How Volvo Evolve in the Changing Market

BK 3037 Strategic Marketing Question 1: PESTEL Answer: Political One of the macro-environment factors which influencing Volvo’s strategy is the large taxation toward automotive trade by the government. Government is putting in place taxation structures that penalize large cars, with large CO2 emission. According to the case, Volvo’s biggest seller was its XC range, now being particularly successful in America, where big cars typically equated to big success. This government acts is encouraging consumers to move to hybrid or fuel efficient cars from big cars because the selling price of big cars would be more expensive when governments impose larger taxation on large vehicles. Consequently, the demand for big cars would drop significantly as consumers would prefer smaller cars due to high price sensitivity level and benefits gained from the government on smaller cars (Yoon and Tran, 2011). Therefore, large taxation on large cars will affect the sales and revenues of Volvo who mostly sells big cars. Legal The enforcement of US government toward the safer initiatives for automobile industry has challenged most of the automobile manufacturer which included Volvo. Therefore recently, Volvo invested heavily in safety research and development; its Goteberg Safety centre is world-renowned. Hence, Rudall (2011) emphasizes that the cost per unit of car has increased as research and development require a lot of experiments and tests to assure the performance. Besides that, research and development in new products involves a risk of whether the consumers will like the new features that have been added to the new or existing product. The more Volvo invests in research and development, the less cash flow they have in hand, thereby affecting the smooth running of daily operations. Economic Oil is the major ingredient in the production of tires. According to Li and Zhao (2011), increase in oil prices means that the cost to make the tires also increases. These tire production affects the Volvo as the increase in the price in tire production affects their profit margin. Additionally, rising commodity prices also affects Volvo’s strategy as 1 BK 3037 Strategic Marketing he raw materials for automotive industry are basically rubber and steel. Since, the prices of these commodities have gone up; Volvo would have to spend more money to purchase the auto component to make the entire cars. The higher the price Volvo purchases these commodities, the higher the selling price that Volvo would have to charge their customers. If they were to transfer the cost to their customers, there is a possibility that customers would shift to Volvo’s competitors as customers are very price sensitive (Lee and Cheong, 2011). Hence, the sales and profits of Volvo will decline and they might lose market share. Moreover, with the rising price of oil in the American market, sales and revenues of Volvo has dropped dramatically because their main business comes from fuel grueling SUV’s. With the increasing fuel prices, the trend has shifted from bulky cars to smaller and fuel efficient cars, thus, Volvo will be faced with many competitors such as Toyota while dealing with satisfying their customer demand (Hilmola, 2011), and hence, it affects the profit margins of Volvo. Moreover, increased oil prices is affecting the type of vehicles demanded by the customer and the way those vehicles are designed. According to Xia and Tang (2011), since there is a big shift from SUVs to fuel efficient or hybrid cars due to the rise of fuel prices, the problem of manufacturing overcapacity has incurred, where supply is more than demand, thereby, sharply dropping the SUV price. Additionally, when Volvo lowers down the selling price of SUVs, the profit margins of each car will become smaller, as their selling price might just be sufficient to cover the total cost of the production. Besides, when supply is more than demand, they would need more space or bigger warehouse to store the cars, and hence, higher cost of storage would incurred. Consequently, it forces Volvo to change their strategy to produce fuel efficient cars instead of SUVs. Environmental Furthermore, the community realizes that the transportation sector is becoming increasingly linked to environmental problems. With a technology relying heavily on the combustion of hydrocarbons, notably with the internal combustion engine, the impacts of transportation over environmental systems has increased with motorization (Bernon, et al. 2011). According to case study, Volvo’s main strategy is to produce SUVs but the consumers are engaging with environmental concerns where they are 2 BK 3037 Strategic Marketing demanding from fuel-efficient cars that release less pollution and absorb lesser fuel. Hence, this forces Volvo to offer Flexi-Fuel (combination of Petrol and Ethanol) in certain geographic mark ets in order to catch up the latest trend. Due to this reason, Volvo has to spend vast amount of money to purchase new raw materials and develop the technology to produce fuel-efficient cars to meet the current demand. Under such conditions maintaining market share and customers is difficult as the selling price needs to be lower to beat the