Scandinavian Airlines System 1998 - Case Study Example

Case Study of Scandinavian Airlines System 1998 Scandinavian Airline System is an international airline serving travelers in different part of the globe. Beset by problems in 1981, the ascent of Jan Carlzon as CEO paved the way for a complete turnaround. The new strategies undoubtedly revolutionalized the whole system. This paper will examine the strategies employed by SAS, their drivers and implicants. It will also try to prescribe solutions for SAS’ future. Question 1. Critically analyze the type of strategies employed by John Carlzon and SAS during the course of its history (500-750 words). Students should use material from course notes and Chapters 1-2 of Richard Lynch Corporate Strategy. The ascent of Jan Carlzon as President and CEO of Scandinavian Airlines System marked a revolution in the company during 1981. Jan Carlzon has undoubtedly initialized changes, which caused a dramatic turnaround in the overall business operation of the airline system. These changes were carried out in response to the problems that beset SAS and the entire airline industry as a whole. These changes were also geared to adapt to the rapidly changing external environment and trends in the transportation sector. Among the new strategies implemented by SAS during the presidency of Jan Carlzon was focusing on the business traveler. The airline has evolved as the “businessman’s airline, ” offering an excellent service to full-paying business traveler through the introduction of “EuroClass” that provides more amenities than the other business class airlines at the level of the old economy fare. This was further strengthened by the improvement of flight schedules and punctuality. To provide a more attractive schedule, Eurolink was also created for short distance routes. Scanorama which feature lounges for the exclusive use of full-paying class were also introduced by the company in order to further different and highlight the luxury offered to the business traveler. In order to completely execute the new strategies, SAS has undergone a corporate cultural revolution, which was a deviation from the company’s focus on resources and technology. There had been a restructuring which involved decentralization, education, and empowerment. A second wave of strategies were crafted and geared towards the improvement of SAS service to its customers. SAS has banked on its aim of being “a full service, door-to-door, travel service company,” and “offer a unique product which we could control from A-Z.” These have lead to the introduction of SAS International Hotels, SAS Reservation System, Credit Cards, SAS Service Partner, other related activities such as publishing and advertising, and a new group structure. We can see that in SAS major reforms, Jan Carlzon made use of both prescriptive and emergent strategies. According to Richard Lynch (2000), prescriptive strategies are those whose objectives have been defined in advance while emergent strategies refer to those strategies which has unclear objectives and whose components are developed during its course of life. As the case presented, the company has tailored its strategies to suit the changing needs of its market (Lynch, 2000). Prescriptive strategy was used in order to take into account the rapidly altering socio-cultural trends in the airline industry, thus the utilization of the socio-cultural theories of strategy. According to the case, the focus on business travelers was due to the fact that full-paying business travelers comprise the largest chunk of the airline’s revenue yet the total number of passengers serviced was declining. This was prompted by the change in preferences of travelers as they seek more value for their money and change in lifestyle, which necessitated them avail service when their need arises. We can trace these changes to the transformation in the socio-cultural aspect of the European community. As the economy was facing a recession, maximization of customer’s purchasing power was a priority. Also, the demands of being an executive left a busier lifestyle for the executives and require less time waiting for flight schedules. Commoditization of air travel as opposed to its being a novelty was also a key factor. The SAS International Hotel and SAS Reservation system introduced during the second wave of strategies are also examples of prescriptive strategy as they contributed to the achievement of the company’s objective of “providing a full hotel and airline package” and “the need for an integrated information system.” These exemplify the resourced-based theories of strategy that banked on resources of the company in crafting a competitive advantage. It was also clear that SAS has employed emergent strategies to cope with the changing environment. Emergent strategy was clearly shown in the company’s pursuit of extending excellent customer service. It can be noted that the company already has an established objective of providing maximum satisfaction to the customer, however, the procedure on how this objective was attained was modified as it becomes clear what type of service the customer looks for. The case stated that the process of the determination of customer value was through the examination of tasks and functions within the organization. Those services that add to customer value were maintained while those that don’t were discarded. We can see an employment of innovation and knowledge-based theories of strategy as the company banks on its innovations through knowing the needs of the customer more. Question 2. Using strategic models, critically examine the response by SAS to the developments and changes to its environment (1000-15000 words). Students are required to apply a range of strategic models i.e., Porter’s Five Forces, etc, to analyze the actions taken by SAS. You need to identify the drivers of change and if SAS response was appropriate. Students should use material from course notes and Chapters 4-6 of Richard Lynch Corporate Strategy. A. PESTLE Analysis 1. Social Social changes prompted SAS to restructure its present business operation. SAS has recognized the dramatic changes in the preference of its customers as a result of the evolution in the society. During 1981, the needs of business executives has altered due to the busier and fast paced society where they thrive. This meant that these business travelers want air travel when they need as they became hesitant and impatient in waiting for airlines’ flight schedule. This social change was responded by SAS by the modification of its fleet. It was stated in the case that SAS has been a product driven airline, which heavily invested in new aircraft and new, engines that usually entails the acquisition of larger crafts leading to higher load factor and less frequent flights. The demand for more frequent flight schedules necessitated the acquisition and refurbishment of smaller aircrafts. I believe that SAS has been right in changing its focus from being a product-driven company to a customer-driven one. Customers are the lifeblood of a company and it is imperative for an airline to deliver the maximum customer value possible. Thus, it should take into account the changes in the social aspect and preferences of customers. 