Lufthansa Case

17th October, 2012
LUFTHANSA and Star Alliance

Q one airline cannot cover the world, an alliance can
Q Karla Kopf Q Nivia Satriavi Soetrisno Q Sim Su Shuen Q Yong Shu Hui Q
Q1:
What type of international strategy has Lufthansa chosen? What entry mode has it chosen?
LUFTHANSA and Star Alliance 17th October, 2012 Karla Kopf, Nivia Satriavi Soetrisno, Sim Su Shuen, Yong Shu Hui Rose
Q1: What type of international strategy has Lufthansa chosen?

Different forms of strategy
Measure level of Local Responsiveness
Measure level of Global Integration
Identify Lufthansas strategy
Local Responsiveness
Low L o w Global Integration H i g h
High
Multi-domestic
Global
Transnational

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)
Local Responsiveness is LOW

Text

Global Integration
Considerations
Degree of Centralization
Headquarter in Germany All management staffs in Germany Only counters in airports globally with minimal decision making
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 is HIGH

Text
Low L o w Global Integration H i g h
High
Multi-domestic
Global
Transnational
Global Strategy Considerations

Advantages
Economies of scale Uniform standards of quality
Disadvantages
Low adaptability Dependence on a single facility Transportation and tariff costs
Text
More about Lufthansas Global Strategy
Prior to 1997
massive European and Global expansion strategy since early 1980s viewed as not successful pressure from bad industry conditions
annual growth rate negative in 1986 decreasing trend in growth rate
After 1997
Lufthansa adopt a new entry mode through Star Alliance
Q1: What type of entry mode has Lufthansa chosen?
Major events
January 6, 1926 1992-1993 1980s Deutsche Luft Hansa AG Global expansion strategy Lufthansas turnaround
Area of focus
August 6, 1954 Launched as an airline Deutsche Lufthansa AG 1992 Close to bankruptcy May 14, 1997 Star Alliance was formed between Air Canada, Lufthansa, SAS, Thai Airways International and United Airlines
10

Situational Assessment
Identify Strategic Goals
Needs & Gap Analysis
Select Best Strategic Option
11

Internal Environment
+
Strong reputation
Engineering excellence High standards in IT and customer service
High fixed costs Global expansion strategy of 1980s not economically viable
Global operations Good employee management Achieved cost reductions in operations through its cost-cutting initiatives
12

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
13

Identify Strategic Goals
Opportunities & Threats Lufthansas goal:
To operate in a global network without increasing ones own investments in an economically unsustainable way
14

Needs & Gap Analysis
Fast entry into new markets 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
Organic Growth
M&A
Cooperative Strategy
15

Cooperative strategies Strategic Alliance Non-Equity Strategic Alliance Opportunities & Threats 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
Text
16

Cooperative strategies Strategic Alliance
International Level Cooperative strategy: Cross- Border Strategic Alliance Opportunities & Threats 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
17
Q1:
What type of international strategy has Lufthansa chosen? What entry mode has it chosen?
Q&A
18
Q2:
What can Lufthansa achieve with its cooperative strategy?
19
Q2: What can Lufthansa achieve with its cooperative strategy?

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)
20

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)
21

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
22
Q2:
What can Lufthansa achieve with ist cooperative strategy?
Q&A
23
Q3:
Discuss the uncertainties and challenges Lufthansa faces related to operating beyond the companys national boundaries, and the potential risks of its cooperative strategy.
24
Uncertainties
Crisis of Individual Members In the past, Lufthansa had to bail out alliance members who were close to bankruptcy
1.
Interdependency between members

Changing Needs of Global Customers
2.
More emphasis placed on quality as customers get increasingly affluent

Presence of budget carriers
25
Uncertainties
Economy Air travel is highly susceptible to booms and recessions People will tend to travel less during times of recession Tourism Climate Terrorist attacks 9/11, Bali bombings Epidemics SARS, Asian Bird Flu Natural disasters
3.
4.
26
Challenges
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
Different members of the
Challenges
Homogenization in the alliance might weaken
Lufthansas standings Employees and customers may not identify with Lufthansa as well as before
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
Brand Dilution
27
Risks
ALLIANCE FAILURE
Titel
Titel
Reasons
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 Reduction in overall market share of Star Alliance
Airlines may have tarnished reputations

