The strategic issues and problems

2004 words (8 pages) Essay

1st Jan 1970 Management Reference this

Disclaimer: This work has been submitted by a university student. This is not an example of the work produced by our Essay Writing Service. You can view samples of our professional work here.

Any opinions, findings, conclusions or recommendations expressed in this material are those of the authors and do not necessarily reflect the views of UKEssays.com.

Executive Summary

In current world with economic globalization, each business must respond to increasing complexity and competition (Mendenhall, 2008, 14). As a member of the glamorous, but financially not so glorious airline industry( Hitt et al, 2010, 233), the pivotal company Lufthansa now faces many sustainable challenges and new uncertainties. This report aims to illustrate these strategic issues facing this company.

Get Help With Your Essay

If you need assistance with writing your essay, our professional essay writing service is here to help!

Find out more

With Porter’s Five Forces considered in this paper, the existing important issues and problems facing Lufthansa will be identified firstly, followed by the exploration of the causes and some appropriate solutions to these issues and problems. Finally some recommendations arising from a critical evaluation for Lufthansa to implement will be made.

Identification and Analysis about both the General and Key Issues and Problems

Just as Porter said, if the firm is intense, as they are in such industry as airline, almost no company earns attractive returns on investments( Porter, 2008, 3). To achieve financial success, Lufthansa urgently need to understand the industry it place and its competition. Porter(1980) has taught us an instrument that assists in analyzing the enormous value of competitive advantages( Majaro, 1997, 3 ). The nagging issues that Lufthansa has to cope with are as follows:

Porter’s Five Forces Model (Porter, 1980)

  • The competition that Lufthansa suffered is more and more violent.
  • Undoubtedly, in the existing market for commercial aircraft, companies now are mostly privatized and they have to fight for survival on their own. Due to the globalization of airline industry, the economies of scale were created and no-frills low-cost airlines quickly spread over the world. However, it is not only incumbent rivals that pose a threat to Lufthansa, those new firms may enter this industry also affects Lufthansa greatly. On account of the deregulation and the erosion of the IATA, the airline appears a ‘high-growth’ industry now( Hitt et al, 2010, 235). These new entrants must have the desire to gain a foothold in this market that has already been divided, which probably cause the fierce competition with the existing business( Fritz, 2008, 18 ). It is this disadvantageous situation that may result in lower level of earnings of Lufthansa, what is worse, probably endanger the existence of it.

  • The volume of its passenger surge even slide sharply.
  • To our knowledge, buyers may have a special power on Lufthansa. The service of air transportation has become a bulk commodity( Albers, 2008, 33 ). At present the product(service) each airline company provide is basically standardized(Robock et al, 1989, 447), so it can go approximately well if customers purchase the product(service) from any one that meet their demand. This produced a trend that the customers of Lufthansa will divert to other counterparts. Moreover, the economic and political turbulence also contributed to the decrease of its customers.

  • The operating costs are too high.
  • Any industry requires raw materials and resources, to Lufthansa, it may be fuel, components and so on( University of Michigan, 1918, 998 ); these are factors that determine the whole costs. Since 2005, the oil prices has escalated dramatically and now the fuel costs are the second-highest cost category for Lufthansa; at the same time the fixed costs such as the depreciation for airlines were quite high for this cyclical business; both of which make the operating costs significant.

  • The threat that other alternatives lead to can not be neglected too.
  • With more substitutes become available, the demand becomes more elastic since customers have more alternatives( Morris, 1990, 42 ). Today high-speed trains are an attractive alternative for air journeys. Just because of the invasion of such substitute, the pressure laid on Lufthansa is heavy and its profits are restricted unprecedentedly.

    However, since the competition derived from the airline industry itself along with other substitutes both belong to external macroscopic environment, which is hard to predict, manage and control. This report just addresses some major problems that Lufthansa can or must solve.

    Firstly, financial operating issues are dominant for Lufthansa and it must concertrate its cost-cutting on the cash flow impact to ensure a rapid capital recovery.

    Secondly, it must pay attention to its passenger sales at the same time, which is a decisive factor that influences its profits and earnings.

    Generation and Evaluation of Alternative Solutions

    To ensure its costs are considerate, there are some cost-cutting initiatives has been accelerated since Lufthansa’s turnaround and so has some particular management that focused on cash flow. For example, by hiring foreign crew members, transforming the fixed costs into variable costs, slightly lowing staff wages and abolishing some discounts etc.

    In addition, since 1996 Lufthansa has been decentralized and each dissolved division is fully responsible for its own financial results under the control of its management board.

    What has been indicated is that Lufthansa staff are now carrying on a 4-day strike, which was exactly because they felt tense when Lufthansa cut down expenses through lowering their salaries(UPDATE 3-Lufthansa Strike Leaves Thousands Stranded, 2010). So to judge whether these methods can be effective, the visible decline of costs it generated is just one part to measure, more important is without losing consensus with its passengers and employees.

    Find out how UKEssays.com can help you!

    Our academic experts are ready and waiting to assist with any writing project you may have. From simple essay plans, through to full dissertations, you can guarantee we have a service perfectly matched to your needs.

    View our services

    Next in order to solve the constant point to win more customers, Lufthansa needs to understand passengers’ expectations and requirements and also establish a good public image. Now customers are all global and they differ by culture. One viable approach for Lufthansa is to know more about passengers through its alliance who has served them, and another is to participate more social and economic activities. An apparent evaluation of this method is the turnovers of its passengers which correspond to the public’s accept degree to it.

    Recommendations

    Because transforming the fixed costs into variable costs is comparatively flexible, so it is advised that Lufthansa may invest to keep relationships with its suppliers. According to Albers(2008), Airbus and Boeing who have the bargaining power are both Lufthansa’s key suppliers. So Lufthansa must build a long-time relationship with them to obtain right foundation at reasonable price, then Lufthansa would make sure an excellent maintenance thus keep its costs in a steady level.

    Furthermore, it is recommended that Lufthansa continue to give its divisions more duties and missions on the basis that they are under control. As this launch that decentralized Lufthansa attempt to remove intermediaries and avoid duplication of functions, which not only cut costs but also streamlining its business model(Lufthansa Official Website, 2009).

    Beside of this, Lufthansa should understand the expectation of its employees and customers, and then it will have a better chance to satisfy them. In the period when economic often experiences ups-and-downs, it may bring an unexpected surprise if Lufthansa add employee’s welfare adequately as them feel they are still sufficiently appreciated by the company and thus feel satisfied. What should be remembered is only those who are satisfied can create satisfying service( Verma, 2008).

    Last but not the least, being an undertaker of its alliances and social obligations are the ways for Lufthansa to operate in global network without increasing its own investments. Nevertheless, too many involvements may create the perspective that Lufthansa is seeking to be shareholder or to be ruler, so the involvement degree should be strategic and wise. What is delight, Lufthansa do rather well in this respect.

    Implementation and Conclusion

    Above all, it is practical for Lufthansa to build up a stable cooperation relation with suppliers. Letting the suppliers take part in its product development is one best path. By means of this strategy, not only can Lufthansa availably decline low cost and raise product (service)quality, it can also improve competition ability in airline market. While support suppliers is an important foundation for maintaining relations. Meanwhile, consciously introducing a competition mechanism between suppliers will promote them to continuously optimize its product quality and price level therefore cut down expense.

    The management board must try a ‘smart’ leadership, allowing its divisions to be the master of itself aligned with company’s core value. Continuous education and training about self-management including self-monitoring and program planning etc. for supervisors of such divisions is essential. It helps them develop skills and improve confidence in handling with various affairs(Corbin et al, 2007, 315). Obviously, successful treatment of business will lower Lufthansa’s operating costs.

    Thirdly, Lufthansa could show concerns by asking frequently its employees and passengers about their feeling and find out whether they were satisfied and where can be improved. Lufthansa should also train and educated its attendants as they act as its representatives to contact passengers. While, on one hand, it should be more engaged in a wide range of charities such as supporting children in need or protecting endangered animals; on the other hand, it must try best to rescue other members of alliance who are suffering from crisis. It is believed that Lufthansa will surely win more customers when it has provided really good service and set up really positive image.

    Having achieved these, Lufthansa would witness its profits pick up steadily, therefore gradually become the leader in international air traffic.

    Executive Summary

    In current world with economic globalization, each business must respond to increasing complexity and competition (Mendenhall, 2008, 14). As a member of the glamorous, but financially not so glorious airline industry( Hitt et al, 2010, 233), the pivotal company Lufthansa now faces many sustainable challenges and new uncertainties. This report aims to illustrate these strategic issues facing this company.

    With Porter’s Five Forces considered in this paper, the existing important issues and problems facing Lufthansa will be identified firstly, followed by the exploration of the causes and some appropriate solutions to these issues and problems. Finally some recommendations arising from a critical evaluation for Lufthansa to implement will be made.

    Identification and Analysis about both the General and Key Issues and Problems

    Just as Porter said, if the firm is intense, as they are in such industry as airline, almost no company earns attractive returns on investments( Porter, 2008, 3). To achieve financial success, Lufthansa urgently need to understand the industry it place and its competition. Porter(1980) has taught us an instrument that assists in analyzing the enormous value of competitive advantages( Majaro, 1997, 3 ). The nagging issues that Lufthansa has to cope with are as follows:

    Porter’s Five Forces Model (Porter, 1980)

    • The competition that Lufthansa suffered is more and more violent.
    • Undoubtedly, in the existing market for commercial aircraft, companies now are mostly privatized and they have to fight for survival on their own. Due to the globalization of airline industry, the economies of scale were created and no-frills low-cost airlines quickly spread over the world. However, it is not only incumbent rivals that pose a threat to Lufthansa, those new firms may enter this industry also affects Lufthansa greatly. On account of the deregulation and the erosion of the IATA, the airline appears a ‘high-growth’ industry now( Hitt et al, 2010, 235). These new entrants must have the desire to gain a foothold in this market that has already been divided, which probably cause the fierce competition with the existing business( Fritz, 2008, 18 ). It is this disadvantageous situation that may result in lower level of earnings of Lufthansa, what is worse, probably endanger the existence of it.

    • The volume of its passenger surge even slide sharply.
    • To our knowledge, buyers may have a special power on Lufthansa. The service of air transportation has become a bulk commodity( Albers, 2008, 33 ). At present the product(service) each airline company provide is basically standardized(Robock et al, 1989, 447), so it can go approximately well if customers purchase the product(service) from any one that meet their demand. This produced a trend that the customers of Lufthansa will divert to other counterparts. Moreover, the economic and political turbulence also contributed to the decrease of its customers.

    • The operating costs are too high.
    • Any industry requires raw materials and resources, to Lufthansa, it may be fuel, components and so on( University of Michigan, 1918, 998 ); these are factors that determine the whole costs. Since 2005, the oil prices has escalated dramatically and now the fuel costs are the second-highest cost category for Lufthansa; at the same time the fixed costs such as the depreciation for airlines were quite high for this cyclical business; both of which make the operating costs significant.

    • The threat that other alternatives lead to can not be neglected too.
    • With more substitutes become available, the demand becomes more elastic since customers have more alternatives( Morris, 1990, 42 ). Today high-speed trains are an attractive alternative for air journeys. Just because of the invasion of such substitute, the pressure laid on Lufthansa is heavy and its profits are restricted unprecedentedly.

      However, since the competition derived from the airline industry itself along with other substitutes both belong to external macroscopic environment, which is hard to predict, manage and control. This report just addresses some major problems that Lufthansa can or must solve.

      Firstly, financial operating issues are dominant for Lufthansa and it must concertrate its cost-cutting on the cash flow impact to ensure a rapid capital recovery.

      Secondly, it must pay attention to its passenger sales at the same time, which is a decisive factor that influences its profits and earnings.

      Generation and Evaluation of Alternative Solutions

      To ensure its costs are considerate, there are some cost-cutting initiatives has been accelerated since Lufthansa’s turnaround and so has some particular management that focused on cash flow. For example, by hiring foreign crew members, transforming the fixed costs into variable costs, slightly lowing staff wages and abolishing some discounts etc.

      In addition, since 1996 Lufthansa has been decentralized and each dissolved division is fully responsible for its own financial results under the control of its management board.

      What has been indicated is that Lufthansa staff are now carrying on a 4-day strike, which was exactly because they felt tense when Lufthansa cut down expenses through lowering their salaries(UPDATE 3-Lufthansa Strike Leaves Thousands Stranded, 2010). So to judge whether these methods can be effective, the visible decline of costs it generated is just one part to measure, more important is without losing consensus with its passengers and employees.

      Next in order to solve the constant point to win more customers, Lufthansa needs to understand passengers’ expectations and requirements and also establish a good public image. Now customers are all global and they differ by culture. One viable approach for Lufthansa is to know more about passengers through its alliance who has served them, and another is to participate more social and economic activities. An apparent evaluation of this method is the turnovers of its passengers which correspond to the public’s accept degree to it.

      Recommendations

      Because transforming the fixed costs into variable costs is comparatively flexible, so it is advised that Lufthansa may invest to keep relationships with its suppliers. According to Albers(2008), Airbus and Boeing who have the bargaining power are both Lufthansa’s key suppliers. So Lufthansa must build a long-time relationship with them to obtain right foundation at reasonable price, then Lufthansa would make sure an excellent maintenance thus keep its costs in a steady level.

      Furthermore, it is recommended that Lufthansa continue to give its divisions more duties and missions on the basis that they are under control. As this launch that decentralized Lufthansa attempt to remove intermediaries and avoid duplication of functions, which not only cut costs but also streamlining its business model(Lufthansa Official Website, 2009).

      Beside of this, Lufthansa should understand the expectation of its employees and customers, and then it will have a better chance to satisfy them. In the period when economic often experiences ups-and-downs, it may bring an unexpected surprise if Lufthansa add employee’s welfare adequately as them feel they are still sufficiently appreciated by the company and thus feel satisfied. What should be remembered is only those who are satisfied can create satisfying service( Verma, 2008).

      Last but not the least, being an undertaker of its alliances and social obligations are the ways for Lufthansa to operate in global network without increasing its own investments. Nevertheless, too many involvements may create the perspective that Lufthansa is seeking to be shareholder or to be ruler, so the involvement degree should be strategic and wise. What is delight, Lufthansa do rather well in this respect.

      Implementation and Conclusion

      Above all, it is practical for Lufthansa to build up a stable cooperation relation with suppliers. Letting the suppliers take part in its product development is one best path. By means of this strategy, not only can Lufthansa availably decline low cost and raise product (service)quality, it can also improve competition ability in airline market. While support suppliers is an important foundation for maintaining relations. Meanwhile, consciously introducing a competition mechanism between suppliers will promote them to continuously optimize its product quality and price level therefore cut down expense.

      The management board must try a ‘smart’ leadership, allowing its divisions to be the master of itself aligned with company’s core value. Continuous education and training about self-management including self-monitoring and program planning etc. for supervisors of such divisions is essential. It helps them develop skills and improve confidence in handling with various affairs(Corbin et al, 2007, 315). Obviously, successful treatment of business will lower Lufthansa’s operating costs.

      Thirdly, Lufthansa could show concerns by asking frequently its employees and passengers about their feeling and find out whether they were satisfied and where can be improved. Lufthansa should also train and educated its attendants as they act as its representatives to contact passengers. While, on one hand, it should be more engaged in a wide range of charities such as supporting children in need or protecting endangered animals; on the other hand, it must try best to rescue other members of alliance who are suffering from crisis. It is believed that Lufthansa will surely win more customers when it has provided really good service and set up really positive image.

      Having achieved these, Lufthansa would witness its profits pick up steadily, therefore gradually become the leader in international air traffic.

      Reference

      • Albers, M. (2008). Lufthansa in its Competitive Environment(2nd). Norderstedt: Drunk und Bindung
      • Corbin, C.B. and Lindsey, R. (2007). Fitness for Life(1st). Champaign: Human Kinetics. P.O.
      • Fritz, N. (2008). Internet Protocal Television German-Analyzing Business Model for Market Success(1st). Norderstedt: Drunk und Bindung
      • Hitt, M.A and Ireland, R.D and Hoskisson, R.E. (2010). The Management of Strategy-Concepts and Cases(9th). South-Western College PU.
      • Lufthansa Official Website: Company Portrait-Organization(2009). Retrieved from: http://konzern.lufthansa.com/en/history.html. Date Accessed: [Feb.22th, 2010].
      • Majaro, S. (1997). Marketing(1st). Hemel Hempstead: Prentice Hall.
      • Mendenhall, M.E. (2008). Global Leadership: Research Practices and Development(1st). Oxon: Routledge.
      • Morris, M.H. and Morris, G. (1990). Market-Oriented Pricing: Strategies for Management(1st). New York: Quorum Books.
      • University of Michigan. (1918). Automotive Industries, vol, 39. Chilton: Chilton Company Inc.
      • Porter, M.E. (1980). Competitive Strategy: Techniques for Analyzing Industries and Competitors(1st). Washington: Free Press
      • Porter, M.E. (2008). On Competition-Updated and Expanded Edition(11th). Harvard: Harvard Business School Publishing Corporation.
      • Robock, S.H. and Simmonds, K. (1989). International Business and Multinational Enterprises(1st). Bel Air: Irwin.
      • UPDATE 3-Lufthansa Strike Leaves Thousands Stranded. (2010). Retrieved from: http://cn.reuters.com/article/companyNews/idUKLDE61L03V20100222?symbol=BAY.L. Date Accessed: [Feb.22th, 2010].
      • Verma, H.V. (2008). Service Marketing: Text and Cases(1st). London: Dorling Kindersley Pvt. Ltd.

Cite This Work

To export a reference to this article please select a referencing stye below:

Reference Copied to Clipboard.
Reference Copied to Clipboard.
Reference Copied to Clipboard.
Reference Copied to Clipboard.
Reference Copied to Clipboard.
Reference Copied to Clipboard.
Reference Copied to Clipboard.

Related Services

View all

DMCA / Removal Request

If you are the original writer of this essay and no longer wish to have your work published on the UKDiss.com website then please: