LUFTHANSA

2000:
MAINTAINING THE CHANGE MOMENTUM













Group D
Tilda Wikner, 921115
Isabell Hultn, 930329
Emelie Karlsson, 930214
Sara Liljenstrm, 900424
Tao Hemberg Jankel, 900618

Executive Summary
In 1991 Lufthansa was practically bankrupt. Eight years later, the company announced an all time high
result. In 1999, Lufthansa was one of the worlds leading airline companies. Lufthansa managed to
make every individual in the company aware of the urgency of change. It decentralized its structure
and moved from growth through strengths to growth through partnership and founded the network
STAR ALLIANCE. In only eight years the CEO, Jrgen Weber, succeeded in restructuring the
company.
This paper raises the challenges that Lufthansa faced in the beginning of the 1990s as well as the new
strategy to mitigate these challenges. Furthermore, this paper illustrates the challenges still remaining
in the late 1990s, how these occurred and how these challenges could be linked to the strategy
implemented.

Our Conclusion
By the end of the 1990s, Lufthansa had managed vast conversions in organization structure. The
renovation of Lufthansa has shown great changes in results. At first, Lufthansa was a fixed and
bureaucratic organization with un-profitable outcomes. However, through the renovation it was
transformed into an organization with more openness to change and Lufthansa became one of the most
profitable airlines on the market. Giving birth to natural incentives throughout the company, creating a
more divisional structure, and forming the STAR ALLIANCE have all been parts among many others,
which have put Lufthansa in its position today. Remaining challenges for Lufthansa, among others,
involve managing external relationships in combination with coordinated strategic aims, continuously
envisioning an open culture for the whole company, and preserve efficiency through control systems.

Table of content
1. LUFTHANSA IN THE EARLY 1990S ........................................................ 4
1.1 INTERNAL CHALLENGES ..................................................................................... 4
1.2 EXTERNAL CHALLENGES ..................................................................................... 4

2. THE NEW STRATEGY ........................................................................... 4

2.1 COST SAVINGS ................................................................................................. 5
2.2 CORPORATE RESTRUCTURING ............................................................................. 5
Figure 1. Corporate reconstructing ............................................................................................................. 6
2.3 STRATEGIC NETWORKING .................................................................................. 6

3. THE IMPLEMENTATION OF LUFTHANSAS NEW STRATEGY ................. 6

3.1 THE UNFREEZE-PHASE ...................................................................................... 7
3.2 THE MOVE PHASE ............................................................................................ 7
3.3 THE RE-FREEZE PHASE ...................................................................................... 8

4. RESULTS FROM THE NEW STRATEGY .................................................. 9

4.1 POSITIVE RESULTS ............................................................................................ 9
4.2 NEGATIVE RESULTS ........................................................................................... 9
4.3 SUGGESTIONS ............................................................................................... 10

5. CHALLENGES IN 1999 ........................................................................ 11

5.1 INTERNAL PERSPECTIVE ................................................................................... 11
5.2 EXTERNAL PERSPECTIVE ................................................................................... 13

6. SUMMARY OF REMAINING CHALLENGES AND PROPOSED SOLUTIONS .... 14

Figure 2. Summary of remaining challenges in 1999. ...................................................................... 14
Figure 3. Proposed solutions for remaining challenges. ................................................................. 14

7. REFERENCES ..................................................................................... 15

1. Lufthansa in the early 1990s

Lufthansa was founded in 1926 and was almost fully owned by the German state. Historically, the
company was characterized by traditional German industry, with its focus on reliability, order, and
technical excellence. Being a state-owned company lead to a bureaucratic and inflexible organization.

1.1 Internal Challenges

In 1991, Lufthansa was monolithic, unprofitable and on the verge of bankruptcy. At this time,
Lufthansa was functionally organized with six departments (finance, personnel, sales, marketing,
maintenance and flight operations). This structure meant high involvement of top management in
operations, slow decision-making, low transparency and an insufficient proximity to the market.
Lufthansa could not respond effectively to the emerging competition with its existing functional
structure. Lufthansa relied heavily on their state-ownership and immortality was taken for granted.
Even when the crisis became obvious, people at Lufthansa still thought that the government would
never let the company die. In turn, the state-ownership, lead to lack of motivation among the staff to
look beyond their own duties and try to evolve Lufthansa for the better. The pension fund secured by
the state was an incentive for the employees wanting the company to stay state-owned.
In the late 80s Lufthansa applied a policy of growth through own strength. This policy was based on
the belief that only the largest airlines would survive in an era of global competition. This altered in a
rapid fleet expansion to capture larger market share where Lufthansa expanded its fleet from 120 to
275 aircrafts in 1991. This lead to a high degree of fixed assets and costs, and the number of
employees at the time was high.