Failure of alliance may leave the airlines in a weakened position
Text
28
Risks
LOSS OF INDEPENDENCE AND IDENTITY
Titel
Titel
Reasons 1. Management systems and information technology systems are harmonized with other alliance members 2. Common standards set within the alliance causes uniformity
Consequences Might result in individual brand dilution A customers poor experience with an alliance member will affect the rest of the alliance Compromise on unique corporate culture which might go against individual airlines strategy
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
30
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
31
Q3:
Discuss the uncertainties and challenges Lufthansa faces related to operating beyond the companys national boundaries, and the potential risks of its cooperative strategy.
Q&A
32
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.
33
Q4: Recommendations for Lufthansa in the Star Alliance
Detailed contracts
Covering possible contingencies Independent committee to observe compliance
34
Monitoring systems
To ensure goal accomplishment, honesty and transparency To manage the high complexity To observe the financial situation
35
Development of trusting behaviors

Effective communication Regular interaction
36
Incentive systems to reward cooperation
Making benefit of the partners competencies
37
Q4: Recommendations for Lufthansas Internal Management
Improve employees
performance evaluation system
Team-based evaluation with specific targets Managers compensation based on teams performance Emphasis on learning and development
38
Strengthen companys culture

Bring back Lufthanseat pride Team-building activities at Lufthansa Training and Conference Centre Feedback system
39
Sharpen Lufthansas
competitive edge
Back to basics: Engineering excellence and service Invest in R&D
Rigorous training and recruitment exercise
40
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

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17th October, 2012

LUFTHANSA and Star Alliance

Q1: What type of international strategy has Lufthansa chosen?

Measure level of Local Responsiveness

Measure level of Global Integration

Identify Lufthansas strategy

Q1: What type of international strategy has Lufthansa chosen?

Low L o w Global Integration H i g h

Q1: What type of international strategy has Lufthansa chosen?

Local Responsiveness is LOW

Q1: What type of international strategy has Lufthansa chosen?

Need for Consistency

Pressures for Cost Reduction

Global Integration is HIGH

Q1: What type of international strategy has Lufthansa chosen?

Low L o w Global Integration H i g h

Q1: What type of international strategy has Lufthansa chosen?

Global Strategy Considerations

Q1: What type of international strategy has Lufthansa chosen?

More about Lufthansas Global Strategy

Lufthansa adopt a new entry mode through Star Alliance

Q1: What type of entry mode has Lufthansa chosen?

Q1: What type of entry mode has Lufthansa chosen?

Identify Strategic Goals

Needs & Gap Analysis

Select Best Strategic Option

Q1: What type of entry mode has Lufthansa chosen?

Q1: What type of entry mode has Lufthansa chosen?

Q1: What type of entry mode has Lufthansa chosen?

Opportunities & Threats Lufthansas goal:

Q1: What type of entry mode has Lufthansa chosen?

Q1: What type of entry mode has Lufthansa chosen?

Q1: What type of entry mode has Lufthansa chosen?

Q2: What can Lufthansa achieve with its cooperative strategy?

Q2: What can Lufthansa achieve with its cooperative strategy?

Increasing reputation and satisfaction among customers Strengthening company image

Q2: What can Lufthansa achieve with its cooperative strategy?

Setting a base for future collaboration

Interdependency between members

More emphasis placed on quality as customers get increasingly affluent

Need for common protocols

Different members of the

Consequences Reduction in overall market share of Star Alliance

Airlines may have tarnished reputations

Customer Perceived Risk

It could increase or decrease perceived risk of an airline alliance

Q4: Recommendations for Lufthansa in the Star Alliance

Q4: Recommendations for Lufthansa in the Star Alliance

Q4: Recommendations for Lufthansa in the Star Alliance

Development of trusting behaviors

Q4: Recommendations for Lufthansa in the Star Alliance

Incentive systems to reward cooperation

Making benefit of the partners competencies

Q4: Recommendations for Lufthansas Internal Management

Q4: Recommendations for Lufthansas Internal Management

Strengthen companys culture

Q4: Recommendations for Lufthansas Internal Management

Rigorous training and recruitment exercise

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