Strategic Management: Scandinavian Airlines - Case Study Example

Table of Contents Introduction 2 Background of the Case 2 Vertical Integration 3 SWOT Analysis 4 Critical analysis of the Vertical Integration at SAS 5 Conclusion 8 8 8 8 References 9 Bibliography 11 Introduction Scandinavian Airlines or what was previously known as Scandinavian Airlines System is the state registered carrier of Norway, Denmark and Sweden. According to the reports the airlines system was formed as a result of collaboration among three aviation companies of Norway, Denmark and Sweden. It was then responsible for carrying out the international operations of the aforementioned countries. Scandinavian Airlines or SAS is also the largest airline company of Scandinavia. Scandinavian Airlines belongs to the parent SAS group (Clow & Kurtz, 2003, p.79). It was founded in the year 1946 and is presently headquartered at the Stockholm Arlanda Airport (ARN) which is at the Sigtuna area of Sweden. The airline has around 90 destinations and operates with 176 aircrafts (Nationsonline, n.d.). However the central base is situated at the Copenhagen Airport (Beyman, n.d.). The present study entails about the challenges faced by the company in the 1980s and also offers the solution by which the company surmounted the challenges. The company applied vertical integration strategy in order to overcome the challenges. The threats mainly came from intense rivalry within the aviation industry. This has declined the sales volume as well as the profitability of the company. The new management found the only way to overcome the issue by carrying out an end-to-end restructuring of the company. It happened through successful vertical integration. The company was fully restructured and growth was witnessed. It vertically integrated with the other divisions such as catering sector, credit card, hotel, and reservation within the aviation industry. The paper will therefore shed light and offers a critical on the vertical integration approach of SAS in reviving their situation. Background of the Case The case entails about Scandinavian Airlines (SAS) where the company had to deal with various issues and how the company recovered from the situation. It was in the year 1970s and 1980s; the company faced various challenges (Gallos, 2008, p.42). The issues led to various disparities among the owners, staffs and the management. Furthermore the stakeholders also did not agree on the reasons portrayed for the big loss and was also unsatisfied with the ways to be adopted for the revival of the company. Hence at this point of a time there was an urgent need of quick and firm decision which will help the restrict or save the company from the verge of a collapse. At that moment of time the management structure was changed and new executives came forward. In the year 1981 i.e. during the time, when the issue was at its peak, Jan Carlzon was appointed as the president of the SAS airline (Hendry and Eccles, 1999, p.359). As soon as the new management took charge, the improvement process started. The improvement or the changes are characterized by the management reputation and charismatic leadership of the new president. His past records also clearly depict that how the president was capable of transforming an airline company. The strategy adopted by the management in order to improve the situation was vertical integration (Hong and Kim, n.d.). As a result of that, dramatic transformations were witnessed and the group succeeded to become the largest airline system of Scandinavian region. Now it operates within the European, Scandinavian, intercontinental and domestic routes and caters to a whopping 23 million travelers. Moreover it now also owns many air travel services, hotels and airlines. Vertical Integration Vertical integration can be defined as a process or method in the business by which an organization buys another organization that supply buys goods or supplies the raw materials so as to control all the activities pertaining to production (Cambridge Dictionaries online, n.d.). Some time it also happens that the organization which is currently embracing vertical integration may consider opening of the separate division on its own without buying it (Graham, Papatheodorou and Forsyth, 2010, p.148-149). Now in the context of an aviation industry vertical integration can be portrayed as the merger of several other companies (International Transport Forum and OECD, 2010, p.12). It provides products and services along the same course of the airlines like reservation agents, hotels, credit cards etc. However the primary aim of the vertical integration is to carry out vertical integration was to achieve greater success by offering superior quality of product and services. Furthermore a number of scholars have highlighted that, the principal rationale behind adopting vertical integration is the large number of benefits offered by it (Peyrefitte, Golden and Brice, 2002, p.218). Some of the benefits considering which SAS adopted the strategy of vertical integration are as follows:- The availability of the central management and strong communication will reduce the transaction cost of the air travel to a large extent. In addition, the vertical integration policy employed by SAS can be effective in monopolizing the airline industry. A central system for controlling the quality of a vertical integrated system allows the group companies to assure service quality. Nevertheless it may also result in higher organization cost for the purpose of managing a multifaceted organizational structure and a diverse workforce. SWOT Analysis In order to get deeper insights of the company, a SWOT analysis of the company is carried out. A SWOT analysis will be done to evaluate the internal and external factors of the company (Williams, Champion and Hall, 2011, p.108). Strengths The company has a strong brand reputation and has large presence. Vertical integration acts as a strength to the company. Strong alliances and linkups with the subsidiaries. Opportunities Emerging markets. Opportunity to use social media for promotion. Weaknesses Declining number of passengers Inability to reach the desired profit margins. Declining market share Threats Intense competition Changing customer needs. Recession may affect the service delivery. Critical analysis of the Vertical Integration at SAS The initiative towards vertical integration was taken during the year of 1988. SAS also experienced a series of changes in the same era, only for the primary purpose of reviving the condition of the organization. The strategic decision of embracing vertical integration was also taken at this time. In this process SAS acquired various service providing companies. It came in the form of travelling companies, travel agents, hotels, ground services etc. As a result of this, SAS was successful in driving more passengers towards itself. The growth in revenue was also enormous. The strategy paid off to such an extent that the company went on to become the one of the major players in the global airlines market. One of the prime reasons for the success of the company can be highlighted as the strong leadership and sound management of the president Jan Carlzon, who has possibly witnessed or went through some of the worst challenges (A. J. Mills, J. C. H. Mills, Bratton and Forshaw, 2006, p.57). His excellence in the field of aviation has transformed the company and enabled them to taste success. The philosophy of the CEO was that every employee within the organization has to pass through bad and good times. On studying the case deeply, it has been analyzed that one of the principal reasons for embracing vertical integration was to boost the market share of the leisure and travel market. The management of the company realized that according to the present market trends, within few years the rivalry among the existing players will reach to such an extent that there will be issues with sustainability of the firm. Thus it became obligatory for the company to consider strong and pertinent management strategies so as to ensure long run success of the company. In the meantime i.e. during the period of 1988, vertical integration indeed came handy for the company. It offered more market share, centralized control, and also had a monopolized effect. However due to complex nature and difficulties in structuring, it has resulted the airlines to become consortium. Furthermore these activities have also allowed dispensing the control to the respective governments. It has been also analyzed that the requirement for vertical integration was therefore to reduce the inefficiency and making decisions in the regular operations of the company. Also it has been assessed that the company is having some issues pertaining to the route system, and thus it needs serious attention. There was stiff competition in every corner of Europe which resulted in a declining market share of SAS. Moreover due to lack of control in the three centers of the airlines, the service delivery was also poor. The unsound central has also affected the passenger scheduling, control scheduling and movement of the aircraft. In this context some of them regarded it as worst service delivery. Based on this outcome and responses from the passengers have forced the company to improve their service delivery. However slowly with the adoption of sound management policies, there were dramatic turnarounds, and strong improvements were visible in every part of operations. One of the imperative strategies adopted by the new management of SAS was the decentralization of the responsibilities. In this context various duties and responsibilities were decentralized thereby making the control mechanism more flexible. The prime rationale behind its adoption was to make sure that the operational activity of the company gets reorganized. Moreover this will allow the company to cater to the clients in a ‘focused service delivery’ approach. The prioritization strategy of the customers also allowed them to witness colossal growth and achieve incredible success in the market place. The strategy of vertical integration along with the sound management of the company, it also started to gain competitive strengths and thereby converting them as the competitive advantage for the company in the market. The strategy has also offered the company with new strengths and opportunities. In order to cite an instance the market presence of the airlines in the Scandinavian region became stronger like never before. The vertical integration strategy not only offered the company to restructure and revive its operation, but also helped it tremendously in targeting of the new customers. In addition, existing customers were also satisfied. The move transformed the company and gave it a tag of businesspersons’ airline. It can be also emphasized that the strategy offered multiple number of benefits to the organization. Due to the adoption of the strategy the company has been able to achieve the following benefits:- The incorporated strategy led the frequency of flights to increase and thereby reducing the fare of travelling. This helped the company serve more customers. The company has shut down the first class seat and in place of that euro class seats were introduced. In this context, it can be clearly portrayed that regulating the classes of travelling, was aimed to offer superior facilities at low cost. The operational cost was reduced to a substantial level and hence it increased the profitability of the company. The brand value of the company was also increased and strong brand equity was also achieved. Finally the financial standings of the company were also improved to a large extent. A revolution within the company was highly needed so that the challenges faced by the company can be faced with ease. Initially the company had two choices that are to either embrace an end to end restricting of the business operations of the organization or to continue with its existing old system. On reviewing the case it is highly recommended that the company should reconsider its corporate strategy. It only gives stress to the Scandinavian market, but it must also consider operating in other parts of the world. Furthermore it is also recommended that the company should also consider using social networks to promote themselves in the marketplace. Conclusion The present study was about analyzing the Scandinavian airlines case. The case revealed that the airlines company has faced serious issues in the early 1980s regarding their operation. However adoption of vertical integration strategy has helped the company to revive their condition and some believe that the strategy was even responsible for the colossal growth of the company. The study revealed that the vertical integration was achieved by means of acquiring hotels, credit card companies, reservation and travelling companies etc. This allowed SAS face the rising weaknesses. Hence it can be concluded that vertical integrating indeed played the most important role in revving the company. References Beyman, M. J., No Date. Scandinavian Airlines History. [online] Available at: [Accessed on 06 November 2012]. Cambridge Dictionaries Online, No Date. Vertical Integration. [online] Available at: [Accessed on 06 November 2012]. Clow, K. E., and Kurtz, D. L., 2003. Services Marketing, 2E. New Delhi: Dreamtech Press. Gallos, J., 2008. Business Leadership: A Jossey-Bass Reader. 2nd ed. New Jersey: John Wiley & Sons. Graham, A., Papatheodorou, A., and Forsyth, P., 2010. Aviation and Tourism: Implications for Leisure Travel. Burlington: Ashgate Publishing, Ltd. Hendry, J., and Eccles, T., 1999. European Cases in Strategic Management. Connecticut: Cengage Learning EMEA. Hong, I. B., and Kim, C., No Date. Toward A New Framework for Interorganizational Systems: A Network Configuration Perspective. [pdf] Available at: [Accessed on 06 November 2012]. International Transport Forum and OECD., 2010. ITF Round Tables Integration and Competition between Transport and Logistics Businesses. Paris: OECD Publishing. Mills, A. J., Mills, J. C. H., Bratton, J., Forshaw, C., 2006. Organizational Behaviour in a Global Context. Toranto: University of Toronto Press. Nationsonline, No Date. Major Airlines of Europe. [online] Available at: [Accessed on 06 November 2012]. Peyrefitte, J., Golden, P., and Brice, J., 2002. Vertical Integration and Economic Performance: A managerial Capability Framework", Management Decision, 40 (3), pp. 217-226. Williams, C., Champion, T., and Hall, I., 2011. MGMT. Connecticut: Cengage Learning. Bibliography Conklin, D. W., 2006. Cases in the Environment of Business: International Perspectives. Thousand Oaks, California: SAGE. Enz, C. A., 2009. Hospitality Strategic Management: Concepts and Cases. Hoboken, New Jersey: John Wiley & Sons. Hill, C. W. L. and Jones, G. R., 2012. Strategic Management Theory: An Integrated Approach. Stamford, Connecticut: Cengage Learning. Ireland, R. D., Hoskisson, R. E., and Hitt, M. A., 2008. Understanding Business Strategy: Concepts and Cases. 2nd ed. Connecticut: Cengage Learning. Kotler, P., 2009. 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