Strategic Plan Introduction The strategic plan is established by analyzing alternative solutions through tools and matrices designed to develop a strategic direction. The stacked EFE/IFE matrix is initially studied to establish the best airline to work with. After this, various tools are utilized to reveal strengths and weaknesses, competitive positions, best objectives, and optimal tactics that will put the airline in the best strategic position. The QSPM will then reveal the specific direction that the company should focus their resources. Next, a plan for strategy implementation is established. This proposal will take into consideration changes that need to be made to all aspects of the company's business. Finally, objectives will be established to monitor and evaluate the strategy over the next five years. External Factor Evaluation (EFE)/ Internal Factor Evaluation (IFE)Matrix The stacked External Factor Evaluation (EFE)/Internal Factor Evaluation (IFE) Matrix is a tool that is used to assess the current external environment and internal business factors of companies. When analyzing a company, the EFE and IFE Matrix can be used independently. This type of strategic tool helps companies see how they rate in different categories that affect the overall state of their business. The EFE/IFE matrix also shows a comparison between its competitors. The EFE portion focuses on external forces such as social, economic, legal, and political.1 The IFE portion focuses on internal factors, such as financials, timeliness, human resources, and leadership/management. EFE MATRIX Impact Rating Factors Growth in Asia Pacific, Middle East, Africa markets Fuel Costs Alternative Fuel usage Organized Labor Environment Sustainability Terrorism Economy Deregulation/Antitrust Laws Demographics Stock Market Product differentiation Cultural Impacts Waste Management Globalization Score American/US Airways Wtd. Rating Score United Wtd. Rating Score Delta Wtd. Rating Score Lufthansa Wtd. Rating Score 11 2 22 4 44 4 44 3 33 11 5 6 2 2 4 22 10 24 2 2 4 22 10 24 3 2 1 33 10 6 4 2 2 44 10 12 7 10 9 4 3 4 28 30 36 3 3 4 21 30 36 3 3 4 21 30 36 3 2 2 21 20 18 4 3 9 7 4 6 5 3 3 1 2 4 3 2 12 9 9 14 16 18 10 3 3 4 2 3 3 4 12 9 36 14 12 18 20 3 4 4 2 2 3 3 12 12 36 14 8 18 15 4 3 2 4 3 3 3 16 9 18 28 12 18 15 1 Maxi-Pedia. (2012). EFE Matrix (External Factor Evaluation). Retrieved April 4, 2014 from Maxi-Pedia: http://www.maxipedia.com/EFE+matrix+external Alliances EFE Total IFE MATRIX Factors Fuel, Wages, Salary, Benefit Expense as a % of OE Leadership/Mgmt Human Resources/ Employee Satisfaction Customer Satisfaction Fuel Management/Fleet Efficiency Route Network On-Time Arrivals, Delayed Flights, Cancelled Flights Price Competitiveness In-Flight Quality Technology Net Income Current Ratio Debt-to-Equity Ratio Share Price Dividends IFE Total OVERALL TOTAL OVERALL RANK 3 100 Impact Rating Score 3 9 67 4 American/ US Airways Wtd. Rating Score 12 80 United Wtd. Rating Score 3 9 76 Delta Wtd. Rating Score 4 12 71.5 Lufthansa Wtd. Rating Score 11 4 3 3 33 12 3 3 33 12 3 3 33 12 4 3 44 12 6 7 3 2 18 14 3 2 18 14 4 4 24 28 2 4 12 28 10 8 4 3 40 24 4 4 40 32 3 3 30 24 2 2 20 16 7 4 6 4 11 6 7 6 3 100 200 2 3 2 4 1 2 1 2 1 14 12 12 16 11 12 7 12 3 60 127 4 2 3 2 3 2 2 3 4 1 14 12 12 12 22 12 21 24 3 70.3 150 3 4 3 3 4 3 2 2 3 3 28 12 18 16 33 12 14 18 9 77.8 154 1 2 4 4 3 4 3 4 3 4 14 16 24 12 44 18 28 18 12 79.5 151 2 Figure 1- Stacked EFE/IFE Matrix There are many factors that can help determine potential strategies for each airline. Looking at these factors together is the most accurate way to determine the airline's overall rank. After looking at the internal and external factors as a whole, the group has decided to focus their strategic planning on Lufthansa. Because of their strong financial position and dedication to quality and customer service, Lufthansa ranks number one internally. However, the company ranks third externally, following both United and Delta. Lufthansa has the resources and capability to grow their operations and the opportunity to improve their position within the global market. SWOT Analysis The SWOT analysis is an internal examination of Lufthansa's strengths and weaknesses and an external examination of the threats and opportunities in the industry. Lufthansa's strengths will help to maximize opportunities and minimize threats. Lufthansa's weaknesses are also addressed in the strategy with the external environment. Strengths/Opportunities, Strengths/Threats, Airline Industry Analysis Page 2 Weaknesses/Opportunities, and Weaknesses/Threats are combined to formulate a plan of action for sustainable success in the industry. SWOT Matrix Lufthansa Group Opportunities 1) Asia-Pacific leading economic growth 2) Growth of Chinese tourists 3) Growing markets of Middle East, Africa 4) Global passenger airline market growth 5) Utilize IT segment to integrate technology into customer experience 6) Push for improvement in current German labor laws 7) Increase global presence of MRO & Catering Threats 1) Price competitive market driven by low-cost competitors 2) Volatile price of fuel 3)European economy climbing out of recession 4) Emissions and noise pollution 5) Labor unions 6) Taxation and regulation 7) Terrorism 8) SkyTeam and oneworld alliances Strengths 1) Founding and largest member of the leading airline alliance, Star Alliance 2) Diversification of synergistic business segments 3) Financial stability and long-term vision 4) Most profitable and largest long-haul network in Europe 5) Strong liquidity 6) Positive customer experience 7) Leader in biofuel trials 8) Industry leading MRO and Catering S-O Strategies Weaknesses 1) Continued labor union strikes halt operations and cause significant financial losses 2) CEO turnover in midst of SCORE restructuring strategy 3) Relatively small low-cost structure 4) Low operating profit margins 5) Cyclical nature of airline industry 6) Fuel and labor costs 7) Route network smaller compared to global leaders 1.