Vertical Integration: A Case Study of Scandinavian Airline System In 1988
The Scandinavian Airlines System (SAS) applied vertical integrations strategic management approach as a way of overcoming the challenges it faced especially in the 1980s. The threats in the aviation environment such as competition from other major airlines caused the profitability of the airline to decline steadily. Because of the new management, which began with Jan Carlzon as the company’s CEO, there was complete company restructuring and thus the airline began to grow steadily through vertical integration with the hotel, reservation, credit card, and the catering sectors of the aviation industry. This paper gives a critical analysis of vertical integration approach of strategic management with a special focus of the SAS as the case study.
The establishment of the Scandinavian Airlines System came just after the Second World War and its operations began in September 17 1946. Ghoshal et al (1988, 35) say that the airline system was formed as a collaboration of three airlines from Sweden, Norway and Denmark. The partnership of the airlines, which formed the SAS aimed at taking control of the intercontinental air travel in the Scandinavian countries. Late in the 1970s and in the 1980s, the SAS experienced many challenges, which led to disagreements within its management, owners, and the staff. The stakeholders of the airline disagreed on the causes of the big losses incurred by the company and the ways, which would help the company to cut its costs. There was dire need for a turning point at this time, which would save the airline from collapse.
Following the appointment of Jan Carlzon as president of the airline in 1981, the change of management began which led to the improvement of the airline in the subsequent years. The changes relate to the charismatic leadership and management reputation of the new president and his record of transforming airlines. Vertical integration adopted as a strategic management strategy of the airline and as a result, SAS is currently the largest airline system in the Scandinavian region. The airline has its bases in Denmark, Stockholm, and Oslo and it serves about 23 million travelers every year within the domestic, European, Intercontinental, and Scandinavian routes. The SAS Group is the larger organization within which the SAS operates. The SAS Group owns many airlines, hotels, and air travel services.
Vertical integration in the aviation industry is the merger of various companies, which provide services and products along the same path in air travel such as airlines, hotels, and travel agents with a central control. It aims at achieving greater success in terms of quality of services, products, and increased revenue. Peyrefitte, Golden & Brice (2002, 218) assert that the application of vertical integration as a strategy in strategic management by airlines is due to the advantages associated with this strategy. The transaction cost in air travel is reduced owing to central management and communication among the subsidiary companies. Additionally the vertical integration strategy is used by airlines so that an airline would monopolize the aviation market. Furthermore, a common system of quality control in a vertically integrated airline system enables the subsidiary companies to guarantee quality of service. However, the vertical integration in airline industry may lead to high organizational cost which is related to the management of its complex organizational structure as explained by Peyrefitte, Golden & Brice (2002, 223).
Strategic management of SAS
During the period of 1988, the SAS underwent a phase of vertical integration in which the SAS Group acquired travel companies such as airlines,...