340496531 Karina Permata Sari Final Exam of Business Strategy and Enterprise Modeling PDF

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MM-5012 BUSINESS STRATEGY AND ENTREPRISE MODELINGCASE 18 – LUFTHANSA: GOING GLOBAL, BUT HOW TO MANAGECOMPLEXITY?FINAL EXAMBy:Karina Permata SariNIM: 29115447Program: GM 2Master of Business Administration ProgramSchool of Business and ManagementInstitut Teknologi Bandung2017iCHAPTER 1INTRODUCTION1 Co...

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MM-5012 BUSINESS STRATEGY AND ENTREPRISE MODELING CASE 18 – LUFTHANSA: GOING GLOBAL, BUT HOW TO MANAGE COMPLEXITY? FINAL EXAM

By: Karina Permata Sari NIM: 29115447 Program: GM 2

Master of Business Administration Program School of Business and Management Institut Teknologi Bandung 2017

i

CHAPTER 1 INTRODUCTION 1.1 Company Overview Lufthansa (Deutsche Lufthansa) is the largest German Airline and is the largest German airline. If combined with its subsidiaries, Lufthansa also the largest airline in Europe, in terms of fleet size, and the second largest airline in terms of passengers carried during 2016. It operates services to 18 domestic destinations and 197 international destinations in 78 countries across Africa, the Americas, Asia, and Europe, using a fleet of more than 270 aircraft. Lufthansa is one of the five founding members of Star Alliance, the world's largest airline alliance, formed in 1997. Deutsche Lufthansa AG owns several aviation-related companies such as Lufthansa Technik as part of the Lufthansa Group. Combined with its subsidiaries, the group has over 615 aircraft, making it one of the largest passenger airline fleets in the world. In 2014, the group carried over 106 million passengers. Lufthansa was a stateowned enterprise (and flag carrier) until 1994. In 2014, 60% of Lufthansa's shares were held by institutional investors. The remaining 40% were held by individual stock owners. Since 1970, Lufthansa has involved its employees in profit sharing, giving them the opportunity to choose between cash and preference shares. When Lufthansa was privatized, employees received more than 3% of its shares. Lufthansa is the leading, probably pivotal, member of the largest alliance, the Star Alliance. If globalization means increasing complexity, alliances are even more complex to manage than individual companies because they lack the hierarchical conflict resolution mechanisms that individual companies can employ. But despite their pride in mastering the turmoil of the past, some challenges remain for Lufthansa’s management as the globalization of the airline industry moves full speed ahead. Lufthansa has to know whether the current strategy is sufficient enough to maintain Lufthansa’s position as one of the few profitable airline companies given the uncertainties and dynamics in the highly competitive but cyclical market. Lufthansa also have to know whether they done enough to reduce complexity in the right places and to survive the competition, especially against the background of customer satisfaction and high value added. They also have to find out whether all employees in the corporation embraced culturally or not. And Lufthansa has to prepare for the

sustainability challenges—in particular global warming—which create new uncertainties.

1.2 Objectives The main objective for final report is wants to analysis the condition of Lufthansa and how they act facing the challenges ahead in airline industry. There are 3 objectives of this research: 1. Analyze the current internal and external environment analysis to develop and improve business and corporate strategy for Lufthansa. 2. Develop growth and global strategy as a support strategy for formulate implementation plan 3. Use business and corporate strategy to get sustainable competitive advantage for Lufthansa

CHAPTER 2 ENVIRONMENTAL ANALYSIS 2.1 External Environment Analysis To analyze the current airline industry, the external analysis framework that would be use in this report are: PESTEL Framework, Porter’s Five Forces, and SWOT analysis. The details explained below. A. PESTEL Framework PESTEL analysis is a framework or tool used by marketers to analyse and monitor

the

macro-environmental

(external environment) factors that have

an

impact

on

an

organization/company. It is suitable to analyze the external environmental condition

of

airline industry

in

Germany using PESTEL framework,

Figure 2.1 PESTEL Framework

since this will also give a brief description of what PESTEL aspects that currently Lufthansa facing in the airline industry

1. Political and Factors These factors determine the extent to which a government may influence the economy or a certain industry. Political factors include tax policies, Fiscal policy, trade tariffs etc. that a government may levy around the fiscal year and it may affect the business environment (economic environment) to a great extent. There’s political factor that impact Lufthansa performance in airline industry which is the Deregulation in 1978, which beginning in 1978 in the United States. This

Deregulation

increasingly

replaced

the

government-organized

International Air Transport Association (IATA) cartel. The deregulation process had not gone far enough to allow for major mergers (in the United States, foreigners can own only 25 percent of an airline; in the EU non-European ownership is limited to 49 percent; in most of Asia any acquisition of a major

airline

might

not

be illegal, but it is practically impossible). But deregulation and the erosion of the IATA cartel went far enough to allow for scores of new competitors. Nofrills low-cost airlines spread from the United States to Europe and then Asia, nurtured by the abundance of used aircraft and leasing opportunities.

