Building Quality into Services - Case Study Example

Scandinavian Airlines System (SAS) in 1988 's Number 's Table of Content I IntroductionII History & Back Ground III Strategies employed by Jan Carlzon IV Profit-maximizing, competition-based theories of strategy V Resource-based theories of strategy VI Human-resource-based theories of strategy VII Environmental analysis models VIII SAS Achieved a Sustainable Competitive Advantage IX Future Prospects & Recommendations Introduction Scandinavian Airlines System is considered the region's largest airline and fourth in Europe in terms of passengers carried and operating revenue. The SAS Group's airlines have flight to almost every part of the world. The Group also has companies that support airline operations as well as a hotel business. History & Back Ground Although SAS is one of the oldest Airline in the Europe but it really took off after WWII at the cost of Germany. Germany was not allowed to keep its own Airline after the War. After that, SAS never looked back achieved numerous milestones one after other. SAS pioneered in the Arctic route in 1954 with flight from Copenhagen to Los Angels. In 1957 with transpolar service to Tokyo. SAS is also Pioneer in using modern technology within Europe or to US reducing travel time and improving quality of flight. There was a boom in terms of profit in 50s, 60s and 70s. The problems started appearing in late 70s and early 80s. There was substantial reduction in the profits. Strategies employed by Jan Carlzon Jan Carlzon accepted Presidency of this Giant in 1981. Looking at the recent reduction in profits Carlzon had take drastic measures for a improving the financial status of the company. He undertook various strategies and was able to achieve sustainable growth rate for SAS. (INSEAD CEDEP 1988) Profit-maximizing, competition-based theories of strategy Carlzon being a sharp and intelligent business leader at once noticed that due to stagnation in the market and over capacity company was losing its market share against competitors. He understood that he should chalk out a new business strategy to deal with the situation. The first strategy that proven and tested by him in his previous venture. He decided to reduce the fleet so that the operation costs may be reducing thus increasing the profit. The replacement of large aircraft in smaller ones would be more cost effective and it would be helpful in increasing the frequency of flights on short and busy routes. He also planned to convert the first class to Business class with almost similar facilities but lower rates. Resource-based theories of strategy As discussed earlier the previous management was more interested in acquiring the planes of latest technology and also of larger size. These planes drained the resources of group and also increased the operations costs. He asked the managers to cut those expenses that were not productive but should not hesitate in raising those that may increase the productivity of the company. Administrative costs were reduced by 25% but also good investments were made into new services and facilities and aircraft interiors. Another important step taken by Group was to expand the circle of their services. The group wanted to take care all the needs of customer from buy tickets to going back home. Introducing SAS International Hotels did this. In 1983, SIH became a separate division within SAS group. (INSEAD CEDEP 1988) Human-resource-based theories of strategy As Carlzon believed in quality not quantity, so he brought about wholesale changes in the human resources section of the group. As the size of fleet was reduced, consequently the number of staff was also reduced. But on the other hand, new recruitments were made on smaller scale where the quality was decisive factor not quantity. As he introduced new products so different, type of staff was required for that. In past there was a bureaucratic atmosphere, everybody just sticked to the company policy, there was no personal initiative involved. For this purpose large number of staff was required to take care of all sorts of rules and regulations. Most of the employees were afraid of the future of the company. A great change was required to transform the company from bureaucratic culture to corporate culture. Changes were made on large scale, 13 out of 14 senior executives were changed. There was an overall change in philosophy at SAS. (INSEAD CEDEP 1988) Innovation and knowledge-based theories of strategy Carlzon was a very innovative person. He added some unique features to SAS. These features proved very profitable and productive. He was true believer of market research techniques. His expert researchers gave very useful inputs that were converted by him and his planning team into very profitable products. The researchers gave him input that the Business class passengers do not know much about the hotels at various locations. The output was SIH the chain of hotels and ground transport service for the convenience of business class. (INSEAD CEDEP 1988) Environmental analysis models Richard Lynch describes the basic 8 models for environmental analysis. These models can be applied for a thorough analysis of SAS. Model 1: Consideration of the nature of the environment (General considerations) The problems like market recession and oil crisis required a thorough analysis. Carlzon did this very well in comparison to competitors and also with other industries. It helped in assessing the situation correctly into true perspective. His research and evaluation team gave him correct input. The market research was one of the tools used by Carlzon. A correct and true analysis was the key of success of Carlzon. He understood that although situation is quite turbulent but it can be brought under control. He was able to make correct decisions because of these comparative studies and analysis by his staff and himself. He slashed some expenditures in unproductive sections. Made investment in new sections and divisions. Model 2 Factors affecting the organization (PESTEL analysis and scenarios) For analysis under this model we need to ask few questions 1. What are the industry's dominant economic features This question gives an overview of the industry's dominant economic features. The factors to consider in this question are market size, scope of competitive rivalry, market growth rate, number of rivals and their relative sizes, etc. Knowledge of the industry's economic features is important because of the implications they have for the strategy. 