Analysis - Lufthansa Introduction
This paper describes the way Lufthansa has undergone fundamental change - its approach relying on people. As opposed to a top down planned approach, Lufthansa has put emphasis on managing the process and creating conditions that activate a critical mass of change actors. Human resource management has played a crucial role in the transformation as well as in the management of the process of strategic strategic renewal. “Core elements of this strategy involve providing space for reflection and dialogue despite the crisis pressure, building networks of change actions and creating durable platforms for emotional mobilisation and reflection on action”. Background
Lufthansa was founded in 1926 as the German national airline company. During the 1980’s, under the leadership of Heinz Ruhnau, Lufthansa followed a policy of “growth through own strength”, trying to win market share to survive under hard competition. In 1991 Lufthansa airlines went almost bankrupt . An impressive strategic leadership and human resource management played an important role in the transformation and in the process of strategic renewal. The implementation of an integrated cost le adership/differentiation adership/differentiation strategy and a related diversification corporate-level strategy also contributed to Lufthansa's success. The evolutionary patterns of strategy and structure and the strategic leadership and German culture contributed to the turnaround. Lufthansa's change management during its crisis was outstanding. Its management was able to identify the signals for the potential problems, showed great strategic leadership through CEO Weber and transformed the organization into a profitable company. This experience in strategic change management is very valuable and will surely help the organization with any challenges in the future Having had major involvement in the creation of the Star Alliance also played an important role in Lufthansa's transformation into a successful company that operates in a quite difficult industry environment. In 1997, Lufthansa, Air Canada, SAS, Thai Airways und United Airlines create the "Star Alliance", the world’s first multilateral multilateral airline grouping, later to be joined by other carriers. In 1999 the company already already announced record results in its 70-year history, helped to found the Star Alliance, the industry's largest network, and is now looking to become one of the leading airlines in the world. Lufthansa established the Lufthansa School of Business to keep the sense of urgency for change and transformation alive. Current Situation
Lufthansa has come a long way. They no longer sell the tickets as an act of state but as a skill that they do better than the competitors. Lufthansa has developed and preserved its identity. With the goal to increase the market proximity, transparency of the cost & processes and to reduce the fragmentation of decision making, Lufthansa was restructured. There are seven SBU under Lufthansa Group – Passenger service, Logistics, Tourism, Technical services, Catering, Ground
services, and Information technology. The Lufthansa Passenger Service, the original core of the former airline industry “Lufthansa” was restructured as “Profit Center”. The Lufthansa Aviation Group is considered to be one of the world's leading air transport corporations. It includes a number of independent group and affiliated companies with business segments in passenger airlines, logistics, aircraft maintenance, catering, tourism and IT services. Lufthansa's headquarter is located in Cologne, Germany and its operational centre for passenger and cargo services is situated in Frankfurt. Corporate-level strategy of Lufthansa
Lufthansa Group consists of seven independent SBU that include Passenger service, Logistics, Tourism, Technical services, Catering, Ground services, and Information technology. The individual Lufthansa companies are quite successful. LH Technical services and LH Ground Services are number one in their market. Each of the seven main companies was supposed to aim at achieving profitable, sustainable growth and leaving positions in world market segment. Lufthansa centrally coordinates their strategy development process. Lufthansa's motives for such a corporate level strategy are likely to be issues such as taking advantage of economies of scope, sharing activities, transfer of core competencies, and an increase in market power as well as blocking competitors through multipoint competition. Business-level strategy of Lufthansa
A business-level strategy is an integrated and coordinated set of commitments and actions the firm used to gain a competitive advantage by exploiting core competencies in specific product markets. I feel that Lufthansa uses integrated cost leadership/differentiation strategies as Lufthansa operates globally and it is vital for them to implement cost leadership strategies as well as differentiation strategies in order to develop competitive advantages. Lufthansa's "Program 15" is a good example of a cost leadership strategy. After Lufthansa had undergone privatization they implemented this extensive strategic costs management program with the goal of reducing overall unit cost by 20% within five years. In terms of a differentiation strategy, Lufthansa constantly tries to come up with a range of innovative ideas to stay ahead of the competition. It can be concluded that Lufthansa has made the right decision to implement an integrated cost leadership/differentiation strategy. Strategic Leader and German Culture Strategic leadership, which has the ability to anticipate, envision, maintain flexibility and empower others to create strategic change as necessary was extremely important in Lufthansa's turnaround. The main responsibility for effective strategic leadership generally rests at the top, especially with the CEO, but also with other recognized strategic leaders like members of the board of directors and the top management team. In the case of Lufthansa, the formulation and implementation of strategies was also in the hands of the top-level management, in particular Jurgen Weber, who was Lufthansa's CEO at the time.
