Porter’s Five Forces Model for the American Automotive Industry Abstract This analysis encapsulates the conditions and prospects of the American automotive industry since the 2008 financial crisis. The prospects of the industry are described, as well as the consequences of foreign competition…
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Introduction In the automotive industry or any similar business field, an essential step is to identify the critical paths and limiting factors involved in profitability. Where does the power reside in a business situation? Based on the forces of supply and demand which party can command the most advantageous bargaining position? A number of business tools and theoretical models address these and other questions; the Five Forces model is among them. When the manager has a clearer understanding of the strengths and weaknesses of all parties involved in a potential transaction, it permits him or her to leverage the situation to maximum advantage, and prepare for the most likely responses from the other party (Samuelson & Marks, 2012) Overall, it is beneficial to acquire data allowing the manager to take a longer view of holistic market forces in order to define costs and risks in terms of doing business. In any competitive environment, an inevitable hierarchy will develop, likely through a combination of simple random forces as well as actual merit. These forces are influenced by social and legal factors in a civilized environment, but within the competitive framework certain fundamental rules will remain universal. This analysis will focus upon Porter's Five Forces model as an explanatory tool to put these factors in perspective relative to the automotive industry. By 2009, the global recession crisis sent ripples through the banking sector, credit markets and then most productive industries across the industrialized world. The American automotive industry was no exception. Chrysler and General Motors were on the financial precipice, and Ford faced an uncertain future. 2008 automotive sales had plummeted to historic lows, with sharp declines in the disposable income and available lines of credit for the purchase of new vehicles. A loan process was deemed necessary in order to rescue these and other industries from total collapse, at the likelihood of further damage to the American – and potentially the global economy. Industry Definition For the purposes of this analysis, the automobile industry will be defined as the American corporations involved in the direct manufacture of automobiles, and the challenges they have faced in light of the current financial crisis. The scope of this analysis will include the interests of car production as well as sale, and the companies in the United States that perform both functions. Specifically, this will focus on what are termed 'The Detroit Three', generally understood as Ford, Chrysler, and General Motors. Industry Profile With the immediate danger of total collapse averted as a result of the federal loans, it is necessary to take stock of the situation using sound theoretical planning in order to plot the next move forward for the automotive industry. Theoretical models to identify forces and threats must be given careful consideration during the planning process. The planning process must include the prospects and profile of the 'big three' automakers as described above, specifically the damage to the economy that might ensue if they were allowed to go bankrupt and fail entirely. Structured bankruptcy agreements for General Motors and Chrysler were considered during the spring of 2009, with considerable national debate regarding the possible ripple effects from their collapse (McAlinden et al., 2009) Ultimately there were two approaches by which
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