Lufthansa: Going Global and Managing Complexity

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Describe the type of international strategy the company has chosen

The type of international strategy that Lufthansa has chosen is the cooperative strategy. As defined by Hitt, Ireland, and Hoskisson (2009), a cooperative strategy is “a strategy in which firms work together to achieve a shared objective” (p. 246). This means that companies unite to provide their customers with the values that neither of them can provide while working alone. In other words, the joint, or cooperative, the value of two or more companies is obviously larger than the values of those companies apart. Further on, the cooperative strategy presents the companies that cooperate with competitive advantages over those firms that function alone (Hitt, Ireland, and Hoskisson, 2009, pp. 246 – 247).

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Thus, using the cooperative international strategy, companies unite into alliances and work to achieve their joint goals (Hitt, Ireland, and Hoskisson, 2009, pp. 246 – 247). The examples of such alliances are numerous, and Lufthansa takes part in one of them. This union is called Star Alliance, in which, apart from Lufthansa, there are United Airlines and a number of other companies. The Star Alliance is a union of commercial airlines that operate around the world and share the profit of the whole alliance among all its members (Hitt, Ireland, and Hoskisson, 2009, pp. 60 – 61). Thus, a cooperative strategy is a powerful tool of business development, which is especially useful for small companies that would not have developmental opportunities if they functioned alone.

Explain what means the company has used to expand internationally

Nowadays, Lufthansa is one of the largest commercial airlines in the world. It offers its services in more than 100 countries and employs people from 155 countries (Lufthansa, 2010). Needless to say, to expand internationally to such an extent and to maintain its growth in various markets the company uses the above described cooperative strategy in combination with its own Group Strategy that is based on six major elements including strengthening the foundations for profitable growth, value, profitability, growth, focus on core competencies, and financial strengths (Lufthansa, 2010). This strategy allows Lufthansa to expand internationally and to establish new relations with newly emerging airlines, as well as with the highly developed ones that join the Star Alliance.

In particular, to expand internationally Lufthansa takes steps that range from integrating the efforts of its business segments, like Lufthansa Technik, and introducing the idea of “paperless flights” to working with such Star Alliance members as Air Egypt, Turkish Airlines, Brussels Airlines, etc., and trying to put in practice its “Upgrade to Industry Leadership” initiative (Lufthansa, 2010). At the same time, understanding the fact that Germany, Europe, and the whole world are the three markets for Lufthansa, the company also considers “taking equity stakes in other companies” as a part of its cooperative international strategy (Lufthansa, 2010).

Identify and describe the elements and objectives of Lufthansa’s cooperative strategy

The elements and objectives of the cooperative strategy used by Lufthansa conform to the theoretical framework presented by Hitt, Ireland, and Hoskisson (2009). According to these scholars, cooperative strategies are used by companies that aim at strengthening their market positions and gaining competitive advantages. For this purpose, vertical and horizontal strategic alliances serve as the most effective cooperative strategy forms (Hitt, Ireland, and Hoskisson, 2009, pp. 266 – 267). Accordingly, the main objectives that Lufthansa aims at with its cooperative strategy are similar, i. e. the company develops to increase its market share, strengthen its positions in the global business environment, and gain competitive advantages over other markets players.

To achieve these objectives, Lufthansa uses the mentioned cooperative strategy that consists of six major elements. The first of them is the idea of strengthening the foundations for profitable growth, which is realized by Lufthansa through adjusting to the permanently changing demands of the international air-traffic regulations and economic conditions. The next three elements, i. e. values, profitability, and growth, are closely connected. Lufthansa values quality, proximity, and innovation for its customers, and profitability for its own businesses. At the same time, arguing that profitability is more important than growth, Lufthansa establishes partnerships in various regions of the world to ensure its presence in all, even the smallest, markets around the world.

Finally, focus on core competencies and financial strengths are also rather close as the company, on one hand, aims at developing its German, European, and global markets as its core competencies, while financial strengths, such as cost-effective fuel supply, adjustment to the conditions of the global economic crisis and regulations of every market help Lufthansa in achieving these aims.

