Strategic Management Assignment help on : Automobile Industry

Strategic Management Assignment help on : Automobile Industry

PORTER’S FIVE FORCES ANALYSIS

PORTER’S FIVE FORCES

Michael E. Porter gave his five forces model to analyze the situation of a business or an industry. The model is a powerful tool for assessing the balance of a business and to understand where the power lies in a business situation. It is useful because it tells you the current position as well as helps you in deciding the way you want to achieve your desired position. A brief introduction of all the five forces and then their application on the automobile industry is given below:

(Source: Harvard Business Review 2008)

1. BARGAINING POWER OF SUPPLIER

Suppliers affect a business. Based on the position of suppliers a business decides the prices as they supply the raw material for the production. Suppliers can easily affect the prices by bargaining for the prices of the raw material. Fewer the number of suppliers a business have higher the bargaining power of suppliers it faces.

2. BARGAINING POWER OF BUYER

Here a business analyzes its position in front of the bargaining power of buyers. These buyers are consumers as well as customers. Buyers bargain to get the prices of the products and services down. In this section of model a business analyzes its strength in facing the bargaining power of buyers. If the number of buyers is less; they will have high bargaining power (Mind Tools 2012).

3. RIVALRY AMONG THE COMPETITORS

Here a business analyzes the situation of its competitors. Capability of the competitors decodes the strength of a business in an industry. If the number of competitors is high then the business will have lesser strength as the buyers and suppliers can move to competitors if they are not getting good deal from the business.

4. THREAT OF NEW ENTRANT

Situation of a business also gets affected by the capability of the new companies to enter into the market. If the cost of entering into the market in terms of money and time is less or if there are lesser economies of scale then new companies can easily enter into the market and weaken the business of existing business by grabbing a part of the consumer’s pie.

5. THREAT OF SUBSTITUTES

Availability of substitute of the products that a business offers affects the business. High number of substitutes weakens the position of a business. Due to the availability of the substitutes consumers can easily move to the other products if they are not satisfied with the products and services a business offers to them (Mind Tools 2012).

All the above mentioned forces and model is applied on the automobile industry below. Each power of the model is critically analyzed and then there are some important forces have been selected to consider in the automobile industry.

PORTER’S FIVE FORCES: AUTOMOBILE INDUSTRY

Automobile industry comes among those industries which require high level of capital investment as well as powerful man force. The main phases of the automobile industry are production, marketing, selling and after sales services. The main costs of the automobile industry are described below:

• Technology has helped the automobile industry a lot still the industry requires a huge number of labor force for designing and engineering works.
• Advertising is a big cost for the automobile industry as there are many competitors and to compete with them each year automakers spend a lot of money on advertising (Business Teacher 2011).
• Automobile sector is mainly driven by automakers e.g. Toyota, General Motors, Volkswagen etc, but there is another part of automobile industry which is auto parts makers. These makers also affect the industry with their capabilities.
• Original equipment manufacturers are the essential part of the automobile industry. Automaker companies cannot produce everything required to produce a vehicle. OEMs come here into the picture.
• Rubber fabrication is another division of the automobile industry which mainly involves production of tires, seats, belts, hoses etc (Investopedia 2012).

Automobile industry involves many industries in it. It includes original equipment manufacturers, rubber makers, advertising industry as well as oil and natural gases industry and hence becomes a complex structure which can get affected by many forces available in the industry. Main players of the automobile industry are Toyota, General Motors, Volkswagen, Honda, Hyundai, Ford etc. Porter’s five forces model is used to analyze these players and their strength below:

1. THREAT OF NEW ENTRANTS

As I have already described that automobile industry is very complex and to start a business in automobile industry high level of capital investment is required. Not only huge amount of money but also a labor force will be essential, which are the main barriers to enter into the automobile industry. But there are examples available which have proved that although the entry is difficult but with the power of technology and excellent marketing strategy entry is not that difficult. Initially it was considered that the big three automakers of America i.e. General Motors, Ford Motors and Chrysler are safe with their positions in the Automobile industry but Honda Motors gave a big challenge to these companies by opening its plant in the Ohio. Globalization has also affected the automobile industry as the companies are now keen to enter into the new markets to capture the market share as well as enhance the revenue (Barnat R 2005). For example if General Motors is not able to enter into the Australian market then it can acquire a company in Australia and in this manner it will become able to enter into the country and hence will be a big challenge for the existing automobile companies in Australia. General Motors has a subsidiary in Australia named Holden.

1. BARGAINING POWER OF SUPPLIERS

We discussed above that automobile industry includes many other industries as well for example original equipment manufacturers and tires and seat manufacturers. These industries are the suppliers of the Automobile industry. When we consider the situation of suppliers and automakers we find that Automakers are in a more powerful position. Many suppliers in the automobile industry are dependent on one or two auto makers and hence possess less power (Pauly, C 2009). Bargaining power of the suppliers also depends on the reputation of the supplier i.e. if the supplier is able to provide high quality of auto parts he can easily shift from one company to another. For example Faurecia is a global auto parts manufacturer and present in 33 countries with its 84000 employees. With the fact given above we can imagine the strength of a supplier who is well established (Faurecia 2011). Not only the strong position of Automobile companies but also the unstable economic condition of the world affect the bargaining power of supplier as we have seen during the time of global economic slowdown auto parts manufacturers have suffered a lot.

1. BARGAINING POWER OF BUYER

Power in the hands of buyer is very strong in Automobile industry. This industry mainly works on the basis of taste and preferences of the consumers. There are many automobile manufacturers and they produce a range of Automobile products. It is just because of the consumers taste and preferences. Here if we consider only car market we find that many world level car manufacturing companies are available and they produce a range of cars according to the segmentation i.e. midsize, small, big and luxury. Still consumers are looking for a change and they bargain on the prices because of the alternatives available to them. For example if a consumer is not able to purchase a luxury car from Toyota, he can shift to Honda (Swathen 2010).

