lufthansa case

Q Karla Kopf Q Nivia Satriavi Soetrisno Q Sim Su Shuen Q Yong Shu Hui Q

Q one airline cannot cover the world,

an alliance can

LUFTHANSA and Star Alliance

17th October, 2012


17th October, 2012

Karla Kopf, Nivia Satriavi Soetrisno, Sim Su Shuen, Yong Shu Hui Rose

Q1:

What type of international strategy has Lufthansa

chosen? What entry mode has it chosen?

2


17th October, 2012


Q1: What type of international strategy has Lufthansa chosen?

Different forms of strategy

Measure level of Local Responsiveness

Measure level of Global Integration

Identify Lufthansa’s strategy

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17th October, 2012



Local Responsiveness

Low High

Multi-domestic

Global Transnational

Global

Integration

L

o

w

H

i

g

h

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17th October, 2012



Considerations

Market Assumptions

• Markets share significant similarities

across country boundaries:

• Same target customers of middle

to upper class

• Dominated by a few big players

• High growth low profit

Nature of product/service

• Standardized:

• Same nature of service

• Standard value chain activities

• For customers also standard

procedures (order tickets, board

the plane, served on board, etc)


Text Local Responsiveness is LOW

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17th October, 2012



Considerations

Need for

Consistency

• Due to standard nature of

service, need for a

consistent quality of service

• Lufthansa branding

Pressures for Cost

Reduction

• High R&D cost

• Favorable logistics costs

• Costs across countries

are similar (asset – plane,

fuel)

Global Integration

Text Global Integration is HIGH

Degree of

Centralization

• Headquarter in Germany

• All management staffs in

Germany

• Only counters in airports

globally with minimal

decision making

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17th October, 2012




Low High

Multi-domestic

Global Transnational

Global

Integration

L

o

w

H

i

g

h

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17th October, 2012



Considerations

Advantages

• Economies of scale

• Uniform standards of quality

Disadvantages

• Low adaptability

• Dependence on a single facility

• Transportation and tariff costs

Global Strategy

Text

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17th October, 2012


More about Lufthansa’s Global Strategy

Prior to 1997 massive European and Global expansion strategy since early 1980s viewed as not successful

• annual growth rate negative in 1986

• decreasing trend in growth rate

pressure from bad industry conditions

After 1997 Lufthansa adopt a new entry mode through Star Alliance


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17th October, 2012


Q1: What type of entry mode has Lufthansa chosen?

Major events

May 14, 1997

Star Alliance was formed between

Air Canada, Lufthansa, SAS, Thai

Airways International and United

Airlines

January 6, 1926

“Deutsche Luft Hansa AG”•

August 6, 1954

Launched as an airline

“Deutsche Lufthansa AG”

1992

Close to bankruptcy

•

1980s

Global expansion strategy•

Area of focus

1992-1993

Lufthansa‘s turnaround

•

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17th October, 2012



Situational Assessment

Identify Strategic Goals

Needs & Gap Analysis

Select Best Strategic Option

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17th October, 2012



Internal Environment

+ • Strong reputation

• Engineering excellence

• High standards in IT and customer

service

• Global operations

• Good employee management

• Achieved cost reductions in operations

through its cost-cutting initiatives

- • High fixed costs

• Global expansion strategy of 1980s not

economically viable


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17th October, 2012



External Environment

+ • Presence of emerging markets for

overseas expansion and to increase

global presence

- • Limitations in domestic growth

• Alternative transport mode

• Highly competitive airline industry

• Uncontrollable events • Government, politics, taxes

• Oil prices


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17th October, 2012



Opportunities & Threats

Lufthansa’s goal:

To operate in a global network without increasing one’s

own investments in an economically unsustainable way…

Identify Strategic Goals

“ ”

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17th October, 2012



Fast entry into new markets

Organic

Growth

Cooperative

Strategy M&A

Increase market share

Cost savings

Economies of scale

Reduce competition

Increase in travel destinations & routes

Leverage on others’ resources and

capabilities to strengthen its

competitive advantage

Needs & Gap Analysis

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17th October, 2012




Cooperative strategies – Strategic Alliance

Text

Star Alliance

• An alliance in which >2 airlines develop contractual relationship to share their

resources and capabilities to develop competitive advantage

• Airlines can meet critical their business needs while maintaining their independent

identities and the alliance product

Non-Equity Strategic Alliance

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17th October, 2012




Cooperative strategies – Strategic Alliance

Star Alliance

• Members’ headquarters are in different nations

• Members of the Star Alliance share resources and capabilities to create economies

of scale to create competitive advantage

• Might be difficult to manage due to differences in management styles, cultures or

regulatory constraints

International Level Cooperative strategy: Cross- Border Strategic Alliance

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17th October, 2012


Q1:

What type of international strategy has Lufthansa

chosen? What entry mode has it chosen?

Q&A

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17th October, 2012


Q2:

What can Lufthansa achieve with its cooperative

strategy?

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17th October, 2012


Cost cuttings

Economies of scale

‘strong reasons supported the belief that the ”network effect” and economies of scale were

leading to a global airline industry, dominated by a handful of key players’ (p. 27)

Q2: What can Lufthansa achieve with its cooperative strategy?

