volvo trucks case
TRANSCRIPT
BI 4242
Global Strategic Management
Case Analysis: Volvo Trucks
Submitted to: A. Pattana Boonchoo
Group: Synergy 442-5178 Long Pham Duy 451-0450 Patthamawadi Sirirak 451-1930 Krongkan Boonkerd 451-8887 Yi Hao Chiang 452-0088 Yu Ching Chang 452-5124 Yuwei Mao 452-5206 Shou Feng 452-5222 Ying Qin 452-5337 Ye Wang
Section: 404
Semester: 2/2005
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Table of Content
I. Executive Summary - 2 - II. Internal Analysis - 4 - 2.1 Mission - 5 - 2.2 Goal - 5 - 2.3 Current Strategies - 5 - 2.4 Performance - 6 - 2.5 Functional Analysis - 7 - 2.6 Strength and Weakness - 10 - III. External Analysis - 11 - 3.1 General Environment - 11 - 3.2 Business / Competitive Environment - 12 - 3.3 Key Success Factors - 14 - 3.4 Value Chain Analysis - 15 - 3.5 Stakeholder Analysis - 16 - 3.6 Opportunity and Threat - 16 - IV. Critical Issues - 17 - 4.1 CI-1 - 17 - 4.2 CI-2 - 18 - V. Alternative Strategies - 19 - 5.1 Strategic Package – 1 - 19 - 5.2 Strategic Package – 2 - 19 - 5.3 Strategic Package – 3 - 20 - VI. Recommendations and Implementation - 20 - VII. Case Questions - 22 - 7.1 Case Question – 1 - 22 - 7.2 Case Question – 2 - 22 - 7.3 Case Question – 3 - 24 - 7.4 Case Question – 4 - 24 - Appendix - 26 - Appendix I Operating Margin - 26 - Appendix II Market Share Growth in US - 26 - Appendix III Truck Global Sales - 27 - Appendix IV BCG Matrix - 27 - Appendix V SWOT Analysis Table - 28 - Appendix VI Five Force Analysis Table - 29 - Appendix VII U.S Truck Market - 33 - Appendix VIII Volvo Organization Structure - 33 -
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I. Executive Summary
Volvo Trucks has entered into the United States in attempts to survive in the
toughest market in the world. After an unsuccessful alliance, Volvo turned to acquisition
and purchased two American truck companies. Although the company successfully
utilized its brand and position itself as a high quality and safe vehicle, their sales
remained low. Management does not seem to have a lot of information to make better
judgments of the market.
After reading the case, two critical issues were identified. The first one is that the
benefits of being a fully integrated company do not seem to be obvious. The company is
not making as much sales as its competitors, and the operating margin of the company is
also lower than the other companies. All the cost savings have been neutralized because
the company prices its trucks on the low range. Another critical issue is that Volvo’s
market share in the United States is low. It has failed to gain more market acceptance, in
spite of the rebound of the industry in 1998. This is critical because it reflects on how the
company does not understand one of its most important markets. If it wants to survive
and learn from their mistakes, the company has to make adjustments in their strategy.
Three strategic packages were suggested in this report. One is for the company to
decentralize and give more authority to the U.S. division so they will be allowed to make
decisions according to their knowledge of the market. The second alternative was for
Volvo to focus on what it does best. Volvo should divest the production for the non-
essential parts and focus on the engines and other important parts. The third alternative
was for Volvo to stay fully integrated and become a supplier for the assembly companies.
This way Volvo can achieve economy of scale and further lower their costs.
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The strategic package chosen is the second one. The second alternative is the
easiest to do and has the best outlook for the long-run. In divesting non-essential
activities, the company can focus its resources on developing a higher technology engine
and establish a stronger brand value in terms of product functionality. Also, previous
customers will not be lost because of the superior customer service that the company
provides. This will provide a win- win situation for both the company and their customers.
The company enjoys better brand image (not just “safe” anymore) and better profitability
from the engines (thus satisfying its stockholders too). The customers enjoy a better
product and service that they cannot get elsewhere.
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II. Internal Analysis
2.1 Mission:
To be a leader in the world’s heavy truck industry, producing high reliability,
state-of-the-art safety trucks for the business users and individual households, and
establishing higher value throughout the value chain.
The mission provides the reason for the company’s presence in U.S. market.
Because “the U.S. market is the world’s most difficult market, those who can succeed
there can do it anywhere in the whole world”. (Karl-Erling Trogen, CEO of Volvo Trucks)
2.2 Goals:
The company’s management goal is to break the 12% market share barrier on the
way towards 20% and to raise profitability.