In 1992 Weber realized the extent of Lufthansa's problems and called for a "crisis management meeting" with 20 selected senior managers. The Seeheim workshop was repeated three times with different groups to 50 people. This was done in order to let them feel the threat and urgency and not just inform them the facts and the appropriate strategy which they had to implement. The outcome of this meeting was "Program 93", 131 key actions aimed at drastically cutting about
8,000 jobs, lowering non-personnel costs, reducing the aircraft fleet as well as increasing revenues by DM 700 million to reduce the losses of DM 1.3 billions. The Executive Board then appointed a number of different teams that had the task to achieve the implementation of these 131 projects. Line management was responsible for the implementation of the staff cuts. It was seen as important for the success of "Program 93 that line managers took that responsibility to realize the unavoidable cuts and motivates the remaining employees. Weber also created the OPS team as a forceful team in the process of implementing the 131 projects. They constantly monitored, advised and supported the line managers who had ultimate responsibility for the implementation process. Weber showed his total support for the OPS team and personally supported them in many ways. He also implemented visible actions like a 10% reduction of the salaries of all Executive board members. To convey and spread these actions, Lufthansa implemented Town Meeting. A typical agenda of a Town Meeting would mainly involve a talk with the particular Lufthansa unit's management about problems and plans. An extensive dialogue then follows with the employees where the topmanagement explains latest plans and also listens to the concerns and suggestions of staff members. Weber decided to hold as many of those meetings himself as possible when visiting the different Lufthansa units. By 1999, he had taken part in more than 200 Town Meetings. It was important for the turnaround of Lufthansa that the management told the employees openly what the situation was. This allowed for the development of common goals between employees, management, work councils and unions. Even issues such as staff reduction and productivity could be discussed more openly and personally. Weber was able to win people personally by his open and authentic communication. He told those unvarnished figures and explains to them how he felt about them. During the turnaround phase, he informed them that he felt an overwhelming responsibility for all his employees and family members. People were taken by his leadership emotionally and were happy to go where he pointed them because they simply understood what he said. It can be said that Weber's leadership contributed significantly to the successful turnaround of Lufthansa. German culture had a substantial impact on Lufthansa's successful turnaround. Lufthansa still represents German values such as precision, technical reliability, high quality and expertise, which are crucial positive indicators of their business. These typical German traits of Lufthansa are of direct use to their image. However, another German trait worked against them. Germans are not known to be very friendly and open, so the organization had to work very hard to create a customer service oriented organization. Evolutionary Pattern of Strategy and Structure
Lufthansa's evolutionary patterns of strategy and structure can be divided into four parts. 1. Turnaround 2. Corporate restructuring and Privatization 3. Strategic cost savings 4. Building alliance Turnaround In 1991, despite the increase of passenger by 11 % because of reunification, Lufthansa had an after-tax loss of DM 444million. Although an awareness of serious crises began to spread in 1992, Lufthansa was so programmed on the growth and immortality was taken for granted being state owned. In1992 Lufthansa had only 14 days of operating cash requirements in hand.
