LUFTHANSA CASEFlinders

International Business Policy and Strategy

Case Study Analysis

Lufthansa 2000: Maintaining the Change Momentum

Author:

Christian Gerlach (9905388)

June 2004

Table of Contents

Executive Summary                                                                        3

1.0         Introduction                                                                                 4

2.0         Lufthansa - A company overview                           5

3.0         Porter's Five Forces                                                               6                  3.1         Threat of new entrants                                                      7

3.2                  Bargaining power of suppliers                                             8

3.3         Bargaining power of buyers                                             9

3.4         Threat of substitute products                                             10

3.5         Rivalry among competing firms                                             12

4.0         SWOT Analysis of Lufthansa                                                      13

        4.1         Strengths                                                                        13

        4.2         Weaknesses                                                                        16

        4.3         Opportunities                                                                        17

        4.4         Threats                                                                        18

5.0         TOWS Analysis for Lufthansa                                                      21         

6.0         Business-level strategy of Lufthansa                                             24

7.0         Corporate-level strategy of Lufthansa                                             25

8.0         Strategic Alliances                                                                        26

9.0         Strategic Leadership and German Culture                                    39

10.0         Evolutionary Patterns of Strategy and Structure                           33

11.0         Conclusion                                                                                 36

12.0         Appendices                                                                                 37

13.0         References                                                                                 39

Executive Summary

In 1991 Lufthansa airlines was almost bankrupt. In 1999 the company already announced record results in its 70-year history, helped to found the Star Alliance, the industry's largest network, and is now looking to become one of the leading airlines in the world.

An impressive strategic leadership und human resource management played an important role in the transformation and in the process of strategic renewal. The implementation of an integrated cost leadership/differentiation strategy and a related diversification corporate-level strategy also contributed to Lufthansa's success.

Having had major involvement in the creation of the Star Alliance also played an important role in Lufthansa's transformation into a successful company that operates in a quite difficult industry environment. Right now, Lufthansa's future looks bright, but they should try to keep the change momentum alive and possibly apply a few new strategies such as enter the low-fare market in Europe, exploit business opportunities in non-airline related market segments, focus on improving in-flight entertainment and customer service, offer Lear jets for lease and improve their hedging against fluctuations in the areas of exchange rates, interest rates and fuel prices.

1.0         Introduction

This report will take a closer look at the turnaround of Lufthansa airlines which went from near bankruptcy in 1991 to a now profitable airline. The evolutionary patterns of strategy and structure are identified in this report as well as how strategic leadership and German culture contributed to the turnaround. Furthermore, this paper will analyse the airline industry in terms of Porters five forces and will also take an extensive look at Lufthansa's current situation by means of a SWOT and TOWS analysis. Additionally, Lufthansa's business-level and corporate-level strategy will be identified and the Star Alliance, the world's most important airline alliance, will be discussed in detail.

2.0         Lufthansa - A company overview

The Lufthansa Aviation Group is considered to be one of the world's leading air transport corporations. It includes a number of independent group and affiliated companies with business segments in passenger airlines, logistics, aircraft maintenance, catering, tourism and IT services. Lufthansa's headquarter is located in Cologne, Germany and its operational centre for passenger and cargo services is situated in Frankfurt (Key data on environmental care and sustainability at Lufthansa 2002/2003).

Lufthansa is 78 years old and has currently about 93,000 employees worldwide and in 2003-reported revenue of about 16 billion Euros (Lufthansa - Key Figures 2003- see also Appendix I).

In terms of traffic performance, Lufthansa is in third position in worldwide passenger transport. For many years the company has also been the market leader in international cargo traffic. In 2002, Lufthansa's 368 aircrafts operated on routes to 327 destinations, carrying 50.9 million passengers and 1.63 million tons of airfreight. Lufthansa was also one of the founding members of the Star Alliance in 1997, when 16 partners joined into the world's largest airline alliance (Key data on environmental care and sustainability at Lufthansa 2002/2003).