1.2 External Challenges

Due to the deregulation in the late 80s, the Gulf War, and the subsequent recession, a fall in air traffic
was a fact and an intensive price competition was triggered. As a result, a serious overcapacity for the
entire airline industry arose on a global basis. No companies had enough flexibility to adapt to the
rapid changes in the industry and the airline companies suffered losses. Because of the German
reunification and the fact that Lufthansa was a state-owned company, Lufthansa noticed the serious
crisis later than other companies, believing it was invincible. In 1991, when the rest of the industry
faced this market downturn, Lufthansa increased the number of passengers by eleven percent. Despite
the boom, Lufthansa had a cash crisis and reported losses in 1991. In 1992, none of the outsiders or
private banks were completely sure about Lufthansas survival. Finally, Kreditanstalt fr
Wiederaufbau agreed to provide Lufthansa the capital it needed in order to pay its employees.

2. The New Strategy

In 1992, Weber invited a group of the top management to a Mental Change Meeting that aimed to
focus on the redevelopment process within Lufthansa. Weber had been convinced of the urgency of a
redevelopment process by a group of managers called Samurai of Change. Prior to the scheduled
meeting, Weber became aware of the seriousness of the embarking crisis and changed the name to
Crisis Management Meeting. The purpose of the meeting was to make managers aware of the
serious situation and its threats and urgency, instead of simply inform them about the facts and the
needed strategy. This type of meeting was repeated three different times with different groups of 50


people, and afterwards the majority of the senior managers were convinced of the need of a drastic
change, which resulted in the development of the following strategies.

2.1 Cost Savings

The new strategy included drastic downsizing of the fleet and extensive staff cuts due to the
overcapacity. In the beginning of the 90s, Lufthansa started to negotiate with the German state to
privatize the airline, with purpose of solving the problems of bureaucracy and inflexibility. One
stumbling block was replacing the highly valued state-owned pension fund (VBL). In May 1994,
however, the problem with the pension fund was resolved and in 1997, Lufthansa became fully
privatized. Being a privatized company, Lufthansa experienced increased pressure to focus even more
on strategically cost efficiency, but also competition, which resulted in a strategic cost management
program called Programm 15 as a successor to the former Programm 93. Programm 15 was
focused on three concrete goals instead of the more wide-spread 131 goals of projects set up in
Programm 93 before the 1990s. The program aimed at improving Lufthansas competitive position
through cost reduction, create an internationalized cost structure, and making the staff at every level
cost-effective and cost-conscious in their daily work. To create incentives for Lufthansas middle
management to radically improve, a tight monitoring and public sharing of results for each individual
manager were used in order to ensure accountability and continuous feedback. This also solved the
transparency problem noted earlier. Through Lufthansas approach, much alike the Balanced
Scorecard originated by Kaplan and Norton (1996), the company administered cost reconstructing.
The main idea of the Balanced Scorecard approach is to consider aspects beyond financial, when
pursuing a successful strategy (Kaplan & Norton, 1996). Lufthansa used a similar approach when it
was focusing on the entire organization in the change process.

2.2 Corporate Restructuring

Lufthansa, with its existing corporate structure of that time, faced problems with slow decision
making, low transparency, high involvement of top management in operations, and an insufficient
proximity to the market. The company had realized their lack of efficiency in responding to changes in
the market, which lead to difficulties in coping with the emerging competition. The goal with a
restructuring plan was to speed up the decision making process and increase both transparency and
market proximity.
This new corporate structure enabled Lufthansa to overcome some of the previous challenges such as
inflexibility, bureaucracy and the lack of proximity to the market. The idea behind the restructuring
was that Lufthansa would be more successful as a group of independent units rather than as a closed
functional block. After considering various alternatives, three business areas were separated as
independent subsidiaries: Cargo AG (logistics), Technik AG (Technik) and Systems GmbH (IT).
These three joined the four subsidiaries already existing, shown in Figure 1.

