Porters Five Forces Model to American Automotive Industry - Essay Example

? American Automotive Industry Outline 2. 3. Introduction to the Auto Industry  3 Industry Definition  3.2. Industry Profile  3.3. Industry Structure  3.4. Future Outlook  4. Porter's Five Forces Strategy Analysis as it applies to the Auto Industry  4.1. Bargaining Power of Buyers  4.2. Bargaining Power of Suppliers 4.3. Competitive Rivalry in the Industry  4.4. Threat of New Entrants  4.5. Threat of Substitutes  5. Conclusion  6. References Abstract After an organization has known its competitors, it needs to establish its realms of competition also known as business-level strategy. For international organizations, decisions have to be made on whether the strategies would be the same for every country it competes with as well as giving managers the mandate to choose their own strategies. Functional strategies for particular operations derived from business level strategies include marketing, accounting and finance. An automotive industry manufactures, designs, develops, markets and sell motor vehicles and is considered the world’s most significant economic sector in terms of revenue generation. The American automobile industry is the only industry that has never changed for years since its inception. Businesses begin, grow, develop, and end just like human beings. Some do not complete their life cycle as a result of their interruptions. They undergo a myriad of challenges that make them eventually die. Contrary to a human being, a business can change its methods of operation to more efficient mechanisms for improvement. From this view, the American automobile industry has raised the question of whether it will be able to adapt or it will end from its stagnating condition. Before establishing an organization’s business-level strategy, it must discern the determining factors of profit maximization of an industry. The tool of analyzing these factors is what is known as Porter’s Five Forces Model. The external environment comprises of general and competitive environment. Therefore, fluctuations I the general environment impacts the competitive environment. An organization must evaluate the general environment to understand the negative aspects that can change the industry within which to compete. American Automotive Industry 3. Introduction to the Auto Industry As defined earlier, an automotive industry manufactures, markets, designs, develops and sells motor vehicles. It does not include industries attached to automobiles after delivery to the client such as fuel stations, electronics and repair shops. An automobile industry involves producing and selling individual powered vehicles such as trucks, passenger cars, farm equipment and other commercial vehicles. The auto industry has facilitated the growth of infrastructure for long distance commuters, entertainment and shopping, growth of market centers, increased urbanization and industrialization (Burgess, 1980). The industry is also one of the key employers thus contributing to economic growth. Until 2005, the US dominated the world in production of automobile. Majority of the auto dealers in the US were blacksmith and carriage shops. Progress was soon developed when the car replaced the horse and buggy. Blacksmith shops were everywhere in the market centers and played the role of serving customers at a great deal. The inventors of automobile industries were engineers like Henry Leland and Henry Ford. Blacksmith shops were service oriented whereas carriage shops required time to time management together with the horses that drew them. Since their goal was to provide exceptional satisfaction to the customers needs, they slowly became auto dealers of servicing their customer’s vehicles. They were able to compete with service stations such as Jiffy Lube, Midas, and Meineke among others. From that time the number of dealers began to increase giving rise to many franchised automobile dealers. This trend went down from 1950 until 2007 (Tuman 19). 3.1 Industry definition The first fifty years saw the industry survive due to the dealers dependence on fixed coverage for their success. This is the overall amount got from their services, repair and spare parts. To achieve a great coverage, there was need to have strong, income generating operations. High Fixed coverage reduced the need for selling vehicles to maximize profits. Proper servicing was the only fundamental way of attracting customers. Meanwhile, the industry graduated from sale of vehicles meant for use only to more luxurious ones i.e. those with speed and style. The luxurious vehicles saw a dramatic increase in profit making which led to a change from engineering to design. Several manufacturing companies like Kaiser, Bantam, Fraiser and Nash began to diminish as utilitarian vehicles were no longer wanted. Also, marketing replaced customer retention leading to promotion of field sales managers to regional managers and deployment of service and parts representatives. The shift to marketing made manufacturers to lose customers in need of service around the 1980’s.companies like Renault and Peugeot lost at the expense of local manufacturers and eventually left the US market (Georgano, 1992). Today, the industries principal products are passenger vehicles, light trucks, pickups, vans and sport vehicles. It is one of the worlds major manufacturing industry involved in the production of these vehicles, and special purpose vehicles such as fire engines, hearses and ambulances. The manufacture of engine bodies, design and assembly are also included in the production (Lincoln, 2006). 3.2 Industry profile The industry began in the 1890’s and tremendously grew to become one of the world’s largest industries from its size of local market and use of mass production. In the 1980’s it was overtaken by Japan and in 2009, china took over as the second largest manufacturer in the world by volume. In 2010, 7761,443 automobile were manufactured in the US despite the average production of 15 million units in the 2000s (Cantrell & Robbins, 2011). By the end of 1920,s the industry was dominated by General Motors, Ford and Chrysler. After the First World War, these companies continued to domineer until in the 1970’s when high fuel prices, competition from other foreign manufacturers and bureaucracy affected the companies. In the following years, the competitors underwent a crackdown. Before the 1980’s, most of the plants were owned by local manufacturers of the Big Three (GM, Ford, Chrysler) and AMC. However, that has dropped dramatically since factories in US are now owned by foreign investors (Coffey& Layden 1996). 3.12 Chronology of production Before 1890’s – horse powered buggy Early 1890’s- The first American automobiles, internal combustion engines, battery powered electric engines and steam engines used. 1896-Ford motor company was born. 1903- 3750 vehicles were sold. 1908- General motors corporation was formed. 1924- 31,000 miles of paved roads were constructed. 1925- Chrysler Corporation was revitalized. 1930’s- great depression leading to stiff competition from the Big Three 1960’s- competitors of the Big Three ended 1970’s- auto industry severely affected by the oil crisis Arab Embargo Mid 1980’s- oil prices fell, American auto industry revitalized. 1990’s & 2000’s- recession, invasion of Kuwait by Iraq caused a temporary jump in oil prices. 3.3 Structure Until the last decade, the US automobile industry was largely shaped by political and economic forces particular to the North American continent. The production in the US market has dominated the industrial sector for so long. Six companies dominated the manufacture of passenger vehicles in the US- the three local ones (General Motors, Ford and Chrysler) and three Japanese (Toyota Honda and Nissan) all of which contributed greatly to the production of cars sold in US and North American assembly plants. This accounted for 87% of the sales with the remaining shared among the other non –US firms (Everett, 1997). 3.3.1 Manufacture The six manufacturers operated internationally, for example, GM derived 31% its revenues from non- US markets, ford, 30% (Cantrell & Robbins, 2011). The industry was both a capital and labor intensive venture with the cost of materials and labor amounting to 75%. Car makers were concerned with design, engineering and manufacturing. The design addressed aesthetic styling and functioning of the vehicle i.e. something attracting. Engineering concentrated on vehicle performance and handling involving emissions control, steering, engine power and fuel efficiency. Manufacturing began from fabrication to assembly. Design and manufacture were both expensive processes in the industry. 3.3.2 Production planning The assembly plants were designed to hold a capacity of large numbers of the vehicles produced. Plants had many assembly lines to produce specific vehicle models with the set features. Assembly workers were paid full time wages regardless of whether the production rates have dropped or not (Appel, 1993). This made the plants to begin operating at high utilization rates. The assembly plants set ups could not be changed anyhow due to time consumption and expenses. The requirements of capacity utilization demanded a minimum rate of production per plant. 3.3.3 Distribution and marketing It was carried out through a network of franchised dealers. This was a formal agreement enabling the dealer to operate a factory authorized sale and service for a particular brand in a given geographical area. Minimum sales levels and service capabilities were the requirements of the franchised dealers. They submitted stock orders to manufacturers 1-2 months ahead of delivery and were allotted to one new vehicle for each one they sold. Advertising and promotional campaigns were used by car makers to support the dealers. 3.3.4 The modern industry From the early 1980’s, Japanese and German companies established factories in the US and by 1999 they were able to produce 3 million vehicles in a year (Cantrell & Robbins, 2011). This caused the big three to produce less than 67% of the vehicles sold in the US. Complaints about air pollution, traffic congestion, and auto safety led to introduction of government laws governing the complaints. As a result, manufactures begin to improve fuel efficiency and safety, a move that made the use of natural gas, electricity and solar power alternative sources of energy. 3.4 Future outlook A new generation of auto entrepreneurs is on the rise, concerned with the improvement of infrastructure. The government will support the production of vehicles that burn minimum gasoline or none at all (Sobel & Fink, 2004). Production capacity is going to increase. Chrysler group is expected to increase investments in US facilities to 4.5 billion dollars. The company is also to add more employers especially hourly ones who will share in success when achieved. Innovative business strategies will be designed to cope with the new economic era and international market. To overcome the competitive status, the auto companies will revamp their human capital processes to attract and grow the skills of the workforce (Crabb 1969). 4.0 Porter’s Five Forces Strategy Analysis and how it Applies to the Auto Industry It’s a framework for industrial analysis and business development strategy that was brought by Michael Porter of Harvard business school in 1979. The five forces are derived from industrial organization to determine the competitive capacity and market attractiveness. An attractive industry combines the five forces to drive the business to profitability. An unattractive industry is the one that is close to competition and which profits are driven to normal. Three of the porter’s forces are micro environment or competition from external sources whereas the remainder are internal or macro environment (Porter, 1980). Micro environment forces affect the companies’ ability to make profit as well as serving customers. Porter’s five forces are a reaction to the SWOT analysis which is ‘rigorous and ad hoc’. The forces are based upon the structure-conduct- performance paradigm in industrial organization economics. It has been applicable to a wide range of problems, thus helping businesses to become more stable and increase profits (Porter, 1979). Porter’s work on strategy devising encompasses overall cost leadership, differentiation and focus. Strategies help an organization to rate itself in an industry so as to prevent the effects of the five forces to emerge as winners. Te five forces are important in an organization by helping it determine the chances of profit maximization as well as evaluating the effects of each of the forces on the functioning of an industry. By understanding the industrial functioning, firms can devise a strategy that strengthens its operations for its benefit. The five forces include: threat of new competition, threat of substitutes products or services, bargaining power of customers, bargaining power of suppliers and intensity of competitive rivalry (Porter, 1979). 4.1 The buyers bargaining power. Buyers are the people or organizations that create a demand in an industry. Buyer power is understood as the effect that customers have on the production industry. When the buyer power is strong, a market is created in e\which there are more suppliers than the buyer. The buyer then determines the price of commodities. The customers then put the business under pressure which eventually affects the customers’ sensitivity to price changes. The bargaining power is greater under certain circumstances listed below: Existence of few potential buyers and many sellers in the market Buyers can easily switch to other providers making the provider to improve customer satisfaction such as reasonable prices and high quality services. Buyers have the power to take over the firm or business provided they have the resources to buy. This threat can make providers improve their services due to the negotiation power. The industry is not a main supplying group for consumers Products are standardized (Porter 37). 4.2 Bargaining power of suppliers These are the businesses that deliver materials and products in an industry. The cost of those materials can affect the company’s profitability. Suppliers determine the terms and conditions in which the business is operated. Firms find it difficult to make profits when the power of suppliers is stronger. The bargaining power of suppliers is higher when: There are many buyers and few potential suppliers There are undifferentiated, high valued products Suppliers threaten to switch or set up their own outlets The industry is not a main consumer group to the suppliers (Turban 2009). 4.3 Competitive rivalry This determines the extent of rivalry between existing organization. The higher the level of rivalry, the harder it is for the firms to make profits. The intensity of rivalry depends on: Structure of competition. For instance, rivalry is more higher when are equally sized competitors, rivalry ids less when an industry has a defined market The structure of the industry costs. Industries with high fixed costs encourage competitors to fill unused capacity by price reduction Degree of differentiation. Industries where products are commodities have greater rivalry while those whose competitors differentiate their products have less rivalry. Switching costs. High switching costs reduces rivalry Strategic objectives. Rivalry is more intense when competitors are pursuing aggressive growth strategies (Turban 39). 4.4 Threat of new entrants This refers to the extent to which barriers to entry exist. Existing firms can make relatively high profits if other firms do not enter a market. New entrants can raise the level of competition thus reducing its attractiveness. Key barriers to entry include economies of scale, investment requirements, openness to industry distributors, likelihood of switching from existing industries and costs of switching customers (Porter 36). 4.5 Substitute threats This determines the degree to which buyers can switch to other products of the same category. The ease of switching depends on the costs incurred in transferring the data to a new database system and retraining staff. The availability of substitutes decreases the industry’s profitability and attractiveness because of the limitations in price levels. The threat of substitute products depends on cost of switching to substitutes, buyers interest in switching and the relative price and performance of substitutes (Porter 35). 5.0 Conclusion The five forces are subject to change with time as market conditions interfere. A lot of information is available nowadays to help customers review prices according to different providers hence increasing the buyer power. The establishment of international; markets has led to increased rivalry in the recent years. In the case of American automotive industry, Toyota sales have reduced the market share of American car manufacturers like General Motors as customers have other choices. The installation of internet has increased the accessibility of producers to reach many markets. The ability to sell online has reduced a major barrier to entry (Hill & Gareth 2009). 6.0 References Hill C. & Gareth J. (2009) Strategic management theory: An integrated approach. NY: Cengage Learning. Turban R. (2009), Introduction to Information Systems (2nd edition), Wiley, 2009, pp 36–41 Porter, M.E, How Competitive Forces Shape Strategy, Harvard Business Review, (1979) pp 35. Porter, M.E, Competitive Strategy, Free Press, New York, 1980 Tuman, J. (2003). Reshaping the North American Automobile Industry:Restructuring. London: Routledge. Sobel, R. & Fink, J. (2004).The Automobile Age: The Consolidation of the International Automobile Industry  Appel, M. (1993). Driving continentally: National Policies and the North American Auto Industry. Ottawa: Carleton University Press Everett, R. (1997) Disintermediation in the U.S. auto industry, Chrysler Corporation. Case number: ec-10. Lincoln, J. (2006). The Automobile. Tarrytown New York: Wise Galahad Books. Crabb, R. (1969). Birth of a Giant. Chilton Book Company Philadelphia, PA. Coffey, F. & Layden, J. (1996). America On Wheels. Santa Monica, CA: General Publishing Group, Inc. Georgano, N. (1992). The American Automobile,  New York, NY: Smith Mark Publishers. Burgess, D. (1980). Classic American Automobiles,  New York, NY: Wise Galahad Books. Cantrell, S. & Robbins, J. (2011). Solving the Skill Crisis in the Automotive Industry, Accenture Institute, Outlook. Read More