Business Strategy In A Global Environment History Volvo Marketing Essay

INTRODUCTION

This report will analyse the critical incidents of Volvo, a company Volvo company that has a great potential of developing globally.

The first part of this report, will breifly explain the history of Volvo, thereafter a SWOT analysis on the current situation of the company will be conducted.

Consequently, it will focus on the strategy of Volvo, the overview of its strategy, referring also to different strategic theories such as Porter’s Generic Strategy, Cost Leadership strategy, Differentiation strategy, Value Chain Analysis and Mintzerg Theory.

Then, the report critically and tactically analyses the implementations of such strategies in the case of Volvo.

The last part of this report, concludes the analysis of the strategies and a conclusion is reached as why Volvo has the capabilities and the opportunities to expand and to participate more actively in the global market.

BUSINESS STRATEGY IN A GLOBAL ENVIRONMENT

HISTORY OF VOLVO

One of the strongest brands of the automotive industry, the Volvo Car Corporation was founded in Gothenburg, Sweden by Assar Gabrielsson and Gustaf Larson in 1927. Volvo Cars, 2010) From the very beginning, the aim of the two owners was to construct vehicles that will be safe, compatible to the Sweden’s climate and awful roads at that time. So the company’s development in last 80 years was focused on safety-the main principle of Volvo’s design, quality and durability of the vehicles. The first truck was introduced and immediately sold i January 1928 and not only in Sweden. In 1930s there was an export of Volvo trucks to Europe.1929 the first marine engine was introduced, followed by the first bus that was launched in 1934 as well as the aircraft engines in 1940s making the company to develop and grow and become global group worldwide. .(Volvo Group Global, 2010)

In 1999 Volvo Group sold Volvo Cars to Ford, which was the biggest mistake of Volvo’s management, because Volvo became .In December 2008 Ford announced the possible sale and in December 2009 confirmed that the preferred buyer was Geely Automobile, the Chinese Auto manufacturer with which the deal was signed on 28 March 2010 for $1.8 billion. (Fabo,2010)

VOLVO’S SWOT ANALYSIS

STRENGHTS

The Volvo Group is one of the leading mobile automotive manufacturers in the world, with currently operations in Europe and North America. It currently produces Lorries, construction and aerospace equipment, buses and services as well as commercial automobiles. (Datamonitor, 2009) The company has a strong market presence in its Swedish domestic market, where every fifth car sold is a Volvo. (Josephs, 2004)

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Research & Development Capabilities

The Volvo Group has developed technological innovations in terms of design and security, it has strong focus on research and development as their cars are well recognised and respected for their advanced technologies including the preventive safety systems (blind spot information system, intelligent driver information systems, adaptive cruise control, warning systems and repellent glass), protective safety systems (whiplash protection system and inflatable curtains) and post- crash safety systems. (Volvo, 2009)

Diversified portfolio

Volvo is bringing in, innovative safety features, such as a system that alerts the driver by stopping the automobile if it determines that an accident is about to happen. (Taylor, 2010).

Strategic acquisitions and joint ventures

Volvo has focused on joint ventures and strategic acquisitions to expand further the business and to increase revenue. In the past years Volvo has finalized deals with companies such Eicher Motors in India, where the main focus was to strengthen the Indian market for heavy trucks. (Datamonitor, 2009); Another important deal was done with Shandong Lingong Construction Machinery (Lingong) of China. Volvo is currently under negotiations with Geely in China, it is expected that by June 2010 the ownership for Volvo will be under the administration of Geely. (Naughton, Kinnander and Chan, 2009).

Volvo has a vastly diversified product portfolio. It currently has the following business divisions (Volvo Website, 2010)

Trucks

Construction and Aerospace equipment

Buses

Volvo Penta

Customer finance

Volvo Aero.Volvo’s truck

Volvo Cars (Automobile Manufacturer)

This diversification allows customers to have an excellent customer service, hence acquiring a service along with their products.

