Essay on "Lufthansa Going Global but How to Manage Complexity"

Essay 7 pages (1992 words) Sources: 4

[EXCERPT] . . . .

Lufthansa

Describe the type of international strategy the company has chosen.

Lufthansa's international strategy has traditionally been built around its Frankfurt hub, with secondary operations in Munich and Dusseldorf. The airline has typically linked Germany with the world via these three cities. According to Porter's generic strategy typology (QuickMBA, 2007), Lufthansa has not determined a particular competitive strategy, although the brand's good reputation places it more in the differentiated category. It has in past refused entry into the low-cost carrier market (World Airline News, 2000). Monopolies protected Lufthansa's business for a long time, so it did not need to develop a clear competitive strategy. As these monopolies have crumbled, Lufthansa has begun to broaden its market focus by including a number of other German cities, while maintaining a weak form of differentiated strategy.

When expanding abroad, Lufthansa has maintained focus on linking those flights back to Germany. Some of the company's expansion has been through direct investment in the form of establishing flight routes. However, a sizeable portion of the company's international strategy rests on the partnerships that it has created to link its passengers to the rest of the world, known as non-equity strategic alliances. It was a founding member of the Star Alliance, a group of several world airlines that works together to build and drive traffic to one another. These partnerships also drive considerable traffic back to Lufthansa from other airlines, in particular through the Frankfurt hub, which is one of the world's busiest airports. Lufthansa helped found the Star Alliance at a point in time when it was in terrible financial condition (Bruch & Sattelberger, 2001). The Star Alliance became the cornerstone of Lufthansa strategy in the 1990s and 2000s as one of the airline's main points of differentiation vis-a-vis the newer discount competitors that have come into the German market over the past twenty years.

2. Explain what means the company has used to expand internationally.

Lufthansa has expanded internationally by developing its own routes and via the Star Alliance. The Star Alliance is a strategic partnership founded in 1997 consisting of Lufthansa, Air Canada, SAS, Thai Airways and United Airlines. The group now includes twenty-seven airlines. The group is a loose partnership of independent companies that come together on issues such as code-sharing, facilities-sharing, co-marketing and other cooperative ventures. The objective is to provide a more integrated customer service function for airline passengers, resulting in those passengers developing strong loyalty to Star Alliance airlines.

This cooperative approach is significantly different from most international expansion strategies, but is congruent with the realities of the airline industry. The cost structure of airlines is high, so airlines tend to limit the number of airplanes they own or lease to those that they can fill with routes that they own. In addition, in most parts of the world there are limitations on landing rights in order to protect domestic airlines from full competition. This necessitates a more cooperative approach. Joint ventures are unreasonable for airlines because of ownership restrictions in many countries, again necessitating the current model of cooperation among a set of independent entities.

3. Identify and describe the elements and objectives of Lufthansa's cooperative strategy

The objective of the cooperative strategy is explained on the Star Alliance website (2010) as "making the travel experience smoother." This entails a number of cooperative efforts between the different member airlines. They are located close to each other in terminals, which allows for better integration of services and communication between each other, and allows for passengers to connect more easily among Star Alliance members. Common facilities at airports allow member passengers to have a more consistent experience anywhere in the world. In addition, Alliance members converge on areas of code-sharing, technological development, schedule coordination, maintenance and other service provision. Each initiative of the Star Alliance is geared towards leveraging the capabilities of the different members to provide a better customer experience for passengers all over the world.

By cooperating with the different airlines in the Alliance, Lufthansa increases traffic to its airline and to its core airports. In addition, Lufthansa provides a better experience to its different customers as well, which will attract customers to fly Lufthansa over other non-Star airlines on its routes.

4. Describe the uncertainties and challenges related to operating beyond the company's national boundaries.

There are a number of challenges associated with operating beyond the company's national boundaries, some of which are general and some of which are particular to the airline industry. In general, firms are less familiar with the local culture, which places challenges on their marketing arms. In addition, the company is faced with currency exchange rate risk, political risk, the application of a new set of trade and local laws (Goudy, 2007). The airline business in particular faces a number of challenges with international expansion. The industry is heavily regulated. Many airlines around the world are at least in part owned by the host government. The strategic nature of the airline industry also means that a number of airlines have at monopolies in their home markets, or have access to those home markets restricted. This means that international expansion in the airline industry entails more than simply taking into consideration business issues, but a whole host of legal and political issues as well.

5. Describe the potential risks of cooperative strategies.

Because of the level of communication and sharing that must exist in order for a strategic alliance to function properly, there are a number of risks inherent in the tactic. The partners may choose to act opportunistically, in particular with respect to the development and implementation of new technologies. Members may acquire critical technology and then leave the alliance to pursue direct competition against the alliance using the technologies acquired. In addition, alliance members may fail to perform to expectations, leaving the remainder of the alliance members to pick of the slack, or simply resulting in the group failing to function as well as intended. This could be because the partner has misrepresented its competencies or it could be because the partner has failed to commit the necessary resources to the partnership (Middlemist, 2004).

6. Explain the use of organizational structure and controls to effectively support Lufthansa's strategy.

Lufthansa has kept the Star Alliance headquarters in Frankfurt, which allows it to keep fairly tight control over the partnership. The leadership of the Star Alliance has a heavy German influence as well. CEO Jaan Albrecht is from Mexico, but holds dual German citizenship. Two other senior managers are from Lufthansa, and another has strong ties to the Frankfurt aviation community as a former German manager for Air France. By keeping a strong Lufthansa influence over the governance of the partnership and by keeping the partnership in Frankfurt, Lufthansa is able to oversee the functioning of the partnership closely.

Outside of the Star Alliance strategy, Lufthansa operates a relatively centralized organization. The company has five units, divided along functional lines. There are no high-level divisions with respect to geography. This centralized structure allows Lufthansa to control its operations relatively tightly and allows the company to easily embark on corporate-wide strategy.

7. Describe what strategic leadership actions should be recommended for developing human capital at Lufthansa.

It is recommended that Lufthansa can improve human capital development by increasing international influence. Attracting managers from smaller partners can help Lufthansa to develop the best talent. As one of the world's leading airlines, Lufthansa will attract outside talent as a matter of course, but if a program was put into place that allowed the company to actively seek out talent from the smaller airlines with which Lufthansa is aligned, it would have a sustainable competitive advantage with respect to talent attraction. In addition, Lufthansa should implement a system by which talent is fostered internally. It is critical that managerial talent by identified, mentored and guided through the Lufthansa system, in particular with respect to placing top candidates into different functional areas of the organization, into the Star Alliance, or into top positions at partner airlines in order to build top leadership skills that will allow this human capital to eventually return to Lufthansa ready for top positions.

8. Describe what strategic leadership actions should be recommended for establishing an effective organizational culture at Lufthansa.

Lufthansa has a strong and effective corporate culture. It would be foolish to make recommendations to change that culture. Lufthansa has a corporate university -- the Lufthansa School of Business - that seeks to build a common managerial culture in the organization and support change processes within the company (HR.com, 2006). The best recommendation to Lufthansa is to continue with its current strategy. The training program is excellent. The centralized organizational structure also helps to foster a common organizational culture. In addition, management should send out reinforcement measures to maintain the culture throughout all levels of the company.

9. Describe what strategic leadership actions should be recommended for promoting an entrepreneurial mind-set at Lufthansa.

No actions should be recommended for promoting an entrepreneurial… READ MORE

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