Some of the unhealthy cultures of Continental were:
- Rigid procedures manual, bureaucratic relations and policies
- Absence of open communication and team work undermines the over all performance of the company and customer dissatisfactions
- Non-motivated employees
- Entrusted employees
Operating strategy concerns the approaches for managing key operating units like plant, sales, distribution centres for handling daily operating tasks with strategic significance.
Efficient operating activities are the sources of high revenue and customer’s satisfaction
Operational problems were the sources for loss of continental airlines.
Some of the problems were:
- Loosing money on 18% of its routes
- On time performance ranked last among the largest US commercial air lines
- The highest number of mishandling baggage’s and complaints reported
- Passengers involuntarily denied boarding ranked among the worst.
3. Core Competencies of Continental Airlines
Core competence refers to the enabling culture existing in an organisation. It should be unique to the organisation, invisible to competitors and difficult, if not impossible to imitate. (Veronique Ambrosini, 1998 p.4)
The core competence of Continental Airlines lies in its Management/Leadership capabilities, loyal, committed and motivated employees, teamwork, and employee friendly culture. These are developed over a long period of time and are the sources of competitive advantage for Continental Airlines. This has enabled the company to achieve organic growth by building on its core strengths and unique capabilities. The real essence of core competence approach lies in the fact that company strategies should be built upon its competences ones it has developed or identified them. Continental Airlines was able to strengthen its position in the industry after it has developed core competences relevant to its strategies.
3.1 VALUE CHAIN
Identifying the value chain activities and understanding where value is added can help Continental Airlines in revamping its value chain. Value chain analysis can help continental to eliminate nonessential and low-value-added activities in its attempt to cut costs so as to help it revive. As a result of the 9/11 attack the company is in a big crisis and need to cut low-value added activities as much as possible so as to be able to reduce costs and survive.
The value chain of Continental Airlines can be depicted as follows:
Supplies/Suppliers Check
4. Key success factors of Continental Airline
The KSF are the values that shape whether the company will be financially and competitively successfully. Continental KFS are based on the:
Leadership or management style: The kind of leadership Bethune used was democratic style of leadership describes a leader who involves employee in decision making, delegates authority, encourages participants in deciding work methods and goals, and uses feedback to coach employees.
Other characteristics that Bethune had were
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High need for achievement: Bethune usually set himself goals and took calculated risks in attaining those goals, this is indicated in the case where he was first introducing a Go-Forward – Plan, employees and management were all sceptic that it will be successful.
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Internal locus of control: these are people who believe they control the events and consequences that affect their lives. Such person tends to attribute positive outcomes; for example the implementation of the Go-Forward-Plan was successful and Bethune was really making thing happens in the company.
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Need for social power: people with high need for social power like work and are concerned with discipline and self respect.
5. Continental Airline corporate culture
Every company has a unique organisational culture each has its own business philosophy and principle, its own way of approaching problems and making decisions, it’s own work climate, its own taboos and political don’ts.
The culture dimension in Hofstede-Bond studies.
This describes a unique method of culture as it allows a person to isolate the culture effects in the company. There are four cultural dimensions in Hofstede model.
Power distance
How much do people expect inequality in social institutions (e.g. family, work organisation and government)? Before Bethune employees and management were demarcated as unequal in the organisation, and employees views and ideas were not recognised.
Bethune introduced teamwork and as well as independence of workers in decision-making, this enhanced their sense of belonging and erased the perceived inequality of management and employees as they felt they too were recognised as important stakeholders in the organisation.
Individualism-Collectivism
This is how loose or tight is the bond between individuals and societal groups. In this dimension Continental staff can be viewed as people who were working together either individually or working collectively to assignments given to them. This made the company to have a tight bond between employees and management and also its customers.
Masculinity-femininity
To what extent do people embrace competitive masculine traits (e.g. success, assertiveness and performance) or nurturing feminine traits (e.g. solidarity, personal relationship, service, quality of life)? In this dimension Continental can suit with regard to the leadership it had in the company. Bethune was striving hard for the success of the company, because of outspoken character making things to happen, he builds teamwork and opens communication within the company. The kinds of incentives given to employees and the quality service that was offered to customers build a good relationship between the company and its clients and all these leads to the good performance of the company.
