Executive

Summary:
The strategic problem is how to increase the market share of heavy truck division of Volvo in the U.S. to
20% in next 5 years. This strategic problem occurred as Volvo didn’t customize and localize its trucks and
services to suit the US market, resultantly its market share could not exceed 11% even after over 20
years. There are four alternatives for available: (1) exit the engine manufacture business; (2)continue
with the existing structure (policy of complete integration); (3) exit truck business to focus on engine
manufacturing or (4) separate truck and engines business (move away from complete integration) and
provide customization in services and products. We recommend Volvo to proceed with option 4 that will
enable it to increase market share to 22% in next 5 years.

Situation Analysis:

The truck manufacturing industry is categorized by intense competition with 6-7 major firms competing
for market share. The major component of the trucks are engines and economies of scale are required
for being profitable in engine manufacturing which means that engine manufacturers enjoy
considerable power. However, other parts are sourced from hundreds of suppliers implying their limited
power. Almost one third of the customers are large fleet owners which means they enjoy the leverage
of bargaining with the manufacturers in some instances. Due to high investments required for entry,
threat of new entrants is low (see Exhibit 1). Cargo Trains and Airplanes could be considered as
substitutes but they don’t have the flexibility offered by the trucks. In Exhibit 4, the matrix indicates the
current situation of Volvo in the U.S. market.

The stagnation of Volvo’s growth in United States could be attributed to many reasons. Volvo perceives
itself to be highly reliability, safe and comfortable. However, one of the most important features
customers look for is fuel efficiency. Therefore, in order to develop the business it’s essential for Volvo
to invest in developing fuel efficient engines. This will provide it with a competitive edge and help it to
offer a superior value proposition (see Exhibit 2). Currently it doesn’t offer any significant differentiation
compared to competitors. Company should pursue a marketing strategy of product differentiation and
targeting a broad market according to Porter’s strategy model.

In case of large fleet (over 100 trucks/ year) and medium fleet (10-99) trucks (which form more than
55% of the market) buyers, consumers are truck drivers but purchase decisions might be made by the
purchasing department of the company. After sale services and maintenance offered are extremely
important considerations for these customers. Moreover, the customers in U.S. prefer to customize
drive-train components including the engine. It means Volvo should strive to provide more
customization. Volvo’s operating margin of under 4% is almost half of Navistar whose market share is
only 2% more. This signifies inefficiencies in Volvo’s manufacturing process. It is advisable to outsource
the units that cost more to produce compared to outsourcing.

The distribution structure in U.S. is also different from that of Europe. Volvo chose to establish exclusive
dealerships and had 240 dealers in 2000. This could be a major strain, as it offers very limited access to
the consumers. Other brands using regular distributors are likely to be exposed to approximately 10
times the number of potential customers.

In engine manufacturing economies of scale play a critical role. Market leader in this category, Cummins,
sold 400,000 engines in 2000 and had around 2000 service points – compare to 200 service points of
Volvo. Limited number of service centers could be one of the major reasons restraining the sale of Volvo
engines.

Volvo had a wide product line consisting of three major brands prior to 1995. The decision to merge the
brands in to one has played a significant role in dropping sales by 38%. Moreover, Volvo is competing
against traditional American brands, and in the minds of consumers it might be perceived as an outsider.
This could be the reason that other European companies retained the brand names even after acquiring
the U.S. truck manufacturers. Volvo concentrates on mainly on heavy trucks market, but there is the
market for medium sized trucks which Volvo has not participated.

Recommendations

As per our analysis, Volvo has four strategic options available. First option would be to exit the engines
manufacturing business, however, this won’t be a suitable thing to do as its engines have a market share
of almost 20% in the trucks category and outsourcing engines would further erode the profitability.
Second option is to continue with the current structure, however, this is not advisable as this strategy is
not satisfying the sales and profitability targets of the company and its market share has stagnated at
11%. Third option is to exit the truck business and concentrate on producing and marketing engines.
This option is not recommended as it would decrease the engine’s sales by more than 50%, thus making
that division unprofitable as well. Fourth option is to separate the engines and truck businesses and
provide more customization of drive-train components including different brands of engines. In our
opinion this would increase the market share of heavy trucks to 12 % in one year and 20% in 5 years.
Along with this Volvo should invest in R&D and introduce fuel efficient engines. This strategy would pull
the consumers towards its products rather than the company pushing it.