2.3 Current Strategies:
2.3.1 Diversification Strategies: Historically, under the leadership of
CEO Pehr Gyllenhammar, Volvo diversified into many different businesses and became a
conglomerate during the 1980s. It entered into unrelated industries such as financial
services, processed food (seafood, beer, etc.), matches, and pharmaceuticals.
However, in the mid-1990s the conglomerate strategy was reversed and
Volvo refocused on vehicles and heavy equipment. In 2000, Volvo Truck Finance North
America was formed for offering both financing and service contracts for Volvo trucks. It
helped Volvo improved the relationship with customers and strengthened Volvo’s after-
market business.
2.3.2 Vertical growth strategies: The Company attains vertical growth
through backward integration. Volvo was fully backward-integrated, developing and
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producing all major drive-train components, including engines and transmissions by
themselves. The company attempts to be a fully integrated company in providing for all
the parts of the truck. With regard to forward integration, the company seems did not
have any control over distribution channels. They distributed the trucks by the dealer
networks.
2.3.3 Horizontal growth strategies: Volvo grows horizontally by
acquisitions. In the U.S. market, Volvo acquired White Motor Corporation in 1981 and
GM’s heavy truck business in 1988. The acquisitions helped Volvo gained a foothold in
U.S. market more quickly.
2.3.4 Portfolio strategies: Since 1999, Volvo group was a manufacturer
of transport solutions for commercial use, including five separate business groups: trucks,
buses, construction equipment, marine and industrial power systems, and aerospace
engines. Each managed separately as a sub-company.
For Volvo Truck, the product lines included European cab-over trucks (the FH series for
long-haul and FL series for construction and distribution use), European conventional
trucks (the NH series), and American conventional trucks (the VN and 770 series).
2.4 Performance:
Volvo acquired White Motor Corporation in 1981 and acquired GM’s heavy truck
business in 1988. It helped Volvo expended the dealer network and strengthen the
foothold in the U.S. market.
Volvo Truck finance North America was formed in 1995; it offered both
financing and service contracts for Volvo trucks. It also helped to improve customer
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relationship as after-sales service is one of Volvo’s key strengths. Additionally, the dealer
net work was consolidated and reorganized, focusing on an upgrading of the services.
From product point-of-view, in order to stand out in U.S. market, the company
had adapted their product and developed the VN series for U.S. customers. It helped to
increase profits and reduced costs. Products focused on safety and environment
performance.
In order to improve profitability, the restructure and cost reduction program had
been conducted. In spite of these efforts, Volvo’s market share in U.S. market never
achieved more than 12%.
2.5 Functional Analysis:
2.5.1 Product/ Operations
Volvo was one of the world’s leading manufacturing of heavy trucks, with
the world head quarter located in Belgium, the product serving 180 markets and
delivering 81,000 medium and heavy trucks in 2000. The company was fully integrated
developing and producing all major drive-train components, including engines and
transmission. The heavy truck segment took the account of more than 90% of the overall
production. However, the company still produced the medium-heavy segment in order to
offer the dealer a full product line. During the 1980’s the company began to export and
established R&D centers and production facilities in various countries. Volvo attempted
to penetrate into the U.S. heavy truck market by acquiring the bankrupt U.S. truck
manufacturer White motor Cooperation and the heavy truck division of General Motors
in 1988.
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The assembly line for a truck is a complex operation involving tens of
thousands of parts. Therefore, in order to be profitable, it relies on economies of scale, so
plants with annual output of over 40,000 units were common. Of all the parts, the engine
itself constitutes 25%-30% of the total truck value, which creates the great majority of the
after-market part of sales management. This leaded to the modular concept, in which
standardized components were produced centrally for local assembly. Economy of scale
is achieved and the company is working towards the long term objective of Volvo. The
objective is to reduce the number of components from 41,000 to under 25000 by the year
2001, while decreasing the number of supplier from around 16000 to under 400.
Moreover, this concept can be applied to reduce the cost of warehousing, purchasing and
shipping.
Currently, the world market for truck in Western Europe and North
America each accounts for about one-third of the market, the fastest growth is expected to
occur in China and India at an annual rate of around 11%, which is the highest rate of
growth and none of the Asian competitors are the key players in the world heavy truck
market. This attracted Volvo to consider entry into these two countries.
