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Lufthansa – maintaining change momentum
Heike Bruch and Sumantra Ghoshal

EBF issue 7

Lufthansa ’s turnaround from near bankruptcy in 1991 to sound financial health by the end of the 1990s is one of the more remarkable stories of recent European corporate change. Reduced to asking the major German banks for money to pay employee salaries in 1992, the company ’s CEO, Jürgen Weber, embarked on a programme which ultimately led to his announcement in June 1999 of the best results in Lufthansa ’s seventy-year history.

Lufthansa had reversed a record loss of DM 730m in 1992 to a record pre-tax profit of DM 2.5bn in 1998 on revenues of DM 22.7bn. The proportion of seats filled (Seat Load Factor or SLF) reached 73 per cent,a record performance in Lufthansa ’s history and a nine percentage point increase on 1991), while the number of passengers increased from 33.7 million in 1992 to 40.5 million in 1998. Staff numbers were cut from about 64,000 in 1992 to roughly 55,000 in 1998.

By 2000 Lufthansa was a privately-owned, profitable company –- and a core element of the strongest world-wide alliance in the airline industry. This article – a specially abridged version of a full case study – describes how the company went from the brink of disaster to becoming one of the world ’s leading airline companies. Introduction by Tim Dickson
Learning by experience

Fads in management education come and go – but the ‘case study ’ approach to teaching appears to be a more durable technique than most.

Latest figures from the European Case Clearing House (ECCH)** – a non-profit organisation supported by around 350 institutional members, most of them European business schools – show that fees paid by users of the 2000-2500 most ‘active’ cases reached a record £1.5m last year.

Harvard Business School – where case writing was pioneered and with which case writing is almost synonymous – still produces roughly 60 to 70 new ones each month while the Richard Ivey School of Business (Western Ontario) and the Darden School (Virginia) are other North American stalwarts. In Europe, Insead, IMD, IESE and the Helsinki School of Economics (a member of the Community of European Management Schools) all fund case writing in a formal way and produce a steady trickle of new studies. Elsewhere, cases are written by individuals in their own time or with money provided by corporate sponsors.

In some ways the robustness of the case study, which is generally written with a clear pedagogical objective and which records the real-life issues faced by managers with surrounding facts, opinions and prejudices, is surprising. E-learning has introduced new techniques and many recent entrants to the executive education market have tried to make their mark by challenging the traditional ways of ‘chalk and talk’. Critics have argued that ‘static’ cases have limited relevance in a fast moving world and have repeatedly – if prematurely – predicted their demise.

The popularity of cases can also be measured by the fact that they feature prominently in the courses of most of the world’s top business schools. That said, their durability is not guaranteed: some of the new breed of B-School faculty lack case experience because they come to business school teaching without having had any personal exposure to cases, e.g. via economics or similar degrees, some of the best teachers/authors are reaching retirement, and the emphasis in many universities (notably in the UK) is increasingly on research rather than teaching.

Case studies are not formally peer-reviewed. They do not appear in those journals where professors and other business school academics are required to have their work published if they wish to advance their careers. And they can have a limited shelf life in disciplines like marketing and strategy where thinking and new fashions can change quite quickly.

ECCH is dedicated to the development and promotion of the case method, organising workshops and seminars both for budding case authors and for teachers, either unfamiliar with the case approach or whose skills need polishing. ECCH always insists that cases accepted for publication must have been tried and tested in a learning environment and more recently has been eager to improve the standard of accompanying teaching notes. The teaching note is an important document usually produced by the author and designed to give other instructors valuable insights into the case and the learning which can be derived from it.

EBF believes that good cases still make lively and instructive reading – and that is why in this issue (pp40-45) we have introduced the EBF case study, a specially abridged version complete with edited teaching notes (management lessons). Our first case in this new series is based on the winning entry to the 2000 case competition organised by the European Foundation for Management Development (EFMD). EBF’s editors will welcome feedback on this initiative and submissions from other case authors.

**ECCH distributes a wide collection of case studies, reprints and videos produced by European and North American business schools. Details can be found on its online bibliography COLIS which can be accessed via ECCH is also distributing a new series of 18 CD-ROM-based case studies which have been developed by a consortium of six European business schools which are members of the Community of European Management Schools (CEMS). These studies are designed to describe successful innovation in different industries and are based on organisations such as Lego, Rockwool and Norsk Hydro.

Editor ’s note

Few industries will be hit as hard by the catastrophic terrorist attacks on the US as air transport. As EBF went to press airlines and aircraft manufactuers in North America and elsewhere were announcing cutbacks as they sought to match their capacity to lower expected levels of demand. Since the end of the period covered by the following case study Lufthansa was already encountering new difficulties – notably a bitter strike by pilots demanding higher wages and seeking a ‘payback ’ from management for the sacrifices they made as part of the rescue plan in the early 1990s.

Case studies of the Lufthansa kind are not intended to be brought up to date – the issues raised are nevertheless relevant to all companies undergoing change.It is also safe to say that in the possible restructuring of the European airline industry following the catastrophe in the US the German carrier finds itself in a stronger position than it would have been without the transformation described in the case study.

Lufthansa ’s own corporate commitment to executive education is reflected in its sponsorship of the annual Case Challenge organised by CEMS (Community of European Management Schools) later this year. Students from 15 universities will meet in Cologne to tackle the issue, ‘Facing and managing the challenges of global competition in the aviation industry'.

What went wrong?

Founded in 1926, liquidated in 1945 and reborn in 1953, Lufthansa represented the characteristic strengths of German industry: reliability, order and technical excellence. Majority-owned by the German state, its strategy, organisation and culture were an amalgam of a strong technical orientation, dominated by engineers, with the bureaucratic values of public administration. Its role as an organ of the state was reflected in its values and beliefs: formal, rule-driven and inflexible, the yellow badge of Lufthansa symbolised independence, permanence and sovereign dignity. Lufthansa was the national airline carrier of the Federal Republic of Germany, state-owned, monolithic and unprofitable.

Deregulation of the airline industry had begun in 1978 in the US. In Europe, by contrast, while there was some relaxation of regulations, over the 1980s most airlines continued to be owned by their respective national governments, who continued to maintain strict control over both routes and landing slots at airports. In the late 1980s, however, deregulation triggered intensive price competition. Coupled with the steep fall in air traffic during the Gulf War and the subsequent recession, this led to a serious overcapacity for the global airline industry and, specifically in Europe, a severe market slump. In 1991 the SLF went down to about 57 per cent in Europe, compared to a worldwide average of about 65 per cent.

In the second half of the 1980s, under the leadership of Heinz Ruhnau, Lufthansa had pursued a policy of ‘growth through own strength’. Based on the belief that only the largest airlines will survive in an era of global competition, Ruhnau had committed the airline to rapid fleet expansion in order to capture market share. By the time Jürgen Weber was appointed CEO in 1991, Lufthansa had enlarged its fleet by some 120 aircraft to 275. The problem was aggravated by Lufthansa’s remarkable inflexibility over the capacity and services offered.

Furthermore, Lufthansa noticed the economic crisis later than other companies. Because of German reunification, Lufthansa enjoyed a boom at a time when the rest of the industry was facing this severe market downturn. In 1991, while overall traffic dropped by 9 per cent in Europe, Lufthansa’s passenger numbers increased by 11 per cent. Despite this growth, Lufthansa reported an after-tax loss of DM 444m in 1991 – a result largely attributed to unique non-influenceable factors like the Gulf War. But results in the second half of 1991 and in the beginning of 1992 also fell below expectations.

Although awareness of a serious crisis began to spread in early 1992, Lufthansa was so focused on growth as the route to success that employment continued to rise during the first six months of the year. “Even when the crisis became very obvious”, Jochen Hoffman, Lufthansa’s Senior Vice President, noted, “people still thought: ‘We are the German Airline Company, state-owned and a prestige organisation. They will never let us die’.” Outsiders were not so sure. When Weber, with only fourteen days of operating cash requirements in hand, went to the banks in 1992, no private bank believed Lufthansa would survive. Only a single state-owned institution – the Kreditanstalt für Wiederaufbau – agreed to give Lufthansa the money it needed to pay salaries.

The turnaround

On a weekend in June 1992, Jürgen Weber invited some twenty senior managers to the training centre at Seeheim for a meeting that was originally entitled ‘Mental Change’. It was aimed at building a network of change-minded managers who would drive redevelopment within the company. Realising that the crisis was becoming acute, Weber changed the workshop’s title from ‘Mental Change’ to ‘Crisis Management Meeting’ shortly before it began. The turnaround had started.

The process of this meeting was as important as its outcome. For some managers this was their first experience of interdepartmental co-operation and non-bureaucratic problem solving. The necessity of drastic action and the direction of change required were not contentious. The facts were too obvious. As Wolfgang Mayrhuber, a former member of the Operations Team, explained: “No one had an idea of the gravity and the brutality of the crisis. After a long phase of denial or ‘not wanting to believe’, there was a next phase of ‘searching for the guilty people’, which was followed by an awareness that there was a massive pressure to act. After this, everything went very fast. The goals we committed ourselves to at Seeheim were very ambitious and nobody believed that we could ever meet them ... The critical question was how to win over other managers and employees for these ‘stretching’ goals and activities.”

The Seeheim workshop was repeated three times, with different groups of fifty people. Rather just informing managers of the facts and the strategy they would have to implement, these additional workshops enabled a larger group of managers to live through the same process, recognise the threat and feel the urgency of remedial action. After the meetings the majority of senior managers were convinced of the necessity for drastic change and committed to a set of extremely ambitious goals. According to Dr Heiko Lange (former Chief Executive for Personnel), “In the turnaround we have consciously tried to win the commitment of people through workshops, town meetings, etc. With everything I do, I try to demonstrate that at first we have to reach the emotional mobilisation before a rational mobilisation becomes possible at all.” He describes the approach as: “Hard success through soft processes.”

The Seeheim meetings produced a set of 131 projects or key actions, known as ‘Programm 93’. In order to reduce losses of DM 1.3bn, Programm 93 required drastic cuts in staff numbers (losing 8,000 positions); lower non-personnel costs, including a downsized fleet (saving DM 400m); and increased revenues (by DM 700m). To implement these measures, Lufthansa adopted the idea of town meetings. Jürgen Weber decided to hold as many meetings as possible when visiting different Lufthansa units in person. By the summer of 1999 he had participated in over 200 of them. Other senior managers also held town meetings in their departments and this was still common practice over the whole Lufthansa organisation in 2000. “It was decisive for the turnaround that we told the employees openly what the situation was”, Weber himself remarked. “It allowed us to develop common goals between employees, management, work councils and unions. We could even discuss issues such as staff reductions and productivity increases openly and personally.”

A second implementation measure was the installation of special ‘redevelopment controlling’ under the direction of corporate controller Dr Peter Hach. This programme aimed at monitoring progress and results concerning personnel and non-personnel cost-cutting and the enhancement of revenues.

Last but not least, the Executive Board appointed a forceful group of senior managers representing the main departments of the company. This Operations (OPS) Team had the task of implementing Programm 93 and became an important motor for that process. Their enormous efforts succeeded in driving the Programm 93 initiatives into action by defining concrete activities and constantly monitoring, advising and supporting the line managers who had ultimate responsibility for changes made. Jürgen Weber showed his unconditional commitment to the OPS Team, personally supporting all their needs. His involvement was demonstrated by a variety of actions, including the Executive Board’s waiver of 10 per cent of their annual salaries in 1992.

In total, about 70 per cent of the 131 projects of Programm 93 were successfully implemented during the turnaround. Those remaining were put in place later, with implementation continuing into 2000. Weber did not insist on immediate implementation of the remaining 30 per cent in order not to jeopardise the consensus with the unions. Indeed, the absence of strikes and a high level of consensus between management and other stakeholders, in particular the trade unions, had been a remarkable feature of Lufthansa’s crisis management. The same philosophy influenced all subsequent decisions and action.

Implementation of staff cuts was the responsibility of line management. It was important that line managers also took responsibility for motivating the remaining employees. In the words of Jürgen Raps, Senior Vice President of Flight Operations and Chief Pilot: “The most important factor during this hard phase was credibility. We had to apply various strategies in order to intensify the communication during the crisis. This took a lot of energy but was worthwhile.” The first effects of this effort were noticeable in 1993. Numbers of passengers grew, revenue increased and costs fell. In November, eighteen months after the crisis management meeting, these initial successes was reported in the media: “The crane has lift-off again.” (a reference to the bird in Lufthansa’s logo).

But Lufthansa was aware that superficial recovery could not guarantee sustainable success. More fundamental change had to follow: to secure its future, the company had to deal with broader issues, including corporate restructuring, privatisation and strategic cost savings.

Corporate restructuring and privatisation

At the beginning of the 1990s, Lufthansa was functionally organised into six divisions (Finance, Personnel, Maintenance, Sales, Marketing, Flight Operations), each headed by a member of the Executive Board. This was inefficient due to high levels of top-management involvement in operational matters, slow decision-making processes, lack of accountability, lack of transparency, the existence of functional silos or baronies and, finally, insufficient responsiveness to the market.

Lufthansa realised it could not respond effectively to emerging competitive challenges with the existing functional structure. The goals of Lufthansa’s restructuring process were to increase both responsiveness to the market and transparency of costs and revenues, and to reduce the fragmentation of decision-making processes. The central idea was that Lufthansa would be more successful as a federative group of interdependent smaller units than as a monolithic functional block. It was not intended to sell off large parts of the company, but to give them sufficient opportunities to prove their vitality in the competitive environment. The idea was to outsource into the ‘family network’ rather than the free market.

Lufthansa considered various organisational alternatives, both in terms of how to break up the integrated operations into smaller, self-contained units and in terms of the specific legal and administrative structures for governance of these units. In the end, three business areas were formally separated into legally autonomous and economically independent subsidiaries: LH Cargo AG (airfreight), LH Technik AG (technical maintenance service) and LH Systems GmbH (IT services). These joined the existing subsidiaries CityLine (domestic flights), Condor (charter flights) and LSG Sky Chefs (catering). At the same time, the tasks and responsibilities of the Executive Board were redefined by strengthening their strategic focus and giving more weight to the core business: ‘Passenger Service’. By 2000 the Lufthansa Group Management Board directed the activities of the entire group through three central organisations: the Chairman’s Office, Finance Management and Human Resource Management.

Persisting with decentralisation led Lufthansa in 1997 to grant further operational independence to Lufthansa Passenger Service – the original core of the company. With 26,000 employees, including 12,500 flight personnel and cabin crew, Lufthansa Passenger Service was restructured as a profit centre, led and directed by a six-member Management Board. While tax and landing-slot considerations prevented the Passenger Service business area from becoming a separate legal entity, this restructuring clearly separated it from the day-to-day influence of corporate top management.

Parallel to the restructuring, the idea of privatisation was pursued. At the outset of the turnaround, Lufthansa had embarked on negotiations with the German government to privatise the company. One important stumbling block for privatisation was withdrawing from the VBL (Versorgungsanstalt des Bundes und der Länder) pension fund that bound Lufthansa to the German state. It was extremely difficult to untie these ‘golden chains’ but, in May 1994, the problem of the pension fund was resolved. The German government reduced its holdings in Lufthansa to 36 per cent and agreed to pay DM1bn into the VBL to cover disbursements to current retirees, as well as to offer guarantees for constituting a separate Lufthansa pension fund. In 1997 Lufthansa became fully privatised.

Strategic cost savings

As a private company, Lufthansa felt the full pressure of having to be competitive and strategically cost-effective. As a strategic response, Lufthansa continued its transformation process by starting ‘Programm 15’, so-called because 15 pfennig was the target cost for transporting one aircraft seat one kilometre by 2001 (it had cost 17.7 pfennig in 1996). Programm 15 was a wide-ranging strategic cost management programme aimed at an overall unit cost reduction of 20 per cent within five years (4 per cent annual reduction across the Lufthansa Group). It was based on the need strategically to maintain the course of cost reduction, and derived from the conviction that a 20 per cent reduction is easier to achieve than 2 per cent. All Lufthansa divisions and companies were affected.

Programm 15 worked with certain rigorously applied principles, using experience gained from the turnaround. Like Programm 93, the implementation of Programm 15 was based on integrated responsibility. The line managers were responsible for cost reductions, which meant that the planned yearly results of Programm 15 were integrated with their ‘normal’ management objectives and made part of the managers’ performance evaluations. Tight monitoring and publicly-shared results (actual performance data for each individual manager were published regularly) ensured accountability and continuous feedback.

Star Alliance – growth through partnership

Apart from the focus on internal costs and structural redevelopment, Lufthansa constantly worked on its external relationships. Having experienced extreme overcapacities when following the philosophy of ‘growth through own strength’, it decided to choose an alternative strategy: ‘growth through partnerships’.

Lufthansa was one of the central founding members of the most comprehensive and probably the most competitive airline network in the world. The Star Alliance started functioning in May 1997. From April 1999, when Air New Zealand and Ansett Australian joined the Alliance, the network included eight members operating between 720 destinations in 110 countries. In October 1999, ANA (All Nippon Airways) joined the Star Alliance, an important step for the Asian expansion strategy of the Alliance.

By 1999, three other global alliances had emerged: Oneworld, Wings and Qualiflyer. With the launch of Oneworld in February of that year, competition in the airline industry took on a new dimension. This new alliance had five founding members, a common logo and shared the Star Alliance vision of seamlessly linking the partner airlines’ route networks. Lufthansa believed that the Anglo-Saxon culture binding the Oneworld partner airlines could facilitate mutual understanding and shared decision-making, making the alliance a potentially cohesive and dynamic rival.

Strategically, these developments were of vital importance. At the end of the twentieth century, the economic structure of the airline industry was changing from competition between airlines to competition between networks. In consequence, airline networks were striving to intensify integration and common alliance strategies. By 2000 the biggest challenge for Star Alliance lay in defending its leading position and expanding its market leadership through integrated network management in a new phase of intensifying competition between the rival networks.

The established core of airline alliances was code-sharing – that is, using the same flight numbers. In 1999 Lufthansa and United Airlines, for example, served not less than 130 code-share flight destinations. Lufthansa reported that in 1998 supplementary revenue of DM 450m was due to the alliance. Further important synergies were realised through joint sales activities (joint advertising, common frequent-flyer programmes, joint travel-agency contracts), collective market research, shared facilities (such as lounges) and staff exchange. The ‘landlord concept’, introduced within the Star Alliance in 1997, illustrates the nature and extent of these potential benefits. Aimed at developing a common ground- service (ticketing and check-in), twenty-seven key hubs were identified worldwide to start this integration process of sharing airport facilities and services under one roof. At each station one carrier was appointed `landlord’ and given the responsibility for airport services like check-in and ticketing for all the other Star Alliance members. Since the other airlines did not retain any activity in these hubs, the programme implied a take-over of the entire staff of all the other partner airlines by the `landlord’ airline. For example, in November 1997 all the former Lufthansa employees at Copenhagen were transferred to SAS while Lufthansa took all the SAS employees in Frankfurt.

Beyond these important established operational synergies, in 1999 the Star Alliance was beginning to approach the much more demanding challenges of co-ordinating and integrating strategic activities. These included establishing a common global brand, developing a shared technology platform, joint training, and personnel development. While the operating synergies could be managed through ad hoc teams and task forces, effective co-ordination of these strategic issues required an integrated management structure for the overall alliance, as well as a systematic process for co-ordinating the internal strategic activities of all the partners.

In December 1998 the Star Alliance airlines formed a focused management team to lead the alliance on a day-to-day basis. Until then the alliance activities were co-ordinated by a set of committees and project teams. The presidents of the airlines decided to bundle responsibilities for strategic issues. Jürgen Weber personally championed the need for a permanent management structure in order to give further force and dynamism to the Alliance. The newly appointed Alliance Management Board consisted of six executives who were made responsible for dealing with all the strategic issues of the network and implementing the five-year business plan approved by the airlines’ presidents at their meeting in October 1998 in Rio de Janeiro.
There were four key strategic issues:

  • the global network
  • marketing and sales
  • service and product development
  • information technology.

    The Management Board was chaired by Lufthansa’s Friedel Rödig with Bruce Harris of United Airlines serving as his deputy. The other core members of the Management Board were responsible for specific areas of activity: Ross McCormack of Air Canada was in charge of global network development, Per Stendenbakken of SAS was responsible for seamless service and product development, Dieter Grotepass of Lufthansa looked after sales strategy, marketing communications and co-ordination of frequent-flyer programmes, while all issues related to information technology and automation were the responsibility of United’s Bruce Parker.

    With this new structure in place, the Alliance had progressed beyond committee-based collaboration – but this was not considered sufficient for true strategic integration. The central question was whether the success of the alliance demanded a fusion of the partners’ different corporate cultures. Thomas Sattelberger, Corporate Senior Vice President of Executive Personnel and Human Resource Development, pointed out: “The key issues for the Star Alliance will be common training and development of staff in order to support inter-organisational learning of partner companies, to build a strong alliance glue and network culture, but most of all to create a shared customer-obsessed alliance spirit.” Another vital question was how such closer integration within the alliance would affect the other Lufthansa companies. A common network strategy and cultural integration were inevitably connected to critical issues concerning branding and identity within the Lufthansa Group. The specialisation within the Star Alliance – and particularly the planned extension of joint procurement – could cause serious economic problems for some of Lufthansa’s subsidiaries.

    For example, the search for synergies within the Star Alliance included the joint development of IT solutions. In April 1999 the Management Board of the Star Alliance signed a Memorandum of Intent concerning the formation of a central Star Alliance IT Organisation. The main task of this organisation would be to develop a common information system for all the Star Alliance partners.
    As a first step, a small team of about twenty people would be set to work, located in one place so as to eliminate the problems of working across different time-zones. For LH IT Services this development represented a serious threat to their main market. Dr Peter Franke, Chief Executive Lufthansa IT Services and Lufthansa Systems GmbH, explained that: “Within the Star Alliance Management, United Airlines took responsibility for the Electronic Data Programming. Being a monolithic bloc, United Airlines embodies its own IT department which is supposed to take charge of the entire Star Alliance IT solution.
    The market is neglected in this case and Lufthansa IT Services is treated as an external provider, ‘standing outside the door’ together with ‘real externals’ such as IBM and Debis. The policy of improving synergy within the Star Alliance could cost us our main client, Lufthansa. Then we would be out of business because other alliances will not let us in either.”

    Lufthansa in 2000 – development of an aviation group

    Simultaneous to the Star Alliance integration process, Lufthansa aimed to evolve from an airline company into an aviation group. The explicit goal was to become the leading provider of air transport services in the world. Lufthansa’s way is more or less unique: according to Jürgen Weber, “No other airline follows an aviation group strategy as consistently as Lufthansa does.”

    Lufthansa identified seven major business areas within the Group and centrally co-ordinated their strategy development process. Each of the seven main companies is supposed to aim at achieving profitable, sustainable growth and a leading position in its world market-segment. In terms of their competitive positions, most of the business areas already held leading roles. Nevertheless, their strategies for growth and globalisation varied significantly.

    Differences could be seen in their degrees of internationalisation and in their relationships to the brand ‘Lufthansa’: the patterns of the Passenger Service – the airline and traditional core of Lufthansa – and the emerging decentralised cores of the new aviation group differed hugely. Being a member of the Star Alliance meant that, for Lufthansa Passage (Passenger Service), the development could be seen as a ‘renationalisation’ process, especially when taking the landlord concept into account. In contrast to this, GlobeGround and LSG Sky Chefs had businesses linked to the local needs and infrastructures of their respective regions. This not only implied the need for an international orientation and for local integration in each market, but also created a potential tension with regard to the use of the Lufthansa brand: for example, the name GlobeGround was deliberately chosen as a ‘Lufthansa-neutral’ name.

    The business characteristics of Lufthansa Technik AG and Lufthansa IT Services were very different. These technically dominated services were less local and demanded a global strategy that was closely associated to the Lufthansa brand. `Lufthansa stands for German values such as precision, technical reliability, high quality and expertise, which are important positive indicators of our business,’ according to Dr Franke. “The ‘Germanness’ of Lufthansa is of direct use for our image, while this might be the other way round for customer services, which demand more ‘non-German’ traits such as friendliness or modesty. The name Lufthansa opens doors. We will always be ‘Lufthanseats’.”

    Present and future challenges

    In 2000 one of Lufthansa’s most serious challenges was to achieve radical improvements in operational areas such as punctuality, luggage safety, waiting periods, technical reliability and telephone availability. In order to improve the situation for Lufthansa’s customers, Jürgen Weber announced a quality offensive at the annual general meeting in June 1999. ‘Operational Excellence’, a project with ambitious goals and significant resources, aimed to establish a basis for drastic improvements in punctuality and quality. The three-year programme was expected to use similar methods with the same persistence as its predecessor Programm 15.

    With the arrival of network-versus-network competition, rather than the previous airline-versus-airline battles, the key challenge was to manage the Star Alliance as a whole. This raised questions about how to establish the network in the market, how to form a ‘Star Alliance’ brand, how to create a network identity and how to handle network borders. A problem linked to this was the inner structure of Star Alliance, which had to cope with the challenges of managing the mental adjustments, getting used to the mechanism of ‘competition/co-operation’ and shaping the different relationships within the Alliance.