WEAKNESSES

Declining Sales

Sales of bi-fuel cars have diminished vastly, regardless of their marketing strategies and price reductions. Sales of bi-fuel cars dramatically decreased from 3.529 units in 2002 to 1.478 in 2004. Another weakness of Volvo, is the lack of production facilities in America, therefore, producing cars in Sweden, has an effect on American customers, as cars are considered to be more expensive. (Anonymous, 2006)

According to CCN News, Consumer Reports have given outstanding calcifications to Volvo cars to 46% of the total of 149 vehicles ranked. (Taylor, 2010)

Declining profits and margins

The Company has been suffering from declining profits and margins since 2005. (Ward, 2010); Volvo’s operating profit shrank 22.3% in 2006. The operating margin also diminished from 7.9% in 2006 to 5.2% in FY2008. (Datamonitor, 2009)

Deprived performances of Volvo in strategic geographical regions

Sales figures in North America reported in 2007 a significant decrease, the North American region including US, Canadian, Mexican, and Puerto Rican markets reduced its sales by 11% from 2006 to 2007, this is due to the number of cars sold for 2006 and 2007 (Reign, 2009)

OPPORTUNITIES

Ford sold Volvo on March 29/2010 to Zhejiang-based Geely Group, China´s largest private carmakers. This represents an opportunity, as Geely assured injection of financial resources and support to strategic development. (The Local, 2009). Volvo´s requires the investment and development they didn´t get with Ford. Being owned by a Chinese company will result in increasing sales in this country. China is a potential market, representing almost 20% of world´s population. Opening plants in China will represents lower costs (labour/raw material); and nearness to India, the second most populous country in the world. Both are currently increasing their buying power.

Volvo Aero business has potential growth. According to Air4Cast, passengers’ traffic will increase as high as 10.9% in Latin America and 10.2% in Middle East, which implies additional commercial airplanes. (Davitt, 2003). Per Airbus, the increase in passengers’ traffic will result in 25,000 additional new commercial airplanes to satisfy demand during the next 20 years (Kingsley-Jones, 2009). As Volvo offers components, services, maintenance, an increasing of airplanes will lead to increase aero business profits.

Bus industry is growing. Governments are enhancing using public transportation to reduce contamination and traffic. Additional, emerging markets are implementing new transportation systems which are using Volvo. Colombia already ordered 432 buses, Brazil, 49 and between Bangladesh and Sri Lanka, 200 buses. Per Srivastava (Srivastava, 2010), Volvo wants to take advantage of the lower labour costs and reduced overheads of Volvo´s India Plants to increase exports of buses, mainly to developing countries.

Hybrid cars are another market that is increasing as the world is getting more environmentally conscious. Governments are implementing regulations towards reducing contamination. According to www.hybridcars.com in graph 1, in 2015 demand will reach almost 2.000.000 units. (Hybrid market forecast, 2006). Volvo is continuously working in R&D, so a concentration in hybrid technology and launch of this type of vehicles would be an opportunity.

Figure 1: Growth in Hybrid Market

(Source- 200 X:)

Toyota´s current cars recall situation is an opportunity for Volvo to enhance their brand, promoting themselves as a company who offers quality products. They should remind their customers that they have the safest cars in the world. People are not buying Toyotas´ cars as they used to. Customers are searching for new alternatives and it´s now when Volvo should be able to reach those customers and cover this unfilled demand.

THREATS

Car industry has turned into a very competitive industry. First, new brands came into the market, most of them, with very accessible prices (Hyundai/Kia). Second, some traditional well known companies, have been consolidating, reducing the number of competitors, creating stronger ones. (Daimler/Mercedes Benz). This should make Volvo think twice about their strategy, as in the lower end market, there are competitors who are very strong in price, and in high end market, companies are offering a wider range of products, with higher technology and features included.

Recession is another threat. Volvo has never been recognized for offering low cost products. It targets customers with a good buying power; however, cars sector is mainly affected by recession. During 2009, car sales in USA were the worst in 27 years. (Krolicki & Kim, 2010). This will force Volvo to move fast and create strategies to overcome the current economic climate, including fluctuation in currencies. Most cars are produced in Europe, and as the market is currently very unstable, this would make them vulnerable.

