the once “integrated” cooperation. Strategic controls of this nature include improving the flow of communication between management and front line employees and translating the over arching values of the organization into “leadership values”. Providing a degree of accountability, to every employee with targets, and dialogue with management about their endeavors through an annual evaluation. There is an aggressive effort to restructure the business model focusing on cost cutting and streamlining anything that may be impacting the cash flow significantly. Strategic and Financial controls are necessary to maintain a balance within the organization, thus the use of a balance score card would be ideal.
This score card would serve as a check and balance system between what the organization has set out to accomplish and strategic and financial controls used to assess their performance. The old adage “if you can’t measure it, you can’t manage it” lends to the legitimacy of using such controls. An example of such a financial control for Lufthansa was the elimination of discounted tickets used by independent travel agencies and promotion of direct booking using the internet or call centers. Financial operating goals have become a high priority with a direct focus on intervening in areas which impact the cash flow. Lufthansa has demonstrated great resiliency given its financial crises during the 1990’s, now holding a positive investment grade rating. Given that experience the organization is prepared to implement controls in order to maintain financial discipline in avoidance of succumbing to financial failure.
Improving the organizational structure requires making a significant investment in its Human Capital this means developing the leadership skills of individuals within the organization. Many believe that the human element in any organization is most important. The word “Capital” is typically referred to as an asset that can be utilized in the production of more wealth. Therefore investing in what one would consider as its most valuable assets “human capital” , productivity is likely to increase. Lufthansa should begin with an organization wide initiative aimed at restoring the trust and loyalty of its employees.
There is such a rich history of Lufthansa dating back to the 1930’s and employees should be reminded of this history built on quality and pride at one time to be a “Lufthanseat”. The message of “value” i.e. corporate values, and how valuable every employee is, can be incorporated into the current town halls held and worked into the “corporate university” curriculum. The organization has become quite complex with the many subsidiaries, strategic alliances and acquisitions that perhaps the employees doing the front line work feel left out of the loop. There should be a financial investment made in providing effective training and development programs tailored to every employee within the organization. Every employee within an organization can benefit from continued education and learning opportunities.
Continuing learning and leveraging the firms expanding knowledge base are linked with strategic success (Hitt, 2009). A concerted effort by management and workforce education professionals should be made to development up and coming managers and future leadership. Developing relationships inside and outside of the organization inclusive of those organizations partnered with enhances the social capital of the organization. Given the competitive nature of the job airline industry, it would prove advantageous for Lufthansa to use their strategic alliances to foster their social capital positively.
It is inconceivable to envision an organization reaching is maximum potential without cultivating its organizational culture and defining its mission and vision. The case study divulges occurrences where the workforce has become fragmented with varying interests, perceptions, communication channels and expectations. This is evidence that the organizational culture inclusive of ideologies, symbols and core values must be addressed and strategically in alignment with the vision of the organization (Hitt, 2009). Competencies can be derived and influenced by the organizational culture in order produce desired outcomes. The culture of the organization should positively impact its workforce, fostering an environment of innovation, transparent communication and trust, and in the case of Lufthansa a commitment to quality and upholding of standards.
Strategic Leadership means focusing on incremental changes, with celebration of small success to maintain the momentum of the cultural change. Top leadership must fully buy-in to the cultural change endeavors in order to ensure its success. The selection of management and employees at all level with an intrinsic desire to contribute to the organization in a positive manner is important. There should be a sincere desire to act responsibly and ethically and avoidance of opportunistic behavior and other behavior which could destructive to the culture of the organization.
A positive organizational culture feeds an entrepreneurial spirit and opportunities within an organization. The importance of entrepreneurial opportunities cannot be under stated. This entrepreneurial-state of mind facilitates the energy and enthusiasm necessary to promote innovative “out of the box” thinking. The freedom of expression, sharing of ideas, and asking the “Why” questions is tremendously valuable to an organization such as Lufthansa and any organization interested in competing globally. The five dimensions of autonomy, innovativeness, risk taking, proactivenesss and competitive aggressiveness should be capitalized upon throughout training initiatives and encouraged in order to create an entrepreneurial mind set work force. The workforce should be challenged to come up with better, faster; more efficient was of accomplishing tasks or streamlining processes, and recognized by Lufthansa Leadership for doing so.
Lufthansa has expressed and exercised a number of initiatives aimed at reducing complexity of its organization. The dissolving of business segments and evaluation of process improvement strategies all serve as advances towards building an organizations model in alignment with business simplicity versus that of complex nature. Lufthansa can experience tremendous simplicity in appropriately managing the various business elements within the organization by acquiring a global mind set, and providing flexibility to address the need of each segment. An in depth look at core competencies and measurement of how much value each segment is contributing to the overall success of the organization and how the internal characteristics of the organization measure up to the competition ; meeting the needs of the customer is a great starting place. The environmental uncertainty of the airline industry and other customer base for the varying business units does increase the complexity and range of issues to consider when evaluating the internal environment (Hitt, 2009); however, it is essential in order to understand the organizational complexity in its entirety.
Ashby’s Law of Variety suggests that organization can handle high external complexity on by a similar internal complexity (Hitt, 2009). Recommendations regarding the reduction of complexity are as follows: •Development of a unified vision that is shared across the organization, in an effort to eliminate the diversity of values, aims, cultures and types of behavior. •A shared global strategy communicated throughout the organization in the fulfillment of a common goal. •Education regarding the benefits of a culturally diverse workforce; recruitment of a diverse work force with varying ethical and professional backgrounds yet committed to the success of Lufthansa and a shared vision. •Standardizing of processes and norms throughout the organization Lufthansa possess the organizational know how and strategic leadership to face future uncertainties of the airline industry. It has proved its strength and resiliency in its survival of a turbulent industry and shows promising potential despite uncertainties regarding global warming issues. Here education is key and it would be advantageous for Lufthansa to continue fostering positive social relationships with environmental agencies and other social activities.