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
BK 3037 Strategic Marketing
the 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...