International Business of Volvo Group - Case Study Example

Your name: Course name: Professors’ name: Date Table of Contents Your name: 1 Course name: 1 Professors’ name: 1 Date 1 Chapter 1 3 Introduction 3 Research background 3 Statement of the problem 5 Chapter 2 6 Volvo’s role in the global pattern of trade 6 Volvo’s comparative and competitive advantages 8 Impact of new trade theory on Volvo 11 Chapter 3 12 Volvo’s Internationalisation 12 Culture, legal and economic systems effect on Volvo’s operations 14 Chapter 4 16 Analysis 16 Chapter 5 17 Recommendations and conclusion 17 References 18 Chapter 1 Introduction Globalization commenced in the late 21st century and has given an opportunity for organizations and businesses to become internationalized. Many organizations have spread their wings to capture customers of far-flung markets. Capturing a huge market share results to organizations reaping more profits. For the organizations to be internationalised, they need to follow a certain process. This process will ensure the internationalization process is effective and manageable. Lack of an effective process in the internationalization can lead to massive losses. When an organization ventures into a new country, they have to study the market first to ensure that their products and services will be competitive in the market. There are various forces that drives internationalization. These forces are either internal forces or external forces. In this report, factors that affect internationalization of organizations will be critically analysed. In the research, we will consider the internationalization process of the Volvo Group. The report will capture the role of the company in the global trade and how they gain a completive advantage among their rivals in the market. The impact of the new trade theory on the Volvo Group will be analysed and how that reflects on their growth. Ultimately the process of internationalization of the Volvo organization will be discussed, and the various success factors associated with the organization. The report will also discuss the effects of the external market on the operations of the company. On this light, the report will concentrate on the legal, economic and cultural factors that affect Volvo’s operations. Research background With the increased trend in globalization, countries, organizations and individuals are getting closer and closer with each other. The distance are shorted by the advanced communication systems due to technology. There is a massive flow of information, commodities, capital and knowledge throughout the world. With increased globalization, there’s increased interdependency among countries, organizations and individuals. In today’s world, no individual or organization can work alone and remain sustainable in the market. Therefore, many organizations have embraced the concepts of internationalization. To be precise, almost all firms are striving to capture the foreign market through the process of internationalization. With internationalization, organizations increase their market share. With increased market share, organizations increase their revenues. Therefore, internationalization has been defined as a process of increasing an organizational participation in the international operation. On this light, organizations starts small in their domestic market. With time, the organization focuses on a strategy to incorporate their operations in other countries that are close by. The process of internationalization is gradual and takes a considerable period. However, there is a misconception that an organization will increase their profitability when they enter into other countries. This is not the case; the profitability will arise when a company employs an effective process of internationalization. There are various factors that affect this process, and for a company to be competitive in a foreign venture, the internationalization process must be effective. Companies can either follow either the downstream or upstream approach during the internationalization process. Following the upstream approach, the organization acquires international experience via import activities that are related to production. In the downstream approach, an organization can internalise by either adopting a reactive response (internationalism induced by a foreign organization) or proactively through ethnic links. In this research, the case of Volvo Group will be employed for empirical analysis. Statement of the problem According to findings of research by (Zineldin 2007; Hutzschenreuter 2009), firms can improve their profitability by entering into international markets through expansion. As most organizations are eager to be internationalized to cope with the increased competition, they must ensure that they manage all the factors that affect this process. The research problem will be to know the various issues confronting Volvo Group in their internationalization process. Therefore, the objective of this report will be to know the factors behind the process of internationalization of Volvo Group. What factors motivated the firm to embark on the internationalization process? Chapter 2 Volvo’s role in the global pattern of trade Volvo automobile is a Swedish firm founded in 1927. In 1935, the company was introduced to the Swedish stock exchange and share were available for buying. Volvo is among the leading manufacturers of automobiles in the world. Volvo has a diversified customer base