Figure 1. Corporate reconstructing

When it comes to the corporate culture, a goal was to make the individuals within the organization
more conscious of how their piece of the puzzle affected the whole picture, as well as making the staff
on all levels highly cost-conscious and effective. The top management hoped for an outcome where
the employees on all different levels felt more responsibility in contributing to the development of the
company.

2.3 Strategic Networking

Apart from the strategic directions mentioned above, Lufthansa continuously worked on its external
relationships. The company moved from the philosophy of growth through own strength to growth
through partnership. Lufthansa was one of the founding members of STAR ALLIANCE, an airline
network that started functioning in 1997. In 1999 the network included eight members, which together
operated in 110 countries. The members of the network cooperated in numerous ways. Apart from the
code sharing they also collaborated in joint sales activities, joint marketing, market research, shared
facilities, and staff exchange. These efforts in turn lead to increased cost efficiency and cost synergies
within STAR ALLIANCE. In 1999 the network started to integrate more challengeable strategic
activities such as establish a common global brand and have a shared technology platform. In late
1998 the alliance formed a management team to lead the airlines in the network on a day-to-day basis.

3. The Implementation of Lufthansas New Strategy

Kotter (2007) mentions eight errors that can occur when a company applies a strategy of change. By
looking at how Lufthansa and Weber acted within the strategy implementation process, connections to
Kotters theories can be identified and later evaluated. Lufthansa succeeded in adopting the change
management methods that Kotter argues for. Kotters eight errors can be interpreted in reverse to
evaluate how well the strategy of change was implemented. The eight errors, or as we now translate
into eight areas of possible success, can in turn be grouped into three phases, the unfreeze phase, the
move phase and finally the re-freeze phase.

3.1 THE UNFREEZE-PHASE

1. Creating an awareness of urgency
The whole renovation began with a month-long program aiming at unite various managers to discuss
the urgency of change. It was through the group Samurai of Change, as mentioned before, the
realization of the current urgent situation was intensified among the engaging managers, including
Weber. After the program, Weber understood the scope and the severity of Lufthansas situation.
According to Kotter (2007), the urgency rate is high enough when three out of four managers at a
company believe that business as usual is totally unacceptable, which the Samurai of Change
suggestively succeeded in explaining.
2. Establishing a influential guiding coalition
The result of the group Samurai of Change was a clear awareness of urgency regarding the issue.
Shortly after, a guided coalition followed where Weber established a training network that aimed at 20
managers in higher positions, in order to train their abilities in change management and provide them
with capabilities in redeveloping various processes in their divisions. It is necessary, as Kotter (2007)
mentions, to have more than just a few managers leading the transformation process. The network was
extended into three additional sessions with 50 new participants each time, in order to make them
feel the situation, and get naturally convinced of the new radical changes. Through the additional
sessions an even larger coalition coped with the commenced change.
3. Shaping a common vision
Through the workshops that were carried out, several managers became committed to high
performance goals, in order to carry out the changes that Weber believed were essential. Having a
vision empowers the whole organization to see a common goal and follow one defined direction, as
stated by Kotter (2007). Lufthansa succeeded in reducing costs and becoming more efficient by
working on projects such as Programm 15 and arranging employees in new ways. The plan resulted
in lower costs in terms of more effective personnel activity and a reduction of former total losses.
However, the plan also required Lufthansa to terminate many employee contracts.

3.2 THE MOVE PHASE

4. Illuminating the vision
The vision continued to be further implemented in Lufthansas company and its surroundings.
Lufthansa started arranging town meetings in the areas where it was active. Town meetings were
carried out in order to make local management, employees and key customers aware of the changes
being implemented and what the results were aimed to be. It seemed that through Webers total
honesty and informal dialogue he managed to provide the surrounding listeners with great
expectations regarding the strategy implementation. Beer and Eisenstat (2000), state that managers
best succeed spreading belief and faith when something is articulated well enough to be compelling to
the listener, and it is likely that the informal discussion made Webers arguments trustworthy. A chief
executive mentions that there was a saying describing Webers way engaging people, Schlede
(previous CEO) is collecting the money, Weber is collecting the people. Through the beliefs that
Weber had managed to plant in the surroundings, the organization would accept to ride along the wave
of changes that would derive.


