Competitive Advantage, Organisational Culture and Lufthansa’s Financial Issues

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Introduction

Competitive advantage is a topic that is discussed frequently in all business fields. Moreover, the subject of organisational culture has been becoming more prominent, and the association between the two concepts warrants consideration. According to Heshmati and Kim (2016), the latter directly affects the former, particularly for airlines, which mostly offer similar products because they are limited to the same suppliers in many aspects. As such, organisational culture is essential in continued airline performance, as this essay will demonstrate using the example of Lufthansa. Despite its size, the airline has been reporting poor financial results both in 2011 (Morrell, 2018) and 2019 (Lufthansa Group, 2020). These results are indicative of continued low competitiveness, which this essay will link with its misaligned organisational culture commitment.

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Discussion

Comparative and Competitive Advantage in Business

Competitive advantage is, on the surface, a simple and intuitive concept. Yalcintas (2019) defines it as the ability to perform some task in a manner that is superior to that of the competition. By demonstrating an advantage in some aspects of performance, the company can attract customers who value this aspect, increasing its revenue. Alternatively, by operating more efficiently than others, the business can guarantee that its profits are higher. Generally, companies will attempt to secure a competitive advantage while also achieving parity or superiority in aspects where they are inferior to the competition. Kumar (2016) describes competitive advantage that other companies cannot match as sustainable, providing the example of Southwest Airlines and its consistently high profits. Sustainable advantage is highly desirable because it secures the company’s position in the market.

The concept of competitive advantage is broad and loosely defined, and several theories have been developed to create a more specific definition. Mishra (2017) highlights the resource theory and Porter’s positioning theory as two approaches that have been discussed in detail throughout the recent past. The former considers strategic resources to be the principal source of competitive advantage and encourages firms to seek valuable and inimitable resources. Meanwhile, Porter’s model focuses on positioning, asserting that firms set goals that correspond to one of four generic strategies and obtain an advantage through implementing these methods successfully. The lead is sustainable because positioning can be challenging to copy, as Flouris and Oswald (2016) demonstrate using the example of Continental trying and failing to imitate Southwest. As such, both theories explain competitive advantage, though they fail to consider each other’s critical aspects.

The Importance of Competitive Advantage

Competitive advantage is the goal of most initiatives in which companies participate. They either attempt to secure it or eliminate the advantages that other businesses in the field have over them. Saurabh (2019) claims that competitive advantage leads the company to improve its financial and market performance. Increased revenues and profits as a result of more attractive products or improved operational efficiency would be highly beneficial for the business and warrant consideration. Moreover, Ghosh (2016) supports the claim by declaring that a competitive advantage is necessary for companies to increase their market share. Customers are generally looking for the best available offer, which leads them to consider numerous possible benefits and drawbacks. In terms of competitive advantage, Lufthansa is the quintessential legacy carrier, providing excellent service while also emphasizing safety (Oqubay and Tesfachew, 2019) at the expense of higher prices.

With that said, growth is not the only reason why a company would seek to create and sustain a favourable position. Labrouche and Kechidi (2016) state that the durability of a firm’s competitive advantage is directly associated with its resilience. A market-leading firm, such as Southwest Airlines that was mentioned above, has created and maintained a powerful reputation of excellence that has enabled it to succeed throughout periods of difficulty. Meanwhile, Continental Airlines no longer exists as a separate entity, possibly because it failed to create an advantage. Its functions were supplanted by other airlines, and it could not continue operating because it was unnecessary. Parniangtong (2017) suggests that to remain successful in the long term, a firm has to be irreplaceable, with no other businesses being able to imitate its value creation or offer a superior alternative. Another advantage of Lufthansa is its size, which enables it to serve numerous locations and leverage its loyalty system.

Organisational Culture

Organisational, or corporate, culture is a factor that is often strongly associated with competitive advantages, but it is another concept that is usually defined loosely. Bremner (2017) identifies a fundamental difference in approaches to viewing and altering it: prescriptive, where cultures define companies, and descriptive, where organisations choose to implement specific cultures. The first approach implies that cultural values that lead to success can be replicated. In the second, culture is generated as a result of the company’s achievements and is less relevant. This paper will employ the prescriptive approach and evaluate frameworks that lead to success. Otelea (2018) provides a definition by Schein that consists of conduct and team rules, dominant values, policy philosophy, efficient operation rules and spirit and climate but also suggests several alternatives. The discussion of all of these factors in this paper would take excessive space, and it will focus on ones that are relevant to the context.

