Strategic Management case study :
describe Paccar's strategies positioning?
evaluate the strength of five forces of heavy truck industry?
show how successful /unsuccessful Paccars strategy is in dealing with the impact of those forces?
assess the source of sustainability /unsustainability of Paccars?
Daimler AG is the market-share leader (38 percent) in the U.S. heavy-truck business. It got that large by buying Ford's troubled heavy-truck business in 1977. The next largest producer is Paccar (25 percent), 25 followed by Volvo (20 percent), and then Navistar (16 percent). Truly in the middle of a low-growth, mature, very competitive industry, Paccar nevertheless turns in a solid performance. Its return on equity over the past twenty years has averaged 16 percent, compared with an average return of 12 percent earned by its competitors. Even more important, Paccar's profits have been remarkably stable in an industry plagued by strong upswings and downswings in demand. Paccar has not lost money since 1939, and its profit roll continues despite the recession of 2008-9. The driving element in Paccar's strategy is quality, with its Kenworth and Peterbilt brands widely recognized as the highest-quality trucks made in North America. Paccar has received J. D. Power awards for its heavy trucks and for its service. The company prices accordingly, maintaining its strong market position despite premium prices. How can you sell a truck at a premium price? In theory it is simple-your trucks have to run better and last longer so that the owner's cost to operate the truck is lower. Fleet operators look at differences of a fraction of a cent per mile in making purchase decisions, and the swing in costs is mostly fuel and wages. For example, if you buy a 2008 Kenworth T2000 sleeper for $110,000, and drive it 125,000 miles that year, you will probably pay another $115,000 each year in operating expenses for fuel, maintenance, repair, and insurance. And that is before wages and benefits. Because of this, Kenworth pioneered low- drag aerodynamic truck cabs thirty years ago as a way to cut fuel costs. It is not easy to hold this kind of quality leadership for three big reasons. First, no one will believe you have the longest-lasting trucks until they have already lasted a long time on the road. It's a reputation that takes a while to earn and can be lost quickly. Second, designing a very high-quality piece of machinery is not a textbook problem. Designers learn from other designers over time, and the company accumulates these nuggets of wisdom by providing a good, stable place to work for talented engineers. Third, it is usually quite difficult to convince buyers to pay an up-front premium for future savings, even if the numbers are clear. People tend to be more myopic than economic theory would suggest. Paccar's strategy is its way of dealing with these three obstacles to being a quality leader. The first element of its strategy is a subtle shift away from seeing quality purely in terms of operating cost. Instead, Paccar views quality through the eyes of the owner-driver. Owner-drivers increase their wages by pushing themselves harder, driving sixteen hours a day or more. Owner-drivers care about efficiency but also look beyond cost per mile, because the truck is their home, office, lounge, and TV room on the road. In addition, drivers prize the special sense of classic American style-a Harley-Davidson-type aura [sensation]-that attaches to Paccar's brands, even as the interiors now have more of a Lexus look and feel. Owner-drivers buy Kenworth and Peterbilt trucks from experienced dealers who use 3-D computer displays to select from hundreds of customizing options. Paccar builds each truck to order, keeping inventories low and using a network of suppliers for its main components and parts. The trucks are designed with as many parts in common as practicable. Truck fleet operators don't care about aura very much; they do care about turnover and idle time amon their drivers. Fleet managers find that by using two drivers, idle time is cut in half or more. That means one of the drivers is sleeping or resting in the sleeper compartment a good part of the time, raising the same concerns about comfort the owner-driver has. Plus, when truck drivers meet at a stop, the own drivers have the highest status and their opinions have the most weight. The beauty of Paccar'spositioning is that although fleet buyers pay more attention to cash cost per mile than owner-drivers do, many are pushed in some of the same directions by their drivers' preferences. Whatever the fleet owner's opinion, many of their drivers prefer Paccar trucks. Paccar's strategy is based on doing something well and consistently over a long period of time. That has created difficult-to-replicate resources: its image, its network of experienced dealers, its loyal customers, and the knowledge embedded in its staff of designers and engineers. This position and these kinds of slow-build resources are simply not available to companies, mesmerized by the stock market, who want big results in twelve months. A flexible approach to manufacturing makes Paccar's variable costs higher than competitors' but provides stability for its designers and engineers. In addition, its higher margins create a loyal, more dedicated network of dealers. All of this works, in part, because it is not in a high-growth industry that would attract large new investments from outside. To attack it directly, a rival would have to create new brands and new designs, and, quite possibly, sign up new dealers. The high-end market isn't big enough to warrant that kind of investment. Paccar's design is expressed in actions that are consistent with its positioning and that are consistent over time. It does not make small trucks, only large ones. Within the large-truck segment, it does not make cheaper economy trucks. The product-buyer focus is maintained by its dealers, designers, and engineers. Because it is not diversified, the talk and knowledge in the design studio, in manufacturing, and in the executive suite are about truckers and heavy trucks. They don't need to hire a consulting firm to figure out their core competence or to find out who their buyers are
