Continental Airlines Case Study
Frank Lorenzo, in 1986, owned one of the largest airline networks in the world. From a small investment in Texas International Airlines, after restructuring it and bringing the company to profitability, Texas Air bought Continental for $154 million. In order to reorganize the corporation as a more viable enterprise, Lorenzo took Continental into bankruptcy. This process caused a walkout by many union workers, so Lorenzo replaced strikers with nonunion workers at much lower wages. Low-cost operator and cut-rate prices was Lorenzo’s way to manage the company.
After the corporation emerged out of bankruptcy, Lorenzo bought Eastern Airlines. In an environment of heavy losses, he instituted a severe downsizing program. At first Lorenzo’s move appeared to be successfully, but he was wrong and Eastern went out of business. In 1993, Continental tumbled again into bankruptcy. The court approved a reorganization plan for Continental to emerge from bankruptcy. In the early 90’s, a sick airline industry caused heavy losses not just for Continental but for all the companies. In 1994, Gordon Bethune became chief executive officer of Continental Airlines.
He made dramatic changes. Since Continental was by far the worst among the nation’s 10 biggest according to the Department of Transportation, Bethune renewed focus on on-time flights, lost luggage, and customer complaints. Customers began returning and Bethune transformed the workforce in a happy one by giving them benefits through achieved goals. The new company’s manager apologized to their customers and asked them how we could be better being serving you. Instead of the company’s old focus on cost savings, efforts were directed to putting out a better product.
By giving employees bonuses for meeting certain standards, the incentive was created. Competing just on price basis leaves any firm vulnerable because it can easily be matched by competitors. Q: If you ran the airline, would you employ theory X or theory Y? Why? Theory X and Theory Y were identified by Douglas McGregor. There is a group of people who think, feel and therefore act according to the assumptions of what he called Theory X, and another group moves according to the assumptions of Theory Y. The theories suggest the possibility of managing human productivity in business organizations, as well as view human behavior within them.
According to Theory X, humans do not generally like to work, or want to work as little as possible, as such, most workers have to be monitored and threatened with punishment to achieve the objectives of the company. Employees avoid responsibilities, prefer formal orders whenever possible, show little ambition and put safety above all other factors associated with work. On the Other hand, Theory Y highlights the fact that when a favorable environment, the work can be a natural thing that gives pleasure. In this environment, an employee, when enticed with a reward, engages more in carrying out his task.
In time, the employee ceases to be just under orders and responsibilities and begins looking for some responsibilities (do not confuse this theory with too much freedom or lack of control; it is just a different way of managing human resources within the organizational environment). X and Y theories are interesting, but we must consider the culture of each company and the context that a team is to generate a higher profit. Today, many organizations that succeed show strong traits influenced by the theory Y.
Theory Y management style develops an open, dynamic and democratic, through which run becomes a process of creating opportunity, releasing potential, removing obstacles, encouraging individual growth and provide guidance on the objectives. His management style is democratic, creating opportunities and providing guidance on the objectives to the employee. It is up to administrators to provide conditions for development and recognition of characteristics such as motivation, responsibility and potential for development to employees of the company.
In this method of administration, workers can improve their work through their attitudes and their relationship with other workers giving the firm a better place to meet its goals. We can say that on the Theory X, it is an inhumane theory that discards the fact that workers are human beings, normal people, and treat them as machines, as objects, or rather, as the property of the company. An employee who should do no more and no less than the work assigned to him, without making any complaints, criticisms or suggestions.
A company that adopts the concepts of theory X, employees presents themselves unmotivated and lazy attitudes and behaviors, on the other hand, if one choose to Theory Y, people will interact and present motivational characteristics. Managing is not enough. Recognize the needs and capabilities of your employees are essential to good business development and administration. Q: Evaluate the causes and the consequences of frequent top executive changes such as Continental experienced in the days of Lorenzo? Any company needs a plan.
Lorenzo was an administrator who did not have a way of following up with a plan. He often changed his strategy at the first sign of failure and did not give time to his top managers try to reverse the situation. Over a period of 10 years, nine presidents had left Continental. This caused a big problem for the company since every time he changed his plan, time and money were spent to organize another strategy. Planning and focus are important aspects for a company to acquire the desired success. Each manager thinks differently. New ideas are brought after each change in administration.
With several points that can be improved in the company, the focus of each manager will face a different problem. Giving time and working conditions to a staff member to develop his projects is essential to achieve results and profits for the company. Lorenzo gave no time for his top managers and each exchange, a new mentality was deployed in the company. One needs time to put his plans into practice and show results. Usually without time there are no results and consequently, no profit. Inconsistent strategies are vulnerable. A manager should always follow a plan to maintain the confidence of investors.
The lack of planning is not good for the reputation of the company also with relation to customers. Sometimes a strategy needs to be revised and modified to achieve new goals; however, frequent and drastic changes can make a big burnout among employees. The exchange of managers in the company may have been one of the causes of the low profitability in which Continental had suffered in the middle 80’s. Q: It is 1994 and Bethune has just taken over. As his staff adviser he has asked you to prepare a report on improving customer service as quickly as possible.
He has also asked you to design a program to inform both business and nonbusiness potential passengers of this new commitment. Be as specific as possible in your recommendations. First, the company should let everyone know that there have been changes in the administration. By sending email to our customers could be a good way to do it. After a period in which the company had bad times, letting customers and investors know about the changes can bring their confidence back and consequently many customers would start flying with us.
Second, we could create a program (perhaps a phone number) where customers can make complaints and propose new ideas. Confidence is everything. We get to get our customers confidence back. Emailing people cost nothing. That is a cheap and easy way to get customers to know about the change. Emailing people does not take so much time either, and, therefore, we got a combination of non-cost and few time spent on this new advertisement. By letting customers know about this new commitment, the company can expect an increase on sales because of the return of many unhappy customers who are going to be waiting for a better service.
In order to get the expected better service, we get to listen to our customers’ complaints and suggestions. A phone number where people could leave messages or talk to a representative would be a great way to get it done. It is another cheap program that would get the confidence of our customers back. These two ideas will bring the company more customers since they would be excited with the new manager’s ideas. This will also cause a higher profit for Continental Airlines in a short period of time without spending a lot of money.
