The Internationalization of Firms
-------------The Case of Volvo
BA International Business Y3
ZHAO Zhuoyun
M00279786
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Content
Brief Introduction
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Context
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Part 1 Global Expansion to Automobile Market
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1.1 Internationalization Processes: From Western-Europe to US
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1.2 Development and Innovation of Automobile Products
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1.3 Achievements of Internationalization
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Part 2 Diversification to other Industries
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2.1 FDI to South Korean Heavy Industry
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-Why South Korean?
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-Why FDI
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- Achievement
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2.2 Soft products Diversified
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Conclusion
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References
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The internationalization of the firm ------- Case of Volvo
Brief Introduction of the Whole Report
The widespread orientation of multinational enterprises has given rise to many
research studies and articles on varies fields of the international strategies of firms.
Many firms, however, begin to operate internationally when they are still in small
scale and gradually develop their operations and implement their international
planning abroad. The gradual internationalization, rather than grandiose foreign
investments, is characteristics of the process internationalization of many firms.
The Swedish automobile company Volvo was established in 1926 and competed
aggressively in foreign market in 2009(Volvo club, 2009). Quality, safety, and
environmental protection are the entire Volvo Group's common values (Volvo, 2009).
The whole report will focus on the internationalization of Volvo and its product
diversification which are supported by three aspects of internationalization theories:
economic, learning and network theories. The development of the firm, which is the
body of the report, will be briefly divided into two stages: expansion in global
automobile market and diversification to other related industries, which helped Volvo
achieved internationalization.
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1. Global Expansion of Automobile Industry
The term internationalization usually refers to either an attitude of the firm towards
foreign activities or to the actual carrying out of activities abroad (Johanson and Finn
Wiedersheim-Paul, 1975, P305). The process of internationalization is driven by
market knowledge, which can be defined as the experiential knowledge of firms and
country specific and can be only gained by experiencing (Jeryl Whitelock, 2002).
Because of lack of knowledge and resources of the foreign markets, many firms start
to export to neighboring countries or countries that are comparatively well-known and
similar with the regard to business practices (Johanson and Finn Wiedersheim-Paul,
1975).
1.1 Internationalization Processes: From Western-Europe to US
The Uppsala Model, which focus on the concepts of learning and knowledge, gave
us a potent explanation of how firms considering different steps of developing the
operations in individual countries (Jan Johanson and Fan-Erik Vahle, 1997).
There
are mainly four different stages: (Johanson and Finn Wiedersheim-Paul, 1975)
(1) No regular export means that the firm has little market knowledge or resource in
any target countries, so it does business in domestic market. Like the first two years of
Volvo, it produced cars and trucks as well only in Sweden and did not start its
exporting and selling until the end of 1928. (Johanson and Finn Wiedersheim-Paul,
1975, P313)
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(2) The second stage - export via sales agent - is implemented when the firm has
fairly regular information of sales influencing factors and has a reasonable channel to
the market (Johanson and Finn Wiedersheim-Paul, 1975).
Volvo established new representatives in neighboring markets – Denmark and Norway,
and in other countries, such as Argentina, Brazil, Spain and Portugal (Johanson and
Finn Wiedersheim-Paul, 1975, P 314). In this period, market knowledge is limited
with a certain commitment to the market.
(3) The third stage is using sales subsidiary, occurred when there is a controlling
channel to the market and provides the ability of information flowing from market to
the company, which is psychic distance. As Johanson and Vahlne explained, firms
expand first into the market which is physically closed and then into more distant
markets as their knowledge developed (Johanson and Vahlne, 1977). With more
market knowledge, changes of firm’s decision and activities lead the firm get more
market commitment (Beckermann, W. 1956).
From 1950s, Volvo started selling subsidiaries in large European countries, USA, and
Canada. In USA, it had an agent for part of the market before establishing a
subsidiary for the other part. So the situation in the market is that an agency and a
subsidiary were used side by side, which was not normal in most MNEs (Johanson
and Finn Wiedersheim-Paul, 1975).
(4) The final stage, which is production unit abroad, means a more direct experience
of resource influencing factors to a still larger market commitment (Johanson and
Finn, 1975).
In the case of Volvo, main of its manufacturing facilities were built in Sweden, China,
and Belgium nowadays (Volvo, 2009). In addition, it created joint-venture in India
with Eicher Motors in 2008 (India Automobile, 2008).
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2.2 Development and Innovation of Automobile Products
The internationalization strategy made by most MNEs is not only local expansion to
worldwide, but also develop more new products to satisfy more customer needs. A
new product progresses through a sequence of stages from introduction to growth,
maturity, and decline which is known as the product life cycle and is associated with
changes in the marketing situation, thus impacting the marketing strategy and the
marketing mix. There are four stages that every product moves: market introduction,
growth, mature and decline stage (Gorchels, L, 2000).