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Describe the uncertainties and challenges related to operating beyond the company’s national boundaries

On the whole, carrying out business activities abroad is characterized by great risks associated with the peculiarities of local laws, market regulations, cultural and personal peculiarities of customers in those markets (Freedman, 2004, p. 190). At the same time, operating in the domestic market, any company, and Lufthansa is not an exception, is partially or fully protected by governmental regulations and legal acts. Operating beyond the company’s national boundaries, respectively, deprives it of such protection and puts into conditions of foreign companies that should adjust to the local laws and cultural peculiarities (Freedman, 2004, p. 191).

Drawing from these risks, the main uncertainties of operating aboard arise. First of all, a company might become a victim of being unaware of the recent changes in the local legislation. Second, the company might be uncertain about the modifications in cultural peculiarities, traditions, or customs of any foreign market. Third, the financial environment in any foreign market might be uncertain, and the company can be unready for any unexpected developments in this environment. Thus, operating beyond the national boundaries is always associated with a considerable number of uncertainties, challenges, and risks for business companies.

Describe the potential risks of cooperative strategies

The situation can become even more complicated if it is a strategic alliance that operates both within and beyond its members’ national boundaries. For example, Hitt, Ireland, and Hoskisson (2009) argue that strategic alliances on the whole fail in 70% of cases, and the major reasons for such failures are the risks that include the opportunistic behavior of other alliances members and ineffective communication between alliance members. If the international alliances are concerned, cooperative strategies also expose their members to political, legal, and cultural risks (Hitt, Ireland, and Hoskisson, 2009, pp. 234 – 235).

In more detail, when an alliance is built over false perceptions of its members’ positive images and trustworthiness, such an alliance can be destroyed by a situation when one of its members gets, and uses, an opportunity to use the forces of the whole alliance to benefit alone. For instance, if participation in a strategic alliance allows a company to double its sales, this company might use this participation to further increase sales but not notify other alliance members of its operations.

Insufficient communication between alliance members is another potential risk of a cooperative strategy. It may result in the discussed opportunistic behavior, as well as in the ineffective management of the alliance activities. Thus, the lack of communication might become a reason for the alliance’s failure, as well as for the failure of its member.

Finally, using a cooperative strategy is often associated with potential political and legal risks. Hitt, Ireland, and Hoskisson (2009) enumerate political risks as governmental instability, the potential for armed conflicts, riots, etc. The legal risks are also closely associated with the political ones and include changes of legislation and failure of the companies to conform to new regulations (Hitt, Ireland, and Hoskisson, 2009, pp. 234 – 235).

Explain the use of organizational structure and controls to effectively support Lufthansa’s strategy

The above discussion reveals that using a cooperative strategy to expand internationally is simultaneously a quite promising and rather risky idea. Scholarly opinions exist, according to which organizational structure and controls play an important role in supporting and developing effective cooperative strategies (Hitt, Ireland, and Hoskisson, 2009, pp. 308 – 309). Further on, there is a need for the company’s strategy and the organizational structure and controls system its uses to perfectly match, as Hitt, Ireland, and Hoskisson (2009) argue that companies, where these points do not match or match poorly, fail in both domestic and foreign markets (p. 308).

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The annual report by Lufthansa (2010) reveals that currently, the company pays considerable attention to developing its strategy and adjusting it to its organizational structure and controls. For instance, the company’s structure separates the functions of trading from the ones of risk control and management (Lufthansa, 2010). Moreover, Lufthansa has six business lines (including passage, maintenance, repair, and overhaul (MRO), logistics, IT services, catering, and sales), the performance of which is an independent task of each of them (Hitt, Ireland, and Hoskisson, 2009, p. 239). Thus, although current trends in maintaining effective organizational structure and controls in Lufthansa are seemingly proper, special attention should be paid to this point at times of any changes made into the company’s cooperative strategy.

Describe what strategic leadership actions should be recommended for developing human capital at Lufthansa

Another important part of a company’s success in any kind of business is nowadays the so-called human capital, i. e. the sum of skills and knowledge that the whole staff of a company possesses (Hitt, Ireland, and Hoskisson, 2009, p. 352). The notion of human capital is reciprocally connected with the idea of strategic leadership, and both these notions function to facilitate the development of each other. Particularly, Hitt, Ireland, and Hoskisson (2009) notice that one of the main tasks for strategic leadership is to develop human capital, while the latter is what helps to develop effective strategic leadership in a company (pp. 352 – 353).