THE GLOBAL STRATEGY

A strategy as we know helps an organization to define its goals and objectives and work towards achieving them. Strategies exist at all levels in an organization, from operations to strategic level. Volvo already participates in the global market, operating in North America, Europe and Asia. The company focused on innovation, which has lead to its cars being well recognized however its performance is not as active as the company would want to be. Poor management performance has led to decrease in sales. This performance has had an impact on the company’s financial status therefore; a good strategy will help the business not only to increase its sales but also participate actively in a global market and maximize its competitive advantage.

According to Philip Kotler (2005), “competitive advantage is a company’s ability to perform in one or more ways that competitors cannot or will not match”. The strategy will involve the use of formalized decision models of Mintzerg, Whittington and porters five forces; with Volvo aiming to participate globally, where there is high risk of changing environment such as change of technology with high level of competition, the company needs to decide on key strategic decision, which will enable to achieve its competitive advantage. And as it has identified by Michael Porter (ACCA 2008/09), competitive advantage can be achieved by pursuing either one of them i.e. cost leadership, or differentiation

To emphasis that the company would be successful with a Cost Leadership strategy by focusing its efforts such as analyzing, its value chain where its cost driver will be identified and hence maintaining its costs as low as possible while ensuring that quality is not compromised over its competitors.

Another way of competing, he added, is that the company can be ahead of its competitor if it has the ability to ‘differentiate’ its product through innovative design which will increase unique perception in the market. Hence being able to increase its market share through charging high price as customers buying behavior is increasingly influenced by quality rather than price.

Analysis of generic strategy

Joint venture and cost leadership strategy

In the effort of improving efficiency in order to achieve cost leadership, according to the chairman’s report, Lif Johansson (Volvo annual report 2009) The company has managed to pursue joint venture strategy which has helped it to enjoy the benefits of economies of scale through;

Geographical expansion with diversified portfolio.

Enjoying the benefits of local firms that have enhanced the company with easy local knowledge and entry to the market.

Use of major global branding which initially could have been incorporated in the company’s research and development expenditure.

Therefore it has contributed to improve its internal efficiency as one of the company’s strategic objectives. Also economies of scale has helped to create barriers of entry against new rivalry reduce level of competition.

On the other hand one could argue that Volvo operational loss was partly due to its joint venture strategy in that, as the company tends to increase its joint web of operations with an increase in demand and reduce its spider web when demand falls, aiming at increasing efficiency (Volvo annual report 2009).

This implies that regardless of company initially successful pursuing the strategy, failure to analyze and coordinate its value chain activities it has posed a threat to Volvo as it has encouraged erosion of cost advantage position (e.g. out competed by Toyota) and hence ending up losing its customer royalty.

Joint venture and differentiation strategy

Through sharing local knowledge, experience and use of major global branding, the company has managed to successful launch new diversified portfolio products that have enhanced its credibility and strength over its competitors. According to Johansson, it has helped the company;

Responding rapidly with market demand growth which seems to be sophisticated

Reduce bargaining power of customers with diversified range of products hence,

Retaining its market attractiveness.

With the fact that the company is having diversified products towards achieving its competitive advantage, one could argue that it shortened product life cycle of existing products. Implying that initially Volvo would be incurring introductory cost for the product such as research and development expenditure as part of its fixed cost, however with short product life cycle will mean that it will not be able to capitalize its cost at maturity stage where its benefits seems to be accrued.

In addition to that, the loss of sales might be due to company’s failure to explore its diversified existing products into the new markets. This could have been an opportunity for Volvo to capture the market using existing resources, improving its internal efficiency and hence increase its profit growth and so its market share.

Therefore in general terms Porter’s generic strategies (1980) seem to be proved difficulty to Volvo, and basing on the evidenced above the problem might due to the fact that the company is trying to pursue both strategies at the same time. And this proves his idea that in the real world, irrespective of size or type of organization, it is difficult to apply a generic strategy despite being used by many industries.

