Vertical Integration at SAS in 1988 - Report Example

Case study analysis: Vertical integration Case Study Analysis: Vertical Integration at SAS in 1988 Introduction Scandinavian Airlines System (SAS), a joint venture of Sweden, Norway and Denmark, has seen its fortunes move up and down over the years, in line with the changing dynamics of the airline industry. It has succeeded in strategising its operations in times of crisis but it is seen that new strategies need to be implemented once competition catches up with a game plan. This report analyses the case study of vertical integration at SAS in 1988, done by Ghoshal et al for INSEAD-CEDEP, Fontainebleau, France, and is made in the classical format of internal and external analyses (SWOT) touching upon the competitive forces, resource-based view (VRIO) of the firm, key issues and appropriate conclusions. Industry Analysis i. Internal analysis (Strengths and weaknesses) Sweden, Norway and Denmark situated at the fringe of mainland Europe, aspired to have a common airline service and realised the goal when SAS was started in 1946. In the absence of competition from Germany immediately after the War, it had ample opportunities to innovate and grow. However, SAS did not have the luxury of a large travelling-public base within the constituent countries and needed to overcome this weakness by attracting customers from other countries. SAS successfully did this and recorded many pioneering efforts like being the first to restart transatlantic flights after the War, opening the economical arctic and transpolar routes, operating newer aircrafts like the French Caravelle and Douglas-8-62 and developing ultra-long range routes. Case study analysis: Vertical integration 2 These initiatives point to the dynamic and strategic moves of the organisation in the face of much bigger competitors from Europe and the USA. It recorded profitable operations till 1978/79. The pioneering spirit that led to the several initiatives has been the strength of SAS while its location and relatively small size have been its recognised weaknesses. But by the late 70s the strategic moves of the earlier years ran their course, competition increased and profits started falling. Its high operating costs at US cents 76 per tonne-km and high labour costs meant that it could no longer offer competitive prices. Added to these woes, its on-time performance was the lowest among major European carriers and its major hub at Kastrup in Copenhagen acquired a bad reputation for inconvenience and inefficiency, discouraging potential clients. Blindly following competition in investing in expensive planes even when returns did not support such investments, rigid route plans, chasing budget travellers, neglecting service quality, complacency and management weakness made SAS run into losses by 1979/80. Rumours of possible closure impacted staff morale severely. Differences within the group also diminished co-operation after Denmark joined EEC in 1973. This confirms the principle that strategic moves are not a one time affair but business organisations need to periodically review competition and implement new strategies for sustained growth and profitability. Further, competitive advantage comes not by following others but by a careful analysis of SWOT factors and reworking strategy to suit market dynamics. Case study analysis: Vertical integration 3 ii. External analysis (Opportunities and threats) At the end of World War II, major European airlines were competing with each other and with the large US carriers for intercontinental traffic. They had the resources – financial, government support, customer base and logistics – to operate on and realise the economies of scale. The growing competition, particularly with the mega US carriers serving the European destinations, put SAS in serious difficulty. The successive oil shocks added fuel to the fire literally, with rising oil prices and high interest costs without recourse to passing on the higher costs to customers in the face of competition. Globalisation was also on the horizon which meant further increased competition. Thus the external situation presented a grim picture with rising costs, falling revenues and competition. The new management headed by Jan Carlzon took these factors into account and looked for opportunities even in these adverse conditions and came up with a radical change of strategy by end 1981. Airlines operation is a service industry and the perception of quality of service is an important factor and SAS implemented a new strategy to offer a differentiated product to gain competitive advantage. This strategy put the business class traveller at the core of its operations and reworked everything – from fleet to flight frequencies and facilities at every point of customer contact. The full fare paying business class travellers, if they could be induced to choose SAS, were to bring in the additional revenues which would be spent to modify/refurbish the fleet and invest in improving the image of Kastrup hub and every other customer-contact point – be it the distributors, credit card companies, catering or transport service providers. The Case study analysis: Vertical integration 4 opportunity was to bypass competition and lure away the high fare paying passengers from the competitors. Vertical integration & VRIO Even as SAS implemented its strategic changes in fleet and frequency with flexible schedules, and emphasized on short haul destinations, it went several steps further in its thrust for gaining control on all activities that had customer interface with a view to ensure superior service. High on the list are ticketing, hotel reservations and transport services. In these areas it opted for vertical integration of operations. It promoted Amadeus, the distribution service in association with Air France, Iberia and Lufthansa. This move negated the resistance to booking its EuroClass and EuroLink tickets by other distributors. It acquired Diners Club Nordic and became the sole franchisee of Diners Club credit cards in the region. The SAS International Hotel (SIH) was promoted and tied up with several high class hotels with a view to guarantee hotel reservation to passengers at the destinations. These three services ensured that the bothersome issues of ticketing, payment and hotel accommodation for business travellers, were taken care of to add depth to the quality of SAS service. SAS Service Partner as an independent catering services division, SAS Leisure (Vingresor) for holiday makers completed the five areas of vertical integration that addressed customer needs fully. These moves made dramatic impact on the bottom line and SAS continued to make impressive profits till 1988, the date of this case study. Its full fare traffic was the highest among competitors and on-time performance reached 93%. Case study analysis: Vertical integration 5 Postulated by Jay Barney, VRIO is a method of analysing a firm’s resources and capabilities, based on their value, rarity, inimitability and organisation’s capability (1991). The vertical integration implemented by SAS in its entirety is a valuable strategic option since SAS had simultaneously revamped its entire organisation into five business areas for management as per the vertical integration lines developed. Although taken individually, each facet of this strategy does not classify as a valuable, rare or inimitable resource. They are common and can be easily acquired by the competitors as for example, the Galileo CRS service. But in the case of SAS, the decisive factors were the leadership provided by Jan Carlzon and the organisational capability that he built up, which can be termed as the VRIO resources. He set the objective for SAS to become the most efficient airline in Europe by 1990. Conclusion Vertical integration as a strategic option must add significant value to operations or else, it would lead to dilution of focus and greater losses. In the case of air travel, high value customers are not satisfied with piecemeal approach and dealing with multiple agencies and are not averse to pay a price for integrated services of high quality. In a competitive situation, more than one firm can offer such option and this would lead to further refinement in strategy planning. References Barney, J. (1991) Firm Resources and Sustained Competitive Advantage. Ghoshal, S., Lefebure, R.B., Jorgensen, J., Staniforth, D. (1998) Scandinavian Airlines System 1988, INSEAD-CEDEP, Fontainebleau, France. Read More