Upon initial inspection, Lufthansa appears to be a company with a robust and excellent organisational culture. Schein and Schein (2016) list it as an example of a company whose culture “has, on one hand, contributed to their success and, on the other hand, placed them in a strong position” by enabling it to evolve to match market needs, securing employee commitment and improving their performance (p. 314). Its organisational culture has made it one of the world’s largest airlines that has remained stable and prosperous throughout the evolution of the airline industry. Kaushal and Sharma (2016) provide information about Lufthansa’s commitments to corporate social responsibility through transparent practices and social aid programs such as education for street children, a topic that has been gaining prominence recently. Hitt et al. (2008) detail the recent transition of the company’s culture from one focused on its German identity to a framework that discusses each employee individually and enables them to set goals for themselves. Bergman and Sokol (2015) also highlight the adaptability of the company’s culture, which enables it to incorporate new values when necessary.

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Safety Performance Measurement

Safety performance is the quantification of the overall safety of an airline’s flights. It is usually expressed through specific indicators, such as the number of accidents that have happened on an airline’s flights and their consequences. Brauer (2016) identifies two practices in safety management: reactive analysis, which responds to significant events, and proactive performance evaluations that incorporate continuous monitoring. Both of these methods rely heavily on data, which they process to determine the causes of issues and see whether performance has improved. Torres (2016) supplies examples of indicators that are specific to aviation, such as engine debris ingestion, and notes that goals can be both short and long-term. Combinations of these measurements constitute the airline’s overall safety measurement framework.

Lufthansa is renowned for its excellent safety record, with significant incidents rarely occurring on its flights. Oqubay and Tesfachew (2019) identify it as one of the world’s leaders in benchmarking and safety, one that other airlines try to imitate. Moreover, per Whyte and Lohmann (2016), the airline offers safety management services to other companies in the field, helping them improve and achieve superior standards. As such, it serves as an example, and often direct inspiration, for aviation provides in terms of its safety. This success in improving an essential characteristic is at least partially related to Lufthansa’s organisational culture and commitment to safety.

Organisational Culture and Safety Performance

Workers at all levels of the airline are responsible for the safety of its operations, and a permeating attitude regarding its improvement is necessary to achieve significant results. Cudney (2018) makes a similar claim, safety improvement strategies should be driven down from the top. This conception is particularly relevant for companies that strive to attain a superior standard in their measurements. A definition used by Lutchman et al. (2016) of world-class safety systems incorporates the personnel holding the characteristic as a core value, considering themselves responsible for the safety of those around them and being ready to take corresponding actions. Without widespread and powerful commitment, it is not possible to achieve the same results as the leading businesses.

Lufthansa’s approach appears to match this definition, as the company has achieved its excellent safety record through dedication and continued effort. In an incident mentioned by Orlady and Orlady (2017), the Chairman and CEO of Lufthansa named safety as the foremost priority of the airline. Orlady and Orlady (2017) claim that the airline convinces its workers to work on safety by prioritising it above profits in evaluations of worker performance. With that said, Bartsch (2016) provides the example of an excessive focus on safety for Lufthansa where it forced pilots to retire at 60 instead of the national and EU standard of 65. It is essential to guarantee security, but the usage of unrealistic standards does not necessarily lead to its improvement.

Operational Performance Measurement

Operational performance is a critical aspect of success for most businesses, including airlines. Samunderu (2020) suggests that the airline industry has a unique set of measurement criteria because of their homogeneous production process and describes the main categories as measures of productivity and technical change. One important metric is the revenue passenger kilometre, which is the total distance flown by paying passengers. It can be used to determine the airline’s popularity and compare it to past statistics and projections. Rapajic (2016) also highlights the importance of considering disruptions and measuring the company’s success in addressing them. The airline’s response to disturbances can serve as a demonstration of the robustness of its operational framework, which does not necessarily manifest in normal operations.

Lufthansa expresses a commitment to measuring and improving its operational performance, at least in some aspects. Rapajic (2016) mentions its past struggles with efficiency, with poor punctuality that resulted from its strained relationship with the newly independent Lufthansa Technik. However, Brenner and Coners (2010) praise the robust operational processes of Lufthansa that enable it to integrate newly acquired airlines efficiently. According to Wu (2016), the airline is continuously looking for approaches that can help it gather additional data and evaluate its efficiency, such as the collection of turnaround data. Fröhlich et al. (2016) consider a case where the company introduced the same flight as its Star Alliance partner Singapore Airlines despite the likelihood that such actions reduce the businesses’ investment in the joint venture.

Organisational Culture and Operational Performance

Operational performance is the non-financial effectiveness of its operations, expressed in values such as turnover times and fuel consumption per passenger-mile. However, evidence regarding the effects of organisational culture on operational performance is frequently contradictory. Holloway (2017) notes that while theoretical considerations support the relationship, the research is inconclusive, partly because many airlines do not monitor their cultures. In a broader context of business in general, Kassem and Ajmal (2019) find a short- and long-term association between organisational culture and operational performance. It is likely possible to extend this assertion to airlines, as they are not distinct enough from most other businesses to warrant special consideration. However, the specifics of the industry still warrant some caution when discussing culture and operational performance.