2. Technological Technological changes have also considerably influenced the strategies of SAS. The most important impact of the advancement in technology is the development of the airline’s reservation system through the aid of the development of the AMADEUS. SAS has wisely utilized this technological advancement in its quest of providing a more efficient ticket distribution to the overall satisfaction of its clientele. This move to reap the benefit of new technology was needed to boost company’s performance. Mechanization of business processes was a trend, which needs to be adopted by companies who want to stay in business and compete head on with its rivals. 3. Economic Economic variables always have a bearing in the operation of a company. During 1981, it can be recalled that the company was beset by economic problems such as the international recession, higher interest rates and fuel costs, overcapacity and less regulated competition. SAS, recognizing these factors have responded by maximizing customer value by offering more convenience and services at less cost. This can be seen by the company’s introduction of EuroClass. The airline has undoubtedly employed a cost leadership approach. SAS’ move had been appropriate for the overall economic condition of the industry. Given the economic crisis faced by the global market, it was imperative to craft a strategy which would maximize the purchasing power of the customers. B. Industry Life Cycle Analysis As seen in the case, services offered by airlines are not considered novelty anymore. It had already surpassed the introduction and growth stage but had reached the stage of maturity and nearing decline. We can see this by considering the volume of passengers utilizing air travel. It was stated in the case that demand has not been growing but has been declining in 1981. SAS had painstakingly restructured its operations in order to boost and increase consumer demand by the launching of different strategies to each market. Differentiation strategies were employed to focus on the full-paying business traveler. Foremost is the effort of providing luxury to the passengers through exclusive services. Cost leadership was geared to the other segment to maximize customer value and to attract switching. C. Five Forces Analysis Competitive Rivalry: HIGH As discussed in the SAS case, competition among players in the airline industry is stringent. This is due to the fact that demand for services offered by the airline industry is fast declining in response to the economic recession. Rivalry is also intensified as the exit costs for each player is high. The equipment used in airline operations required a huge cost of initial investment and maintenance. Disposal of these resources are often hard as these are designed for specialized purposes. Therefore, the best strategy for the player is to compete aggressively as exit from the industry will entail huge losses. SAS had competed head-on with its rival for market share. It can be noted that as the competition heats up, the airline has initiated aggressive strategies such as cost leadership and differentiation. Realizing that it should employ a survival strategy amidst the intense competition, SAS had crafted and implemented strategies which are often to the detriment of its rivals. Power of Buyers: HIGH In the airline industry, there is no switching cost for customers when they transfer from airline service providers to the other. In fact, buyers hold a significant control as the airline industry is becoming more and more customer-driven and market-oriented. Catering to the need of the customer and maximization of customer value is a priority of SAS. It was also mentioned in the case that customers have become sensitive to price, as they needed justifications on the high prices charged by airlines. Since travelers are the lifeblood of the airline industry, they hold a considerable leverage against airline service providers like SAS. SAS has been transformed from a product-driven company to a service-driven one. The airline has reformed its corporate cultural structure and focus in response to this. SAS had recognized the power that the buyer holds and responded to it accordingly. Threats of Substitutes: HIGH The aggressive strategies launched by other competitors in the industry along with the more stringent competition among players give the traveler a wide array of choices for air travel. As stated above, there is no switching cost for a passenger, which posts no limit on his choice of service provider. In addition, travelers are often wiling to substitute one airline service provider for the other according to their needs and preferences. SAS has responded to this issue by further differentiating its service to other airlines. It can be noted that in order to differentiate the luxury offered to business class passengers, Scanorama was introduced. Also, cost leadership strategy, which was attained through the provision of EuroClass that offered more amenities than the other business class at the price of economy. These services offered are amongst the differentiation strategies geared to offset the high level of substitutability of SAS services. Threat of New Entrant: LOW Operation in the airline industry entails a huge amount of investment in capital. Acquisition of aircrafts requires a large amount of money as well as collaboration with suppliers. Entrants are also deterred from entry as the whole airline industry is becoming more and more competitive. The declining market is also unattractive for potential entrants. D. Market Segmentation Market segmentation has been undoubtedly employed by SAS. Though not clearly specified in the case, it can be seen that the airline has identified two certain markets to cater to. SAS has chosen to focus on the business class and the “more for less” class. Looking at it more closely, these markets are very different. Business class can afford to pay any price the airline charge while the “more for less” class is price sensitive. I believe that SAS has been right in deciding to serve the two different markets. Focusing on the business class only can devoid them of the opportunities posted by serving the more price sensitive market. On the other hand, serving only the “more for less” market can be a threat to the image of the company as a