Uncertainty avoidance
This explains to what extend do people prefer structured versus unstructured situations. In normal situations people prefer structured situations because they want to know where they fit and what they are supposed to do. Bethune introduced the Go-forward –Plan during the time that the company was in crises and people were loosing hope that the company will succeed. Meaning that there were people at that time that did not know what to do, where they fit in the organisation as a whole in order to make things happen. The restructuring of the company and the introduction of the “Go Forward Plan” helped the company and the employees alike.
Latitude with regard to decision making in doing their work and not constraining themselves to the rigid policies also made the employees feel that their capable of performing and that the belong. Thus the structures introduced by Bethune removed the uncertainty of both employees and management with reference to where the organization is going and how they are going to get there.
Long –term versus Short-term orientation (Confucian Values)
It refers to what extent are the people orientated towards the future by saving and being persistent versus being orientated towards the present and the past by respecting tradition and meeting social obligations.
Bethune wanted people to believe in him, that what he is going to do will work. He also wanted people look towards the future of the company as opposed to concentrating on the past, thus he needed for the employees to stop remarking that; many people have tried this and failed. He encouraged people not to waste their energies by concentrating on the past failures of the company and believing that nothing positive and worthwhile can be done.
To combat this negative attitude, Bethune orientated all employees as to the plans he has for the company end the cooperation that is expected from all employees for that plan to work. By so doing he got the employees to think and focus on the long-term success and prosperity of the company, through attitude change, teamwork and hard work.
Need for cultural change:
- Bethune wanted the culture to fit the new organizational structures and strategy
- Examples are revision of the strategy and setting of the new policies and guidelines for the company.
- To meet the needs of employees and customers at large, quality service that was provided to customers of the on time performance.
- To motivate employees and customers and uplift their moral. e.g. incentives were given to employees and free services like food and free nights spending to customers who were late to capture their flight.
- To enhance a more related and casual relations between employees executives and their clients.
- To make employees feel that they are the stakeholders of the company.
Factors focused on in the new culture:
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Improved Services: on time performance where the flight schedules (departure and arrival times) were adhered.
- Organisational targets:
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Teamwork: Bethune boosted teamwork and cooperation in the organisation through offering a certain percentage of the company’s earnings to the employees if they reached a certain level of performance. This worked well as all the different sections in the companies collaborated their efforts in order to adhere to the set standards.
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Communication: Communication efforts were improved through the demolishing of the barriers of communication that were in the organisation. Bethune first started by opening his office doors to all employees so that they could feel free to go to him and communicate what was in their minds. He also got rid of the security checks that were instituted before employees were allowed into the executive offices.
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Motivation of Employees: Continental was motivating its employees by giving out incentives for their performance and the targets that they made in the company.
- Customer satisfaction: customers were always the first priority to the company, quality service was provided to them so as keep good relationship between the company and the clients.
- Cost Effectiveness.
6. Key policies, operating practices for implementing the Go Forward Plan
In Bethune’s view the key to changing Continental’s corporate culture was for management to act differently and for the company as a whole to treat its people differently.
Incentives
Bethune made a decision to pay employees a bonus when they achieve on time performance. The bonus was due to employees only as the management team were entitled to a bonus at the end of the year.
All employees were also entitled to annual leave, the programme to improve benefits also involved increase in vacations, paid holidays, increase in matching contributions to programs and past – service retirement credits for most senior employees.
Financial and Information Systems
Bethune moved to install much stronger financial systems. Continental developed systems that allowed management to have dependable and regularly update estimates of revenues, cost, profits and cash flows. Every morning executives had a report of the previous day’s credit and receipts with the system.
Costs:
Continental made inroads on reducing training and maintenance costs by reducing the number of different types of aircraft making up its fleet. Continental launched a three-year program to bring employees wages and salaries up to industry standards.
Open communication and teamwork:
There was a hot line employees could call for information about pay benefits and their 401(K) programme to keep employees up-to-date on company developments, corporate headquarters distributed a daily update via the company internet and e-mail.
Bethune preached a teamwork among senior executives warning them that he look every dim view of people who engaged in power players, backstabbing or jockeying for position, and of department that failed to work cooperatively with other departments.
