INC.: How do you mean?
CARLZON: To get a satisfied customer back is just about free. To get new customers has a price, but to keep satisfied customers is almost without cost. On the other hand, it costs a small fortune to get dissatisfied customers back. So the danger is not that employees will give away too much. It's that they won't give away anything -- because they don't dare.
INC.: So you aren't worried that your people will make mistakes.
CARLZON: On the contrary, I want them to make mistakes. I heard once about a company president who told his people, "I want you to make at least two mistakes a week." What was he really saying? "I know you're so good that -- to make 2 wrong decisions a week -- you must be able to make 20 to 30 right ones. I want you to make decisions." The same goes for me. The dangerous thing is to not make decisions.
INC.: This all seems a little soft. What if you can't afford these mistakes? What if you're not making money?
CARLZON: We weren't making money at SAS when I came here. We were in a desperate situation, and that's the worst time to focus on preventing mistakes and controlling costs. First, we had to increase revenues. We had to decide what business we were going to do and go to work on the revenue side. Then we could think about cutting costs, because only then would we know which costs could be cut without losing competitiveness.
INC.: Why were you in that situation in the first place?
CARLZON: Because the market environment had changed. Remember, after the Second World War, we did not have a competitive structure in this industry. We had a situation where supply was much less than demand. So my predecessors were totally production oriented. They were the custodians and brokers of assets. And they were 100% right. Since the market bought everything they produced, why shouldn't they just focus on producing it as efficiently as possible?
INC.: Then the market stopped buying. . . .
CARLZON: Right. Suddenly, in the mid-1970s, the supply was higher than the demand -- not only in air transportation but in most industries. There was competition, global competition. In that situation, you can't be production driven anymore. You can't focus on controlling the cost side as if the revenue side were a given. Competition means that the one thing you have to fight for is your revenues. Nothing is given on the revenue side. So you have to create as much revenue as possible and then attack the cost side with the revenue situation in mind. What I did at SAS was to transform the company from being very production oriented into a competitive service enterprise.
INC.: Can we go back to a comment you made a moment ago? You said, "First, we had to decide what business to do and go to work on the revenue side." What did you mean by that?
CARLZON: I mean that, before you can start managing effectively, you must know who is your customer and what is your product. The most important advice I ever got in business came from a colleague of mine who was quite a character. One day he kicked me and said, "Never forget, Jan, that the most difficult thing in doing good business is to say no to bad business, the bad opportunities." He meant that you must always decide who your customer is, and what product you are going to present to your specific customer. And you should say no to every option that is not related to that customer's need, or to that production, or to that performance. You should say no even if the option could be profitable in its own right.
INC.: How did you figure out who your specific customer should be at SAS?
CARLZON: Oh, well, that wasn't very difficult. Every airline in the world knows that it has to go after the business traveler to be profitable. Because the business traveler will pay what it costs to make an efficient journey, while the tourist wants to pay as little as possible. So this was not very clever or very new on our part.
INC.: What was new?
CARLZON: What was new was the way we did it. We said we want to be the preferred airline for the frequent business traveler, and we are not allowed to invest one penny or spend one resource in any activity not related to the business market. We went through the entire company asking ourselves, "Is this service, is this production, is this person related to the business traveler's needs or not?" If the answer is yes, we have to ask ourselves if we have enough or too much of that resource, and should we increase or decrease it. If the answer is no, we have to get rid of it immediately. Because it's more important to be 1% better in the right detail than to be 100% better in the wrong detail.
INC.: So you just abandoned the tourist business.
CARLZON: No. We still had marginal resources left over due to seasonal fluctuations in business travel. Of course, we wanted to sell the excess seats in another market. But to sell those seats at a tourist bargain and still be a business airline, we had to provide a different level of service to the full-fledged business traveler, so that he wouldn't be motivated to shop around for a lower price. And we found out there was a paradox in this. The more we did to motivate the business traveler to buy full-fare tickets, the lower prices we could give tourists without losing our business customers. But the more seats we could sell, the higher our total company revenues -- and so the lower the prices we could give back to business travelers. So it worked very well for us. I think it goes for any business that price differentiation requires product differentiation. The unique thing was how we did it, down to every small detail.
