Wednesday, March 23, 2011

The amazing turnaround of SAS


Earlier this week, we had a glimpse into the idea of Strategy and why it's imperative for a firm to have one.
We also learnt about the seminal idea of 'Five Forces' from Michael Porter.
In this blog article, I would like to point out an example of a company, which I feel had great strategies. I will also try to analyze the situation of the company from the view of Porter's Five Forces.


SAS
One of the companies that I came across, which placed itself strategically, to earn great reputation and revenue is SAS - Scandinavian Airlines. During the 1980s, the airlines was in a bad shape. It had lost its former glory and was rated way low in the list of European airlines. A lot of factors were leading to its slow demise unless something was done to change its course. It was during this time that they had a change in management. The new CEO was Jan Carlzon, who had a reputation for turning things around.

In the span of one year, Carlzon managed to turn the company from losses of $17 million to a profit of $54 million. The key to this transition was the change in strategy - that still holds true for SAS!
When Jan Carlzon took over the company, there were some immediate problems that he identified. The customers of SAS were extremely dissatisfied with the service of the airlines. The employees themselves felt that SAS was not a great airlines to travel in. Lastly, SAS, until then had employed a strategy of 'Cost Cutting'.
'Cost Cutting' is not a strategy per se, as we understand from Porter's article 'What is Strategy'. Cost cutting is more on the lines of Operational Effectiveness that is aimed to ensure that the activities are done in the most efficient manner possible.

The Strategy
SAS, helmed by Carlzon decided to target the Business Class traveler. The strategy that SAS chose was to 'Target the business class traveler as the airline's primary business' and 'great customer service'. In terms of Michael Porter's' strategic positioning, this clearly is a needs based positioning. To this effect, SAS created a separate 'Business Class' and an ecosystem surrounding this class of travelers - Business lounges in key airports, better seats, better fare structures, free newspapers among others. Two concepts of Porter stands out in this example - Strategy merely spoken but not implemented in terms of differentiating activities is nothing more than a marketing slogan and the concept that trying to avoid trade-off's will hurt the firm.
Sure, SAS made a change in its strategy in words. But they followed it up with motivating its employees, changing the culture in the firm, decentralizing the organization and providing more autonomy to the employees on the field. All of these ensured that the operations of SAS are aligned to its strategies and harder for competitors to imitate. The second concept applies more to the competitors of SAS, who were trying to target economy class as well as business class travelers, which did not allow them to extract value out of their strategy of targeting business class travelers as good as SAS.
One another area that SAS targeted was punctuality. In the past, SAS had earned itself the reputation of being extremely unpunctual. SAS did this by highlighting to its employees the loss of customers if the flights were not on time. The change in mindset, along with rebranding of SAS planes helped turnaround their bad reputation, so much so that even last year, they won the award for being the most punctual airlines in Europe.

This change in strategy helped move SAS from a loss to a profit in just one year. This is a great success story and a strong proof of how powerful strategy can be for a firm.

Five Forces for SAS
Michael Porter's 'Five Forces' article provides me with a framework to analyze the situation of SAS during that period.
The forces that were acting on SAS were
  • The industry itself was facing some changes. The deregulation of the US airline industry and similar prospects in the European market was expected. This put a lot of pressure on the airlines that were enjoying regulatory benefits until then.
  • The deregulation of US airline industry brought a lot of new competitors who wanted to capture the international market. This brought in the threat of new competitors for SAS.
  • The bargaining power of customers were increasing. They demanded better service and features from airlines, but at no extra cost.
These forces were the key cause for the losses of SAS and drove the strategy changes.

Before concluding my blog submission, I would like to ask the readers,
Is it possible for other airlines to manage such a turnaround in today's market? What could be the potential strategies that they could use?
While I ponder over these questions myself, I recommend everyone to read through the case of Jan Carlzon and the amazing turnaround of SAS.

References
1. Jan Carlzon: CEO at SAS HBS Case 9-392-149
2. Jan Carlzon - http://en.wikipedia.org/wiki/Jan_Carlzon
3. SAS - http://en.wikipedia.org/wiki/Scandinavian_Airlines
4. Michael Porter - What is Strategy
5. Michael Porther - How competitive forces shape strategy

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