5. Emboldening surroundings to perform according to the vision
Line managers were through the Programm 15 given more responsibility for decreasing costs. The
program also aimed at spreading the cost structure globally. By censoring activities closely through
this program, Lufthansa was able to see that vital control mechanisms were affected harmlessly.
Middle managers also succeeded in making employees engaged in the cost management processes.
Results of the program were more effective cost management and a change in culture. As Beer and
Nohria (2000) argue, reaching a sustainable competitive advantage was easier for Lufthansa as they
focused on both economic values and organizational aptitudes.
6. Setting up short-term goals
Weber understood the value of keeping employees motivated. Kotter (2007) describes the importance
of showing gratitude to short-term-successions in order to make employees aware of how the company
has succeeded thanks to the changes. In the Lufthanseat magazine distributed to all workers, chosen
success stories were published for everyone in the company to view. Kotter (2007) continues
explaining that a company lacking in screening short-term achievements to employees will result in
employees not understanding the urgency of change. By publishing the success stories in the magazine
employees were reminded of what some of the changes had resulted in. However, using extensive
methods in reminding the employees of their successes, could keep employees even more motivated.

3.3 THE RE-FREEZE PHASE

7. Merging progresses and continuously producing change
Lufthansa realized that their first achievements, such as increased profits and other positive results,
would not grant future success. The leaders of the company believed that more efforts could be done
in the areas of cutting costs. It was supposed that further organizational re-structuring was in need. A
more alert management was shaped in order to make them capable of facing greater issues, thus
drawing some attention from the short-term scope. The results from short-term achievements can be
used in more complex problems, when wanting to restructure organizations (Kotter, 2007). Lufthansa
was given a new organizational shape. Going from a functional structure to a multidivisional structure,
which concentrated more on each business unit and the intrinsic effectiveness. By giving managers
further down the line more responsibility, pressure was not as centered on the top management, which
is a state that is highly regarded by Beer and Eisenstat (2000). They point out good effects from
spreading authority throughout the whole company, making more individuals capable of taking
actions.
8. Maintaining the implemented ways
The school that Lufthansa created continued teaching their managers to always be prepared for urgent
actions and how to manage their employees to have the knowledge and support needed, when meeting
changes. Just like Kotter (2007) argues, it is extremely important to not fall back on old convenient
ways of managing, and Lufthansa managed to secure its foundation by creating the business school,
where only relevant management approaches according to their situations were taught out.

4. Results from the new Strategy

4.1 Positive results
Lufthansa fulfilled each of the eight points to some extent according to Kotters (2007) theories. The
process of change was carried out effectively through smart and attentive solutions. In accordance
with Kotters (2007) points, Webers change strategy had reasons to succeed.

4.1.1. The soft and hard management approach

The impression given through the Staff Managers description was that Weber was good at being open
and personal in his way of communication, and therefore acting accordingly with Beer and Nohrias
(2000) Theory O. Such a personal approach can lead to cultural and more long-lasting effects. By
laying off a number of employees and implementing the cost reducing programs, such as Programm
15, Lufthansa and Weber also followed a Theory E approach. Through a mix of hard and soft
management approaches social factors were developed along with costs being cut. A combination like
such is suggested by Beer and Nohria (2000) to be the most effective, where both Theory E
(mechanical cost cutting and impersonal approach) and Theory O (less mechanical cost cutting and
more personal approach) methods should be included. The increased profits and equity returns along
with the new vision that was reflected further down the hierarchy, demonstrate the success argued for
by Beer and Nohria (2000).

4.1.2. From a restructuring and cost saving perspective

Dividing the company into more subsidiaries resulted in quicker decision-making abilities and higher
obligations to the different departments, generating a closer awareness of costs and clearer relations to
the goals that had been set. In summary, this new form of autonomy increased the service quality and
efficiency. The activities performed at the lower ground could simply be governed easier when
spreading responsibility further down the hierarchy. A closer methodology toward consumer
preferences and emphasis was achieved. The LSG Sky Chefs department, for example, could
through this change better adapt to different culture specific taste preferences and comply with them.

4.1.3. From an external relationship perspective

Through the network STAR ALLIANCE, Lufthansa shaped a more collaborative market approach in
relation to the former highly competitive that existed. The elaborating airlines of the network were all
made tougher, including Lufthansa themselves. Making all flight information attainable within the
network and performing united marketing plans were two of the actions that created positive cost
synergy effects for all participating airlines. Webers early wish and vision in reducing costs were at
this stage of the strategy process realized even more.

