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BACKGROUND OF THE COMPANY
Continental Airlines, found by Walter Varney and Louis Mueller, began flying from El Paso,
Texas to Pueblo, Colorado in 1934 and the CEO of Continental Airlines Inc. is Gordon Bethune.
Continental Airlines is the world's fifth largest airline. The headquarters moved from El Paso to
Denver in 1937 and then to Houston in 1982 following a merger with Texas International.
Continental, together with Continental Express and Continental Connection, has more than 2,750
daily departures throughout the Americas, Europe and Asia, serving 133 domestic and 132
international destinations. More than 750 additional points are served through our alliance
partners. With more than 43,000 employees, Continental has hubs serving New York, Houston,
Cleveland and Guam, and together with its regional partners, carries approximately 67 million
passengers per year.
Goals of Continental Airlines
To use technology to improve the flow of information between aviation manufacturers and
Continental, and between Continental’s engineers and its 3,500 technicians in the field. The
ultimate goal was to improve efficiency of maintenance and repair processes, reduce error rates
and reduce and/or eliminate document management costs.
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VISION AND MISSION OF CONTINENTAL AIRLINES
Vision
Continental Airlines Inc. seeks to lead its industry in superior customer service,
innovative technology, employee satisfaction, and environmental advances, at home and
abroad.
Mission
At Continental Airlines Inc., we strive to obtain excellent customer service and
satisfaction through technological advances in on-line bookings and e-ticket purchases.
We have strict security measures to ensure our customer’s safety. Our international
flights cater to our customer’s cultures, with language, food choices, and movies. We
have committed to making the lives of our customers, employees, vendors and as
efficient as possible, through environmental advances we are dedicated to reducing fuel
waste by cost effective innovation of smaller jet fleets. The use of high quality products
and services will create a decline in cost to us, therefore we will be able to pass the
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Proposed Vision and Mission Statement
Proposed Vision
“Is to be the world's favorite airlines”.
Proposed Mission Statement
“To be recognized as the best airline in the industry by the customers, employees and
shareholders”. However the mission statement illustrates the role of this plan as the
premier guiding principle, “The Go Forward Plan” at Continental. Their Go Forward Plan
has four cornerstones-
I. Fly to Win (Market Plan)
Achieve above-average profits in a changed industry environment.
Grow the airline to where it can make money and keep improving the
business/leisure mix.
Maximize distribution channels while reducing distribution costs and
eliminating non-value added costs.
II. Fund the Future (Financial Plan)
Manage company assets to maximize stockholders value and build for the
future.
Reduce costs with technology.
Generate positive cash flow and improve financial flexibility by increasing its
cash balance.
III. Make Reliability a Reality (Product Plan)
Deliver an industry-leading product the airline is proud to sell.
Rank among the top of the industry in the key DOT measurements: on-time
arrivals, baggage handling, complaints, and involuntary denied boarding.
Keep improving the product.
IV. Working Together (Employees)
Help well-trained employees build careers they enjoy every day, Treat each
other with dignity and respect.
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Focus on safety, make employee programs easy to use, and keep improving
communication.
Keep pay and benefits competitive in a changed industry environment.
However, the overall mission statement of the organization is better because the mission
statement have more than four components
Mission Statement Components:
A. Customer
B. Product and services
C. Market
D. Concern for survival growth and profitability
E. Concern for public image- The Continental is committed to reducing greenhouse
emissions.
F. Employees
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SITUATIONAL ANALYSIS
THE EXTERNAL FACTOR
PEST ANALYSIS
A PEST analysis is an analysis of the external macro-environment that affects all firms.
P.E.S.T. is an acronym for the Political, Economic, Social, and Technological factors of the
external macro-environment. Such external factors usually are beyond the firm's control and
sometimes present themselves as threats. The PEST Analysis that Continental Airlines Faced
was:
I. Political Segment
Terrorism fear and political instability
Fear of further attacks caused lower demand both domestic and international
Airspace closed for 4 days because in fear of the terrorism attack.
So the discussion about the relationship between the airlines and terrorism are the
airlines don’t have control over the size of the market and security cost burden.
II. Economical Segment
Nearly impossible to achieve capacity growth.
Demand for air travel is not growing.
Business travel budgets were slashed by as much as 20% - 40%.
Delay in delivery of new Boeing 787s.
Causes the cost-savings in fuel to be delayed. Delay of aircraft delivery damages
Continental’s long-term planning.
Increase in federal and airport taxes.
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III. Sociocultural Segment
Ageing Population (in developed countries): provisions/services for disabled pax,
needing medical care and help at airport.
One-day trip as opposed to a two day trip (influences the flight times).
Some have time and no money; some have money and not enough time.
Change in marketing advertisement.
IV. Technological Segment
The usage of the internet such as internet bookings and electronic tickets (e-
tickets).
Enables companies to hold conferences and meetings without travel.
Due to heightened security measures, i.e., the implementation of full-body
scanners.
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PORTER 5 FORCES
The following Porter 5 Forces Model in Continental Airlines is as following:-
No Porter 5 Forces Components High/Low Discussion Profit
1 Threat of New Entrants :
The Entry Barriers in the airline
industry.
High Airport and government
regulations, High Capital for
entering market.
4
2 Bargaining power of suppliers High Few suppliers support the large
number of established airlines,
High switching costs in
changing supplier
4
3 Bargaining Power of Customers High Deregulation, Technology and
customer loyalty.
4
4 Threat of Substitute Products Medium For short distances, airplanes
will be substitute with
automobiles.
3
5 Competitive Rivalry within an
Industry
High High exit barrier, Industry is
cyclical
4
* Notes: Profit Figure
5- Strongest
1- Lowest
CONCLUSION
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The profit for the barrier to entries shows the strongest point because high regulations in
airport and by government and the airlines consume high capital for entering the market. The
profit of supplier r is in strongest point as it has high bargaining power. This is because few
suppliers support the large number of established airlines and have the high switching cost in
changing the supplier. Besides that, the bargaining power customers is high and its profits is also
in strongest point as the carriers compete on low price the consumer retain some power in the
purchase process and business consumers seek for the brand that they are loyal to so they are
willing to pay any price.
Meanwhile, the threat of substitute product is medium and in moderate level of profit which
not to say high or low. This is because, for short distances, airplanes will be substitute with
automobiles or the consumers may use train or marine. Finally, the existing rivalry of
Continental Airlines is high with strongest profit as the airline industry is cyclical and high exit
barrier.
COMPETITIVE PROFILE MATRIX (CPM)
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CONTINENTAL AIRLINES
DELTAAIRLINES
SOUTHWEST AIRLINES
Critical Success Factors
Weights Rating Weighted Rating Weighted Rating Weighted
0.0 to 0.1
1 to 4 Score 1 to 4 Score 1 to 4 Score
Domestic Market Positioning
0.08 2 0.16 2 0.16 3 0.24
International Market positioning
0.1 4 0.4 4 0.4 4 0.4
Consumer Loyalty
0.09 3 0.27 3 0.27 3 0.27
Service Quality 0.1 3 0.3 4 0.4 3 0.3
Price Competitiveness
0.07 4 0.28 3 0.21 3 0.21
Product Quality 0.07 3 0.21 3 0.21 4 0.28
Customer Service 0.09 4 0.36 4 0.36 4 0.36
Financial Position 0.05 2 0.1 2 0.1 2 0.1
Management Experience
0.1 3 0.3 3 0.3 4 0.4
Organizational Structure
0.09 2 0.18 3 0.27 4 0.36
Fuel and Labor 0.06 2 0.12 2 0.12 2 0.12
Global expansion 0.1 3 0.3 3 0.3 4 0.4
Totals 1 2.98 3.1 3.44
Overall it seems that Southwest Airlines has best product quality, management experience,
organizational structure and global expansion compare to Continental and Delta Airlines.
Meanwhile, Delta Airlines has best service quality and Continental has best price
competitiveness by ratings.
EXTERNAL FACTORS EVALUATION
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An External Factor Evaluation (EFE) Matrix allows strategist to summarize and evaluates
economic, social, cultural, demographic, environment, political, government, legal,
technological, and comparative information.
OPPURTUNITIES:
1. Online booking ticket up to 24%
2. Major competitor recently ceased operation
3. Purchase plan for new fuel-efficient 78
4. Emerging market and expansion abroad
5. raise money thought debt up 6.89% in 2006
6. moving aircraft from the gate
7. using ground equipments rather than aircraft engines
8. electronic ticket save time and reduce cost of airline ticket counter
THREATS:
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1. Rival merger from bankruptcy
2. Increasing fuel cost to 29.4%
3. Economic slow down between 2001-2005
4. Rival operating under bankruptcy protection
5. Increasing labour cost up to 24.5%
Assign each of factors a weight that range from 0.0 (not important) to 1.0 (very
important). The weight indicates the relatives’ importance of the factor to being success
in the firm’s industry. Opportunities often receive higher weight than threats, but threats
can receive high weight if there are especially severe of threatening.
Assign a 1-4 to each key external factor to how effectively the firm’s current strategies
respond to the factor, where 4 = the response is superior, 3 = the response is above
average, 2 = the response is average and 1 = the response is poor. Ratings are based
on effectiveness of the firm’s strategies. Ratings are thus company-based, whereas the
weights in step 2 are industry-based.
Regardless of how many factors are included in an EFE Matrix, the total weighted score
can range from a low of 1.0 to a high of 4.0, with the average score being 2.5. Total
weighted score well below 2.5 characterize organizations that are weak internally,
whereas scores significantly above 2.5 indicate a strong external position
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EFE Matrix
Key external factor Weight Rating Weighted
score
Opportunities
1. Online booking ticket up to 24% 0.12 4 0.48
2. Major competitor recently ceased
operation
0.08 3 0.24
3. Purchase plan for new fuel-
efficient 787
0.07 2 0.14
4. Emerging market and expansion
abroad
0.09 4 0.36
5. raise money thought debt up
6.89% in 2006
0.09 3 0.27
6. moving aircraft from the gate
using ground equipments rather
than aircraft engines
0.08 2 0.16
7. electronic ticket save time and
reduce cost of airline ticket counter
0.12 2 0.24
0.65 1.89
Threats
1. Rival merger from bankruptcy 0.08 1 0.08
2. Increasing fuel cost to 29.4% 0.08 3 0.24
3. Economic slow down between
2001-2005
0.07 2 0.14
4. Rival operating under bankruptcy
Protection
0.06 4 0.24
5. Increasing labour cost up to
24.5%
0.06 3 0.18
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0.35 0.88
Total 1.00 2.67
In general, we can say that Continental Airlines Inc is effective because more than 2.5
that is 2.67.
TWSO (total weight score for opportunities) 1.89
=
TWO (total weight opportunities) 0.65
= 2.91
TWST (total weight score for threats) 0.88
=
TWT (total weight threats) 0.35
= 2.51
Further analysis, it seem that Continental Airlines Inc is more effective in addressing
opportunities but not effective in addressing threats.
Period EndingChanging in
(%) 2007 2008Assets Current Assets
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Cash and Equivalents 21.12 2,892,000 3,503,000Short-Term Investments 3.19 373,000 390,000Net Receivables 6.61 796,000 847,000Inventory 1.92 221,000 225,000Other Current Assets 3.68 431,000 447,000Total Current Assets 36.52 4,713,000 5,412,000Long-Term Investments 0.72 81,600 82,200Property, Plant and Equipment 55.39 6,310,000 6,360,000Goodwill - - -Intangible Assets 5.34 636,000 670,000Accumulated Amortization - - -Others Assets 2.04 236,000 241,000Deferred Long-Term Asset Charges - - -Total Assets 100 11,976,000 12,765,000LiabilitiesCurrent LiabilitiesAccounts Payable 29.90 4,392,000 5,705,208Short/ Current Long-Term Debt 5.08 603,160 633,801Other Current Liabilities - - -Total Current Liabilities 4,995,160 6,339,009Long-Term Debt 42.97 3,880,209 2,645,956Other Current Liabilities 17.53 2,329,450 2,737,803Deferred Long-term Liability Charges 1.46 167,410 169,854Minority Interest - - -Negative Goodwill - - -Total Liabilities 11,372,229 11,892,622Stockholders' EquityMisc Stocks Options Warrants - - -Redeemable Preferred Stock - - -Preferred Stock - - -Common Stock 1000 1000 1000Retained Earnings (0.10) (10,989) (10,978)Treasury Stock - - -Capital Surplus 12.12 1,536,000 1,722,163Others Stockholders' Equity (8.96) (922,240) (839,607)Total Stockholders' Equity 603,771 872,578Total Liabilities and SE 100 11,976,000 12,765,000
INTERNAL FACTOR
FINANCIAL ANALYSIS
Budgeted Balance Sheet for Continental Airlines
Pro Forma Income Statement for Continental Airlines
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Period Ending 2007 2008
Total Revenue 15,376,826 18,010,876
Cost of Revenue 7,456,703 6,491,319
Gross Profit 7,920,123 11,519,558
Operating Expenses - -
Research Development - -
Selling General and Administrative 6,236,000 8,796,000
Non-Recurring 26,600 26,2000
Others 393,000 395,000
Total Operating Expenses - -
Operating Income or Loss 1,264,523 2,066,558
Income from Continuing Operations
Total Other Income / Expenses Net 199,000 114,000
Earnings Before Interest and Taxes 1,463,523 2,180,558
Interest Expense 368,000 353,000
Income Before Tax 1,095,523 1,827,558
Income Tax Expense - -
Minority Interest - -
Net Income from Continuing Operations 1,095,523 1,827,558
Non-Recurring Events - -
Discontinued Operations - -
Extraordinary Items - -
Effect of Accounting Changes (26000) (26000)
Other Items - -
Net Income 1,121,523 1,853,558
Preferred Stock and Other Adjustments - -Net Income Applicable to Common Shares 1,121,523 1,853,558
Financial Ratio Analysis
A. LIQUIDITY RATIO
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2005 2006
Working Capital
Current asset (– ) Current liabilities
3,427,000 - 3,399,000 = 28,000
4,129,000 – 3,955,000
= 174,000
Current Ratio Current asset / Current liabilities
3,427,000 / 3,399,000 = 1.01 times
4,129,000/ 3,955,00
= 1.04 times
Quick Ratio Current asset (-)Inventory / Current liabilities
3,427,000-201,000/3,399,000 = 0.95 times
4,129,000 – 217,000 / 3,955,000 = 0.99 times
B. LEVERAGE RATIO
2005 2006
Debt to Total Assets Ratio
Total Debt / Total Assets
10,303,000 / 10,529,000 = 0.98
10,961,000 / 11,308,000 = 0.97
Long term Debt to Equity Ratio
Long-term debt / Total Shareholders’ Equity
5,057,000 / 226,000 = 22.38
4,859,000 / 347,000 = 14.00
Times Interest Earned Ratio
EBIT / Total Interest charges
330,000 / 398,000 = 0.829
752,000 / 383,000 = 1.963
C. A CTIVITY RATIO
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2005 2006
Inventory Turnover Sales / Inv. of times good
11,208,000 / 201,000 = 55.76
13,128,000 / 217,000 = 60.50
Fixed Asset Turnover Sales / Fixed Asset 11,208,000 / 6,086,000 =1.84
13,128,000 / 6,263,000 = 2.10
Total Asset Turnover Sales / Total Asset 11,208,000 / 10,529,000 = 1.06
13,128,000 / 11,308,000 = 1.16
Acc. Receivable Turnover
Annual credit sales / Acc. Receivables
11,208,000 / 687,000 = 16.31
13,128,000 / 747,000 = 17.57
Average Collection Period
Acc. Receivable / Total credit sales / 365
687,000/ 11,208,000 /365 = 22.37 day
747,000 / 13, 128,000 / 365 = 20.68 day
D. PROFITABILITY RATIO
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2005 2006
Gross Profit Margin Gross profit / Sales
1,533,000 / 1,208,000 = 13.678%
4,562,000 / 13,128,000 = 34.75%
Operating Profit Margin
EBIT / Sales 330,000 / 11,208,000 = 2.944 %
752,000 / 13,128,000 = 5.73%
Net Profit Margin Net Income / Sales
(68,000) / 11,208,000 = (0.607%)
343,000 / 13,128,000 = 2.61%
Return on Total Asset (ROA)
Net Income / Total Assets
(68,000) / 10,529,000 = (0.646%)
343,000 / 11,308,000 = 3.03%
Return on Stockholders’ Equity (ROE)
Net Income / Total Stockholders’ Equity
(68,000) / 226,000 = (30.01%)
343,000 / 347,000 =98.85%
INTERNAL FACTOR EVALUATION
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A summary step in conducting an internal strategic-management audit is to construct an
Internal Factor Evaluation (IFE) Matrix. This strategy-formulation tool summarizes and
evaluates the major strengths and weakness in the functional areas of business, and it also
provides a basis for identifying and evaluating relationships among those areas. Intuitive
judgments are required in developing an IFE Matrix, so the appearance of a scientific
approach should not be interpret to mean this is an all-powerful technique.
STRENGTHS:
1. Average yield per revenue passenger mile up to 12.29% over last two years
2. Company assets up $ 10,529,000 to $ 11,308,000
3. Poorer on-time performance = (73.4% 2006) compared to (76.9% 2005)
4. Fifth largest airline = serves 148 domestic and 134 international destinations
5. Customer complaint rate reduce from (0.92 in 2005) to (0.88 in 2006)
6. Improved flight over the last 3 years = 77.8%
7. Denied boarding rate reduce from (1.92% in 2005) to (1.74% in 2006)
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WEAKNESSES:
1. low employee morale
2. slow to adopt online booking
3. decrease employee incentive
4. increase mishandled baggage rate per 1,000 passengers = (4.76% in 2006) compared
to (4.12% in 2006)
5. losses a net income of $ 343 million in 2006 after 2 previous years
6. low market share
Assign a 1-4 to each factor that indicate whether the factor represents a major weakness
(rating=1), a minor weakness (rating=2), a minor strength (rating=3), or major
strength (major=4). However, that strength must receive a 3 or 4 rating and weakness
must receive a 1 or 2 rating. Ratings are thus company-based, whereas the weights in step
2 are industry-based.
Regardless of how many factors are included in an IFE Matrix, the total weighted score
can range from a low of 1.0 to a high of 4.0, with the average score being 2.5. Total
weighted score well below 2.5 characterize organizations that are weak internally,
whereas scores significantly above 2.5 indicate a strong internal position.
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IFE MATRIX
KEY INTERNAL FACTOR WEIGHT RATING WS
STRENGTH
Average yield per revenue passenger
mile up to 12.29% over last two
years.
0.10 4 0.40
Company assets up $ 10,529,000 to $
11,308,000 0.10 4 0.40
Poorer on-time performance =
(73.4% in 2006) compared to (76.9%
in 2005)
0.10 4 0.40
Fifth largest airline = serves 148
domestic and 134 international
destinations
0.05 4 0.20
Customer complaint rate reduce from
(0.92 in 2005) to (0.88 in 2006) 0.05 3 0.15
Improved flight over the last 3 years
= 77.8% 0.05 4 0.20
Denied boarding rate reduce from
(1.92% in 2005) to (1.74 in 2006) 0.05 3 0.15
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KEY INTERNAL FACTOR WEIGHT RATING WS
WEAKNESES
Low employee morale 0.05 2 0.10
Slow to adopt online booking 0.05 2 0.10
Decrease employee incentive 0.05 2 0.10
Increase mishandled baggage rate per
1,000 passengers = (4.76% in 2006)
compared to (4.12% in 2006)
0.15 1 0.15
Losses a net income of $ 343 million
in 2006 after 2 previous years 0.10 1 0.10
Low market share
0.10 1 0.10
TOTAL 1.00 2.55
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SPACE MATRIX
The axes of the SPACE Matrix represent two internal dimensions (financial strength [FS]
and competitive advantage [CA] and two external dimensions (environmental stability
[ES] and industry strength [IS]). These four factors are perhaps the most important
determinants of an organization’s overall strategic position.
Financial Strengths Ratings
1. The Continental Airlines net income of $ 343 million in 2006
after two previous years of losses.