Performance target:
Executives got bonuses based partly on Continental’s performance and partly on the achievement of individual’s goals.
Row five tests:
Bethune wanted Continental to add costs only when the expenditure added customer value. He defined success and good performance in customers’ terms as meaning safe clean, reliable service from well-managed hubs, convenient flight to places customers where they wanted to go: amenities that made the travel experience more pleasant and desirable frequent flyer benefits.
Reallocation of resources:
Employee empowerment:
Evaluation of Go Forward Plan
Marketing plan:
- The win to fly market plan concentrated on the company market strengths, to identify the product, all the planes were painted with Continental Lite.
- Continental had made substantially revision in the routes schedule, by cutting back flights that generated losses and focusing on routes of enough passengers’ traffic and flights that enable the company to generate more profits.
- To win back customers, and confidence of travel agents. The company conducted marketing campaign, by apologizing for prior mistakes and establishing high commissions and packages incentives to the travel agents.
- The win to fly plan was focusing on better service and performance. The company was adding cost only when the expenditure added customer value.
- Expansion was particularly aggressive in international markets; Continental had over 2000 flights on going to nearly 90 international and 130 domestic, it expanded also e-ticketing to about 95 percent of its destinations.
Product Plan:
- On time performance was the single most important determinant of customer satisfaction, therefore the company at improving in Continental’s on time performance, baggage handling, and overall flying experience, bonus for achieving good on-time performance paid to employees.
- To upgrade the reservation system, Continental has introduced automated software by which flight status and other standard questions had to be answered directly. Phones were installed in most of Continental’s planes by the end of 1997.
People Plan:
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Open Communications and Teamwork: treating the lower level workers as the change agents in the turn around process. The improvement of the communication system between the managers and lower level workers helped developing good corporate culture.
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Employee motivation: to build trust, and to keep employees moral high the company rewards people by paying bonuses for good performance, and attendance.
Financial Plan:
- Refinancing some of Continental’s debt at lower interest rates (saving about $25 million in annual interest payments), and postponed some of the debt repayment and raising fares on certain routes.
- Cash flows were further improved by the efforts of selling excess part of inventories and renegotiating maintenance contracts improved cash flows.
- Continental had introduced new financial systems to generate better information for decision-making. This enabled executives to become more accurate and with updated estimates of revenues, costs, profits and cash flows.
- Continental hedged its jet-fuel purchases against unexpected increases in fuel costs and saved an estimated of $3 million as fuel prices rose.
- By reducing the type of different aircrafts, Continental had reduced its training and maintenance costs.
The above product and marketing plan helped Continental in building customer confidence in the airline and winning back customers who was disappointed by the services given before Bethune and become top airline company in customer satisfaction
Continental also structured individual efforts into teams and work groups in order to facilitate an exchange of ideas and foster a climate of support. They allow employees to participate in making decisions about how to perform their jobs, and they try to make jobs interesting and satisfying. While financial incentives (salary increased, performance bonuses, stock bonuses, retirement packages etc.) are the core component of Continental to empower employees, it is recommended for Continental also to make extensive use of no monetary incentives as jobs promotion, opportunities to transfer to attractive locations.
The financial plan helped Continental in securing positive cash flow and developing effective financial information system that helped in decision making. Continental needs also to strengthen its international and domestic alliances to be able to pay its loans within short time.
From the above “go forward plan” the strategy was in solving the problem from its root not quick fix or band-aid. It starts from building employee morale to winning back customers from other competitors.
Broad differentiation: Bowman’s clock
Continental is also following broad differentiations strategy, trying to differentiate the services from the rivals by offering value added services to customers charging to medium to high prices.
The strategy clock= Bowman’s Strategy option
High
Perceived
Value added
Low
Low price medium price high price
In many cases company efforts to achieve differentiation usually raise costs. The trick to profitable differentiation is either to keep the costs of achieving differentiation below the price premium the differentiation attributes can command in the marketplace (thus increasing the profit margin per unit sold) or to offset thinner profit margins with enough added volume to increase total profits. It is recommended for Continental airlines to incorporate extra differentiation features that are not costly but add to buyer satisfaction.