4.2 Negative results

4.2.1. From a restructuring and cost saving perspective
Dividing the company into subsidiaries made it harder for Lufthansa to solely focus on the same
vision and brand image. Strategic aims were in some situations not enough for each division, as they
needed to observe the local markets as well as customers at the same time. Making departments more
independent decreased the level of communication between departments and the higher parts of
Lufthansa. Thereby, the meaning of the brand was incrementally split and directed towards new


individual areas. As part of the organizational change, collaborations between departments were not as
high, and existing synergy effects were damaged, according to Mintzbergs (1981) theory. The
damage of the brand can be echoed through one of the employees who explained how the IT Service
departments ways of working was influenced by the culture of Germany. An example of a department
in need of other cultures than the German is the food supplying business, like LSG Sky Chefs, who
are in need to adjust to various food traditions and preferences.

4.2.2. From an external relationship perspective

The formation of STAR ALLIANCE made Lufthansa reliant on the relationships within. Lufthansas
IT services faced competition from United Airlines IT division, which meant that even though a
relationship existed between the two, they were also competitors. At the same time, Lufthansa was
reliant on the network to keep their existing position on the airline market, and leaving the IT services
business could also be harmful. Lufthansas IT services became vulnerable and had to face more
competition. Without the support and funding that was naturally expected from the STAR
ALLIANCE, the IT services business area could perish. The network of airlines resulted in
competition between networks rather than competition between airlines.

4.3 Suggestions
A way of preserving positive synergy effects within and between divisions could be to create a middle
unit with the purpose of arranging frequent meetings with delegates from each division. Through these
meetings, the meaning of the brand could be discussed and the true brand culture could be repeated
towards the divisions that are lacking the same beliefs. Preserving synergy effects is essential both for
STAR ALLIANCE and the divisions of Lufthansa. Divisions would, through such confrontation, be
able to discuss how to best coordinate and work while at the same time practicing in being
independent. Research and development issues could in this way follow a more unified path, in all
divisions. Collaboration among the different parts of the company would thus grant all parts
advantages. However, communication activities need to be organized in a smart way to enable
collaboration. Lufthansa has used these methods before, for example as part of their Programm 15.
Simons (1994) theory explains how management can be looked upon as having different levers of
control. There are four categories included in his theory, belief systems, boundary systems, diagnostic
control systems and interactive control systems. According to the author, the four features of control
need to be approached during both the opening and the continuing phase. Weber has successfully
created belief systems and boundary systems. Through town meetings and the management programs,
Weber managed to make the company and its surroundings realize the belief needed to influence
change. Programm 15 envisioned managers to be more effective in their managing while at the same
time having to follow certain rules and operation declarations. Employees and middle managers also
took after management methods through the programs, which would help maintain the philosophy of
Weber, and therefore Programm 15 also worked as a belief system. The founding of Lufthansa
School of Business also helps preserve the beliefs being strived for by Weber.
The diagnostic control systems and interactive control systems became weaker further in the process
of change. These systems were expected to be cultivated easier at the time when the company was
more compact and not as divided, as part of the subsidiary process. Measuring performance goals was

10


not done by the top management to the same extent as before the divisional structure, since each
division was meant to take own responsibility. Furthermore, the separation into divisions caused
further distance from the top management and discussion. The exchange of information was thus more
difficult. If Lufthansa would manage to create a middle unit to function as a communication
platform between the top management and the leaders of the divisions, diagnostic control systems and
interactive control systems could be improved in Lufthansas current organization structure. But
before such a unit is created, diagnostic control systems and interactive control systems can be seen as
areas to further develop (Simons, 1994).

5. Challenges in 1999
5.1 Internal Perspective
Since 1997, Lufthansa was fully privatized and from being a company facing bankruptcy, it became
one of the worlds leading airlines and core element of the strongest worldwide alliance in the airline
industry. From a rather conservative organization, believing in immortality, Lufthansa managed to
change its corporate culture to become an organization striving for change and improvements.
Decentralization was a fact in 1997 and by 1999, the Lufthansa Group Management Board directed
activities of the entire Group through three central functions; the Chairmans Office, the finance, and
the Human Resource Management. Lufthansa moved from the functional organizational structure
toward a divisional structure with the purpose of achieving a higher degree of decentralization. The
divisional structure, according to Mintzberg (1981), is not as integrated and instead a set of rather
independent units joined together by a loose administrative overlay. The decentralization process
resulted in seven main businesses with different strategies for growth and globalization. This new
structure arose challenges and internal tensions regarding the use of Lufthansa as a brand, since the
degree of internationalization and use of the brand varied significantly across the different businesses..
This organizational structure also created difficulties for lone business units as they lacked experience
in working autonomously. Lufthansa Cargo AG, for example, had never been an autonomous
organizational unit before, but a dependent child and a mental change was needed in order to sustain
as an independent unit. The challenges facing independent businesses, which was now forced to tackle
operations by their own, was a result of the decentralization process.
As mentioned above, different growth and globalization strategies were undertaken by companies in
The Lufthansa Group. As a result, different units had different relationships to the brand Lufthansa
and internal tension was created within the company. A challenge caused by the new strategy was
therefore to preserve the Lufthansa identity, which can be linked to the lack of an overall vision and
thus a vital hinder when trying to maintain sustainable change (Kotter, 2007). Internal costs,
restructuring, and external relationships were main focus aspects when Lufthansa implemented the
new strategy and the change process. However, a clear vision of the overall aviation group was
lacking. Grant (2013) points out the sense of a common purpose, shared goals, and values as keys to
achieve coherence and cooperation throughout the organization. In order to coordinate the use of the
Lufthansa brand, a strong corporate culture is needed and Lufthansa should use control systems and
performance incentives to direct division in a coherent manner. Simons (1994) states control systems
as tools in order for managers to frame beliefs, norms, values, as well as boundaries on acceptable

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strategies and behavior. These control systems can also be used to manage measurements of
performance variables and enhance cross-functional dialogues. The Lufthansa School of Business was
established at a corporate level in 1998. The school was used as a tool in order to establish a cultural
and knowledge platform and can thus be claimed to be a belief system used to control the use of the
Lufthansa brand (Simons, 1994).
So-called silent killers of implementation, as described by Beer and Eisenstat (2000), can be traced in
the organization of Lufthansa and can be stated as blocking learning from being distributed throughout
the corporation. As mentioned above, ambiguous strategies and conflicting priorities are silent killers
still present in the organization. The autonomous business units of Lufthansa Group entail strategic
dissimilarities. The feedback system needs to be more extensive, and include lower-level unit
managers, in order to refine and delineate a common strategy into a coherent business direction.
One crucial question concerned the influence that the close integration within the STAR ALLIANCE
would have on Lufthansas companies. Critical issues regarding branding and identity within the
Lufthansa Group were connected to the network strategy and cultural integration. STAR
ALLIANCEs influence on the independent companies within Lufthansa was sometimes problematic,
particularly due to the planned extension of joint procurement. Several units were highly dependent
upon STAR ALLIANCE, which complicated their independent business. Lufthansa Technik, for
example, which had a strategy in 1999 that mainly focused on growth through cooperation with the
alliance and its partners, faced problems with creating an alliance independent from STAR
ALLIANCE. On one hand, Lufthansa Technik was dependent on an alliance with STAR ALLIANCE
in order to grow. On the other hand, such an alliance was almost impossible due to the perception
within STAR ALLIANCE that technical maintenance was not a real business. As a result, Airlines
Materials was founded in 1998 by Lufthansa Technik, United Airlines, and Air Canada. Airlines
Materials became a trade and service center for spare parts in Chicago and turned out to be a serious
competitor to Lufthansa Technik. From this example, we can see that STAR ALLIANCE constituted a
serious challenge for the subsidiaries operations and market positions.
When the radical change process was first implemented, Lufthansa tightened its awareness of weak
signals and other features in the environment. The achieved record performance was in large part due
to openness for change and the willingness to tackle the crisis. A crucial challenge for Lufthansa is to
keep people motivated when the pressure has eased off and prevent them from falling into a
comfortable zone. This phenomenon is described by Kotter (2007), where the tendency to declare
victory too fast is stated as a common error in change processes. Several managers at Lufthansa imply
that a serious crisis was needed in order to motivate people and achieve real change. After turnaround
was reached it took ages to realize changes, even small ones. Kotter (2007) explains that a sense of
urgency is needed in order to motivate and drive for change. It is important for Lufthansa to maintain
an open culture with strive for continuously improvements. It is also important to encourage and
empower employees, showing that risk-taking and innovative projects is important regardless of the
current market situation. The Lufthansa School of Business is partly used in order to enhance future
performance, whereby links are tightened between strategy, organizational and individual
development in order to strengthen the key priorities.

