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Introduction
Background to the study
Lufthansa is one of the largest firms in the European airline industry. The firm operates from two main hubs which include Munich and Frankfurt. In its operation, the firm serves approximately 242 destinations which are located in 87 different countries (Lufthansa, 2008, ¶ 3). Apart from its passenger business, the firm operates other businesses which include aircraft maintenance, catering, devision of cargo and information technology. The firm has undergone via tough time in establishing itself as the most profitable firm in the global airline industry. In the 21st century, there has been an increase in the rate of globalization which has affected almost all the economic sectors including the airline industry. In addition, there has been an increase in customers travelling demands in relation to quality of services. According to Hitt, Ireland, and Hoskisson (2009, p.236), increased globalization has resulted into an increase in the level of within the local airline industry. In addition, there has been emergence of electric trains which have resulted into increased intensity of competition to the airline industry. This is due to the fact that they deliver quality and fast services to the travelers. To remain competitive in the international market, firms in the airline industry have formulated various international competitive strategies. This paper is a report on the international global challenges facing Lufthansa Group.
Aim
The aim of the report is to identify the international strategies that Lufthansa has adopted in expanding into the international market. It also identifies the elements of Lufthansas cooperative strategy and the potential risks of the cooperative strategies. In addition, the report also analyzes the possible uncertainties that the firm faces by operating beyond the national boundaries. It is also the objective of the report to determine how the organization structure and other controls can be used to support Lufthansas strategy.
The report also analyzes the various strategic actions that can be incorporated by Lufthansa in developing human capital, promoting entrepreneurial mindset, developing an effective organization structure and reducing complexity at Lufthansa.
Scope
The paper entails analysis of the firms international strategy which entails the cooperative strategy. Other methods that the firm has incorporated in expanding into the international strategy are also considered. These include organic growth, consolidation and partnership. The elements and objectives of Lufthansas cooperative strategy are also analyzed. The report also considers the challenges of operating in the international market and the risks of cooperative strategy. Finally, a number of recommendations are made on how to improve the firms human capital and reduce organization complexity. However, the report does not include the various costs that the firm will incur in restructuring its organization structure.
What type of international strategy has the company chosen and what means has it used to expand internationally?
Cooperative strategy
It is the objective of Lufthansas management to ensure that the firm has strengthened its position as the leading premium carrier in the European airline industry with a global capacity. To achieve this, the management of the firm has to ensure that Lufthansa covers numerous traffic flows to, from and through Europe. As a result, the firm has developed an effective international growth strategy. The strategy involves formation of strategic alliance. Strategic alliance is an international business strategy in which a number of firms come together and develop a legally independent firm. The objective of strategic alliance is to enable the firms share some of the capabilities and resources that they have thus developing a higher competitive advantage. In its international strategic alliance strategy, Lufthansa has adopted a cooperative strategy form of strategic alliance which is non-equity in nature.
Through cooperative strategy, the parties involved are able to attain a synergistic effect through sharing of the resources, capabilities and core competences. Non-equity alliance form of cooperative strategy refers to a contractual agreement between a company to either produce or supply the firms products and services without any form of equity sharing. In its cooperative strategy, Lufthansa has entered into non-equity strategic alliance with Star Alliance. This is a global airline alliance network that was established in 1997 to ensure that passengers achieve a global reach and a superior travel experience to various international destinations (Lufthansa , 2008, ¶ 3).
Methods that Lufthansa has used to expand internationally
Organic growth strategy
In addition, the firm has also incorporated the concept of organic in expanding into the international market. Organic growth involves utilization of a firms internal resources in expanding into the international market. The management of the firm incorporated this business expansion strategy due to the firms level of profitability and effective management skills. Over the years, the management of the firm has ensured that the firm operates cost effectively. Increase in Lufthansas level of profit arises from the fact that the firm serves 87 countries through flights to 242 destinations. This enables the firm to serve a large number of flights. In addition, the management has ensured that Lufthansas flights are flexible. This has enabled the firm to adjust to the changes in the market and exploit the opportunities that arise in the individual markets.