in Europe, America and Asia. However, its main market is Sweden and the US. Volvo group is reputable for its industrial structure with the manufacturing, distribution and sales throughout the world. The company has 67 factories spread over 18 countries. The firm has 95,533 employees on a permanent basis and 14,794 employees on a temporary basis according to the firm statistics at the end of 2013. The firm has more than 185 markets; it sells over 300,000 buses, trucks, and construction machines every year via independent and wholly-owned dealerships (Volvo Group 2014). From the above, we can find that Volvo is highly involved in the global trade. With the increased competition in the automobile manufacturing industry, Volvo announced a strategy that will lead to its acquisition by Zhejiang Holding Group in early 2010. Volvo invested over $10 billion in investments with the Chinese company. Volvo opened a new manufacturing firm in the city of Chengdu in 2013. Volvo employed this strategy to gain the market of the massive population in China. China is continuously developing, and construction industry is on the high rise. Volvo took this strategy, to gain a larger market share in China. Though, at the moment Volvo has little presence in the region, the firm intends to sell more than 200,000 vehicles and construction machines in the region by 2015. The firm also in its internationalization strategy intends to expand in China by initiating more dealerships in the region by the end of next year. The reason Volvo chose Chengdu which is on the Southwest region of China is because Geely has a factory established there. Having their location close to Geely, they can share manufacturing services such as logistics and infrastructure. Volvo has its largest market in Europe. The European market accounted for approximately SEK 112 billion in 2012; corresponding to about 37% of the Group’s net sales (Volvo Group 2014). From the inception of the company, Europe has been its major market. The company has well-developed industrial structure that enables it to have a large share in the manufacturing and exports. However, in 2012 their sales reduced substantially by 9%. Markets in the Southern part of Europe weakened during that year and spread to the other regions (Volvo Group 2014). However, the Germany market remain strong as compared to the UK and the Scandinavia. The Russian market remained strong even with the recession. However, in 2013 European market become more stable, and more sales were made. The construction market remained to grow even with the challenges of a global market. Volvo construction machinery have been in demand throughout Europe. The demand is expected to rise in other continents and regions (World Trade Organisation 2014). The demand for construction machinery has increased in China and most of Africa. Africa being a developing country requires more machinery in construction and transportation industries. With the changing dynamics in the global market, companies are striving to have a competitive advantage among their rivals. The manufacturing industry is filled with many entrants, and a lot of companies are exploring this field. According to study by Hutzschenreuter (2009, pg.62), companies are investing a lot in infrastructure and human resources so that they can gain a competitive advantage among their rivals. Due to the increased competition prices have become competitive. With competitive prices buyers have gained a higher bargaining power with reference to the sellers. On this light, Volvo has introduced trucks and other automobiles that are competitively priced in order to gain an advantage over their rivals (Verbeke 2013, pg.177). This has worked very well in the African markets where prices are a major purchasing factor. With this strategy, Volvo group has managed to enter the African market competitively. On January 2013, the firm introduced a new concept in their organization for its marketing and sales of its trucks in Europe, Middle East and Africa (EMEA). This strategy aims to capitalise on the opportunities in the region for the firm to effectively market and sale their products and brands. This strategy also aims at increasing Volvo’s operating margin worldwide by approximately 3 % points (Volvo Group 2014). Employing smart networks in their internationalization process, the firm can effectively capitalise on their brand while continuously improving their operations and customer satisfaction. Volvo’s comparative and competitive advantages With increased competition, it is imperative for organizations to gain a competitive advantage over their rivals. A competitive advantage can be gained through various means. Most of the firms gain a competitive advantage by either improving on their quality or reducing their prices so as to offer competitive prices. The factors that drive customers to buy products and services of a particular firms are the ones that enable the firm gain a competitive advantage. Better resources such as infrastructure gain a firm a competitive advantage. If the company invests in its human resources, they will ultimately gain a competitive advantage. Gounder & Prasad (2011, pg.57) contend that, realizing a competitive advantage is the best way a firm can employ to maximize its welfare. In analysing the competitiveness of the Volvo Group, we will apply SWOT analysis. Strengths, weaknesses, opportunities and threats of the firm will help us determine the competitiveness of the firm with respect to its rivals. Strengths Volvo’s comparative advantage is in its specialization in producing trucks, construction equipment, marine and industrial engines. Volvo has invested a lot in manufacturing trucks that are employed in various specialised fields. Their trucks are employed in the construction industries to transport materials. Due to the enhanced safety of their products, Volvo trucks and machinery are been employed in the defence and marine. Capturing this markets gives them a competitive advantage over their rivals. Volvo’s competitive advantage is in its low-cost production model and quality products reputation. To capture markets especially in Africa and parts of Asia, Volvo has developed brands that are competitively priced. Volvo invests a lot on technology so as to manufacture vehicles and machinery that are safe on both the driving and the environment. Most governments advocate safety on all cars that operate within their countries. On this light, Volvo cars are extensively used by different departments and ministries of various countries. Having been in the market for quite a long time, people have reputed the firm for is long lasting automobiles and machineries. Volvo has more than 2400 dealer globally. The firm is also available in 120 countries globally (Volvo Group 2014). This gives them a wider market to market their products and brands. The whole point of internationalization is increasing the market share. Volvo Group has continuously been increasing their market share throughout the world by venturing into new markets. The company invests a lot of resources in research and development. With increased technology research on the new technology is paramount. People are embracing new technology in all aspects of their life. Volvo with its advanced technology has invested a lot of resources in hybrid vehicles that are environmental friendly. They have manufactured city buses that operate on electricity. Clean energy forms part of a global initiative and encouraged globally. This gives Volvo a competitive advantage when transportation is concerned. The firm prides of more than 90 years’ experience in the automobile manufacturing field. Been in the industry for so long, they have a competitive advantage over some of their rivals as they are familiar with the dynamics of the industry. Over the years, the firm has achieved expertise in the manufacturing industry with the aim of producing automobiles that are both safe and environmental friendly. Safety of their products and their brand is their core competence. This has led to them gaining a competitive advantage among other players in the industry. Weaknesses The company does not have a dynamic management to propel its strategies effectively. Therefore, there has not been improvements and innovation in some of their products. There has been a slump in the sales of their bi-fuel cars. To gain a competitive advantage, the firm through its strategy is aiming at improving their management and extending their flexi-fuel cars to other geographic markets so as to capture more customers. Opportunities The firm anticipates future growth for its business due to their new business in India and China. They forecast sales of approximately 10,000 yearly in China. Penetration in other markets of Africa, Europe and America will gain them a competitive advantage. Threats A firm succeeds well if it analyses all its threats well and develop a mechanism to manage the new entrants. Toyota has taken up the market mostly in Asia and Africa. This is because of their handling, reliability and value for money. Volvo, on the other hand, concentrates much on safety and quality. In African and Asian markets, economy plays a vital role when purchasing an automobile and more often than not, buyers will go for cheap vehicles. Volvo has embarked on manufacturing trucks and vehicles that are relatively cheap. Adding to the quality and safety of Volvo products, more people are likely to purchase their products. This will give them a competitive advantage. Impact of new trade theory on Volvo According to the new trade theory, a firm’s output expands with specialisation, realisation of economies of scale, reduction of costs and implementation of research and development (Reinert, Rajan, Glass, & Davis 2009, pg. 107). Volvo’s activities mirror these aspects of new trade theory. Volvo has specialized in manufacturing of heavy trucks and equipment to produce at low cost. On this light, Volvo Group despite having a decline in truck market sales this year by 14 %, they have decided to invest in the renewal of their local truck lines 30 years since it commenced operations in Brazil (Volvo Group 2014). The trucks will be cost effective to both the buyer and the manufacturer. Among the new trucks will be the FM and FH heavy cargo models and al so the FMX off-road model to be employed at remote locations. The new generation of FH trucks was launched to the major markets of Europe in 2013. The advanced technology of the FH Volvo trucks creates a platform that will strengthen the competitiveness of the firm (Volvo Group 2014). United Nations Conference on Trade and Development (UNCTAD) is United Nations’ body responsible for dealing with international trade as the main driver of development in the world. UNCTAD (2014) offers a forum for discussion of appropriate policy framework that can be adopted to enhance trade between countries for development. In a global market, different