Only a single state owned German bank had faith in Lufthansa and agreed to give money to pay the employees. The mental starting point of the turnaround was a Lufthansa-specific four-week management program about change management at Seeheim. This was also where a group called 'Samurai of Change' was created. This group discussed the outcome of the change-management program and created awareness for the necessities to redevelop the organization. The redevelopment process was started with 'Program 93', 131 key actions aimed at drastically cutting jobs, lowering non-personnel costs, reducing the aircraft fleet and losses. By summer of 1994, non-personnel costs had been reduced as well as staff numbers and management positions had been reduced. Lufthansa knew that the superficial recovery would not assure sustained success and that another major change had to follow. Corporate restructuring and Privatization Before the turnaround, Lufthansa's structure included six departments (finance, personnel, maintenance, sales, marketing and flight operations), which were all headed by a member of the Executive Board. This structure proved to be inefficient, as there was high involvement of top management in operational problems, slow decision processes, low transparency, lack of accountability and also insufficient market proximity. Lufthansa recognized that with its existing functional structure it could not successfully respond to emerging competitive challenges. Lufthansa realized that it would be more successful as a group of co-dependent smaller units than as a massive functional block. Finally, they created the seven economically independent subsidiaries. In order to achieve further operational independence, Lufthansa became fully privatized in 1997 after negotiations with the German government. Strategic cost savings - Program 15 After having been privatized, they realized the pressure to be competitive and strategically cost effective even more. Consequently Lufthansa continued its transformation process by implementing the strategic cost-management program 15, which aimed to reduce overall unit cost by 20% within five years Building Alliance In 1997 Lufthansa was one of the key-founding members of the Star Alliance, the world's best airline network worldwide with the purpose of realizing higher revenues and decreasing costs by exploiting synergy effects as well as offering more customer benefits. While concentrating on internal costs and structural redevelopment, Lufthansa also worked on its external relationships by implementing the strategy: 'growth through partnerships’. While in other industries globalization triggered a wave of mergers of companies that operate internationally; airlines had to look for alternatives because national ownership regulations do not allow cross border mergers. No airline worldwide has the infrastructure capacity to offer a suitable network by itself . Only through cooperating and alliances can the industry cater for the mobility requirements of the world economy. Therefore, founding the Star Alliance was a logical consequence and Lufthansa was one of the key-founding members of the first airline network in the world. The purpose of the Star Alliance is to realize higher revenues and decrease costs by exploiting synergy effects. The synergies range from shared use of ground facilities like check-in-counters. Other advantages include common frequent flyer programs, joint travel agency contracts collective market research and joint purchasing of materials and equipment (Economic effects for the airlines). Alliance members can also use code sharing - a system by which two or more airlines agree to use the same flight number for a flight in order to attract more business by means of extending their networks through partner airlines.
Besides cost-saving synergies, the combined networks of Star Alliance members also offer many customer benefits. In comparison with other industry alliances, the Star Alliance is the recognized market leader (see Appendix 6). Other fundamentals of its brand value include the presence of its members in important home markets and large international hubs, a high degree of customer recognition, excellent service and good cooperation between the frequent-flyer programs of the individual airlines. Furthermore each airline has its individual strengths with a strong market position in its home bases and regional hubs like Lufthansa in Germany. Due to the good cooperation, a whole network of these hubs was established and regional strengths complement each other. Additionally, most members also have regional alliances with smaller airlines, which improve the Star Alliance network even further
Key Success Factor
The key success factor in the air line industry is characterized by: 1. Economies of scale: because the cost for a flight is very expensive so airplane utilization and load factors are very important for an airline company to make profit. 2. Strong brand and reputation is also important for airline companies to success. 3. Managing their operations and aircraft utilization. Airlines need to be able to manage their aircraft efficiently, from fuel operations to ground management. Technological development needs be taken into account to offer the best, safest and most reliable aircrafts to the customers. 4. Managing human resources. The nature of the service business relied on human resources in providing the best service for their customer. 5. Manage financial resources. Airline companies, aside from requiring a high capital investment for establishment, requires the ability of financial management in managing fleets, fuel cost, airport costs, services, labor cost etc. 6. Providing the best service to the customers. Airline customers are sensitive to services and price offered by airlines, and in order to succeed airlines must compete against one another and offer the best service to their targeted market segment.
Environment Analysis PESTEL
The PESTEL analysis is a framework used to scan the external macro-environment in which a company operates and identify which factors influence the industry in general. I have deployed the PESTEL framework to analyze external factors outside the company and industry that affects the airline industry and consequently affecting Lufthansa Political In 1991, the German reunification had increase in passenger (Lufthansa) when overall traffic dropped by 9 percent.
Economic In late 80s there was steep fall of air traffic during the Gulf War and the subsequent recession led to a serious over capacity for the airline industry on global basis and severe market slump in Europe. Technological The development of internet led to a faster, cheaper, more convenient method of marketing and a wider distribution for the airline’s customers. This created a closer buyer-seller relationship, value added and excellent services and performance, and increase in revenue for the airline Legal Privatization of Lufthansa in 1999 opened up the opportunities for Lufthansa and become a core element of the strongest world-wide alliance The deregulation triggered the intensive price competition. Being a member of the Star Alliance meant abiding by the National Laws and regulation of countries covered by the operations of the alliance A breach of the contract will have different legal repercussion, interpretation and consequences. Porter Five Forces Competitive factor and industry attractiveness: analysis using Porter’s Five Forces Model The Porter Five Forces Model is used to examine the external environment in which a company is operating. Structural analysis of an industry is a useful way of determining a company's longterm profitability. Comprehending the dynamics of the competitive forces in an industry can give an insight of attractiveness of industry structure and the competitive power within the industry and whether there are any chances for returns on capital. Porter identified five competitive forces that form the external environment of every industry. This force determines the concentration of competition and attractiveness of an industry. The model is used for analyzing forces influencing the Lufthansa in the airlines businesses.