(1) In introduction stage, the firm seeks to build new product and develop a market
for it. Product branding and quality level is established and price may be high. In the
year of 1927, the first series-manufactured Volvo car, the Volvo ÖV4, became a
sensation in Sweden because it was constructed to better withstand the harsh Swedish
climate; it has an absolute competitive advantage in that period (Volvo club, 2009).
However, because of its slow sales to start, limited customer need, there is no profit
basically.
(2) When the product enters into growth stage, the firm seeks to earn more market
share and product quality and additional features are added. Price in this stage is
lower than before, because of the lower cost of production and more competition
(Quick MBA, 2007). In 1929, a six-cylinder PV651 model was introduced with both
larger and wider of size than normal cars earned a high opinion in European countries.
After the expansion largely in large European countries, Volvo’s production reached
10,000 in May 1932 and the economic of scale made the company low the cost of
production and profitability began to rise. At that time, the strongest competitor in the
same market is another automobile company named Jakob. The increasing
competition between them made the price of automobile lower than before (Volvo
Club, 2009).
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(3) At maturity, there is strong growth in sales diminishes. Competition may appear
with similar products. The primary objective at this point is to defend market share
while maximizing profit. PV444 is Volvo’s first "true" small car. Its stylish design
combined American flair with European size and it was a definitely success which
also gain Volvo a slice of the important US market during the 1950’s. New features,
safety and accident protection were explored and added into new model of Volvo,
which provided competitive advantage in most market. Feature diversification is
emphasized to increase market share. By 1964, Volvo opened a new production plant
in Torslanda, Sweden, the yearly capable of producing was up to 200,000 cars.
(Volvo club, 2009).
(4) In the decline stage, productions are undifferentiated and competition is only on
price. Sales volume declined or stabilized and profitability becomes more a challenge
of production efficiency than increased sales. Firms begin to find more beneficial
ways and strategy to continue its profitability statue. The most familiar strategy is
product-mix and market diversification (Levitt, T.1965). After 1970s, Volvo
concentrated on the traditional values of safety, environmental care with sporty,
elegant and exciting design and engineering. The complex market situation and less
profit paved the way for Volvo’s new dynamic product strategy which benefits it into
different fields of industries and will be discussed more in next section.
1.3 Achievements of Internationalization
Today, the group has about 100,000 employees, production facilities in 19 countries,
and sales activities in some 180 countries (Volvo, 2009). Johanson and Mattson
explained this internationalization process as gradual learning and internationalization
of market knowledge through interaction with networks. The flexibility running
between different networks is highly based on high level of trust and commitment.
From the unwilling firm to finally experienced firm, Volvo changes its
internationalization pattern by more commitment of the firm and less control
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(Innovation Model of internationalization) (Johanson and Mattson, 1988). From
2006, Volvo achieved large expansion of internationalization and built core
information systems of communication approach from unit to unit. The lower cost of
adjustment and knowledge development is the result of high degree of
internationalization of both firm and network (Volvo, 2009). In 2008, Net sales have
reached SEK 304bn, and Profit for the year amounted to SEK 10,016m.
(Annual Report of Volvo, 2008)
From neighboring countries to large European markets, then to North American areas,
Volvo developed in great processes of internationalization which brought it to be the
largest Sweden industry manufacturing corporation and led it into deeper
development of diversification.
2. Diversification to other industries
2.1 FDI to South Korean Heavy Industry
One of the most significant activities made by Volvo is its foreign direct investment to
South Korea in February 1998 (Nicholas. A. Phelps, 2007)
- Why was South Korea?
According to the Porter’s stages of development, Korea, with an investment driven
economy, requires foreign technology and upgrade to more advanced factors (Michael
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Porter, 1998).
(1) Factor Endowments: Before Volvo entering SK, Hyundai, Samsung, and
Daedong are three biggest corporations in heavy industry which provided a large
amount of skilled labors and production equipments (Donghyun Park and Insoo Kang,
2000).
(2) Demand conditions: the quite high competition of heavy industry and the
ascendant base of its development increase demanding of higher quality of products
with more innovation. However, the lurch of their economy and relatively low
know-how level of the nation made it more expected to be invested. Volvo moved in
some of its managers to oversee the operations and built R&D there. Volvo earned the
first mover advantage and got its opportunity to account for more market share.
(3) Related and supporting Industries: In the domestic market, South Korea has its
core heavy construction and equipment corp. – Samsung, which led SK into a
heavy-industry nation and provided Volvo a very potential market to establish
facilities of excavators and construction equipments (Donghyun Park and Insoo Kang,
2000). The acquisition of Volvo joined the SK’s heavy industry and led the whole
industry into a high level with more technological equipments and products.
