Development of Decision Model for Vertical Integration of Sales and Service Network, Scania CV AB

Home , Vertical integration

Linköping University | Department of Management and Engineering Master’s thesis, 30 credits| Master’s Programme Spring 2020| LIU-IEI-TEK-A--20/03677—SE

Ashwanth Sankar Gokul Kannappan

Supervisor: Martin Kylinger Examiner: Janerik Lundquist.

Linköping University SE-581 83 Linköping, Sweden +46 013 28 10. www.liu.se.

Acknowledgement

After five months of writing our master thesis, this process, and our education, is coming to an end. We, Ashwanth and Gokul, have had the great fortune to spend the last period of our master’s course at Scania, where the thesis has been carried out. This study was conducted as a part of the Industrial Engineering and Management program at Linköping University. The project has been challenging, interesting and educative. Above all, we have had great fun at Scania, which is all thanks to the wonderful and inspiring people that we have had the opportunity to meet and get to know.

During the process of carrying out the thesis, many people have contributed to the report that you are about to read. To all of you, we would like to direct our gratitude. The first person to whom we are thankful is Daniel Schröder for initiating the thesis project. Also, for continuously helping us and giving us valuable feedback throughout the process. We also want to thank Jens Tullberg who put in a good word for us and forwarded our ideas on possible thesis subjects within Scania.

A special acknowledgement is addressed to our supervisor and examiner at Linköping University, Martin Kylinger and Janerik Lundquist for all their help, support and feedback during this study with the immense knowledge in the field of Production Economics.

During the process we could carry out several interviews, helping us to refine the developed decision model. We would like to express our appreciation to Anders Smith, Torsten Linder, Thomas Lindberg and Kjell Jansson for giving insightful information on Scania’s views on integration. Hans Hallin is another person who has helped us by giving valuable insight into why the business market has to be kept captive and non-captive.

Also, we would like to mention everyone from the KR department who provided us with an encouraging and energetic work environment for that we are grateful.

Last but not least, we would like to thank our families for their endless support and encouragement both throughout this master thesis, but also during all our other commitments.

Ashwanth Sankar and Gokul Kannappan

Abstract

Vertical integration is a strategy where the firm owns the supply chain activities to gain control over the business operations, increasing the market share, and lowering the transaction costs. The vertically integrated firms tend to make more in-house operations. In the supply chain, vertical integration is performed either upstream or downstream. In the automobile industry, upstream integration is chosen to acquire or increase control over the suppliers by manufacturing goods internally while downstream integration is preferred to gain ownership with the previous distributors and dealers.

This thesis work is carried out in the department of New and Strategic Project Markets in Sales and Marketing, Scania. The department New and Strategic Project Markets works with identifying the market potential in a country and future expansion of the sales and service network. A significant part of the Scania business is delivered through the sales and service network, which differentiates Scania from the competitors and provides the basis for profitability. Scania currently has models for identifying market potential and setting up the business in a market. With the future expansion, the establishment of a competitive sales and service network is a core part of the Scania business model. Currently, with changing market dynamics, Scania needs to evaluate the appropriate level of vertical integration to capture market potential, achieve profitability, and manage risk for the sales and service network. This led to the development of a decision model for vertical integration of the sales and service network.

The purpose of this research is to develop a structured decision model for performing vertical integration and disintegration in the sales and service business of Scania to maintain or improve profitability by considering the risks.

The current state illustrates an overview of the sales and marketing business process in Scania. As a pre-study phase, the thesis project includes reviewing Scania’s current practice for evaluating the market which contains market screening model and distributor development process (market establishment). Adding to that, an empirical study is carried out through interviews to identify the factors, forces, and risks involved in driving captive and non-captive markets. The above-mentioned information will act as a base for performing the analysis on building the decision model.

From the acquired information, the analysis is carried out by prioritizing and categorizing the predominant factors and forces of vertical integration. Further, by performing risk analysis the decision model is built into four levels and the appropriate decisions are made to identify the level of vertical integration in the sales and service network. At last, to check the credibility of the decision model, a country is chosen for analysis, and the results are discussed.

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Table of Contents

1. Introduction ...... 1 1.1 Company Background ...... 1 1.2 Background of Vertical Integration...... 3 1.3 Problem Description ...... 5 1.4 Purpose and Research Questions...... 6 1.5 Delimitations ...... 7 2. Methodology ...... 9 2.1 Guideline of the study ...... 9 2.2 Research Method ...... 10 2.2.1 Research Paradigm ...... 10 2.2.2 Research Approach ...... 11 2.2.3 Research Design ...... 12 2.3 Data Collection ...... 13 2.3.1 Primary Data Collection ...... 13 2.3.2 Secondary Data Collection ...... 14 2.4 Validity and Reliability ...... 14 2.4.1 Validity ...... 14 2.4.2 Reliability ...... 15 2.4.3 Workshop...... 15 2.5 Realization of Study ...... 16 3. Frame of Reference ...... 19 3.1 Sales and Service Networks ...... 19 3.2 Marketing Environment ...... 19 3.2.1 Macroenvironment ...... 20 3.2.2 Microenvironment ...... 23 3.3 Decision Model ...... 24 3.4 The Decision Environment...... 25 3.5 Vertical Integration ...... 26 3.6 Dimensions of Integration ...... 28 3.6.1 Stages of Integration ...... 28 3.6.2 Breadth of Integration ...... 29 3.6.3 Level of Integration ...... 29 3.6.4 Form of Integration ...... 30

3.7 Forces Driving Vertical Integration Downstream ...... 31 3.8 Pros and Cons of Vertical Integration ...... 34 3.9 Uncertainties in Vertical Integration ...... 35 4. Current State ...... 37 4.1 Sales and Marketing ...... 37 4.1.1 Business Area ...... 38 4.1.2 New and Strategic Project Markets ...... 38 4.2 Market Organisation ...... 38 4.2.1 Captive Network - Commercial Operations ...... 38 4.2.2 Non-captive Network ...... 40 4.3 Reason for Captive and Non-captive Network ...... 41 4.3.1 Reasons for Captive Network ...... 41 4.3.2 Reasons for Non-captive ...... 42 4.4 SMSM - Scania Market Screening Model ...... 43 4.5 DDP - Distributor Development Process ...... 44 5. Empirical Data ...... 47 5.1 Gathering of Factors and Forces Required for Decision Model ...... 47 5.1.1 Data Gathered from Interview 1 ...... 47 5.1.2 Data Gathered from Interview 2 ...... 49 5.1.3 Data Gathered from Interview 3 ...... 50 5.1.4 Data Gathered from Interview 4 ...... 52 6. Analysis...... 55 6.1 Prioritization of Factors ...... 55 6.2 Categorization of Forces ...... 57 6.3 Risk Analysis...... 61 6.4 Changes and Weighing of Forces for Performing Vertical Integration ...... 62 6.5 Development and Working of the Decision Model ...... 66 6.5.1 Calculation for Overall Rating of the Factor ...... 66 6.5.2 Level 1 – Political and Legal Factors ...... 67 6.5.3 Level 2 – Market and Technological Factors ...... 69 6.5.4 Level 3 - Financial Factors at the Distributor Level ...... 70 6.5.5 Level 4 – Financial Factors at the Dealer Level and Strategic Factors ...... 71 6.5.6 Final Decision Model ...... 72 7. Results ...... 75

7.1 Selection of the Country to be Analysed ...... 75 7.2 Collection and Analysis of Data...... 75 7.3 Calculation and Decision of Political and Legal Factors ...... 76 7.3.1 Interpretation of Scores ...... 77 7.3.2 Calculation of Scores ...... 77 7.4 Calculation and Decision of Market and Technological Factors ...... 78 7.4.1 Interpretation of Scores ...... 79 7.4.2 Calculation of Scores ...... 80 7.5 Calculation and Decision of Financial Factors at Distributor Level ...... 86 7.5.1 Interpretation of scores ...... 86 7.5.2 Calculation of Scores ...... 87 7.6 Financial Factors at Dealer level and Strategic Factors ...... 88 7.7 Overall Discussion ...... 92 8. Conclusion and Recommendation ...... 95 8.1 Conclusion ...... 95 8.1.1 Model Positioning...... 95 8.2 Ethics and Sustainability ...... 96 8.2.1 Ethics ...... 96 8.2.2 Sustainability ...... 96 8.3 Recommendation ...... 97 9. References ...... 99 Appendix ...... 103 Appendix 1: Interview Questions ...... 103 Appendix 2: Analysis Model...... 104 Appendix 3: Market and Technological Factors ...... 105 Appendix 4: Financial Factors at Dealer Level ...... 106 Appendix 5: Overall Model Analysis, Result ...... 109

List of Figures

Figure 1: Scania Glance Map, 2018 (Karlsson and Irle, 2018) ...... 1 Figure 2: Organization Structure (Scania, 2019) ...... 2 Figure 3: Vertical Integration Operation (Isaksen, 2007) ...... 4 Figure 4: Scania Market Organisation (Scania, 2019) ...... 6 Figure 5: The “U” Structure adapted for the study with research objective at the respective part of the report, inspired by Lekvall, et al. (2001) ...... 9 Figure 6: Realization of the study ...... 16 Figure 7: Altered design of Jobber and Fahy marketing environment (Jobber and Fahy, 2015, p.73) ...... 20 Figure 8: Decision Model, inspired by (Bickerton, 2018) ...... 25 Figure 9: Sales and Marketing Department (Scania, 2019) ...... 37 Figure 10: Captive Network (Commercial Operations) Business Unit (Scania, 2019) ...... 39 Figure 11: Non-captive Network Business Unit (Scania, 2019)...... 41 Figure 12: Scania Market Screening Model (Scania, 2019) ...... 44 Figure 13: Distributor Development Process (Scania, 2019) ...... 45 Figure 14: Example - Analysis of Political and Legal Factors in Excel ...... 67 Figure 15: Level 1 – Political and Legal Factors ...... 68 Figure 16: Level 2 - Market and Technological Factors ...... 70 Figure 17: Level 3 - Financial Factors at the Distributor Level ...... 71 Figure 18: Level 4 - Financial Factors at the Dealer Level and Strategic Factors ...... 72 Figure 19: Final Decision Model for Vertical Integration of Sales and Service Network ...... 73 Figure 20: Level 1 - Political and Legal Factors...... 78 Figure 21: Decision for Level 1 ...... 78 Figure 22: Business Investment vs Market Size Matrix for Evaluating Investment in Distributor and Dealer...... 81 Figure 23: Comparison Table for Evaluating Economies of Scale...... 84 Figure 24: Level 2 – Market and Technological Factors ...... 85 Figure 25: Decision for Level 2 ...... 86 Figure 26: Level 3 – Financial Factors at Distributor Level ...... 88 Figure 27: Decision for Level 3 ...... 88 Figure 28: Level 4 – Financial Factors at Dealer Level...... 90 Figure 29: Reference Table for Evaluating Strategic Objective ...... 90 Figure 30: Reference Table for Evaluating Product Fit ...... 91 Figure 31: Level 4 – Strategic Factors ...... 91 Figure 32: Decision for Level 4 ...... 92 Figure 33: Decision Model with Assessed Case ...... 93 Figure 34: Decision Model positioning in the Sales and Marketing Department ...... 95

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List of Tables

Table 1: Factors for And Against Vertical Integration Beckman and Rosenfield (2008) ...... 27 Table 2: Summary of Pros and Cons of Vertical Integration (Harrigan, 2001) ...... 34 Table 3: Summary of Factors and Forces from Interview 1 ...... 49 Table 4: Summary of Factors and Forces from Interview 2 ...... 50 Table 5: Summary of Factors and Forces from Interview 3 ...... 52 Table 6: Summary of Factors and Forces from Interview 4 ...... 53 Table 7: Categorization of Forces and Altering it to Scania Level ...... 59 Table 8: Weighing of the Force ...... 64 Table 9: Grading Table for Political and Legal Factors ...... 68 Table 10: Grading Table for Market and Technological Factor ...... 69 Table 11: Grading Table for Financial Factors at the Distributor and Dealer Level ...... 70 Table 12: Grading Table for Strategic Factors ...... 71 Table 13: Interval Values and Score for Political and Legal Factors ...... 76 Table 14: Relative Market Share- Competitor Performance ...... 81 Table 15: Range of Relative Market Share ...... 81 Table 16: Sales Performance (Units and Sales Amount) ...... 82 Table 17: Sales Performance (Units and Sales Amount), Average 2015-2017 compared with 2018...... 82 Table 18: Grading Table for Sales Performance...... 83 Table 19: Scania and Dealer or Distributor Revenue Comparison and Range of Relative Difference ...... 85 Table 20: Interval Value for Evaluating the Presence of European Brands ...... 85

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Abbreviations

AOR – Asia and Oceania

AMR – Americas

BU – Business Unit

DDP – Distributor Development Process

EMA – Eurasia, Middle East, and Africa

EUR – Europe

GDP – Gross Domestic Product

KB – Bus Sales

KPI – Key Performance Indicator

KR – New and Strategic Project Markets

KT – Truck Sales

OEM – Original Equipment Manufacturer

PESTEL – Political, Legal, Economic, Social, Technological and Ecological

RQ – Research Question

SMSM – Scania Market Screening Model

SWOT – Strength, Weakness, Opportunities and Threat

USD – United States Dollar

1. Introduction

The first chapter aims at describing the company background, description of the study and the context of the problem. The purpose of the study and the research questions are elaborated in detail. Additionally, the delimitations included in the study are explained.

1.1 Company Background

Scania CV AB is a global provider of trucks and buses with approximately 52100 employees around the world. Scania is now transforming from being a supplier of trucks, buses, and engines to a supplier of complete and sustainable transport solutions. Currently, Scania’s sales organization is present in over 100 countries. The central marketing department which is present in Södertälje at the Scania head office handles competitive analysis, strategy, and method development and 95 percent of sales occur outside Sweden. Scania gains insights into different client needs through close customer contact to drive its product development and to benefit the end customer. Scania has a relationship with its customer for the entire life cycle of the products. In the area of service, Scania offers vehicle finance, leasing, and rental services to allow customers to concentrate on their core business. Scania is not only a provider of transport solutions, but it is also a major provider of industrial and marine engines. Scania’s sales and service network are tactically located where the customer needs, no matter where they operate. Research and development activities are mainly performed in Sweden, with branches in Brazil and India. Production takes place in Europe, Latin America, and Asia with facilities for global trading of both components and complete vehicles. Besides, there are production centres in Africa and Eurasia, see figure 1. Now, Scania is a part of the Traton Group. Under Traton Group there are various brands present like Scania, MAN, and Volkswagen Caminhões e Ônibus work closely together to turn Traton Group and its brands into a Global Champion (Karlsson and Irle,2018).

Figure 1: Scania Glance Map, 2018 (Karlsson and Irle, 2018)

In the heavy vehicle business, achieving the number of vehicle sales is not the only goal, with vehicle sales, it is a prerequisite for the company to be able to provide repair, maintenance services close to the end customers. Therefore, to sell more vehicles, Scania needs to expand the sales and service network. The market organization is responsible for the goal to be determined, as seen in figure 2. In the market organization, the business networks are separated into a captive network and non-captive network. The captive network contains a business unit which is owned and controlled by Scania in a market1 with an administration team known as commercial operations which can be seen in figure 2. Unlike the captive network, the non- captive networks are controlled by the sales and marketing team. In both the captive and non- captive network, the business unit consists of a distributor, dealer, and workshops operated under a dealer. In the captive network, there are cases, were the dealers, and the workshops can be non-captive, which means the private entrepreneurs own it. However, in the captive network, the business unit is wholly controlled by the department commercial operations, as shown in figure 2. Commercial operations are responsible for strategies, operations, and control of the Scania-owned business units globally (Scania, 2019).

In the non-captive network, the whole business unit (distributor, dealer, and workshops) is owned and controlled by private entrepreneurs. In this case, Scania sells the product to the private distributor directly from factory sales and marketing. Further, factory sales and marketing acts as a base to develop and provide franchise standards for the sales and service network throughout the world. Also, it is responsible for the sales of vehicles, engines, and parts, including branding, market specifications, strategic marketing, and factory pricing with parallel to commercial operations (Scania, 2019).

Figure 2: Organization Structure (Scania, 2019)

1Market – The term market represents the country or region where Scania performs business. 2

In factory sales and marketing, the work is distributed among various departments which can be seen in figure 2, such as Trucks sales (KT) and Bus sales (KB) and New and Strategic Project Markets (KR).

This project is conducted under the department of KR as a business development strategy. The primary responsibility of KR is to generate, develop, and conduct Scania sales on selected markets and to initiate, implement, and finalise all new business projects according to Scania standards. Also, it is the key partner for Scania’s strategic business development within Sales and Marketing. The mission of KR is to have a competitive advantage over the markets and to help Scania achieve volume growth and profit targets through the identification and realization of new business strategies and opportunities (Scania, 2019).

1.2 Background of Vertical Integration

Commercial vehicle industries are becoming increasingly aware that better supply chain management can provide a cost advantage. The integration of the supply chain in a large corporation is a widely discussed topic in supply chain management. Based on the large corporation vertical integration is defined as “the overall scope of different business activities in a supply chain brought under the management of a single company” (Majumdar and Ramaswamy, 2000, p. 119). Vertical integration is classified into two types; backward integration, and forward integration, see figure 3. Backward integration is a process where the companies move upstream in their supply chain to own more of the suppliers. Whereas, in forward integration, the companies move downstream to own the customer end of the supply chain (Isaksen, 2007). Also, downstream integration plays a significant role in a business to be competitive in several ways, while securing the distribution channel of its products, particularly markets with high risks of failure. According to Sheperd (1997), vertical integration differs majorly from horizontal integration by the direction of the acquisition. However, both the integration methods are used to increase the performance efficiency and profitability of a company. In the supply chain, the activities in adjacent stages are considered in horizontal integration.

To be competitive and to survive in the market, industries must make a structured strategic decision model for an efficient supply chain. In vertical integration, it includes everything from open spot markets, collaboration, and joint ventures to contracting and full vertical integration (Hobbs and Young, 2000).

Figure 3: Vertical Integration Operation (Isaksen, 2007)

In manufacturing companies, downstream or forward vertical integration plays an important role in product lifecycle management. It means that the company tends to have control over the whole downstream supply chain, unlike the companies which are only involved in product sales. When the company is only involved in the product sales it does not have control over the life cycle of the product, the activities like product support, service, and end life solution which are mostly outsourced to the private companies. In this case, it decreases the customer trust involved in the product, and it reduces in understanding the requirements of customer needs and values. Further, it does not allow the companies to adapt to the changes immediately as they do not have any contact with the end customers. The companies which integrate their downstream supply chain for the first time must consider both the product and service aspects during the designing phase unlike the product sales and it has to be carefully communicated to the engineers involved in the phase. In beginning, the business transaction cost can increase the expenses spent in time and resources in finding the appropriate trading partners, gathering price information, specifying product quality, monitoring of performance, and negotiation of contracts but when considered in the long run it can be both of a profit or loss to the business depending upon the management of the company (Hobbs and Young, 2000). While creating a business model for integrating the downstream supply chain the major driving forces, risks, and uncertainties must be analysed. In the process, the changes and new incentives that have been included in the new business model has to communicate properly to the stakeholders involved in the process. Once the process is set the downstream integration allows the companies to reach the customers by knowing the specific needs and values. Here the company will be in charge of the whole product and services which allows the customers to focus on their core operations and from the company perspective it can adapt to the changes quickly. By conducting predictive maintenance, the product can be altered or repaired before the customer places a complaint. In product sales, the manufacturer does not have any control over the end

4 life of the product. By integrating the company tend to have control over the end life of the product by reusing, recycling, and remanufacturing, which also allows the company to have a revenue gain. In product sales manufacturing companies does not gain any downstream profit rather than selling the product. By vertically integrating manufacturing companies tend to gain the overall downstream profit from service and product end life activities. By gaining the overall downstream profit there will be an increase in the company’s market share and which helps them to gain competitive advantages by creating entry barriers to the companies which are only involved in the product sales. By restricting the expansion of competitor vertical integration can increase the rival cost (Nicovich and Dibrell, 2007).

If the business structure of a company is vertically integrated, there are aspects on which it can be disintegrated. The companies integrate their supply chain for superior reasons and later, with the absence of the updated business structure, they tend to disintegrate. The emerging market will increasingly pressurize integrated companies to restructure their integration. Similarly, disintegration occurs when a company is not able to reach their desired profitability level in the business market (Stuckey and White, 2019).

If a company plans to vertically integrate its supply chain network either upwards or downwards there are potential risks which may occur. According to Alfaro et al., (2012), the risks which the companies may face is that it must invest a huge capital amount to set up or buy the distributor or supplier channel. Followed by that a proper follow up must be intimated to run and maintain the business efficiently, if not it leads to a huge loss of the business. Vertical integration reduces the company’s flexibility which means it does not allow them to do changes or decide immediately as there are a lot of stages in the integrated supply chain and taking a decision will affect the overall supply chain. So, each stage in the supply chain must be considered before making the decision. Since each stage must be considered the whole process can be time-consuming. Alfaro et al., (2012), says that the company might lose focus on the main operations due to the integration of its supply chain. For example, vertical integration can cause the management to focus less on their core competencies and more on the newly acquired assets which will tend to lose the customer’s trust over the company and the brand. Ultimately, rapidly changing technology will greatly impact integration. Different technologies across different supply stages can also make integration more complex and expensive.

1.3 Problem Description

The role of vertical integration plays a significant role in changing the business environment while having a better understanding and more control over the business in the markets. Scania, New and Strategic Project Markets (KR) is looking for an appropriate level of integration in the sales and service network, see figure 4. At present Scania performs vertical integration and disintegration in an ad hoc format with its current business units2 in different regions.

2 Business Unit - Sales and service business unit consist of a distributor, dealer, and workshops operated under a dealer.

Figure 4: Scania Market Organisation (Scania, 2019)

In terms of Scania sales and service, the integrated business units are known as captive network, and the business units which are not integrated are known as non-captive network. From the previous business projects, Scania faces complications in understanding when the sales and service business should be integrated or disintegrated, which has been a long-lasting argument. With the changing market dynamics, a structured decision model is required for Scania to perform the integration and disintegration by considering driving forces and risks.

1.4 Purpose and Research Questions

Research Questions

RQ 1: What is the current operation of Scania sales and service, and how is the existing integration process carried out in it?

RQ 2: What driving factors and risks should Scania consider in performing vertical integration?

RQ 3: How is the decision model built with the identified driving factors and risks?

RQ 4: How can the developed decision model be applied to the current business?

1.5 Delimitations

To set the scope limitations of the project, and due to time constraint, there are several factors which will not be taken into consideration while the research is performed.

- Scania Engine sales and service network will not be considered. The focus will be only on trucks and bus sales and service network, which includes parts sales.

- The whole network of captive and non-captive in different markets will be analysed to build the decision model, but the final decision model will only consist of a major Scania business market as the main case and which will be applied in the decision model.

- This research does not include any cost calculation model. As an alternative, the values are analysed from the previously established cost charts from the department of Scania sales and marketing.

- Due to confidentiality agreement, the values used in the calculation of some forces are not disclosed.

- Due to the delay in attaining data and time constraint, only one country is used to check the credibility of the developed decision model.

- Subjective analysis is used for the calculation of certain forces which may affect the credibility of the developed decision model.

- This research work is handed over to Scania management, and the implementation of the decision model of this research is based on the management.

2. Methodology

This chapter, discuss the guideline of the study, research methodologies, data collection techniques, reliability, validity, and realization of study are described in detail below with the arguments, and the selection of each method is mentioned.

2.1 Guideline of the study

The U Structure for the guideline of the study is inspired by Lekvall and Wahlbin, and it has been arranged and connected according to the requirements of the study (Lekvall, et al., 2001).

Figure 5: The “U” Structure adapted for the study with research objective at the respective part of the report, inspired by Lekvall, et al. (2001)

The structure allows both the authors and the readers to follow the general flow of thought throughout the project. Firstly, it is a structural guideline that is used as a way to actively connect different parts of the work and grouped to create a common thread. Secondly, it helps to analyse the report to see that all parts that are connected and present, as seen in figure 5. Finally, the U structure connects the eight activities of a report to form a common thread.

To begin with the study, the chapters problem description, and purpose act as a suitable base for the thesis work, and these are reflected in results, conclusion, and recommendation. The problem description and purpose helps to find suitable topics related to the study which leads to the frame of reference.

In this study, the RQ 1 will be answered in the current state with the help of the data collection technique and methodology followed in the study. Further, the empirical data are collected through interviews acts as a base for answering the other research questions. The RQ 2 and RQ

3 will respond to the analysis chapter, which is made possible with the information obtained through the current state, empirical study, and frame of references.

Finally, RQ 4 will be answered with the information obtained from the analysis chapter to satisfy the purpose and problem description of the study and the recommendation chapter will discuss the future recommendations related to the study.

2.2 Research Method

Research, in general, refers to a “search for knowledge” (Kothari, 2004, p.1). The purpose of the research method is to provide a framework that involves data collection, analysis, and interpretation of the research work.

2.2.1 Research Paradigm

Research paradigm describes the beliefs, thinking, thoughts, and information that leads to a deep understanding and interpretation of the results (Denzin and Lincoln, 2000).

Positivism vs Constructivism

Positivism is one of the scientific forms of research investigation, which emphasis more on quantitative research (Creswell, 2014). The truth and real events are taken as an objective of the study for answering the research questions. Positivism focusses on facts, experience, an observation that are valid and reliable (Hume, 1993). Since positivism uses much of empirical observations and measurements, it is validated only by using the internal data which are consistent and reliable. The interpretation of results in positivism begins with theory as a base, and the data for the study is collected through empirical study to support the findings (Karlsson, 2008).

On the contrary, constructivism is known as interpretivism, which typically seen as a qualitative approach for the research study (Mackenzie, 2011). In constructivism, the researcher has to rely on multiple participant's responses, and the views are based on specific circumstances. It includes developing certain meaningful views based on experiences. For instance, personal, social, or historical information, which is taken into consideration to seek knowledge. The results of the study are developed based on own or individual views to develop a model (Karlsson, 2008).

To get the desired outcome for the problem, the positivistic approach is the most suitable and appropriate way for this analysis. As highlighted above in the previous sections, the mentioned problem requires immense study about the cluster of factors that are responsible for constructing the decision model and the gathering of forces that drive vertical integration. As this decision model is built over the basis of the sales and service network, a detailed empirical study along with reliable validation is required. To support all these tasks and to stick with the limited time frame, the positivistic approach seems to be favourable for this study. On the other

10 hand, constructivism elongates the scope of the thesis and doesn’t yield the desired result. Hence this study is carried out in the positivistic approach.

2.2.2 Research Approach

Research approaches are the set of methods or approach acts as a base for broadening the study in a more detailed manner. The choice of research approach helps to conclude the problems (Kothari, 2004).

Inductive vs Deductive

An inductive approach is used “to conclude from one or more particular facts or pieces of evidence” (Cooper and Schindler, 2008, p.74). In the beginning, the researcher involves analysing the information collected through observations, and findings that are available for the generation of new theory. As the inductive approach is more focused on the grounded theory in which the researcher moves from a specific set of data to general. In other words, an inductive approach is called a bottom-up approach, as it acts as a base for the research. And, the interpretation of the data in the inductive approach is mostly associated with qualitative research (Bryman and Bell, 2011).

The deductive approach is also known as a top-down approach. The researcher develops a hypothesis by understanding the relationship between the theories and the field of study. The results obtained through the deductive approach are based on specific theoretical models and are used to validate the theories with meaning full relationships (Cooper and Schindler, 2008).

The strength of both these approaches are utilized in this study. Initially, when the study began, there were a lot of existing theoretical models that were studied in detail to grasp a common understanding of the specific sets like vertical integration, sales and service complexities, and Scania sales and service business operations as well. These specific set of knowledge was applied and contributed a much greater role in the empirical analysis and statistical validations. To perform such work, the inductive approach was used which gave a deeper insight into the problem. Hence in this study, both of these approaches will be utilized, and greater advantages are foreseen in acquiring the best results.

Qualitative vs Quantitative

The qualitative approach, in contrast, is associated with constructivism, interpretation, and perception, which rather relates to the identification of rational and objective truth. The research approach, “aim is to discover the underlying motives of human behaviour” (Kothari, 2004, p.3). In this, the researcher seeks to have an in-depth understanding of the situation by viewing, observing, and conducting many repeated interviews to create or develop a phenomenon (Phillips and Stawarski, 2016).

The quantitative research approach defines the “measurement of quantity or amount, and it is expressed in terms of quantity” (Kothari, 2004, p.3). In this approach, the researcher follows a

11 statistical procedure to analyse and quantify the data. Also, an experimental design is used to measure the differences, in which the conclusions are made. In this, the use of the positivistic research paradigm is related to this research as it involves the use of mathematical and statistical tools to analyse the quantifiable data (Cooper and Schindler, 2008).

This study is carried out only with the help of qualitative approach. The qualitative method helped in identifying the problem needs, and more insights on the Scania way of performing business with the captive and non-captive markets. Further, qualitative analysis will be performed to know the current operations of sales and service and to know the driving factors, forces, and risks for performing vertical integration. The results obtained from the qualitative analysis will be used to build the decision model based on the importance that was collected through empirical study. Thus, the qualitative approach is preferred as it involves subjective viewpoints in developing the decision model. Therefore, a quantitative approach is not chosen for the study.

2.2.3 Research Design

According to Cooper and Schindler, (2008) the research design acts as a structure for investigating the study to answer the research questions. The research work involves a case study as the research design, and the report focuses on a single case study. The case study method is one of the common methods of qualitative analysis that requires close observation of a unit, business, or a person (Kothari, 2004). The case study focusses on in-depth analysis of the limited number of events and their interrelations. It helps the researcher to get a broader view of the work and to identify the issues. Also, it facilitates to combine both the qualitative and quantitative data through observation and analysis.

Advantages - Investigate and explore the study more thoroughly and deeply. - Compares different types of data regarding the study for providing a solution Disadvantages - It is limited to a certain sphere and not possible to analyse significant issues. - Time-consuming and require more data.

Reason for the choice of research design – case study

This study will require a qualitative approach which will be performed by conducting interviews with the Scania project managers. Furthermore, the significant forces driving vertical integration are weighted based on the importance given by subject experts form sales and marketing, and the commercial operations department helped to conclude building the decision model. So, case study will be the best-suited choice of research design in answering the purpose and research objective of the study.

2.3 Data Collection

To fulfill the purpose, different types of data collection methods were selected and discussed in this chapter. The data collection process begins after defining the problem. To perform research, two different types of data collection are required. The primary data is the one which is not available and is to be collected. It consists of observation, experiments, interview, questionnaires, etc. Secondly, the secondary data are available or existing information which includes company records, statistics, historical documents, published reports, books, etc. (Kothari, 2004).

2.3.1 Primary Data Collection

Interview - Interviews involve the qualitative approach of data gathering. The method of conducting an interview includes a personal and telephonic interview (Karlsson, 2008). The personal interview, in general, refers to a face-to-face interview, in which the interviewer initiates with a set of questions and the respondent answers to it. The method of collecting information through personal interviews involves structured, semi-structured, and unstructured interviews (Bryman and Bell, 2003).

In the structured interview, a set of pre-documented questions are listed in a pre-arranged order. In the semi-structured interview, the interviewer does not require to follow a formalized set of questions. It involves following up questions and discussions. In the unstructured interview, the questions are not pre-determined, and the interviewer has flexibility in asking the questions. Meanwhile, the unstructured interview is challenging to sort out the answers and time consuming (Björklund and Paulsson, 2013).

The telephonic interview involves contacting the respondents through telephone and acquiring the needed information. It is widely used in conducting surveys and a more flexible way of collecting data. Also, the questions developed are short and up to a point, which gives a higher response rate (Creswell, 2014).

To have a detail-oriented discussion about the problem and to gather more information, a personal interview is preferred over a telephonic interview. The personal interviews are performed by having a close observation with the respondent to have more control over the questions. Similarly, it helps to gain a large amount of information. However, the telephonic interview, regardless of the structure and time, less importance is given when compared to face- to-face interview (Gillham, 2005).

For this study, structured interviews were conducted. The discussions were prefixed and face to face mode of interviews were conducted. The questions were open-ended and framed before the interviews were performed. To prevent the manual data entry error, both of the team members were engaged in recording the information that were gathered. In the beginning, the interviews were conducted with the Scania project manager from the new and strategic project market to understand the purpose and the problems faced in integrating the sales and service network. To gain knowledge and views on the captive and non-captive business operations,

13 interviews with Scania project managers were conducted from departments like parts and services, sales, commercial operations, new and strategic project markets. Also, the respondents chosen for interviewing had experiences from different geographical locations of the world, which helped to have a broader view of the sales and service network operations.

2.3.2 Secondary Data Collection

Secondary data are considered as the recorded information that is existing and collected over a period by the researchers for their understanding. It includes lots of published and unpublished data. In the published data, various publications, journals, books, magazines, organisation reports, public reports, and historical documents. The unpublished data are many in this case, but the major things to be listed out are unpublished biographies, autobiographies, confidential organisation reports and other public reports (Cooper and Schindler, 2008).

To study and recognize the business activities and process over a sustained period, a mix of both the published and unpublished data will be considered. In the unpublished data, Scania’s internal documents and reports will be used like pre-study, planning, market establishment and initiation reports.

Adding to that, the literature review is carried out to demonstrate, explain and acquire information to solve the problem and to build the knowledge in the respective field. Its purpose is to have a closer study related to the problem, to build a relationship with the previous and current state and to explore more about the topic (Rocco and Plakhotnik, 2009).

To get an overview of this study, literature review related to operations strategy, business economics, sales and service operations, supply chain management were selected to have a broader knowledge on the topic which is discussed in the frame of references. To have multiple perspectives, detailed knowledge about the study, is carried out by online search engines like Science Direct, Research Gate, Unisearch. For this study, to make the search easier, certain keywords were identified micro, macro factors, vertical integration, horizontal integration, sales, services, social, economic, political and technical factors to gain the required knowledge.

2.4 Validity and Reliability

According to Creswell (2009), researchers need to check and measure the accuracy and credibility of the data gathered for the study. To make the data interpretation process more meaningful, validity and reliability are considered for measuring the qualitative data in this study.

2.4.1 Validity

Validity refers to “the extent to which a test measures what we wish to measure” (Cooper and Schindler, 2008, p.253). It acts as one of the strengths of qualitative research to check the accuracy of the findings. The validity is categorized into internal and external validity. Internal validity refers to how well the obtained data are consistent with reality. On the other hand,

14 external validity aims at how the results of the study can be generalized (Lekvall and Wahlbin, 2001).

To measure the validity of the qualitative data, the triangulation method is chosen for this study. To validate the data, the same questions were asked to four different project managers in Scania, and their responses were noted down, which helped to draw correct inferences from the data collected. The triangulation method helped to cross-validate the obtained responses and to make conclusions. To strengthen the validation of the data continuous verification method is chosen for the study. The responses gathered from four different interviews were shared with new and strategic project market manager and cross-verified to measure the consistency of the data.

2.4.2 Reliability

The reliability of the study aims at verifying the collected data’s which are consistent and accurate for providing results (Kothari, 2004). To ensure the reliability of the acquired results, the correlation method is used, such as test-retest (Cooper and Schindler, 2008).

In this study, to test the consistency of the information collected through internal interviews is measured using the test-retest method. The same questions were asked to four different project managers, and their responses are noted down. So, to verify the reliability of the responses, the answers obtained from all the interviews were gathered and analysed to see that common response are obtained. Thus, the test-retest method helps in making a strong correlation between the results obtained.

2.4.3 Workshop

A workshop aims at “producing reliable and valid data about the domain”. The workshop is used to strengthen the theory, add, or remove certain things and get feedback. Also, it is used for making an organisational change in a company, and the design process (Ørngreen and Levinsen, 2017).

In this study, a workshop is preferred to validate the developed decision model. Integrating the sales and service network involves different kinds of decisions which were acquired during the different sets of interviews. To build a more stable decision model, these responses need to be validated before proceeding over the analysis phase. Thus, the workshop is a better idea to project the authors responses to the subject experts and allowing them to judge whether these responses can be considered for further work. Apart from making appropriate decisions, integrating the sales and service network involves certain driving forces which need to be considered for evaluation. Further, some of the forces are eliminated and added as per the Scania’s suggestion. So, this workshop proved to be a useful tool as a validation check as well to check the reliability of the responses recorded in the past interviews in performing the integration process.

2.5 Realization of Study

In this section, after selecting the research methods used for the study, the realization of study was developed for understanding the flow of the work carried out in the thesis. The realization of study is divided into five categories, as seen in figure 6.

Figure 6: Realization of study

The planning phase acts as a base for the thesis work and contains important activities like company description, formulation of the problem, purpose, research question formulation, and methodology development. The planning phase begins with understanding the background of the problem by conducting a structured interview with the new and strategic project department. With this, the purpose of the study is identified, and the research questions are formulated. By identifying the problem, certain delimitations are set to narrow down the research work. Followed by that a specific methodology is developed which explains how the study will be performed in a structured way to obtain the results.

In the data collection phase, both the primary and secondary data are collected. The primary data helps to know the current business operation in Scania, sales and service network, and the business operations of the captive and non-captive network. Further, empirical data were collected to know the respective factors, forces that drive the captive and non-captive network, and risks involved in integrating the sales and service network. To know the business operation, data collection techniques like structured interviews are conducted with the project managers from new and strategic project markets and commercial operations. Next, the literature review

16 is carried out to get a clear perspective of the study in the frame of references. The frame of reference includes information obtained from literature, journals, and books relevant to study such as forces driving vertical integration, marketing environment, and decision model. The combination of both the data helps the researcher to identify and connect the relevant information to make reliable conclusions.

In the current state phase, from the interviews conducted Scania way of performing business is identified concerning vertical integration and disintegration. The analysis phase is carried out with the help of information collected from the literature review, current state, and empirical study. With the gathered information, the prioritization of factors, categorization of forces under the factors, and the risks involved in performing the vertical integration are conducted. Further, the predominant driving forces and factors are validated by conducting a workshop. The validation includes the addition, elimination, and matching of forces as per Scania’s understanding. Up next, once the forces and factors are validated weights are assigned to the forces by considering its importance for Scania in performing the integration process. Further, the decision model is developed with the appropriate decisions from the data obtained through the current state and empirical study. Also, to measure the reliability of the decision model the workshop is conducted with the subject experts in Scania.

In the result phase, to utilize the decision model, an example of how the identified forces are calculated is performed with data from one of the Scania’s non captive markets. The chosen market is analysed, and the conclusions are made for the market.

3. Frame of Reference

This chapter discusses the literature associated with the study regarding sales and service, marketing environment and vertical integration to provide readers with a better understanding of the theoretical concepts. Finally, the forces driving the vertical integration are discussed.

3.1 Sales and Service Networks

Sales and service network is responsible for delivering the product and for providing a complete service solution for the product. According to Kohtamaki et al., (2013) nowadays the OEM’s are moving towards being a complete service provider despite being only a product provider previously. As the product and service function are integrated the OEM’s can achieve customer satisfaction which tends to increase the demand of the product and brings out a stable revenue (Kohtamaki et al., 2013). Having a sales and service network with effective and efficient management is most crucial because it makes up most profits for the industrial companies (Gaiardelli et al., 2007). In the automotive industry, approximately 45 % to 50% of gross profit stems from the aftersales market (Cohen et al., 2006). Gallagher et al. (2005) have discussed that the aftersales market has a constant connection with customers and has an influence on customer satisfaction and loyalty. Also, Johnstone et al., (2008) state that the process of developing an after-market network is highly complex. Further, it is acclaimed that product companies must be conscious of how to approach the aftersales market.

Cohen et al., (2006) explain the hierarchy that should be taken into consideration while setting up the aftersales market. The hierarchy is differentiated into product hierarchy and geographical hierarchy. Product hierarchy refers to the service level to which the company will commit. A high product hierarchy refers to the end product, where the lead time of the end product is low, while a low hierarchy refers to extended lead time. Geographical hierarchy refers to how close the service station or dealer location is to the customer. A high geographical hierarchy means being present on customer sites, while low geographical hierarchy refers to the use of central facilitates. Being high in the product hierarchy and geographical hierarchy, the companies tend to have a successful after-sales market. To maintain the performance level companies must introduce KPI’s to the aftersales market (Cohen et al., 2006).

3.2 Marketing Environment

In the world where the international trade is continuously increasing companies need to look outward to the environment in which it operates by adapting to take advantage of emerging opportunities and to minimize potential threats. There are plenty of factors influencing a company’s reputation to work effectively and to provide suitable products and services for the customers. This is called the marketing environment. Further, the marketing environment is divided into macroenvironment and microenvironment, see figure 7 (Jobber and Fahy, 2009).

Figure 7: Altered design of Jobber and Fahy marketing environment (Jobber and Fahy, 2015, p.73)

3.2.1 Macroenvironment

The macroenvironment consists of factors affecting not only the company itself but also other players in the market (Jobber, 2010). Macroenvironment cannot be changed or adjusted. The macroenvironment forces are divided into six forces, as seen in figure 7. The acronym PESTEL is often used to describe macroenvironmental analysis. The acronym PESTEL consist of forces, namely political, legal, economic, social, technological, and ecological (Kotler and Armstrong, 2012; Jobber and Fahy, 2015).

Political and Legal Forces

Political and legal forces majorly influence the ability of companies operating in an international market (Doole and Lowe, 2012; Kotler and Armstrong, 2012; Jobber, 2010; Johansson, 2009). Political forces mainly describe the close connections with the politicians and the senior businesspeople have. These relationships are often created by the companies to monitor the political mood and to influence it. Companies sometimes contribute to local politicians to maintain a favourable relationship (Daniels, Radebaugh, and Sullivan, 2012). It also helps the companies to use the country’s resources and facilitates without any interruption such as real estate, harbor, airports, telecom etc. Political decisions can have significant consequences for companies. For example, it can lead to the creation or removal of companies and businesses. (Jobber and Fahy, 2015).

Further political effects that can affect companies are when sanctions or war are declared against other nations. An example of that is when the business climate for foreign, and local, 20 companies abruptly changed, and many firms pulled out of the USA when they decided to conquer Iraq. It has resulted in some leading American companies becoming the targets for attack and some American products being boycotted, which resulted in the creation or removal of industries and businesses in Iraq (Doole and Lowe, 2012).

Doole and Lowe (2012) discuss the significant political actions which can increase the political risk like currency exchange control, operational restrictions in the form of employment policies and requirement of national ownership. Also, physical actions in the form of nationalization and seizure of material or equipment.

Political action can be directly translated into legislation which can have a massive influence on business operations. Many countries have a kind of consumer protection act which indicates how the business cooperates with the consumers and how they publicize their products. These acts sometimes seem to be unfair, misleading, or aggressive (Jobber and Fahy, 2015). For instance, if a company promotes information that the product is environmentally friendly, it should be backed up with the evidence. The National Consumer Agency enforces this legislation. The political and legal decisions can change the rules of business very quickly. The mayor of San Paulo in Brazil introduced a law called the clean city which included that every company must avoid advertising outdoor, with the result many companies adapted quickly by advertising in social media to reach their customers (Bevins, 2010). On top of the various laws that are in place, specific industries have drawn up a code of practices to handle the political pressure and to protect consumer interest.

The companies must be aware of the constraints that might affect them by political and legal forces. It must know the extent to which there is a need to influence the political decision that might affect the operations. Also, the degree of industry standards must be self-regulated to maintain service and customer satisfaction (Jobber and Fahy, 2015).

Economic Forces

The economic forces can have a significant influence on the success of a company through its effect on supply and demand. A company needs to identify and monitor the forces that influence them. Doole and Lowe, (2012) and Jobber and Fahy, (2015) discuss the major economic forces that influence a company like economic growth and unemployment, interest rates and exchange rates and taxation and inflation.

Economic Growth and Unemployment - Economies tend to vary according to the business cycle. In the early, to mid-2000s the economies went through a period of significant growth because of the rise in demand in developing economies. For instance, China and the developed markets in the west (Jobber and Fahy 2015). This economic pattern is closely monitored by the sectors like retailing, services, and commodities. In the year 2007, there was a Global Financial Crisis which brought up a sudden scarcity of credits and which gave a significant downturn in the economies of Europe mainly. The financial crisis doubled up the unemployment rates. For example, Spain’s youth unemployment rate was estimated to be close to 50 %, all of which has

21 a negative effect on levels of consumer demand for products and services. So, companies need to predict the boom or downfall. Low growth rates and high unemployment levels can have a direct influence on the consumers because they tend to purchase less and sometimes switch to cheaper products or alternatives. A key challenge for the companies will be to try and understand the implications of the changing patterns of global economic growth (Jobber and Fahy, 2015).

Interest Rates and Exchange Rates - Interest rates are one of the levers which government uses to manage the economy. “The Interest rate is the rate at which businesses and individuals borrow money” (Jobber and Fahy, 2015). The interest rates are historically low throughout the world. This will result in an increase in capital investment for the companies. The exchange rates are the rates at which one currency buys another (Jobber and Fahy, 2015). For example, since the formation of the European Union, the exchange rates between the European countries are now fixed. However, the rates at which significant currencies like the US dollar, the euro, pound, and the yen are traded are still variable. These can have a massive impact on the profitability of the business in an international market (Doole and Lowe, 2012; Jobber and Fahy, 2015).

Taxation and Inflation - Taxation is of two types, direct tax, and indirect tax. “Direct taxes are taxes on income and wealth, such as income tax, capital gains tax, inheritance tax, and so on” (Jobber and Fahy, 2015). Income tax is considered the most important for the companies because it determines the level of disposable income that consumers have. Disposable income is the income which is remaining after deduction of taxes and social security charges. “Indirect taxes are the taxes which includes value-added tax (VAT), duties and tariffs and the taxes that are in the price of goods and services” (Jobber and Fahy, 2015). The changes in tax must be passed on to the customers, and sometimes it can cause a problem for the companies who are trying to compete on lower price segments. Differences in indirect tax level across the various countries give rise to the problem of parallel importing, which means the goods are bought in a low-cost country for importation back into the high-cost country. By parallel importing the cost of purchasing the products can be expensive and this creates a problem for the distributor or a buyer in the high-cost country. (Doole and Lowe, 2012; Jobber and Fahy, 2015).

Social Forces

According to Doole and Lowe (2012), the social forces consist of two major aspects which have a significant impact while pursuing a business in an international market namely demographic changes and cultural differences that exist within or between the nations. The term demographics represents changes that occur in the population. The critical factor in the last 200 years from society’s point of view has been the abrupt population growth. On the other hand, this situation brings out the benefit to the company by bringing more demand and needs. Also, on the parallel side, it raises the question about the sustainability of this global growth (Doole and Lowe, 2012). “Culture is the combination of values, beliefs and attitudes that are possessed by a national group or subgroup. Cultural differences have implications for how business is conducted” (Jobber and Fahy, 2015). As an example, India and China have a

22 growing market, so the international companies started implementing their business in these markets, and they are finding a vast difference both in terms of culture and the working pattern. However, international companies need to pay attention to the possible impact of the culture.

Technological Forces

Technology is essential when conducting business in an international market. At present, the growth of technology is phenomenal, which makes human lives easier and it supports the companies in their day to day process. On the other hand, it is also affecting the lives of human beings and companies. Technological advancement has given us various products which have made human life more comfortable. It also supports the companies to be competitive in the market and on the other side, it can cause problems for companies. If the company is not updated with their technological advancement, they risk being outperformed in the competition (Jobber and Fahy, 2015).

Environmental Forces

The sudden growth of the earth’s population and due to the overuse of fossil fuels has brought the issue of environmental sustainability to the center stage. Nowadays, most of the companies are working towards environmental sustainability. In effect of this, there has been a ban on many products (Doole and Lowe, 2012; Kotler and Armstrong, 2012). For example, as per the new legislation law, from 2025 onwards heavy vehicle manufacturers will have to meet the targets set for the fleet-wide average CO2 emissions of their new vehicles registered in a given calendar year. So, the heavy vehicle companies must reduce the emission levels up to 15% by 2025 and 30% by 2030 (Climate Action - European Commission, 2020). To get a substantial competitive advantage in the market, the companies must produce and transport their product in an environmentally friendly way (Jobber and Fahy, 2015).

3.2.2 Microenvironment

The microenvironment consists of factors which are in closes contact with the companies. Concerning the macroenvironment, microenvironment can be affected by the company to an extent. Doole and Lowe (2012) state the significant forces that affect the microenvironment such as customers, suppliers, distributors, and competitors.

Customers

The customers are one of the main assets of the companies. The customers are the one who determines the success or failure of a company (Jobber and Fahy, 2015). The great challenge for the companies is to be more innovative and identify the unserved market need to gain or retain the customers. This requires sensitivity to changing needs in the market, and the companies must be more adaptable to take advantage of the opportunities that are present in the current market (Jobber and Fahy, 2015).

Distributors

Distributors act as traders for many of the companies. In some cases, distribution is directly done by the company to the customers, and some use the services of independent wholesalers and retailers. Distributors provide many valuable services like making the product available whenever needed and by providing support services such as merchandising, installation and servicing. The growth of distributors plays a vital role in the performance of the manufacturing companies which tend to increase the profitability of the company (Doole and Lowe, 2012; Jobber and Fahy, 2015).

Suppliers

The distributors are not the only one who influence the companies, they can be influenced by their suppliers also. Sometimes supply chains can be very simple or complex; it depends on the size of the company. For instance, an automobile consists of about 15,000 components. As a result, the suppliers are categorized into three segments of suppliers. Tier-one companies provide essential components, such as electrical and braking systems. In Tier-two who might provide with the cables and in tier-three can produce necessary components like plastics or metals required for the product. Just like the distributors, powerful suppliers can extract the profitability of the company by restricting the supply of essential components (Doole and Lowe, 2012; Jobber and Fahy, 2015).

Competitors

The level of competition may vary from company to company. In some cases, there might be only two or three major players in a market which depends on the product segment (Jobber and Fahy, 2015). If an entry to the market is more accessible with high-profit potential and without any complicated entry barriers, in that case, there will be a lot of players and the competition can be intense. To be successful a player in the market, the companies must not only be able to meet the customer needs at the same time they need to have the capability of gaining a competitive advantage over other similar players in the market (Doole and Lowe, 2012).

3.3 Decision Model

A decision model is a decision support tool that uses a tree-like model of decisions. Decision models are commonly used in operational research, particularly in decision analysis, to help identify the strategy most likely to achieve a goal. It is also used when a choice is required for the company to be considered, see figure 8. The model is not only used for identifying the choices but for selecting the decision with the highest probability of success or effectiveness and to identify the best fit with the goals and values (Harris and Nayab, 2019).

The decision model consists of a Decision node 1 as shown in figure 8 which consists of the main factor on which the decision must be made. After identifying the main deciding factor, it is followed by a “yes” or “no” question. The “yes” or “no” question is branched out into two alternatives, the “yes” decision alternative and the “No” decision alternative. The “yes”

24 decision node denotes that the decision can proceed to the next step, i.e. Decision node 2 which is also followed by a “yes” or “no” question and so on. The arrows pointing the nodes in between are said to be called as the alternative branches of the decision model which shows the decision path that should be followed as shown in figure 8 (Bickerton, 2018).

The advantages of using the decision model are that it can be useful with or without hard data, and any data that is required in the model needs minimal preparation. New options in place of chance nodes can be added at any time. Also, it gives out the chance to pick the best option and it is easy to understand when combined with another decision-making tool. The disadvantage of the decision model is that it can become excessively complex when the inputs and the decision alternatives are larger. It can be avoided by keeping the model short and with the most required and important alternatives (McNamee and Celona, 2008)

Figure 8: Decision Model, inspired by (Bickerton, 2018)

3.4 The Decision Environment

Every decision made is within the decision environment, which is defined as the “collection of information, alternatives, values, and preferences available at the time of the decision” (Harris, 2019, p.2). A right decision environment includes all the possible information, every possible alternative with an accurate level. In the decision environment, the alternatives and information are limited due to the constraint of time and effort. The time constraint is nothing, but the limited time required to finalise the decision. The effort constraint reflects the limits of human resources, money, and priorities. Since the decision must be taken within the constrained

25 environment, there might be many uncertainties occurring and it is seen as a significant challenge in the decision-making process. The significant goal in this process will be to reduce uncertainty. It has been said that gathering of all the information required for a decision with certainty has never occurred, so most decisions involve certain risks (Harris, 2019). As time passes by the decision environment tends to grow, and a lot of new information and alternatives come into the environment even after the decision is made. So, the decision must be taken on time with the information and alternatives required. If the decision is delayed, there are two major risks involved in it (Harris, 2019; Nayab, 2019).

• While the decision environment grows, the decision taker might be overloaded with the information, and it misleads to the wrong interpretation of information and alternatives. • If the decision is delayed, the competitors can make a quick decision and can gain an advantage in the market.

3.5 Vertical Integration

Operations strategy drives the company’s operations and involves several decision-making processes to determine the company’s competitiveness in the market. In the operations strategy, vertical integration is one of the structured decision strategies which is used by various companies (Vieira, 2008).

Moreover, vertical integration is one of the significant strategic decisions for firms to overcome market imperfections and to enhance business performance. By vertically integrating the supply chain, firms able to have more control over their business by getting closer to the end customer, which intends to increase the customer values and gain higher profit margins (Hayes and Wheelwright, 2008). If a company is planning to implement vertical integration there are various factors of vertical integration that must be taken into consideration which majorly influences the ability of a company’s operation. According to Beckman and Rosenfield (2008), the four major key factors that need to be considered for making vertical integration in the company are categorized as the strategic, market, product, technological, and economic factors, are discussed below.

Strategic Factors

Strategic factors are linked to the decision made on the vertical integration process by looking into the firm's core capabilities on which the firm will compete in the market. From a strategic point of view, firms typically own only the core, important, or vital tasks, and the rest of the activities in the supply chain are outsourced based upon the possibility and need. Strategic factors assist in improving the companies essential core competencies. On the other hand, if the company cannot afford to meet the essential core capabilities internally, certain activities are outsourced which leads to vertical disintegration of the supply chain activity (Beckman and Rosenfiel, 2008).

Market Factors

Market factors in vertical integration focus on the reliability of the products on the distributor, dealer or service side in terms of improving the cost, quality, innovativeness, and availability. Further, owning business activities includes improving business operations, gaining market power, and minimized reliance on external suppliers. Further, if the companies prefer to disintegrate vertically, it leads to strengthening the companies competitiveness in the market among various distributors by obtaining larger economies of scale with less market demand (Beckman and Rosenfield, 2008).

Product and Technological Factors

Product and technological factors are associated with technological improvement and a change in product design. Based on the need, operational decisions are made either to own the technology or outsourcing it. Therefore, by integrating design and production or product and service benefits the firms in meeting the needs of the customers. Contrarily, if the company identifies that the external supplier or dealer has less access to advanced technologies vertical integration tends to disintegrate (Beckman and Rosenfield, 2008).

Financial Factors

Financial factors refer to the financial performance of the firms, which reflects on sales and expenses made for the product. In this, companies get benefited from fewer internal transaction costs and reduced cost on transportation and logistics cost. Also, if the companies depend on a lot of external suppliers or service providers, it leads to a lower production rate and lesser investment cost (Beckman and Rosenfield, 2008).

Further, Beckman and Rosenfield (2008), highlights how these four factors affect the firm's decision on vertical integration is discussed in Table 1.

Table 1: Factors for And Against Vertical Integration Beckman and Rosenfield (2008)

Factors Vertically integrate to Vertically disintegrate to

Strategic Factors • Build and maintain the • Get essential core essential core capabilities externally competencies. while working on internal development.

Market Factors • Improve quality, cost • Strengthen competition control, availability, among the suppliers to innovativeness, and perform well in the market. environmental performance are unstable • Have aggregate demand on in the markets. suppliers to have better economies of scale and • Make relationship lesser responsiveness to changes in the industry. the demand.

• Make less dependency on the suppliers.

Product and • Have more control over • Have less or no access to Technological the technologies. the use of current Factors technologies available • Integrating design and internally. production or product and • Use of available resources service offerings. from modular product architectures.

Financial Factors • Reduce cost on • Lower production rate or transportation and service delivery cost. logistics. • Reduces investment cost. • Lesser transaction costs.

3.6 Dimensions of Integration

Rudie Harrigan (2001), proposed a framework for looking at the vertical integration and the integration decision for the companies which are made based on the dimensions of integration. The dimensions of integration are classified into stages, breadth, degrees, and forms of integration that need to take place in the firm for the betterment of the business process. Below are the integrations categories. • Stages of integration • Breadth of integration • Level of integration • Forms of integration

3.6.1 Stages of Integration

The number of steps involved in the firm’s supply chain process from the start of purchasing the raw material to delivering it to the end customer defines the stages of integration. In the manufacturing industry, the stages of integration are differentiated into upstream and downstream integration. In the upstream integration, the firm engages in integrating the supply chain at the beginning of the process. And, in the downstream integration firm engages in

28 integrating the supply chain at the end of the process. Also, economists refer upstream and downstream integration as the backward and forward integration (Rudie Harrigan, 2001).

In an automobile manufacturing industry, the firm’s supply chain process is vertically integrated into several stages, which includes research and development, purchasing, production, assembly, logistics and other additional stages. Alongside, certain firms involve only in the assembly of the vehicle, which is described as one of the stages in the supply chain process. In addition to that, in the oil industry, firms engage in several adjacent stages, like seismic exploration, land leasing, pipeline services, refining, production, and wholesale distribution of gasoline, heating oil and petrochemical products. In this, if the firm engages in one or two stages of the supply chain process, like refining crude oil and shipping it to the wholesalers, it is termed as the stages in the supply chain process (Rudie Harrigan, 2001).

To make the vertical integration decision more accurate, firms must focus on the stages and breadth of integration simultaneously. The main issue while implementing vertical integration strategies is its complexity, as each distinct activity may contain technological advancements, managing the business operations, and requires high investment. Depending upon the need, management decides on how much of the integration activities should be performed in-house or provided to the outsiders, and decisions on upstream or downstream integration are made (Harrigan, 2001).

3.6.2 Breadth of Integration

According to Harrigan, (2001) “the number of activities a perform in-house at any particular level of the vertical chain determines the breadth of integration”. The breadth of integration matters to many companies resulting in cost advantages. Firms that have widely integrated business units choose to perform more activities internally than small or medium-scale firms. Widely integrated business unit significantly improves the value-added margin of a firm at each stage of integration. By making more in-house products and services, widely integrated firms can be benefited at each stage of the supply chain process (Harrigan, 2001).

The reason that breadth of integration matters is when firms manufacture more unique products and provide better services to the customer results in improving the firm's financial performance. When the demand for the product or service is more on the customer's side and the time when firms cannot able to meet the need of the customers, widely integrated business units can rely on the external suppliers or service providers. In most cases, managers try to cut down the number of transactions made with the external suppliers or service providers to enjoy the cost benefits (Harrigan, 2001).

3.6.3 Level of Integration

The level of integration is the percentage of activities the firms perform internally. For instance, purchasing components or providing in-house services. The level of integration is differentiated into full and taper integration. In the fully integrated business units, 95% or more

29 of the activities are made in-house. Next, in the taper integration, the company purchases more than 5% of the raw materials or services from the outsiders (Harrigan, 2001).

When the firms are vertically integrated, the level of integration matters, as it reduces or eliminates the transaction cost made with the external suppliers or outsiders. The change in transaction cost directly affects the firm's financial performance. Also, if firms engage in outsourcing the supply chain activities, then the vertical integration tends to outbalance due to financial transactions made with the outsiders. To experience better financial advantages, firms are benefited more through taper integration than the full integration provided the technological benefits (Rudie Harrigan, 2001).

By vertically integrating, firms need to look after each supply chain activities, as making lots of in-house products or services will cause a firm to invest more money in each business activity. Alongside, based on the firm's capability and needs, a few, all, or none of the raw materials or services from the outsiders is accepted to reduce the uncertainty in upstream or downstream integration. The firm’s management is responsible for deciding the level of integration in which how many numbers of internal transactions should takes place at a given time (Rudie Harrigan, 2001).

3.6.4 Form of Integration

In the forms of integrations, many firms choose to own vertically integrated business units entirely to enjoy the advantages of vertical relationship, for a variety of other control arrangements. If the firms cannot able to own the vertically integrated business units, the forms of integrations contain three types of strategies to make use of the vertical integration benefits. The types of strategies include full, taper, and quasi integration. Depending upon the extent and mode of ownership the firms can adapt to one of three integrations strategies. These types of strategies benefit the firm in terms of managing the risks, controlling the business process, increasing the market share, and long-term profitability (Rudie Harrigan, 2001).

Full integration - Full integration refers to companies making more in-house products and services by obtaining all the assets, resources, and expertise in the business unit, which leads to an increase in the firm's market share. If the business environment is stable, more integration steps can be performed and result in cost benefits when the transaction takes place internally. Also, it needs a considerable amount of investment to integrate business activity. By fully integrating, the firms can produce more in-house products and services which enables them to get closer to the customers in meeting their needs and demands (Rudie Harrigan, 2001).

Taper integration - Taper integration refers to companies involving a mix of in-house and outsourcing activity in any stage of the vertical integration chain. The most use of taper integration is experienced when the firms add significant value to the products they produce, and the availability of raw material does not have a meaningful impact on the firm's financial performance. In this, companies sell part of its products through in-house sales and rest through independent distributors or dealers (Rudie Harrigan, 2001).

Quasi integration - Quasi integrated companies account for not owning 100% of the adjacent business units in the vertical chain. The relationship between the firms and the adjacent business units takes place in the form of joint ventures and franchises. By quasi integration, firms need to invest more money on the adjacent business unit. Also, it offers more flexibility to business operations and can adapt to the changing business environment. At certain conditions, quasi integrated business units benefit from economies of scale to some extent (Rudie Harrigan, 2001).

3.7 Forces Driving Vertical Integration Downstream

Driving forces of downstream vertical integration act as a base to measure the performance of the industry and to make decisions on when and when not to integrate. Also, several internal driving forces determine the positioning of the vertical integration strategy in the supply chain. In downstream vertical integration, strategy positioning in the supply chain directly affects the company’s performance in terms of resources and competitive advantages. As discussed in chapter 3.5, the strategic, market, product, technological, and financial factors are further categorized into several driving forces and the reasons are discussed below from various authors point of view on the downstream vertical integration.

Technical complexity Technical complexity in vertical integration refers to product and technological factors which results in higher utilization and a longer lifespan for the product. Technical complexity in an industry leads to a greater number of products in use than the products sold in a year. The longer life expectancy of the products made a substantial portion of the value-added activities to move from production to maintenance and servicing of the existing goods in the marketplace (Osegowitsch and Madhok, 2003). Synergies In the downstream integrations, synergies act as a strategic factor in getting closer with the product producer and the service provider. It helps to make a better decision-making process in terms of meeting the demand, customers having more access to the products or services, and improved product lead-time. Further, synergies can be gained between the supplier and customer by managing more operations in-house, minimizing the amount spend on assets and maximizing the profit. (Osegowitsch and Madhok, 2003).

Customer demand for an integrated solution

Customer demand for an integrated solution is focused on the product and technological factors of downstream integration. Further, providing an integrated solution to customers acts as a strategic business activity in meeting the needs of the customers and helps to broaden the company's scope in future. In today's corporate business activities, lots of companies are pressurized by their customer in providing a more extensive range of product and service

31 offerings. As customers are keen on their core capabilities of the product, providing integrated solutions will benefit the company in the long run (Osegowitsch and Madhok, 2003).

Competitor Volatility

Competitor volatility in the downstream integration concentrates on the market factors in the downstream vertical integration. When the competition in the market is identified as volatile, companies prefer to make less in-house and tend to outsource the distributor, dealer, and service operations by reducing certain risks. Further, if the competition in the market is identified as stable, companies shift their business activities by providing services internally to the customers. Moreover, it makes the company gain more power over the market and acts as a barrier for new entrants (Rudie Harrigan, 2001).

Higher Margins

Higher margins in downstream integration play a major role in financial factors in which the companies get benefitted from various sources of revenue. In the downstream integration, companies gain higher profit margins and acquire more assets by investing more in sales operations and providing service in various locations. As a result, it indicates a higher profit is obtained in the downstream integration by providing better services to the customers than the product manufacturing (Wise and Baumgartner, 1999).

Market Reliability

Market reliability in downstream integration refers to the measurement of the operations such as market share, technological adaptation, revenue, customer satisfaction, and environmental conditions. Further, the performance of the market is measured in terms of cost, quality, availability, and innovativeness. By measuring the market reliability on continuous bases, the decision on integrating the supply chain activities can be performed. Moreover, it results in defending market performance through competition and ensuring more control over the market (Wise and Baumgartner, 1999).

Corporate Strategy objective

In vertical integration, the corporate strategy objective is to perform business activities with fewer risks and to enhance business performance by maintaining sufficient cash flow. Most companies rely on strategies to achieve their long-term goals. For the betterment of the company, specific targets are set, like profit maximization, increasing market share, providing better services, and advancement in technologies. By vertically integrating, companies need to invest huge money on technological improvement, and it leads to a higher degree of integration in the supply chain (Harrigan, 2001).

Strategic partnership with the customers

Strategic partnership with the customers states that downstream integration activity creates more competitive advantages to the business. Further, the strategy on a partnership with 32 customers helps the distributor or dealer to maintain a better relationship with the customers in maintain or expanding the business with the most loyal customers. Also, it helps to become more competitive in the market by enhancing customer relations (Harrigan, 2001).

Transaction Cost

Transaction cost is one of the primary forces driving vertical integration in the companies. In vertical integration, transaction cost refers to several transactions made in an organization, either internally or externally. The internal transaction cost includes managing and improving the operations in the company, which results in more profit by lesser transactions. The external transaction cost includes purchasing the parts or outsourcing the sales and service operation to the outsiders, which directly results in higher transaction cost involved with the outsiders (Guan and Rehme, 2012).

Technological Adaption

Hall and Khan (2003), states that technological adaptation as “the choice to acquire and use a new invention and innovation.” In downstream integration, adapting to new or advanced technologies results in higher investment and, at the same time, contributes to the company’s well-being. Advancement in technologies promotes business growth in providing better solutions to the customers in an efficient way and results in gaining a competitive advantage in the market.

Asset Specificity

Asset specificity defined as “an extent to which the investments in assets (both physical and human) are specific to the particular trading relationship” (Ruzzier, 2009). During the integration process, companies prefer to invest more in assets for the establishment of the business. Higher asset specificity on the business creates more interdependence in the market and helps in better business operations. Also, it creates a barrier for other companies to enter the market and results in gaining a competitive advantage in the business. Asset specificity aims at inducing opportunities and results in reducing the cost of preventing opportunities (Ruzzier, 2009).

Economies of Scale

Economies of scale refer to the situation where the average cost of producing one unit of a good or service decreases as the number of output increases. When the integration is performed either downstream or upstream, it helps in increasing the company's market share by creating a barrier for new business entrants. Also, resulting in higher profit margins by reducing the average cost of the product will benefit the firm in the long run. The risks for economies of scale are seen when the average cost of production increases simultaneously output increases, which leads to more complexity to manage and run the business (Chen and Sen, 2012).

3.8 Pros and Cons of Vertical Integration

The pros and cons of vertical integration listed are adapted from the framework for looking on vertical integration, Harrigan (2001).

The pros of vertical integration are divided into internal benefits and competitive benefits as shown in Table 3. By performing vertical integration, a company can gain internal benefits by increasing transparency in the process. It also avoids time-consuming tasks, like communicating design or services, and negotiating contracts because the company will be the one who is responsible for the whole downstream supply chain. The competitive benefits which a company can gain by performing vertical integration are, it can improve technologies in its operations to be the top player in the market. It makes the company more flexible which makes the company provide increased value-added services of the product to the end customer and it brings the trustworthiness on the product.

The cons of vertical integration are divided into internal costs and competitive risks as shown in Table 3. If the company performs the integration process without any prior business plan it may results in a bad time with the distributor or dealer at a high cost in the downstream supply chain. Since the company is responsible for the whole downstream chain the resources which are required for the service operations and the aftermarket should be planned in a structured manner or else it leads to a lack of resources to meet the firm’s requirements in service operations. The competitive risks which the company may face after performing vertical integration are that it may lose access regarding the distributor and dealers since the whole operation is handled by the company itself. Also, if the integration process is performed with a bad business partner, for instance, a private distributor or dealer with a bad business performance the company will lose a competitive advantage over the market.

In the below table the summary of pros and cons of vertical integration are presented for a clear understanding.

Table 2: Summary of Pros and Cons of Vertical Integration (Harrigan, 2001)

Pros Cons Internal Benefits Internal Costs • Transparency in the business process • Improper integration in the business results reduces the costs in certain activities in a bad time with the distributor or dealer at a higher cost. • Avoids time-consuming tasks, like communicating design or services, and • Lack of resources to meet the firm’s negotiating contracts requirements in service operations.

Competitive benefits Competitive risks • Improved technologies and higher • No access regarding the business marketing power. operations and performance from the distributor or dealers. • Increased value-added services. • Integrating the business with weak • More market power and trustworthiness business partners. on the products.

3.9 Uncertainties in Vertical Integration

The major criteria which must be considered before performing vertical integration are the risks and uncertainties. Kumar, Trinh and Sakao, (2012) discusses how the companies perceive and react to the different types of uncertainties involved while performing vertical integration. The different types of uncertainties described are market uncertainty, company uncertainty, environmental uncertainty, product function uncertainty, the uncertainty of innovative service, and integration uncertainty. The first three uncertainties, market uncertainty, company uncertainty, and environmental uncertainty, are addressed during the planning phase of the integration, while the rest are primarily addressed in the design and development stage.

Market Uncertainty - In the vertical integration process, market uncertainty plays an important role. Market uncertainty comprises identifying the customer target and market segmentation, as well as positioning the product development process. Here the uncertainty which may occur is that the frequent change of the market environment. Due to the frequent change of the market environment, the companies lag in updating their business structure, which means it does not allow them to make changes or decide immediately as there are many stages in the integrated supply chain, and making a decision will affect the overall supply chain. So, each stage in the supply chain must be considered before making the decision. Since each stage must be considered, the whole process can be time-consuming (Kumar, Trinh and Sakao, 2012).

According to Kumar, Trinh and Sakao, (2012) market uncertainty has been regarded as an important uncertainty in the planning phase of the integration process. To avoid uncertainties, companies should continuously monitor changes in customer behaviour and market segmentation to gain competitive advantages.

Company Uncertainty - The major aspects due to which company uncertainty occur are organizational structure, stakeholders, resources, and competencies needed for performing the integration process. According to Kumar, Trinh and Sakao, (2012) company, uncertainties are mostly faced by small firms due to the adequate resource allocation and unstable organizational structure. Company uncertainty can be avoided if a firm has sufficient funds to allocate its resources in the right time and a stable organizational structure.

Environmental Uncertainty - Environmental uncertainties are the uncertainties that occur due to political and legal forces and as well the technological changes. Political and legal forces decisions can have significant consequences for companies. For example, it can lead to the creation or removal of companies and businesses. Technological changes support the companies to be competitive in the market, and on the other side, it can cause problems for companies. If the company is not updated with their technological advancement, they risk being outperformed in the competition (Kumar, Trinh and Sakao, 2012).

Product Function Uncertainty - The vertical integration has ambiguity over time since it can alter with the purpose of businesses, e.g., by updating. Obsolescence is a reason for the uncertainty. Product function uncertainty may lead to incompatibility of new product functions with existing platform strategy. It can be avoided by providing extra services to the customer, like maintenance and upgrade or repair of the product (Kumar, Trinh and Sakao, 2012).

Uncertainty of Innovative Service - Innovation leads to changes in technology and can, therefore, be the source of confusion. Also, there is a likelihood of a lack of resource allocation for innovative services, as businesses get used to focusing on product innovations in the manufacturing sector. This leads to an uncertain situation for the company where the challenge is more to achieve good customer satisfaction and to maintain competitive advantages in the market. To avoid such kinds of uncertainties, the companies must have a regular follow up with technological innovations and should quickly adapt to the market environment (Kumar, Trinh and Sakao, 2012).

Integration Uncertainty - The uncertainty occurs due to the integration of more stages in a company’s supply chain. When the stages of integration are more, it becomes complex for the companies to adjust or make changes. It can be avoided by properly designing the business plan and by looking at the exact needs which the company is required (Kumar, Trinh and Sakao, 2012).

4. Current State

This chapter presents an overview of the sales and marketing business process and market organisation. Also, the business process of how captive and non-captive network works are discussed. As a pre-study, the models such as market screening and distributor development process studied in detail are presented.

As the study concentrates on developing a structured decision model for performing vertical integration in the sales and service network. RQ1 focusses on analysing the current business operation in Scania sales and marketing and how the captive and non-captive network works. Also, Scania’s current practice for evaluating the market based on market screening model and distributor development process is reviewed as a pre-study for developing the decision model.

RQ 1: What is the current operation of Scania sales and service, and how is the existing integration process carried out in it?

To answer RQ1, internal interviews were conducted with the new and strategic project markets and commercial operations department. The interviews conducted in a structured way and the questions can be seen in Appendix 1. To make sure of the consistency of the data obtained the same questions were asked to the four different project managers.

4.1 Sales and Marketing

As seen in figure 2, previously, sales and marketing in Scania are divided into departments KT, KB, and KR. Under sales and marketing, KT, and KB is responsible for the factory sales of buses, coaches, trucks, engines, parts, services, connected services, and solution portfolios, as seen in figure 9. On the other hand, under sales and marketing, the KR department is responsible for entering new markets for market communication, including branding of all Scania products and development of franchise standards for the sales and service network throughout the world.

Figure 9: Sales and Marketing Department (Scania, 2019)

4.1.1 Business Area

The business areas are responsible for product management, sales and profitability in their respective product or service areas like trucks, buses, coaches, engines, connected services and solutions, parts and services.

4.1.2 New and Strategic Project Markets

In the new and strategic project markets of sales and marketing (KR), the department is in charge of the advancement of product sales, and responsible for finding new market opportunities. To identify the business opportunity in the country, market analysis is conducted. The market analysis constitutes of macro and microenvironment. In the microenvironment, factors like distributors, customers, suppliers, and competitors are analysed. And, in the macroenvironment factors consisting of political, economic, legal, social, technological, and environmental are analysed to get an overview of the market and the risks involved in establishing the business.

4.2 Market Organisation

The market organization is categorized into commercial operations and sales and marketing, as discussed in chapter 1.1. The commercial operations are responsible for the captive network, which is handled entirely by the Scania and responsible for running the business unit in a market.

The sales and marketing department is the one who receives the finished product from the logistics department, which comprises of trucks, buses, and parts. Also, the department is responsible for selling the products to the commercial operations for a captive network. In the captive network, commercial operations control the entire business units (distributor, dealer, and workshops). In the end, products are sold to the dealers of the respective market.

The non-captive network has privately owned distributors and dealers, where the sales and marketing department sells the products directly to the distributors in the market, and the company has no power to manage or control the business units (distributor, dealer, and workshops).

4.2.1 Captive Network - Commercial Operations

As seen in figure 2, previously, the market organization is divided into two, namely commercial operations and sales and marketing. The commercial operations department comprises business units, distributors, dealers, and workshops (captive and non-captive), as seen in figure 10. And, the business units in the regions are responsible for the Scania retail network in one or several countries.

Commercial Operations is responsible for strategies, operations and control of the Scania- owned business units globally. The commercial operations define the offer of customer-driven

38 solutions for each market and acts as a support to drive performance. The operational activities are based on specific regions and are co-ordinated by a regional director. The business units (distributor, dealers and workshops) consist of one or several national sales and service companies. The business units are managed by the Corporate Governance Manual and are governed by boards of directors, which monitor and support operational and financial performance. The captive markets are grouped into four different regions, and an Executive Regional Director heads each region. A Managing Director heads each Business Unit. The dealers and workshops in a business unit can be both captive (owned by Scania) and non- captive (owned by private entrepreneurs), as seen in figure 10.

• AMR – Americas • AOR – Asia and Oceania • EMA – Eurasia, Middle East, and Africa • EUR – Europe

Figure 10: Captive Network (Commercial Operations) Business Unit (Scania, 2019)

Distributors

A distributor is a member of Scania’s distribution network of products and services set up by Scania CV AB, in charge of sales and the distribution network for one or more of Scania’s products and services in one or more countries. The distributor also comprises the term Business Unit (BU) which is a unit operationally responsible for more than one distributor. The Scania distribution network is either captive (Scania owned) or non-captive (not Scania owned) as shown in figure 10.

Dealers and Workshops

Dealers and Workshops is the collective term for all facilities within Scania’s authorised distribution network of products and services irrespective of their activities. A dealer is in charge of sales and distribution of new Scania products as well as after-sales services. A workshop is exclusively in charge of after-sales services, as seen in figure 10. Each dealer is assigned an area of responsibility and responsible for expanding the Scania business and for meeting the demands of all Scania customers.

4.2.2 Non-captive Network

The sales and marketing department is divided into KT, KB, and KR, as seen in figure 2. In a non-captive network, the sales and marketing department is responsible for the selling of trucks, buses, and parts directly to the private distributors in the market globally as seen in figure 11. The operational activities in a non-captive network are based on specific regions and are co-ordinated by the respective area manager by Scania. Area managers are responsible for looking after the sales operations until the distributor level. In the non-captive network, the department does not have the power to manage or control the business unit (distributors, dealers, and workshops). However, a non-captive network has limited access to the private distributors in the market; it helps to support the distributor and drive performance together with the Scania strategy.

Distributor

As discussed in chapter 4.2, the distributor network in the non-captive network is responsible for product sales and services, which are owned by private entrepreneurs, and Scania does not have any access to control or evaluate the distributor or dealer performance. The distributor in the non-captive network is responsible for more than one dealer and workshop.

Dealers and Workshops

Dealers and workshops in the non-captive networks are owned by private entrepreneurs and do not have a Scania authorized distribution network of products and services. A dealer is in charge of sales and distribution of new Scania vehicles and parts sales and, the workshop is entirely in charge of after-sales services and owned by private entities.

Figure 11: Non-captive Network Business Unit (Scania, 2019)

4.3 Reason for Captive and Non-captive Network

To distinguish the reasons for moving with the captive and non-captive network, it is essential to understand Scania’s history over the last 25 years on how the process of vertical integration is conducted. Below are the few reasons for the integration of the Scania sales and service network.

4.3.1 Reasons for Captive Network

Establishing a captive network or the change of network from non-captive to the captive are carried out in a step by step process. The steps are connected to the macroenvironmental factors which include political, legal, market, technological, and economic reforms in a country. For instance, over years, all of Europe, Eastern Europe, and Asia were non-captive. However, today, it is mostly captive, especially the parts of the Middle East and Africa, which is non- captive. As mentioned, it has been a long term trend that has been figured out from non-captive to the captive situation. However, still, there are some white spots called unidentified areas. The white spots, in general, described as a not proper representation of sales and service networks in lots of countries like Africa and there is a regional sort of harm like political or legal issues while representing a market.

To move into a captive network, it involves more to look at the specific market factors like market maturity, the investment required to build a distributor and dealer network, building

41 workshops, technological needs for better service operations, and recruiting employees. If the market was non-captive, further from identifying the market growth and maturity, sooner or later, a change is required for a non-captive to move with the captive network provided the political and legal factors are stable in the market. Moreover, that is often seen as a turning point for a transformation from a non-captive to a captive. Similarly, setting a business in a region without having a proper representation had started the process of moving into a captive or non-captive network. Also, it does not happen from one day to another, as it is more like a project and takes decades to do these things happen in the long run. Further, if the country is forecasted with market potential the management decides to capitalize on the business units in driving the market forward. This decision acts as the moment of buying or selling the distributor or dealer in the market, provided with the political situations.

In the late 1990s, Asian economic crises collapsed the industrial sectors globally. At that point, Scania had only independent representation (non-captive) of the sales and service business unit, and most of those were family companies where they had been building the business not only for Scania but also for multiple franchises. For capitalizing the business, the companies obtained several loans which were in USD. As the lending of USD is at lower rates the payback of the amount was in local currencies during the period. This favoured lots of companies in capitalizing and establishing the business. However, the arrival of Asian economic crises forced the devaluation of local currencies. For instance, if the company had borrowed 1 Million USD suddenly, it becomes equivalent to 5 or 6 Million USD in local currency. In some cases, it was even up to 8 or 9 Million USD. From the devaluation of the local currencies, there is a kind of hit for most of the companies where it went bankrupt, or at least they have to downscale the market sale considerably, which was the case.

If the market is captive, then Scania can able to measure it entirely in terms of profitability, products sold, distributors, dealers, workshop performance, and efficiency as it is in its own hands. Adding that captive network allows getting closer to customers in meeting their needs.

4.3.2 Reasons for Non-captive

The verdict of moving with the non-captive network is more or less similar to the factors discussed in the captive networks macro environmental factors which include political, and economic changes in the country.

In this, the political conditions include corruption, political instability, risks, taxes, etc. For example, in Saudi Arabia, the reason for going with the non-captive network is due to political instability in the country, which made the business operations difficult to move with a captive network.

In terms of economic conditions, Scania focusses on finding the maturity of the market, how large the economy to have a better return on investment. For instance, if the business environment is less in the developed countries it puts Scania business operations at risk which results in attaining the targeted profit margins. Subsequently, when the market requires less

42 investment and has a lower demand for the products and parts it is advantageous for Scania to move with a non-captive network.

If the market is non-captive, Scania does not have access to evaluate the business performance as it owned by the private distributors and dealers, which seemed like another company.

4.4 SMSM - Scania Market Screening Model

In Scania, the new and strategic project market department developed a Scania market screening model (SMSM) to evaluate the market potential. The SMSM is performed in three stages, as seen in figure 12. In the model, an analysis is carried out for each factor. The analysis of the screening model is carried out in which the factors with better performance are moved to the next stage. Contrarily, the factors having the worst performance is moved out of the screening model with “no” decision. The same analysis procedure is carried out on the next two stages of the screening model and the decisions are made.

The stage 1 includes the minimum criteria need to be known or considered for starting a business in terms of sanction against a country, which explains Scania to be aware of the cause of the sanction imposed on the countries. The second factor, the population of the country are set with a minimum range of one million inhabitants in a county.

In Stage 2, the countries that pass the first stage are further analysed on the factors within political, economic, and legal groups. In the political group, factors like corruption, political instability, and political risk are evaluated.

In the second sub-group, GDP, GDP growth, GDP/capita, ability to transfer foreign currency, national investment activities, and foreign direct investment are assessed. And, in the last subgroup, the rule of law, tariffs, duties, and safety are considered.

In Stage 3, a group of social, technological, and micro factors is analysed. The social group comprises of urbanization, education level, and disposable income per capita. Further, current infrastructure, ongoing infrastructure projects, logistics efficiency, and the presence of the leading competitor are analysed in the technological and micro factors.

Finally, the total score obtained by the countries after the third stage is taken into consideration to build the decision support used to decide which countries to study in the Distributor Development Process (DDP).

Figure 12: Scania Market Screening Model (Scania, 2019)

4.5 DDP - Distributor Development Process

The Distributor Development Process acts as one of the processes for the captive and non- captive network and for the new or current markets in identifying the market potential for Scania. DDP aims at providing a better structure for expanding Scania’s business to new markets or when to move with new distributors in the current markets.

As seen in figure 13, the initiation stage of DDP contains macro factors and preliminary case. The macro factors are analysed to check the business condition in a country is appropriate for Scania to perform business or not. Secondly, the preliminary case focusses on identifying the business potential for Scania in a market by making a rough estimation of the market. For a detailed understanding of the initiation stage, Scania developed a model called the Scania Market Screening Model (SMSM), which is explained in detail in chapter 4.4.

In the second stage of DDP, the pre-study contains five sub-steps. The first sub-step is structuring the process by making a project plan and controlling the project. The second sub- step contains distribution evaluation which aims at identifying and evaluating the right distributor on numerous aspects to find the best fit for Scania. In the third sub-step, the distributor passing through the evaluation process needs to write the letter of intent stating what they want to achieve in the business by collaborating with Scania. The letter of intent helps to get to know each other (Distributor partner and Scania).

The fourth sub-step in pre-study explains the setting up a business plan. The business plan aims at presenting the information about the distributor and their organization, carrying out a SWOT (Strength Weakness Opportunity and Threat) analysis, and a three-year development plan. In

44 the fifth sub-step, to make sure of the business plan, an agreement is carried out with the distributor to move with the business case. The business case helps to find the breakeven point of both Scania and the distributor. Also, Scania should investigate the distributors potential for survival in the market and make sure the distributor will not go bankrupt in a certain period. So, the business case is performed by having an estimation of the sales volume on different products, staff, and operating expenses, calculating the net investment, analysing the financial situation, and the performance of the distributor.

The third stage in the DDP is the planning phase. It is also known as a final check-up, such as due diligence to examine the distributor potential. Also, to formulate contracts with the best partners in the country where the future expansion is possible.

Figure 13: Distributor Development Process (Scania, 2019)

5. Empirical Data

The empirical data chapter consists of primary and secondary data obtained from the Scania market organization in Södertalje. Primary data consists of interviews conducted during the study. And, the secondary data consists of internal reports obtained from the different departments in Scania.

5.1 Gathering of Factors and Forces Required for Decision Model

This section will address the gathering of factors and forces that drives the captive and non- captive network. As the business operations of the captive and non-captive network are discussed in chapter 4. Empirical data helps to gain more understanding of how the factors and forces affect the business operations in a captive and non-captive network. As discussed in the problem description, it has been a long-lasting argument that when the sales and service network should be integrated or disintegrated. With the changing market dynamics, a structured decision model is required for Scania by identifying the driving factors, forces, and risks for performing integration.

To identify the factors, forces and for the development of a decision model, four internal interviews were conducted with the project managers of commercial operations and the sales and marketing department. During the study, a structured interview was conducted which can be seen in Appendix 1. The structured interview is focused on the integration operation in Scania which helps in identifying the factors, forces, and risks in the captive and non-captive network. The primary data that has been obtained through interviews are also used as an input for building the decision model and for identifying each factor and forces. Further, secondary data were obtained from the Scania internal reports with the support of project managers. From the internal reports, few forces were suggested by the project managers as it helps in measuring the performance of the business operations in a captive and non-captive network.

5.1.1 Data Gathered from Interview 1

The first interview is conducted with the area manager, who is responsible for one of the countries under a non-captive network. In this, the respondent discusses the significant driving factors, forces, and risks faced in moving with the non-captive distributor or dealer in a network.

The respondent states, political and legal factors are analysed as the first step of the analysis process in moving with the captive and non-captive network. In the political and legal factors, forces like corruption, political instability, transaction risk, taxes, and sanctions against the country are assessed for performing business in a country. The mentioned political and legal forces affect the company’s business environment by disrupting business operations. Also, it puts the business operations at risk by imposing more taxes and higher transfer costs resulting in the company's operational performance at higher risk. If the corruption level, political instability, transaction risk, taxes, and sanctions are less it makes easier for the Scania to

47 establish a captive network in a market. On the other side, if the political and legal forces are high, it is good to move with the non-captive network to reduce Scania’s risk of performing business.

After viewing the political and legal factors, the respondent states the investment cost in the dealer and distributor level in the market factors helps in moving with the captive and non- captive network. In the sales and service network, investment cost in dealer and distributor includes setting up workshops, recruiting employees, and owning technologies for servicing buses and trucks. To move with the captive network, the decision is made by identifying the market size. So, if the market size is big or small and it requires less investment it is good to move with the captive network. Also, if the investment cost is high and the market size is small it is good to move with the non-captive network with results in reducing the cost involved in business investment. And, in the market factors, the sales performance of the buses, trucks, and parts are measured quarterly to check the market reliability and to measure the revenue outcomes from the non-captive and captive network. If the sales performance of buses, trucks, and parts are high in a market, then it benefits Scania in the long run, which ensures that the market is more reliable for performing business.

Next, in meeting Scania’s mission and goal in the sales and service network strategic factors are taken into consideration. As the non-captive network are owned by private entrepreneurs Scania faces complication in meeting the strategic goals. In the non-captive network, Scania brand is not accurately represented to the customers, as the private entities have their agendas, and their way of performing business seems like one of the risks in meeting the Scania’s strategic objective. And, the level of sustainability maintained in the non-captive network is fewer in terms of environmental factors due to higher investment, which is not made possible by the private companies is seen as another risk for Scania. If the market is captive, Scania provides high importance in meeting the strategic objectives and sustainability level in providing better services to customers and improving the brand image.

At last, the financial performance of the non-captive network for all the markets or countries is measured quarterly to evaluate the profit margins. If the network is non-captive, the financial transaction ends with the distributor level as it owned and controlled by private entrepreneurs. So, the financial factors like market share for trucks and buses, and gross profit % of vehicle sales, parts sales and labours are measured to find the profit margins at the distributor level. And, if the market is captive the financial performance at the dealer level is measured to know the overall profit margins of the sales and service network in a country.

Finally, from the respondent view on the non-captive network, the specific forces are identified and categorized based upon the political, market, financial, and strategic factors, as seen in Table 3 next page.

Table 3: Summary of Factors and Forces from Interview 1

Factors Forces

Political Political Instability, Corruption, Sanctions, Transaction Risk, Taxes

Market Market Size, Investment Cost, Sales Performance

Financial Gross Profit % of Vehicle Sales, Parts Sales and Labours, Market Share for Buses and Trucks

Strategic Strategic Objective, Level of Sustainability

5.1.2 Data Gathered from Interview 2

To support the idea of triangulation method, a similar set of the interview is conducted with another respondent from the captive network to validate the responses received over the first one. In this interview, a similar set of questions were prepared, and the responses were recorded regarding the factors, forces, and risks involved in moving with the captive network.

In the beginning, the respondent illustrates that the political and legal forces like political instability and corruption are analysed to check the risks for performing business in a market. If the market or country is identified with higher political and legal risks, it directly affects Scania’s business performance. And, if the political and legal risks are less then moving with the captive network is the right decision for Scania.

Next, in the market factors, forces like the level of competition in the market, negotiation power with distributor and dealer, and presence of European brands are viewed as a base for before moving with the captive network. As Scania establishes business far away from the head office, the mentioned market forces are given prior importance for understanding the market reliability. At first, the competition in the market is evaluated to identify the market potential, identifying strategies for market establishment or expansion, and thereby focussing on investing money in establishing the distributor and dealer network. If the competitor in the market or country is less, then it acts as a positive one for Scania to see more profit, block the new truck or bus manufacturers to enter the market. And, also Scania can focus on investing money in the establishment of the distributor and dealer network. At last, in the market factors, the presence of European brands is analysed in the new market or country to identify Scania's survival. In this, if the previously established European truck and bus manufactures have a

49 better business in a market then it increases the chances for Scania to sustain in the new market or country.

To measure the financial performance in the captive network, it is evident that Scania has access throughout the whole system the financial forces are measured at both the distributor and dealer level. Here, the financial forces like gross profit % of vehicle sales, parts sales and labours are measured to find the profit margins at both the distributor and dealer level.

Coming to the strategic factors in the captive network it is seen as an opportunity for Scania to measure the sales and service network entirely, as it becomes easier to work towards the long- term goal, which is in-lined with the Scania’s strategic objective. If the distributor or dealer network is non-captive, Scania does not have access to measure or improve the distributor and dealer level, as another company owns it. And, the product fit in the market is seen as an important strategic force to be considered in Scania. For instance, in Turkey, the customers are much adapted towards the European truck manufacturers, as the customers are interested in paying more for better trucks then the local manufactures make a perfect product fit for Scania to make business.

At last, from the above discussion, the forces driving captive network are categorized based on the political, market, financial, and strategic factors are seen in Table 4.

Table 4: Summary of Factors and Forces from Interview 2

Factors Forces

Political Political Stability and Political Risk.

Market Competitor Analysis, Investment Cost, Presence of European Brands.

Financial Gross Profit % of Vehicle Sales, Parts Sales and Labours, Market Share for Buses and Trucks Strategic Strategic Objective, Product Fit

5.1.3 Data Gathered from Interview 3

To evaluate the reliability of the responses, the senior advisor of commercial operations was chosen for this interview to know the significant driving factor and forces that need to be considered for moving with a captive network. Since the higher officials might help in responding to a bigger picture which will provide much wider information for the study in developing the decision model.

As discussed in chapter 5.1.2, the commercial operations respondent states similar political and legal factors like political instability, corruption, taxes, corruption, and transaction risk. If the mentioned political and legal forces are of less risk, then it is advantageous in moving with the captive network. And, if the risks are high it is good to move with the non-captive network (private entrepreneurs).

In the market factors, the forces negotiation power, competitor analysis, investment cost, presence of European brands, and sales performance are comparably the same as discussed in chapter 5.1.2 and 5.1.3 in moving with the captive network and non-captive network.

Here, the respondent discusses an in-depth analysis for measuring the financial forces at the distributor and dealer level as it completely owned and controlled by commercial operations, Scania. Here the financial forces considered for assessing the distributor level are the same as discussed in chapter 5.1.2 such as market share for trucks and buses, and gross profit % of vehicle sales, parts sales, and labours. Additionally, the driving force Scania vehicle parc 0-10 years is mentioned in the distributor level, which means knowing the number of trucks and buses in a market for the past ten years.

In measuring the financial performance at the dealer level in the captive network, the financial forces are split into vehicle operations in dealer level, service potential utilization, and workshop production for a better understanding of the profit margins and business performance. At first, in the vehicle operation, the financial forces like gross profit % of vehicle and parts sales and labours from the distributor level are once again considered for measuring the financial performance at the dealer level.

Second, in the service potential utilization, forces like invoiced orders or sold, the value of parts sales per vehicle in the parc, the number of contracts sold and contracts per vehicle in parc are calculated and analysed. The invoiced orders or sold is nothing but the number of vehicles invoiced or sold. And, the number of contracts sold refers to several contracts sold for the vehicle. Lastly, the contracts per vehicle in parc is defined as the number of contracts sold per vehicle in the market.

Thirdly, in the workshop production sub-division, the forces such as productivity % and efficiency % of the workshop, the number for technicians per workshop, invoiced hours per technician, number of invoiced hours per vehicle in parc (0-10 years) and customer satisfaction index. In this, the force workshop productivity and efficiency refer to the technician’s work and in providing services to the vehicles. And, the force number of technicians per workshop includes assessing the number of permanent and temporary employees in the workshop. In this, the temporary employees will be working on the external components of the vehicles like trailers, and body works. The permanent employees in the workshops take care of servicing the cabs, engines and handling the office administration. Next, the force invoiced hours per technician is measured by identifying the technician stamping time for servicing the vehicle. In the dealer level, the financial factor, customer satisfaction index is kept for measuring the customer satisfaction with the company, product and service provided.

Further, from the above discussion, the forces driving captive networks are categorized based on the political, market financial, and strategic factors, as seen in Table 5.

Table 5: Summary of Factors and Forces from Interview 3

Factors Forces

Political Political Stability and Political Risk.

Market Negotiation Power, Competitor Analysis, Investment Cost, Presence of European Brands, Sales Performance, Investment Cost.

Financial Customer Satisfaction Index, Gross Profit %, Invoiced order or sold, Value of parts per vehicle in the parc, Number of Contracts Sold, Contracts per vehicle in parc%, Productivity%, Efficiency %, Number of Technicians per Workshop, Invoiced Hours Per Technician.

Strategic Nil Information

5.1.4 Data Gathered from Interview 4

The final discussion is conducted with the head of market development for parts and service which illustrates the management decisions and forces on moving with the captive or non- captive network.

In the captive network, when the management identifies an opportunity to capitalize on the business (distributor or dealer network) and drive the market forward, better than the private entrepreneurs, that is the moment Scania owns the distributor or dealer network. At the same time, Scania tries to capture the distributor and dealer network in the market or country provided the political and legal factors discussed in the chapter 5.1.2 are stable.

Also, the legal force, code of conduct in a country includes a set of rules, norms, and practices where the companies need to follow for performing business in a country. And, the code of conduct applied to all countries and varies from country to country which makes the business process more difficult.

Moving with a captive network requires lots of investment in the distributor and dealer level as a long-term plan. Adding that business environment is analysed by knowing the market

52 maturity and economy size which are needed to be measured to have a better return on investment. If the business environment is not at the satisfying level in a market, then it becomes difficult to see more profits, as it plays a vital role in building the distributor and dealer network.

At the same time moving with the captive network Scania need to utilize a lot from the market or country by selling trucks, buses, and parts in large volumes. The captive network helps in gaining more profit margins with the distributor and dealer network. If the marker or country is non-captive, Scania tends to lose profit in the business as the profit margins obtained from the private distributor and dealer gets less.

Further, from the above discussion, the forces driving captive networks are categorized based on the political, market financial, and strategic factors, as seen in Table 6.

Table 6: Summary of Factors and Forces from Interview 4

Factors Forces

Political Corruption, Code of Conduct

Market Investment in Dealers and Workshops

Financial Nil Information

Strategic Nil Information

6. Analysis

This chapter begins with analysing the factors, forces, and risks gathered from the frame of references, current state, and empirical study. After analysing, significant forces required for vertical integration is evaluated, weighed and the decision model is built in a step by step procedure.

This chapter focusses on the research objectives, which include, RQ 2: What driving factors and risks should Scania consider in performing vertical integration? And RQ 3: How is the decision model built with the identified driving factors and risks?

To begin with, answering the research questions, the RQ 2 will be answered first. Further RQ 3 will be answered to meet the research objective. In RQ 2, the analysis will pave the way for the prioritization of factors, categorization of forces, and the risks involved in performing the vertical integration. The analysis is conducted based on the information retrieved from literature, current state, and empirical study. The first subchapter will present the prioritization of factors. The second subchapter is conducted for categorizing the forces under the prioritized factor group that has been finalised from the first subchapter. The third subchapter will represent the risks involved in performing integration. Also, in the fourth subchapter, all the possible forces that contribute to vertical integration have been categorized and the forces are matched and altered with the gathered forces from the empirical study as per Scania’s understanding.

From the current state and empirical study, it is evident that decisions for vertical integration are made possible with the involvement of commercial operations and the sales and marketing department. As discussed in chapter 4.2, commercial operations are responsible for managing the captive network operations and sales and marketing is responsible for non-captive network operations. As both departments have their point of view in integrating the sales and service network, a workshop has been conducted to validate the factors, forces and risks that need to be taken into consideration for building the decision model. The workshop involved 5 subject experts from commercial operations and sales and marketing departments together. The validation in the workshop includes the matching and alternation of the names, elimination and addition of forces based on the importance of each force that is required for Scania to perform the integration process. Also, the workshop included the validation of the final decision model which will be concluded in the latter part of the report.

6.1 Prioritization of Factors

As previously stated in the problem description, the integration process in Scania is performed in an ad hoc manner. Thus, the focus of this chapter is to structure and prioritize the factors that need to be analysed and for developing the decision model to perform vertical integration. Here the factors chosen to be included in each stage are dependent on the information collected from the frame of references, current state, and empirical study.

From chapter 3, Jobber and Fahy, (2009) discussed the factors influencing a company’s ability to work effectively and to provide suitable products and services for the customers. Also, Osegowitsch and Madhok, (2003), Harrigan, (2001), Wise and Baumgartner, (1999) discusses the significant driving forces that are required for performing vertical integration. Further, from chapter 5 it is apparent that in which situation Scania performs integration and the significant factors influencing Scania while performing integration are explained.

Conferring to Jobber and Fahy, (2009) it is important to consider the political and legal factor at the first level while performing a market evaluation or establishment to understand the stability of performing the business for a company in a market. From chapter 4.3, the factors that majorly influencing Scania at the first level while performing the integration is identified to be same as Jobber and Fahy, (2009) conferred which is political and legal factors. It is that the move towards the captive network or the change from captive to a non-captive network is connected to the macroenvironmental factors at the first level which includes political and legal factors. So, it is evident that political and legal factors are the most significant ones to be considered at the first level while developing the decision model.

Moving further, according to Hayes and Wheelwright, (2008) the vital forces driving vertical integration are categorized into different groups which are market, strategic, technological, and financial factors. In chapter 4.3 it has been discussed that for Scania to perform integration it involves additional research on a specific market and technological factors. It is also discussed that the market and technological factors should be considered after analysing the political and legal factors to know the current situation in the country to check on how good it is for performing integration. Further, Beckman and Rosenfied, (2008) say that market factors in vertical integration are important to consider to know the reliability of the market in the distributor and the service side in terms of cost, performance, economies of scale and innovativeness. The stability level of the market factors gives an overview of the company on when to perform the integration. After considering the above statements market factors has been prioritized at the second level for analysis while developing the decision model.

Moreover, from the chapter in 4.3, it is evident that once that platform is set, looking after the financial factors is vital, because in the terms of financial conditions Scania focusses on finding the maturity of the market, how large the financial situation is to have a better return on investment. For instance, if the market maturity is less in the developed countries it makes the company difficult to achieve the profit margins. Subsequently, when the market requires less investment, and have lower demand for the products and parts performing vertical integration will lead to a market failure. In this case, financial factors have been prioritized at the third level for analysis while developing the decision model.

In chapter 3.5, Beckman and Rosenfied, (2008) says that strategic factors are linked to the final decision made on the vertical integration process by looking into the firm's core capabilities on which the firm will compete in the market. Strategic factors assist in retaining the companies essential core competencies and to plan, expand its business in the future. From chapter 5 for Scania, analysing the strategic factors is seen as an opportunity to measure the sales and service

56 network entirely, as it becomes easier to work towards the long-term goal, which is in-lined with the Scania’s strategic objective. By considering the statements strategic factors are measured at the final level to forecast future assurance over the market before conducting the integrating process.

As per the above discussion, the factors for analysis are categorized in the levels as described below. 1. Political and Legal factors 2. Market and Technological factors 3. Financial factors 4. Strategic Factors

6.2 Categorization of Forces

This chapter mainly discusses the categorized forces under each factor group such as political and legal factors, market and technological factors, financial and strategic factors. After the prioritization of factors, the next step of analysis is done to categorize the forces under each factor group. Like the prioritization of factors, the categorization is conducted to bring out the significant forces that are required for Scania to perform the integration in a better way. Here the factors chosen to be included are dependent on the information collected from the frame of references, current state, and empirical study. In this chapter, the analysis of categorization is conducted in a step by step procedure. That means the forces required for each factor group have been analysed in the prioritized level as mentioned in the previous chapter 6.1.

Political and Legal Forces

Primarily the forces required for analysing the political and legal factors are identified. In chapter 3.2 under political and legal forces Jobber and Fahy, (2015) and Doole and Lowe, (2012) discusses the significant forces under political and legal factor group. The authors also convey that if a company is set to perform its business in an international environment the major consequences, they face are regarding currency exchange, taxes, corruption, and sanctions. Further, while analysing chapter 5 two more significant forces under political and legal factor groups are identified. The two identified forces are operation risks and code of conduct. It is also mentioned that the basic legal conditions like operational risks and code of conduct are applied for all the markets where Scania performs business currently and it is important to analyse it before starting the business. In summation the forces under political and legal factor groups are categorized into currency exchange, taxes, corruption, sanctions, operational risks, and code of conduct.

Market and Technological Forces

As a next step, the analysis of forces under market and technological factor group are categorized. In chapter 3.2 under macroenvironment in technological forces Jobber and Fahy, (2015) states that technological advancement has given various products which have made

57 human life more comfortable. Further, the authors state that it also supports the companies to be competitive in the market and on the other side, it can cause problems for companies if they are not adapted to the technological advancement, they risk being outperformed in the competition. Also, in chapters 4 and 5 it is identified that Scania also has a similar perspective on technology adaptation. It is that Scania dealers and workshops must adapt to technological advancement quickly for not being outperformed and which is an important force to be considered under technological factors. In chapter 3.7, Ruzzier, (2009) states that higher asset specificity on the business creates more interdependence in the market and helps in better business operations. Also, it creates a barrier for other companies to enter the market and results in gaining a competitive advantage in the business and which is one of the significant forces to be considered under the market factor group while performing the integration process. In chapter 3.7, Guan and Rehme, (2012) define that transaction cost is one of the primary forces driving vertical integration in the companies. They also state that it must be analysed and fixed before performing the integration process. From chapter 4.3.1 it has been identified that one of the reasons for Scania moving into a captive network is to internalize the transaction cost. If the risk is more for making the transaction cost internalized in a market Scania tends to keep the network non-captive. So, the transaction cost is taken as a force under the market factor group.

Moving further in chapter 3.7 Rudie Harrigan, (2001) states that when the competition in the market is identified as volatile, companies prefer to make less in-house and tend to outsource the distributor, dealer, and service operations by reducing certain risks. Further, if the competition in the market is identified as stable, companies shift their business activities by providing services internally to the customers. Moreover, it makes the company gain more power over the market and acts as a barrier for new entrants. In chapter 5, one of the respondent’s states that Scania frequently investigates the competitor’s performance and level of competition before starting up the business in a market and to analyse the market stability and potential. Further in chapter 3.7, Rudie Harrigan, (2001) states that forces like Industry Volatility, Bargaining Power and Market Power are the essential forces to be analysed before performing the integration process and further states that for knowing the stability of the market environment these forces are crucial. Also, when these forces are verified with Scania’s perspective most of the respondents during the interviews stated that for a market to be captive the forces like industry volatility and market power allow them to know the present state of the market for efficiently performing the business. Lastly, from chapter 3.7, Chen and Sen, (2012) discuss that when the integration is performed either downstream or upstream, economies of scale helps in increasing the company's market share by creating a barrier for new business entrants. Also, resulting in higher profit margins by reducing the average cost of the product will benefit the firm in the long run. In summation, the forces which have been analysed and categorized under market and technological factors are asset specificity, transaction cost, competitor volatility, differentiation, industry volatility, economies of scales, bargaining power, market power, and technological adaptation.

Financial Forces

In the next stage, the analysis of forces under the financial factor group is categorized. The general forces which fall under the financial factor group and the forces that are relevant to Scania to measure the financial outcome are analysed and categorized from the frame of references, current state, and empirical study. The categorized forces under the financial factor group are higher margins, revenue, market share, customer relationship, and market reliability.

Strategic Forces

Finally, the forces under the strategic factor group are analysed and categorized. In chapter 3.7 Harrigan, (2001) describe the forces like corporate strategy objective and resource-based view are crucial for a company to have a sight on it before performing the integration process. Further, the author states that the company will be able to forecast future assurance over the market before conducting the integrating process. When these forces are validated with Scania, the force sustainability level has been included in addition to corporate strategy objective and resource-based view. Sustainability level has been added because it is one of the main forces in which Scania currently focuses on its products and business. In summation, the categorized forces under the strategic factor group are corporate strategy objective, sustainability level, and resource-based view.

At the next step after categorizing the forces, the forces are matched and altered with the gathered forces from the empirical study as per Scania’s understanding. The alteration is done to understand the forces better for the employees inside Scania and to make the calculation process easier in the final steps, other than that the contribution of the force is the same towards performing the vertical integration. The terms are altered and finalised from the workshops and discussions conducted internally in Scania with the subject experts. The alteration of the names of forces can be seen in Table 7 below.

Table 7: Categorization of Forces and Altering it to Scania Level

Factors Forces Gathered Altered Forces

Currency Exchange Transaction Risk

Operation Risk Political Stability and Risk

Taxes Taxes

Political and Legal Level of Corruption Corruption

Code of Practices Code of Conduct

Sanctions Security

Asset Specificity Investment in Dealers and Workshops

Transaction Cost Exchange and Interest rate

Competitor Volatility Competitor Performance

Industry Volatility Sales Performance Market and Economies of Scales Market Economies of Scale Technological Bargaining Power Negotiation Power with distributor and dealer Market Power Presence of European Brands Technological Adaptation Technology Adaptation Higher Margins Gross Profit %

Revenue Gross Profit % Financial Market Share Market Share Customer Relationship Customer Satisfaction Index Market Reliability Workshop Production

Corporate Strategy Objective Strategy Objective

Resource-Based View Product Fit Strategic Sustainability Level Level of Sustainability

6.3 Risk Analysis

To make vertical integration decisions more accurate, risk analysis is performed with the help of data obtained through the frame of references, current state, and empirical study. The decisions for vertically integrating the sales and service network is made possible by analysing forces and their effects on it. In the risk analysis, the driving forces of vertical integration will determine the risks for integration. For instance, if one of the forces considered for vertical integration is regarded as worst, then it is seen as the risk for integration decision. On the other hand, if the forces seem to have a positive impact, it is seen as a significant force that needs to be considered for vertical integration. This chapter discusses the risks of each force under each factor group such as political and legal factors, market and technological factors, financial factors, and strategic factors.

Risks for vertically integrating the sales and service network begins with political and legal factors. According to Doole and Lowe, (2012), and Jobber and Fahy, (2015) under political and legal factors states, the forces like currency exchange, corruption, taxes on goods, sanctions against a country, operational risks and code of conduct are viewed with higher importance for performing business in a country. From the empirical data, it is evident that, if the above- mentioned forces have a higher percentage of risks in a country, it makes harder for Scania to perform business in an international environment and, it is considered as the risk for performing integration or market establishment in a country. So, if the currency exchange rates, corruption level, taxes on goods, sanctions, and operational risks are less in a country, then the country is stated as politically and legally stable, it helps Scania for integrating the sales and service network or helps in establishing a captive or non-captive network in a country.

In the next step of the risk analysis, the forces under market and technological factors are categorized. Under market factors, forces including investment cost, competition in the market, sales performance, economies of scale, and negotiation power are evaluated to measure the performance of the business in a market. Wise and Baumgartner, (1999) states that identifying the market reliability in terms of sales performance and economies of scale helps in integrating the sales and service network or establishing the business in a country. From the empirical data, measuring the sales performance and market economies of scale helps in identifying the market's future demand and forecast sales volume. By understanding the market reliability, the decisions for integration on sales and service network or market establishment is performed to limit the risks for Scania. As the sales performance and economies of scale are seen as the opportunity to gain more profit for Scania, the forces competitor in the market, investment in dealer and distributor and presence of European brands are listed as the forces with lower risks.

Coming to the technological adaption, under technological factors, Jobber and Fahy, (2015) states if the company is not updated with the current technologies, they risk being outperformed in the competition. Also, for Scania adapting to new technologies acts as one of the major things in the sales and service network. With the rapid advancement in the field of technology, if the private distributor or dealers (non-captive) are not connected with the current technologies can cause problems for Scania in meeting the customer needs. So, in the non-

61 captive network, if the technological factors are not up to a certain extent it is considered as one of the major risks for Scania which puts the service operation at risk. If the market is captive, Scania invests resources in adapting to new technologies in meeting the needs of the customer, and it is not seen as a significant risk.

Finally, the risks in the financial factors comprise of forces such as gross profit %, market share and the workshop production as discussed in chapter 5. As the financial factors help to meet the financial objective of the company and to meet the revenue goals, high importance is given to identify the financial risks of integrating the sales and service network. In Scania, the financial factors are measured at the distributor and dealer level. From the discussion in chapter 4 and 5, Scania tries to own the distributor and dealer network in a market which leads to higher profit margins in the business. If Scania owns the distributor or dealer network, and therefore have higher profit margins, then it is viewed as a positive sign for Scania. Simultaneously, if the market or country does not seem to have much profit then it is seen as the risks for Scania. To reduce the financial risks, Scania prefers to go with the independent distributor or dealer network. Thus, the respondents view on performing risk analysis focusses more on analysing the political, legal, market and technological factors in identifying the market potential and integrating the sales and service network.

6.4 Changes and Weighing of Forces for Performing Vertical Integration

In this chapter upon categorizing the forces under each factor group and conducting the risk analysis the obtained forces are evaluated and weighed. The weighing and changes of forces are done with the collaboration of the subject experts from the department sales and marketing and commercial operations in Scania together. The collaboration is done by conducting a workshop. Here the weights are assigned to the gathered forces. Also, apart from the weights provided, from the conducted workshop as stated earlier few forces have been eliminated and added. These things have been performed to know the significance of each weight depending upon their importance value for Scania in performing the integration process.

The workshop is initially started by eliminating and including forces under each factor group such as political and legal factors, market and technological factors, financial factors, and strategic factors. In stage one, the forces of political and legal factors are evaluated. While evaluating the forces, sanctions and code of practices have been eliminated from the political and legal factor group. The forces which have been eliminated were not the primary forces for performing integration.

In stage 2, market and technological factors are evaluated. In market and technological factors, the force transaction cost has been eliminated though it is an important force under the market and technological factor group. It has been eliminated because the subject experts felt that it will be complex for gathering the data for several non-captive markets since it is owned by the private entities. Also, they stated that in private entities the transactions are internalised, and it is not shared with Scania. Therefore, in this case, the force transaction cost has been decided to be removed.

Up next in stage 3 the financial factors are evaluated. As seen in Table 7 those were the primary financial factors which has been collected from the frame of reference, current state, and empirical study. The subject experts wanted the financial factors to be more elaborated and precise for performing the integration process. So, after a detailed discussion in the workshop, the financial factors are divided into two separate levels that are financial factors at the distributor level and financial factors at the dealer level. This has been done to know the financial performance at each level distinctly such as distributor and dealer level. After separating the financial factor into two different levels the respective forces in each level has been added. The addition of forces is done by going through the various internal reports of performance evaluation that has been conducted for various countries in Scania previously and the empirical study. After evaluating the reports and conducting the discussion with the subject experts, the forces in financial factors at the distributor and dealer level have been obtained. The obtained forces in financial factors at distributor level are vehicle sales and parts sales - gross profit %, market share for trucks and buses, and Scania vehicle parc (0-10) years. Further, in the financial factors of dealer-level vehicle sales and service operation, service potential utilisation and workshop production is added. To make the calculation process more precise, vehicle sales and service operation, service potential utilization, and workshop production have been classified into several forces. Vehicle sales and service operations are classified into gross profit % of vehicle sales, service, parts sold, and labours. Service potential utilization is classified into Invoiced or sold, the value of part sales, the number of contracts sold, and contracts per vehicle in the parc. Workshop production is classified into productivity, efficiency, number of technicians per workshop, invoiced hours per technician, number of invoiced hours per vehicle in parc, and customer satisfaction index.

In stage 4 the strategic factors are evaluated. After the evaluation, the forces which have been gathered previously have been unchanged. Further in the process, the subject experts wanted the strategic factors and the financial factors at the dealer to be analysed at the same level. By analyzing the strategic factors at the final level together with the financial factors at the dealer level Scania will be able to forecast future assurance over the market before conducting the integrating process. So, as a suggestion from Scania, both factors have been considered at the same level for analyzing. So, after this, the elimination and addition of forces are concluded. The finalised forces under each factor group can be seen below in Table 8.

In the next step, weights are fixed for all the forces under each group depending upon their importance to the current and future business. The forces under each group are weighed to a total of a hundred percent which can be seen below in Table 8 next page. For instance, in political and legal factors transaction risk is 30% important than the political stability and risk which is 25% important. The weights which are given below in Table 8 for each of the force is provided by Scania. Since the subject experts are well experienced and aware of the situation in most of the markets the weights are finalised after a discussion among them. The finalised weights have been shown below in Table 8 and those are the weights that are used for the final testing of the model.

After finalising the weights for each force, an analyses model is developed in MS Excel which can be seen in Appendix 2. Further, the developed analysis model can be used by Scania in evaluating the market or country in the future for deciding on moving with a captive or non- captive network.

Table 8: Weighing of the Force

Factors Forces Weights of Forces (%)

Transaction Risk 30%

Political Stability and Risk 25% Political and Legal

Corruption 25%

Taxes 20%

Total 100%

Investment in Dealers and 10% Workshops Competitor Performance 10%

Sales Performance 20%

Market and Market Economies of Scale 20% Technological Negotiation Power with distributor 20% and dealer Presence of European Brands 10% Technology Adaptation 10%

Total 100%

Vehicle Sales - Gross Profit % 20% Financial – Distributor Level Parts Sales - Gross Profit % 40%

Market Share for Trucks 25% Market Share of Buses 5% Scania Vehicle Parc 0-10 years 10%

100% Total Vehicle Sales - Gross Profit % 15%

Service Operation - Gross Profit % 15%

Parts Sales - Gross Profit % 20%

Labours - Gross Profit % 6%

Invoiced Orders or Sold 5%

Value of Part Sales per vehicle in 5% parc

Financial – Dealer Number of Contracts Sold 5% Level Contracts per vehicle in parc % 5%

Productivity % 5%

Efficiency % 5%

Number of Technicians per 4% workshop

Invoiced Hours Per Technicians 3% (Year)

Number of Invoiced Hours/Vehicle 2% in Parc (0-10 Years)

Customer Satisfaction Index 5%

Total 100%

Strategy Objective 50% Strategic Product Fit 10%

Level of Sustainability 40%

Total 100%

By identifying the driving factors and risks that should be taken into consideration for Scania to build the decision model, the chapter continues by answering the RQ 3. Based on the current state and empirical study, a decision model on vertical integration of sales and service network is developed and the process involved in the decision model is discussed briefly. Finally, the built-in decision model is validated by conducting a workshop with the subject experts from sales and marketing, and commercial operations in Scania.

6.5 Development and Working of the Decision Model

In this chapter, the development and working of the decision model are explained. Further, the method of calculating the overall rating and its outcome are discussed for analysis of the different levels. Also, a grading table is used to identify the outcomes of the overall rating. As previously stated in the problem description Scania had a request stating that the decision model must be user friendly and structured. Initially, to develop the decision model, the information gathered from the current state and empirical study helped in making appropriate decisions for each level. When developing the decision model for this thesis it was believed that four levels of the decision-making process are a suitable number. Because as previously discussed in chapter 6.1 and 6.4 the prioritized factors involved four significant levels that are sufficient for performing the integration process. The four levels are categorized into level 1 political and legal factors, level 2 market, and technological factors, level 3, and level 4 included the financial factor at the distributor and financial factor at the dealer and strategic factors.

The decision model is inspired from Bickerton (2018) and it has been altered as per Scania’s suggestion. The developed decision model consists of a decision node. The decision node is followed to the “yes” or “no” decision alternative by answering a question “is the obtained overall rating is 3 or above?”. The “yes” or “no” question is branched out into two alternatives, the “yes” decision alternative, and the “No” decision alternative. To start making decisions for each level, a market or country must be chosen for integrating the sales and service network.

Later after developing the decision model, the model is validated with the subject experts in the workshop conducted. The validation of the model has been conducted to know that the decisions are accurate and right for Scania to perform the integration process.

6.5.1 Calculation for Overall Rating of the Factor

As the overall rating defines the final “yes” or “no” decision the rating obtained for each factor level is dependent on the scores achieved from the forces under the factor group. The calculation process is done in such a way that the overall rating includes the scores of the forces. For conducting such calculation, the weighted scoring method is used to calculate the overall

66 rating for each level. The weighted scoring method is used when all the forces considered are not equally important, which differs from the normal scoring method. In weighted scoring, each force has a different weight and it is summed up to a total of a hundred per cent. In this case, the weighted scoring method is appropriate for calculating the overall rating of the factor as forces of different weightage are used as discussed in chapter 6.4.

As a first step, the score of the forces under the corresponding factor group is calculated. Since the score of each force is calculated differently the calculation process of scores for each force is explained in the upcoming chapters under corresponding factor groups such as political and legal factor, market and technological factor, financial factor at distributor and dealer level, and strategic factor. As a next step, after identifying the scores of each force, the weights are applied to the respective forces. Then the applied weights are multiplied with the identified scores and a result is obtained as shown in column H in example figure 14.

The result obtained by multiplying the scores and the weight is summed up. As seen in the table below the summed-up value is 2.1. Since the overall rating should be an integer the value 2.1 is rounded off to the closest whole number. After rounding off, the obtained value is 2 and that is said to be the overall rating for the political and legal factor. As discussed in chapter 6.5 here the overall rating is fixed from range 1 to 5 for the factor group. A similar method is used for calculating the overall rating for all the factor groups.

Figure 14: Example - Analysis of Political and Legal Factors in Excel

6.5.2 Level 1 – Political and Legal Factors

As the first step of the decision model developing process, to analyse the level of political and legal factors, overall rating and its outcome are discussed. The overall rating is fixed from the range 1 to 5. The outcome of each rating is shown in a grading table as seen in Table 9. The ratings present in the grading table denotes the ease of doing business in a market. Rating 1 defines that the level is very bad for performing business in a market. Similarly, rating 2 describes that the level is bad for performing business. In this case, if the level scores 1 and 2 the analysis cannot be carried forward to the next level. Further, rating 3 means the level is found to be good for performing business. Rating 4 indicates that the level is very good for performing business. Correspondingly, rating 5 states that the level is excellent and stable for

67 performing business in the considered market. The analysis is taken forward to the next level if the obtained rating is 3 or above. The grading table for the political and legal factors is seen in Table 9.

Table 9: Grading Table for Political and Legal Factors

Overall Rating Ease of Doing Business 1 Very Bad 2 Bad 3 Good 4 Very Good 5 Excellent

As a next step in the process, the decisions and working of the model are discussed. In level 1, the political and legal factors are considered as the first decision node in the model with the conclusion made in chapter 6.1. To make proper decisions, the political and legal forces discussed in chapter 6.4 are analysed and the overall rating is obtained between the range 1 to 5, which will be explained in later part of the report in the chapter named utilization of the decision model. To decide based on the rating obtained, a question is inserted under the decision node. If the obtained overall rating is 3 or above, “yes” decision is selected, as seen in figure 15, which means political and legal conditions are good and the risks are low in performing business, for the particular market as seen in Table 9. Then the analysis is moved to the next level by following the arrows pointing to the next decision node (market and technological factors) as seen in figure 15.

On the other hand, if the acquired rating doesn't answer the question “is the obtained overall rating 3 or above” shown in the model then “no” decision is selected which means, obtained rating for level 1 is either 1 or 2. In this case, the risk factor is more for performing business, as seen in Table 9. The decision branches out into two different alternatives, i.e. if the market is analysed for captive possibilities, the risk factor is more for performing business. Also, another alternative is made indicating that if the current market is captive and found to have higher risks, then find possibilities to make it into non-captive, as seen in figure 15.

Figure 15: Level 1 – Political and Legal Factors

6.5.3 Level 2 – Market and Technological Factors

As a next step of developing a process to analyse the level market and technological factors, overall ratings and its outcome are discussed. The outcome of each rating is shown in a grading table as seen in Table 10. The ratings present in the grading table denotes how reliable is the market environment to perform business. Rating 1 states that the country has a very bad market environment. Similarly, rating 2 states that the level has a bad market environment. If the level achieves, overall rating 1 and 2 which means the market is not reliable for performing the business. In this case, the analysis cannot be carried forward to the next level. Further, rating 3 means that the country has a good market environment. Rating 4 describes that the level has a very good market environment for performing business. And, rating 5 indicates that the level is excellent, and the market is reliable for performing business, as seen in Table 10. The analysis is taken forward to the next level if the obtained rating is 3 or above. The grading table for market and technological factors is seen in Table 10.

Table 10: Grading Table for Market and Technological Factor

Overall Rating Market/Business Environment 1 Very Bad 2 Bad 3 Good 4 Very Good 5 Excellent

To decide based on the rating obtained, a question is inserted under the decision node. If the obtained rating is 3 or above, the “yes” decision is chosen, which means the market is more reliable for performing business and have good future market potential, as seen in Table 10. Based on the decision, the analysis is moved to the next decision node (Level 3 - Financial Factors at Distributor level) as seen in figure 16.

Alternatively, if obtained ratings for level 2 is either 1 or 2, it states that the market or country is unreliable for performing business, which can be seen in Table 10. If the rating does not satisfy the question, “no” decision is selected in the decision model. From the discussion in chapter 5, it has been identified that the market forces vary for different countries. It means some forces under market and technological factors might not seem important for certain markets. In this case, Scania tends to analyse only the important forces. For example, if the force competitor performance and the presence of European brands are not seen important in a country for Scania, then the scores of the forces are not taken into consideration. As discussed above, the “no” has two decisions to choose from. The first decision is to check if the forces can be adjusted or managed for the current market, as seen in figure 16. If the market has good prospects by adjusting or managing the level 2 forces, the analysis is moved to the next decision node (Level 3 – Financial factor at the Distributor level).

The second decision is chosen if the forces cannot be altered or managed at the current level, then the decision branches into two different alternatives, i.e. if the market is captive, Scania 69 needs to find possibilities for making it non-captive (private distributor and dealer). Also, another decision states if the market is non-captive, Scania should stay with the current level of integration and the analysis is not taken to the next step, as seen in figure 16.

Figure 16: Level 2 - Market and Technological Factors

6.5.4 Level 3 - Financial Factors at the Distributor Level

As a next step of developing a process to analyse the financial factor group at distributor and dealer level, overall rating and its outcome are discussed. As in Table 11, the ratings present in the grading table denotes how the financial outcome of the market affects the business. Rating 1 and 2 defines that the financial outcome in the market will be of a loss. In this case, the analysis cannot be carried forward to the next level. Similarly, rating 3 states that the financial outcome will be of low profit. Rating 4 and 5 indicates that the financial outcome will be of profit and huge profit. The analysis is taken forward to the next level if the obtained rating is 3 or above.

Table 11: Grading Table for Financial Factors at the Distributor and Dealer Level

Overall Rating Financial Outcome 1 Huge Loss 2 Loss 3 Low Profit 4 Profit 5 Huge Profit

To decide based on the rating obtained, a question is inserted under the decision node as seen in figure 17. If the rating ranges from 3 to 5, the “yes” decision is chosen which denotes that the market or country has good financial outcomes at the distributor level, as seen in Table 11. In that case, the analysis is moved to the final decision node (level 4 – Financial factors at dealer level and strategic factors) as seen in figure 17.

In contrast, if obtained overall rating is either 1 or 2, this means that the distributor level in the market or country does not have a good financial outcome. In that case, the “no” decision is

70 selected. This alternative has three different suggestions to choose from. The first alternative is to check if the market is captive and not important for Scania, in chapter 5, it is discussed that a market is not important if it yields lower revenue and vehicle sales. In that case, it is suggested to find an investor and make it non-captive. The second alternative is chosen if the market is important for Scania, the suggestion made here is to stay with the current level of integration. The third alternative is chosen if the transition to the captive market is difficult, the suggestion made is to find a better dealer or distributor, as seen in figure 17.

Figure 17: Level 3 - Financial Factors at the Distributor Level

6.5.5 Level 4 – Financial Factors at the Dealer Level and Strategic Factors

As a final step to analyse the strategic factors, the overall rating and its outcome are discussed. The overall rating is fixed as seen in Table 12. Here, ratings present in the grading table denotes the future potential of performing business in a market or country. Rating 1 and 2 defines that the future potential to perform business in the market is bad. In this case, the analysis cannot be carried forward to the next level. Similarly, rating 3 states the market has good future potential in performing the business. Rating 4 and 5 signify very good and excellent future potential to perform business in the market. The analysis is taken forward to the next level if the obtained rating is 3 or above.

Table 12: Grading Table for Strategic Factors

Overall Rating Future Potential 1 Very Bad 2 Bad 3 Good 4 Very Good 5 Excellent

If the considered markets obtain a rating of 3 and above in the first three levels, then the analysis is moved to the final level which is financial factors at the dealer and strategic factor. To decide based on the rating obtained, a question is inserted under the decision node. If the obtained rating ranges from 3 to 5, the “yes” decision is selected which indicates the market has good financial outcomes and future potential. This decision has two alternatives, the first alternative states that if the level of performance is stable and the chosen market is captive, no changes are required in the integration process. The second alternative indicates that if the market is non- captive, then it can be checked for captive possibilities (full integration) as seen in figure 18.

On the other side, if the financial factors at dealer level and strategic factors obtain an overall rating of less than 3 “no” decision is selected. In this case, the “no” decision chosen for levels 3 and 4 are the same as both the levels discuss the financial factors in the market or country. The first alternative suggests checking if the market is captive and not important for Scania, in chapter 5, it is discussed that a market is not important if it generates low revenue. In that case, it is recommended to find an investor and make it non-captive. The next alternative indicates if the market is important for Scania, the suggestion made here is to stay with the current level of integration. The final alternative is selected if the transition to the captive market is difficult, the suggestion made is finding a better dealer or distributor, as seen in figure 18.

Figure 18: Level 4 - Financial Factors at the Dealer Level and Strategic Factors

6.5.6 Final Decision Model

Figure 19 in the next page, presents the final version of the developed decision model for finding the level of integration in the sales and service network. Finally, the decision model is developed with the final decisions concerning captive and non-captive network for each level from the analysis conducted during the study. In the upcoming chapter, the model which is presented below is tested with the real-time data of a business market to check the credibility.

Figure 19: Final Decision Model for Vertical Integration of Sales and Service Network

7. Results

This chapter informs the reader on how to analyse the forces and factors for each level. Also, to have a better understanding of the decision model, a study is conducted on one of the Scania markets and then followed by an explanation of the results obtained from analyzing the forces and then conclusions made for the market.

RQ 4: How could the developed decision model be applied to the current business?

In this chapter, the overall rating of the factors, its interpretation, and the decision model are applied as mentioned in chapter 6. The scores of each force are calculated differently, the calculation process and its interpretation are explained in this chapter under corresponding factor groups. To utilize the decision model, an example of sorting the values and the calculation method of each force are presented while taking Turkey as an example.

As previously stated, the data used for calculating the market, technological, and financial factors are hidden due to the confidentiality agreement.

7.1 Selection of the Country to be Analysed

As discussed in the previous chapters, to run the first test in the decision model, a country must be selected. Initially, Scania had several countries that have to be analysed to know the level of integration. The first countries were Sweden, China, Russia, and Turkey. In the later stages Sweden, Russia, and China are neglected due to the conditions of the market environment which also had a mix of captive and non-captive markets which need more time for data collection. Considering the constraints to run the model country Turkey has considered as a test case, which is a non-captive network. Turkey has been selected due to the right future potential of the market. So, Scania wanted to know the right possibilities of integration and the level when it can be integrated. Concerning that Turkey is taken to the model for analysing the level of integration and all the levels are analysed to know the future potential and to validate the decision model.

7.2 Collection and Analysis of Data

Since Turkey is non-captive, the data collection process was time-consuming, but with help from KR and commercial operations department it was a bit easier to find the required data and after many days of researching the internal documents and internet, sufficient data were finally collected. The complexity of several forces under factor groups was sometimes a limit to which data that were available, and other times the data was just not possible to find, and such forces were eliminated as stated in chapter 6.4.

7.3 Calculation and Decision of Political and Legal Factors

To perform an analysis with the newly developed decision model, data for each factor had to be collected. As finalised in chapter 6.4, the political and legal factor group consists of four forces, political stability and risks, corruption, taxes, and transaction risk. All the data regarding the forces under political and legal factors were collected. To determine the political and legal factors, the online source global economy index is used, which is easily accessible and open for the public. For the force like political stability and risks and corruption, it is measured based on economic distress. The index spans from 0 to 2.5, where 2.5 indicates less vulnerability, and 0 indicates the highest vulnerability. The taxes are measured based upon goods and services the index which spans from 1 to 80 where 1 indicates low tax on goods and services and 80 indicates high taxes. The transaction risk is measured based upon the adverse effect that foreign exchange rate fluctuations can have on a completed transaction before settlement. The index spans from 1 to 7 where 1 indicates low transaction risk and 7 indicates high transaction risk (Global Economy, 2017). The latest compilation of the Index dates is 2017 and is the one that will be used in the model.

At first, for evaluating the score for the forces in political and legal factors, the range of the score is fixed from 1 to 5. The range states the amount of risk for each of the forces, where 1 is said to be of high risk and 5 is said to be of low risk. Now, to calculate the scores of each force in political and legal factor group the indexes of the force which are obtained from the online source global economy are divided into 5 intervals as shown in Table 13. Then the index number is divided by five which resulted in an interval size of around 0.5 for political stability and risks and corruption, 16 for taxes, and 1.4 for transaction risks. To clarify the weight for each force an integer ranging from 1 to 5 is fixed for each interval as shown in the table below. These integers will define the new scores for political and legal factors.

Table 13: Interval Values and Score for Political and Legal Factors

Interval Value 0 – 0.5 0.6 – 1 1.1 – 1.5 1.6 – 2 2.1 – 2.5 for Political Stability and Risks

Interval Value 0 – 0.5 0.6 – 1 1.1 – 1.5 1.6 – 2 2.1 – 2.5 for Corruption

Interval Value 0 – 16 17 – 32 33 – 48 49 – 64 65 – 80 for Taxes

Interval Value 0 – 1.4 1.5 – 2.8 2.9 – 4.2 4.3 – 5.6 5.7 – 7 for Transaction Risk

Score 1 2 3 4 5

7.3.1 Interpretation of Scores

This part deals with a discussion regarding the interpretation of scores of each force under the political and legal factors. The force political stability and risk states the political conditions in the current market. The political conditions are considered as one of the most important aspects for a company to perform business in a market. Score 1 and 2 denotes that political stability is bad. In that case, it is difficult for Scania to do the business in the market as it will face a lot of risks. The only way to conduct the business is by having a connection with the local entrepreneurs who are present in the market. The score 3-5 indicates that the political conditions in the market are stable which means the international companies get support from the local government for performing their business. In that case, the amount of risk can be reduced so the companies get leverage in performing their business.

The score 1-2 for the force corruption denotes that the presence of bribing is more in the considered market and which is a bad sign for Scania to establish their business. Performing business in these conditions will lead to unnecessary expenditures. Score 3-5 denotes that the corruption in the market is low which means the amount of bribing is less. In this case, Scania can perform its business without unnecessary expenditures.

The score 1-2 for the force taxes signifies that the taxation in the market is high. If the taxation is high the initial investment that Scania needs to spend for establishing the business will be more. In that case, the decision is dependent on Scania. The scores 3-5 denotes that the taxation in the market is less. In this case, the initial investment will be less for Scania to establish its business in the market.

The score 1-2 for the force transaction risk indicates that Scania will have a negative effect from foreign exchange rate fluctuations which will have adverse impacts on establishing a business. The score 3-5 denotes that Scania will have a positive effect from foreign exchange rate fluctuations which will have definite impacts on establishing a business.

The score of each force mentioned above directly influences the overall rating of political and legal factors, since the overall rating depends on the score of the forces. The rating of the overall factor is calculated as mentioned in chapter 6.5.1. If the obtained overall rating of this factor is 3 to 5, then it is good enough for Scania to move to the next level as the ease of doing business is more and there are no considerable risks, as seen in Table 9. If the obtained overall rating is 1 to 2 then it is not advisable to move to the next level and the analysis should be stopped at this point as the risks in political and legal factor is high.

7.3.2 Calculation of Scores

Now, for analysing the political and legal factors for the case Turkey, the score for each force is obtained by looking at the current index of the force from the online source, global economy. So, in this case, the current index for political stability and risks and corruption is 0. Since the current index is 0 for Turkey, the range 0-0.5 in Table 10, is denoted by score 1. So, the final

77 score for political stability and risks and corruption is considered as 1 which is shown in figure 20. Further, the current index for taxes and transaction risk for Turkey is 38.42 and 3. For taxes, the range 32-48 and for transaction risk the range 2.8-4.2 is determined by score 3 and so, the final score for taxes and transaction risk is considered as 3. The outcome of complete political and legal factors are shown below in figure 20. After finding the score of each force such as political stability and risks, corruption, taxes, and transaction risk the overall rating is determined by the calculation process explained in chapter 6.5.1.

Overall Rating (High- 5, Low - 1) Score (High-5, Low-1) Soft Numbers 2 Political and Legal Factors - Level 1 Current Median Weight of Each force Score*Weight Forces

Political Stability and Risks 1 25% 0.25 Corruption (Measured in Public Sector) 1 25% 0.25

Taxes 3 20% 0.6

Transaction Risk 3 30% 0.9

100% 2

Figure 20: Level 1 - Political and Legal Factors

Now, after finding the overall rating the developed decision model is referred for knowing what decision has to be considered for the current level. The overall rating for the level 1Turkey is 2. As stated in Table 9 earlier, if the level achieves 2 it is said to be bad and the considered country is not business-friendly. So, in this case, as seen in figure 21, the answer to the question, is the obtained score 3 or above is “no”. Therefore, the decision for level 1 political and legal factors will be that since Turkey is a non-captive network and it is analysed for making the network captive in that case, the risk factor is more for performing the business.

Figure 21: Decision for Level 1

7.4 Calculation and Decision of Market and Technological Factors

As discussed before in the previous chapters the objective for market and technological factors Is to analyse the market and technological situation in the country to check on how good it is for performing integration. For Turkey, the data of each force under the group have been collected and calculated. Here the forces, investment in dealers and workshops, competitor performance, sales performance, market economies of scale, and negotiation power with distributor or dealer are calculated separately to obtain the scores. Due to the confidentiality of the data, the values used for the calculation process for the forces mentioned are not shown. Instead, of that, the method used for calculating the forces has been explained.

7.4.1 Interpretation of Scores

This part deals with a discussion regarding the interpretation of scores of each force under the market and technological factors. The score 1-2 for the force investment in dealers and workshops denotes that the initial investment that is required to set up the dealer and workshop network for Scania in the current market is high. Score 3-5 denotes that the investment that is required in setting up the dealer and workshop network is less. In this case, it is an advantage for Scania to establish its dealer and workshop network on their own.

The score 1-2 for the force competitor performance signifies that the presence of similar products from several brands in the market is more. In this case, Scania must be more adaptive to satisfy customer needs and establish its brand among strong competitors. Score 3-5 denotes that the presence of similar products from various brands in the market is less. In this Scania has fewer entry barriers and will have the leverage to perform its business and establish its brand.

The score 1-2 for the force sales performance denotes that the current sales performance of Scania in the considered market is low which means either the market has more competitors or Scania lacks in its dealer and workshop operation. At this point, if the market is under a private entrepreneur the possibilities of improving is less. Score 3-5 signifies a stable level of sales performance which is a good sign for Scania to perform its integration process.

The score 1-2 for the force market economies of scale signifies that the number of Scania’s vehicles present in the considered market to set up the dealer and workshop network is less. At this point, the decision is up to Scania. If they feel the units of the product that is present in the market are not important then the integration process can be performed. Score 3-5 denotes that the number of vehicles present in the considered market to set up the dealer and workshop network is sufficient. In that case, Scania can obtain a good level of profit in its dealer and workshop network.

The score 1-2 for the force negotiation power with distributor or dealer signifies that the overall business revenue of the distributor or dealer is more than Scania’s revenue. In this case, it will difficult for Scania to negotiate the investment amount for establishing the distribution or dealer network. If the amount of investment that is obtained after the negotiation is substantial, then the decision is up to Scania. Score 3-5 denotes that the overall business revenue of the distributor or dealer is less than the Scania’s revenue. In this case, Scania has good negotiation power which yields a profit in establishing its distribution or dealer network.

The Score 1-2 for the force presence of European brands indicates that the amount of the market share that is held by the European brands is less in the considered market which shows that the customers prefer other brands when compared to European brands. Score 3-5 implies that the presence of European brands in the market is more. That is most of the market share is held by the European brands in the considered market which shows that the customers prefer

European brands when compared to other brands. In this case, Scania has the leverage to conduct the business as most of the market share is held by the brands from Europe.

The score 1-2 for the force technology adaptation indicates that the distributor or dealer network is not adapted to the current level of technology and Scania will need to invest a lot of money to update the technology of the dealer or distributor. Score 3-5 denotes that the distributor or dealer network is highly adapted to the current level of technology and further investment for updating the technology is not necessary.

The score of each force mentioned above directly influences the overall rating of market and technological factor, since the overall rating depends on the score of the forces. The rating of the overall factor is calculated as mentioned in chapter 6.5.1. As mentioned in Table 10 if the obtained overall rating of this factor is 3 to 5, then it is good enough for Scania to move to the next level as the market environment is good and there are no considerable risks. If the obtained overall rating is 1 to 2 then the risks present in market and technology factors are high. In this case, it will be difficult for Scania to perform its business as there is a lot of chance for Scania to be outperformed in the market.

7.4.2 Calculation of Scores

Initially, for calculating the force investment in dealers and workshops a business investment vs market size matrix is developed. Because it is difficult to obtain the investment values separately for distributor and dealer and the values were highly confidential. So, in this case, the business investment vs market size matrix is used to calculate the force, investment in dealers and workshops. In the growth-share matrix, the horizontal axis is considered as the market size, and the vertical axis is considered as the overall business investment as shown below in figure 22. Here the market size refers to the maximum total number of sales in the region and the business investment refers to the total amount invested in the market.

The scores 1 to 5 are given based on the following criteria. If the overall business investment is high and the size of the market is small then it is not good for making the network captive, because the risk factor is more on the investment side. In this case, the market should be kept non-captive and the weight given is 1. If the overall business investment is high and the market size is huge then the network can be kept as captive or non-captive and the weight given is 2 or 3*. If the market is said to be non-captive, then the given weight is 2 and if the market is said to kept as a captive the given weight is 3. Similarly, if the investment is low and the market size is small it is good for making the network captive because of the low-risk factor involved in investment and the given weight is 4. Finally, if the investment is low and the market size is huge then it is much of an advantage to make the network captive as very less risk involved in the investment and the given weight is 5. For Turkey, the overall business investment is high, and the market size is huge and since the market is non-captive the given weight is 2.

Figure 22: Business Investment vs Market Size Matrix for Evaluating Investment in Distributor and Dealer

For calculating the force competitor performance, the relative market share of all the brands present in the country Turkey for the year 2018 is identified. Because Scania suggested that identifying the relative market share of all the brands will be appropriate to analyse the competitor performance as they use the same method in their competitor evaluation for several markets. The relative market share is calculated by comparing the strongest brand with the other brands in the market. For instance, the market share % of Scania is divided by the market share % of Mercedes and the obtained relative difference is 0.32 as shown in Table 14.

Table 14: Relative Market Share- Competitor Performance

Competitor Performance Company Market Share Year 2018 Mercedes 0.346 1.24 Ford 0.279 0.81 Man 0.113 0.33 Scania 0.109 0.32 Volvo 0.055 0.16 Renault 0.044 0.13 Iveco 0.036 0.10

To obtain the scores a range interval is calculated by excluding the market share of the strongest brand. By default, the score given for the strongest brand is 5 as no other brands are above the strongest brand hence score 5 is justifiable. Therefore, in this case, the interval range has been calculated from the second strongest brand which is Ford as in Table 14. Then the range is calculated for 4 intervals, which can be seen in Table 15. The identified interval range is 0.2. Then the brands are categorized according to the range interval. The brands that fall under the range 0 to 0.20 are Volvo, Iveco, and Renault, and the score given is 1. The brands that fall under the range 0.20 to 0.40 are Man and Scania and the score given is 2. There are no brands in the range 0.40 to 0.60 and 0.60 to 0.80, in case if there are any brands present then the given score is 3 and 4. Further, the brand that is above range 0.80 is Mercedes and Ford which is the strongest brand in the market and the given score is 5.

As seen in Table 15. Scania falls under 0.20 to 0.40 and the score given for the range is 2. This will be the final score for the force competitor performance for Turkey.

Table 15: Range of Relative Market Share

Range of Relative Market Share Obtained Competitors in the Range (2018) Given Score 0.80 and above Mercedes, Ford 5 0.60 to 0.80 Nil 4 0.40 to 0.60 Nil 3 0.20 to 0.40 Man, Scania 2 0 to 0.20 Volvo, Iveco and Renault 1

Up next the force sales performance is calculated. For calculating sales performance, the data of the number of units sold and the total sales amount of Scania buses, trucks, and parts are gathered for the last four years that is from the year 2015 to 2018 as seen in Table 16. Then the average for all the units and the sales amount for trucks, buses, and parts for the three years (2015-2017) and the year 2018 are identified separately and can be seen in Table 17. Further, for calculating sales performance Scania just wanted a comparison of the sales amount and, they wanted the number of units to be kept in the calculation part as that will be useful for future reference. As Scania suggested, the comparison is done only for the sales amount. The 2018 sales amount is compared with the total average sales amount (2015-2017) obtained in Table 17. By dividing, a relative difference can be seen where Scania is currently in their sales performance in 2018.

Table 16: Sales Performance (Units and Sales Amount)

Sales Performance Year Trucks Buses Parts Sum Units Sales Amount (MSEK) Units (MSEK) Sales Amount (MSEK) Units Sales Amount (MSEK) Units Sales Amount (MSEK) Year 2015 $$$ $$$ $$$ $$$ $$$ $$$ $$$ $$$ Year 2016 $$$ $$$ $$$ $$$ $$$ $$$ $$$ $$$ Year 2017 $$$ $$$ $$$ $$$ $$$ $$$ $$$ $$$ Year 2018 $$$ $$$ $$$ $$$ $$$ $$$ $$$ $$$ Sum $$$ $$$ $$$ $$$ $$$ $$$ $$$ $$$ Table 17: Sales Performance (Units and Sales Amount), Average 2015- 2017 compared with 2018

Average 2015-2017 2018 Units Sales Amount (MSEK) Units Sales Amount (MSEK) Trucks $$$ $$$ Buses $$$ $$$ $$$ $$$ Parts $$$ $$$ Sum $$$ $$$

After identifying the relative difference, the scores are obtained by referring to Table 18. The scores in the grading table for sales performance are determined by the difference in sales performance of the compared years. The difference obtained is not disclosed due to a confidentiality agreement. Score 1 is given if the sales performance is very bad when compared

82 with the previous year’s performance. Similarly, score 2 is given if the performance is bad. Correspondingly 3 is given if the performance is good, 4 is given if the performance is very good and 5 is given when the performance is excellent as shown in Table 18.

The weights for Turkey were given based on the achieved difference and the given score is 2. That means when compared to previous years, the sales performance in the year 2018 is bad.

Table 18: Grading Table for Sales Performance

Current Year Sales Scores Performance when Compared with Previous Years Performance 1 Very Bad 2 Bad 3 Good 4 Very Good 5 Excellent

The calculation for the force economies of scale has been conducted by developing a comparison table as shown in figure 23 on page 84. The comparison table is developed because it is difficult to calculate the economies of scale directly and somehow Scania wanted to calculate this as they felt this will be a new inclusion to their market analysis process. So, in that case, the comparison table is developed, and which can be seen in figure 23. For comparing, four aspects have been taken into consideration which is dependent on each other.

Here the row consists of, the minimum number of vehicle units needed to run the operation in a region and value of rolling fleet for running the workshop. Here rolling fleet describes the total number of vehicles running in a certain area. Then the column consists of the required and the current value which is dependent on the minimum number of vehicle units needed to run the operation in a region and value of rolling fleet for running the workshop. The required value for the number of units of vehicles needed for operation in a region is identified as 60 and the rolling fleet is identified as 600.

In step 1 current values of the minimum number of units of vehicles needed for operation and the number of rolling fleet in a region are identified. Up next in step 2, the required value is compared with the current value to know the score for the force economies of scale. If the current value of number of units and the rolling fleet are less than the required value, it is denoted by AB. It means that it is positive for making the network non-captive and negative for making it captive and for that the given score is 1 as seen below in figure 23. Next, if the number of units is more than the required and the rolling fleet is less than the required value it is denoted by CB, which means the network can be partially captive and partially non-captive and the given score is 3. In CB if it is not possible to make the network partially captive due to the business situation, such as the political conditions, etc., then the score given is 2. Here the

83 score is determined according to Scania’s interest. Further, if the current units are less than the required and the rolling fleet is more than the required the network can be changed to captive since the rolling fleet is more and it is denoted by AD and the score given is 4. Similarly, if the current number of units and current rolling fleet is more than the required value it is denoted by CD which means it is positive for making the network both captive and non-captive and the highest score is given which is 5. For Turkey, the scenario is CD where both the values are more than the required and the given score is 5.

Comparison Table - Market Economies of Scale Minimum Number of units needed for Minimum Rolling Fleet (For running a workshop) in operation (For sustaining the business) in a a region region

Required 60 600

Current Enter Value Enter Value Step 1

If the entered current units are less than the If the entered current Rolling Fleet is less than the required consider it as "A" required consider it as "B"

If the entered current units are more than the If the entered current Rolling Fleet is more than the required consider it as "C" required consider it as "D"

Comparison Outcomes Scores

(+ve) for NC and (-ve) for C AB 1 (+ve) for partial captive (Distributor Captive and Step 2 CB Dealer Non-Captive) 2 (or) 3* (+ve) for NC and (+ve) for C CD 5

AD (+ve) for C 4

*In CB if the network can be partially captive and partially non-captive and the given score is 3. In CB if it is not possible to make the network partially captive due to the business situation, such as the political conditions etc., then the score given is 2.

Figure 23: Comparison Table for Evaluating Economies of Scale

Next, the force negotiation power with distributor and dealer is calculated. For calculating the negotiation power Scania’s annual turnover and the top distributor or dealer’s annual turnover in a country are identified. Then the relative difference of Scania’s turnover and distributor or dealer’s turnover is found out. The obtained relative difference is matched with the range of relative difference as seen in Table 19. The turnover’s and the range of relative difference are not disclosed due to confidentiality agreement. For the country Turkey, the obtained relative difference falls in the range -X3, hence the score given is 2. The calculation of the relative difference is shown in Appendix 3.

Range of Dealers or Distributer Scores Scania revenue Relative revenue Given Difference X1 5 X2 4 X Y 0 3 -X3 2 -X4 1

Table 19: Scania and Dealer or Distributor Revenue Comparison and Range of Relative Difference

Further, the force presence of European brands is calculated by finding the difference between the sum of all EU brands market share % and the total market share % which includes all the brands worldwide. In Turkey, EU brands market share is 72 % and the total market share is 100 %. The difference obtained from the market shares is 28 %. So, in a total of 100 %, 28 % of market share is held by the EU brands. For obtaining the scores for the presence of European brands an interval table is developed based on the total market share and which is shown in Table 20. In the interval table, the range 21 - 40 % is determined by score 2 and that is considered as the final score for the force presence of European brands.

Table 20: Interval Value for Evaluating the Presence of European Brands

Interval Values for Presence of European Brands 1% – 20% 21% – 40% 41% – 60% 61% – 80% 81% - 100% Scores 1 2 3 4 5

Lastly, the force technological adaptation is calculated by subjective evaluation, as the gathering of data is not possible and the score for the force is given from Scania internally. The given score is 5, that means in Turkey the distributor, dealer, and workshops are highly adapted to the current technology. The scores obtained for all the forces under market and technological factors are shown below in figure 24. Once all the scores have been calculated the overall rating of the factor is calculated as mentioned in chapter 6.5.1.

Figure 24: Level 2 – Market and Technological Factors

The overall rating for level 2, Turkey is 3, as seen in figure 24. So, in this case, from Table 10, score 3 represents the market and the technological environment is good for performing business. As seen in figure 25, the answer to the question is the obtained score 3 or above is “yes”. Therefore, the decision for level 2 is that the situation of market and technological factors are stable, and which is good for doing business. Subsequently, the analysis is taken to the next level which will be the financial factors at the distributor level.

Figure 25: Decision for Level 2

7.5 Calculation and Decision of Financial Factors at Distributor Level

The objective of this level is to analyse the financial factors at the distributor level. As stated in the previous chapters the financial factors are divided into distributor level and dealer level. It has been divided to analyse the financial situation at each level for performing integration. The collection of data and calculation were performed for each of the force. Here, the data used for calculating each force are hidden due to the confidentiality agreement. So, to explain the calculation of the scores the hidden values are considered as variable X1 and X2. Likewise, political, and legal factors and market and technological factors there were no calculation models developed for calculating the financial factors and it is calculated directly due to the data limitation and time constrain.

7.5.1 Interpretation of scores

Here the interpretation of scores for the forces present in financial factors at the distributor and dealer level is conferred together. It has been done because each force that is present in the financial factor group indicates the outcome concerning profit or loss of the distributor and dealer network in the considered market. So, if the force attains score 1-2 then it signifies a loss in the outcome. In this case, Scania will require high investment to set up the distribution and dealer network in the market. Score 3-5 signifies profit in the outcome which is a benefit to Scania that there is no need for investment as the network already yields a good profit.

Up next the interpretation of scores of forces present in strategic factors are discussed. Here the scores of the forces are subjectively evaluated. Score 1 for the force product fit denotes that

86 the automotive products which are equivalent to Scania are not present in the considered market. In this case, the market is not used to buying automotive products similar to Scania’s which is a disadvantage. Score 3 and 5 denotes the presence of similar brands in the market which is an advantage as the customers are used to buying products of the similar calliper.

Score 1 for the force strategic objective means there will be no scope for future expansion of the business. Score 3 denotes that when seen from the perspective of Scania in the considered market, there is the scope to add vehicle volume. Score 5 denotes the possibility of adding good vehicle volumes, as well as the possibility of obtaining a business license to expand the business in different areas.

The score for the force sustainability level is subjectively evaluated. Here score 1-2 signifies that the considered market is not up to Scania’s sustainability standards. Score 3-5 denotes that the considered market is equal or above the Scania’s sustainability standards.

The score of each force mentioned above directly influences the overall rating of financial and strategic factors, since the overall rating depends on the score of the forces. The rating of the overall factor is calculated as mentioned in chapter 6.5.1. As mentioned in Table 11 and 12 if the obtained overall rating of this factor is 3 to 5, then it is good enough for Scania to move to the next level as the financial outcome and the future business potential in the market is good and, in this case, there will be no considerable risks. If the obtained overall rating is 1 to 2 then the risks present in financial factors are high and the market contains a bad future business potential. At this point, the decision is dependent upon Scania either to invest or to stay at the current level of integration.

7.5.2 Calculation of Scores

The financial factor at distributor level consists of forces like sales gross profit, gross profit of parts, market share for trucks, market share for buses, and Scania vehicle parc (0-10) years. For calculating sales gross profit, gross profit of parts, market share for trucks, and market share for buses the best level of percentage is identified and fixed, which is shown as X2 in the table below and a current level of percentage is identified for the particular market and which is shown as X1 in the figure 26.

For calculating the scores, the relative difference between the best level percentage X2 and the current level percentage X1 are identified. The identified value is rounded off to the closest integer. In the case Turkey the best level percentage X2 which is provided by Scania for each of the force. The current level percentage X1 is obtained from the annual and internal reports of Scania. After identifying the values, the relative difference is calculated between X2 and X1 to obtain the scores for forces such as sales gross profit, gross profit of parts, market share for trucks, and market share for buses. The obtained scores are shown below in figure 26.

The force Scania vehicle parc (0-10) years is calculated like the previous forces but here the current vehicle parc X1 is compared with the required vehicle parc X2 as shown in figure 26. The values X1 and X2 for the force Scania vehicle parc (0-10) years are identified and a relative difference is calculated between X2 and X1. The obtained scores for the case Turkey can be seen in figure 26 below. Once all the scores have been calculated the overall rating of the factor is calculated.