Bargaining Power of the Supplier The bargaining power of suppliers includes the threat of forward integration as well as the concentration of suppliers in the industry. The supplier has not been mentioned here but from my point of view, the main suppliers within the airline industry are the manufacturers of aircrafts and fuel suppliers and materials suppliers.
(Manufacturer of Aircraft) supplier – High The concentration of suppliers (Boeing and Airbus) makes it difficult for the airlines to influence over the two manufacturers and negotiate lower prices or play one supplier against the other. The aircrafts for long distance travel cannot be substituted by any other transport alternative, which strengthens the bargaining power of the suppliers. Fuel Supplier- Low There are many fuel suppliers like Shell, British Petroleum and Chevron Texaco. The airlines can easily to the other suppliers and the switching cost is not very high. Bank- High
The bargaining power of the bank is high. There is only one bank which agreed to give Lufthansa the money when Lufthansa was about to get bankrupt. Airport- High Airports and airports facilities management supply gates, terminal etc. They have a high bargaining power because the unique service they offer, which resulted in the high switching cost. Airport facilities cost is also part oh the high fixed cost for airlines. There are many airlines which will be landing on the airport and they airport could be concentrated so the bargaining power of the supplier is high. It depends on the location of the airport too. More concentrated and accessible airport has more bargaining power. Since Lufthansa Group has LH technical and IT services, catering services, Ground services they can be treated as the supplier of the Passenger service. Bargaining Power of Buyers Lufthansa passenger - Buyer power is determined by relative volume of purchase, switching cost, standardization of the product, brand identity. Switching costs are quite low as customer has a range of choices when selecting an airline. The customers have high power due to stiff competition in the airlines. The customers are more prices sensitive have ability to access and to choose the airline which has low price than Lufthansa regardless of Reputation and Brand. The bargaining power is high Technical Services – the bargaining power of the buyer is high as there is other supplier which has strong market presence. Threat of New Entrants The threat of new entrants can raise the level of competition in an industry which increases the cost of competition. There are barriers of entry, such as the high set up cost, economics of scale, product differentiation, access to distribution channels, switching costs as well as brand value. It is difficult for the new entrant to form new alliances and to compete with existing alliances. Additionally, entering the aviation industry requires very high capital investments because aircrafts, technical support and IT services need to be purchased or leased. After deregulation there are many companies who entered the airline industry and posed threat to the existing airline industry. The threat of new entrant is high.
Threat of Substitutes Lufthansa Passage - There is threat of substitutes because there are other transport alternatives. The airline industry is threatened by a number of substitutes like high speed trains, automobiles buses, Telecommunications and video conferencing are eliminating much of the need for business travel. The threat of substitutes is high as substitutes increased dramatically. The threat of substitutes increases in the short-haul as compared to the long-haul air transport. There are sufficient means of transport in which the customers can decide to use instead of airlines including high speed trains, cars and sea transports. For the long haul the threat of substitution is reduced because in some cases, substitution by using other means of transport is rarely possible. Lufthansa Cargo AG – there are other substitutes like ships.
Extend of competitive rivalry The competition within the industry is high because there are many competitors in the industry with each of them are roughly equal size. Highly competitive industries are generally less profitable as the cost of competition is high or customers are receiving the benefits of lower prices.
