Analysis of the Scandinavian Airline System - Case Study Example

Name Course Institution Instructor Submission Date Executive Summary The paper aims at giving a case analysis of Scandinavian Airline System during the period of reign of Jan Carlzon. It involves an analysis of strategies employed by Carlzon. Analysis will be done with the help of SWOT analysis tools. SWOT analysis tool helps in pinpointing company’s strengths, opportunities, threats and weaknesses (Anja & Böhm, 2009 P. 1). The main aim of this case analysis is to evaluate how successful the company was under certain strategies employed by Carlzon. Strategies employed include; vertical integration, motivation and training, and participatory management. Introduction Since establishment in 1945 after three partnering countries; Denmark, Norway and Sweden signed an agreement, Scandinavian Airlines experienced a considerable growth except for the year 1972 in terms of its profitability up to 1978. The economic downturn of 1972 was as result of oil crisis that affected the fuel prices. It was a factor that affected all the airline companies in Europe including Scandinavian Airline System. Between 1978 and 1980, SAS recorded losses consecutively. The turnaround for the airline company was when Jan Carzlon was appointed as the president. The company experienced a remarkable increase in profitability successively. Carlzon employed different strategies in managing this airline company to overcome its challenges and bring it back to track. Despite his success in managing this company to a record of consecutive profitability, the company faced a lot of threats. Analysis of External Environment and Internal Strategic Capabilities Threats Stiff Competition Towards 1980’s, well established companies were gaining ground in the airline market. During this period of struggle, the most important factor that threatened the survival of this company was the immense competition from other airline companies. Compared to other companies, Scandinavian Airline System was placed at the periphery of Europe’s densely populated region (Ghoshal et al., 1988 P.787). In addition to this, the eastern region of Europe was sparsely populated compared to the western part. All the companies were competing for the same clients and the ‘mega carriers’ were eyeing Europe as the major hub for new markets. The most important factor that led to this turnaround was the immense competition from other airline companies. Compared to other companies, Scandinavian Airline System was placed at the periphery of Europe’s densely populated region (Ghoshal et al., 1988 P.787). As a matter of factor, SAS airline needed a lot of effort to woo passengers from entire Europe. At the same time, harsh economic crisis was at its peak. Company’s Social Structure By 1980, SAS group financial and operating report indicated that the company was among the leading when compared to other airline companies in Europe. The most important factor that led to this turnaround was the immense competition from other airline companies. Compared to other companies, Scandinavian Airline System was placed at the periphery of Europe’s densely populated region. At some point, Lindberg the company’s vice president stated that the social structure of the company was the main cause of high operating costs. At that instant, the company had not established partnership with other airline companies. Jan Carlzon, was able to come with new ideas which overcame these threats. The company was able to maintain competitive advantage which lasted for a considerable length of time. The current performance of the company can attributed to his ideas during his period of rule. Opportunities Merger and Acquisition Being a merger of three companies, SAS airline enjoyed the benefits of such a partnership. The company had experienced years of good returns since establishment in 1946 except for 1972 where it was affected by fuel price crisis. The company was able to establish a robust network of market within the Scandinavian region. The three partners were able to pool their resources together to reduce operational costs (Cento, 2008 P. 43). Strengths Upon his appointment as the company’s president, Jan Carzlon employed a number of strategies to rescue the ailing company whose employees were totally demoralised and didn’t have hope for the future. Vertical Integration Scandinavian Airlines Systems is indeed a perfect example of a firm that was able to employ vertical integration method of strategic management in its quest for a sustained competitive advantage. In the airline business sector, vertical integration is the unification of different establishments to provide service mutually. This strategy helps in reducing transaction costs besides improving the quality of service provided. When the three airline companies were merged together to form Scandinavian Airlines Systems, they had a common interest of establishing an impressive air service. The challenges of 1970’s and 1980’s such as economic instability and stiff competition from other airlines placed this company in a tough position especially because it had a small asset base when compared to other companies. A major challenge to the company during this period was competition. As a result, the company experienced huge losses in the late between 1979 and 1981. The arrival of Jan Carzlon as the company’s president resulted to a turnaround in the company in terms of profitability. Even though his strategies were not sustainable especially in 1988, the current good performance of the company can be attributed to Jan Carzlon’s leadership skills. Scandinavian Airlines Systems is the leading airline system in the region today. According to Gustafsson et al. (1999) SAS has invented new services and restructured old ones. Before his arrival, the airline companies were competing on grounds of acquiring more sophisticated aircrafts (Ghoshal et al., 1988 P.791). Carzlon’s idea was to move from this idea towards customer needs approach. The vertical integration combined with good leadership skills of Carzlon resulted to the company flourishing. The main aim of vertical integration is to enable a company to specialize on one undertaking. With the increasing number of individuals using this company for flight services, there was need to integrate all services related to travelling. Initially, SAS airlines was under the threat of other Europe airline companies owing to the fact that they had centralized their control. Vertical integration started in 1983 when SAS international hotels became a separate division (Ghoshal et al., 1988 P.796). The main aim of separating the two was to enable an excellent service provision to the travellers. In 1984, Scandinavian Airline Systems established a reservation system (Ghoshal et al., 1988 P. 37). This system was established to run concurrently to the airline operations but independently. Needless to say, Carzlon was able to employ this strategy successfully in his management. Currently, Scandinavian Airline Systems has a robust network system in the airline industry which can be attributed to vertical integration strategy introduced in 1980’s. In 1987, SAS airlines signed a joint agreement with other airline companies to establish a single reservation system. From this idea of coming together, SAS airline was able to establish mutual relationships with other companies offering the same service. This strategy was indeed fruitful because it resulted to smooth operations and economies of scale (Mourdoukoutas, 2006 P. 130). For this case, vertical integration resulted to increased number of customers. By acquiring Diners Club Nordic in 1986, SAS airline was employing vertical integration strategy. The main aim of doing so was to acquire Diner’s Club credit card. Through vertical integration with Diner’s club, they were able to increase their customer base. At the same time, integration of credit card lessened the time taken in making payments for aviation services and other related services. Generally, vertical integration was a good approach to use because it centralized all the services and reduced operational services of Scandinavian Airline Systems. However, this strategy can have some disadvantages. For example, large vertically integrated organizations have been found incapable of achieving greater levels of efficiency and they are not responsive customer’s needs in an ever changing business environment (McIvor, 2005 P. 19). Vertical integration employed by Jan Carzlon was very fruitful strategy. It was one of the strengths of the company mainly because most of the ideas within this strategy had not been implemented by other airline companies. It enabled SAS airlines to be ahead of other affiliate companies. “Businessman’s Airline” strategy One of the strategies employed by Carlzon that resulted to increased number of customers was “businessman’s airline strategy (Gross, 2009 P. 47). This innovative idea of Jan Carzlon resulted to the company rising and moving past other airline companies. Innovation is not just bringing new ideas to the market but it also involves improving what is already in use. Historically, most large companies have risen from improvement of what is already in the market rather than introducing new ones (Stringer, 2000 P. 71). Innovation enabled the SAS airlines to be ahead of its competitors. By introducing Euro class and dropping first class, Carzlon was sure of attracting more passengers at the time when economic downturn was looming. Yet it was a risky decision to drop first class in some routes, in the long run it resulted to increased profitability. Euro class was established to gather for the business class. First class passengers had more privileges compared to those of Euro class. The idea of introducing Euro class could help in the attainment of short term goals. It was at risk of being emulated by other competitors in the airline market especially with the company being disadvantaged by its geographical location. The company was located on a region which was sparsely populated and located at the boundary region of Europe. Motivation and Good communication Motivation and good communication was another strategy that was employed by SAS airlines under Carzon’s management. Initially, before the arrival of Carzlon, employees’ morale in the organization was minimal (Ghoshal et al., 1988 P. 795). There was an experience of bureaucratic leadership where junior staff relied entirely on directives from staff in the upper management. His remarkable leadership skill is maintenance of close ties with all the staff. Rather than using manuals to communicate ideas, he opted for simple method of using small booklets. At some instance, Carzon spent some time with his employees worldwide. Additionally, he employed participatory management where employees were included in decision making process. Using this kind of strategy indicates that that Carlzon was agreeing with Fredrick Taylors’s scientific management theory. Taylor asserts that the rule of thumb ought to be substituted with scientific methods which are based on research. Similarly, he uses training as a motivation to his employees. Motivation is one of the best strategies of influencing performance in an organization. It leads to application of skills and knowledge in work (Wlodarczyk, 2011 P.12). Past research studies have indicated that there is a direct correlation between motivation and work performance. Motivation leads to increased performance in an organization (Bowen & Ostroff, 2004 P. 204). Motivation is therefore a critical factor in management. Coaching and training helps in workers grow professionally and enhances their self esteem (Mintzberg et al., 1998 P. 48). The move from being a product driven to service driven company also impacted greatly on the performance of SAS airlines. Before the arrival of Carlzon, airline companies were competing in acquiring new aircrafts at expense of customers’ needs (Ghoshal et al., 1988 P. 