A case analysis entitled

Changing the Culture at XYZ Airlines

Submitted to the

Ramon V. Del Rosario College of Business

De La Salle University - Manila

In partial fulfillment

Of the course requirements in

BUS 500M Management Principles and Dynamics

Saturday Class 1245 – 1600, Section KRG

Term 1, A.Y. 2014-2015

June 21, 2014

Submitted by:

Group 3

Añora, Maria Wilvenna

Bariuan, Dennis

Gabato, Jomar

Malibiran, Bernard

Submitted to:

Mr. Rey Lugtu

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I. SYNTHESIS

The newly appointed Chief Executive Officer (“CEO”) of XYZ Airlines (“XYZ”), James Sanchez (“Sanchez”), needed to change the culture at XYZ. XYZ was the product of a merger in 1998 between a long-haul and a short-haul airline. However, integration of its management structure did not take place until 2003. Even then, the attitudes and rivalries inherited from the predecessor airlines were not eliminated. As such, two distinct organizational cultures continued to exist within XYZ, one belonging to the resourceful, high frequency, quick turnaround “Short-Haul Group” in XYZ’s Terminal A, and the other belonging to the cosmopolitan, ‘flag carrier’ “Long-Haul Group” in XYZ’s Terminal C.

XYZ suffered from inefficiency, overstaffing, and a heavy dominance of Air Force officers who were very status conscious, preserving traditions like separate officers’ mess. XYZ had poor service and a bad image. In a poll, 33% of the respondents rated XYZ as the airline to be avoided at all costs. It had a poor punctuality record, with only 38% of its long haul flights leaving within 15 minutes of their scheduled departure time in the summer of 2006. Aside from XYZ’s embarrassing service levels and terrible image, XYZ was also experiencing financial difficulties. It was losing money at the rate of €750 per minute, and, at the end of the year, would have accumulated losses of just over €1 billion within two years.

XYZ’s top management had known that the airline was overstaffed by about 11,600 to 14,500. Further, XYZ’s performance is below 60% of the average of its main competitors in terms of ton/kilometers per airline employee. While XYZ had forecasted an increase in passenger volume by 8% to 10%—which would have been sufficient to absorb the overstaffing—the said passenger growth did not materialize because of the economic crisis. Instead, passenger volume had decreased by 4% to 5%.

II. POINT OF VIEW

The case study shall adopt the point of view of James Sanchez, CEO of XYZ.

III. STATEMENT OF THE PROBLEM

Faced with increasing costs, a terrible image, poor service levels, inefficiencies, and a divided corporate culture, how should Sanchez change the culture of XYZ towards a “service culture” to return to profitability?

IV. STATEMENT OF OBJECTIVES

Short-Term Objective: To decrease cost, improve image and service levels, and return XYZ to profitability immediately.

Long-Term Objective: To unify the corporate culture of XYZ from a “transportation culture” towards a “service culture”.

V. AREAS OF CONSIDERATION

The case will be examined using the Deshpandé, Farley and Webster Model of Organizational Culture Types (“Websters Model”), cited by Aliza D. Racelis in her article, “An Exploratory Study of Organizational Culture in the Philippines” (Racelis, 2005). The case will also be analyzed using the Four Step Organizational Change Framework (Dyck, 2012).

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Organic Process

Mechanistic ProcessIn

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Figure 1 Deshpandé, Farley and Webster Model of Organizational Culture Types

The Webster Model classifies organizational behavior as belonging to one of four quadrants, depending on whether organizational emphasis is either organic or mechanistic, and whether organizational emphasis is on internal maintenance or external positioning, as shown in Figure 1. Companies that fall under the “Clan” quadrant lay emphasis on teamwork, sense of family, and towards developing human resources. “Adhocracy” focuses on creativity, adaptability, entrepreneurship, and innovativeness. The “Hierarchy” quadrant emphasizes order, rules, regulations, and stability. Finally, the “Market” quadrant focuses on competitive advantage, goal achievement, and market superiority (Racelis, 2005).