So, to develop the human capital in Lufthansa, a set of strategic leadership actions should be recommended. First, Lufthansa should increase attention to professional development and improvement of its staff. Specialized classes, meetings with other companies’ professionals, and rewards programs should be helpful in this respect. Second, the company should train more leaders able of making strategic decisions for Lufthansa. This can be achieved through delegating more decision-making power to the lower levels of Lufthansa’s organizational structure. Finally, the company should develop the process of experience inheritance, in which senior employees would transfer their knowledge to the newcomers so that Lufthansa could develop successively.

Describe what strategic leadership actions should be recommended for establishing an effective organizational culture at Lufthansa

Similar to human capital, organizational culture is also regarded to be the basis for the company’s success in its strategic aims and objectives (Hitt, Ireland, and Hoskisson, 2009, p. 354). Defined as “a complex set of ideologies, symbols, and core values that are shared throughout the firm and influence the way business is conducted”, organizational culture is thus the context in which a company works according to its strategy (Hitt, Ireland, and Hoskisson, 2009, p. 354).

So, to establish an effective organizational culture in Lufthansa, this company’s strategic leaders should, first of all, modify the collective mind of its staff through two main techniques. First, the balance between conformity to financial and strategic controls should be developed and monitored using the balanced scorecard approach. This means that no short-term goal will damage the long-term one, and Lufthansa will be able to develop according to its strategy. Such a balance would allow the company to benefit from achieving its short-term financial and long-term strategic goals. The second step for the strategic leaders to take is to encourage the entrepreneurial mindset in the staff of Lufthansa.

Describe what strategic leadership actions should be recommended for promoting an entrepreneurial mindset at Lufthansa

As mentioned above, the entrepreneurial mindset is one of the major elements of the organizational structure of a successful business company. Hitt, Ireland, and Hoskisson (2009) call entrepreneurial opportunities “a vital source of growth and innovation”, and argue that promoting the latter through the entrepreneurial mindset is one of the basic functions of strategic leadership in the modern business world (p. 354). Thus, to encourage the entrepreneurial mindset, strategic leaders of Lufthansa might:

  • Invest into opportunities as real options having the potential of becoming profitable in the future;

For instance, using this option, Lufthansa can buy land, property, or technology, foreseeing their potential price increase of ability to benefit the company’s strategic goals.

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  • Demonstrate advantages of the entrepreneurial mindset;

Using this approach, the company’s strategic leadership should use means of propaganda to demonstrate how the entrepreneurial mindset would benefit not only the whole business entity but every single employee in particular. This can be achieved through launching special classes during which video reports about the companies adopting this mindset are provided. Another way for Lufthansa to promote this is to carry out its staff’s meetings with representatives of other companies that could share their experiences of working with the entrepreneurial mindset. As a result, the staff of Lufthansa should display “autonomy, innovativeness, risk-taking, proactiveness, and competitive aggressiveness” (Hitt, Ireland, and Hoskisson, 2009, pp. 355 – 356) as the five markers of the successfully adopted entrepreneurial mindset.

Describe what strategic leadership actions should be recommended for reducing complexity at Lufthansa

Thus, all the above-discussed strategic leadership practices should after all be aimed at achieving the final goal of Lufthansa, i. e. reducing complexity in the process of its global expansion. In particular, there are three actions that, according to Freedman (2004), can be recommended for this purpose (pp. 197 – 198).

First of all, Lufthansa’s strategic leadership should analyze the set of services and business segments the company deals with and limit the set to a small number of the most important points, like for instance passage, MRO, sales, and catering. Such a step will allow the company to reduce the complexity of its spheres of activity and manage the remaining segments more effectively. This is especially important in the light of the global expansion, which also presupposes a considerable widening of areas of interest for Lufthansa.

Second, Lufthansa should work on its human capital development as one of the basics of successful performance. Third, the company should pay much attention to creating an effective organizational culture that would facilitate the use of human capital and allow Lufthansa to achieve its strategic objectives.

References

Hitt, M. A., Ireland, R. D., & Hoskisson, R. E. (2009). Strategic management: competitiveness and globalization : concepts & cases. Cengage Learning.

Freedman, M. (2004). The Art and Discipline of Strategic Leadership. McGraw-Hill Professional.

Lufthansa. (2010). Official Corporate Website. Web.

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