Through the organic growth international expansion strategy, the management of Lufthansa Group is committed at ensuring that the firm continuously establishes new brands. For instance, the management established Lufthansa Italia in 2008 with flights commencing operations to Milan in by February 2009. Through Italia destination, the firm will be able to serve approximately 8 European destinations (Lufthansa, 2008, ¶ 3). To ensure that the new brands established through organic growth strategy are of high quality, the management of the firm ensures that they incorporate features that are tailored for that specific market. For instance, the management should ensure that the flight attendants are capable of speaking the native language of the new travel destination.
Consolidation and partnership strategy
To ensure that the firm expands it operations within Europe, the firm has incorporated the concept of consolidation that is currently dominant in European airline industry. In its consolidation plan, the management of Lufthansa Group initially conducts equity investment in various airlines which culminates into a takeover. This has been an effective way through which Lufthansa has been able to venture into the international market. In addition, the management of Lufthansa is continuously incorporating its partners into its group while maintaining its own market presence. This has enabled the firm to become both a multi-brand and multi-hub airline group. Consolidation has also enabled the firm to strengthen its market proximity and effectively link the European and global flow of traffic through its well established multi-hub systems. This has been achieved cost efficiently while ensuring that there is optimal utilization of its capacity (Lufthansa , 2008, ¶ 3).
Through consolidation, the firm has been able to attain synergistic effects. In line with its consolidation strategy, the management of Lufthansa entered into a contract with Brussels airline in which it would acquire 45% of the airline. In addition, there are forthcoming arrangements to acquire Australian Airline. Through these acquisitions, Lufthansa will be able to link Belgium, Brussels and Austria in its network. This will also enable the firm strengthen its network to African markets through Brussels Airline. This is due to the fact that Brussels Airlines has got flights to 10 additional destinations through its partnership with Australian Airlines (Lufthansa, 2008, ¶ 3).
Discuss the elements and objectives of Lufthansas cooperative strategy?
In adopting cooperative strategy as its international expansion plan, the management of Lufthansa intended to gain a higher market power. This is due to the fact that the firm would be able to effectively capture potential new markets. Through cooperative strategies, the firm will be able to increase its market positions in the various markets. This means that Lufthansa will be able to effectively incorporate the cooperative strategy element of opportunity maximization (Lufthansa , n.d. ¶ 5). For instance, by being a member of Star Alliance, the firm is able to increase its number of travel destination. According to Hitt et al (2009, p.237), it is estimated that the annual increase in Lufthansas profit through Star Alliance is 500 million pounds.This is due to the fact that Star Alliance serves approximately 1,042 destinations located in 168 countries.
It is also the objective of the management to overcome possible trade barriers through cooperative strategies. For instance, through strategic alliance, the firm would be able to overcome trade barriers that have been set by various governments in relation to the airline industry. Some of the requirements of venturing into a particular foreign market involve formation of strategic alliances with a local company in the foreign market.
Through cooperative strategy, the management of Lufthansa intended to access various complementary resources within the airline industry. These resources include equipments, spare parts, flight plans, landing rights and a global sharing of codes. This enables the firm to attain the element of opportunity maximization.
In its cooperative strategy, the management of the firm is committed at ensuring that the firm attains the element of cost minimization in its operation. This is achieved by ensuring that the contract between Lufthansa and its strategic partners are effectively monitored. Monitoring the contract ensures that the probability of opportunistic behavior occurring between the partners are minimized. This will enable Lufthansa to develop into an effective low cost carrier within the Airline industry thus attaining a higher competitive advantage.