2. What is the competition like and how strong is each of the competitive forces This question gives understanding to the industry's competitive process in order to discover the main source of competitive pressure and how strong each competitive force is. This analytical step is essential because managers cannot devise a successful strategy without understanding the industry's competitive character. It is first and most important phase of re-assessing business strategies of the company. The first and major step taken by Carlzon to identify the problem areas. Carlzon felt that SAS has become product driven organization instead of service driven. (Identify key influences) For example by acquiring large aircrafts the frequency of flights was reduced that was against the customers interest. In the past he said we were working like booking agents and aircraft brokers just booking tickets and selling and purchasing aircrafts. Now we have to fight like street fighters if we want to get success (Predict & Understand). Another tool used by Carlzon was his little red book. These were booklets containing description about Company situation and it future goals. Cartoon and drawings were used for making them more effective. These red books were distributed among employees and it brought very positive results. In first year Carlzon traveled extensively and met with the employees all over the world. This strategy by Carlzon was quite correct and it paid off. But by replacing the larger and modern planes like Airbus and Boeing SAS sacrificed its pride of being an innovative organization. But this was need of hour latter on this situation was reversed and now SAS has one of the best fleet in the world. The emphasis on customer oriented policies was a very correct decision. It brought about a change in the image of the company (Interconnection between events). The Carlzon red book was a unique method of communicating with employees and getting them aboard. These techniques show that Carlzon was very innovative and hard working President of SAS. Model 3 Analysis of growth (Industrial Life Cycle) The balance sheet of SAS showed the CEO that there is enormous reduction in the profits. After almost two decades of growth the SAS group sustained huge operating losses. This situation was shocking for the management as well as for shareholders. Rumors spread that there would be a break down of the group into its partner companies. The Airline started losing market share and the trust of the customers. As seen in the case, services offered by airlines are not considered novelty anymore. As such, 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. The launching of different strategies to each market evidences this. 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. CEO and other manager continuously analyze the image of company among shareholders. If there is nosedive decline in the status of company, it should be rectified by taking emergency measures. Carlzon did this as he said we need to fight a street fight for the betterment of the company. Such situations sometimes lead to complete collapse of companies. Enterprising person like Carlzon can only avoid it. Model 4 Factors specific to the industry what delivers success (Key factors for success analysis) There were many factors that were the cause of that decline. The market recession, the oil crisis, over capacity and faulty business strategies were the main cause of this decline. Once the problem areas were identified it was easy to over come them. Although market recession and oil crisis are conditions that can not be corrected by any CEO of a company individually. But management of the company can do other things to reduce the impact of such conditions. As done by Carlzon, by correcting business strategies. As he introduced new products for getting more revenues and for reducing operation costs. The conditions being faced by any company are actually true test of any management. If the management can sail smoothly through such high waters then they gain enormous trust of customers and shareholders. This happened in the case of SAS. The response of Carlzon to these dreadful conditions earned a name and fame for his group and himself. Model 5 factors specific to the competitive balance of power in the industry (Five forces analysis) The Five - Forces Model of Competition from the Harvard professor Michael Porter is used and questions are asked on: i) The rivalry among competing sellers in the industry. ii) The market attempts of companies in other industries to win customers over to their own substitute products. iii) The potential entry of new competitors. iv) The bargaining power and leverage of inputs suppliers can exercise. v) The bargaining power and leverage exercisable by buyers of the product. This model is a powerful tool for systematically diagnosing the chief competitive pressures in a market and assessing how strong and important each one is. Not only is this model the most widely used technique of competition analysis, but it is also relatively easy to understand and apply. From a qualitative evaluation the prospect of industry profits is assessed. This model was almost completely applied. There were many factors that were related to competitiveness of the company. Some of them were: Regular travelers of Norway and Sweden were avoiding the SAS because of troublesome airport of Copenhagen. Because of acquiring bigger costly aircrafts the frequency of the flight had reduced. Reduction of travelers in first class was also affecting the revenues of the group. The major competitors were after the Business class passengers and tried various means to attract them. Competitive forces from Western Europe and US were posing great challenges. How can Carlzon lag behind He used very innovative and unique methods for diverting the attention of Business class passengers to SAS. This has been discussed earlier. The situation was responded well by Carlzon. He introduced several policies that made a great changes in the look of troublesome airport of Copenhagen. He introduced Business class with similar amenities of first class. He also replaced the larger planes with smaller cost effective planes. Such actions taken by Carlzon require great deal of firmness of beliefs and trust in personal assessment. These two qualities were present in Carlzon. It was because of his leadership that SAS faced all these challenges successfully. SAS not only survived but grown to its full potential. Model 6 factors specific to co-operation in the industry ( Four links analysis) There were many small and large scale Airlines were operating in the area. Carlzon thoroughly analyzed all possibilities of co-operation. Although his plan could not get great deal of success with the competitors but in coming years SAS was able to extend cooperation with many of its competitors Model 7 Factors specific to immediate competitors (Competitor analysis and product portfolio analysis). In this model we need to ask following questions. What strategic moves are rivals likely to make next This question discusses what competitors are doing by monitoring their actions, and trying to understand their strategies and anticipating what moves they are likely to make next. Good clues about what moves a specific rival may make next come from studying its strategic intent, monitoring how well it is faring in the marketplace, and determining how much pressure it is under to improve its financial performance. Aggressive rivals with ambitious strategic intent are strong candidates for pursuing emerging market opportunities and exploiting weaker rivals. Carlzon was one of the best leaders of the Industry. He immediately pinpointed the points of weakness of his company and rivals. Then he introduced various reforms like introduction of new Business class, offering first class amenities for Business class travelers. He introduced a new division with chain of Hotels to accommodate all the needs of customers. Model 8 Customer analysis (Market and segmentation studies) The market share of economy class travelers and tourists was being taken away by other companies. It was necessary to attract increasing number of Business class travelers. It was also important to offer better services schedules to the customer. The large aircrafts were main hindrance in the way, so they need to be replace by smaller cost-effective aircrafts for more frequent flights within Europe. Carlzon strategy of going after Business travelers was need of the time. All the competitors were also thinking on same lines and many followed the suit. The revolutionary steps taken by Carlzon team proved very effective and once again gained a great respect and trust of Customers as well as shareholder. These measures ended all the rumors and earned good name for the company. SAS Achieved a Sustainable Competitive Advantage There is no doubt those were critical, changing times. One thing is certain those were very complex issues, and successful companies will be those who seek solutions on every front. Regardless of the level of threat or comfort your cooperative management is feeling. That was time to position for a potential crisis. The most effective managers are those who can walk in the door each day and ask, "What can I do to make it easier for my employees to provide excellent service to our members" This is called serving our internal customers. Jan Carlzon, president of Scandinavian Airline Systems, puts it well when he says, "If you're not serving the customer, you had better be serving someone who is." This was the thinking of Jan Carlzon that made possible a great turn around for SAS. Consequently SAS got Airline Year Award in 1984 by Air Transport World Magazine. The new culture introduced by Carlzon was getting popular among the employees and the customers. The motivations made by Carlzon and the incentives offered proved very productive and financial status of company improved dramatically. But the untiring Carlzon was not yet satisfied. He launched a second wave of reforms, expansion and innovation. As discussed before division of the company was established with the name of SIH. This new service offered by SAS become very popular among the customer specially the Business class who were most productive, the most of revenue was earned through these customers. This new service offered airline tickets, ground transportation and hotel reservations by telephone. Destinations Service was also offered a complete door to door service. By creating SIH Carlzon achieved his main objective of attracting most of the passengers of business class. It improved the revenues tremendously. The numbers of transaction were one million in 1980 and were doubled in 1983. This increase in transaction required efficient management and integrated information system. A unique networking system was developed at the cost of SEK 250 millions that had 13,000 terminals all over the world. In collaboration with other European Airlines one of the world 's largest reservation and ticketing system was developed. (INSEAD CEDEP 1988) Due to these innovative policies company achieved a fiscal space for further expansion. These new venture also proved very productive and profitable. Some these new projects planned and implement Carlzon 's SAS are given below briefly. Credit Cards: In collaboration with dinner's club SAS launched the credit cards sale. This project proved very profitable and in 1984/85 cards worth of SEK 11 billions were sold. SAS Service Partners: It is one of the largest catering business operating in 13 important countries of the world. This project also proved very profitable. Sustainable competitive advantage The SAS was ready to deal with the threat of globalization in 1988. It was just because of the efficient management and leadership of Carlzon that after so much expansion SAS yet do not intend to stop expanding. The sound base provided by able leadership of Carlzon had made SAS viable for long-term. The potential for growth was still there. If the future management utilizes this potential completely it will make SAS the world leader. Future Prospects & Recommendations This paper has examined the role and the performance of the SAS. In the context of the further enhancement of the contribution of the SAS and to appraise the present performance of the SAS. Although Carlzon was very much successful in achieving his objectives and he was able to turn SAS into a leading Group of Companies and Airline. But yet the full potential was not achieved. There were more chances to convert SAS into world leader as it had the potential to become a world leader. The following recommendations could have been suggested in the context 1988 scenario. SAS should take appropriates steps for managing the over capacity in the market that could have negative impact in fututre. SAS should pay more attention to Business on our long-haul routes as that could be more productive and revenue generating - SAS must increase collaboration between management and employees it could be, the key to success. - SAS should bring down the responsibility for earnings to the individual employee. SAS should pay more attention to leisure travel markets offering low priced travel packages. - The management should pay more attention to systematic analysis of competitors References Baird, L., Briscoe, J., Tuden, L., & Rosansky, L. (1994). World Class Executive Development. Human Resource Planning, 17(1), Cavaness, J. P., & Manoochehri, G. (1993). Building Quality into Services. SAM Advanced Management Journal, 58(1) Freeman, J. M. (1994). Serving Each Other: Positioning Ourselves for Crisis. Management Quarterly, 35(2) Harvey, M. (2001). The Hidden Force: A Critique of Normative Approaches to Business Leadership. SAM Advanced Management Journal, 66(4) Lefebure B. Ronald Sandinavian Airlines System (SAS) 1988 INSEAD CEDEP France Lynch Richard "Corporate Strategy" 2003 Read More