2.5.2 Marketing
2.5.2.1 Product & Price: Volvo’s product line included European
cab-over truck (the FH series for the long-haul and FL series for construction and
distribution use), European conventional truck (the NH series), and American
conventional truck (the VN and 770 series). Volvo’s trucks were known for their high
reliability, state-of-the are safety features, and good comfort. The price is set lower than
the key competitors, as Volvo tries to achieve the economic of scale. However, an
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analysis of the financial information shows that the profit margin of Volvo is lower than
the competitors. The lower margin might have resulted from two actions, one was
because Volvo sold the product in the cheaper price, and another was because the
company needed to follow a series of model changes which required substantial
investment. Nevertheless, in 2000 Volvo management was considering what needed to be
done to make the North American business viable.
2.5.2.2 Place& Promotion: The information given did not mention
much about the promotion but most of the promotion were in the after sale service.
Careful maintenance is necessary for trucks, especially for the engine, which requires the
most service and Volvo gains most revenues from after–market engine part. There are
also financial services provided for the customers’ convenience. It gives the customer
greater long-term control over their operating costs. This was the reason why the truck
are often sold with contracts and most of the time Trucks were sold through distributors
who maintained closed relationship with customer as the truck need special care.
2.5.3 Organization
Volvo use acquisition to achieve a fully integrated status most of the time.
The decision power tends to be centralized as the head quarter gains full control of the
acquired companies. The acquired company, like White Truck, was used as a tool to
connect the dealer and the customer to Volvo itself. (APPENDIX VIII)
2.5.4 Financial analysis
The company earn low profit margin due to the substantial investment in
fully integrating its operations. The growth of the market share is also a concern as
Volvo’s growth is stagnant while competitors’ growth is substantial (APPENDIX II).
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This shows that Volvo has not reached its full potential yet and may be inefficient in
utilizing their capital.
2.6 Strengths and Weaknesses: (APPENDIX V)
2.6.1 Strengths:
Volvo’s major strength is in its reputation of high reliability, state of the
art safety feature and good comfort that it provides to the truck driver and its passengers.
It is the major point of differentiation from their competitors. Another strength is that
Volvo has and advanced production line and standardized parts and components. This
helps the company with lowering their costs and be more cost efficient. Volvo also used
this cost advantage and established modern assembly plants. Volvo’s strength is not only
in their products, it is also in their services. Volvo Truck Finance North America was
formed in 1995. It offers financing and service contracts to their customers and thus
allowing their customers to gain more control over their spending and establish a good
relationship with them.
2.6.2 Weakness:
The major weakness of Volvo is its inability to adjust in their strategies.
They have low creativity in their strategy and tend to imitate the strategies of their
competitors. Also, the direction of the company strategy is not clear and it seems to be
contradicting with the market situation in the United States. The management of Volvo
does not have, or cannot utilize, enough information regarding the market in the United
States. Thus they cannot compete efficiently with the local competitors, or even other
global competitors. Compared with the other competitors, Volvo also seems to be lacking
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technological integrity and does not demonstrate themselves as a technological advanced
company.
III. External Analysis
3.1 General Environment
3.1.1 Economic Environment:
The truck market is like any other cyclical industry; therefore an
understanding of the basic drivers of supply and demand is necessary. Increasing cost
factors like inflationary pressures and increases in crude oil prices are the trends that
directly affect the trucking industry. Engine development costs had increased also, in
order to address the need of new environmental demands and pressures for higher fuel
economy.
3.1.2 Social Environment:
The U.S. market was dominated by conventional trucks whereas Europe
favored the cab-over design and there were substantial differences in driving
characteristics for the two designs. The different countries have different characteristics.
In U.S. they have independent companies and small chains that sold more than one brand
and they attend to large fleet operators and leasing companies who provide full servicing
contracts to keep the relationships with customers. In Europe, distributors were exclusive
and often owned by the manufacturer, they tended to own and drive their vehicles so
large fleet operators were less common. Truck manufacturers aggressively market their
products in many ways because the manufacturers have comparable product offerings so
it is necessary for the manufacturers offer many of options to the customers.
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3.1.3 Political-Legal Environment:
Political factors were, at first, highly restricted upon the entering the
country. Political conditions were especially tough in the U.S., as Volvo failed to enter
through alliance with a local U.S. company. Besides that, before the year 1981, there was
the restriction on truck length due to the safety reasons in both Europe and American but
later they changed to restrict on the weight. This act in deregulation had an effect on the
profitability of trucking companies.
After the change in political conditions, the number of owner-operated
trucks decreased, and the industry consolidated into larger companies. Regulatory rules
have significant impact on overall industry demand. The regulation was restrictions on
truck length for safety reasons and also regard to the maximum acceptable weight of
trucks in all market.
