The man who's built one of the most successful airlines in the world has some surprising notions about how to run a business

The demise of People Express Airlines has left us with few heroes in the airline industry. In place of Don Burr, we find ourselves with the likes of Frank Lorenzo -- tough guys with little imagination, hard as nails, treating their people like so many interchangeable parts on a 747. The Europeans are more fortunate. They have Jan Carlzon, president and CEO of Scandinavian Airlines System Group, and Sweden's answer to Lee Iacocca. He is certainly tough enough: he had to be in order to turn around a major international airline in an era of brutal competition. Yet his management style has much more in common with Burr's than Lorenzo's -- or even Iacocca's.

Scandinavian Airlines System (SAS) was flying into a headwind when Carlzon took command of it in 1981. The company was in the midst of compiling a loss of $20 million, its second straight losing year. Morale was low. Employees were being laid off. Service was being slashed. The market for passenger and freight services was stagnant. Carlzon immediately set out to make SAS "the best airline in the world for the frequent business traveler." Toward that end, he invested $45 million to upgrade every detail of service for the business traveler, while cutting nearly as much from programs directed at tourists.

The most important change, though, came in the way he treated SAS employees. To be market driven, he believed, the company had to be successful in its 50,000 "moments of truth" every day -- those brief moments that occur whenever an SAS employee delivers a service to one of its customers. That meant turning the organizational chart upside down. No longer were middle managers to spend their time making sure instructions were followed. Now, they were to support the frontline people who have direct contact with customers, enabling them to make decisions and solve problems on the spot.

And the results? SAS returned to profitability the year after Carlzon took over. Two years later, in 1983, SAS won Air Transport World's Airline of the Year award, and in 1986 it received that magazine's Passenger Service award. As Europe looks toward deregulation in 1992, SAS ap-pears to be one of the strongest competitors in the field. Meanwhile, Frank Lorenzo has his work cut out for him.

Inc. editors George Gendron and Stephen D. Solomon visited with Carlzon in his office in New York City.

INC.: You don't seem to fit the image of the modern airline president.

CARLZON: I agree. I think there's an expectation that the president of an organization such as mine should be tough, ruthless, driving people to do their best. Of course, I think my way gets people to really do their best.

INC.: How's that?

CARLZON: In my experience, there are two great motivators in life. One is fear. The other is love. You can manage an organization by fear, but if you do you will ensure that people don't perform up to their real capabilities. A person who is afraid doesn't dare perform to the limits of his or her capabilities.

INC.: Why not?

CARLZON: Because people are not willing to take risks when they feel afraid or threatened. But if you manage people by love -- that is, if you show them respect and trust -- they start to perform up to their real capabilities. Because, in that kind of atmosphere, they dare to take risks. They can even make mistakes. Nothing can hurt.

INC.: Now wait a minute. Those are wonderful sentiments, but we're talking about running a business here. What do you mean, employees "dare to take risks'? Are you sure you want them to?

CARLZON: Absolutely. Let me give you an example from my own company. It's a story about a flight that was delayed because of heavy snowfall in Stockholm. Normally, we sell coffee, cookies, and sandwiches on domestic flights. But because of the delay and the weather, the purser on this flight decided to give the snacks away. Since they would be free, she figured she'd need enough for 80% to 90% of the passengers. So she called SAS Service Partner, our catering company, and asked for that amount. But the man in charge said she couldn't have it because it was out of our routine. She said she'd take responsibility. He still refused.

What could she do? Well, she realized that Finnair, which is one of our competitors, is also a strong customer of Service Partner. So she took the cash she had and went to the purser on the Finnair flight standing next to hers and asked him to order 60 coffees and cookies. She said, "I will pay for it if you can put it on the Finnair account." So he called Service Partner, and the man there couldn't refuse because Finnair is an extraordinary customer. The snacks were delivered, and she carried them in her hands to the SAS flight. To me, this is an extremely good example of a person daring to grab responsibility.

INC.: OK, but let's be realistic. That sort of individual initiative can go too far. Employees can just as easily spend too much money rectifying a problem or give away what they shouldn't.