Outside- in strategy (stretch strategy): Continental was also following the outside-in strategy. The strategy concentrates on providing what the customers need, thus they produce and supply according to the demand of the market. Bethune was open for all ideas of both employees and customers to hear their views and what they wanted, and this lead to improved services and customer care.
8. Implementation and execution of the Go Forward Plan
Continental Airlines Financial & Operating Performance
The implementation and execution of the Go Forward Plan for Continental Airlines can easily be explained by the financial and operating performance as follows:
a) Financial Performance
1995-2000
- Operating revenues increased from $5.8 billion in 1995 to $9.9 billion in 2000, with a CAGR of 11.2%.
- Operating income has increased from a 385 million in 1995 to $684 million in 2000, with a CAGR of 12.2%.
- Net-Income rose from a loss of $39 million in 1995 to $342 million in 2000 with a CAGR of 8.8%.
- Earning per share (diluted) jumped from $3.37 in 1995 to $5.45 per share, with a CAGR of 10.1%.
- Revenue passengers increased from its lowest 37,575 (thousands) in 1995 to 46,896 (thousands) in 2000, with a CAGR of 4.5%.
- Operating Expenses rose from $5.4 billion in 1995 to $9.2 billion in 2000,with a CAGR of 11.1%, and comparative operating expenses where 8.67c and 10.2c per average seat mile respectively.
The above data reveals that, the since the time Gordon Bethune came to Continental Airlines in 1994, the company’s financial position and its operations have improved and it has emerged form the second bankruptcy proceedings in April 1993.
2000 –2001
Table 1 Key Ratios
The above diagram shows us that how Continental Airlines performed financially in the year 2000 and the three quarters of 2001 up to September 30, 2001. The key ratios interpretation can be presented as follows (based on the data provided in Exhibits 1, 2&3):
Profitability Ratios:
- The profit margin of the company has declined in September 30, 2001 due to higher costs it incurred during the terrorist attack and there after.
- The assets of the company didn’t yield sufficient profit during September as compared to the previous year.
- The return from stockholders equity has dropped by 25.2 points in September 30, 2001 when compared to the year before.
- Earning per share has fallen from $ 2.21 per share to $ 0.05 per share in September 2001, when compared with the same period in 2000. (See table 2)
In general the profitability of Continental Airlines has declined and was in danger during and after the 9/11 attack as compared to the year 2000.
Liquidity Ratios:
- The current ratio is showing us that the company’s current assets as compared to current liabilities were insufficient to cover the short-term obligations. Even in the previous six months of 2001, the liquidity of the company was in question. Thus, the company’s liquidity at the end of September 2001 was weak.
Leverage Ratio:
- The leverage ratio-the debt to asset ratio is showing us that a total of 37% debt in 2000 and 42% in September 30, 2001 of the respective total assets was borrowed to finance the firm’s operations. Hence the company was relying heavily in debt financing and the increase in 5 points between the period shows that the debt burden has increased.
- The debt to equity ratio is indicating that the company is using more borrowed funds from creditors than the funds provided by the owners of the company. This implies the company was heavily relying on external sources of fund (borrowed fund) to finance its operations during the time of the crisis (meaning the debt burden was heavy).
Activity Ratio
- The activity ratio- the total asset turnover ratio is indicating the company had a ratio below the industry average in September 30, 2001, which means the company, was generating a low volume of revenue when we compare it with the total assets of the company.
b) Operating Performance
The operating performance of Continental Airlines before 2000 was improving at an increasing rate from year to year. However as the operating statistics in table 3 shows, it declined surprisingly in the year 2001- e.g. Revenue passengers declined by 5.7%, passenger load factor declined by 2.8% in 2001 etc. when compared with that of 2000. (For details refer table 4)
In conclusion the financial & operating performance of Continental Airlines has dropped from its satisfactory position in 2000 and the previous years, to its lowest level in September 30, 2001. This weak position in 2001 could be blamed to the sluggish US and world economy and the terrorist attack in USA, during September 11, 2001.
9. Evaluation of the Turnaround Strategy, “is it fragile or not?”
Immediately after the 9/11, Gordon Bethune announced that the company would reduce its long-term flight schedule by about 20%. He also announced that the company would furlough about 20% of its workforce. These are the steps taken by almost all airlines in the US. Some companies like Southwest didn’t cut their workforce because of their no layoff policy. Some others like the US Airways where both the pilot and flight attendants were unionised were unable to furlough because there was no furlough clause in their contracts.