Tactical Marketing Plan

Solution: Tailor the product according to demands of the customers. To achieve this option of selecting
the engine brand should be offered to customers placing an order of more than 25 trucks. Volvo engine
can be offered as a recommended option.

Information: Devise a marketing campaign to communicate the safety and reliability of Volvo trucks to
customers. Moreover use the influencers like magazines to tilt consumer preference in favor of Volvo.

Value: Launch different brands to target premium as well as low cost customers. Moreover, prices could
be increased in proportion to the level of customization demanded by the customer.

Access: Expand the distribution channels by selling the trucks through regular dealers (that is those who
sell many different brands. This would increase the product exposure to potential customers. Invest in
establishing more service centers and raise their number to at least 700 within next 2 years. This would
provide the easier access and ease of maintenance to consumers thus increasing their preference for
Volvo’s engines.
Exhibit 1 - Porter five forces
Power of Buyers

Power of Buyers: High buyer power - large fleet
owners. In 1997, 33% of buyers is large purchasers
(over 100 trucks per year), 25% buy 10-99 per owner, Threat of Competitive Threat of new
the rest are individual buyers. This is contrary to EU Substitutes Rivalry entrance
where a large owner has 50 to 100 trucks.

Power of
- Demand for drive-train customization Suppliers
- Prefer conventional design

Power of Suppliers
- There are thousands of suppliers for alternative components.

Competitive rivalry: the competition is tough, with around 6 major competitors (reduce from 50)

Renault (RVI): truck industry- Renault V.I., was fully integrated, Entered US in late 1970s acquired Mack
but two were managed as separate units.

Mack (13% market share): reputation for durability (bulldogs), sold to RVI in 1990, reputation for being
innovative, industry leader, 10% MS in Canada in 2000, joint purchasing with RVI.

Scania: not v successful in US, did well in Far East and South America, advanced technology, prestigious
image MAN Iveco DAF

Freightliner (31% market share): (Owned by Diamler-Benz) increase market share from 17% to 31%,
positioned as the lowest cost of ownership, targeted large felt buyers, considered a technological leader,
Pure assembler used outside engine suppliers, DB, Mercedez engines were not specified even after 20
years of acquisition.

Paccar (21% market share): Kenworth and Peterbilt Brands- Concentrated on the premium segment,
highly profitable, known for technology and performance, highly customized with a macho look
appealing to independent owner-operators.

Navistar: 19% market share

Threats of substitutes: There is relatively low threat - other modes of transport are not very flexible

Threats of new entrants: relative low threat: declining Industry volume/ declining, high initial
investment required

Exhibit 2 – The value map of heavy truck division of Volvo

Price Parity
Inferior

Volvo
Competitors

Superior

Value
 Exhibit 3 – SWOT analysis of Volvo in 2000

STRENGTHS WEAKNESSES
• Experience in truck manufacturing • Different requirements in US market
• Cooperation and acquisition of big (Cultural differences)
manufacturer in US • Distribution channel is not convenient for
• high reliability, state of the art safety truck owners to repair.
features, and good comfort • Low operating margins- compared to
competitors
• limited customization options
• Operating under capacity- production
capacity of 30,000 units

OPPORTUNITIES THREATS
• Very potential market (market size • Lose market share because of
~180,000 units in the year 2000) inconvenient service.
• Expand market share • Volatile market- fluctuation in volume-
• Provide engines for other company to 15% decline in 1996, rebounded in 1998
assemble.

Business Unit strength

Market share 11%

Industry High Medium Low

attractiveness High
Market size of US
179,386.79 units Medium

Low

Exhibit 4 – GE McKinsey Matrix of Volvo