Describe the uncertainties and challenges of operating beyond the companys national boundaries and potential risk of cooperative strategy
According to Hitt et al (2009, p.234), increase in the rate of globalization has resulted into abolition of social, political and economic boundaries. These boundaries are important in that they help in containing the various effects to a certain entity. Due to increase in the rate of internationalization, there are a number of challenges that Lufthansa is exposed to. For instance, globalization has affected the airline industry due to increase in political instability. This is evident from an increase in the rate of terrorism and the commitment of government in fighting terrorism. Increase in war on terror results into a reduction in the volume of air travel passengers. For instance, in 2001 and 2003, there was a global reduction in air passenger volume by a margin of 3.3% and 2.4% respectively. During the same period, Lufthansa suffered a reduction of traffic turnover with a margin of 4.6% (Hitt et al, 2009, p. 234).This is due to the fact that terrorists are increasingly targeting at airlines in conducting their terrorist activities.
In addition, by operating beyond the national industry, the airline industry faces the risk of currency fluctuations that affect various economies. For instance, the occurrence of Asian, Russian and Mexican financial crisis affected the air travel. This resulted into a reduction in turnover of airline firms that had travel destination in these countries (Hitt et al, 2009,.p 234). In addition, increased uncertainties in relation to currencies can result into inefficient operation of a firm. This is due to the fact that the firm will incur high operational costs.
A firm that ventures into the international market also faces intense competition from other multinational firms. This means that the firm is faced with intense price competition. This is due to the fact that there are other large firms which are already well established within the international market. Price competition is also intensified from the existence of a large number of low cost carriers within the international market. Price pressure also results from the existence of subsidies that are offered to the airline industry by various governments. For instance, there are consistent subsidies that are offered to the airline industry by various governments in Latin America, Southern Europe and Asia (Hitt et al, 2009, p.234).The subsidies enable these firms to reduce their prices hence attaining a high competitive edge.
Risks of cooperative strategies
Despite the benefits of cooperative strategies, there are a number of risks that a firm that has incorporated this strategy faces.
For instance, in the event that the contract between the partners is not well developed, one of the parties to the contract can become more opportunistic than the other. This means that there contract will not result into the expected mutual benefit. In addition, the parties to the cooperative strategy can fail to make available the complementary resources. The firm may also be held hostage by a number of specific investments that are made in association with the partners (Hitt, 1999, p.230).
Discuss the use of organizational structure and the controls necessary to Support Lufthansas strategy
By being a member of Star Alliance, Lufthansa experiences some degree of inefficiency in its operation due to the complex superstructure of Star Alliance. Lufthansa also has a complex corporate organization structure. The structure is constituted of 6 business lines (Hitt et al, 2009, p.238). The six divisions consist of passage, logistic, IT services, globe ground, catering and condor. All the 6 business divisions are decentralized with every business being responsible of its financial results. To be able to operate efficiently, the management of Lufthansa should be able to streamline its organization structure.
To attain its strategy, the management of the firm should restructure its organization structure by ensuring that there is open communication. This will enable the firm to effectively control its operations. There are a number of ways through which Lufthansa can restructure its organization structure. The management should establish smaller units which are easier to manage and which are closer to the firms product market. The management should also continuously benchmark its processes from external competition. Alternatively, the firm should segment its groups to become more market oriented.
What strategic leadership actions do you recommend for developing human capital, establishing an effective organization culture, promoting entrepreneurial mindset and reducing complexity at Lufthansa?
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To attain an effective human capital, the management of the firm should develop a continuous training program for both its executive management and the lower level employees. The training program will enable the firm to be proactive in incorporating the changes that in the airline industry. In addition, training will help in integrating the concept of innovation amongst the employees. This will result into development of an entrepreneurial mind-set.
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To reduce the complexity of the firms management, the management should restructure its organization structure.
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The management of the firm should also ensure that the firm incorporates corporate social responsibility in various fields. This will enable the firm develop a positive public image. This can be achieved by ensuring that it contributes to reduction of global warming by purchasing fleets that emit minimum amount of carbon dioxide.
Reference list
Hitt, M.A, Ireland, R.D & Hoskisson, R.E. (2009). Strategic management:Â competitiveness and globalization, concepts and cases. Mason, OH: South Western Cengage Learning.
Lufthansa.(2008). Annual report: business strategy. Web.
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