2. Economic Factors These factors are determinants of an economy’s performance that directly impacts a company and have resonating long term effects. Economic factors include inflation rate, interest rates, foreign exchange rates, economic growth patterns etc. It also accounts for the FDI (foreign direct investment) depending on certain specific industries who’re undergoing this analysis. The economic factor that effect on Lufthansa current performance is the succeeding “War on Terror”—especially the second Iraq war—along with spreading tensions through the Middle East and the SARS scare delivered a three-year nightmare for the industry, which was in a cyclical business downturn anyway: Worldwide air passenger volumes fell by 3.3 percent and 2.4 percent in 2001 and 2003, respectively, and remained flat in 2002.3 Lufthansa’s traffic turnover even decreased between 2001 and 2003 by 4.6 percent.4 Then, once passenger demand began to recover, oil prices escalated dramatically in 2005–2006. Currently, fuel costs are the second-highest cost category per seat kilometer, accounting

for

26

percent

of

operating

costs

in

Europe airlines

(labor costs account for approximately 30 percent).

3. Social Factors These factors scrutinize the social environment of the market, and gauge determinants like cultural trends, demographics, population analytics, etc. The Social Factor that impact on Lufthansa are the corporate culture transition. Lufthansa was once known for its strong culture, based on pride in being a “Lufthanseat,” the positive image of the company in Germany and its reputation for engineering excellence, underpinned by ongoing training and educational activities. Now approximately one-third of the workforce is nonGerman, and it has become more fragmented in its interests, perceptions,

communication channels, and expectations. The other social factor is the education and training. Continuous education and training is also high on the agenda, not only for employees but also for management. Among Germanbased companies, Lufthansa pioneered a “corporate university” in 1998. The “Lufthansa School of Business” is recognized worldwide as one of the best in the industry.

4. Technological Factors These factors pertain to innovations in technology that may affect the operations of the industry and the market favorably or unfavorably. This refers to automation, research and development and the amount of technological awareness that a market possesses. IT is the technological factor in Lufthansa. For Lufthansa—trained in the art of consensus more than others—it seems to be easier to accept only an 80 percent workable solution, if everybody is behind it and has bought into the compromise. Nevertheless, it was a learning process over several years; many compromises ran counter to a Lufthansa culture that takes pride in engineering excellence and maintaining standards, not only in back-office processes like IT, but also with customer interfaces (e.g., Lufthansa thought that the electronic check-in should be completed in half the time than the other alliance members found acceptable for their customers). Sometimes alliance initiatives run counter to the interests of Lufthansa divisions: The idea of creating a common Star Alliance IT infrastructure would rob the IT systems’ divisions of most of their customers.

5. Environmental Factors These factors include all those that influence or are determined by the surrounding environment. This aspect of the PESTLE is crucial for certain industries particularly for example tourism, farming, agriculture etc. Factors of a business environmental analysis include but are not limited to climate, weather, geographical location, global changes in climate, environmental offsets etc. Environmental factors impact Lufthansa is the CSR activities. Lufthansa environmental activities engage

a wide range of social and

environmental projects from supporting children in need (via the help alliance)

to protecting endangered animals and recycling or introducing fuel efficiency initiatives.

6. Legal Factors This factor will describe about how a company knows the rules to legally trade in a location, especially if it trades globally. Most legal issues these days are connected with said labor disputes or lawsuits concerning passenger rights. However, some airlines have tried to realize efficiency gains by merging such as American Airlines and US Airways or Delta and Northwest in 2008. (Final approval of AA and US has been given in early November 2013). Lufthansa has experienced trouble with one of its newer subsidiaries, Austrian Airlines. When Austrian’s staff refused to move to new payment schemes – Lufthansa transitioned Austrian’s operations to Austrian’s subsidiaries, Tyrolean, which resulted in the departure of a considerable number of employees. v Most recently, an Austrian court has retroactively ruled this transition void and thus added to the difficulties

B. Porter’s Five Forces Porter's five forces analysis is a framework that attempts to analyze the level of competition within an industry and business strategy

development.

It

draws

upon

industrial organization (IO) economics to derive

five

forces that

competitive

intensity

attractiveness

of

an

determine and

the

therefore

Industry.

Below

explained the Porter’s Five Forces of Lufthansa: Figure 2 Porter's Five Forces Framework

 Threat of New Entrants  Low/Moderate  Economic barriers

 Brand recognition of existing companies  Economies of scale  Low cost carriers

 Bargaining Power of Suppliers



 Threat of Substitutes  Low

 High  Mainly dominated by Boeing and Airbus  Suppliers’ goods are critical



Road, rail, and ship



Internet

 Degree of Rivalry  High

to buyers’ success

 Bargaining Power of Buyer  High 

Low differentiation

Low switching cost



So many competitors



Saturated market



High exit barriers



Difficult to differentiate

From above framework, we can conclude that the airline industry is no longer attractive. It means that to achieve high profit or margin will be difficult because of too competitive conditions. This five forces also can countered by Porter’s generic strategies to create competitive advantage. 2.2 Internal Organization Analysis For proper internal organization analysis, the framework used to analyze internal environment of Lufthanasa must be VRIO Analysis

Asset

In-Bound Logistics

Is it

Is it

Valuable?

Rare?