Four Link Analysis
The Four Links Model is used to study the co-operation linkages between Lufthansa and others parties in its environment. This analysis is carried out for in-depth study of the various linkages that are missing in Porter Five Forces Model. . Formal Linkages
Lufthansa worked on its external relationships by implementing the strategy: growth through partnerships. The purpose of the Star Alliance is to realize higher revenues and decrease costs by exploiting synergy effects. Alliance members used code sharing - a system by which two or more airlines agree to use the same flight number for a flight in order to attract more business by means of extending their networks through partner airlines .The important synergies were also realized through joint sales activities, collective market research, shared facilities such as lounges and staff exchanges. This will have economic benefits for the airlines. Besides cost-saving synergies, the combined networks of Star Alliance members also offer many customer benefits. In comparison with other industry alliances, the Star Alliance is the market leader (from Appendix 6). In 1999 the Star Alliance approached the much more demanding challenges of coordinating and integrating strategic activities such as establishing a common global brand, developing a shared technology platform, joint training and personal development International alliance with some STAR ALLIANCE member, vertical integration through networking with forwarders in order to offer customers a complete door-to- door logistic chain, and finally, acquisitions. These strategies were linked to a fundamental change within the cargo business from a traditionally unintegrated transport provider (as low as involvement standard services) to an individual complex solution supplier. Beyond pure freight transport, Lufthansa Cargo intended to offer solutions for complex global logistics requirements. This was an answer to increasing demand for full service (door-to-door logistics) and the fast growth of the supply chain management market. Contract Air, Augsburg Airways, Cimber Air and Air Littoral had cooperative agreements which is led them to fly under brand name “Team Lufthansa” on a franchise base Lufthansa School Business build close relationship with some well selected academic Instructions like London Business School, INSEAD, Mc Grill in Montreal, Indian Institute of Management in Bangalore and Hitots Hubashi University of management Tokyo have academic relationship and build a net work of leading business schools and universities.
Informal Links •
Airliance material co. give a trade and service center for spare parts to Lufthansa Technical together with united air lines and air Canada. It aimed at setting a counterweight against the increasing market presence of aircraft manufacturing corporations, which were trying to ties customers closer to themselves by providing maintenance and reconditioning services.
Government Link •
May 1996 The US Dept of Transport (DOT) frees Lufthansa and United Air Lines from the American competition low (Antitrust-immunity) and after 6 month they receive the trilateral Antitrust-immunity from DOT.
Internal Analysis Mckinsey 7S Model
This is the diagnostic model for organizational effectiveness and used for internal analysis for a company The 7S model can be used in two ways. Considering the links between each of the Ss can identify strengths and weaknesses of an organization. The model highlights how a change made in any one of the Ss will have an impact on all the others. This is valuable tool to initiate change processes and to give them direction. Determine the current state of each element and to compare this with the ideal state Shared Values
Employees have a commitment to go under change momentum and rose up. Employees are motivated to implement the strategy and achieve the firm’s goals and objectives and to serve more fully the needs of the customers. The consent of all the constituents lead to the restructuring of pension scheme, modernization of company structure, drastic decrease in work force without their consent that wasn’t going to be achieved.
Strategy
The change momentum- Core elements of this strategy involve providing space for reflection and dialogue despite the crisis pressure, building networks of change actors and creating durable platforms for emotional mobilization and reflection on action. Lufthansa want to strengthen their effectiveness through interdepartmental partnership, alliances with regional business, public agencies and governmental units. Cost Saving strategies
Lufthansa implemented “Program 15”, which was a wide ranging strategic cost management program. This program was designed to make Lufthansa more competitive through cost management and cultural change. The goals of this program included an improvement of the competitive position through a reduction in cost, internationalization of cost-structure and making staff conscious of reducing costs in their daily work. This cost management contributed substantially
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Lufthansa
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1999
Structure
Lufthansa has seven SBU. Lufthansa, its subsidiaries work more individually than collectively and these subsidiaries can set their own business strategies. As a result, they can just focus on achieving their own target. Also, because Lufthansa recognized that it is very difficult for all employees and managers to gather and discuss together to make decisions. If people in each subsidiary act and are treated as separate individuals, it is much clear for managers to supervise which part of the organization is successful and what must be changed. However, this kind of strategy can also emerge risks to some extent. Firstly, if each subsidiary works individually, managers in other branches may not know what another subsidiary's goal and decision are. Diversified structure, covering a lot of areas The old structure was inefficient and the new restructuring process ended with independent small units as follows LH cargo, AG (air freight), LH technique (technical maintenance services, LH systems GMBH (IT services), these joined existing subsidiaries city line (domestic flights) condor (charter flights and LCG sky chiefs (catering) The group management board directed the activities through 3 central functions -Chairman’s office -Finance -Human Resources management functions • •
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Systems
In 1998 the star alliance formed a focus management team to lead the alliance on day to day basses until then the alliance activities were coordinated by a set of comities and project teams, the presidents of the airlines decided to bundle responsibilities for strategic issues. Involvement of people: because the employees involvement in strategic big processes and networks employees are much more concerned with what happens in the organization because they also have improved customer orientation, cost consciousness and thinking in big term
Staff
There was pool of people that need to be developed and encouraged. Era before the war, Lufthansa’s organization and culture represented an amalgam of a strong technical orientation, dominated by engineers, together with the bureaucratic values of public administration. At each level after it was privatized decisions were made at various levels. Eg: the line managers were responsible for staff cuts. The mangers also had personal relationship with Jurgen Weber. The staffs are committed and dedicated that way the implementation of crisis management came to pass. The output of Seeheim meeting was a drastic cut in staff members (8000 positions) Staffs were decreased from 64000 in 1992 to 55000 in 1998. Mostly technical staff (qualified, educated employees) •
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Committed staff
Style
Leadership quality of Weber: Authentic communication and emotional involvement. In 1992 Weber invited about 20 senior managers in the training center at Seeheim meeting and wanted a mental change. Being a state owned company, immortality was taken for granted. Involved a larger group of managers to repeat the Seeheim work shop three times to let them live through the same process and letting them feel the threat and urgency and not just inform them The managers communicated openly with the employees about the situation ( staff reduction and productivity). Specific combination of conciseness orientation and persistence
The employees were taken by his leadership emotionally and willing to go the way he pointed, they understood what he said. He was tactical in the way he handled issues – he showed unconditional commitment to the OPS team, he demonstrated involvement of the change process, about 70% of the 131 project were successfully completed, the remaining 30% he put for later implementation in order not to risk the consensus with the union. Skills •
Systematic planning and open & transparent communication
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Cost consciousness
Core Competences:
One thing to be aware of is that there are two different ways to look at the competences and other aspects of this case. One is by looking at JUST Lufthansa, which means looking at Lufthansa group and what it gets out of the STAR ALLIANCE, or the other way is look at Lufthansa and STAR ALLIANCE as two separate focuses. Because what might have been a core competence of Lufthansa might not have been for the alliance even though at some point in the case, Lufthansa was trying to implement the core mentality into other members of the alliance. Anyway, you determine them for yourselves whether you think they belong to both or to one of the other. Lufthansa
Open and transparent communication Informal relationships Monitoring and Benchmarking encouraged (both in the business and in the school as well) Systematic planning Employee loyalty ACTIVE Management having the ability to setting challenging and realistic goals and achieving them through persistence and no compromising Mental core culture (growth through alliances as opposed to growth through strengths) Structure within the Group and within the ALLIANCE
STAR ALLIANCE
Initially code sharing Synergies (programs, facilities, market research etc)
Sustainable Competitive Advantage
This analysis enables to identify the sustainable competitive advantage for Lufthansa The Business School of Lufthansa – supports their business and strategic objectives. It creates value by building intellectual capital that is difficult to imitate. Economies of scale by owning diversified subsidiaries
Tangible SCA Economies of scale • Human Resource SCA Motivated employees • Intangible SCA Building intellectual capital • Organizational capacity SCA: Strong leadership •
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Reputation: Global Brand Innovative ability| Use of the state of the art technology Core competency: Skilled Professionalism
Combine resources With Star Alliance R& D • Service or Product Innovation •
SCA of Lufthansa: High Skilled Employee, Economies of scale, intellectual capital
SWOT Situation analysis carried out will involve the critical evaluation of Lufthansa’s internal and external environment with respect to its objectives, strategy and performance, allocation of resources, structural characteristic and political situation. I use this model as it helps organizations evaluate the environmental factors and internal situation facing a company. I have been motivated to use the SWOT analysis to analyze the Lufthansa’s situation because this model is simple to use and can be easily be understood by managers and encouraging then to collaborate towards common goals.