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Lufthansa’s culture is not necessarily focused on the same objectives as those of low-cost carriers such as Southwest or United. Nedopil et al. (2010) claim that it focuses on “engineering excellence and maintaining standards,” sometimes to the detriment of alliance initiatives that would be less well-designed (p. 69). Improvements in operational efficiency are not necessarily prioritised, particularly compared to safety. Brenner and Coners (2010) attribute Lufthansa’s successes in integration to the company’s focus on innovation, both in passenger-related services and internal operations. Lufthansa also participates in maintenance resource management research and uses the results to improve its practices (Patankar, 2019). Additionally, Useem and Kunreuther (2018) discuss the company’s robust approach to crisis management that results from the management’s policies of supplying accurate information and direct managerial ties to numerous parties.

Financial Performance Measurement

Financial performance is the expression of the business’s overall success in the market, expressed as its revenue, profit, and other money-related indicators. It reflects the company’s current assets, and, per Needles et al. (2016), shareholders, as well as both existing and potential lenders, review their clients’ financial and nonfinancial statistics carefully. Their goal is to determine whether the business’s prospects justify the continued investment or a loan, which can affect the company substantially. According to Günther (2019), three primary financial measurement indicators can be distinguished for airlines: “(1) earnings before interest, taxes, depreciation and amortisation (EBITDA) margin, (2) earnings before interest and taxes (EBIT) margin, and (3) average annual revenue growth (AARG)” (p. 50).

Lufthansa’s recent financial performance has likely not been satisfactory for its shareholders and creditors. Lufthansa Group (2020) reports a 6% yearly decline in adjusted EBITDA and a 29% drop in adjusted EBIT (38% non-adjusted), though its revenue grew by 2% between 2018 and 2019. The airline attributes these figures to slowing economic growth, the depreciation of the euro, volatile fuel prices, a decline in the airfreight market, and a variety of other factors. The situation is particularly problematic because, as Charifzadeh and Taschner (2017) indicate, Lufthansa operates with a negative net working capital, relying on loans from its suppliers that it repays later. A loss of trust can be catastrophic for the firm, though its size will likely convince most providers to retain the partnerships.

Organisational Culture and Financial Performance

Organisational culture has a substantial effect on financial performance, partly through its influence on other aspects of success. Kasemsap (2016) identifies it as a vital requirement for organisational excellence, claiming that it controls the alignment of workers with company goals. Samson et al. (2017) confirm that the same consideration applies to airlines, using the example of Virgin Australia. It came into a field that was dominated by Qantas and took over a substantial portion of the market with its culture-enabled improvements to productivity and customer service. Its different approach to treating employees has led to fewer union concerns and improved employee satisfaction, driving success.

As discussed above and by Orlady and Orlady (2017), Lufthansa’s culture is not necessarily strongly oriented toward financial performance. Hang et al. (2017) indicate that the airline proclaims financial strategy to be a central factor for all planning and decision-making. Taneja (2016) names Lufthansa as a company with a brand that is renowned for its excellent and innovative customer care. However, the disputes with its staff that are mentioned by Bartsch (2016) imply a culture that may not devote adequate attention to other aspects of performance. Lufthansa is willing to take financial losses to retain its position as a carrier with world-class safety, and therefore, its financial performance may not necessarily be consistently excellent.

Organisational Culture and Competitive Advantage

Due to the combination of the factors mentioned above, organisational culture is an essential factor in securing a competitive advantage. According to Lynch (2018), the business environment is continuously evolving, and businesses must adapt dynamically, for which purpose a culture that encourages innovation is vital. Otherwise, other firms will implement developments that enable them to secure an advantage over the current leader and eventually take their position. Lufthansa has formed a culture where safety is more important than operational and financial performance, creating some competitive advantage and supplementing it with practices that reduce competition (Seristö & Kleymann, 2017). As a result, when competition increases or other factors start affecting the market, Lufthansa’s financial results can become unstable.

Conclusion

Lufthansa, an airline with outstanding safety performance and customer service but lacking operational and financial standards as well as weakly articulated organisational culture, serves as an example of the dangers of a weak competitive advantage. Organisational culture is a critical determinant of sustained success in safety, operations and financial management as well as an overall competitive advantage. It motivates employees to continuously innovate to match market developments or surpass them, which leads to parity or superiority when compared with the average. While it is possible to achieve this excellence in the short term without a powerful cultural commitment, it will not be comprehensive or sustained. Lufthansa’s success as one of the world’s largest carriers is predicated on anticompetitive practices and acquisitions enabled by its resources amassed before deregulation. As a result, nowadays, it struggles to match the competition, which has led its performance to decline.

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BusinessEssay. "Competitive Advantage, Organisational Culture and Lufthansa’s Financial Issues." January 12, 2022. https://business-essay.com/competitive-advantage-organisational-culture-and-lufthansas-financial-issues/.