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5.2 External Perspective

Lufthansa changed its strategy from growth through own strength to growth through partnership
in conjunction with the creation of the STAR ALLIANCE network. The new strategy constituted
focus on external relationships and entailed challenges for Lufthansa.
Managing the alliance as a whole was a key challenge for Lufthansa that included several difficulties.
STAR ALLIANCE developed collaboration beyond the stage of a committee-based collaboration.
However, strategic integration was believed as requiring something more. Organizational changes
required mental changes among the network members, in order to get used of the new processes.
When trying to manage STAR ALLIANCE, the members, including Lufthansa, were faced with the
challenge of forming the corporate culture and coordinate the large network. All companies within the
network had different history and cultures. Lufthansa, for example, had a culture based on openness,
which enabled change and successfully led them through the crisis. A central question was whether a
fusion of the companies cultures would improve their success and develop a more coherent corporate
culture
A crucial challenge, linked to the creation of STAR ALLIANCE, was the change of Lufthansas
economic structure from competition between airlines to competition between the networks. Due to
increased competition from rival networks, an important challenge for STAR ALLIANCE was linked
to defending and expanding its leading position. Through integrated network management, STAR
ALLIANCE dealt with coordinating and integrating strategic activities. This included tasks aiming at
creating an identity of the alliance, setting borders for the network, and creating a global alliance
brand. Connected to this, Lufthansa faced problems of keeping its own identity, which was further
explained in the above section of internal challenges. STAR ALLIANCEs integrated network
management can be described by the findings of Gadde, Huemer, and Hkansson (2003). The
traditional strategic management theory is argued to focus on strategy as winning and strive for
independence and power over other actors. In the Industrial Network Perspective, on the other hand,
interdependence and coevolution are the most important competitive aspects. The core strategy is
stated as the ability to create and maintain relationships with external actors. An important challenge is
thus for Lufthansa to manage this new form of competition and importance of network relationships.
Other issues connected to the alliance were marketing and sales, information technology, and service
and product development. To manage these strategically important issues, STAR ALLIANCE can
develop a common information and technology platform. In order to create organizational capabilities,
the network needs to effectively integrate the companies different recourses, which are largely
determined by the structure of the organizations and its culture (Grant, 2013).

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6. Summary of remaining challenges and proposed solutions

Internal

Challenges caused directly by the

strategy
Strategy: Lufthansa Group
Various use of the brand Lufthansa
Internal tension
Ambiguous strategies, particularly regarding
internationalization
Lack of clear vision
Lack of cross-division synergies
Conflicting priorities
Difficulties for lone business units, since they
lacked experience in working autonomously

Strategy: STAR ALLIANCE
Difficult to preserve the Lufthansa identity
Lack of overall vision and coordination
Problems with creating independent
businesses

Challenges caused indirectly by the

strategy

Keep people motivated

Defending and expanding its leading

position
Create an identity, brand and network
borders.

External Strategy: STAR ALLIANCE

Manage a mental change

Form the alliance's corporate culture and
coordination
Change competition focus

Figure 2. Summary of remaining challenges in 1999.

Lufthansa

Proposed Solutions

Envisioned corporate culture understood by the whole company

- The culture should also be open and strive for continuous improvements
Control systems
-

STAR ALLIANCE

For example, Lufthansa School of Business

Extensive feedback system

Coordinate and integrate strategic activities through integrated network

management
Develop a common information and technology platform

Figure 3. Proposed solutions for remaining challenges.

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7. References
Beer, M. Eisenstat, R.A (2000) The silent killers of strategy implementation and learning, MIT Sloan
Management Review.
Beer & Nohria (2000) Cracking the code of change, Harvard Business Review
Gadde, L-E; Huemer L, Hkansson H (2003) Strategizing in industrial networks, Industrial Marketing
Management
Grant, R. (2013) Contemporary Strategy Analysis, Seventh edition, Blackwell Publishing
Kotter J. P (2007) Why transformation efforts fail?, Harvard Business Review
Mintzberg, H (1981) Organizational design: fashion or fit?, Harvard business review
Simons R (1994) How new top managers use control systems as levers of strategic renewal, Strategic
Management Journal, Vol. 15

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