Case study

Answer the two questions at the end of the attached document, must use your own words. No references needed.The key benefit to be enjoyed by firms that successfully integrate low cost and differentiation strategies is that it is generally harder for competitors to duplicate or imitate them. An integrated strategy enables a firm to provide two types of value to customers: differentiated attributes and lower prices. Furthermore, the benefits of combining advantages can be additive, instead of merely involving tradeoffs. To stay competitive, firms must update their strategies to reflect the new possibilities and constraints that the Internet and Web-based technologies represent.An overall low cost leadership strategy involves managing costs in every activity of a firm’s value chain and offering no-frills products that are an exceptional value at the best possible price. Internet technologies now provide more opportunities to manage costs and achieve greater efficiencies. But these capabilities are available to many firms and may provide only short-lived advantage.Most analysts agree that the Internet’s ability to lower transaction costs will transform business. Transaction costs refer to various expenses associated with conducting business. It applies not just to buy-sell transactions but to the costs of interacting with every part of a firm’s value chain, both within and outside the firm.The process of disintermediation lowers costs. Each time intermediaries are used in a transaction, additional costs are added. Removing those intermediaries lowers transaction costs. The Internet may also reduce the costs of traveling, and the cost of maintaining a physical address.Many experts agree that the net effect of the Internet is fewer rather than more opportunities for sustainable advantages. Therefore, new strategic combinations that make the best use of the competitive strategies may hold the greatest promise for future success.The Internet has provided all companies with greater tools for managing costs. This may be good in general for the efficiency of the economy. But for individual companies, it may shave profit margins and make creating a sustainable advantage more difficult.Many differentiation advantages are diminished by the Internet. The ability to comparatively shop, for example, is depriving some companies of unique advantages. In the Internet age, the best approach may be to combine differentiation with other competitive strategies.The greatest benefit may be in using the Internet to focus on a niche. However, an incumbent firm that previously thought a given niche market was not worth the effort may use Internet technologies to enter the segment for a lower cost than it could in the past.
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Copyright © 2013. Pearson. All rights reserved. May not be reproduced in any form without permission from the publisher, except fair uses permitted under U.S. or applicable
copyright law.
200
CHAPTER 6 BUSINESS STRATEGY
ILLUSTRATION 6.2
Volvo’s different Indian buses
Volvo has a strategy to sell buses at nearly four times the prevailing
market price.
The Indian bus market has long been dominated by
two home players, subsidiaries of major Indian conglomerates: Tata Motors and Ashok Leyland. The two
companies made simple coaches on a design that
had hardly changed for decades. On top of a basic
truck chassis, the two companies bolted a rudimentary coach body. Engines were a meagre 110–120
horse-power, and roared heartily as they hauled their
loads up the steep mountain roads of India. Mounted
at the front, the heat from the over-strained engines
would pervade the whole bus. Air conditioning was
a matter of open windows, through which the dust
and noise of the Indian roads would pour. Suspension
was old-fashioned, guaranteeing a shaky ride on
pot-holed roads. Bags were typically slung on the
top of the bus, where they were easily soiled and at
high risk of theft. But at least the buses were cheap,
selling to local bus companies at around Rs 1.2 m
(b15,000; $21,000).
In 1997, Swedish bus company Volvo decided to
enter the market, with buses priced at Rs 4 m, nearly
four times as much as local products. Akash Passey,
Volvo’s first Indian employee, commissioned a consultancy company to evaluate prospects. The consultancy company recommended that Volvo should not
even try. Passey told the Financial Times: ‘My response
was simple – I took the report and went to the nearest
dustbin and threw it in.’ Passey entered the market in
2001 with the high-priced luxury buses.
Passey used the time to develop a distinctive strategy. His basic product had superior features. Volvo’s
standard engines were 240–250 hp and mounted at
the back, ensuring a faster and quieter ride. Air conditioning was standard of course. The positioning of
the engine and the specific bus design of the chassis
meant a more roomy interior, plus storage for bags
internally. But Passey realised this would not be
enough. He commented to the Financial Times: ‘You
had to do a lot of things to break the way business is
done normally.’
Volvo offered post-sale maintenance services,
increasing life expectancy of buses from three to ten
years, and allowing bus operating companies to dispense with their own expensive maintenance workshops. Free training was given to drivers, so they
drove more safely and took more care of their buses.
The company advertised the benefits of the buses
direct to customers in cinemas, rather than simply
promoting them to the bus operators. To kick-start the
market, Volvo supplied about 20 subsidised trial units
to selected operators. Volvo trainees rode these buses,
alerting the company immediately when something
went wrong so Volvo could immediately send its
engineers. Faster, smoother and more reliable travel
allowed the bus operators to increase their ticket
prices for the luxury Volvo buses by 35 per cent.
Business people and the middle classes were
delighted with the new Volvo services. Speedier, more
comfortable journeys allowed them to arrive fresh for
meetings and potentially to save the costs of overnight stays. Tata and Ashok Leyland both now produce their own luxury buses, with Mercedes and Isuzu
following Volvo into the market. None the less, the
phrase ‘taking a Volvo’ has become synonymous with
choosing a luxury bus service in India, rather as
‘hoover’ came to refer to any kind of vacuum cleaner.
In 2008, Volvo opened a new state-of-the-art bus
factory in Bangalore. It is Volvo’s most efficient
bus factory worldwide, producing a fully built bus in
20–25 days. Annual capacity is 1,000 buses per year.
Source: Adapted from J. Leahy, ‘Volvo takes a lead in India’,
Financial Times, 31 August 2009.
Questions
1 Rank the elements of Passey’s strategy for
Volvo in order of importance. Could any have
been dispensed with?
2 How sustainable is Volvo’s luxury bus
strategy?
EBSCO Publishing : eBook Collection (EBSCOhost) – printed on 7/4/2017 9:53 AM via AMERICAN PUBLIC UNIV SYSTEM
AN: 1418653 ; Johnson, Gerry.; Exploring Strategy Text & Cases
M06_JOHN2552_10_SE_C06.indd 200
Account: s7348467
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