791). Emphasis to the service being offered to the customers resulted to an immense increase in profitability to the company. Carlzon’s idea was new in airline industry and it was among the strengths of his company. Weaknesses SAS’s merriment did not last for long. The company experienced a down turn in 1988. It was clear that the strategies employed were short term. Inequity in Motivation Even though it was a good idea for Jan carlzon to motivate his workers, he did it in the wrong way. Motivation is an important aspect of any management system. However, if a manager introduces motivation without putting into consideration equity, there is a high chance that it may not bring out the expected results. By sending top managers and front-line employees to seminars and leaving behind middle managers, he was creating a rift between the employees. The most likely result of this was separation among the employees. As a result it could result to poor communication within the organization. It is for this reason that, small pyramids started to erupt within the middle management. Equity theory states that, in effect, that people will be better motivated if they are treated equitably and de-motivated if they are treated inequitably (Armstrong, 2006 P.261). Employees were supposed to be motivated equally if the goals were to be achieved in totality. Adams (1965) points out the fact that equity can either be distributive or procedural. Distributive equity focuses on the perception of fairness among employees with regard to others while procedural equity is the perception of fairness among employees with regard to various procedures are being operated (Armstrong, 2006 P. 262). It is for this reason that at one point, the employees started forming pyramids. This indicated that the operations of the company were not long lasting. Focus on Short Term Strategies By 1988, the company was facing a lot of challenges starting with the need to renew all the aircrafts. Initially, Carlzon had focused on customer service alone which possessed a lot of disadvantages. The idea of only servicing the old aircrafts alone without replacement is what led to the downturn which began 1988. The strategies employed by Carlzon worked for some few years and new problems emerged due to a failure in a diversification strategy (Burton, R. M. & Obel, B., 2004). The company focused on short and medium term strategies alone. Strategies employed included undertaking safety initiatives and employee training. Additionally, the move by the company to remove first class flight was not a good idea. Considering the situation that it was a time when economic crisis was at its peak. A good idea was to reduce the first class flights and increase the newly introduced Euro class which was the best for that period. By so doing, they will be gathering for all customers at the same time. This could have been another reason for the downturn in 1988. Also considering the fact that the company was less advantaged in terms of its geographical location, carlzon was supposed to employ a strategy that could gather for all the customers. The best idea was to focus on both service and product simultaneously. Conclusion Strategies employed by Jan Carlzon were successful to some extent. It is for this reason that the company experienced an increase in profitability for a considerable length of time. There was too much focus on short term strategies. It is for this reason that the profitability of the SAS airline began to decline towards 1999. The shift in focus from product to customer oriented alone is what resulted to failure to procure new aircrafts that were environmental friendlier. For example, vertical integration strategy possesses a lot of advantages such as increasing the number of customers to the business and improving the quality of service provided to the customers. On other hand, vertical integration was accompanied with disadvantages associated to it such as higher costs of operation and its inflexibility (Peyrefitte, Golden & Brice, 2002 P. 217). It was one of the contributing reasons for SAS’s profitability decline towards 1990. Recommendations Perhaps, the best idea was to look into new ways of financing. For a company like SAS airlines, employee share capital could work best. It also has a number of advantages besides raising capital to the company. Employee ownership is advantageous to the company because it motivates employees and at the same time boosting productivity. Operational cost was also a critical factor in SAS airlines. The costs of operation can be reduced through merging with more airline companies which results to scale of benefits (Cento, 2008 P. 43). Competition which was a serious threat to SAS airlines need to be addressed. It was therefore paramount to focus on competition-reducing strategies that will help in creating sustainable competitive advantage (Hitt, Ireland & Hoskisson, 2007 P.279). For example, it would be helpful to opt for mergers as a competition-reducing strategy. The ability to innovate faster than competitors can be a success factor in competition (Haberberg & Rieple, 2007 P.20). This implies that if SAS airline was to survive the threat of competition, constant and faster innovation was crucial. Similarly, focus into the long term strategies was paramount to the success of SAS airlines. It was inappropriate to neglect the previous focus on new technology and improve customer service alone. What was important was a concurrent focus on both product and service at the same time. Environmental concern is a common aspect in the airline industry. Purchasing eco-friendly aircrafts is a crucial idea. Rather waiting for last minute rush, Carlzon would have procured as he progressed. References Adams, J. S. 1965. Injustice in Social Exchange, in Advances in Experimental Psychology, Vol 2. New York: Academic press. Anja, B. H., & Böhm, A. 2009. The Swot Analysis. Munich: GRIN Verlag. Armstrong, M. 2006. 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