Value chain analysis

Using value chain analysis as identified by Tailor (2005), it will help to pin point those areas which add value in line with company’s strategic objectives by eliminating non value activities. Hence Volvo will be able to monitor its inbound logistics to ensure that its work in progress is kept to the minimum.

Where as, emphasized by the Chairman Leif Johansson that their operations are more likely to be affected in case of delivery disruption, moreover as further mentioned by Porter (Harvard Business Review 1979) in its five forces, it will tend to increase bargaining power of its suppliers who will be imposing high prices for raw materials where quality is likely to be compromised due to high dependant from a single source.

Therefore to avoid that impact, Volvo should use its strengths such as sourcing differentiated suppliers from existing strong brand companies, where quality assurance and supply royalty has already being built in and hence become competitive in its cost efficiency.

Investing on hybrids technology

In order to sustain its competitive advantage, Volvo has invested and come up with new hybrid technology (Chairman’s report 2009). The system incorporates electric motor with diesel engine working together to;

Save fuel consumption and hence less cost incurred by its customers,

Protect the environment by reducing CO2 emissions.

Johansson continued to add that their hybrid testing solutions started since 1980s, which seems to take long time until they came up with hybrid products such as wheel loaders which proved to offer fuel reduction of 10% in the USA (Underground Construction article, 2008), refuse collection trucks, and city buses spreading in some parts of the world such as Sweden, France, New York-USA, and London- England.

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This implies that continuous investing on this technology, it will create barriers of entry against rivals, as it will be hard to imitate due to its time and cost consuming on research and testing efforts. Hence it will give Volvo an advantage of participating fully in the global market, capturing the market, breaking entry regulations barriers by enjoying local government subsidies.

Team management strategy

The aim of this strategy is to improve team management performance that will enhance the overall business performance. This will involve knowledge management that will encourage generations of new ideas and help the team to make the right decisions.

Staff training and development will also help to increase team performance and boost their morale on the other hand, Mintzerg states In the Nature of Management (Harper and Row, 1973), that motivation; morale and welfare are important factors to individuals work. In the working environment, if people are not motivated it is likely that their attitude and willingness to work will change and this has an impact to the organizations success. He continued to say that managers must take into account these three factors (Charlotte Davies et al, 2006). Volvo became one leading automobile manufacturing company and down the line sales have been decreasing and this reveals the ineffective management of Volvo. Therefore, applying Mintzerg theory to solve management problems will encourage team members to give opinions and suggestions and enable the organization to successfully achieve its objectives.

IMPLEMENTATION

There are many factors that we have to consider when thinking about how to implement the Global Strategy; we have to start from the point that Volvo it’s being centralizing its activities and using a well developed distribution chain to allocate its products in their market as it’s being established in the (Volvo Annual Report, 2009); this behavior for one side can be considered as positive if we are going to talk about an export entry strategy and even better a well developed Supply Chain; but because we are talking about growing globally, Volvo has the need to transforming its strategy if wants to be overseas.

An international Strategy, usually follows some drivers to get a better orientation and focus, in this context Gerry Johnson et al (2008) mention 4 drivers that will cover the strategy: Market, Government, Cost and Competitive Drivers, those drivers have being identified already when creating the strategy, from this base we will start building an Strategy Map, following the model of the Balance Scorecard (Robert S. Kaplan, 1996) to analyze the benefits of applying the Global Strategy we are proposing.

Before we start with the implementation, is important to know the type of strategy we are focus on, Following (Gerry Johnson et el, 2008) model, we locate the current Volvo strategy as a “complex export strategy” which in other terms means that most of its activities are located in a particular area and it using a developed distribution channel to put their products in the market; to transform this strategy into a “Global Strategy” we are going to have to put Volvo’s activities in a high coordination level in the most important places in the world.