Strengths • •
Star Alliance, most comprehensive and competitive network in the airline industry Brand and reputation A very strong brand name, quality and innovation, safety and reliability are some of the
major strengths of the Deutsche Lufthansa AG. This is strength as the customer considers it as reliable. Dedicated staff during the crisis management High level of communication dialogue and network establishing a monitoring and controlling system to monitor progress. But this was only during the change process. Good negotiation skill (specially with government) and Entrepreneurial skills Lufthansa's School of Business – It creates value by building intellectual capital that is difficult to imitate by others. The school was established to keep the “sense of urgency” for change and transformation alive. This school was to create better links between strategy, corporate culture and organizational and individual development in order to support the priorities for transformation and future performance. Lufthansa implemented “Program 15”, which was a wide ranging strategic cost management program. This program was designed to make Lufthansa more competitive through cost management and cultural change. The goals of this program included an improvement of the competitive position through a reduction in cost, internationalization of cost-structure and making staff conscious of reducing costs in their daily work. This cost management contributed substantially to Lufthansa making profits again in 1999 Strong Leadership. Lufthansa's change management during its crisis was excellent. The management was able to recognize the signs of problems, which showed great strategic leadership by CEO Jurgen Weber and transformed the organization into a profitable company. This experience in strategic change management is very valuable and will surely help the organization with any challenges in the future. • •
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The Lufthansa group consists of seven independent SBU. Lufthansa centrally coordinates their strategy development process. The core element of the Lufthansa group is clear customer-supplier-relationships between the companies within the group. Lufthansa has not reached the required relationships for a market-based internal coordination. Lack of relation management with in the Lufthansa group. Growth strategies of Lufthansa varied and differences could be seen in degree of internationalization. Each SBU has their own strategies and goals and they could be conflicting. Not being able to sustain the change process Challenges in improving operational areas such as punctuality, luggage safety, waiting period, technical reliability. Formal and rule driven (before crisis)
Opportunities Reunification of Germany • Relaxation in regulations in Europe • Operational synergies • Lufthansa has a good opportunity to reduce a number of their costs. These cost reductions can be achieved with synergy effects that result from partnerships and alliances as well as from efficiency improvement programs.
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The Lufthansa group also has the opportunity to engage in other diversified areas. For example Lufthansa's Sky Chef and Lufthansa IT services have the opportunity to conduct business in the areas of catering and maybe IT consulting that is not directly linked to the airline industry.
Threats The specialization within the Star Alliance (planned extension of joint procurement could • cause serious economic problems for some of Lufthansa subsidiaries. Threat of sticks and disagreement with the labor union • Airlines were more confronted with time bass competition, price competition and a need • for transparency of product and services Fall in the air traffic due to recession plus sever market slump in Europe • The deregulations triggered intensive price competition. • Competition from airline based on network competition. • Common network synergy and a cultural integration were inevitably connected to the • critical issue concerning branding and identity within the Lufthansa Group. There is a threat of Lufthansa losing its identity. The management board of STAR Alliance signed a memorandum of intent concerning • the formation of a central STAR Alliance IT organization. The main task of this organization would be to develop a common information system for the STAR alliance partner ship. For LH IT services this STAR Alliance IT organization is transit for their main market. Any of the other companies inside the Lufthansa group considering business ties with a • competitor of Lufthansa Passage had to obtain prior approval from the Executive Board. Alliance was not considered the appropriate growth strategy for all the LH subsidiaries.
Strength Star Alliance Brand and Reputation Dedicated staff Strong leadership Intellectual
Weakness Lack of relationship between the Lufthansa groups. Not being able to sustain the change process. Serious challenge in punctuality, luggage safety, technical reliability.
Strategy 1 (S-O) Strategy 2 (W-O) Opportunity Reunification in Germany Expand internationally in Focus on expanding on its Operational Synergies non related segments. non related airline business Relaxation of to get more professional regulation in Europe business relationship Threats Deregulation Fall in air traffic Price Competition
Strategy 3 (S-T) Strategy 4 (W-T) Improvement of the Provide staff training. competitive position through a reduction in cost, internationalization of coststructure and making staff conscious of reducing costs in their daily work
Strategy 1
Lufthansa should focus on equipping it with innovative to set themselves apart from its competitors. Lufthansa can expand internationally by exploiting other business opportunities in non-airline related segments with its strong brand name and its core competencies in innovation and customer service under strong leadership. Strategy 2
Lufthansa independent subsidiaries could focus on expanding its non-airline related business. This way they would get used to more professional business relationships, which will hopefully improve the relationships and communication between the Lufthansa subsidiaries.
Strategy 3
Improvement of the competitive position through a reduction in cost, internationalization of coststructure and making staff conscious of reducing costs in their daily work Strategy 4
Lufthansa should try to improve things like punctuality, luggage safety, technical reliability etc. Some of these areas could be improved through more staff training. To minimize the weaknesses and avoid some of the threats Lufthansa should probably get involved in the low-fare market in Europe under different brand name.
Vision ( From the Lufthansa Website)
Lufthansa is characterized by its open culture. We fly all over the world. We connect people and countries. We are a transparent company that places great value on communication. Our aim was for all that to find expression in the new Lufthansa Aviation Center – and that has also succeeded. Mission Statement of the Lufthansa Group
Flying is an age-old dream of mankind. That dream has today become commonplace, but not without the endeavours of airlines which have spurred the development of aviation since its infant days. Proud to be among them since its founding is Lufthansa, which has carved its own special niche in the industry from Day One to its present pre-eminence in the global economy. The success of our Group is driven by a talent for developing pioneering ideas and translating them into practice. That gift will continue to shape its future. In more recent decades, Lufthansa has successfully evolved into a global enterprise. It is now re-positioning as a focused aviation group with the passenger airline at its core supported by other business segments operating as airline service providers. The prime objective of the Group is long-term profitable growth. To that end, its efforts are directed at strengthening and expanding the leading position of the airline and its partners in Europe. At the global level, Lufthansa operates the world's biggest route network in harness with its Star Alliance partner airlines. Our corporate values are the foundations which underpin the Group's efforts towards attainment of its goals: Focus on customer benefits The customer is central to our business activities. We tailor our services to customers' needs and offer a wide range of products for different target groups. All our efforts are service-oriented and synonymous with quality, innovation, competence and reliability. Accent on core skills Our core skills determine our activities. They enable us to manage our flight networks, nurture partnerships, streamline operative processes on the ground and in the air, and also provide and maintain infrastructure and production factors. System integration sets the pace Intensive system integration strengthens our competitiveness over other locations, other airlines and airline alliances. We cooperate closely with major partners, suppliers and infrastructure providers in integrating and optimising our core processes. Attractive working environment Our staff are integral to our success. We offer them good working conditions, commensurate incentives for personal development and an energising, international corporate culture. That makes us an attractive employer for qualified, motivated and service-minded personnel. Long-term profitability In the interests of our investors, we strive for sustainable and pace-setting value creation in the aviation business. That goal is furthered by sound risk and financial management. Social responsibility We are committed to keeping a balance between business and social prerogatives. Environmental
protection and sustainable development are the overriding objectives of corporate policy. Active engagement in social projects is ingrained in our corporate culture. nach oben At your service again
That was the slogan which Lufthansa used 50 years ago to present itself and advertise its new flights. The young airline took off in the tradition of the original Lufthansa, retaining the reputed name and the brand identity of the pre-war airline. To mark the new beginning the logo was given a contemporary look, with a parabolic curve and capital letters, as shown on the cover of our Annual Report. In the 1960s, by which time the company was financially secure and no longer needed state subsidies, Lufthansa commissioned none less than Otl Aicher and the Ulmer School of Design to develop a more modern corporate identity. Until his death in 1991 Aicher was one of Germany's leading designers, and his corporate design is still in evidence at Lufthansa today. Even back then, quality, competence, innovation, reliability and safety were the hallmarks of Lufthansa. In the regulated market at the time, those were the key factors determining competitiveness. Prices were fixed by IATA and required official approval. Lufthansa soon gained a reputation for reliability and technical expertise - and combined with its first-rate inflight service, it offered a quality product. Time and again the company's innovations caused a sensation. Lufthansa was the first airline to deploy the Boeing 747 as a freighter aircraft. In the 1960s it developed the "Airbus", a shuttle service with simple check-in procedures, and for eleven years it operated the Lufthansa Airport Express train service as an alternative to short-haul flights between Cologne and Frankfurt. Lufthansa also persuaded Boeing to build the Boeing 737 - a twin-engine jet aircraft for short- and medium-haul routes. The 737 became the world's bestselling commercial jetliner. Even today, innovation remains a high priority at Lufthansa. The HON Circle programme launched at the end of 2004, for example, brought Lufthansa to the forefront of the competition. With the introduction of FlyNet, Lufthansa became the first airline to provide Internet access on board, enabling passengers to surf the web at the speeds to which they are accustomed on the ground. Our services are provided by individuals. Their expertise, dedication, creativity and attention to the customer shape the Lufthansa image. But it is not only the staff who have direct contact with customers who ensure the quality of the Lufthansa product. This responsibility is shared by the countless other employees who perform their duties behind the scenes with great care and enthusiasm. In this Annual Report we have selected a number of staff members - including an LSG buyer, an IT specialist and a flight crew trainer - to represent the range of activities in the Lufthansa Group. Services of which our customers may not be aware, but which determine the quality of the Lufthansa product.
Generating Options
Environmental Based Options 1. Cost Leadership 2. Service Differentiation
Resource Based Options 1. Use strong leadership to innovate and lead the company through the changing environment. 2. Safety, reliability and punctuality.