(4) Firm Strategy, structure, and rivalry: The western European firm’s philosophy
changed its Old Korean hierarchy management into a more flexible ways of
production. Bureaucracy was removed and the function of decision-making was
pushed down to primary production teams. Thousands of employees had to leave
because of high efficiency of production management. However, product quality,
operating efficiency and profitability were focused on, which were main factors of
Volvo to obtain competitive advantage.
- Why FDI?
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Dunning’s Eclectic Paradigm explained the reasons why Volvo chose the pattern of
FDI (Dunning 1991).
(1) Firstly, Volvo turned the ex-Samsung facility into its main global base. It got the
ownership of excavators and other construction equipment which creates a
monopolistic advantage in markets abroad.
(2) Secondly, Volvo owned the internalization advantage. The company transferred
leading-edge manufacturing technology to the plant and made the facility its global
center for R&D in excavators. Volvo even closed its excavator facility in Sweden.
The Transaction costs were reduced and made the plant to be the strongest
manufacturing and R&D of Volvo’s excavators and other construction equipments
(Nicholas. A. Phelps, 2007).
(3) Finally, SK had absolute advantage of location. The FDI destination local market
must provide factors that it is advantageous for the firm to locate its investment there.
Korea, having total stock of 62.7bn dollars of FDI in 2000, was experiencing a new
wave of foreign investment with deep suspicion. Costs of transport, labor, and raw
material were also quite low (Hill, Charles W. L, 2006).
- Achievement
Here is the comparison of Profit and production units and export output between 1998
and 2002 by the plant Volvo FDI.
1998 (before FDI)
2002 (Two years after
FDI)
Profit/Production (Unit)
3,543
6,331
Export Output
34%
68%
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Because of its investment activity to SK, now Volvo has 17 percent share of large
excavators in global market in 2008 with the production from the South-Korean plant
(Hill, Charles W. L, 2006).
2.2 Soft products Diversified
After the mature of the market, Volvo realized its vision to become the world leader
in commercial transport solutions, but not only manufacturing and selling products
(Annual Report of Volvo, 2008). It is offering such services as financing and
insurance, various forms of service agreements, accessories and spare parts to support
core products. The Volvo Group’s increasingly broad range of these so called soft
products (financing solutions, insurance, rental services, used vehicles, spare parts,
preventive maintenance, service agreements, assistance services and IT services) now
has evolved into a more distinct competitive advantage (Volvo, 2009).
Conclusion
This report has provided an explanation of MNEs’ internationalization strategy
focused on the case of Volvo. Three kinds of theories: economics, learning and
network were involved to help analysis firm’s different business activities.
For MNEs, being global is not an option but a necessity. They are pushed into
globalization by attractive market and profit. The increasingly customer needs and
high competition impel them continually expanding geographically and innovation of
products to higher standardization and diversification. The trend of global business
provides an external environment for them sustain a deep awareness and knowledge
of their competitive advantage in foreign markets.
With the growing market knowledge globally, deeper level of FDI may be the trend of
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Volvo in the next decades. Developing countries, e.g. China, Malaysia, South Korea,
seem to be more attractive in future because of their high demand of customer needs,
beneficial trade policy and lower cost of production. The larger expanding of FDI can
not only help the firm earn more market share, but also help the world business
achieve globalization.
References
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of the Firm: Four Swedish Cases, Journal of Management Studies, P305-322
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http://www.volvoclub.org.uk/history/index.shtml. [Accessed 23rd. October. 2009]
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http://www.volvocars.com/uk/experience/Pages/default.aspx [Accessed 23rd. October.
2009]
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entry, Journal of International Marketing review, P342-P347.
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Increasing Foreign market commitments, Journal of International business studies,
8(1), P23-P32.
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of Economics and Statistics, Vol28.
7. India Automobile, 2008, Eicher: Volvo Joint Venture Finalized [Online] Available
at: http://www.indiaautomotive.net/2008/08/eicher-volvo-joint-venture-finalized.html
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[Accessed 28th. October. 2009]
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Management Resource, 2nd ed. McGraw Hill
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http://www.quickmba.com/marketing/product/lifecycle/
[Accessed
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October
2009]
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November-December 1965, pp 81–94.
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models and hybrid models of social order in Southeast Asia. Handbook of research on
Asian Business, P250-P265
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Network Approach Strategies in Global Competition 1988 pp. 287-314
13. Dunning, John H. "The Eclectic Paradigm of International Production: A Personal
Perspective" Chapter 5 In: The Nature of the Transnational Firm Eds. C.N. Pitelis and
R. Sugden London: Routledge 1991 pp. 119-139
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Introduction, The free Press.
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marketplace, 6th ed, New York : McGraw-Hill/Irwin, 2006
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The
Volvo
Group
Annual
Report
2008,
http://www3.volvo.com/investors/finrep/ar08/eng/index.html
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Accessed
at: