Lufthansa International Strategy - Assignment Example

Topic: Lufthansa’s Strategy What type of international strategy has the company chosen, and what means has it used to expandinternationally? Lufthansa has chosen an opportunity and risk management strategy to advance and manage its international air transport business. The strategy enables Lufthansa to explore business opportunities in various countries if the company is able to make profits after adjusting its risks according to the company’s policies as per the market prevailing conditions. Lufthansa’s risk managers assert that risk acceptable must be able to generate value in the organization. The company through the managing board approved integration of risk management into its existing business systems and segments. Integration promotes effective identification and management of business risks at their early stages so that remedial actions can be taken in time. In addition, Lufthansa has centralized its risk management process and actions in order to ensure that identification and management of business risks are consistent and relevant to the company’s investment objectives. The business risk management plan of Lufthansa comprise of a risk map that is regularly updated and aligned to meet the needs of the company’s policies and business environment. It is standardized across all business segment of the company and comprises a list of all risks as well as instruments to manage them. Lufthansa considers risk as material if it can cause a loss of at least one third of all the operating results of the company or lead to a loss of 300 million Euros to the company. Risk materiality is computed uniformly across all segments. The total company figure is computed by summing up the results of individual business segments. To ensure that Lufthansa’s opportunity and risk management strategy become practical, the company appointed business risk managers in all business segments to ensure that all risk management requirements and procedures are followed. In addition, the company has a fully constituted risk management committee that reports directly to Lufthansa’s managing board. The committee core objective is to identify and evaluate the risk across all functions and process in the company (Vandone, 2009). They are also charged with the responsibility of making constant improvements to the effectiveness and efficiency of risk management. Managing directors are responsible for approving and implementing acceptable risk management practices and procedures. Lufthansa’s risk management committee prepares reports on issues surrounding business opportunity and risk quarterly. 2. Discuss the elements and objectives of Lufthansas cooperative strategy. Cooperation occurs when one or more groups or individuals agree to work together with an aim of achieving a specific goal. Elements of Lufthansas cooperative strategy There are at least sixth elements that are important for the effectiveness of Lufthansa’s cooperative strategy. The elements guide and enhance sustainability of the company’s cooperative strategy. The first element is flexibility. Flexibility is key to managing cooperation because it enables the Lufthansa and its partners to influence and persuade each other so as to respond to the needs of change. Consequently, the partners can embrace good strategies, ideas and policies recommended by the other partner so as to add value to their organizations. Secondly, Lufthansa and its partners must agree to share relevant information and resources with each other. At one point in their cooperation, Lufthansa and its partners would have to share infrastructure, market information and other facilities. This is so especially if one partner is entering a market, where the other partner is conversant or dominant. Thirdly, it is important for both cooperating partners to treat each other with courtesy and common sense. Treating each other with consideration lays the foundation of respect and confidence among partners. Fourth element of Lufthansa’s cooperative strategy is trust and commitment. All partners must live to their expectations. Agreements must be honored at all levels to avoid conflict of interest in future. Lufthansa and its partners must be accountable to each other. All partners must acknowledge and assume responsibility for their actions, decisions or policies that are within the scope of their role. As a result, partners are discouraged from blaming each other on negative actions or issues that may arise during their cooperation. The sixth element of Lufthansa’s cooperative strategy is discipline. Lufthansa and its partners must comply with procedures and processes that were established to guide the actions of the cooperation (Luo, 1999). . Objectives of Lufthansa’s strategy There are five main objectives that led to formation of Lufthansa’s cooperative strategy. The first objective is to improve their capacity utilization. Through cooperation, Lufthansa will be able to fill their cargo and passenger spaces because they will have wider access to customers. Secondly, Lufthansa would be able to gain access to the restricted markets in various regions and countries. Thirdly, cooperative strategy will enable Lufthansa to maintain its market leadership in specific segments. Fourthly, Lufthansa and its partners cooperate so as to gain from economies of scale. Through cooperation, the cooperating companies would be able purchase oil, training services and other supplies at a lower cost because they would buy them in bulk. The final objective of Lufthansa’s cooperative strategy is to stabilize the market. Through cooperation, companies will be able to set industry standards as well as the prices. Consequently, they would be able to influence the market and stabilize industry operations. 3. Describe the uncertainties and challenges related to operating beyond the companys national boundaries and the potential risks of cooperative strategies. There are many challenges that affect the growth and sustainability of companies, which operate beyond their national borders. This is because companies are exposed to global pressures and challenges from diverse fronts. The challenges and uncertainties are classified into three main categories. The first category is economic in nature, the second is financial and the third challenges and uncertainties are industry specific. The economic challenges are diverse and serious. Economic downturns can jeopardize stable businesses. Changes in economic growth cause a lot of business uncertainties. Declining economic growth pose big challenges to business, this is because it reduces disposal incomes of people. As a result, demand of service and products become constricted. Lufthansa business would be negatively affected if the global economy fall because they demand for air transport would reduce and the cost of doing business would increase. Therefore, the profits of the company will be reduced significantly. The other challenges facing the company are financial in nature. Global markets experience fluctuations in foreign currencies. Changing foreign exchange rates leads to losses and gains during exchanges. Other financial risk is the fluctuating interest rate. Increase in global interest rates lead to increased cost of capital. Lufthansa will pay more cost of capital if the global interest rates increases thus reduce its profits. Industry based risk are also many. There are incidences of global terrorisms and plane hijackings that cause losses of lives and aircrafts. The other challenges are increasing cost of fuel that is making cost of doing business climb higher. Different cultures pose great challenge to international airlines and it may affect business operations significantly (OECD 2009). There are also increasing competition in the international markets. This has put pressures on fares charged, thus reducing the profit margins of Lufthansa. 4. Discuss the use of organizational structure and controls to effectively support Lufthansas strategy. An organizational structure is a hierarchical system of an organization that defines the roles of various employees or personnel in a company or entity. On the other hand, controls are processes that are used to direct and guide actions of businesses or cooperation to ensure that they are in line with agreed business or cooperation principles and policies. Lufthansa’s cooperative strategy would be productive and sustainable if the company’s organizational structure and controls are used to guide and control the actions and processes of cooperation. Organizational structure and controls play critical roles for efficient and effective cooperation. First, organizational structure helps to identify and manage the roles of various stakeholders of the cooperation. The structure is used to ensure that each party to the cooperation plays designated roles as stipulated in the agreement deed of cooperation. Organizational structure promotes the free flow of information across and along the business or cooperation. Therefore, it promotes good working relations among various departments in an established entity. An effective organizational structure has inbuilt system that help employees or personnel to cope with mix orders as well as adapt to changing conditions in the entity. A good organization structure allows individual employees to be creative and innovative in the pursuits of the duties allocated to them by the senior person in the organizational structure. Controls in the company are useful because they set out the way activities are performed and reported. The controls clearly define when activities are to be done, audited and communicated across all the stakeholders in the cooperation. It also ensures that each partner to the cooperation is treated fairly and respectfully. Controls provides for timely monitoring and audit of all the decisions made across the cooperation. Incase of amendments to the cooperation guidelines and processes, controls help to ensure that all amendments follow the right channels and are accepted by all the parties before they are adopted into the cooperation. Consequently, controls and organizational structure ensures that old and existing guidelines of the cooperation and its processes are integrated in an orderly manner. 5. What strategic leadership actions do you recommend for developing human capital, establishing an effective organizational culture, promoting an entrepreneurial mind-set, and reducing complexity at Lufthansa? Strategic leadership is defined as leader’s ability to predict, envision, communicate and implement change that cause significant benefit to the entity and its people as a whole. There are five major strategic leadership actions that the leader must implement in Lufthansa so as to bring and sustain beneficial change. They are effective management of resources, creating and sustaining good organizational culture, exploiting and maintaining core competence in the organization, creating and implementing organizational ethics and developing and maintaining an effective balance scorecard. The first strategic action is effective management of Lufthansa’s resources. According to Hitt et al (2008), core function of a strategic leader is to manage organizational resources. Resources in the company are diverse in nature and must be well managed and integrated so as to be utilized productively. Therefore, leaders in Lufthansa must organize resources according to their capabilities and develop strategies as well as policies that would assure their appropriate use. If Lufthansa’s resources would be appropriately used, customer value would be created in the process. The second strategic action is exploiting and sustaining Lufthansa’s core competence. Core competencies are defined as capabilities that originate from skills in the field of operations, finance, marketing as well as research and development. Lufthansa’s competencies are strengths that provide definite competitive edge to Lufthansa over all other organizations. Therefore, leaders in Lufthansa should explore and implement company’s competencies that have been developed overtime so as to remain competitive in the market landscape. The third strategic action is enhancing and sustaining an effective Lufthansa’s organizational culture. Organizational culture is consolidation of organizational ideologies, values, traditions and symbols to be shared by all employees and help to influence the way activities are done in the business. Culture influences how organization conduct it businesses. It is a strong instrument that control and regulate employee actions and behavior. Dynamic and vibrant organizational culture can promote creativity and innovation among employees thus helps create competitive advantage for Lufthansa. The fourth strategic action is creation and implementation of Lufthansa code of ethics. Ethics is about what is right and wrong. Code of ethics in Lufthansa would encourage employees to do what is right. Consequently, Lufthansa will avoid scandals that may ruin its image and thus improve its competitive edge through good reputation. The fifth strategic leadership action is developing and maintaining organization scorecard. Balance scorecard measures effectiveness of Lufthansa controls. It allows effective uses of Lufthansa’s core competencies and facilitative structures within company’s financial parameters. It also helps build credibility and demonstrate productive strategies to the shareholders of the company. Therefore, it ensures that Lufthansa achieve desired goals and objectives. References Hitt, M. Ireland, D. and R. Hoskisson(2008) Strategic management: competitiveness and globalization: concepts & cases. 8thEdition. USA: Cengage Learning 356-358 Lufthansa(2009) Annual Report 2009: Opportunity and Risk Management System. Retrieve March 19, 2010 from http://reports.lufthansa.com/2009/ar/groupmanagementreport/riskreport/opportunityandriskmanagementsystem.html?cat=m Luo, Y.(1999) Entry and cooperative strategies in international business expansion. USA: Greenwood Publishing Group Vandone, D. (2009) Consumer Credit in Europe: Risks and Opportunities of a Dynamic Industry. Berlin: Springer OECD (2009) OECD Economic Surveys: Brazil 200 9 France: OECD Publishing OECD (2009) OECD Factbook 2009: Economic, Environmental and Social Statistics France: OECD Publishing Read More