Currently, XYZ would squarely fall under the Hierarchy Quadrant, where the Air Force officers dominating the company would have placed emphasis on rules and regulations. Further, the airline industry is, to a certain extent, regulated, which gives rise to XYZ’s emphasis on mechanistic processes and internal maintenance. XYZ however, must switch from the “transportation culture” normally found in the Hierarchy quadrant, to a “service culture” under the Market quadrant, which focuses on external positioning. XYZ, after all, provides a service, and must therefore focus on its customers, rather than on internal maintenance. Nevertheless, XYZ must maintain its mechanistic process, being in an industry that requires control, stability, and order, particularly in the maintenance of its aircraft and the scheduling of its flights.

In order for Sanchez to be able to successfully implement changes within XYZ, he must adopt the proper change process. A change process can be described as following four steps: (1) recognize the need for change: (2) unfreeze; (3) change; and (4) refreeze (Dyck, 2012). The first step requires the identification of opportunities and threats which lead to the need for change. Thereafter, managers need to communicate and foster consensus for change, which is followed by the change itself. Finally, once the change has been implemented, these changes must be tweaked and reinforced.

VI. ALTERNATIVE COURSES OF ACTION

Sanchez has the option of choosing among the following alternatives:

ACA 1: Execute Incremental Changes

Sanchez can implement small changes within XYZ to change its culture, such as freezing pay increases, employing advertising to improve its image, reengineering its process to improve efficiency, and engaging senior management to foster change.

Pros: This may achieve Sanchez’ objectives without laying off staff, at the same time encountering the least resistance both from XYZ’s senior management and employees.

Cons: The employees of XYZ may not be satisfied in the long run without pay increases, especially considering the strength in employee demand and liberalization of the labor market. Further, it is

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estimated that about 30% of senior management are not going to be able to adapt to the new “service culture”, which would make implementing changes in organizational culture quite difficult. Finally, this ACA may take much time, which XYZ currently does not have since it is losing money at a rate of €750 per minute. By the end of the year, XYZ may become insolvent.

ACA 2: Implement Sweeping Reforms within XYZ

Sanchez can reduce senior management and staff; remove detrimental and hierarchical traditions; gain the support of young managers to foster change; adopt the resourceful, high frequency, and quick turnaround culture of the Short-Haul Group for all its flights, while maintaining the cosmopolitan feel for its long-haul flights; and establish a marketing and after-sales support team.

Pros: Sanchez will be able to achieve his short-term objective of decreasing cost, improving image and service levels, returning XYZ to profitability, and his long-term objective of unifying the corporate culture of XYZ towards a “service culture”.

Cons: The changes to be implemented by Sanchez might encounter stiff resistance from XYZ’s employees.

ACA 3:

Sanchez can retain senior management and reduce staff, freeze pay increases for a year, sell assets such as properties and surplus aircraft and closing routes to reduce cost. Moreover, gain the support of both young and senior managers to foster culture change and remove detrimental hierarchical traditions.

Pros: This may achieve Sanchez’ short-term objective without laying off senior management at the same time encountering the least resistance from XYZ’s employees. No drastic movement on upper management only on mid-level management.

Cons: Culture change might take a longer time to implement since senior management who oppose to change are still retained.

VII. RECOMMENDATION

The short-term objective of Sanchez is to return XYZ to profitability immediately in order for XYZ to survive. To achieve this objective, Sanchez must significantly decrease cost immediately, considering XYZ is losing money at a rate of €750 per minute. Aside from decreasing costs however, Sanchez must increase income through more passenger traffic. Sanchez can only achieve this by improving its service efficiency through less delayed flights, and by improving its image through better customer satisfaction. Finally, to create lasting profitability, it is Sanchez’s long term objective to remove differences in XYZ’s company culture, and adopt a service-oriented culture.

Decision Criteria Weight ACA 1 ACA 2 ACA 3Decrease cost immediately 30% 10% 20%Improve image 15% 10% 20%Improve service levels 15% 10% 20%Unify the culture of XYZ towards a service culture 40% 15% 30%Total 100% 45% 90%

Based on the criteria provided above, ACA 2 is the best option for Sanchez. Sanchez must eliminate overstaffing in XYZ, beginning with top management dominated by the Air Force officers

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down to the bottom. Company culture begins with top management. If top management is comprised of traditional and status conscious Air Force officers, the rest of the company will adopt this culture. “…managers are especially important as public sources of ethical standards due to the example they set with their behavior and the influence they have on the ethical climate of the workplace” (Dyck, 2012). XYZ cannot afford to be traditional or status conscious if it intends to become more efficient and service oriented. XYZ can learn from Southwest Airlines, where the culture is such that pilots have been known to assist baggage handlers in unloading luggage from airplanes to allow flights to depart on time (Southwest Airlines, 2014). It was also an opportune time for XYZ to remove some staff, while there was strong labor demand in the industry and there was hardly any industrial unrest over such issue. It should be noted that there were 16,000 volunteers who were willing to take the severance package of XYZ, compared to the 14,500 staff XYZ needed to let go to bring XYZ’s costs in line with competitors.

Sanchez must then capitalize on his young managers who would support initiatives for change and who are presumed to be more dynamic than their Air Force counterparts. In accordance with the Webster Model, XYZ needs managers who are flexible, innovative, and more focused on external positioning, if XYZ were to move to a more service-oriented culture from a transportation culture. Further, these young manages can be change agents who can foster change among XYZ’s employees.

Sanchez must likewise eliminate the barrier between the Short-Haul Group in Terminal A, and the Long-Haul Group in Terminal C, in the process obtaining the best-practices from each group. The resourcefulness, and quick turnaround advantage of the Short-Haul Group must be mingled with the cosmopolitan feel of the Long-Haul Group, in order to provide the best service possible to XYZ’s customers. Practices of the Short-Haul Group will allow XYZ’s long haul flights to depart on time, while maintaining the cosmopolitan feel for its long-haul flights.

Finally, XYZ needs to develop its marketing, sales, and after-sales service if it were to become a more customer focused, service-oriented company. A Vice-President for Marketing should be appointed, who can formulate a team for marketing and after-sales support.

VIII. IMPLEMENTATION PLAN

Sanchez should begin the transformation of XYZ by obtaining the thoughts and opinions of the members of the company through several focused group discussions. In this process, Sanchez, the managers, and all the employees of XYZ are able to diagnose the need for change. The result of this process should be the formulation of a new vision and mission for XYZ, which will be its guide in its organizational change process in the coming months. Concurrent with diagnosis for the need for change is the formulation of a cost reduction plan and a change management and communication plant. These go together with action plan 1 above as part of the dialogue already entered into by XYZ. Thereafter, XYZ must carefully communicate its new vision and mission, as well as the changes that go with it to all the employees of XYZ.

By the fourth month, XYZ shall begin retiring its current senior management, particularly the 30% who are likely to have a difficult time switching to a service culture. XYZ shall also accept the resignation of the 16,000 who volunteered to leave the company for a severance package. Considering 16,000 is 1,500 employees more than the 14,500 employees XYZ needed to let go to be in line with its competitors, XYZ shall engage the services of outsourcing companies for its non-critical functions, such as onboard catering, reservations, and aircraft maintenance. These functions can be handled more cost-effectively, efficiently, and with better quality by specialized organizations. Onboard catering can be handled, for example by restaurants or caterers who have more extensive experience in the field. Outsourcing will allow XYZ to focus on its core business of

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providing transportation service. Aside from reducing its staff and outsourcing, XYZ must also engage in other cost-reduction efforts, including selling non-income generating and surplus aircrafts; and closing non-profitable routes.

For the remaining 42,000 employees of XYZ, shall adopt best-practices, such as the fast turnaround time of the Short Haul Group, to allow better collaboration, sharing of ideas and culture, and cooperation between the employees. Best-practices shall be identified by management using key performance indicators, and shall be implemented throughout the company. While some resistance may be encountered, the benefits of these best-practices can be shown to the employees of XYZ.