3.0         Porter's Five Forces

Structural analysis of an industry is a useful way of determining a company's long-term profitability. Comprehending the dynamics of the competitive forces in an industry can give an insight whether an industry is attractive and whether there are any chances for returns on capital. Michael Porter, a professor at Harvard Business School, created a framework for understanding the structure of an industry. According to Porter, the five competitive forces that can have an impact on an industry are threat of new entrants, bargaining power of suppliers, bargaining powers of buyers, competitive rivalry, as well as the threat of substitutes (Analysis of industries 2003).

3.1         Threat of new entrants

The threat of new entrants offers the possibility that new firms are going to enter the industry, which will consequently lead to a reduction of industry returns by generally passing more value to consumers in terms of lower prices and also increasing the cost of competition. Factors like economies of scale, capital requirements, product differentiation, access to distribution channels, switching costs as well as brand value determine the threat of entry (Analysis of industries 2003).

From my point of view it currently seems very difficult to enter the airline industry as this area of business as well as the world economy is facing a period of recession. Due to large product differentiation the entry barriers are fairly high. There is a range of flag carriers, charter airlines as well as a number of low-fare airlines in the industry. All these different types of airlines offer an extensive range of products that seem to satisfy most customers needs. Additionally, entering the aviation industry requires very high capital investments because aircrafts, technical support and IT services need to be purchased or leased. This industry is also very labour and fuel intensive which requires a lot of funds. Companies with an interest in entering the market also require access to distribution channels. This means that it is necessary to gain trust within the industry so as to get access to take-off and landing spots. This can be quite challenging as national policies still play a major role in the aviation industry. Furthermore it is a requirement to obtain permission from governments to enter airspace. Moreover once the market is entered, it is very difficult to exit which raises switching costs to a high level. Throughout the last decade the market opened due to the deregulation policy, which provided low budget airlines with an opportunity to enter the industry. The first entrants like Ryanair and Easyjet utilized this opportunity and developed strong brand names due to their first-mover advantage. Airlines that recently entered the market that have a similar price and cost structure generally find it more difficult to generate the traffic that is required to fill the seats in their aircrafts (Jacob & Jakesova 2003).

All in all it can be said that the threat of new entrants is not that high in the airline industry in the current business environment.

3.2         Bargaining power of suppliers

Factors that are connected with the bargaining power of suppliers include the threat of forward integration as well as the concentration of suppliers in the industry. Supplier power decreases the ability for competitors in the industry to earn higher profits (Wheelen & Hunger 2000, p. 64).

The main suppliers within the airline industry are the manufacturers of aircrafts like Airbus and Boeing, fuel suppliers such as Shell, British Petroleum and Chevron Texaco. Furthermore there are technical support and IT services as well as the catering services. Suppliers are very concentrated in the airline industry as Boeing and Airbus supply most commercial fixed-wing aircrafts. The concentration of suppliers makes it difficult for the airlines to exercise leverage over the two manufacturers and negotiate lower prices or play one supplier against the other. Moreover, at the current stage, aircrafts for long distance travel cannot be substituted by any other product, which strengthens the bargaining power of the suppliers even more. Fuel providers have an excellent bargaining position as they can increase fuel prices without regarding the airlines as an important customer group. Forward integration, which is the expansion of a business' products or services to related areas in order to directly satisfy the customer needs, is fairly low. The reason for this is that it can be assumed that neither aircraft manufactures, fuel providers nor technical support companies will purchase an airline and staff it with flight attendants, commercial pilots, a maintenance crew and operate flights across the world (Jacob & Jaksova 2003). Nevertheless, the strong position fuel suppliers as well as the relatively strong position of manufacturers of aircrafts need to be taken into account when operating an airline.

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3.3         Bargaining power of buyers

Buyers can have significant power, as they are able to push down prices, and negotiate for better quality and service. Buyer power is determined by relative volume of purchase, switching cost, standardization of the product, brand identity, elasticity of demand as well as quality of service (Del Vecchio 2000). Since customers are not very concentrated and generally don't purchase plane tickets in large volumes they do not have a strong bargaining position. A single purchase of an airline ticket does not represent a significant fraction of the amount offered. Switching costs are quite low as ...

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