BI 4242 Global Strategic Management Case Analysis: Volvo Trucks Submitted to: A. Pattana Boonchoo Group: Synergy Section: 404 Semester: 2/2005

Volvo Trucks Case

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Page 1: Volvo Trucks Case

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


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


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


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 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. 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


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


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: 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. 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. 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 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


IV. Critical Issues

4.1 Benefit of full integration is unseen and can be the cause of


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


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.

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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.

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Financial Analysis:


Operating Margin










1992 1994 1996 1998 2000 2002










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




e) Freightliner (D-B)PaccarNavistarRVIVolvo

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7.744 8.407 7.919 5.8927.054



($ billions)

Volvo Navistar Paccar Scania Daimler-Bens RVL




Market Share


Growth Rate

1X 10X





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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

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Five Forces Analysis:

I. Threat of New Entrants High Medium Low

1. Economies of scale are high; therefore, threat of new entrants



2. Experience effects are high; therefore, threat of new entrants



3. Product differentiation is high; therefore, threat of new

entrants is


4. Brand identification is high; therefore, threat of new entrants



5. Capital requirements are high; therefore, threat of new

entrants is


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


8. Incumbents proprietary knowledge is high; therefore, threat

of new entrants is


9. Incumbents control of access to raw materials is medium;

therefore, threat of new entrants is


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


2. Buyer purchase in big volume, and infrequently; therefore,

bargaining power of buyers is


3. Buyer switching costs are high; therefore, bargaining power

of buyers is


4. Buyers have good information; therefore, bargaining power X

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of buyers is

5. Buyers’ ability to integrate backward is low; therefore,

bargaining power of buyers is


6. Close-substitute products are unavailable; therefore,

bargaining power of buyers is


7. Product differentiation of suppliers is high; therefore,

bargaining power of buyers is


8. Price of input, relative to the total product cost is medium;

therefore, bargaining power of buyers is


9. Buyers’ profitability is medium; therefore, bargaining power

of buyers is


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


2. Availability of substitute products is medium; therefore,

bargaining power of suppliers is


3. Importance of customer to the supplier is high; therefore,

bargaining power of suppliers is


4. Differentiation of supplier’s product & service is medium to

high; therefore, bargaining power of suppliers is


5. Switching costs of the buyer are high; therefore, bargaining

power of suppliers is


6. Threat of forward integration by the supplier is low to

medium; therefore, bargaining power of suppliers is


7. Importance of the input to the quality of the buyer’s product

is high; therefore, bargaining power of suppliers is


8. Cost of the input, relative to the total product cost is medium; X

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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


2. Rate of improvement in price-performance relationship of

substitute product is medium; therefore, threat of substitute

products is


3. Buyers switching costs are high; therefore, threat of

substitute products is


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


2. Industry growth rate is low; therefore, intensity of

competitive rivalry is


3. Fixed Costs are high; therefore, intensity of competitive

rivalry is


4. Storage costs are medium; therefore, intensity of competitive

rivalry is


5. Product differentiation is high; therefore, intensity of

competitive rivalry is


6. Switching costs are high; therefore, intensity of competitive

rivalry is


7. Exit barriers are high; therefore, intensity of competitive

rivalry is


8. Strategic stakes are high; therefore, intensity of competitive X

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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


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).

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Volvo Group

Trucks Buses Construction

Equipment Marine and Industrial Power System




America European Asian