organization must coexist so as to compete effectively in the market. With increased competition, organization must embark on international trade so as to gain a competitive advantage. Study by Zhang, Jacobs, & Witteloostuijin (2007, pg.52) asserts that FDI is a critical factor in international trade and business expansion. Chapter 3 Volvo’s Internationalisation The internationalization process of Volvo Group started on 1928 when it acquired market knowledge and established its first subsidiary in Finland. The subsidiary saw them sell 20 cars in the Finland market. To gain relevant market knowledge through export, the firm established representatives in Denmark and Norway. They also established representatives to less industrialised countries including Brazil, Argentina, Portugal and Spain. They had challenges in penetrating the market due to dealer’s problems, but they managed. In 1932, Volvo was already making profits with an impressive output of 900 cars yearly. The firm started making buses in 1934. However, during the Second World War they concentrated on trucks due to the high market demand. By the end of 1930s, the group had directed its exports to Belgium, Holland and some markets in South America and Mediterranean. Due to a scarcity of resources after the Second World War, the firm directed most of its exports to Argentina and Brazil. The firm introduced its cars to the American market. In fact, the firm made no attempt to sell their product to the large European market until 50s, because of tough competition in the region. In the 1950s, Volvo started selling subsidiaries in the USA and most of the European countries. At this moment, Volvo Group made a commitment to internationalization. After this embankment, Volvo’s total exports increased exponentially. Data of Volvo’s exports (1949-1958) year No of units exported Increase in exports Base year (1949) % Increase in exports base (1949) 1949 28217 28217 0,3 1950 46076 17859 0,2 1951 74969 48752 0,5 1952 80249 52032 0,5 1953 69350 41133 0,4 1954 102387 7417 0,7 1955 141034 112817 1,1 1956 218741 190524 1,9 1957 253837 22562 2,3 1958 312300 284083 2,8 Most of the exports went to America and the rest to other European countries including Finland and Denmark. In 1958, Volvo reached an agreement with a company in London to sell its cars the UK. Volvo started working in England in 1961. After a while, the firm had enough resources to move its production to Sweden. In 1964, Volvo started production in Canada and Sweden. In the 70s, they opened up new plants in Australia and Malaysia. In 1973, Volvo became the first European car manufacturer to have a manufacturing plant in USA. In 1973, Volvo had a turnover of approximately SDK 700 million. The high turnover was attributed to the growth in export markets. Between 1973 and 1978, Volvo had captured markets in Africa, Asia and America. Nigeria, Japan and Australia were the major markets within the above areas. The profits of the firm fall steeply in the European market between 1986 and 1995 due to the increased competition in the region. In 1990 Volvo planned a merger with Renault so that they could reap more economies of scale. However, the merger was abandoned in 1993. Since 1991, the luxury segment of Volvo was owned by Ford Company. In 2002, Volvo increased sells of their cars. The market in China increased by 28% and Russia by 69 %. However, there were a decline in the German market due to the weak economy in the region. With the increased competition in the automobile manufacturing industry, Volvo announced a strategy that will lead to its acquisition by Zhejiang Holding Group in early 2010 (Volvo Group 2014). Volvo invested over $10 billion in investments with the Chinese company. Volvo opened a new manufacturing firm in the city of Chengdu in 2013. From the above analysis, Volvo cars can be purchased at almost every corner of the world. Culture, legal and economic systems effect on Volvo’s operations The macro environment gives a picture of how the changes in the external environment affect the performance of the firm. These are the factors that are outside the organization of which the organization cannot change. The organization has to study and abide by the external environment factors so that they have smooth operations especially when in a new country. Economic factors According to Welch, Benito, & Peterson (2008), organizations should venture into countries where they view their products will be accepted and competitive with regard to the economy of that country. The transportation industry is affected mostly by the fuel prices. The alarming rise in the fuel prices has affected negatively the automotive industry. Due to the increased oil prices, customers are forced to choose fuel efficient cars that are economical on the roads. Therefore, luxury vehicles are mostly left for the elite class. Reduction in demand of luxury vehicles has led to decreased sales by the firm. The sale of automobiles and related machinery is affected by the economy of a particular country. Some countries have a stable economy while others have a weak one due to certain factors such as war. More sales are recorded in countries that have economic stability as compared to those that have weak ones. Legal factors Trebilcock, Howse, & Eliason (2013, pg.79), emphasize for the need of firms to study the cultures of their customers in order to gain a competitive advantage. Due to certain laws that are aimed at protecting the environment, the