In order to contain costs and detour the need for planes to accommodate prior flight schedules, many airlines responded with immediate announcements of schedule cutbacks.
Our financial analysis above shows that the net income of Continental was improving year after year at an increasing rate until 2000. It slowed down in the year 2000, which is attributable to the sluggish, US and world economies. Other indicators like revenue passengers and passenger load factor have shown incremental growth until 9/11. This was all a result of the turnaround strategy.
Following our analysis, we can say that the action of Gordon was the right decision and we are not surprised. They are the actions taken by most airlines. The crisis is not a result of bad strategy or lack of execution. The causes of the crisis are external factors such as the sluggish US and world economy, and the terrorist attack. This resulted in a sudden downturn in passenger traffic. This in turn caused massive losses for the company. The above given facts justify that the turnaround strategy was not based on a shaky ground.
The US airlines industry was in a big crisis following the 9/11 attack as passengers lost confidence. To recover from such a crisis and build confidence, the different airlines followed different strategies that match their specific company situations. Southwest, despite the schedule cutbacks in the three days immediately after the attack, was able to recover its full schedule by September 17,2001. It elected to make no cutbacks of any kind. It is a matter of policy. Initially the company was following the focused low-cost strategy, while Continental was following broad differentiation strategy. Before the 9/11 crises, the only two American airlines making a profit were Southwest and Continental. The former still continues to be profitable, although by a narrow margin and the latter is the one that loss the least out of all the large airlines.
Being heavily burdened by debt, continental’s strategy may not fully sustain the crisis. As discussed below, additional adjustments are necessary to make it sustainable.
10. Developments after September 11
Even though September 11 was a dark day for the Americans and the airline industry, conditions that followed the attack need special attention. Following are some of the important issues worth mentioning:
Employee Morale
- Employees were well informed before hand about the furlough when Continental decided a 20% capacity reduction, which resulted in the elimination of the 12,000 positions.
- Since the company also assured all employees that it would honour all the severance provisions of all contracts and provided similar benefits for all non-contract employees, their morale wasn’t negatively affected.
- Several programs to find volunteers and to avoid as many involuntary furloughs were implemented.
- A significant amount was invested into treating employees with dignity and respect.
- Continental also remained committed to industry standard wages and benefits even after the attack.
- The company didn’t even cut it’s workers pay after September 11, because management believed the way to keep the best team is to have every one who works on the team work at full pay.
- In 2001, continental celebrated its sixth year of sharing the profits with its employees. It has paid more than $ 545 million -over one half billion dollars in profit sharing to employees since 1995.
The above points show us that the company has managed to keep the dignity and morale of its employees at the same position it was before the 9/11 attacks, and this has really helped the company to perform better in the coming periods.
Job Security
- Even though Continental Airlines was forced to reduce its workforce due to the attack of 9/11, employees were assured that they were going to be reinstated to their jobs when the company has adjusted its positions. That’s why the company found more than 4000 volunteers for the furlough at the beginning of the elimination period and have subsequently reinstated about 6,000 of the eliminated positions.
Prevention of Cash Drain
- Bethune called upon the federal government to enact a major assistance package to help the airline industry cope with the sudden downturn in passenger traffic and the added costs of FAA-mandated airport security regulations. As a result Continental received $ 212.6 million in cash and expected to receive an additional $212 million cash infusion before the end of 2001.
- Four days after the attack Continental decided to reduce its long-term flights by 20% and to furlough 12,000 of employees in order to save costs.
- On September 17,2001 the company announced that it would not make $70 million in debt payments due that date in order to prevent any cash drain.
- Continental officials also indicated that a bankruptcy filing was one of the options being considered to cope with its anticipated cash crunch.
Continental Airlines
Both the company and the industry are in the decline stage of the industry’s product life cycle. It is our opinion that continental airlines need a surgeon as well as an entrepreneur in order to stay afloat. Although an entrepreneur is usually used at the start up stage of the business, we feel that he can also be of great use in this stage as he can come up with new and fresh ideas into the company.
