Porter's Five Forces Model for Automobile Industry Analysis - Coursework Example

?Introduction Automobiles have been contributing to global warming which has prompted the governments across the globe to think in terms of ‘green living’. While the responsibility to control the CO2 emissions lies with all the stakeholders, this becomes an opportunity for the existing automobile manufactures, as well as entrepreneurs that may be able to recognize this opportunity, to enter the market for ‘green cars’. Car sales have been dropping post recession but government support is forthcoming in the UK towards introducing innovation in the automobile industry (Sibbald, 2009). In addition to carbon reduction, small cars with innovative technology that can help in achieving fuel efficiency and reducing the space required for parking, is very much on the government agenda for financial support. However, before venturing into this tiny automobile industry, it is essential to evaluate the competitive forces. If the forces are intense, it becomes difficult to achieve attractive returns on investment (Porter, 2008). However, the company achieves profits when the forces are benign. The strongest competitive forces determine the profitability of the industry and also guide the firm in developing the strategy. Based on Porter’s Five Forces Model, the picture of competition can be build in three stages – identification of the specific competitive pressures with each of the five forces, evaluate the strength of each of the five competitive forces, and determine if the collective effect of the five forces is conducive to making profits within the industry. The five forces that shape strategy have been shown in the diagram below and each of them has been discussed separately: Source: Porter (2008). Threat of new entrants The automobile industry is mature and to survive in this industry the firm must be able to achieve economies of scale. This requires mass production and heavy investments. Because of low sales consolidation is taking place in the industry. Apart from manufacturing regular innovation is necessary to sustain and this requires heavy investments in research and development as well. The cost of entry into an industry also depends upon the probable reaction from existing competitors (Porter, n.d.). High switching costs also deter a manufacturer from entering an industry. Switching costs in this case may be high because of periodical technology up-gradation to survive in the market. Automobile manufacturing and especially with new technology requires intensive distribution strategy with several distribution channels. This becomes difficult for a new entrant to establish and hence threat from new entrants is low. However, foreign competition, new technology and management skills do pose a threat in the industry. Moreover, the UK government is supportive of innovation in the auto industry which makes the threat from new entrants high. Bargaining power of suppliers The automobile manufacturers now outsource bulk of their auto parts to other manufacturers thereby enabling them to focus on the core products, on innovation and research and development. This is known as the OEM (Original Equipment Manufacturer) principle where the industry brand name works with a large number of suppliers (Molnar, 2009).This implies that one automobile manufacturer is dependent on several suppliers at the same time and these suppliers too may be sub-contracting work in turn. Thus there are several layers of suppliers for each automobile manufacturer. Toyota in fact has two or three suppliers for the same parts which reduces their dependency on one single supplier (SD, 2005). This suggests that the bargaining power of suppliers is low in the industry. However, since this is a new concept with innovative technology the dependency on suppliers may be high initially as more manufacturers enter the market. Bargaining power of buyers The automobile industry is totally dependent on the sale of output by the buyers. Thus the bargaining power of buyers is high. Buyers have become demanding of facilities and are also price sensitive. Foreign competition has also made the buyers conscious of the value they can get for money. Customer loyalty no more exists which has prompted companies such as General Motors to start their own blog to discuss their designs with their customers (Singh, Veron-Jackson & Cullinane, 2008). The bargaining power of buyers for green cars may be low but they can always sell their cars and revert back to the traditional cars. Thus, they have a substitute and hence their bargaining power is high. At the same time, consumers are price conscious and prefer affordable cars. These new cars with innovative technology is planned to be an affordable car and hence the bargaining power of buyers in this segment is low. Threat of substitutes For small affordable, fuel-efficient cars the substitutes are motorbike, bicycles, trains and other modes of public transport. However, none of these substitutes would be able to ensure the comfort and timeliness of owning a car. Consumers have become price conscious and more so with the steady rise in oil process. Nevertheless, consumers are time-starved and would be willing to pay for a vehicle that is fuel-efficient. Thus, threat from substitutes is low in the sector. While the subway may be easier to travel