automotive firms are encouraged to manufacture vehicles that are environmental friendly. Due to certain environmental protection acts, passed by legislation, preferences have shifted, and more people are choosing eco-friendly vehicles. People are seeking for more eco-friendly, reliable and fuel efficient vehicles as the government is levying more taxes on vehicles that emit a lot of carbon to the atmosphere. Some governments are giving incentives for those people choosing fuel efficient vehicles. Volvo introduction of the hybrid and flexi-fuel vehicles did not show a remarkable change on the profits. Culture Study by Zineldin (2007, 372) emphasizes the need for automotive firms to consider cultural gaps in international markets and devise strategies of bridging them. Culture mostly affect the preference of the customers in purchasing vehicles. In Europe, there is a decline in the size and number of people in a family. His has led to the downward performance of family vehicles. The shift of customer’s preference from the luxury vehicles to small cars due to the rise in the fuel prices has affected the firm negatively. The government legislations of large cars and fuel-efficient vehicles affect the buying culture in some countries. Therefore, the market segmentation of Volvo is affected negatively, and it is not effective for sales growth. Chapter 4 Analysis From the above research, internationalization is a gradual and slow process. Organization pass through different stages during the process of internationalization. From sporadic export to sales via local agent, then establishing subsidiaries and later manufacturing plants. Market knowledge and research enable the organization to adopt the internationalization process effectively. Volvo group from its inception in the market has been keen on the internationalization process. They formed collaborations with subsidiaries in other countries so as to study the market and analyse the exports. Later, they moved in and built manufacturing plants in those countries. We have found that the internationalization process is affected by both internal and external factors. Therefore, organizations need to study these factors so that they can venture in other countries and adopt to different situations smoothly. With increased competition, it is imperative for organizations to gain a competitive advantage over their rivals. A competitive advantage can be gained through various means. Volvo has been in the industry for a long time and have vast experience in manufacturing automobiles. The firm should ensure they have a dynamic management to cope with the demands of today’s world. Volvo produces in 19 countries and sells in more than 190 markets. This expansive presence obviously exposes the firm to different cultures, legal regimes and economic systems that impact its operations and strategies. Volvo has to study this external factors so that they can manage their operations and remain sustainable in the future. Chapter 5 Recommendations and conclusion More research should be done on the effect legislation on the internationalization of companies. On this light, effects of the new campaign for hybrid and fuel effective vehicles should be carefully researched on so as to come up with strategies that can effectively assist organizations as they venture in other countries. This report talks more on the internal and external factors that affect the internationalization process; more research should be done to find other factors that affect the process. In the chosen case, Volvo internationalization process was and is still affected by internal and external factors of the firm. Therefore, firms should analyse these factors as they venture into new countries. References Gounder, N., & Prasad, B., 2011. Regional trade agreements and the new theory of trade: Implications for trade policy in Pacific Island countries. Journal of International Trade Law and Policy , 10 (1), pp.49-63. Hutzschenreuter, T., 2009. Temporal and Geographical Patterns of Internationalization: An Exploratory Analysis. Multinational Business Review , 17 (4), pp.45-76. Reinert, K., Rajan, R., Glass, A., & Davis, L., 2009. The Princeton Encyclopedia of the World Economy (Vol. 1). Princeton University Press. Trebilcock, M., Howse, R., & Eliason, A., 2013. The Regulation of International Trade. Routledge. UNCTAD., 2014. UNCTAD. [online] Available at: UNCTAD: http://unctad.org/en/pages/DITC/DITC.aspx [Accessed: 22 September 2014] Verbeke, A.,2013. International Business Strategy (2 ed.). Cambridge University Press. Volvo Group. 2014. About Us: Volvo Group Global. [online] Available at: Volvo Group: http://www.volvogroup.com/GROUP/GLOBAL/EN-GB/VOLVO%20GROUP/Pages/aboutus.aspx [Accessed 31st October 2014] Welch, L., Benito, G., & Peterson, B., 2008. Foreign Operation Methods: Theory, Analysis, Strategy. Edward Elgar Publishing. World Trade Organisation. 2014. Who we are: WTO. [online] Available at: WTO: http://www.wto.org/english/thewto_e/whatis_e/who_we_are_e.htm [Accessed 31st October 2014] Zhang, J., Jacobs, J., & Witteloostuijin, A., 2007. Multinational Enterprises, Foreign Direct Investment and Trade in China: the Chain of Causalty in 1980-2003. Journal of Asia Business Studies , 2 (1), pp.48-57. Zineldin, M., 2007. International business relationship and entry modes: A case of Swedish automotive industry Scania and Volvo in Mexico. Cross Cultural Management: An International Journal , 14 (4), pp.365-386. Read More