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17th October, 2012


Cost cuttings

Economies of scale

‘strong reasons supported the belief that the ”network effect” and economies of scale were

leading to a global airline industry, dominated by a handful of key players’ (p. 27)

Combined competencies

Mutual learning

Product / process innovation and development

Increasing reputation and satisfaction among customers

Strengthening company image

‘Lufthansa is the leading, probably pivotal, member of […] Star Alliance’ (p. 25)


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17th October, 2012


Reducing competition

Reducing conflicts

Sharing risks and decreasing uncertainty

Fuel prices

Demand uncertainty

Government laws and regulations

Setting a base for future collaboration


Greater

competitive

advantage

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17th October, 2012


Q2:

What can Lufthansa achieve with ist cooperative

strategy?

Q&A

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17th October, 2012


Q3:

Discuss the uncertainties and challenges Lufthansa faces related to

operating beyond the company’s national boundaries, and the

potential risks of its cooperative strategy.

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17th October, 2012


Uncertainties

1.

Crisis of Individual Members

• In the past, Lufthansa had to bail out alliance members who were close to bankruptcy

• Interdependency between members

2.

Changing Needs of Global Customers

• More emphasis placed on quality as customers get increasingly affluent

• Presence of budget carriers

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17th October, 2012


Uncertainties

3.

Economy

• Air travel is highly susceptible to booms and recessions

• People will tend to travel less during times of recession

4.

Tourism Climate

• Terrorist attacks • 9/11, Bali bombings

• Epidemics

• SARS, Asian Bird Flu

• Natural disasters

26

Challenges

Challenges • Different members of the

alliance have different

practices

• In terms of service:

• SQ: Stewards/Stewardesses are usually

youthful people

• In other countries, this can be perceived

as age discrimination

Maintaining Quality

• Homogenization in the alliance might weaken

Lufthansa’s standings

• Employees and customers may not identify with

Lufthansa as well as before

Brand Dilution

Competition from alternative

transportation • Air travel can be a hassle checking in and

out, possibility of lost baggage

• Emergence of speed train: “Deutsche Bahn”

• Mostly cheaper and sometimes even

faster

Need for common protocols

• As Lufthansa expands globally, it may find it

difficult to have a common set of standards

across all their offices around the world

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17th October, 2012


Risks

Reasons

Titel

1. Inability to share risks due to lukewarm

commitment

• In terms of investments and

resources

2. No coordination and communication

amongst alliance members

• Poor relationship building

• Lack of trust

• Airlines may perceive a risk

in sharing information about

its flights and customers

3. Undefined roles in the alliance

Consequences

Titel

Reduction in overall market share

of Star Alliance

Airlines’ may have tarnished

reputations

Failure of alliance may leave the

airlines in a weakened position

ALLIANCE FAILURE

Text

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17th October, 2012


Risks

Reasons

Titel

1. Management systems and

information technology systems

are harmonized with other alliance

members

2. Common standards set within the

alliance causes uniformity

Consequences

Titel

Might result in individual brand

dilution

A customer’s poor experience with

an alliance member will affect the

rest of the alliance

Compromise on unique corporate

culture which might go against

individual airline’s strategy

LOSS OF INDEPENDENCE AND IDENTITY

Text

29

Risks

Competitive Risks

Alliance members may demonstrate opportunistic behavior

Alliance members may have hidden or non-mutual agendas

Some alliance members may misrepresent competencies just so that they

can be accepted into the alliance

Alliance members may fail to make committed resources and capabilities

available to other partners

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17th October, 2012


Customer Perceived Risk

An airline passenger could book a return flight ticket by a preferred airline of an airline alliance

He might be served by a partner airline, which he has never heard off nor have any idea of what services the airline offers

Changes made during the travel, adds risks to his travel plans

It could increase or decrease perceived risk of an airline alliance

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17th October, 2012


Q3:

Discuss the uncertainties and challenges Lufthansa faces related to

operating beyond the company’s national boundaries, and the

potential risks of its cooperative strategy.

Q&A

32


17th October, 2012


Q4:

How can Lufthansa maximize its gains through its cooperative

strategy while minimizing the risks involved? Recommend specific

plans with respect to the management of inter-firm relationships

such that Lufthansa can achieve both simultaneously.

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17th October, 2012


Q4: Recommendations for Lufthansa in the Star Alliance

Detailed contracts Covering possible contingencies

Independent committee to observe compliance

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17th October, 2012


Monitoring systems To ensure goal accomplishment,

honesty and transparency

To manage the high complexity

To observe the financial situation


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17th October, 2012


Development of trusting behaviors Effective communication

Regular interaction


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17th October, 2012



Incentive systems to reward cooperation

Making benefit of the partners’ competencies

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17th October, 2012


Improve employees’ performance evaluation system Team-based evaluation with specific

targets

Manager‘s compensation based on team‘s performance

Emphasis on learning and development

Q4: Recommendations for Lufthansa’s Internal Management

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17th October, 2012


Strengthen company’s culture Bring back Lufthanseat pride

Team-building activities at Lufthansa

Training and Conference Centre

Feedback system


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17th October, 2012


Sharpen Lufthansa’s competitive edge Back to basics: Engineering

excellence and service

Invest in R&D

Rigorous training and recruitment

exercise


40


17th October, 2012


Q4:

How can Lufthansa maximize its gains through its cooperative

strategy while minimizing the risks involved? Recommend specific

plans with respect to the management of inter-firm relationships

such that Lufthansa can achieve both simultaneously.

Q&A

41

lufthansa case

Documents

nivia satriavi soetrisno

sim su shuen

recommend specific plans

companys national boundaries

identify strategic goals

lufthansas internal management

cost cuttings economies

global airline industry