competition, thereby, forcing Volvo to absorb the production costs (Needles, et al. , 2010). Social On the other hand, the changing social culture is affecting Volvo’s strategy as well. There are declining birth rates in Europe, smaller families and more couples choosing to remain childless. This demographic change has influenced Volvo significantly as their main product, SUVs, as it is suited well for big-size families. However, due to the increase of nuclear families consumers are willing to purchase smaller cars because of their small family size and smaller cars consume less petrol, thus it saves cost (Gwartney, et al. , 2008). In addition, many cars on the road today are used by just single occupants, commuting to work. Hence, the socio-cultural changes affect Volvo business strategy as the demand for SUVs is declining but demand for smaller and fuel-efficient cars is increasing. Besides that, they have to invest a big amount of money to do research and development for fuel-efficient cars in order to compete with Toyota for market share. Baumol and Blinder (2011) emphasizes that heavy R&D will lead Volvo to incur higher cost of production and profit margin will decline as they cannot sell the cars at a high price since to their competitor (Toyota) is offering reasonable price for fuel-efficient cars. Technological Technological factor plays an important role in automotive industry because consumers always demand for better and higher quality technologies in their cars so that the technologies can help consumers to save petrol, bring greater convenience to them, and ensure their safety (Hage, 2011). Based on the case study, Volvo took the first step as the pioneers of the safety cage, crumble zones, side-impact protection, antilock brakes, whiplash protection, and airbags. As the first mover, Volvo is able to 3 BK 3037 Strategic Marketing enjoy great profits before their competitors come out with the similar technologies but with lower prices or better quality (Aswathappa, 2005). Hence, Volvo would have to invest heavier in R&D to develop innovative technologies that create the safest most exciting car experience to customers. Additionally, Volvo also needs to invest in R&D for fuel-efficient cars as it is the current of the market. If Volvo fails to produce hybrid or fuel-efficient cars with a reasonable price, they will lose market share due to competitors are offering customers with the demanded products (fuel-efficient cars) (Schwartz, et al. , 2010). Heavy R&D is required from Volvo and at the same time they cannot charge higher prices, and hence, the profit margin of Volvo will be smaller. 4 BK 3037 Strategic Marketing Question 2: Five Forces framework Answer: Five Forces framework included the bargaining power of supplier and buyer, threat of substitute, threat of new entrants and power of rivalry. Any changes from any of the forces will bring huge impact to an industry. As the world is going to global, competition arise and it make the five forces framework even more competitive and it affect the global automobile market directly. Bargaining power of buyer Bargaining power of buyer are referring to the negotiation power or influencing power of the buyers toward the prices charge by a company (Jones and Hill, 2010), the buyer of the automobile company may refer to the end user of the automobile. As year by year, there are more and more new players joining the market of automobile. One of the reason contributes to high bargaining power of buyer is low switching (Jones and Hill, 2010). As times past, there are more and more players join to the automobile industry. For example, U. S’s automobile market shares which used to dominate by the Big Three (Ford Motor Company (Ford), General Motors Corporation (GM) and DaimlerChrysler (DC)) had been taken over by foreign brands such as Honda, Toyota and Mitsubishi in 2005 (Gopal, n. d. ). Hence, this provides larger range of choices for the consumers and this makes the buyers have high bargaining power toward the industry. Since there are more choices in the market, consumers’ dependency toward the particular brands will decrease, as the product does not fulfil the customers’ expectation, they might switch to another brand with low or even non switching cost. For example, as according to research, the sale of new car in U. S market has increase, as people are willing to pay for better quality cars (Gopal, n. d. ). The world now is moving to the environmental friendly site, thus, most of the automobile firms are facing challenge by switching their focus from big car, large engine to fuel-efficient engine. Beside, due to the availability of information, buyers nowadays are more educated and they are very concerning about the effect of the automobile to the environment and this has relatively increase their bargaining power as buyer. For example, there are more than 100 type of motor magazine in the market 5 BK 3037 Strategic Marketing which provides reliable and sufficient information for consumers (Gopal, n. d). Since the switching cost of the buyers is low due to the fierce competition, buyers’ brand loyalties have decrease. Bargaining power of supplier Bargaining power of supplier is referring to the negotiation power of the supplier for the business which may include supplier of human resource, supplier of raw material, and other outsourcing partners (Jones and Hill, 2010). For the auto component supply industry, the bargaining powers of suppliers are relatively low, as there are many available suppliers of raw materials in the market, the switching cost of the cars manufacturer to other suppliers are low or even none. For example, large automobile manufacturers such as GM, Ford and Toyota have strong bargaining power as they always purchase the raw material in large quantities (Jones and Hill, 2010). The sizes of auto components are typically small (Ahmadjian and Lincoln, 1997), meanwhile the big players are able to use the threat of manufacturing a component themselves rather than buying it from auto component suppliers to played off suppliers against each other, forcing them to lower down the price and increase the quality (Ahmadjian and Lincoln, 1997). Hence, we can say that the bargaining powers of auto component suppliers are relatively low. Unlike air line industry, which the air line are highly depend toward the suppliers, automobile manufacturers such as Toyota, Honda or Volvo, it has own research and development department (R&D) which helps in exploring all the latest technology. It contributes in lowering down the dependency toward the suppliers as suppliers merely involve in supplying raw material instead of important technologies as like Boeing (air plane manufacturer) and other air line. Hence, in short, the bargaining powers of suppliers are relative low as the low dependency toward the suppliers and the threat of switching to other suppliers always work as a strong bargaining tool for the automobile manufacturers. Threat of Substitution This refers to the product of different businesses or industry that can satisfy similar customer needs (Jones and Hill, 2010). For automobile industry, due to the increasing 6 BK 3037 Strategic Marketing number of public transport and other way of transportation, the demand toward automobile has gone down. For example, as according to research, nowadays people might choose to take public transport as their daily transport instead of own private car due to cost and environmental issues (Eboli and Mazzulla, 2008). Beside as government is placing pressure toward the environmental issue, public transports are being well develop day by day (Eboli and Mazzulla, 2008), and it actually decrease the dependency of owing a private car. In addition, as the social-culture has changed, people nowadays are reluctant to give birth and hence it decreases the willingness of consumer to own a car. As according to research, the birth rate of developed countries such as Japan, Korea and State are relatively low and it actually affected the several industries and this included automobile industry (Powell and Hendricks, 2009). In this case we can justify that only small part of the automobile industry are highly affected by the substitution, however, for those luxury brands such as Volvo, BMW or Audi, their target markets are hardly affect by the improvement toward the public transport (Svensson and Wagner, 2011). In short, the threat of substitution toward the automobile industry is not high as it merely affected those below middle-income. Threat of New entrant New entrant may refer to potential competitors that are not currently competing in an industry but have the capability to do so if they choose so (Jones and Hill, 2010). As refer back to the case, the automobile industry has facing increasing deregulation; this had broken down the entry barrier for new entrance. For example, Volvo needs to compete with not only the local market players but also the Asia market player such as Toyota since there entry barrier of foreign brands to the local market had been broken down. As more new entrance coming into the market, the switching cost of the consumer from one brand to another brand is even lower than before (Che and Seethu, 2008). Hence, there deregulation may affect partly of the industry but not whole. Firstly, setting up a new automobile manufacturing company requires huge capital injection which decreases the willingness of new player to enter the industry. This may due to the high risk of huge capital injection and hence potential companies dare not to grab the opportunity. Beside there are already few strong players in the automobile manufacturer industry such as GM, Ford, Toyota and Honda, which have 7 BK 3037 Strategic Marketing already gain certain economic of scale in term of buying large quantity of auto components (Xia and Tang, 2011), and this had build barrier of entry for potential players. In short, the threat of new entrant is low as it is high risk business. Rivalry among established companies It refers to the current struggle between companies in an industry to gain market share from each other (Jones and Hill, 2010). For automobile industry, the rivalry is intensified due to the high exit cost and the industry demand. As mentioned earlier, the set up cost of an automobile manufacturer is relatively high and hence this has created exit barrier. Hence, even the business of an automobile manufacturer is bad; it will still lock into the industry where overall demand is static or declining (Jones and Hill, 2010). For example, GM, had struggled in the industry for more than 8 years due to declined sale, because of the high exit cost, it had been locked within the industry (Terlep, 2011). Besides, the declining demand from customers as mentioned earlier had contributed to intensify the rivalry as well. As consumers are reluctant to buy a new car due to environmental issue or declining birthrate, it actually forcing the automobile manufacturers to play off against each other for larger market shares (Eboli and Mazzulla, 2008). Hence, we can conclude that the rivalry among the established companies of automobile industry is intensified due to the declining demand and high exit cost. 8 BK 3037 Strategic Marketing Question 3: Answer: There are many different brands of vehicles. As to stand with one foot crossed in front of the other competitors, Volvo has adopted the focused differentiation strategy (Dinitzen, 2010). A focused differentiation strategy is aimed at a niche group of customers with unique tastes (Schermerhorn, 2010). The cars produced by Volvo are targeted at a niche market of safety conscious upscale families. These upscale buyers of Volvo are those who value Volvo's reputation for durability, and are willing to pay high dollars for this Swedish brand of luxury. Volvo has differentiated their cars by adding additional features that are not available on other cars. Their cars are known as extremely safe cars for families due to the design, which its innovation in car safety enhancements, being pioneers of the safety cage, crumble zones, side-impact protection, antilock brakes, whiplash protection, and airbags, as stated in the case. One primary means of differentiating Volvo’s cars is through its research and development department to produce cars model that exude quality, performance and safety which emphasize on creating luxury automotive brand for family sector. This can be seen from the case that the model of XC90 is well-designed with a large SUV and the price range from ? 33,000 to ? 54,000. However, Volvo continually develops and adds new features that increase values to customers. Some recent innovation of Volvo’s that differentiates their products is Volvo’s sporty hatchback S30 which the engine and brake system of the S30 is designed differently from any compact executive hatch class cars in existence and is destined to compete against high-end versions of VW’s Golf. This shows Volvo attempted to broaden their target market by attracting younger drivers to their car marque (The Sydney Morning Herald, 2007) and Volvo sees their future as delivering safe, premium and exciting driving suitable for families. At the same time, Volvo has reached a level of maturity, by providing a better balance between sportiness and comfort, and also achieved high level of safety. Besides using focus differentiation strategy, Volvo should use differentiation strategy with a little of expansion strategy. A differentiation strategy depends on developing resources that set the company’s offer apart in a way that is meaningful and difficult 9 BK 3037 Strategic Marketing to duplicate (Lowy and Hood, 2004). This can be achieved through keeping ahead of competition, satisfying customer’s wants and also expectations better than business rivals (Moynihan and Titley, 2001). Volvo’s cars consist of those attractive features which meet customers' exact demands in terms of passenger comfort, driving safety and total economy. This enables Volvo to sell their cars at a premium price and satisfy the unique needs or preferences of customers (Hills and Jones, 2007). Furthermore, people are becoming more conscious about what they are buying, and are more environmentally and safety conscious too in today’s trends (Aarts, 2010). This means that quality work is a crucial part of all areas in their global organisation from product development and design to purchasing, manufacturing, sales and service. Therefore, Volvo should expand their products and focus on product innovation that developing product features that customer value to prevent eroding the current market and increase overall sales and profits (Hunt, 2003). This is to ensure that in case the existing market for the type of product that Volvo offers is already saturated and there are convenient ties to other product types. This strategy helps reduce overall business risk by offering products in a variety of customer categories. With this, Volvo may build up a brand name that evokes the feeling of safety and luxury in an expanding market base. The uniqueness of Volvo may insulate the company from competitive rivalry and reduce customer sensitivity toward price increases. Consequently, these will increasingly affluent public and they will become more famous and trusting of automotive industry. 10 BK 3037 Strategic Marketing Reference List Aarts, L. (2010) Feeding People. United Kingdom: Academy Press. Aswathappa, A. (2005) International Business. nd ed. New Delhi: Tata McGraw-Hill Education. Baumol, W. J. and Blinder, A. S. (2011) Economics: Principles and Policy. 12th eds. Ohio: Cengage Learning. Bernon, M. , Rossi, S. and Cullen, J. 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