Overall Rating (High- 5, Low - 1) 100% 3 2 Financial Factors Distributor - Level 3 Score (High-5, Low-1)

In Vehicle Operations Soft Numbers Vehicle Sales Current Level Best Level Weight of Each force Score*Weight

Gross Profit % X1 X2 1 20% 0.2 Gross Profit Parts%

Distributor (%) X1 X2 2 40% 0.8

Market share for Trucks X1 X2 2 25% 0.5 X1 X2 Market share for Bus 1 5% 0.05 (0-10 years) Min Parc Req

Scania Vehicle parc 0-10 years X1 X2 3 10% 0.3 Overall Rating (High- 5, Low - 1) 100% 1.85 Figure 26: Level 3 – Financial Factors at Distributor Level

Now, after finding the overall rating the developed decision model is referred for knowing what decision has to be considered for the current level. The overall rating for the level 3 Turkey is 2. According to Table 11, the country faces mild-loss in financial outcomes. So, in this case, as seen in figure 27 the answer to the question, is the obtained score 3 or above is “no”. Therefore, the decision will be that changing is difficult because it is a non-captive network either the level can be supported by improvement ideas from Scania to the private distributors or if possible, a better distributor can be sorted out. The process might be time-consuming but when seen in the long run the profitability of the level can be improved. At this level, the integration decision is dependent on Scania

Figure 27: Decision for Level 3

7.6 Financial Factors at Dealer level and Strategic Factors

The final test for performing the integration process is conducted by analysing the financial factors at the dealer level and the strategic factors. The objective of this level is to analyse the financial factors at the dealer and the strategic factors. As previously discussed in chapter 6.4, by analyzing the strategic factors at the final level together with the financial factors at the dealer level Scania will be able to forecast future assurance over the market before conducting the integration process. The collection of data and calculation were performed for each of the force.

Here likewise, the financial factor at the distributor level, to explain the calculation of scores the hidden values are considered as variable X1 and X2. Further to obtain the scores of the forces a relative difference between X2 and X1 is obtained.

For Turkey, to obtain the data and to calculate the forces under the financial factor at the dealer level, the data from twenty dealers in Turkey have been gathered and which can be seen in Appendix 4. Since Turkey is non-captive, data of forces at the dealer level were difficult to gather and the gathered data is limited to two years which is 2018 and 2019. The financial factor at the dealer level consists of three groups such as Vehicle operations which includes the forces from vehicle sales and service, service potential utilization, and workshop production. The first group vehicle operations consist of forces like gross profit in sales, service, parts, and labours. For calculating vehicle operations, the best level of percentage is identified and fixed which is shown as X2 in the table below and a current level of percentage is identified for the market and shown as X1 in the table. So, as previously mentioned for calculating the scores the relative difference between the best level percentage X2 and the current level percentage X1 are identified which can be seen in figure 28 next page.

The second group service potential utilization consists of forces like Invoiced or sold, the value of part sales, the number of contracts sold, and contracts per vehicle in the parc. For calculating the forces in service potential utilization, the data of two years are obtained which is the year 2018 and 2019. After gathering the data, the average of the two years which is specified as X2 is considered for each of the forces from the table which is shown in Appendix 4. Further, the average value of two years is compared with the current year's value which is specified as X1 for each of the force which is from 2019. To obtain the scores a relative difference between X2 and X1 is identified which can be seen in figure 28 next page.

Lastly, the third group workshop production consists of forces like productivity, efficiency, number of technicians per workshop, invoiced hours per technician, number of invoiced hours per vehicle in parc, and customer satisfaction index. For calculating the forces such as productivity and efficiency, the data has been gathered from twenty workshops in Turkey and the gathered data is divided into two parts. One is the data for the productivity and efficiency of the mechanic and the other part includes the data of productivity and efficiency of body works and paint. The overall obtained data can be seen in Appendix 4. For both productivity and efficiency, the best level is set which is specified as X2 provided by Scania. Then the best level is compared with the total average of productivity and efficiency from all the workshops which is specified as X1. Further, a relative difference between X2 and X1 is identified to obtain the scores. The forces in the workshop production such as the number of technicians per workshop, invoiced hours per technician, the number of invoiced hours per vehicle in parc is calculated similarly to the forces in service potential utilization from the table attached in Appendix 4. Finally, the force customer satisfaction index is calculated by the overall ranks provided by the customer to the dealers. In Turkey, the rank for customer satisfaction index is okay and the given score for that is 3. The obtained scores of all the forces in the financial factor at the distributor level can be seen in figure 28.

Overall Rating (High- 5, Low - 1) 100% 1.85 2 Financial Factors Dealer- Level 4 Score (High-5, Low-1)

In Vehicle Operations Soft Numbers

Current Level Best Level Vehicle Sales Weight of Each force Score*Weight Gross Profit% X1 X2 1 15% 0.15 In Service Operations Service

Dealer Gross Profit% X1 X2 2 15% 0.3 Gross Profit Parts%

Dealer (%) X1 X2 2 20% 0.4

Gross Profit Labours% X1 X2 2 6% 0.12

Service Potential utilization Current Avg (2018-2019) (18-19)

Invoice Orders or Sold X1 X2 2 5% 0.1 Current Avg (15-18)

Value of Part Sales per vehicle in parc X1 X2 4 5% 0.2

Current Avg (18-19)

Number of Contracts Sold X1 X2 3 5% 0.15

Current Est 2019

Contracts per vehicle in parc % (Penetration) X1 X2 3 5% 0.15

Workshop Production Current % For 80%

Productivity % X1 X2 1 5% 0.05 Current % For 110%

Efficiency % X1 X2 1 5% 0.05 Current Avg (2018-2019) (18-19)

Number of Technicians per workshop X1 X2 2 4% 0.08

Invoiced Hours Per Technicians (Year) X1 X2 2 3% 0.06

Number of Invoiced hours/Vehicle in Parc (0-10Y) X1 X2 2 2% 0.04

Current Rank Total Ranks

Customer Satisfaction Index (CSI) (Bad - 1, Okay - 3, Good - 5) X2 X2 3 5% 0.15 Overall Rating (High- 5, Low - 1) 100% 2 Figure 28: Level 4 – Financial Factors at Dealer Level

Once the scores of forces in financial factors at the dealer level are obtained, the scores for the forces for strategic factors are calculated. The strategic factor consists of forces such as the strategic objective, product fit, and level of sustainability. Since the forces involved in strategic factors are subjective the gathering of data is difficult. Subsequently, a method is developed to obtain the scores for each force. For calculating the scores for the strategic objective, figure 29 is referred. If there is a great future potential for implementing various business in the market the highest score is given which is 5. Next when there is the scope of adding more volume of the product in the market the given score is 3. Lastly, when there is no scope of future potential and the volume of the product the lowest score is given, which is 1. For Turkey, there is no big future potential of securing the market due to the political and legal situations but the scope for adding volumes is more. Therefore, the given score is 3.

Figure 29: Reference Table for Evaluating Strategic Objective

When looking from Scania level, if there is a scope to secure the Rank to be given 5 future in various fields. Such as business licence, private license etc. Strategic objective From the Scania sales level, if there is scope of adding volume Rank to be given 3

When there is no future potential and the scope of adding volume Rank to be given 1 is also less

For calculating the force product fit, a table with various brands is developed which can be seen below in figure 30. The table has been divided into three segments. That is A class, B class, and C class trucks. A class trucks, the brands that have been included are Scania, Volvo, and Mercedes. In B class trucks the brands that have been included are DAF and MAN and in

C class trucks the brands Isuzu, Hino, TATA, and Bharath Benz are included. After dividing the segments, the market is compared to the different classes mentioned. Thus, in Turkey, the brands which are present are A class that is Scania, Volvo, and Mercedes. So, in that case, the given score is 5. In Turkey, the customers are much adapted towards the European truck manufacturers, as the customers are interested in paying more for better trucks then the local manufactures make a perfect product fit for Scania to make business. Figure 30: Reference Table for Evaluating Product Fit

A class trucks Scania, Volvo, Merc Rank to be given - 5 Rank to be given - 3 Product Fit B class trucks DAF, MAN C class trucks Isuzu, Hino, TATA, Bharath Benz Rank to be given - 1

Finally, the force sustainability level has been subjectively evaluated by Scania and the given score for Turkey is 2. Which means that the market is not up to the sustainability standards of Scania. The final obtained scores for strategic factors can be seen below in figure 31. After calculating the scores, the overall rating is calculated.

Overall Rating (High- 5, Low - 1) 100% 2 2 Strategic Factors - Level 4(Cont.) Score (High-5, Low-1) Forces

Strategy Objective (High- 5, Low - 1) 2 50% 1 Product Fit (High- 5, Low - 1) 5 10% 0.5

Level of Sustainability (High- 5, Low - 1) 2 40% 0.8

100% 2.3

Figure 31: Level 4 – Strategic Factors

Likewise, the previous factors after finding the overall rating of the developed decision model are referred for knowing what decision has to be considered for the current level. The overall rating for the level 4 Turkey is 2. According to Tables 11 and 12, the country faces mild-loss in financial outcomes and bad future potential. As seen in figure 22, the answer to the question is the obtained score 3 or above is “no”. Therefore, the decision for level 4 will be that the financial factors at the dealer level and strategic factors are low. As shown in figure 23 the decision will be that change is difficult because it is a non-captive network either the level can be supported by improvement ideas from Scania to the private dealer or if possible, a better dealer can be sorted out. For Turkey, the distribution and dealer are taken altogether by a single company.

Figure 32: Decision for Level 4

7.7 Overall Discussion

The chapter deals with the overall case result of the country Turkey. After running the analysis for every level the final result looks as seen in figure 33 on page 93. The overall analysis outcomes for each factor group is shown in Appendix 5. The model states that level 1, political factors, level 3 and 4 financial factors at the distributor and dealer level as well as the strategic factors are bad or low to perform the integration process. Since the level 1 political factor itself is bad, the risk for performing integration is huge. In case, if the level 1 political factors change in the future then it will be a good sign for Scania to perform the integration process over the business market in Turkey because the level 2 market factors and technological factors are stable which means that the market condition is good according to Scania. If the first two levels are good, in this case, full integration can be performed and the market can be converted from non-captive to captive network. If full integration is performed, in the long run, the final levels also can be changed and brought up to a stable state with a profitable outcome.

Figure 33: Decision Model with Assessed Case

8. Conclusion and Recommendation

In the final chapter, the purpose of the thesis will be answered and where the developed decision model can be used in Scania is discussed. This section will also address the ethical consideration and sustainable aspect of the thesis. And, the chapter finishes with a discussion on future recommendations on the thesis work.

8.1 Conclusion

At the start of the thesis, Scania required a structured and user-friendly decision model to know if it is beneficial for them to own the distributor and dealer network rather than giving it to the private entrepreneurs. Initially, this research was started by conducting a study on vertical integration strategy, the advantages, and disadvantages of its implementation in a huge automotive industry. To formulate the decision model, an extensive investigation was conducted on what factors, forces, and risks to consider while integrating the sales and service network in an international business environment. The first part of the model mainly focused on analysing four significant levels and its risks. Level 1 political and legal factors, level 2 market and technological factor, level 3 financial factor at the distributor, and level 4 financial factor at the distributor and strategic factors. The forces in each factor group are identified and prioritized with weightage to exert its level of importance. Later, the decision model is developed from the information gathered from the current state and empirical study. To test the credibility of the model, a country where currently Scania is present is chosen and the results were obtained. In summation, the decision model was developed by considering all the factors, risks, and its corresponding forces which will pave the way for Scania in future analysis considering the vertical integration in sales and service network.

8.1.1 Model Positioning

As discussed in chapter 4 there are already established models for market screening (SMSM) and market establishment (DDP). The newly developed decision model falls in between the two models, as seen in figure 34. After the development of the model, the process steps for Scania in analysing a business market will be to start with the market screening process then to check for the integration process either to keep the business market captive or non-captive and final stage will be the market establishment process.

Scania Market Decision Model for Distributor Screening Model Vertical Integration Development Process (SMSM) (DMVI) (DDP)

Figure 34: Decision Model positioning in the Sales and Marketing Department

8.2 Ethics and Sustainability

8.2.1 Ethics

The thesis work involves lots of numerical data collected from Scania, the sales and marketing, and commercial operations department to analyse the developed decision model. Adding to that the work involved in Scania was performed under a confidential agreement in not revealing the obtained data or sharing the information with the outsiders. The data collected regarding the financial performance of the market are not mentioned in the report. The company's numerical data are hidden, and the final results obtained from the data were only presented in the report.

8.2.2 Sustainability

To meet the needs of the current generations without damaging the needs of the future generation is defined as sustainability. The sustainable impact of this thesis project is divided into three aspects which are economic, environmental, and social sustainability.

Economic Sustainability

Before the execution of this thesis project, there was no structured way of knowing how individual cost factors affect the financial performance of the Scania sales and service network. To overcome this problem, detailed research on the captive and non-captive network was performed as a part of this thesis to understand how individual cost factor influences the financial performance in the Scania sales and service network. Also, the thesis work deals with the introduction of a captive network in various international markets, which increases the market share and revenue, which will have a positive impact on the Scania business in general.

Environmental Sustainability

The recommendation provided to Scania is to establish a captive network which can be performed after analysing the market or country with the developed decision mode. The implementation of the captive network will have a positive impact on environmental sustainability as Scania puts immense interest in the remanufacturing of the dismantled or repaired parts from the trucks and buses into reuse and thereby reducing waste. In the non- captive network, there was no proper reuse or recycling of parts that were dismantled from trucks and buses, which will harm the environment.

Social Sustainability

One of the main recommendations of this thesis project is to replace non-captive markets with captive markets wherever possible after analysing the market with the developed decision model. As captive markets are known for their social sustainability and it requires a lot of new employees for the administration and functioning of it. This will create many local and

96 international job opportunities for new and experienced talents, thus having a positive impact on social sustainability.

8.3 Recommendation

After completing this thesis, there are a few topics that should be brought to light and discussed for future research. These are either aspects that could increase the performance of the decision model or dimensions that would work as add-ons to make the decision model efficient and better. Several driving forces have been eliminated due to lack of data; the consideration of the eliminated driving forces can make the decision model more accurate. Currently, due to time constraints, only one country was analysed. Future work can include using the developed model as a base to check if vertical integration is possible in countries other than Turkey. The calculation model for forces of financial factors was not developed due to time constraints and data limitation which can be developed in the future. The above-stated suggestions can be performed to make the integration process easier for Scania.

For making the decision model efficient and the process easier, the model can be carried over to industry 4.0 implication. Industry 4.0 is the subset of the fourth industrial revolution that concerns the industry. Scania has already started establishing it in its products and various processes. There are various implications which are involved in industry 4.0. The suggestion of implication would be to compile the model into machine learning. This process takes a lot of time to gather data and information but once it is developed, the integration process will be simple. Machine learning has been implemented in various segments of the industry but it is rarely used in sales and marketing. It would be a fresh implementation for Scania if this process is developed.

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Appendix

Appendix 1: Interview Questions

1. How does the current business works? 2. Is the whole network non-captive or there is any other captive network? 3. What are the main performance indicators that are considered for a market to be non- captive? 4. How do you evaluate the process of successful expansion in the market? 5. How are the employees managed? 6. What are the barriers and risks that are faced in the current market? 7. What is the level of profitability percentage are you able to reach with the non-captive network? 8. How do you analyse the competitors before deciding the market to be captive or non- captive? 9. Do you think the capital investment is more in non-captive considering return on investment? 10. How do you evaluate the partners and how does the contract work? 11. How many workshops and sales outlets are located and how does it manage? 12. What are your suggestions on making a non-captive network to a captive network? 13. What is the technical complexity do you face with the markets (captive and non- captive)? 14. What do you consider as non-value-added activities in the captive and non-captive markets? 15. How do you see the market from the customers perspective? 16. What are the main common aspects in captive and non-captive? Such as customers, product range, type, delivery, and training. 17. How the delivery of service is coordinated and integrated with the customer? 18. On what basis do you categorize the customers? Like customers having few or more fleet of trucks.

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Appendix 2: Analysis Model

Overall Rating (High- 5, Low - 1) Score (High-5, Low-1) Soft Numbers 0 Political and Legal Factors - Level 1 Current Median Weight of Each force Score*Weight Forces

Political Stability and Risks 25% 0 Corruption (Measured in Public Sector) 25% 0

Taxes 20% 0

Transaction Risk 30% 0

100% 0 Overall Rating (High- 5, Low - 1) Score (High-5, Low-1) 0 Market and Technological Factors - Level 2 . Forces Soft Numbers Weight of Each force Score*Weight Investments in Dealers and Workshops 10% 0

Competitor Performance (comparing strong competitor market share) (Unstable - 1, Stable - 5) 10% 0 Current Avg (15-18) Sales Performance, (Sales Amount (MSEK)) 1002 1462 20% 0

Market Economies of Scale (High- 5, Low - 1) 20% 0

Negotiation power with the distributor or dealer (High- 5, Low - 1) 20% 0 Current Sum

72 100 Presence of European Brands 10% 0

Technology Adaptation (High- 5, Low - 1) 10% 0 Overall Rating (High- 5, Low - 1) 100% 0 0 Financial Factors Distributor - Level 3 Score (High-5, Low-1) Forces In Vehicle Operations Soft Numbers Vehicle Sales Current Level Best Level Weight of Each force Score*Weight

Gross Profit % 20% 0 Gross Profit Parts%

Distributor (%) 40% 0

Market share for Trucks 25% 0

Market share for Bus 5% 0 (0-10 years) Min Parc Req

Scania Vehicle parc 0-10 years 10% 0 Overall Rating (High- 5, Low - 1) 100% 0 0 Financial Factors Dealer- Level 4 Score (High-5, Low-1) Forces In Vehicle Operations Soft Numbers

Current Level Best Level Vehicle Sales Weight of Each force Score*Weight Gross Profit% 15% 0 In Service Operations Service

Dealer Gross Profit% 15% 0 Gross Profit Parts%

Dealer (%) 20% 0

Gross Profit Labours% 6% 0

Service Potential utilization Current Avg (Year) 8-19)

Invoice Orders or Sold 5% 0

Value of Part Sales per vehicle in parc 5% 0

Number of Contracts Sold 5% 0

Contracts per vehicle in parc % (Penetration) 5% 0

Workshop Production Current % For 80%

Productivity % 5% 0 Current % For 110%

Efficiency % 5% 0 Current Avg (Year) 18-19)

Number of Technicians per workshop 4% 0

Invoiced Hours Per Technicians (Year) 3% 0

Number of Invoiced hours/Vehicle in Parc (0-10Y) 2% 0

Current Rank Total Ranks

Customer Satisfaction Index (CSI) (Bad - 1, Okay - 3, Good - 5) 5% 0

Overall Rating (High- 5, Low - 1) 100% 0 0 Strategic Factors - Level 4(Cont.) Score (High-5, Low-1) Forces

Strategy Objective (High- 5, Low - 1) 50% 0 Product Fit (High- 5, Low - 1) 10% 0

Level of Sustainability (High- 5, Low - 1) 40% 0

100% 0

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Appendix 3: Market and Technological Factors

Negotiation Power with Distributors and Dealers

Dogus Revenue / Scania Revenue year 2018 in MSEK

$$$

Diff Amount Dogus Revenue $$$ $$$

Scania Revenue $$$

Revenue Comparision 2018 For negotiation power Label (MSEK) $$$

$$$ $$$

$$$ Relative Diff $$$$

$$$ $$$

$$$

$$$ Dogus Revenue Scania Revenue $$$ $$$

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Appendix 4: Financial Factors at Dealer Level

Service Potential Utilization

$$$

2019

$$$

2018

Total Number of hours invoiced hours of Number Total

$$$

2019

$$$

Number of Vehicle Entries Vehicle of Number

$$$

2018

$$$

2019

$$$

Labour hour per hour Labour vehicle

$$$

2018

$$$

2019

$$$

2018

NumberTechnician of

$$$

2019

$$$

2018

NumberMaintenance of Contracts

$$$

2019

$$$

2018

NumberInvoiced of Order Job

$$$

2019

$$$

SEK

$$$

2018

Part Sales Part (TL) Original Including All,

Sum

Region

AverageSEK

OverallAverage

Tuzla

Ahenk

AkenizVasita Agir

Ankara Agir Vasita Agir Ankara

Asya

Basaran Agir Vasita Agir Basaran

Caliskan

Cariksi

Cavusoglu

Dizsan

Ercal

GebzeSevus

KCR Otomotiv KCR

Kocaslan Kocaslan

Kocaslan Sakaya Kocaslan

Konya

Ozaltin

Tirsan Gazianep Tirsan Tirsan Hadimkoy Tirsan Tirsan Sanlaktepe Tirsan

106

Invoiced Hours Per Technicians

$$$

For 2019

$$$

Total Value of Spare Parts Per Vehicle in Parc

Total value of Spare parts per vehicle in parc

Average (18-19) $$$ Current (2019) $$$

Contracts Per Vehicle in Parc

Contracts Per Vehicle in Parc (%) 2018 $$$ Number of active contracts 2019 Est $$$

Number of Invoiced Hours/Vehicle in Parc

Number of Invoiced hours/Vehicle in Parc (0-10Y) $$$ Average (18-19)

$$$ Current (19)

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Productivity and Efficiency at Workshop

January - September 2019 Dealers Mechanic Body - Paint Productivity (%) Efficiency (%) Productivity (%) Efficiency (%) Ahenk $$$ $$$ $$$ $$$ Akdeniz AV $$$ $$$ $$$ $$$ Ankara AV $$$ $$$ $$$ $$$ Asya $$$ $$$ $$$ $$$ Başaran $$$ $$$ $$$ $$$ Çalışkan $$$ $$$ $$$ $$$ Çarıkçı $$$ $$$ $$$ $$$ Çavuşoğlu $$$ $$$ Dizsan $$$ $$$ $$$ $$$ Erçal $$$ $$$ $$$ $$$ Gebze Servis $$$ $$$ KCR $$$ $$$ $$$ $$$ Koçaslan $$$ $$$ $$$ $$$ Koçaslan Sakarya $$$ $$$ $$$ $$$ Konya AV $$$ $$$ $$$ $$$ Özaltın $$$ $$$ $$$ $$$ Tırsan Gaziantep $$$ $$$ $$$ $$$ Tırsan Hadımköy $$$ $$$ $$$ $$$ Tırsan Sancaktepe $$$ $$$ Tuzla Servis $$$ $$$ Average $$$ $$$ $$$ $$$

108

Appendix 5: Overall Model Analysis, Result

109