Y

N

Is it

Is it

Implication for

Costly to

Substitutable

Competitivenes

Imitate?

?

s

Y

Y

Competitive Parity Sustainable

Operations

Y

Y

Y

Y

Competitive Advantage

Outbound Logistics Marketing and Sales

Y

N

Y

Y

N

N

Y

Y

Competitive Parity Competitive Disadvantage

Sustainable Y

Service

Y

Y

N

Competitive Advantage

N

Procurement

N

N

Y

Competitive Disadvantage Sustainable

Technological Y

Development

Y

Y

Competitive

N

Advantage

Human N

Resources

N

N

Y

Management

Competitive Disadvantage Sustainable

Firm Infrastructure

Y

Y

Y

N

Competitive Advantage

Table 2.1 VRIO matrix for Telkomsel Indonesia

The analysis also reflects Lufthansa’s sustainable competitive advantages are the operations, services, technological development, and its firm infrastructure. With four sustainable competitive advantages, we can conclude Lufthansa’s strength and weakness in SWOT analysis. It can also spot which competitive advantage should be improved from Lufthansa. These are two competitive advantages that needs to be improved which are its logistics (both in-bound and outbound), procurement, marketing and sales, and human resources management. 2.3 SWOT Analysis With combining analysis result from external analysis and internal analysis, we can create a proper SWOT analysis. Strength and Weakness come from internal environment analysis, and Opportunities and Threats come from external environment analysis. Table 2.2 SWOT Analysis

STRENGTH

WEAKNESS



Largest Star Alliance Member



Leading IT service provider for the Air

 Significant Exposure to Higher

Transport industry 

Competitive Market  Market share growth restricted due to

Strong image associated with German

pressure from competition

Engineering 

A status symbol amongst Corporate/Business men



Has a strong workforce of over 37,000 employees



Over 200 international destinations in nearly 80 countries THREATS

OPPORTUNITY 



Being the largest member of Star

 Other Alliances: One World, Sky team

Alliance they have scope to

 Increased international competition

acquire some smaller players

 Low cost providers

More

 Rising fuel prices

penetration

in

emerging

economies tapping the high-end customers 

Improvement in experience and high-quality services to customers

CHAPTER 3 BUSINESS STRATEGY FORMULATION

3.1 Current Business Strategy Like most of their old competitors, Lufthansa started their operations with a differentiation strategy as flying was a good only for the wealthy and therefore the price was of minor importance. Nowadays, due to the pricing erosion by low cost carriers and the superior service and newer aircrafts of Middle East and Asian carriers Lufthansa has given up their pure differentiation strategy and can be considered as operating with an integrated low-cost/differentiation strategy. This mainly derives from the fact that they still operate as Europe´s premium carrier, however, they gave part of their operations to their low-cost subsidiary Germanwings.

3.2 Proposed Business Strategy Lufthansa should pursue integration strategy. The goal of an integration strategy is to have a larger economic value created than that of your competitors. For an integration strategy to succeed, Lufthansa must resolve trade-offs between the two generic strategic positions—low cost and differentiation. Lufthansa should focus in increasing the value and cost drivers of the integration strategy. Those factors are:

 QUALITY  In quality factor, Lufthansa should focus in the durability and reliability of their services. This is to maintain the high value of differentiated services for a long time. To lower the cost in increasing their quality, Lufthansa should control the operational cost by setting the total quality management and lean manufacturing. This lead to lower the operational cost and higher quality services. The result is the increasing of economic value creation (V-C) by increasing V while decreasing C.

 ECONOMIES OF SCOPE  Besides quality, economies of scope factor also should be considered by Lufthansa. By economies of scopes, this means that savings that come from producing two (or more) outputs at less cost than producing each output individually, despite using the same resources and technology. Lufthansa should find the way from their resources and technology to provide their services more at less cost in order to save their operational budget. Then, the savings could be used for other important purpose in increasing their competitive advantage.

 INNOVATION  The other factors that should be considered is innovation factor. Of course, Lufthansa should conduct innovation in order to be able to compete

with other competitors. Lufthansa could conduct innovation based on Doblin’s 10 types of innovation, whether innovate its configuration (profit model, network, structure, or process), offering (product performance, product system) or the experience (service, channel, brand, customer engagement). If Lufthansa could innovate one of those and make it their competitive advantage, Lufthansa will stay competitive against other competitors in airline industry.  STRUCTURE, CULTURE, AND ROUTINES  The last factor is structure, culture, and routine. This is important to be considered since this will determine the structure in Lufthansa to pursue integration strategy. Lufthansa should choose the managers that could structure in their organizations so that they can both control cost and allow creativity for differentiated product. The managers should build ambidextrous organizations, which is an organization that able balance and harness different activities in trade-offs situations. It encourages managers to balance exploitation (applying current knowledge to enhance firm performance in the short term) with exploration (searching for new knowledge to enhance firm’s future performance. But overall, they have to careful to not being in the stuck in the middle. Because In the current situation, Lufthansa struggles to clearly state which customers they intend to serve and what quality standards to offer. On the one hand they try to fight the low cost competitors with reduced prices on intra-European flights. On the o...