Swissair Company: The Grounding

Subject: Strategic Management
Pages: 6
Words: 1794
Reading time:
7 min
Study level: PhD

Modern business environment is marked by increased competition and ethical rules, new business models and corporate relations. If it can be agreed on that ethical behavior is legal behavior plus some other element, then it is important that this additional element be identified, if possible (O’Neill & Hern 1991). The case of Swissair portrays that moral and ethical rules are more important than financial gains and goals which should be used as the core of corporate philosophy and strategic planning. Ineffective corporate governance and short-sighted strategic planning led to financial crisis and bankruptcy of the company in 2001. “On October 2001 the company filed for bankruptcy protection, thus two days later Swissair resumed its flight operations” (“The Grounding 2002). During the cent years, Swissair provided aggressive acquisition policy aimed to improve its strategic and competitive position of the market. The main problem of lack of risk analysis and contingency planning, overrun and ineffective resource allocation. The crisis was caused by liquidity problems and disagreement between the companies executives. The aim of the paper is to evaluate and analysis the role of corporate governance in the 2001 liquidity crisis and grounding of Swissair, and evaluate decisions accepted by the Board in terms of moral and ethical issues.

Financial Causes of the Crisis

Consolidation was the main trend in airline industry which helped companies to enter global market and compete on the global scale. Swissair followed the same strategy and developed a merger plan with Scandinavian Airlines, Austrian Airlines and KLM. Like many other companies, Swissair cited certain synergistic benefits, in which wealth was created or efficiencies were gained when firms were combined. This was a strategic decision, but the company did not take into account the nature of European business and differences from the American experience (Paley, 2006). The next step which led to a crisis was a new strategy proposed by McKinsey Switzerland. According to this strategy, Swissair should behave as an independent company, “buy stakes in smaller airlines and become a partner of a European bigger airline” (“The Grounding 2002). In order to meet interests of both parties, the company decided to follow a duel strategy. It is possible to say that a breakeven strategy is not good enough. Any company that rests on its laurels today may not be around tomorrow. Real profits must be generated to pump back into the company to improve services, to find ways of reducing production costs, to improve a product’s margins, or to fund R&D activities, which will create new markets and consequently improve the firm’s profitability. Now, more than ever, to remain competitive in today’s global marketplace, companies must pursue circular growth strategies. A circular strategy is one in which the profits that are generated today are pumped back into the company later to pursue long-term growth and to ensure the future generation of profits (Treviño et al 1999).

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In five years, it was evident that the plans failed and even workforce and fleet reduction could not improve the situation. the next mistake was made in 1997 when the company decided to make a strategic alliance with another company. In general, the main motivation behind strategic alliances activity is to improve a firm’s profitability by acquiring another company’s products, markets, customer base, manufacturing efficiencies, assets, and R&D facilities, or by simply eliminating some of the competition. The hope is that the combination of the firms will improve the operating efficiency and profitability of the companies involved. Due to the sheer magnitude of merger activity in recent years, escalating to the point of what many term “merger mania,” the question one must ask is whether mergers really do improve a firm’s profitability. The “Hunter strategy” was implemented by Swissair.

Critics admit that an alliance itself, by definition, is a calculated risk that exposes the partners to the possible failures of others. This vulnerability is inherently repugnant to many managers, for it serves to increase the number of unknowns. No one can be certain as to the success or failure of a given venture or alliance. There are, however, certain steps that can and must be taken to give the venture the best chance of success. An adequate analysis of market conditions, forecasting, and strategic planning are all requisite before entering into an alliance (Paley, 2006). Furthermore, during the lifetime of the alliance it will be necessary to modify strategies to keep current with changing economies or market conditions. It is the alliance that is flexible and is not afraid of making modifications or taking calculated risks–such as investing in new technologies, creating new markets, or even entering untested markets–that has the best chance of success (Kotabe & Helsen 2005).