Moreover, with the rigid Air Force senior management out of the way, XYZ can implement its service culture more intensely, by changing the mindset of XYZ’s employees. XYZ shall tap its young managers to become change agents. Aside from adopting best-practices, XYZ shall also remove traditional and status-conscious cultures and behaviors. Pilots may be required to assist in baggage handling, while long-haul flight attendants can be asked to serve short-haul routes. Managers shall be made to do frontline tasks, such as being at check-in counters or behind reservation telephone lines. Key performance indicators will be put in place to ensure that XYZ is able to meet the expectations of its customers.

The adoption of all these changes will be made easier since, from the very beginning, the vision-mission of the company was formulated through consultation. All the employees of XYZ developed a shared vision of pushing towards excellence in service, since the airline industry is not just a transportation industry. It is also a service industry.

The table below shows the action plans, responsible parties, and timeline of the implementation plan of XYZ.

Action Plan Responsible Parties Timeline1. Conduct focused group discussions to draft a new mission-vision statement.

CEO, HR, young managers, senior managers and all employees

1 month (1st month)

2. Plan cost reduction efforts. CEO, all managers 2 months (1st to 2nd month)

3. Formulate change management and communication plan

CEO, young managers, Corporate Communications, H.R.

2 months (1st to 2nd month)

4. Communicate to employees changes to be made including movement of positions within the company (promotions), and foster consensus

CEO, remaining senior managers, young managers

1 month (3rd month)

5. Retire current senior management and reduce staff by offering retirement and/or severance packages; promote younger managers to vacated positions.

CEO, HR 3 months (4th to 6th month)

6. Engage outsourcing services, Transition period for outsourced services.

CEO, HR, Managers, Outsourcing Company

3 months (4th to 6th month)

7. Adopt best practices from the Short-Haul and Long-Haul Groups to attain low delays in flight

All employees 3 months (4th to 6th month)

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departures and excellent customer service8. Implement cost reduction effort: Sell non-income generating assets and surplus aircrafts; close non-profitable routes.

CEO, Finance, Legal 3 months (4th to 6th month)

9. Implement cultural changes, such as removal of hierarchical traditions, establishment of goal oriented and market superiority philosophies, encouragement of participation in implementing new mission vision statement.

All employees 4 months (4th to 7th month)

10. Establish a marketing, and after-sales support team; and implement marketing strategies.

CEO, new VP for Marketing, Marketing Team

3 months (4th to 6th month)

11. Consolidate and rationalize routes, enter into code-sharing agreements, open profitable routes

CEO, Finance, Strategy, Marketing, Legal

2 months (7th to 8th month)

12. Refreeze and engage in continuous improvement

All employees ongoing (8th month and up)

LEARNING POINTS

1. There are many different types of organizational cultures, which vary from one corporation to another or from one industry to another. These organizational cultures are dictated by different factors, including external factors such as government regulation, and kind of customers, as well as internal factors such as philosophies of the founder, influence from management, and adherence to these cultures.

2. Organizational culture may be difficult to change, especially if these cultures have been entrenched into an organization. Nevertheless, it is possible to implement changes to organizational culture, whether transformational or incremental, so long as proper and well-crafted plans and measures are implemented.

3. It is entirely permissible for organizations to adopt varying cultures, including cultures that are counter-intuitive or deviant from industry norm. A transportation culture (internal-mechanistic), for instance, can transition to a service culture (external-mechanistic), which may allow the transportation company to service its customers better.

Bibliography

Dyck, B. & Neubert, M. (2012). Management: Current Practices and New Directions. Cengage Learning.

Racelis, A. (2005). An Exploratory Study of Organizational Culture in the Philippines. Philippine Management Review.

Southwest Airlines: A Corporate Cultural Assessment. (16 June 2014). Retrieved June 17, 2014, from http://www.123helpme.com/southwest-airlines-a-cultural-assessment-view.asp?id=167356

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