Let’s center now in the Strategy Map; In the Learning and Growing perspective we included the strategies we talked about before, and now applying them to our map, we start planning personnel training and sharing knowledge in different areas in the organization, this also include personnel for the new manufactures plants in considering China as the best option of growing overseas, this strategies will be follow for a more efficient sales department and will generate as well an improvement in the Management Performance of the organization, this two internal process will create another change in the customer perspective, creating long-term relation and a better feedback with clients, which again will affect positively the financial perspective, obtaining a competitive advantage and cost reductions in terms of developing strategies to gain more customers.

Coming back again to the Learning and Growing perspective, we move now to the strategies focused on suppliers, analyzing new markets behavior and analyzing methods of entry into new markets, these strategies will generate in the internal perspective a focus in a new Supply Chain, basically relation with the restructuration of it, leaving on the side the high cost that the current Volvo distribution channel generates and turning this money to invest in creating new manufactures plants in new markets; this will remark as well in negotiations with new markets (Asia) and the generation of Joint Ventures as a New entry strategy; translating this into the customer perspective, Volvo will meet the New customer need and will give the overseas customers the possibility to get the products easily and with a cheaper price, of course this will end up generating a reduction in cost in the financial perspective for one hand, and being focused in the key products will create a differentiation comparing with the competitors.

Now let’s move on to the restructuration of the Research and Development Area and the analysis of the current plants strategies in the learning and growing perspective, this strategies will be follow with the closure of manufacture plants that are not making profit and with a reduction of inventory, as well as the implementation of new plants in new target markets from one side, and the constant generation of innovative products that will match the need of the new customers from the other; this will be translated in the generation of a Just in Time strategy and the Constant development of innovation, and the final effect in the financial perspective will be to participate actively in the Global Market, Increasing sales and obtaining again differentiation, which will be the Volvo competitive advantage in relation with the competitors.

One of the most important strategies in this implementation process we consider is the Joint venture with a giant in the China Market, as we had mention before, Volvo was just a about to be part of the Giant Geely as established in (The Local, 2009), If Volvo gets into that market not just will increase their sales and be out of the negative numbers, but also will increase the market share and could finally get in the right way to achieve its Vision.

Let’s see now the Strategy Map to have a better understanding of the relation between strategies to be applied in Volvo’s Organization so they can match their objectives, this Strategy map was built on the bases of the Global strategy we are proposing, and reflects the connection between the implementation strategies from the learning and growing and the Vision of the company.

STRATEGY MAP

CONCLUSIONS

As Geely is the new owner of Volvo, new markets will be penetrated. The Asian market is a great opportunity for business development. Volvo being acquired by Geely, will benefit from the local knowledge of the market and established manufacturing facilities in Asia.

If Volvo plans to enter the Asian-Chinese market, market research should be carried out in order to find out exactly what consumers want and need at the best price strategy. They might require high investments to increase production capacity at Volvo’s existing plants and in advertising and brand-building.

Geely and Volvo should both be very flexible as they have completely different corporate cultures. It is a huge challenge for both parties, as the company being acquired has critical issues and the acquirer company has little experience on acquisitions.

Due to the new acquisition, Volvo should concentrate not only on increasing sales in Europe and North America, but should also focus in increasing market share in China and Asian Emerging Markets. They are strong brands as Ford, GM and Chrysler, which makes competition even tougher, especially in mature markets like Europe and USA.

Geely should put pressure to make Volvo one of the top-selling brands in China. As Chinese buying power is increasing. Being Volvo a near-luxury brand, but not as expensive as BMW or Mercedes-Benz, the potential market size is larger than those brands. As is the first traditional and well-known brand owned completely by a Chinese company, Geely should be able to push Volvo’s marketing, sales and distribution much deeper into Asia compared with his foreign players. Volvo should focus in their distribution channels, as this will allow them to target them easily, especially the Indian market, which have an enormous potential, due to their latest growing results.

Volvo will need to change its centralized activities and its distribution channel in order to transform that advantage into a global strategy creating new plants in new overseas markets, transforming their complex export strategy into a global strategy.

Volvo’s new competitive advantage with global focus includes cost reduction based on terms of inventories and developing a Just in Time strategy and a Constant Research development in order to achieve its main objective and satisfy their customers’ needs.