1.0
2. The Continental Airlines operating profit of $ 6 million. 1.0
3. The Continental Airlines improving the revenues generated per
revenue passenger mile flown $ 769 million and $ 6 million in
network carriers.
3.0
4. The Continental Airlines of inventory increase $ 16,000 in
2005 to 2006
4.0
Total 9.0
Industry Strengths
1. Grow the airline to where it can make money and keep
improving the business or leisure mix.
4.0
2. Achieve above-average profit in a change industry
environment.
5.0
3. Continental relies on its regional fleet for its domestic routes. 4.0
Total 13.0
Environmental stability
1. Continental reduces cost with technology -2.0
2. Continental operating costs are very close to the regional and
national carries, but significantly above the cost of the low cost
-4.0
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carriers.
3. Facing stronger competitor from carriers operating under
bankruptcy.
-3.0
4. Fuel accurate for 25.7% of total expenses in 2006 at the largest
U.S carriers
-3.0
Total -12.0
Competitive advantage
1. Market share of Continental Airlines 7.7 percent -3.0
2. General decline in service quality in the industry for 2006
compared to 2005.
-3.0
3. Continental was slow to adopt online bookings and currently
has about 24 percent of its revenues from its web sites,
however its use of electronic tickets (e-tickets) that reduced
costs of online or travel agents to issue e-tickets.
-3.0
Total -9.0
Conclusion:-
ES Average is -12.0 ÷4 = -3.0 IS Average is 13.0 ÷3 =4.33
CA Average is -9.0 ÷ 3 = -3.0 FS Average is 9.0 ÷ 4 =2.25
Directional Vector Coordinates: x-axis: -3.0 + (+4.33) = +1.33
y-axis: -3.0 + (+2.25) = -0.750
The Continental Airlines should pursue Competitive Strategies
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FS
CA IS
ES
-6 -5 -4 -3 -2 -1 +1 + 2 +3 + 4 + 5 +6
-1
-2
-3
-4
-5
-6
+6
+5
+4
+3
+2
+1
(-0.75, +1.33)
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GRAND STRATEGY MATRIX
Weak Competiti
ve Position
Rapid Market Growth
Slow Market Growth
Strong Competitive
Position
Quadrant II (Conservative)
Quadrant IV (Competitive)
Quadrant I (Aggressive)
Quadrant III (Defensive)
Potential Strategies:-
Backward Integration
Forward Integration
Horizontal Integration
Market Penetration
Market Development
Product Development
Potential Strategies:-
Backward Integration
Forward Integration
Horizontal Integration
Market Penetration
Market Development
Product Development
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MAJOR ISSUE
MAJOR ISSUE
CORPORATE LEVEL No vice president specifically oversees international operations given its important at Continental.
No young officer in a top management lines. All top management people are 50’s and above.
BUSINESS LEVEL Slow to adopt online booking low market share
Low market share
FUNCTIONAL
LEVEL
Does not make its organizational chart known to others.
Continental’s AQR score has declined for the last three years even though its ranking improved.
Continental’s on time performance shows that it has not meet the 80 percent of better standard for arrivals for the last fours years, of for departures for the last two years
Low employee morale
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RECOMMENDATION
RECOMMENDATION FOR MAJOR ISSUE
CORPORATE LEVEL
BUSINESS LEVEL Hire employee that has skilled in computer or online
booking
FUNCTIONAL LEVEL Provide training for employee
C A S E S T U D Y : C O N T I N E N T A L A I R L I N E S I N C - 2 0 0 7 | 32
Table above show the major issue that happen in Continental Airlines Inc. Major issue can be
divided to 3 types, that is corporate level, business level and functional level. For business level,
from the case study there is a weakness and major issue that company should eliminate in order
to smoothen the operation of company. As we can see on the table, the problem for business
level is slow to adopt online booking and low market share. The recommendation that we
suggest for Continental is hire employee that has skilled in computer or online booking.
Functional level is the each department in organization, for example human research department,
finance department and others. Major problem for this level is Continental’s AQR score has
declined for the last three years even though its ranking improved. The recommendation is they
must provide training for employee