(S1-O1/2/3) Maximize partnerships with Star Alliance members in emerging markets to increase route network 2.(S3-O4) Increase investments in Information Technology to improve operational efficiency for growing market demand 3.(S1-O7) Expand mutually beneficial MRO and Catering partnerships with alliance members in exchange 4.(S8/O7) Introduce MRO and IT contracts to airlines in growing markets 9.(W5/6/-O5) Increase customer value by integrating technology into customer experience 10.(W1/2-O6) Put a motion forward for government protection of essential corporations from labor union strikes 11.(W3/4/5/6-O1/2/3/4/5) Improve technology in operations to capitalize on emerging market trends and improve operational efficiency 12.(W7-O1/2/3/4) Improve route network through maximizing subsidiaries and investing in new international hubs W-T Strategies S-T Strategies 5.(S4/6-T3) Increase marketing emphasis to business travelers in Europe 6.(S7-T2/4) Increase involvement in industry wide sustainable long term alternative fuel sourcing 7.(S3/4/5-T4) Invest in fleet upgrades to maximize fuel efficiency 8.(S1/4-T1/8) Push for additional carriers to join Star Alliance and increase route network W-O Strategies 13.(W6/7-T2) Investment in vertical integration of fuel procurement in value chain 14.(W4/7-T1/3) Increase route network and short-haul fleet of LCC subsidiaries to increase competition with major LCCs 15.(W1/2-T5) New CEO Spohr start initiative to increase communications and relationship with union representatives Figure 2- Lufthansa SWOT Matrix S-O Strategies 1.) Lufthansa Airlines is one of the founding members of Star Alliance, the largest airline alliance in the world. Alliance members benefit from the largest number of code sharing routes in the world, more than both SkyTeam and oneworld. The vast code share agreements of the Star Alliance allow Lufthansa to offer customers easy connections between the 18,043 flights per day to over 1,269 destinations and 193 countries. Economies of scale constrict Lufthansa from covering the entire planet with their planes, so the benefits of the Star Alliance lie in the capacity to connect customers on a worldwide scale without risking significant capital. Airline Industry Analysis Page 3 2.) Lufthansa Systems provides considerable IT competencies through their profit and revenue maximizing ticket sales software. Steady profitability and liquidity allow Lufthansa to increase the investment necessary for state-of-the-art technology to increase operational efficiency. Increases in the global air travel market will require efficient operations to handle growing traffic. Increasing technologies that handle passenger traffic and customer processing will help to maximize sales in a growing market. Improving operations can lead to higher profit margins in a market where demand is steadily increasing, following the Eurozone financial crisis recovery and Asia-Pacific market growth. 3.) Lufthansa benefits from industry leading MRO and Catering segments, which strengthen their core segment. These divisions have helped Lufthansa maintain profitable business relationships across the global industry. Star Alliance maintains the largest membership base in the industry, and expanding the services of the MRO and Catering segment will help to improve both domestic and foreign relationships. 4.) Contracting their MRO and IT divisions to other members of the Star Alliance will enable Lufthansa to become increasingly diverse in their portfolio and expand business relationships into different markets. The MRO and IT services will bring in additional revenue and increase brand recognition throughout the industry. S-T Strategies 5.) The European economy is emerging from a recession, and businesses are looking for ways to increase their profits. Lufthansa can appeal to businesses by offering companies deals on transportation to increase their network. Marketing their industry leading services and promotional upgrades to some of the fastest growing companies in Europe will allow them to get leverage over LCCs and gain brand loyalty in an economy set for recovery. 6.) Biofuel investment in the PureSky initiative resulted in significant savings in fuel costs. However, supply chains for renewable fuel sources are scarce. Lufthansa must continue initiatives to expand the supply chains for renewable fuels to improve social, environmental, and economic sustainability for the future. 7.) Lufthansa keeps a considerable amount of cash on hand and has maintained profitability through their diverse business segments and vast subsidiaries. They must improve their fuel efficiency and customer service by upgrading planes throughout their long-haul and short-haul markets. Investment in state-of-the-art planes will decrease fuel costs and improve customer service in the long term. 8.) Code sharing with alliance members already allows Lufthansa to provide additional revenue generation from markets outside of their direct route network. Star Alliance membership growth will allow Lufthansa to maintain low cost commitments but improve their customers' global route access. Airline Industry Analysis Page 4 W-O Strategies 9.) Teamed with Microsoft, Lufthansa is in the process of implementing an In-flight entertainment system, called BoardConnect to help improve the customer experience. However, they have yet to implement this technology across all long-haul flights. Lufthansa should continue to invest in technologies that help improve customer interactions and establish a plan to make BoardConnect a staple of their long-haul market. Increasing convenience and value for customers will help Lufthansa achieve a competitive position against low-cost carriers. 10.) Recent strikes have caused several thousands of Europeans to reschedule their travel arrangements due to cancelled flights. Most Germans are not happy with the impact the unions are having on a service that is necessary for so many business travelers on a regular basis. Lufthansa should form alliances with other corporations to protect themselves from the damaging effects of union strikes. These companies could then put a motion forward for government protection of essential corporations from labor union strikes. 11.) Technology has the power to capture customers through the efficient use of marketing, customer data retrieval, and connectivity to customer. Industry trends in operational efficiency through technology should be a focus of Lufthansa Systems. Investing in research and development to decrease costs and improve services will improve profit margins in the long term. 12.) The emerging markets in Asia, Middle East, and Africa must be evaluated for a costbenefit of expanding international hubs. Lufthansa Group's current route network does not reach as many destinations as the global industry leading American companies. Expanding operations into new markets will help them develop a more global reach within the industry. Cost-benefit analysis of joint ventures, code sharing, and hub expansion should be a point of emphasis for continued relevance throughout the global industry. W-T Strategies 13.) Fuel costs continue to be volatile in the industry. While plane engines and travel routes are becoming more fuel efficient, the cost of fuel remains unpredictable. Hedging can reduce risks associated with fuel costs, but only on a short-term basis. Delta has invested in an oil refinery and made deals with major oil companies to supply their new subsidiary with crude oil. Vertically integrating the fuel supply chain into Lufthansa's business profile will help reduce future price fluctuations. Investing in equity of the German oil companies will help maintain the importance of national company pride while also minimizing risk. 14.) Germanwings and Eurowings allow Lufthansa to provide service to the domestic, shorthaul network in Germany and regionally throughout Europe. Improving their infrastructure and aircrafts will help them compete with the much larger LCCs Ryanair and Easyjet. Airline Industry Analysis Page 5 15.) Christoph Franz did not find favor when negotiating with labor union representatives. It will be important that Carston Spohr, newly appointed CEO, establishes favorable communications with these representatives to minimize the impact of union strikes in the future. Spohr must explore additional alternatives to appease the several unions that represent the majority of the workforce. Balanced Scorecard (BSC) The Balanced Scorecard (BSC) helps define an organization's performance and measures whether or not management is achieving desired results. It translates the mission and vision statements into a comprehensive set of objectives and performance measures that can be quantified and appraised. These measures include financial performance, customer value performance, internal business processes, and learning and development.2 The following balanced scorecard depicts a number of objectives that are important for Lufthansa to strive to achieve, along with targets and initiatives that the group has deemed necessary to accomplish for the company to grow and thrive within their current market. Strategy Map Performance Measures Targets Initiative 20% market share 10% average increase per year Expenses 75% of revenue per year Expand flight operations Fuel efficient aircrafts, technologies and methods Cut underperforming routes Financial Increase Net Income Increase Revenue Reduce Costs Market value Revenue Passenger Miles Expense as a % of Revenue Customer Low fares Service Excellence Reliability Available seat per mile Number of Customer Complaints Number of On Time Arrivals 99% ASM <10% customer complaints 92% on-time arrivals (less than 15 minutes late) Al a carte pricing Strengthen loyalty programs Ongoing training in customer service Total Quality Management Internal Improve Employee Relations Improve Turnaround Time % of engaged employees On-Time Departure On Ground Time 98% engaged employees Industry leader 53 minutes or less 2 Rigby, D. (2013). Management Tools 2013. Retrieved April 6, 2014, from http://www.bain.com/Images/MANAGEMENT_TOOLS_2013_An_Executives_guide.pdf Airline Industry Analysis Page 6 Improve communication Share vision Cycle optimization program Learning Career Development/Trai ning Number of employees enrolled in career advancement programs Number of training sessions conducted 98% employees enrolled in career advancement programs 100% training of ground crew Vocational and professional training programs Figure 3-Balanced Scorecard The BSC for Lufthansa indicates under Financial that the ultimate goal is for the company to increase net income, which is achieved by increasing revenue and/or reducing costs. Lufthansa can achieve this goal through various initiatives, such as expanding flight operations, cutting underperforming routes, and employing fuel efficiency equipment and operations. To increase net income, Lufthansa must be able to please their customers. Low fares, service excellence, and reliability are among the things that Lufthansa's customers value. To increase customer approval, the company should strive to lower ticket fares using the a la carte pricing model, strengthen loyalty programs, improve customer service with training, and engage in total quality management. In order to have the ability improve customer relations, Lufthansa must first focus on internal business processes, learning and development. Identifying logistical and staffing issues by setting targets with various initiatives to ensure maximum effectiveness sets the foundation to achieve customer excellence and increase profitability. SPACE Matrix The Strategic Position and Action Evaluation Matrix (SPACE) can be used to determine which type of strategy a company should use. This type of matrix plots a single point on a Cartesian graph in one of four quadrants to determine if the company should use an aggressive, conservative, defensive or competitive position.3 To develop the position, a SPACE matrix takes into consideration two internal and two external strategic dimensions. Internal Strategic Dimension o Financial strength (FS) o Competitive advantage (CA) External Strategic Dimension o Environmental stability (ES) o Industrial strength (IS) 3 Maxi-Pedia (2012). Space Matrix Strategic Management Method. Retrieved April 4, 2013 from http://www.maxipedia.com/SPACE+matrix+model+strategic+management+method Airline Industry Analysis Page 7 Within these categories, there are many different factors that can be evaluated.4 The company's worth is measured through numeric values on a scale of 1 to 6 based on performance. Both FS and IS have positive values; a higher numeric value indicates a better company position. CA and ES carry a negative value; on a scale of -1 to -6, -1 would be the best number. Once these values are determined, CA and IS total values are added together to form the X axis and FS and ES total values are added together to form the Y axis. These axes are then plotted on a graph to indicate which strategic position the company should take.5 Quadrant I - Aggressive Quadrant II - Conservative Quadrant III - Defensive Quadrant IV - Competitive Internal Strategic Position Competitive (CA) External Strategic Position Industry (IS) Leadership/Management -4 Human Resources/ Employee Satisfaction Customer Satisfaction Fuel Management/Fleet Efficiency Route Network -6 -1 -5 -6 On-Time Arrivals, Delayed Flights, Cancelled Flights -5 In-Flight Quality Growth in Asia Pacific, Middle East, Africa markets Fuel Costs 5 Organized Labor 2 Terrorism 3 Economy 1 Deregulation/Antitrust Laws -1 6 Product differentiation -3 Technology 4 Alliances 6 5 Average Average -3.88 Financial (FS) Fuel, Wages, Salary, Benefit Expense as a % of OE Price Competitiveness 4 Environmental (ES) Alternative Fuel usage 5 -5 5 Environment Sustainability Net Income 6 Demographics -2 Current Ratio 5 Stock Market performance -4 Debt-to-Equity Ratio 6 Cultural Impacts -3 5 Waste Management -4 6 Globalization -2 Share Price Dividends Average Average 5.43 4 ibid 5 ibid Airline Industry Analysis -3 Page 8 -3.29 SPACE matrix Suggested Strategy type -6 -5 -4 -3 -2 Linear (Suggested Strategy type) -1 0 1 2 3 4 5 6 Figure 4- SPACE Matrix According to the SPACE matrix, Lufthansa should be implementing an aggressive strategy. Because of Lufthansa's robust financial position and strong competitive position, the company is Figure in SPACEa place to pursue market penetration or market development. This strategy includes 5- good Matrix product development, product diversification, and pursuance of integration with other companies, including merger-like agreements. BCG Matrix The BCG matrix was created by the Boston Consulting Group and is used to determine a good strategy based on relative market share and market growth rate.6 The purpose of this type of matrix is to determine which \"brands\" a company should invest in or divest from. This BCG has four categories setup in a Celestial graph with a point for each \"brand.\" The size of the point is relevant to the amount of revenue brought in by the company under that \"brand.\"7 For this analysis, the group has chosen to compare market regions across the globe and use RPMs as the measurement for market share. Quadrant I - Question Marks o Low unstable earnings o Negative cash flow o Invest if there is potential Quadrant II - Stars o Low stable earnings o Neutral cash flow o Invest for growth Quadrant III - Cash Cows 6 Strategic Management Insight (2012). BCG growth-share matrix. Retrieved April 5, 2014 from http://www.strategicmanagementinsight.com/tools/bcg-matrix-growth-share.html 7 ibid Airline Industry Analysis Page 9 o High stable earnings o High stable cash flow o Invest to maintain Quadrant IV - Dogs o Low unstable earnings o Neutral or negative cash flow o Divest Europe America Asia/Pacific Africa Latin America Relative Market Share (X Axis) 0.27 0.14 0.3 0.02 0.05 Market Growth Rate (Y Axis) 4.9% 1.3% 6.9% 6.7% 8.4% Lufthansa Revenue by region 64.5% 14.1% 13.7% 1.8% 2.9% Middle East 0.08 16.8% 3% Region Figure 6- BCG Matrix 8 BCG Matrix 18% 16% 14% 12% 10% Market Growth Rate 8% 0.35 0.30 0.25 0.20 6% 0.15 4% 0.10 0.05 0.00 2% 0% Relative Market Share Figure 159- BCG Matrix According to the BCG Matrix above, the Asia-Pacific region is an excellent market for Lufthansa to pursue. The Asia-Pacific market maintains stable earnings in a high growth environment, making them very attractive for investors. Other regions such as Latin America/Caribbean, Middle East, and Africa, have the potential to become \"Stars\" given the strong growth rates they are experiencing, but lack higher earnings and stability. 8 IATA. (6 February 2014). Passenger Demand. Retrieved April 13, 2014 from IATA: http://www.iata.org/pressroom/pr/Pages/2014-0206-01.aspx Airline Industry Analysis Page 10 Make or Buy Analysis A make or buy analysis helps a company determine whether a particular task should be performed in house (make) or outsourced to a company that specializes in that particular area (buy). There are various reasons companies will decide to make things happen in-house, particularly for cost concerns, external environment reasons, suppliers being unable to fulfill their duties, and supplier unreliability. A company may decide to buy or out-source a particular task for reasons like strategic partnerships, lack of experience within company, or inability to produce in-house with given resources.9 Criteria Expand network map Fleet upgrades Fuel cost management Staff/union strikes Make Increase number of flights, add new routes, hire more employees, create a joint venture with another airline Updating current fleet with different amenities Weight reduction, flight pattern adjustments, technical improvements Revamp HR department Buy Acquire or merge smaller airline companies Start replacing older aircrafts with newer Buy oil refinery or partner with a fuel distribution company Invest in outside professional training Figure 7- Make or Buy Analysis While the criteria listed are concerns for the entire industry, each airline handles their operations differently. The passenger airline segment of Lufthansa currently operates companies such as Germanwings, SWISS Air Lines, and Austrian Airlines. Lufthansa also has equity investments in Brussels Airlines, jetBlue, and SunExpress. Lufthansa has taken on a hybrid approach for both the fleet maintenance and fuel cost management criteria. New aircrafts are being implemented into the fleet, and the company is updating the current fleet by equipping their aircraft with inflight amenities, installing sharklets on aircraft wings, and analyzing ways to reduce weight on each flight to save on fuel. While capitalizing on these current processes is a viable option for Lufthansa, fuel costs remain volatile, leaving much to be unknown about the future of their fuel efficiency programs. Within the past few years, Lufthansa has experienced a plethora of employee relations issues. Because of certain German restrictions on treatment of unions, the company has limited options when it comes to resolving these conflicts. Lufthansa has the opportunity to resolve these issues in-house through changes within the human resources department or out-source vocational and professional training.10 Based on the buy or make analysis, it seems that Lufthansa has the most potential to expand their network map because of the current state of European airlines and the company's strong alliances with other airlines. Because the Asia-Pacific region is growing at such an exorbitant rate, it would behoove Lufthansa to expand their presence within that region. To avoid the tedious work 9 Tutorialspoint. (2014). The Make or Buy Decision. Retrieved April 3, 2014 from Tutorialspoint: http://www.tutorialspoint.com/management_concepts/the_make_or_buy_decision.htm 10 Lufthansa Annual Report 2012, op cit. Airline Industry Analysis Page 11 involved with an acquisition or merger, Lufthansa could complete this task in-house by teaming up with an airline that has a strong presence in the Asia-Pacific area. QSPM Matrix The Quantitative Strategic Planning Matrix or QSPM is a tool that is used to objectively select the best strategy to move forward with.11 The QSPM takes information gathered from the beginning stages of the analysis and uses it to develop a strategic direction. At this point in the analysis, the group has narrowed the strategy selection down to two options: form a joint venture with Air China or expand into the Chinese market by developing new routes through internal means. To develop the QSPM, the group has taken information gathered from the EFE and IFE matrix and used it to establish an attractiveness score for each of the alternative options. The option with the highest attractiveness score will be selected for implementation.12 Quantitative Strategic Planning Matrix (QSPM) for Lufthansa Alternative 1 Alternative 2 Air China Joint Venture Expand Internally Total Total Attractive Attractive Attractive Attractive Key Factors Weight Score Score Weight Score Score Strengths Fuel, Wages, Salary, Benefit Expense as a % of OE 11% 0.00 11% 0.00 Leadership/Management 4% 0.00 4% 0.00 Customer Satisfaction 7% 4 0.28 7% 2 0.14 Price Competitiveness 4% 0.00 4% 0.00 In-Flight Quality 6% 0.00 6% 0.00 Technology 4% 0.00 4% 0.00 Net Income 11% 0.00 11% 0.00 Current Ratio 6% 2 0.12 6% 4 0.24 Debt-to-Equity Ratio 7% 2 0.14 7% 4 0.28 Share Price 6% 4 0.24 6% 1 0.06 Dividends 3% 0.00 3% 0.00 Weaknesses 11 Maxi-Pedia (2012). Quantitative Strategic Planning Matrix (QSPM). Retrieved 4/5/2014 from http://www.maxipedia.com/quantitative+strategic+planning+matrix+QPSM 12 Ibid Airline Industry Analysis Page 12 Human Resources/ Employee Satisfaction Fuel Management/Fleet Efficiency Route Network On-Time Arrivals, Delayed Flights, Cancelled Flights Sum Weights Opportunities Growth in Asia Pacific, Middle East, Africa markets Fuel Costs Environment Sustainability Deregulation/Antitrust Laws Demographics Product differentiation Cultural Impacts Waste Management Globalization Alliances Threats Alternative Fuel usage Organized Labor Terrorism Economy Stock Market performance Sum Weights Sum of Attractiveness Score 6% - 0.00 6% - 0.00 10% 8% 4 - 0.40 0.00 10% 8% 1 - 0.10 0.00 7% 100% 4 0.28 7% 100% 3 0.21 11% 11% 7% 4% 3% 7% 4% 6% 5% 3% 1 4 4 4 4 0.00 0.00 0.00 0.04 0.12 0.00 0.16 0.00 0.20 0.12 11% 11% 7% 4% 3% 7% 4% 6% 5% 3% 4 2 3 3 1 0.00 0.00 0.00 0.16 0.06 0.00 0.12 0.00 0.15 0.03 5% 6% 10% 9% 9% 100% 1 4 4 0.00 0.06 0.00 0.36 0.36 5% 6% 10% 9% 9% 100% > 2 2 1 0.00 0.12 0.00 0.18 0.09 2.88 1.94 Figure 8-QSPM for Lufthansa Strategy Selection MOST Analysis The MOST Analysis is an internal, strategic planning tool that helps clarify where a business wants to position itself, the key goals that will help it accomplish this mission, the strategy that is needed to accomplish the mission, and a plan for how these actions are going to be implemented. The operations section of Lufthansa's mission statement is as follows: Our target is to grow profitably and maintain a healthy financial structure, to enable investment in the development of our business, fleet, products and people. We are committed to sustainable development and assume our ecological, civic and social responsibilities.13 There are key objectives that Lufthansa has identified as crucial in achieving its mission. These, include increase revenue, reduce costs, and increase net income. They believe these will only be 13 Lufthansa Annual Report 2012, op cit. Airline Industry Analysis Page 13 realized through implementing the right strategy. The MOST analysis featured below shows the strategies and tactics needed to efficiently accomplish these objectives. Mission The mission is to grow profitably and maintain a healthy financial structure, to enable investment in the development of the business, fleet, products and people. Objectives Increase revenue, reduce costs, and increase net income Strategy Expand flight operations into new markets Tactics Add destinations and routes between Europe and China, strengthen alliances and create new partnership with other airlines, enter into revenue sharing agreement Train employees in service excellence, diversification and Total Quality Management Acquire fuel efficiency airplanes Figure 9- MOST Analysis Strategy Implementation Because of rapid economic growth in the Asia-Pacific market, the group believes that Lufthansa should focus their resources on strengthening their route network in China. Lufthansa and Air China, founding members of the Star Alliance, are some of the biggest players in the growth of the Chinese route network. The Star Alliance controls nearly half of the seats on the route network between Europe and China. Air China controls 22% of the seat capacity between China and Europe, while Lufthansa controls 15%. Lufthansa and Air China have had a codeshare agreement since 2000 and became members of the Star Alliance in 2007.14 The group proposes that Lufthansa develop a joint venture with Air China in order to solidify their position as the strongest European carrier to Chinese destinations. This joint venture would include revenue and facility sharing. Both companies would experience many of the advantages of a merger, without the added risk of significant capital. 14 CAPA Centre for Aviation. (October 21, 2013). Lufthansa: a joint venture with Air China could mean almost half its ASKs are covered by JVs. Retrieved April 3, 2014 from CAPA: http://centreforaviation.com/analysis/lufthansa-a-joint-venture-with-air-chinacould-mean-almost-half-its-asks-are-covered-by-jvs-133981 Airline Industry Analysis Page 14 Figure 10-Scale to Merger15 Objectives Integrating operations within a joint venture takes time and resources. It will take Lufthansa and Air China many years to assimilate every aspect of each other's business. Unlike a merger, a joint venture allows two businesses to operate independently of one another. However, the companies will be working very closely, and many aspects of their business will need to mirror each other. For this reason, the group has developed both long and short-term objectives for Lufthansa while implementing this strategy. Short-Term (1 Year) Mid-Term (2 Years) Long-Term (3-5 years) Objective Increase flight efficiencies and decrease economies of scale Reduce ticket prices through network integration and fare alignment Full network optimization Strategy Coordinate and integrate schedules; shared lounge access; shared human resources; shared frequent flyer programs Develop common ticket prices; capitalize on special fares and reductions on interlining flights Develop one, fully-integrated network; combine segments to complete the customers' itinerary; offer the maximum number of route options at multiple different flight times Figure 11- Lufthansa's Objectives In the short-term, Lufthansa will begin combining resources that are less complex to integrate, such as employees, lounge access, frequent flyer programs, and ticketing websites. These items can be integrated fairly easily and should be operating uniformly in one year or less. In addition, Lufthansa and Air China will begin coordinating their flight schedules. The companies will instantly reap the benefits of combined schedules by increasing flight efficiency and increasing economies of scale and density. 15 ibid Airline Industry Analysis Page 15 Within two years, Lufthansa should see their ticket prices reduced. As the route network continues to integrate, passenger flows will become denser. As this happens, both Lufthansa and Air China will be able to fly larger jets to more obscure locations, increasing the profit per flight and decreasing the ticket price. In addition, as the companies engage in fare alignment, they will be able to capitalize on special promotional fares. In the long-term, Lufthansa and Air China will experience full network optimization. As the companies merge their networks into one fully-integrated route system, they will be able to offer the best possible itinerary for their customers. By using each other's hubs, the airlines can provide more direct routes at lower prices than ever before. Additionally, Lufthansa and Air China will be able to offer flights to different locations at multiple different flight times. Mission Statement We are Europe's Airline Powerhouse connecting Europe with the world and the world via Europe with our global services. The customer is the center of our attention: we provide reliable services for passengers and air-cargo. Seamless cooperation with our partners strengthens us in a volatile environment. Our target is to grow profitably and maintain a healthy financial structure, to enable investment in the development of our business, fleet, products and people. We are committed to sustainable development and assume our ecological, civic and social responsibilities.16 Lufthansa is focused on connecting their passengers with the rest of the world. Expanding and strengthening operations in the fastest growing region of the world falls directly in line with the company's mission statement. Furthermore, Lufthansa's mission statement capitalizes on the fact that their partnerships strengthen their competitive position. Therefore, nothing needs changed in the current mission statement to support the strategy. Operations Lufthansa and Air China would accept the idea of \"metal neutrality\" in which both parties would be indifferent as to which fleet operates the flight between China and Europe.17 Therefore, both airlines would begin sharing a lot of their resources. Primarily, all routes provided by Air China and Lufthansa would be available for customers, allowing them to combine flights and take advantage of newly developed connections. This gives Lufthansa a huge advantage as the AsiaPacific region's total passenger traffic is projected to grow at 6.7% over the next three years. 18 16 Lufthansa. (2013). Group Strategy. Retrieved March 9, 2014, from Lufthansa: http://www.lufthansagroup.com/en/responsibility/economic-sustainability/group-strategy.html 17 CAPA Centre for Aviation, op. cit 18 CAPA Centre for Aviation. (March 27, 2013). Lufthansa's long-haul, low cost Asian operation. A range of partner options. Retrieved March 9, 2014, from CAPA: http://centreforaviation.com/analysis/lufthansas-long-haul-low-cost-asian-operation-a-range-of-partneroptions-part-1-102605 Airline Industry Analysis Page 16 3-Year Projected Air Traffic Growth 8% 7% 6% 5% 4% 3% 2% 1% 0% Figure 12- Air Traffic Growth by Region19 Aircrafts would be free to fly back and forth between all Lufthansa and Air China destinations and can dock and be serviced by either airline at any time. Air China will benefit from sharing these aircraft as Lufthansa has recently made huge strides to increase their flight capacity. In 2013, Lufthansa acquired 34 new jets from Boeing and 25 from Airbus and have announced that they are going to purchase over 100 more aircrafts within the next decade.20 Both companies would begin sharing terminals, lounges, and other facilities for their customers in each of their airports. Additionally, both airlines will align their flight schedules. This will enhance network depth for their passengers, giving them the opportunity to fly to more destinations at times that are convenient for the customer. This will particularly benefit those passengers who need to fly to destinations beyond hub airports. Marketing Shared Ticketing Lufthansa and Air China would immediately merge their ticketing processes, allowing consumers to purchase flights from either company in one convenient location. Consumers will have the ability to purchase a ticket online, over the phone, or in person from Air China or Lufthansa and have access to all of the flight options that both airlines offer. Within the first two years, Lufthansa and Air China will also adopt common ticket prices. This benefits both the airlines and the consumers for multiple reasons. Engaging in cooperative pricing allows the airlines to price their tickets so that both the airline and consumer benefit from 19 ibid 20 Julie Johnson, Robert Wall, and Richard Weiss. (September 19, 2013). Lufthansa splits $19B Order between Airbus, Boeing. Retrieved April 9, 2013 from Bloomberg: http://www.bloomberg.com/news/2013-09-19/lufthansa-splits-19-billion-aircraft-order-amongairbus-boeing.html Airline Industry Analysis Page 17 the overall itinerary. This eliminates high fares charged for interlining flights. 21 In addition, the increased demand for more obscure locations will allow Lufthansa and Air China to operate larger jetliners to most destinations. This will increase economies of scale, allowing the airlines to decrease their ticket prices. Shared Rewards Programs Lufthansa's rewards program, Miles and More, has over 23M members. The rewards program is the largest in Europe, encompassing 37 airline partners and 350 commercial partners.22 Air China has the oldest reward program in the country called, PhoenixMiles. PhoenixMiles also partners with numerous airlines and other companies across the globe. Both companies would immediately begin sharing benefits between rewards programs. Frequent flyer miles can be accrued on flights provided by either airline. Similarly, points can be redeemed on either airline, including points that were accrued prior to the joint venture. Human Resources Unlike a merger, a joint venture allows two companies to operate independently of each other but still benefit from shared resources. For this reason, a joint venture does not require employee restructuring, layoffs or massive hiring. However, because this joint venture will increase flight traffic at Lufthansa, the company may need to hire additional employees. The passenger airline division currently employs 117,000 employees. The company will likely need to hire more pilots, flight attendants, and air traffic controllers to cover the surge in demand. In addition, customer service representatives, ticket agents, and maintenance employees will need to be hired to cope with the increase in passengers. In addition to the increase in demand, the company should develop a new department and management position to oversee and act as a liaison in the joint venture process. Chinesespeaking German citizens or foreign nationals will need to be a part of this new department to ensure a smooth transitioning process. Additionally, members of this new department will need to be well-versed and mindful of both Chinese regulations and market forces in China that could affect their business. An organizational chart for the new department is shown below. 21 IATA (2014). IATA Economics Briefing. Retrieved April 9, 2014 from IATA: http://www.iata.org/whatwedo/Documents/economics/Economics%20of%20JVs_Jan2012L.pdf 22 Lufthansa Group. (6 March 2013). 2012 Annual Report. op cit. Airline Industry Analysis Page 18 Figure 13- Update to Organizational Chart Airline Industry Analysis Page 19 R3 Strategy Planning : Strategy Formulaton Strategic Plan 1 Strategy Formulation External Factor Evaluation (EFE) The External Factor Evaluation (EFE) tool is used by many firms to determine ranking within their industry. 1 The top-tier firms in the social networking industry have been analyzed, as well as external factors that may have an effect on the industry. R3 Strategy Planning : Strategy Formulaton The benefit of the EFE tool is that it allows business analysts to have a better understanding of how the competition is responding to external forces, and how a company's response to external forces makes them an industry leader. A disadvantage of this tool is that it is subjective. It may be difficult for business analysts 2 to come up with unbiased weights, as each company may have its own priorities. For instance, Facebook puts a lot of weight into popularity and its user base, while other companies may put more weight into increasing their revenue, or advancing their technology. Hopefully, by incorporating knowledge gained through research, analysts have a better understanding of the importance of certain factors over others. R3 Strategy Planning : Strategy Formulaton The EFE tool depicted in Table 1 below merges the factors that impact the industry with how well each company handles external forces. Each factor is weighted according to how much it impacts the industry, and each company is ranked by how it overcomes obstacles and capitalizes on opportunities. 1 Jurevicius, O. (2014, December 10). EFE & IFE Matrices. Strategic Management Insights. Retrieved from 3 Opportunities The three highest weighted opportunities are: Internet penetration, low barriers to entry, and life cycle in \"growth\" stages. These are considered the most important opportunities for companies to take into account, and are further ranked in the above matrix. R3 Strategy Planning : Strategy Formulaton Internet Penetration The justification for Internet penetration carrying the most weight is simply because social networking sites depend on access to the Internet. Individuals with no Internet cannot typically register on social networking sites, whether for consumer purposes or enterprise purposes. Internet penetration is listed as an opportunity because nearly 42% of the world's population has access to the Internet. 2 4 Facebook is the only company that receives the highest score \"4\" because as previously discussed, Facebook is the only social networking site to transcend the use of the Internet by providing its product, \"Facebook Zero\" to countries with no access to Internet. In addition, Facebook has penetrated not just the U.S. market, but the global market as well (as previously discussed). Below is a graph further demonstrating the importance of Internet penetration for social networking site LinkedIn. The graph compares Internet users by country between the top 10 countries and a side by side comparison of Internet users by country and LinkedIn users by country. R3 Strategy Planning : Strategy Formulaton Figure 1 illustrates that China, the U.S. and India are the top three countries with the most Internet users. 3 With the exception of China, the top 3 LinkedIn users by country is almost identical (U.S., India, Brazil), as http://www.strategicmanagementinsight.com/tools/ife-efe-matrix.html 5 illustrated in Figure 2.4 Clearly, countries with access to Internet are a strong influence on social networking companies. Low Barriers to Entry The low barrier to entry factor is an opportunity for many new social networking sites. This essentially means that the lower the barrier, the easier it is to enter into the industry. The social networking industry is classified as a low barrier to entry because it does not cost much money to start up a business on the Internet. R3 Strategy Planning : Strategy Formulaton Low barriers to entry also implies that it is easier for an established company like Facebook to create and maintain product lines outside of their main site, such as acquiring specialized applications like Instagram and WhatsApp. It is relatively easy to attract users when there is no fee attached to the service. Therefore, 6 Facebook and QZone receive the highest ranking for this category. LinkedIn, though also free, faces different challenges because it is a specialized service which attracts a more limited user base than its competitors within the industry. Rati ng* * ^^ * R3 Strategy Planning : Strategy Formulaton Weig ht^ Weig hted Scor e^^ ^^ * ^^ 2 Kemp, S. (2015, January). Digital, Social, Mobile & Worldwide in 2015. WeAreSocial. Retrieved from 7 * ^^ 8 R3 Strategy Planning : Strategy Formulaton R3 Strategy Planning : Strategy Formulaton http://wearesocial.net/tag/statstcs/ 9 R3 Strategy Planning : Strategy Formulaton 3 Internatonal Telecommunicaton Union (ITU), United Natons Populaton Division, Internet & Mobile 10 11 R3 Strategy Planning : Strategy Formulaton R3 Strategy Planning : Strategy Formulaton Associaton of India (IAMAI), World Bank. July 1 2014 Estmate. 12 13 R3 Strategy Planning : Strategy Formulaton R3 Strategy Planning : Strategy Formulaton 4 https://www.linkedin.com/pulse/20140723071458-25491991-linkedin-statstcs-number-of-users-and- 14 15 R3 Strategy Planning : Strategy Formulaton R3 Strategy Planning : Strategy Formulaton penetraton-july-2014 16