Bargaining power of buyers can be explained in terms of the alternatives available to them but generally different cars from same segment have similar prices. E.g. a luxury car from Toyota will have approximately similar price as compared to the luxury car from General Motors. Consumers do not purchase a large volume of cars and hence they cannot bargain much on the prices.

1. AVAILABILITY OF SUBSTITUTE

Here substitute does not mean that a consumer can purchase a different car as we described in the above section. A car cannot be a substitute of a car but it will be a competitor. Substitute for a car could be bus, train, bikes etc. If the cost of operating a vehicle will be higher consumers will shift to the alternatives. Today increasing prices of diesel and petrol is also becoming a reason for the substitute’s selection by consumers. While analyzing the availability of substitute we can also consider the time, personal preferences, convenience and money. Because of these factors a consumer also shifts to a substitute. While considering the car market we can say that the consumers purchase cars not just because of the requirement but they also purchase it to achieve a social status, convenience and in some cases to fulfill a dream. But if they are not able to afford it they will obviously go for a substitute (12 Manage 2012).

1. RIVALRY AMONG THE INDUSTRY

Automobile industry is highly competitive and in a highly competitive industry return is low because of the cost of the competition. In Automobile industry companies invest a huge amount of money in advertising and research and development just to compete with the competitors. There are also other tools available to beat the competition e.g. mergers and acquisition. A big example of this technique is Volkswagen. It has acquired big brands like Audi, Bentley, and Skoda to enhance its market reach and achieve more market share. With the help of these acquisitions the company has attain the third position in the car manufacturing industry. In short we can say that there is high competition in the industry and it is not easy to compete with the world giants like Toyota, General Motors, Volkswagen or Ford. The level of competition can be shown with the data given in table below:

Top 10 Vehicles

(Source: Market data center 2012)

The data given above is for the U.S. market. Continuous growth in the companies clearly shows that there is a high level of competition in automobile industry.

IMPORTANT FORCES OF AUTOMOBILE INDUSTRY

There are many forces available in the automobile industry which can be considered strategically important for the organizations in the industry. These forces are shown with help of a diagram and some of the forces are described below:

(Source: Mind Tools 2012)

1. Time and Cost of Entry

As we have discussed earlier that to enter into the automobile industry high level of capital investment is required. Also a company with multiple operations i.e. auto parts manufacturing, tires and seat manufacturing, engine and others cannot be established without spending much amount of time. To start an automobile company factories, machinery and high level of technology as well as labor force is required which are the big barriers in front of a new entrant. Before investing in such plans an organization must consider these factors. Yes, there is an alternative approach to enter into the automobile industry by purchasing a company which is running its automobile business successfully (Barnat R 2005).

2. Number of Suppliers

Number of suppliers is a very important factor which automobile manufacturer can consider. Suppliers who supply world level auto parts and of excellent quality are less as compared to the automobile manufacturing companies. There are some suppliers who comes at world level e.g. Faurecia in auto parts or Goodyear in tires manufacturing. Automobile manufacturers are required having good relationship with the suppliers because they can easily shift to the competitors and can have an advantage of the competition (Pauly, C 2009).

3. Performance of the substitute

Availability and performance of different substitute has become an important issue for the organizations today. We have discussed above that generally a consumer purchases car to achieve a social status or for convenience. A large number of consumers cannot afford the high prices of cars and that is why they find trains, buses, metros more convenient. Also sale of small cars is increasing because of the convenience which consumers get in maintaining the small cars. Organizations are required to consider the small cars factor (Silverberg, T 2012).

4. Number of competitors

Number of competitors explains the level of competition in the industry. If we see the competitors in Automobile industry we find that top competitors are Toyota, General Motors, Volkswagen, Ford Motors, Honda, Hyundai etc. Automobile industry is also divided into different sections and competition is also according to the segment of the company for example cars and light – duty trucks. These divisions are again subcategorized i.e. small, big, midsize and luxury. Similarly, light duty trucks are categorized in pickups, cross – over, minivan, small SUV, large SUV, midsize SUV and luxury SUV. An organization is required to consider in which segment it wants to enter and then according to that it can analyze the level of competition. For example a luxury car of BMW is not the competitor of small car of Volkswagen like Polo (Gorman, J 2012).5. Customer Loyalty

Earning customer’s loyalty is a big challenge for the car manufacturing companies. When a company becomes able to get the loyalty from the customers then sales of the new products becomes easier and it can easily sustain in the market. The loyalty which BMW, Mercedes and Toyota have achieved for their strong cars is not easy to achieve. With the help of loyalty an organization in the automobile industry can restrict its consumers to it. If an organization wants to enter into the automobile industry it must have better strategy to achieve the customer loyalty (Glagowski, E 2009).

CONCLUSION

In conclusion we can say that Automobile industry is very large and complex. Application of Michael Porter’s five forces model on the automobile industry explains that there are high barriers to enter into the industry as the required capital investment is very high. Bargaining power of buyers and suppliers are less as compared to the companies in the industry because buyers have many choices but the prices are generally decided by the companies. Similarly suppliers are generally dependent on one or two companies and hence they possess less power to negotiate as if manufacturer will decide to shift the supplier it will highly affect the business of supplier. There are substitutes available to the industry but they do not affect the business much as we can see continuously growing companies in terms of revenue and sales. Level of competition in the industry is very high and it is not easy to compete with the giants like Toyota, General Motors and Ford Motors.

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