11. Adjustments/ Changes necessary on the Go Forward Plan
Marketing Plan:
- Gordon Bethune can start by doing away with the bonuses and other incentives they offered the travel agencies for recruiting clients for them.
- Another alteration will be the reduction in the percentage of the discounts that were being offered to first class travellers when travelling in certain numbers.
- They could also reduce the number international flights and increase the number of destinations locally within the United States.
Product Plan:
- Continental management should consider providing a no-frills product, thus they should do away with the provision of free drinks and the catering services. Although these were incorporated in the airfare, it has an advantage that the price of the tickets will be reduced and thus a possibility of an increase in the number of clientele’.
- They should again communicate with management and all the employees and urge them to support the idea of bonus-cut offs for the time while the company is in crisis until it can be able to offer the incentives again. It should be indicated that by so doing the company will be saving costs and therefore generating more income for other agent operations.
- Due to the security measure that have to adapted after 9/11, they can change their check-in time to an earlier slot so that they can still be able to adhere to their policy of on time departures and arrivals.
Working Together Plan:
- It is recommended that they find the means and ways of enhancing and keeping this plan in operation as it is now very critical due to the changes that the company is being forced to take.
Financial Plan:
- It is suggested that they reduce benefits such as the number of leave days that each employee is entitled to in order to save on company costs.
12. Strategy -Related and Implementation/Execution related Actions
A firm in an also-ran or declining competitive position has the following strategic options:
The company can launch an Offensive Turnaround strategy keyed either on low-cost as a competitive advantage. Continental airlines can cut their costs by reducing the number of product frills attached to their services.
Another alternative is that a company in this situation can embark on fortify and defend strategy. In this case this second option is not applicable in other words it not advisable for continental to engage in this strategy as it needs to fight offensively and challenge its competitors in order to survive the present crisis.
Turnaround strategies are needed when a business goes into worth rescuing goes into a crisis, the objective is to arrest and reverse the sources of competitive and financial weaknesses as quickly as possible.
Management’s first task in formulating a suitable turnaround strategy is to diagnose what lies at the root of the poor performance. In the case of Continental Airlines, the weakness was brought by the weak economy due to the 9/11 terrorist attacks on the twin towers and the Pentagon. For continental airlines to be successful in tailoring a strategy that will fit both the Airline industry and the current situation of the company, the following actions should be taken:
Selling of Assets:
Asset reduction strategies are essential when cash flow is a critical consideration and when the most practical ways to generate cash are through reduction of the workforce. Continental airlines are already doing this as it has already started on the retrenchment avenues. Although this is a necessary thing to do, it has to be made as humane as possible.
Strategy Revision:
The Company can overhaul internal operations and functional areas strategies to better support the same overall business strategy; merging with another firm in the industry and forging a new strategy keyed to the newly merged firm’s strength, thus making strategic alliance with other firms.
Boosting Revenue:
There are number of revenue-building options a company can employ with reference to Continental their best options is to cut price increase in promotion and added customer services and they can quickly achieve product improvements.
Cutting costs
Combination of efforts.
13. Strategy execution and implementation related actions
Implementing and executing strategy entails converting the organisation’s strategic plan into action and then into results
The steps in implementing a strategy are:
Building a capable organization:
Thus a top priority in strategy execution. For Continental Airlines the two components of the first step are already implemented fully. Thus staffing and core competences.
Another component is matching structure with the strategy, the strategy that the company will adhere in order to gain its market share in the industry has to match and fit in the structure therefore the implemented structure has to go together with the implemented strategies of the company.
Linking Budgets to strategy:
Implementing and executing strategy forces managers to consider how the firm’s resources are being implemented and allocated, for the strategy to be successfully implemented the critical activities to be in the operations that should be given a budgeting priority are on time performance and adverting also the customer relations as are the ones that are most important for the success of the strategy.
Creating Strategy – supportive policies and procedures:
Changes in strategy generally call for some changes in work practices and internal operations. Continental has to change their policies and procedures if they are going to cut their costs. The first policy to be looked at is the one’s that regulates bonuses and other incentives.
BIBLIOGRAPH
Arthur A. Thompson, Jr. and A.J. Strickland III, Startegic Management, Concepts and Cases,
13th ed., McGraw – Hill, 2003
. Marketing teacher.com/L
Veronique Ambrosini,1998
