Strategic Management at Scandinavian Airline Systems in 1988 - Case Study Example

 Scandinavian Airline Systems in 1988 1.0 Introduction The case study under consideration is pertaining to the airline industry. The quintessential aspects of the airline sector are that since the times of its genesis, it has always been profit driven, innovation dependent, service oriented, capital intensive and cyclical (Morrison & Winston 1995). In fact, it is a sector that has witnessed dramatic changes since 70s (Morrison & Winston 1995). Therefore, the airline that constitutes the focus of this case study, which is Scandinavian Airlines System, is not much different. Like most of what one may call successful airlines, SAS has also gone through altering phases of restructuring and consolidation. The period being discussed in this case study is the one spanning from early 70s to the late 80s. Over the years, SAS has metamorphosed from being a small yet innovative airline catering to a limited and localized customer base, to the one that has evolved into being an important international player. This journey for SAS group has not been sans challenges and difficulties that required strategic thinking and leadership pertaining to all the aspects of this business. In its quest for sustenance, SAS resorted to varied permutations and combinations of restructuring, alliances, vertical and horizontal integration. Aided with an all knowing hind sight, it will be really easy to analyze the decisions taken by the SAS leadership. Yes, it would not change SAS’s past. Still, such an analysis extends an important academic opportunity for learning and practical application of strategic management. 2.0 Analysis and Evaluation 2.1 External Environment and Internal Strategic Capabilities of SAS For the purpose of carrying out the SWOT analysis of SAS, it is imperative to have a desirable objective (Barney & Hesterly 2008). The stated objective is to assure the long term viability of the company in the altered external environment, as it existed in 1988. The major strength of SAS is its strong position in Europe and its global route network (Ghoshal et al. 1988). Right from its conception, the organization had an innovative and aggressive approach towards business (Ghoshal et al. 1988). The airline has a history of striking successful alliances in areas of technology, business processes, product distribution and reservation, an approach which so far has consolidated its position (Ghoshal et al. 1988). SAS has a firm financial footing as compared to its competitors (Ghoshal et al. 1988). It has successfully managed to horizontally restructure itself through employee education and empowerment (Ghoshal et al. 1988). The airline has a strong hold over the business traveller segment (Ghoshal et al. 1988). It has a positive reputation for efficiency, service quality and punctuality (Ghoshal et al. 1988). Through forward vertical integration it has developed into an “A to Z” airline in terms of product differentiation, product distribution and reservation (Ghoshal et al. 1988; Capon 2008). The organization has besides the airline, four other independent business units, which are profit earning and are high value assets (Ghoshal et al. 1988). For the time, the airline has a worthy and diversified fleet (Ghoshal et al. 1988) High operating costs and problems with the trade unions is one major weakness of SAS (Ghoshal et al. 1988). So far, the airline has focused on a small population base (Ghoshal et al. 1988). The conservative elements in the middle management are not open to change (Ghoshal et al. 1988). SAS Group Structure is very complex, diversified and unwieldy (Ghoshal et al. 1988). Also, a good chunk of the fleet of SAS is bound to phase out in the near future (Ghoshal et al. 1988). (Google Map 2011: Online) The traffic hub of SAS is placed at Copenhagen, quiet far from the socioeconomic centre of Europe (Ghoshal et al. 1988). Augmenting globalization and the resultant liberalization of economies and markets have made it possible for SAS to enter and expand in new markets. The constrained financial prognosis of the airline may jeopardize its ability to replace its aging fleet, as per the requirements of the emerging opportunities (Ghoshal et al. 1988). Also, the competition posed by powerful and leaner American and European airlines, do threatens the viability of SAS (Ghoshal et al. 1988). 2.2 The Strategies Resorted to by SAS From its conception in 1946, SAS started as a local airline with the ambition to consolidate its position in Europe in particular and the world in general. Till 1975, the thrust of the organization was to extend its route network, to assure profitability and to compete technologically (Ghoshal et al. 1988). In 1981, after suffering major losses, the goal before SAS was to adjust to the demands of the industry going competitive. So it restructured its route network by going for smaller planes and started focusing on being customer driven (Ghoshal et al. 1988). This bolstered its efficiency by augmenting flight frequency and punctuality (Ghoshal et al. 1988). The airline started to concentrate on consolidating its hold on the business traveller segment through product differentiation (Ghoshal et al. 1988). The thrust was on a smart allocation of resources (Ghoshal et al. 1988). In 1981, a drive was launched to change the organizational culture, so as to boost the dwindling employee morale and to make the organization information driven through employee empowerment and education (Ghoshal et al. 1988). This drive was resuscitated in 1984 to prepare the company to meet the challenges posed by liberalization (Ghoshal et al. 1988). The organization resorted to tightening its grip around the business traveller segment by opting for further product extension and differentiation, by digitizing customer interfaces and by investing in its distribution and reservation operations (Ghoshal et al.). As the future of the airline industry became clearer in 1988, the airline realized that its existing gross profit level was not sufficient to back future investments in technology and hardware (Ghoshal et al. 1988). Its attempts at collaboration with other interested airlines were also being frustrated by more aggressive and cash rich airlines (Ghoshal et al. 1988). 2.3 The Rational behind these Strategies and how they were implemented In 1946, SAS being a small and state sponsored airline, its objective was to assure sustenance and extend its scope. This it managed to achieve by early 70s, by extending it route network, by stretching its profits and increasing its bargaining power through technical cooperation, horizontal integration and alliances with airlines like Thai Airways, Swissair and KLM (Ghoshal et al. 1988; Heracleous 2003). In 1981, owing to recession, fuel prices escalation, the airline faced a dwindling profitability, courtesy overcapacity, localized concentration and a fleet that grossly mismatched with the customer needs (Ghoshal et al. 1988). The organization tackled this challenge by focusing on the business travelling segment, without going for layoffs and cost reduction (Ghoshal et al. 1988). So it opted for product differentiation by coming out with its “EuroClass”, a product oriented around luxury, punctuality and attractive flight schedules (Ghoshal et al. 1988). Not to mention, the SAS made massive investments in this product range, in times that demanded austerity. At the same time to improve organizational efficiency and effectiveness, in consonance with the surrounding bleak economic and financial environment, SAS launched a drive to alter organizational culture. This was initiated by introducing a new leadership, by making the customer interface information driven, by apt PR activities, through investment in employee education and exposure (Ghoshal et al. 1988). At the same time, to retain its influence over the full-fare paying customer, in a highly competitive and recessionary market, SAS went for a full scale forward vertical integration to leverage its product satisfaction, by launching divisions like SAS International Hotels (SIH), Vingresor and SAS Service Partner, by acquiring Diners Club Nordic, and by collaborating with Air France, Lufthansa and Iberia to develop distribution and reservation systems (Lynch, 2009; Ghoshal et al 1988). With the advent of 1988, the organization has come to the realization that irrespective of its unblemished record for profitability, it has ended up with an unwieldy organization structure and an inability to muster financial resources for hardware up gradation and the much needed horizontal integration (Ghoshal et al. 1988). Globalization and liberalization, which smack of opportunity, SAS perceives it as a big problem. 2.4 Evaluation of SAS’s Strategies During its start, when SAS was a small airline and the airline industry was in its nascent stage, the only way for SAS to grow and expand was through technology innovation and horizontal integration (Coulter 2008). Hence, the strategy selected by SAS was in consonance with the times. In the same vein, the response mustered by SAS towards recession and overcapacity was apt and justified. However, the problem was that SAS got carried away with that recession mentality. It forgot that economic cycles are prone to change. It also missed the point that change and change management tend to be permanent features in any viable company (Sutherland & Canwell 2004). Yes, it was important to consolidate hold over the business traveller segment, as it was the only constant customer base in a recessionary environment. It was also important to leverage the product mix designed for this segment, but it was also a must to reduce costs and make the organization leaner. SAS could have achieved the same results by selecting different options, which would have allowed it to retain its focus on its core competency that is aviation. During the recessionary years that are post 1980 period, the need of the hour was to make the product mix offered to the full-fare paying customer more attractive? SAS could have done so by avoiding costly forward integration and resorting to outsourcing and alliances (Johnson, Scholes & Whittington 2009). If the airline sector was being affected by recession, so was the hospitality industry. So the investments made in SAS International Hotels (SIH) were a waste. SAS could have achieved a similar or perhaps better product differentiation by outsourcing the hotel reservations, catering, tours and transportation to the companies that specialized in it and could have perhaps done it in a more cost effective way (Brown & Wilson 2005). This would have lead to even higher profits, while leaving SAS with the wherewithal to invest in the much needed fleet augmentation, which would have further streamlined flight frequency and efficiency. Exhibit 1 clearly indicates that though the income in percentage from SIH, SSP and Vingresor has remained more or less constant in the period 1982-1987, the features furnished by these units served the purpose of leveraging SAS airline consortium during recession, thereby increasing its profits. Similarly, SAS had no need to acquire Diners Club Nordic. It could have acquired a similar or better distribution by striking strategic partnerships with credit card companies and have avoided getting involved in the risks faced by credit companies in a recessionary economy. The job of designing and putting in place an effective reservation and distribution system could also have been outsourced to some capable IT company, thereby saving $270 million. In the recession it was important to achieve leverage through product differentiation and distribution management. However, given the capital and technology intensive nature of the airline industry, the core business of any airline in the long run is to fly planes, not to sell burgers, run limousines, rent hotel rooms, manage tours or chase credit card defaulters. The airline can manage the Trade Union problem and reduce operating costs by offering stock options and Voluntary Retirement Schemes to its employees. It is also recommended that the airline sell its profit making units SAS Service Partner, SAS International Hotels, Vingresor and SAS Distribution to companies interested in a strategic alliance with SAS. The assets garnered could be used for fleet renewal and the much needed horizontal integration. It is also recommended that the company can become further leaner and competitive if the respective state stakeholders sell their share to the private partners. 3.0 Conclusion SAS is an organization that is used to change. The upcoming globalization and liberalization in the airline sector is fraught with opportunities. SAS has the resources to meet this challenge. All that is required is a realistic vision and a commensurate change of perspective and priorities. Word Count: 2,020 Reference List Barney, Jay & Hesterly, William S 2008, Strategic Management and Competitive Advantage: Concepts and Cases (2nd ed.), Pearson, Harlow. Brown, Douglas & Wilson, Scott 2005, The Black Book of Outsourcing: How to Manage the Changes Challenges and Opportunities, John Wiley, London. Capon, Claire 2008, Understanding Strategic Management, FT Prentice Hall, Harlow. Coulter, Marry 2008, Strategic Management in Action (4th ed.), Pearson, Harlow. Ghoshal, Sumantra, Lefebure, Ronald Berger, Jorgensen, Johnny & Staniforth, David 1988, Scandinavian Airlines System in 1988, INSEAD-CEDEP, Fontainebleau, France. Google Map 2011, Copenhagen, Google Map, viewed 6 January 2011, . Heracleous, Loizos 2003, Strategy and Organization- Realizing Strategic Management, CUP, Cambridge. Johnson, Gerry, Scholes, Kevan & Whittington, Richard 2009, Fundamentals of Strategy, FT Prentice Hall, Harlow. Lynch, Richard 2009, Strategic Management (5th ed.), FT Prentice Hall, Harlow. Morison, Steven & Winston, Clifford 1995, The Evolution of the Airline Industry, Brookings Institution Press, New York. Sutherland, Jonathan & Canwell, Dian 2004, Key Concepts in Strategic Management, Palgrave Macmillan, Basingstoke. Read More