    One vital issue connected with the Alliance strategy, on the one hand, and with development into an aviation group, on the other hand, was the preservation of the ‘Lufthansa’ identity. The question was: how could Lufthansa become an integrated part of a strong global airline network and at the same time form an integrated aviation group in which the Passenger Service was only one part among others? Weber himself noted the importance of “preserving the Lufthansa brand under the roof of the Star Alliance.”

    Developing a ‘new’ identity demanded defining or developing internal relationships. A core element of the aviation group strategy was a system of clear customer-supplier relationships between the companies within the Group. These agreements were supposed to be based on market conditions with the stipulation that the Group companies be conceded a ‘last call’. Franke explains: “One of the problems of increasing importance throughout the Lufthansa Group is the lack of relations management. We have not yet developed the customer-provider relationships that are necessary for a market-based internal co-ordination. Internal customers do not behave like normal customers yet. They demand conditions they would never dare to ask for in the external market.”

    Lufthansa’s sharpened sensitivity to weak signals, costs and so on, and the openness to change resulting from its response to the crisis of 1991, were clearly very important for its record performance in 1998 and 1999. One remaining challenge was how to maintain such attitudes in good times. “Lufthansa has to continue in its success path and not become arrogant or practise cost-cutting indiscriminately,” Weber has said. “The most difficult part is to keep people motivated now that the pressure has eased off.”

    Shaping the future – Lufthansa School of Business

    To keep alive that sense of the urgency of change and transformation, to form a cultural and knowledge platform for the Lufthansa Group, and to drive learning and experience within strategic core processes, Lufthansa established the Lufthansa School of Business at a corporate level in April 1998.

    The school’s philosophy and activities extended far beyond traditional approaches to training and development. Its task was to tighten the links between strategy, organisational development and individual development in order to support the company’s key priorities for further transformation and future performance. Thomas Sattelberger, Executive Vice President of Product and Service since July 1999 and credited as being the conceptual architect of the Lufthansa School of Business, explains the particular advantages for Lufthansa in these terms: “In flexible organisations like Lufthansa, and even more so in a fluid alliance and network organisation like the Star Alliance, a mental cultural core is necessary. When there is almost no formal system of procedures and regulations there is a need for mental integration.
    Like the rock in the river that shapes the water, this is one of the central tasks of the Lufthansa School of Business.”

    The Lufthansa School of Business explicitly follows five goals:

  • Effectively and efficiently supporting the key strategic issues of the Lufthansa Group.
  • Building intellectual capital and tying it to the company.
  • Linking academic expertise and the experience of partner companies to Lufthansa business practice and its needs.
  • Fostering and developing a corporate leadership and performance culture.
  • Creating challenges and options for personal development.

    Within a demanding range of programmes, the Lufthansa School of Business entered into close worldwide ‘learning partnerships’.
    Almost all programmes – from Masters degree programmes to non-degree top management programmes – were designed, run and evaluated with global companies, in order to learn with and from the best (‘Benchlearning’). By building close relationships with carefully selected academic institutions, the Lufthansa School of Business deliberately avoided concentrating on purely academic relationships, preferring instead to build a network of leading business schools and universities (among them the London Business School, INSEAD, McGill in Montreal, Indian Institute of Management in Bangalore and Hitotshubashi University in Tokyo).

    Initiatives launched by the Lufthansa School of Business included shaping of the so-called ‘transformation and change networks’ of several hundred potential or experienced young managers. These programmes usually lasted for twelve months.
    What was remarkable about them were their specific composition and setting: processes of individual learning were directly linked to strategic development and changes in business practice. The head of the Lufthansa School of Business, Dr Michael Heuser, talks of how it “creates value by the change it initiates for both the individual and the organisation ‘Lufthansa’. Our action-learning networks contribute not only to the required mental change, they also show visibly innovative results.”

    ‘Explorer 21 ’ and the ‘Climb Programme ’

    ‘Explorer 21’ challenges carefully selected young professionals to become change leaders early in their careers. Each session consists of 210 Explorers. The `Climb Programme’ is an action-learning network of 160 managers worldwide.
    The overall goals of these programmes include:

  • Initiating and fostering mental change.
  • Delivering significant contributions towards putting leadership into action.
  • Producing visible results and skill transfers.
  • Offering self-assessment and benchmarks.
  • Forming knowledge and change networks across and within Lufthansa businesses.

    Both programmes start with a self-assessment based on Lufthansa leadership tools like the Lufthansa Leadership Compass (Appendix 11) and Lufthansa Leadership Feedback (a 360° feedback programme). Participants then visit leading companies all over the world to analyse their areas of excellence and to work out business recommendations for Lufthansa. At various times, all network members come together in congresses to discuss their findings and recommendations with the Lufthansa management, and to agree concrete goals.

    Sponsors at management level and peer support are considered vital components of the learning process. The participants are encouraged to negotiate alterations to their job assignments so that they can follow through with the implementation of any changes they have proposed.

    Jürgen Weber put the value of the Lufthansa School of Business to the entire Lufthansa Group in these words: “Our business requires a global mindset and networking capabilities across borders. These capabilities can’t be developed with quick-fix solutions. Our Lufthansa School of Business supports our business and strategic objectives. It creates value by building intellectual capital, which others find difficult to imitate.”

    Six lessons from Lufthansa

    Lesson 1 - Provide space for reflection and dialogue

    During the turnaround, Lufthansa developed a distinct style of involving people in strategic business processes. Furthermore, town meetings became a prototype for a culture of dialogue. Often organisations engage in hectic activity when a crisis becomes evident, with careful and thoughtful discussion being considered a waste of time – what counts is doing something fast. Not so at Lufthansa. Jürgen Weber gave his management team ‘time out’.
    The Seeheim workshops for top management permitted thinking, reflection and discussion that led to thoughtful action, rather than panicky ‘action for action’s sake’. This pattern has been repeated again and again at critical phases in Lufthansa’s corporate development (such as for Programm 15) and is still important in Lufthansa’s evolution from airline into aviation group.

    Lesson 2 - Foster intensive personal learning in top management

    Intensive personal learning among the top management usually starts with the realization that management is itself part of the problem. In the early years of transformation, Lufthansa’s Executive Board engaged external advisers to confront top decision-makers (including themselves) with realities from beyond the boardroom. Top management must see itself as a patient as well as a doctor.

    Lesson 3 - Build networks of change actors

    Lufthansa’s change processes were driven and managed decisively by strong networks of change actors. As a result, the building of change networks is a fixed element for systematic, institutionalized renewal. In order to maintain change momentum, Lufthansa consciously placed emphasis on the emotional mobilization and bonding of the change actors. The defining feature of these action-learning networks is their emphasis on leadership, not on being followers.

    Lesson 4 - Create slack for strategic development

    Continuous investment in strategically important resources, such as business growth, skills and leadership development, played a central role in Lufthansa’s turnaround. This was in part due to the long-term returns, but was more important for the immediate symbolic effect of providing a ‘light at the end of the tunnel’. Even in times of drastic cuts and serious threats, some redundancy or organisational slack was maintained and thus innovations could be introduced, such as Lufthansa’s acquisition strategy in the catering business, service initiatives for customer satisfaction and frequent-flyer developments.

    Lesson 5 - Manage intra-and inter-organisational relationships and consensus

    Creating sustainable relationships with various internal and external stakeholder groups is another important lesson that can be drawn from Lufthansa’s experiences. Intra-organisational relationship management was as decisive for the successful transformation of Lufthansa as for inter-organisational partnerships within the Star Alliance. In particular, reconciliation with staff and their representation are frequently forgotten in the competitive battle for success. For Lufthansa, strong relationships and mechanisms of consensus-building were not merely a ‘nice to have’ policy, but essential for survival through constructive consensus-oriented change. Comparable mechanisms constitute the strengths and competence for change of the Star Alliance.

    Lesson 6 - Create a lasting platform for emotional mobilisation The mobilisation of emotions played an important role in Lufthansa’s energetic and yet co-ordinated change process. In order to support these change-nurturing mechanisms, clearly defined platforms are needed to give these emotional processes specific space. For this reason, the Lufthansa School of Business was established as the first corporate university in Germany. As a robust institutionalised platform, it is explicitly intended to provide regular emotional mobilisation, as well as energy creation through reflection and dialogue about its own activities.

    Heike Brook is senior research Fellow,Department of strategic and International Management of the London Business School and Lecturer at the University of St Gallen (CEMS).
    Sumantra Ghoschal is Professor of Strategic and International Management at the London Business School.

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