Organizational Causes of the Crisis

Lack of coordination, communication and consultation were secondary causes of the crisis. A significant factor for the failure lies in the internal power struggles that take place within the management of each firm and among the companies comprising the alliance. It is not surprising that in many instances both groups feel they know the right strategies that must be implemented. A breakdown in communication, an emergence of arrogance, and a collapsing alliance are the fate of many alliances in which authority and responsibility are not evenly divided among the partners. Just as a company is a collection of individuals, so too are alliances a collection of firms. The common purpose of both is a singular goal, a task to accomplish (Hollensen, 2007). When the egos of the individuals, and politics, begin to dominate the nature of the alliance, strategies fall victim to irrational–meaning noneconomic–considerations. It is the larger firm, the one with more economic strength that will win out. That the relationships among partners in such alliances are dominated by power considerations is undeniable. Where the corporations involved are of relatively equal strength, the strategy is different. Rather than imposing its will on others in the alliance, management of one firm will waste precious time and energies trying to gain the upper hand over its partner, instead of working together to create a sustainable competitive advantage. Authority must therefore be distributed among the respective players in an equal and equitable manner. Policies must be established and agreed upon by all parties as to the method of conflict resolution to ensure that each party has an equal say in policy and strategy decisions (Fill, 1999).

The problem was that the executives did not pay attention to the diversity of information coming each day. The magnitude and diversity of information generated each day as a direct result of an alliance could at times be staggering. Each corporation of the alliance generated its own memoranda for internal purposes and to the other members of the alliance. The prospect of miscommunication or redundant procedures was not eliminated. It was of strategic importance to streamline the communication channels among the members in an effort to coordinate the management of the company (Frederick, 2002). The flow of paper between organizations was not strike a delicate balance in which all partners were informed about developments without being overwhelmed by paperwork. The task of streamlining all channels of communication between and within each firm was imperative for the efficient transfer of information necessary for the successful alliance. The new structure of the company and its reorganization prove ineffective channels of communication and authority structure (Doyle & Stern 2006).

It is possible to say that changes in Swiss laws, increased fuel prices and strong dollar exchange rates had little impact on the crisis. To some extend, they fastened the crisis and breakdown, but the root causes were in strategic vision and inability to foster changes. Bruggisser followed the same approach paying attention to financial gains and brand image but neglecting risk analysis and change management. the case of Swissair portrays that the human factor is the most important factor in the failure of the company. The team of men and women working together from each firm are the managers who will determine the fate of the company (Doyle & Stern 2006).

Ethical Issues

The Swissair Board behaved unethically as it persuaded financial gain only. Unsuccessful takeovers hurt both the company and its stockholders, while making the person, group, or company attempting the takeover quite wealthy (Carmichael & Drummond 1989). This harm to the company and stockholders occurred as the result of the company acquiring more debt or siphoning off profits in order to repulse an outside raider. The Board did not take into account risks and problems of the failure and its impact on the stakeholders. The individuals responsible for the day-to-day functions of the company must be qualified, able, and possess the skills demanded by the nature of the venture. This requires the creation of teams that consist of multifaceted managers who possess the skills, knowledge, and drive required for success. The attempts to change reporting and management styles were introduced too late to change the situation and avoid the crisis (Frederick, 2002). At first blush, critics agree that this additional element is the collection of moral principles and values of what is right and what is wrong and what is good and what is bad, as determined by group behavior or by some member of the group. At this point, it appears that one’s behavior is ethical if it is legal and in accordance with group norms (Kotler & Lee, 2004).

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In order to improve the situation, the company should do a step beyond social responsibility to what they call social responsiveness. This is where the company makes itself aware of social problems and responds to them in a constructive manner before the government or society forces them to do it. If a company can afford to do this, it also usually works out to be a useful, profitable, and competitive tool. For proper business and social conduct, these ethical standards and values must be shared by not only individuals but by the total business community and society as a whole. Without agreement by all parties involved, only legality exists to control the actions of everyone. The main financial and management recommendations are stop the Hunting strategy and improve service level, to cover all debts and invest in personal brand image and fleet. Many of those who argue for changes in corporate governance seem simply to assume that there is a need for change. It is important to recognize that there is an economic argument that efforts to enhance one or more of the elements in the monitoring environment just described may be more costly than beneficial. The company should grasp the need to arrange plans within the parameters of a strategic structure. The competitive nature of the global economy and the fast pace of innovation demand that measured attention be given to the formation of a plan.


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Fill, C. 1999. Marketing Communication: Contexts, Contents, and Strategies 2 edn. Upper Saddle River, NJ: Prentice Hall.

Frederick, R. (ed.) 2002, A companion to business Ethics. Blackwell Publishers.

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Hollensen, S. 2007, Global Marketing: A Decision-Oriented Approach. Financial Times/ Prentice Hall; 4 edition.

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Kotabe, M., Helsen, K. 2006, Global Marketing Management. Wiley.

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