CARLZON: Yes, I suppose that has happened, but such mistakes aren't important. What's the danger of giving away too much? Are you worried about having an oversatisfied customer? That's not much of a worry. You can forget about an oversatisfied customer, but an unsatisfied customer is one of the most expensive problems you can have.

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.

INC.: That's probably one area in which large companies differ dramatically from small companies -- getting people to focus on the small details.

CARLZON: I don't know. If you have five employees, you see them every day, and you can communicate with them directly. If you have 34,000 employees, you have a tremendous resource and a fantastic challenge. You have to give very clear objectives in a large organization. But the basic management approach is the same. In both cases, you still need to show people respect and faith.

INC.: But doesn't a company get to a size at which it becomes unwieldy -- when you just can't get your message out to everybody anymore?

CARLZON: I don't think so. If you have a good message, you can get an entire nation to hear it. I doubt there are many Soviet people who don't know Gorbachev wants to change the climate in the Soviet Union. Good messages will be spread.

INC.: How do you spread them?

CARLZON: Show biz. It's all show biz.

INC.: What do you mean?

CARLZON: I produce the show. I think I am a strategic person. But how do I get people to grab the strategy, to get it under their skin, to get a feel for it, to get it? I can't write it in a manual. I must make a show of it. I motivate people through the show. Right? Communication. And it is not manipulating -- it is a way of getting the message across.

INC.: Give us an example.

CARLZON: To some extent, I've used the media to get my message across to people. I know that, if I send out an internal memo, 10% of our people will read it, and 2% will remember it. But if there's an article about SAS in the newspaper, they will all read it, because they are interested in their company. I even published a book to get across the message -- Moments of Truth. My main mission there was to reach people inside the company, because I knew they were going to read it.

INC.: Is that how you see your job, as the communicator of the strategy?

CARLZON: Yes, I suppose so. My job is not to make business; my job is to ensure that other people can make business.

INC.: OK, but you must have to keep your message fairly simple if you want to get it across on that scale.

CARLZON: Oh, definitely. I want to keep it simple. I say, "We want to be the preferred airline for the frequent business traveler." It can't be misunderstood. If you start to give goals that can be misunderstood, you have to begin again.

INC.: Don't you worry that such a goal leaves too much room for interpretation?

CARLZON: Well, you must provide a framework in which people can act. For example, we have said that our first priority is safety, second is punctuality, and third is other services. So, if you risk flight safety by leaving on time, you have acted outside the framework of your authority. The same is true if you don't leave on time because you are missing two catering boxes of meat. That's what I mean by a framework. You give people a framework, and within the framework you let people act.

INC.: You're talking about communicating strategy, but you also had to communicate a different way of running a business when you came to SAS, didn't you? How did you convince managers, for example, to adopt your style of management?

CARLZON: I'm not sure I have convinced so many people. If they think I'm acting in a specific way, well, you know and I know that every manager wants to copy the chief executive -- especially if the company is successful. If I wear a jacket and trousers, managers will do so. If I play golf, more people will play golf. And so forth. It is natural for people to copy me if my way is successful. If it is bad, I think they will find other ways.

INC.: What about employees? After all, you were coming into a company in which people felt mistakes could cost them their jobs. Now, you tell them that they shouldn't worry about mistakes -- they should take responsibility and make decisions. How do you get them to feel secure enough to do that?

CARLZON: There are no simple tricks. Just live up to it. And listen. Sooner or later, you'll hear about someone who made a decision that you think was very good in terms of the company's strategy. When you do, make sure that you give the person many strokes, and do it as officially as possible, so other people will learn from it. A positive example is the best way to create the right atmosphere. Of course, if you think someone made a wrong decision, let him know it, but tell him when you are alone -- and don't let him view it as a punishment. Really, there are so many things you can do to give people the security to take responsibility. Over time, you do it by measuring and rewarding performance.

INC.: Not by show biz?

CARLZON: For a year or two, you can motivate people through emotion and show biz. They are hyped up for a while. But, for the long run, people must know they will be measured in an accurate way in relation to the responsibility they have been given. That's a good way of spreading security among people, and it's one area I didn't always understand as well as I do today.

INC.: Well, that raises another question -- namely, how do you learn about this stuff, anyway? Did you always have this approach to management?

