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TALKING POINT

Jan Carlzon

Turnaround specialist Jan Carlzon says cost cutting makes no sense if the market doesn't want your product

Jan Carlzon is a turnaround specialist in the travel and airline business who returned three companies to profitability within eight years, following a different strategy for each.

His most prominent achievement was bringing the troubled SAS back into the black in the early 1980s when the global airline industry was in crisis as a result of the oil shocks.

The SAS turnaround was remarkable because it was achieved in one year on the back of a contrarian approach that came to be known as the "Carlzon Paradox".

Instead of following the conventional cost-cutting route, Carlzon actually increased investments in services to focus on the premium-paying business traveller, a move that ultimately enabled SAS to offer the economy passenger greater value.

His model, which he wrote about in his best-seller Moments of Truth, eventually became the global standard. Here, in conversation with Kanika Datta, Carlzon describes how and why he chose this route:

One of the biggest mistakes that industrialists make is to think that there is only one strategy and that is to administrate the cost side. In today's competitive environment the only variables you should be concerned about are the market situation and the revenue side and your competitive strength in that market.

In SAS, I realised that the management had always focused on the technical and operations side of things. Few of them thought that service was something they had to deal with and they even looked on the market, which was monopolistic, as a given "" they knew from year to year what their revenues would be and they adjusted the cost accordingly.

Once competition came in, we had to find a way to compete. That's when I said we used to have people who used to fly airplanes, now we have to learn how to fly people.

The company was in a bad position and normally you would have adjusted that by cutting new costs. But the problem was that the product was standing still; nobody liked it, nobody wanted it.

So we defined our market segment "" the business traveller "" and we developed products and services to apply to that and then we invested heavily in improving those services and products.

Once we had done this and created a competitive position, we could take away costs that wouldn't be relevant to that market segment. So in the second step we were able to reduce costs much more than what we had invested.

To focus on customers means that you have to develop products from their point of view. We had 20 million customers and each of them met with five or six of our staff when they were using our services and we realised that that was SAS, it wasn't the aircraft or the technical people.

We calculated that each of those 100-odd million meetings a year lasted about five seconds. So now came the question: how to manage? Well, David Ogilvy once said, "Give me the freedom of a tight brief."

We said we want to be the best airline for the business traveller, full stop. But to give service standards to 100 million meetings is impossible. So one day I declared that we would cancel all the service instructions in the company.

I reasoned that for those that were necessary people would come immediately and tell us we needed them back. In the end, we renewed about 30 per cent of those instructions.

Instruction only limits a person's ability. Information is to open up for possibilities. That's because service is not static; it depends on your expectation. To achieve this, the management must stop being traditional managers doing everything themselves and become strategic leaders who create the preconditions for business to be done.

What is the Carlzon Paradox? It is this. If you fly a Boeing 737 from Mumbai to Delhi it costs a certain amount of money. If that aircraft is filled with low-price passengers, you get one revenue.

If you have 30 per cent of the aircraft filled with business travellers who pay three times that price for good service, it's enough to pay for that journey.

The more you do for the business traveller to make him pay a higher price, the better position you are in to slash prices for tourists. But to be able to get business travellers to pay a premium you must truly focus on them and develop everything for their needs. The tourist will then benefit from this.

You must also make sure that there is real product differentiation. This is difficult but to the business traveller you must communicate the special services, and to the tourists you must communicate just one thing: the price.

The trouble with the airline business today is that it tries to be everything to everybody.

How did I convince the board? Now, if I had been the traditional manager I would have presented the board of directors with one idea now, another the next time, a third after that and each of them would have cost a lot of money.

And they would have said, stop, we are losing money, we can't do it this way. What I did was bring in my new management and we developed an entire plan for this new strategic vision.

We said this is our goal, this is how we will organise the company, these are some examples of the products and services we plan to introduce, this is how it is going to look when we communicate internally and externally. In short, we gave them a full package.

So what was their choice? To say yes or no. If they had said yes, they were delegating responsibility to their president. If they had said no, I would have left.

And that's the trick; you take complete responsibility. As soon as you start to take things to the board without having the full picture in place you don't take responsibility, you delegate upwards and that's the mistake most people make.

To hit on the right strategy you must listen to people in the organisation. If I come up with a strategy that people are carrying within themselves my chances of succeeding are higher.

As Oscar Wilde said, never forget that your best thoughts come from others. So you must be a good listener "" that's a management skill. Then you must be brave, to say I have listened enough "" you never have full information "" and now I must take a risk and jump.

Having now decided you must organise your company to implement your blueprint. Many managers start by organising the company before they know what business they are going to run.

Then there is communication. It is more important than anything else, because what is not communicated doesn't exist. The strategic leader must transform himself into a preacher, he must be obsessed, convinced and he must transfer his conviction to the organisation. To communicate is difficult, it takes a lot of time. You must be personally involved, you can't sit in an ivory tower and send out memos.

If I had to do it again, there were two mistakes I would not repeat. One was that the communication language I used was only one. The pilots and the technical people did not speak the same language as the front-line and service people so to make the strategy fully understood I should have used somewhat different language to different groups of people.

The second mistake was more severe. When we had reached our goals, I started to create a new vision that the company didn't need. The problem was me. I had to find a new Mt Everest to climb but it was not what the company needed.

When I sat down to develop a new business, I realised that we had a whole range of services "" hotels, catering, credit cards, airlines and so on"" and I developed what I called a global service company.

The problem was that did not come from the customer point of view but from the organisation point of view. As it was, there were very few customers who wanted to whole gamut of services just because SAS happened to have them.

In fact, if I write a new book the title will be "Moments of Danger". It will about danger of visionary leaders who stay on, not necessarily in the best interest of the company.

If I had known what I know today I would have taken my briefcase and left that company after seven or eight years, instead I stayed on for 13.