whole. E. Competitor Analysis The case was not able to give a very clear picture of the players in the European Airline industry. However, it can be deduced that SAS is one of the market leaders as it had pioneered a lot of innovations, which revolutionized the whole sector. SAS had undoubtedly innovated and was recognized a very essential component of the airline industry. Using this position, SAS had developed of an innovative strategy, which involved a total turnaround in its previous course. SAS had developed a new segmentation technique, revolutionized its corporate culture and became more customer-oriented. I believe that SAS has been efficient in its aggressive strategies. Market leaders often have the role of reforming the industry and implementing innovative strategies. F. Key Factors For Success There has been a shift in SAS’ perception of what really is an airline industry player’s main driver for success. From its being product-oriented, SAS had evolved to become more customer oriented and found out that the key factor for success is to extend the best customer service possible. This was done by SAS’ effort of identifying value–adding services which were essential in ensuring the success of its new strategies. It can be noted that SAS had obligated its employees to list down services that customers prefer. These were then maintained while the others are eliminated. I believe that SAS had properly identified its key success factor. However, I also think that SAS shouldn’t have solely relied on this factor but should also tried to minimize costs. Operation costs had mounted that it had become a major dilemma for the company. Question 3. To what extent do you think Jan Carlzon and SAS have achieved a sustainable competitive advantage? Discuss in detail. Give reasons to discuss your answer. Students should answer this question, based on their analysis from questions 1 and 2. What do you think of SAS chances of success are? Do you have any suggestion that would improve their chances of success? The strategies introduced and implemented by Jan Carlzon to reform and restructure SAS were undoubtedly instrumental in increasing the profitability and operation of the airline. It is also irrefutable that these strategies have developed a competitive advantage for SAS, which enabled it to survive the tough competition in the airline industry and the pressures from other external factors. SAS strategies were remarkable. In the short run, SAS were able to craft and implement strategies which contributed to the success of the company. The second wave of innovations further contributed to this competitive advantage. I believe that the strategic formulation and implementation in SAS were effective as they were able to address the major issues faced by airline. In fact, the strategies have significantly boost the revenue and profit generated by the company. Demand for their services also mount as they further highlighted their focus on travelers. Decentralization was also a very good strategic reform undertaken by the company. This move has facilitated the education and empowerment of airline employees making them instrumental in the achievement of the airline’s goals. Empowerment and education led to customer service bringing a considerable increment to SAS. This also establishes a sense of belongingness to the employees. However, no matter how remarkable the transformation in SAS was, I believe that the strategies implemented were not completely sustainable in the long run. This is evidenced by the loopholes created during the course of the operation of the company. This specifically refers to the human resources of SAS. The new strategy has created frustration and confusion among middle managers, as they felt bypassed by the frontline employees. The corporate cultural change was also met with resistance from the company’s unions that consequently led to higher operating costs. It was also stated that was a growing resistance as employees feel contented with their performance in the company. Lack of the needed motivation has instilled a feeling of apathy among the company’s workforce. Looking at SAS right now, we can see that it is in a cost disadvantage compared to other airlines. Also, the ageing aircrafts of the company should be replaced by newer ones in order to remain competitive. However, this move is deterred by the financing costs, which is higher than what the company can provide due to its high operating expenses. Another reason why the current strategies employed are not sustainable in the long run is that changes are expected due to the upcoming liberalization of the airline industry. This will further heat up competition among industry players worldwide and challenge the flexibility and agility of SAS. This change was undoubtedly unanticipated and unincorporated by SAS in crafting its past strategies. However, these have a very important bearing in the future direction of the airline. I believe that SAS should formulate and implement strategies suited to the changes and challenges it has to face in the future. As globalization sets in, it should craft strategies to adjust and take advantage of this trend. The company should first address the problem regarding its workforce. This is imperative as the company’s success is often directly related to the coordination and efficiency of its workforce. Motivation should be instilled on each employee in order for him/her to function most efficiently. However, as the company is currently trying to cut costs and improve profitability other non-monetary motivation techniques should be in place. I believe that the most important strategies that should be implemented are those, which are geared in increasing the efficiency of SAS. Increased efficiency will bring down the costs of operation for SAS as well as enhance the value delivered to its passengers. Increasing efficiency can be achieved through a thorough assessment of the company’s business processes. SAS should identify the cost drivers in each process and try to eliminate those which drive cost yet brings no corresponding value. The company should also try to bring more customer satisfaction and safety by the replacement of its ageing fleet. In the long run, these ageing aircrafts will undoubtedly become a liability of the company as they add to the total inefficiency and operation cost. This will also lead to a bad reputation for the company as an ageing fleet often signifies more risk to passengers. In order to compete more aggressively with other competitor, SAS should really pursue efficiency. Efficiency brings in lesser cost for the company, satisfaction for the customer, and become a sustainable competitive advantage in the long run. References Lynch, Richard (2003). Corporate Strategy. London: Financial Times Pitman Read More