Industry Competition in the Automotive Industry - Coursework Example

?Industry competition in the automotive industry Industry competition in the automotive industry Questions: With reference to appropriate theories, frameworks and concepts from Topic 2 (industry competition)… 1. Discuss why the ‘mass market’ segment of the auto industry is currently considered ‘unattractive’ in terms of its profit potential. According to Michael Porter the attractiveness of an industry is depended on the potential of the particular industry to offer to its members the chance to achieve high profits1. In this context, the unattractiveness of the ‘mass market’ segment of the auto industry would be based on the following fact: the profits generated by the firms operating in the specific field are low. The above condition would be checked using Porter’s Five Forces model. Through this model the competitive environment of an organization can be evaluated. In this way, a strategy can be identified so that the organization involved is better positioned in its market2. The above approach has been characterized as ‘outside-in’ approach emphasizing primarily on each firm’s external environment and not on the organizational resources3. In the context of the Five Forces model, the ‘mass market’ segment of the auto industry would have to face the following forces: a) new entrants4; competition in the automotive industry is extremely high. Even if the number of new entrants is kept at low levels, the market share of the industry’s leading firms is so high that it is difficult for medium firms of the particular industry to standardize their market position. Even the industry’s major competitors often face difficulties in keeping their competitiveness high; b) bargaining power of customers5; customers can choose among a high range of cars of the particular category. At the same time, prices in the specific category can be quite low increasing significantly the level of competition; c) bargaining power of suppliers6; components of cars can be retrieved by suppliers worldwide, so that the power of supplier to press for increase of prices is limited; d) industry competition7; the competition in the automotive industry is extremely high; apart from the industry’s major competitors there are firms operating locally increasing the challenges for the industry’s multinationals8; e) substitute products9; in the context of the ‘mass market’ it is quite easy for substitute products to appear at the level that the technology used in cars of the ‘mass market’ can be easily adopted by the industry’s small manufacturers. According to the issues discussed above, the chances for profits in the ‘mass market’ segment of the automotive industry are limited, a fact that harms the attractiveness of the industry’s specific segment. 2. Explain why profitability is generally higher at the luxury and ultra-luxury end of the auto industry. In order to understand why profitability is higher at the luxury and ultra-luxury end of the auto industry, it would be necessary to evaluate the characteristics of the above segment using an appropriate strategic tool, such as the PESTEL analysis. The above tool helps to analyze the macro-environment of an industry, or of an industry’s segment, so that the current status and the prospects of the particular industry are effectively evaluated. The PESTEL analysis focuses on six elements of a firm’s macro-environment, as these elements are able to influence the performance of organizations operating in the industry involved: Political, Economic, Social, Technological, Environmental and Legal. The PESTEL analysis for the luxury and ultra luxury end of the auto industry would be developed as follows: a) Political: political conditions worldwide are not stable. Strong political conflicts are developed in most countries in the international community. In such political environment it would be quite difficult for an industry’s profits to be standardized. The luxury and the ultra luxury end of the auto industry have also to face the above challenge; b) Economic: The global crisis has led to the increase of the gap between rich and poor. The above fact is reflected in the increase of sales of luxury cars worldwide during the last 3 years10. It should be also noted that even if the prices of luxury cars tend to be continuously increased, the interest of rich people worldwide for these cars remains intensive11; c) Social: Inequality in the distribution of wealth worldwide has led to the establishment of quite powerful elites. People in the particular social class prefer to pay a high amount of money in order to have an exceptional car12. In such social environment, the growth of the luxury car market has been unavoidable; d) Technological: The last decade, the technological advances in the auto industry have been significant. Luxury cars in modern market can offer to their buyers a series of advantages, such as extremely high speed, quite high level of safety, exceptional driving experience and so on13. It is for this reason that the interest of rich people on the industry’s new models is high; e) Environmental: The luxury and the ultra luxury segments of the auto industry need to align their production rules with the terms of sustainability. This fact has not negatively affected the performance of the luxury and the ultra luxury segments of the auto industry since luxury cars are, necessarily, developed according to a series of environmental standards so that their effects on environment are minimized; f) Legal: Luxury car brands have been established worldwide. In most countries, the legal framework related to luxury cars is quite flexible, so that potential buyers do not face obstacles in accessing these products. It is clear that the external environment related to the luxury and the ultra luxury segments of the auto industry is quite friendly allowing the high growth of the above segments. It is probably for this reason that the profits of these segments are kept at high levels, with prospects for further increase, despite the delays that the auto industry faces globally. 3. What challenges and barriers would a relative ‘newcomer’ – such as Hyundai – face in attempting to move ‘up market’ into the luxury or ultra-luxury end of the auto industry? What strategies could such firms adopt in attempting to overcome these challenges and barriers? The challenges and barriers that a ‘newcomer’ would have to face in the luxury end of the auto industry can be identified using the Five Forces model, that has been also used earlier for evaluating the competitiveness of the automotive industry in general. Using the Five Forces model, the forces that a newcomer in the luxury automotive industry would have to face would be the following: a) industry competition; the current competition in the particular industry is extremely high; new entrants would face many difficulties in order to stabilize their profits and survive; b) substitute products; it is always possible for cars of similar characteristics and of low cost to appear, even if their potentials would be limited compared to those of the luxury cars; c) suppliers; in the luxury car industry, suppliers can press for continuous increase of prices since the components of these cars are not widely available, in opposition with the components of the ‘mass market’ cars; d) customers; a high range of luxury cars is available in the global market so that customers may press for lower prices; still, as explained earlier the buyers of luxury cars are willing to pay any price in order to acquire a car of exceptional quality/ performance; e) new entrants; the appearance of new entrants in the specific industry is always possible; the specific fact would be another problem that a newcomer in the luxury automotive industry would have to face. A newcomer in the luxury car market could use certain strategies for facing the above barriers. At a first level, market segmentation would be used by Hyundai in order to respond more effectively to the needs of potential buyers, taking into consideration that the luxury end of the auto industry cannot be fully homogenous14. The establishment of different brands in each country15, so that local consumer preferences are met, would be an effective method for a ‘newcomer’, like Hyundai, to enter the global luxury car market. For example, the interior design of the firm’s luxury cars could be slightly differentiated across countries, meeting the local culture and social trends. Segmentation analysis could also help the firm to identify gaps that would constitute a unique chance for the firm’s growth in the target market. For example, by introducing luxury small cars in regions where traffic is heavy could help the firm to respond to the local need for luxury cars that can move easily within the city16. On the other hand, the firm could choose to establish a strategic cooperation, even through a merger, with a major competitor that it is already well established in the luxury car market. Reference can be made to the example of Daimler, the merger of which with Chrysler enhanced its performance in regard to the development of luxury cars17. Bibliography Ahlstrom, D & G Bruton, International Management: Strategy and Culture in the Emerging World, Belmont, Cengage Learning, 2009. Burrow, J, Marketing, 3rd edn, Belmont, Cengage Learning, 2011. Chandrasekar, K, Marketing Management: Text & Cases, New Delhi, Tata McGraw-Hill Education, 2010. Ernst & Young, Global automotive industry to experience modest growth in 2012, January 6, 2012, retrieved 31 December 2012, . 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