Volvo Trucks Case Study

1.0 INTRODUCTION

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 review the analysis, 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.

Two 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. This way Volvo can achieve economy of scale and further lower their costs.

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.

2.0 EXTERNAL ANALYSIS

Business/ Competitive Environment

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.

2.1.1 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, 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.

2.1.2 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.

2.1.3 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.

2.1.4 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.

2.1.5 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 existing 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).

2.2 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