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National Differences

In 1991/1992, Lufthansa was almost bankrupt and got into crisis for two reasons: external and internal problems. 

Externally, the environment acted as selection mechanism to sift out unsuccessful firms.  Using Porter・s theory of competitive advantage (Porter, 1980; 1985) to analyse the competitiveness of the industry, it implied that the airline was once in a sector with low levels of competition and high returns (Figure 1).  However, these advantages diminished with significant changes of its environment by early 1990s.  Globalisation and deregulation triggered intensive price competition and weakened the power of Lufthansa in the industry.  Moreover, the bargaining power of the customers was also increased due to a cluster effect from Gulf War and the subsequent recession, which resulted steep fall in air traffic. 

According to the theory of population ecology, it argued that only the fittest and strongest company could survive in such circumstances.  It provided an insight that successful firms are required to adjust and breakthrough boundaries, so as to match their activities to the markets.  It was obvious that Lufthansa was lack of such responsiveness and therefore, it was unable to fine tune itself to meet these challenges.

Internally, Lufthansa noticed the crisis later than other companies.  Because of the German reunification, Lufthansa enjoyed a boom at a time when the rest of the industry faced the severe market downturn.  Yet, this showed that Lufthansa was suffered from .structural inertia・ according to the theory of population ecology.  Lufthansa was operated in a bounded rationality (March, 1994), so routine and norm were insisted.  The boundary made the company less motivated to anticipate and force change.  Hence, the behaviour of .immortality was taken for granted・ continued during the crisis. 

The internal problem made the situation more serious when Lufthansa was unable to see and respond to the external changes in a co-evolutionary approach (Lewin and Volderba, 1999).  Because the company did not appreciate the inter-relationship between processes of change at the firm level, the sector level and the broader societal level.  This was well represented by its policy of .growth through own strength・ with rapid fleet expansion when the other airlines adopted different strategies in order to survive. 

Nevertheless, it was difficult for Lufthansa to avoid the crisis by responding faster to the market changes.  It was because, from the view of institutionalists, Lufthansa was embedded in the social contexts such as political and cultural that had their own historically determined features.  These features acted as a set of constraints on how Lufthansa acted in relation to the crisis, and could be explained by the approach of institutions as features of national business systems (Dore et al, 1999; Whitley, 1999; Hall and Soskice, 2001). 

The contexts of national business systems had an impact on the responsiveness to change.  It was caused by the differences in attributes and beliefs which coincided with national differences (Hofstede, 1980).  So using Hofstede・s four cultural attributes (power distance, uncertainty avoidance, individualism/collectivism and masculinity/femininity), it was able to analyse and explain how these variables prevented Lufthansa from responding faster to market change as the other players in the industry.

Germany was a masculine society.  This culture reflected that the employees in Lufthansa were loyal and collaborated to any change process.  However, it was only effective in a stable environment; while it would be slow in responding under an environment with drastic and fast change.  The fact showed that it was not easy to implement change in Germany companies like Lufthansa due to its highly collective in orientation.  High collectivism implied a low power distance culture in Germany.  The motivation for change was derived from a sense of belonging during the process.  That meant any change would have to be concerned with winning the approval of the key groups in the company.  Hence, there was usually extensive process of consultation and negotiation for change. 

Due to these characteristics, Germany was high on uncertainty avoidance.    The senior managers in German firms like Lufthansa had high level engineering skills (Dore et al, 1999).  This reflected that they were more emphasised on high quality.  High quality would mean change was a process of adaptation and improvement of existing technical skills through anticipation rather than reaction to changes.  Hence, German firms tended to be a high level of formalisation in practices and procedures, with tightly defined jobs and functions.  This bureaucracy would reduce the responsiveness to turbulent environments.

This was the same case as in Lufthansa.  The majority of the company was owned by the German state.  So its strategy, organisation and culture represented an amalgam of a strong technical orientation, dominated by engineers, together with the bureaucratic values of public administration.  Any change would be a long-term process, and had to be reinforced by the institutional contexts discussed above.  Sometimes, German firms like Lufthansa would prefer to remain status quo, or otherwise it had to accept a very slow change process.  These were reasons prevented Lufthansa from responding faster to market changes.  Some of the German firms might ultimately miss the chance in dealing with crisis. 

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