3.2 Business/ Competitive Environment
3.2.1 General status of the industry:
The heavy truck industry has reached its maturity stage (APPENDIX VII).
European and American manufacturers play the major roles in the world market. In
addition, the product features and customers preferences are different from European and
American markets. In U.S. market, a handful companies dominate the market.
The heavy truck industry is further analyzed using Porter’s five forces model
(APPENDIX VI), and is briefly discussed in the following sections.
3.2.2 Threat of New Entrants:
Threat of new entrants is low. The economics of scale and experience
effects, product and brand identification, capital requirements and switching costs,
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proprietary knowledge are high. Moreover, the control of distributions and control of
access to raw materials are medium to high. These factors threaten the new entrants from
the market.
3.2.3 Bargaining Power of Buyers:
Industry consumers are the main buyers of heavy truck, the overall
bargaining power of consumers are medium to low. On one hand, buyer concentration is
high, they purchase in big volume and infrequently with good information, these stand
that buyers have high bargaining power. On the other hand, buyer switching costs are
high, theirs ability to integrate backwards is low and the close-substitute products are
unavailable since the differentiation of suppliers’ product is high, these stand that buyers
have low bargaining power. Moreover, the price of input relative to the total product cost
is medium and also, buyers’ profitability is medium.
3.2.4 Bargaining Power of Suppliers:
The major suppliers for the heavy truck industry provide important parts,
including diesel engines, gearboxes and rear axles to heavy truck manufacturers; their
bargaining power is moderate. Even though the quality of products is essential for heavy
truck manufacturers, the customers are important to the suppliers, and the switching costs
of buyers are high, the force is partially neutralized by the fact that the suppliers’
concentration and forward integration by the supplier are low. The availability of
substitute products and the cost of the input, which is relative to total product costs, are
deemed moderate. Suppliers can possibly integrate forward and have their own
differentiate products and services to compete with other competitors. As a result, overall
the bargaining power of suppliers is medium.
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3.2.5 Threat of Substitute Products:
The overall threat of substitute products is medium to low. Impossible
close-substitutes of heavy truck fetch out highly loyalty of consumers, whose switching
costs are high, and since the moderate rate of improvement in price-performance
relationship of substitute products, the total threat of substitute products is medium to low.
3.2.6 Rivalry among Existing Firms:
Rivalry among existing firms is high. The industry is in its maturity stage
and the industry growth rate is low; with high fixed costs, exit barriers and strategic
stakes, the heavy truck industry also has high asset specialization and high emotional
barriers to the exiting business exist. The storage cost is medium. Besides that, high
product differentiation and switching costs are offsetting these forces.
The overall threat is medium to low, therefore the industry is attractive.
Companies in this industry should concentrate on how to establish their core
competencies (whether it is technology or service) and create a good relationship with the
customers (through the dealers, or directly).
3.3 Key success factors:
The key success factor for Volvo Trucks is the quality of the products and
features it provides. Volvo’s trucks were known for high reliability, state-of-the-art safety
features, and good comfort. However, Volvo Trucks later implemented a cost reduction
program including negotiations with its suppliers, which allowed Volvo Trucks to gain
more profits and sales. Another point is the relationship with customers. Especially in US
market, the customer is very important that you need understand the preference of
customer and produce the truck that meet their special needs.
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3.4 Value Chain Analysis
3.4.1 Primary Activities:
3.4.1.1 Inbound logistics
The supply of the whole truck industry is vary different, some
company use more outsourcing and some company use the integration strategy. Because
the number of truck component is larger, so the company like Freightliner uses pure
assembly and only designs the outer appearance of their trucks. However, Volvo Truck
integrated with their suppliers and used internal resources to assembly the truck. The
inbound logistics should add more value to Volvo truck because of its relatively low cost,
as the market of truck in US market is highly standardized.
3.4.1.2 Operations
Trade between zones rarely happens, so the operation and
manufacture factories are always located inside the zone. The Volvo Company
established an assembly line located in North America after they acquired White Motor
Corporation and GM Heavy Truck Corporation. White Motor Corporation is the oldest
and best known U.S. truck manufacturers before it was acquired by Volvo. Their
operation system should add value to the whole value chain.
3.4.1.3 Outbound logistics & Marketing and Sales & Service
Most of the trucks are sold through dealers, thus dealing with
dealer is important. The dealer is also major after-sales service point for most of the truck
manufacturers. For the whole U.S. market, Volvo drop dealers in areas with both GM and
Volvo White representation and in other areas new dealership were added. Most dealers
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in US are independent dealers which are separate from manufacturer and the dealer is
important for manufacturer to understand the market.
3.4.2 Support Activities
3.4.2.1 Technology development
The modular concept of Volvo reduced the number of components
from 41,000 to fewer than 25,000 by the year 2001. This technology will go with its
integrated strategy and reduce the supply and also reduce the cost of the truck to make
sure that all the components can be produced in the company itself.
3.5 Stakeholders Analysis
Volvo’s major stakeholders are its suppliers, dealers, stockholder, and customers.
The suppliers are important as the truck requires more than tens of thousands of parts, so
it is impossible for the company to produce all parts on their own. Dealer is another
important stakeholder; they arrange for the sales contract and dealer takes the
responsibility for distributing the product too. Dealers not only sell the product but they
need to maintain the relationship with the customer and provide them the after sale
service. Next, customers are always the most important in every business; some
customers purchase in a large amount (over 100 per year) and some in small amounts
(under 10 per year). The company needs to provide the good care after selling the product
as the truck need the maintenance and treatment. The last type is the stockholder; they are
the sources of fund for the company for further expansion or even uses on day-to-day
operations so the company needs to show a high profitability ratio, such as return on
equity and earning per share, in order to satisfy the stockholders.
3.6 Opportunities and Threats: (APPENDIX V)
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3.6.1 Opportunities:
The biggest opportunity for the industry was when the regulations
and policies for the trucks were loosened during the 1990s. The trucks were allowed to be
longer in length, thus leading to conventional trucks becoming more popular. Also, in the
year 1998, the demand for trucks in the U.S. market rebounded and reached new heights.
Most companies enjoyed a large growth in sales during that year.
3.6.2 Threats:
There are significant differences between the customer demand in the U.S.
and the customer demand in Europe. The difference in preferences poses a great threat to
the companies that want to enter and survive in the U.S. market because they cannot
apply the way they do business elsewhere in the U.S. (The market demands are similar in
Europe and Asia) Also, intense competition in the U.S. market leaves very little room for
mistakes.
IV. Critical Issues
4.1 Benefit of full integration is unseen and can be the cause of
inefficiency.
The reason why this issue is critical is because this full integration has not
provided for any significant competitive advantages. On the other hand, the cost of
investment on manufacturing equipments and research and development of the various
parts of the truck lead to the firm having significantly lower operating margins
(APPENDIX I). This strategy seems to be taking the firm in the wrong direction, and if it
is not considered as soon as possible, it will create a considerate disadvantage for Volvo
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because of its inflexibility and lowered profitability. It cannot be the best in producing
everything, thus it should not be trying to produce everything, because the inefficiency in
some parts will drag down the productiveness of other profitable parts.
Another reason why this issue is critical is that full integration has stalled the
ability of management in the establishing of good relationships with the suppliers and
dealers. With the full integration, the company purchases (or establishes) their own
suppliers and dealers, and these divisions have to follow the orders of the mother
company. Therefore the management does not have to pay a lot of attention in
establishing a good relationship, and when the company deals with outside suppliers and
dealers in the United States, they will be less experienced and not be able to establish a
trustful relationship. This creates great threat to Volvo, because the most successful
companies in the United States have a well established supplier and dealer network that
support the company.
4.2 Market share in the US is low
This issue is critical for two reasons. The first is that an achievement in the United
States is an indicator for the success of a company worldwide in the truck industry. The
CEO of Volvo Trucks commented that the US market is the most difficult one in the
world, and those that can succeed in the US can do it anywhere in the world; that is why
Volvo Trucks will not withdraw out of the US market and is determined to succeed in it.
If the market share remains low, it will show that the company is not capable of success
and lead to a lowered brand value.
Another consideration is that market share for Volvo is low and growth is low
also (compared to major competitors; refer to APPENDIX I and APPENDIX II). Thus if
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the company cannot overcome this problem, it means that they will not be as successful
in their ventures in other countries because they have to spend a large amount of capital
to maintain the US venture and the capital will be taken away from other more potentially
profitable markets. This is the second reason for why the low market share in the US is a
critical issue. This market is like a question mark (in accordance to the BCG matrix
APPENDIX IV), meaning it will need a lot of capital and resources to establish and at
this point in time, the future is vague and the chances to succeed are low.
V. Alternative Strategies
5.1 Strategic Package 1:
Decentralize and give authority for the North American Division to manage. This
way, both the critical issues can be solved because the way the company functions does
not have to be the same as the other divisions. (Europe and Asia) The top management of
the US division can use their knowledge of the market and decide whether or not to stay
fully integrated (or outsource some functions), and how to increase customer preference
and purchase (and thus market share) in the US market.
5.2 Strategic Package 2:
Focus on the research and development of the engine and outsource minor parts.
This way it can solve the inefficiencies of the full integration and also adapt to the market
situation in the US because most US customers prefer to determine the specs of the truck
and the engine is the most profitable piece of the truck. In order to attract customers to
purchase the entire Volvo truck, we provide the complete after-sales service so that
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customers can remain loyal. For customers that only purchased the engine, repair service
is also provided.
5.3 Strategic Package 3:
In the case that the firm still wants to remain fully integrated, the firm can
produce the parts for the assembly companies and achieve economies of scale from
selling and using their own parts. Thus it will further lower their costs and establish their
brand presence.
VI. Recommendations and Implementation
The recommended strategy is strategic package 2. We recommend strategic
package 2 because it is the most feasible for a quick change. As the company is facing
fierce competition, it has to move quickly. In the first strategic package, it is feasible but
the results may not be obvious in the short-run. For strategic package 3, it will also take a
certain amount of time for Volvo to establish a good relationship and show their product
value to the assembly companies.
With strategic package 2, the company can quickly change their operations and
concentrate production on the few parts that are more profitable, namely, the engine. The
rest of the manufacturing, of the unprofitable parts, should be divested. The parts can be
outsourced and purchased from other companies. With concentrating on engines, the
level of profit is expected to increase and the company can concentrate its funds on the
research and development of the engines. This way, the company’s financial status can be
improved in the short run and be able to establish loyal customers through their superior
customer service.
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Customers in the U.S. prefer to set the specs for their truck, thus the biggest
market players are assembly companies. If Volvo adapts strategic package 2, it is
adapting its strategies to the U.S. market in the most efficient and least costly way. The
dealers and distribution channels are already available, and the production is accounted
for, all they have to do is how to make their product more preferable, that’s it.
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VII. Case Questions
7.1 What should Volvo Trucks do in 2000 with respect to the North
American market?
Considering that the North American Market being the world’s most difficult
market, it would be essential that Volvo Trucks maintain their presence. Even though
demand has increased, margins still remained low. Volvo’s attempt to increase its
profitability by reducing its cost produced minimal results of 2%. With the difference in
preference and the favor of nation-built products in the North America market, Volvo
Trucks are facing difficulty in attempts to gain market share in the United States.
However, there are several ways that Volvo Trucks can gain market share. First, Volvo
should make its trucks under different brand names like D-B has instead of just using the
Volvo name alone. Second, Volvo Trucks should outsource more on costly materials and
parts, which are not profitable to make, in order to make more profits and reduce costs.
7.2 Describe Volvo’s penetration strategy in the U.S., and Volvo’s global
strategy.
7.2.1 Penetration Strategy in the U.S.: Volvo’s presence in the U.S. dated from
1955. It started out by selling trucks, using existing dealer networks for the distribution
of Volvo passenger cars. The sales were focused on 13 Northeastern states which were
considered densely populated. Volvo decided to buy White Motor Corporation (WMC)
in 1981, which was one of the oldest and best known U.S. truck manufacturers.
The first strategic decision of the newly formed Volvo White Truck
Corporation was to improve dealer and customer relations. White Trucks were regarded
as lower price products competing mainly with GM, Ford, and Navistar. To improve
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profits, VWTC management decided to move towards the premium end of the market and
introduced the “Integral Sleeper” that combined driving and sleeping components.
In 1988, Volvo acquired GM’s heavy truck business. An explicit
objective of the new combined company was to become the customer’s business partner,
based on a more cooperative relationship.
7.2.2 Volvo’s Global Strategy: Volvo was founded in 1925 to produce cars.
Over the years, Volvo evolved into a diversified industrial group, providing a wide range
of products ranging from cars, trucks, buses, to marine and jet engines.
Volvo was one of the world’s leading manufacturers of heavy trucks. The
company held 14.9% and 10.6% in the European market and the North American market,
respectively, in 2000. However, Volvo’s position in the Asian market was still weak.
New marketing programs had been introduced in China, India, Pakistan, and together
with Eastern Europe and Mexico in the 1990s. Volvo trucks were known for high
reliability, state of the art safety features, and good comfort. The basic philosophy was to
utilize modules whose basic design was common across several models, in a so-called
“platform concept”. The modular concept not only affected product development but
also reduced costs of warehousing, purchasing and shipping.
Volvo Trucks began exporting trucks as early as the 1930s. The company
also launched major centers (such as R&D and productions institutes) in several countries,
such as, Sweden, Belgium, Brazil, and the U.S. Small assembly plants were located in
Latin America, Africa, and Asia.
7.3 Which are the most critical periods? Why didn’t Volvo exit?
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There were two most critical periods. The first is when the U.S. trucking market
had been deregulated in 1981. This allowed for a gateway entry and eliminated price
ceilings. Because of the deregulation, there was a dramatic fall in the profitability of
trucking companies. As a result, truck buyers became more professional and more
concerned with the fuel economy, truck quality, and overall cost performance. In
addition, small buyers in the U.S. tended to favor American built products and often
demanded customization of products and features. The second was when Volvo Trucks
faced a sales drop by 38%, resulting in a record loss of $240 million.
Volvo did not exit the market because Daimler-Benz, RVI and Volvo themselves
have all begun to build up distribution networks since entering the market. Moreover,
Volvo acquired White Trucks in 1981 and GM’s heavy truck division in 1988 which
proved to be a success in maintaining their position in the U.S. market. Also, the CEO of
Volvo truck stated that those who can succeed in the U.S. market can be successful in
other countries as well. Since Volvo Trucks wanted to go global, it must be able to
survive in the U.S. market.
7.4 Why is the heavy truck industry so slow in globalizing?
The heavy truck industry is so slow in globalizing due to several reasons. The
different design preferences between markets resulted from a greater need for
maneuverability in European cities. However, the variation was also due to regulatory
differences. In all markets, there were restrictions on truck length for safety reasons.
Regulations also differed in regard to the maximum acceptable weight of trucks.
Although, regulations in Europe varied from country to country, the maximum weights
allowed were usually higher than in the U.S.
- 25 -
Export of heavy trucks tended to occur within Europe, North America, Latin
America and Asia, but rarely across continents. For instance, in Japan, only a very small
fraction of truck production was of the medium/heavy type due to the roads being the
least developed amongst industrialized countries. Heavy truck usage was limited.
Because of the difference in the economy status quo of every country, sales of
trucks tended to be highly cyclical and truck demand plummeted during economic
downturns. This then affects the growth rates of each region which fluctuated widely.
Furthermore, trucks were often sold with service contracts. Therefore, trucks
were sold through distributors who maintained close relationship with customers. In the
U.S., distributors were typically independent companies and small chains that sold more
than one brand. In Europe, distributors were exclusive and often owned by the
manufacturers. With such a vast difference in the logistics of each country and each
region, it would be very difficult to integrate the heavy truck industry. Thus, globalizing
the heavy truck industry would require immense efforts and time to create a standard
worldwide business.
- 26 -
APPENDIX
Financial Analysis:
APPENDIX I
Operating Margin
0.00%
2.00%
4.00%
6.00%
8.00%
10.00%
12.00%
14.00%
16.00%
1992 1994 1996 1998 2000 2002
Time
Percentage
Navistar
Paccar
Scania
Daimler-Benz
RVI
Volvo
APPENDIX II
Market Share Growth
0.00%5.00%10.00%15.00%20.00%25.00%30.00%35.00%1986 1988 1990 1992 1994 1996 1998 2000TimeMa
rket S
hare
(Perc
entag
e) Freightliner (D-B)PaccarNavistarRVIVolvo
- 27 -
APPENDIX III
7.744 8.407 7.919 5.8927.054
6.74205
1015202530SALES
($ billions)
Volvo Navistar Paccar Scania Daimler-Bens RVL
GLOBAL SALES
APPENDIX IV
Relative
Market Share
Market
Growth Rate
1X 10X
10%
1%
20%
Truck
- 28 -
APPENDIX V
SWOT Analysis:
Strengths Weakness
- Volvo brand have the reputation of high reliability, state of the art safety features and good comfort;
- Have quite advanced production line when acquire White and also standardized of parts and components;
- Volvo has modern assembly plants;
- Formed Finance North America in 1995, offering financing and service contracts and greater long-term control of customers, strength after – marketing business.
- Low creativity in strategy and always be follower in the market;
- Direction of company strategy is not clear and not comparable with the market;
- Management lack of information of U.S. market
- Technology is not as good as major competitors
Opportunity Treats
- Political regulations is low in early 1990s;
- Rebounded demand of U.S. market in 1998 make company growth;
- Different customer demand for U.S. market
- Intense competition in North America market
- Lower globalization of Truck industry in the world
- 29 -
APPENDIX VI:
Five Forces Analysis:
I. Threat of New Entrants High Medium Low
1. Economies of scale are high; therefore, threat of new entrants
is
X
2. Experience effects are high; therefore, threat of new entrants
is
X
3. Product differentiation is high; therefore, threat of new
entrants is
X
4. Brand identification is high; therefore, threat of new entrants
is
X
5. Capital requirements are high; therefore, threat of new
entrants is
X
6. Switching costs are high; therefore, threat of new entrants is X
7. Incumbents control of distribution channels is medium to
high; therefore, threat of new entrants is
X X
8. Incumbents proprietary knowledge is high; therefore, threat
of new entrants is
X
9. Incumbents control of access to raw materials is medium;
therefore, threat of new entrants is
X
Overall Threat of New Entrants LOW
II. Bargaining Power of Buyers High Medium Low
1. Buyer concentration is high; therefore, bargaining power of
buyers is
X
2. Buyer purchase in big volume, and infrequently; therefore,
bargaining power of buyers is
X
3. Buyer switching costs are high; therefore, bargaining power
of buyers is
X
4. Buyers have good information; therefore, bargaining power X
- 30 -
of buyers is
5. Buyers’ ability to integrate backward is low; therefore,
bargaining power of buyers is
X
6. Close-substitute products are unavailable; therefore,
bargaining power of buyers is
X
7. Product differentiation of suppliers is high; therefore,
bargaining power of buyers is
X
8. Price of input, relative to the total product cost is medium;
therefore, bargaining power of buyers is
X
9. Buyers’ profitability is medium; therefore, bargaining power
of buyers is
X
Overall Bargaining Power of Buyers Medium to low
III. Bargaining Power of Suppliers High Medium Low
1. Concentration of suppliers is low; therefore, bargaining
power of suppliers is
X
2. Availability of substitute products is medium; therefore,
bargaining power of suppliers is
X
3. Importance of customer to the supplier is high; therefore,
bargaining power of suppliers is
X
4. Differentiation of supplier’s product & service is medium to
high; therefore, bargaining power of suppliers is
X X
5. Switching costs of the buyer are high; therefore, bargaining
power of suppliers is
X
6. Threat of forward integration by the supplier is low to
medium; therefore, bargaining power of suppliers is
X X
7. Importance of the input to the quality of the buyer’s product
is high; therefore, bargaining power of suppliers is
X
8. Cost of the input, relative to the total product cost is medium; X
- 31 -
therefore, bargaining power of suppliers is
Overall Bargaining Power of Suppliers Medium
IV. Threat of Substitute Products High Medium Low
1. Profitability of industry producing substitute is low;
therefore, threat of substitute products is
X
2. Rate of improvement in price-performance relationship of
substitute product is medium; therefore, threat of substitute
products is
X
3. Buyers switching costs are high; therefore, threat of
substitute products is
X
Overall Threat of Substitute Products Medium to low
V. Competitive Rivalry & Barriers to Exit High Medium Low
A. Intensity of competitive rivalry
1. Concentration of competitors is high; therefore, intensity of
competitive rivalry is
X
2. Industry growth rate is low; therefore, intensity of
competitive rivalry is
X
3. Fixed Costs are high; therefore, intensity of competitive
rivalry is
X
4. Storage costs are medium; therefore, intensity of competitive
rivalry is
X
5. Product differentiation is high; therefore, intensity of
competitive rivalry is
X
6. Switching costs are high; therefore, intensity of competitive
rivalry is
X
7. Exit barriers are high; therefore, intensity of competitive
rivalry is
X
8. Strategic stakes are high; therefore, intensity of competitive X
- 32 -
rivalry is
Overall Intensity of Competitive Rivalry HIGH
B. Barriers to exit High Medium Low
1. Asset specialization is high; therefore, barrier to exit is X
2. Emotional barriers to exiting business exist; therefore barrier
to exit is
X
Overall Barriers to Exit HIGH
The overall threat is medium to low, therefore the industry is attractive. Companies in
this industry should concentrate on how to establish their core competencies (whether it is
technology or service) and create a good relationship with the customers (through the
dealers, or directly).
- 33 -
APPENDIX VII:
APPENDIX VIII:
Volvo Group
Trucks Buses Construction
Equipment Marine and Industrial Power System
Aerospace
Engines
North
America European Asian