CARLZON: No, not at all. In fact, I started out just the opposite. I'd been appointed president of a company where I'd worked for six years with a team of managers about my age, which was 32 at the time. Although I would have been very disappointed if I hadn't been made president, I still got nervous about the attitude of the other managers. How would they look at me now? I felt that I had to show them I was the right man for the job. The company was in a bad situation, with big losses. I thought, "Now, I have to be the boss." I thought I had to prove I knew everything better than the others did -- that I was quicker in analyzing things and making decisions and everything. So I started developing my ego, saying "I want this" and "I decide that.'

INC.: What made you change?

CARLZON: I was lucky to have good friends around me. One of those good friends saw what was happening and came into my office. He said, "What the hell are you doing? Do you think we chose you to be our boss because we wanted you to be somebody different from who you were? If you don't get back to being yourself, you will be a failure." This was a very good lesson to me. You see, I was insecure. He gave me one type of security by saying, "For heaven's sake, we respect you as you are, and we accept you as a boss because of who you are." The next thing, of course, was that we succeeded. I saw I could do things that people expected me to do, and that were good for the company. People liked me as boss. That gave me security and confidence.

INC.: In a sense, you're talking about mental health, aren't you? You're talking about how you feel about yourself. What your friend did was give you permission to be yourself, and that's a big part of leadership.

CARLZON: I can tell you, there are days when I feel very bad and I shouldn't leave my office. I should just stay at my desk. But when I feel fine, strong, I shouldn't stay a minute in my office. I should walk around and see my people, because just to walk around and dare to be strong, dare to give, is much more valuable than any decision I could make or any report I could read. What I give away then is mental health to the organization. You see what I mean? Isn't it right? It is right!

INC.: Do you actually put aside the reports and call it a day?

CARLZON: Sure. The most unproductive time we have is when we sit at our desks. Because the only thing we do is read history: what has already happened, what we cannot do anything about. Statistics, memorandums, reports, minutes of meetings. Then we have eight telephone calls to make, of which two are worthwhile. But when we leave our offices and start to walk around and talk to people, that's when we make things happen. You give your thoughts; you get thoughts back; you draw conclusions; perhaps you even make decisions.

INC.: What could make a day so bad you'd want to stay in your office?

CARLZON: Oh, various things. Ironically, some of our biggest problems have come from having too much success too fast.

INC.: What do you mean?

CARLZON: I mean that, after just two years, we were more profitable than we had ever been in history, and ev-eryone was rating us the preferred airline for the business traveler. So we were there. As Arne Naess said when he climbed Mt. Everest, "I had a dream. I reached it. I lost the dream, and I miss it." It was the same for our whole organization. We had a dream, and we reached it, and we reached it very quickly.

INC.: What was so bad about that?

CARLZON: We didn't have another long-term objective. So people started to produce their own new objectives -- not a common objective, but different objectives depending on where they were in the organization. You see, it had all been a little too easy. And we created frustration, because this is a psychological game. Do you know the song Peggy Lee sings, "Is That All There Is?'

INC.: Did you have that feeling?


INC.: What did you do?

CARLZON: One thing I did was talk to Ingmar Bergman.

INC.: The director Ingmar Bergman?

CARLZON: Yes. Let me tell you a story about Bergman. I invited him to dinner one week before the premier of "Hamlet" in Stockholm. He said, "You are crazy. It would be an insult to all your other guests. It would be like inviting me to dinner one week before my divorce. Do you know why? Because I start to build this play eight or nine months ago. First, I write the synopsis; then I select the artists. I involve them in my play, tell them what I expect from them, help them get the idea. We all work for the same objective: to make this play a fantastic play. But it is my play, my works, my scenery, my thoughts, my everything. So they rehearse, and I help them. I form them. And now -- one week before the premier -- do you know what is happening? They've taken it over. They don't need me any more. I'm a spillover. Can you understand that? So don't invite me for dinner." OK, well, the same thing goes for the president of a company.

INC.: What did you learn from that?

CARLZON: I learned that, before you reach an objective, you must be ready with a new one, and you must start to communicate it to the organization. But it is not the goal itself that is important.

INC.: What is important?

CARLZON: The fight to get there.