but consumers would like to possess a car for personal use over the weekend or on holidays. Thus, substitute for small, affordable fuel-efficient cars does not exist. Competitive rivalry Rivalry refers to the number of players in the sector and the level of competition among firms. When competition is high the returns are low as price-cutting, discounts and other benefits rule the market. As of now competitive rivalry in small cars is low but several manufacturers like the NARO cars are being planned. However, there are no global volume vehicle manufacturers headquartered in the UK as UK suffers from shortage of skilled workers on the shop floor and in research and development (Northedge, 2009). To gain market share there must be competitive advantage. Price-based competition does not exist in the mainstream sector as it has been recognized that it does not increase the market share. In this case, the company can achieve competitive advantage through differentiating innovative technology. Differentiating factors can reduce the risk of high rivalry among competitors. Competitive rivalry is also high when there is slow growth, high storage costs and when the strategic stakes are high. As of now none of these exist in the market and the demand too has not been ascertained and hence it is expected that no competitive rivalry exists. Exit Strategy Three major barriers to exit include economic, strategic and managerial (Nargundkar, Karakaya & Stahl, 2012). Economic barriers refer to the costs associated in selling the assets of the firm while the strategic barriers pertain to the strategic posture of the firm. Managerial barriers refer to the image of the managers that may suffer if the firm were to exit the industry. The economic barriers to exit are high in this industry as this will be new technology for small cars. Plant, equipments and machinery will be company-specific and will not be easily sold off in the open market. The managerial barriers are low because the entrepreneur is not known in the market and would have little impact to his image. Thus, the strategic decision to start or enter this market has to be evaluated carefully as the economic barrier to exit is high. Analysis Different competitive forces exert pressure in different ways. For instance, the threat from new entrants is high in the industry because of technology innovation and government support. The bargaining power of suppliers is high because of innovative technology being used for the new organization. The bargaining power of buyers is low and so is the threat from substitutes. Since this will be a new segment, competitive rivalry is low initially but chances of having high level of rivalry in the foreseeable future is high. Recommendation To sustain the threat from new entrants in the sector, regular innovative and strategic decision should be taken to sustain competition. To overcome the threat from suppliers, the company should engage in forward integration and also have a number of suppliers for the same parts so that the suppliers’ bargaining power is checked. The bargaining power of buyers can be reduced by keeping the switching costs high for the buyers. This implies that switching to other models would mean high operating costs and low returns for selling this car. This would keep the buyer locked-in and maintain low bargaining power. The company can further improve its strategic posture by finding buyers who possess the least power to influence it adversely. To reduce rivalry the new model of car can be employed as a delivery van or as small taxis which consumers could prefer over trains or motorbikes. To minimize the risk of competitive rivalry, this company would have to constantly engage in research and development and upgrade its existing model. Besides, since the UK government is supporting innovative and green cars, over time, the company can even try and gain foreign market share which would eliminate the risk of competitive rivalry. Thus, the competitive forces are weak and suggest that one can venture into manufacturing and selling small, affordable, fuel-efficient cars. Bibliography Molnar, E. (2009). Strategic Management in the ailing automobile industry. [Online]. Available from http://elib.kkf.hu/edip/D_14581.pdf [Accessed 14 January 2012] Nargundkar, S.V., Karakaya, F. & Stahl, M.J. (2012). Barriers to market exit. Journal of Managerial Issues. [Online]. Available from http://www.allbusiness.com/management-companies-enterprises/570250-1.html [Accessed 14 January 2012] Northedge, R. (2009). When the Sun Set on the British Auto Industry. [Online]. Available from http://moneywatch.bnet.com/economic-news/article/the-decline-of-the-uk-auto-industry/301224/ [Accessed 14 January 2012] Porter, M.E. (2008). The Five Competitive Forces That Shape Strategy. Harvard Business Review. Porter, M.E. Industry Structure & Competitive Strategy: Keys to Profitability. [Online]. Available from http://clt.astate.edu/kfish/MIS6413/Industrystructure.doc [Accessed 14 January 2012] QuickMBA. (2010). Porter's Five Forces. A Model for Industry Analysis. [Online]. Available from http://www.quickmba.com/strategy/porter.shtml [Accessed 14 January 2012] SD. (2005). Strategic sourcing. Strategic Direction, 21 (11), 29-32. Sibbald, M. (2009). Britain’s car industry needs the "green" light from the Government. [Online]. Available from http://www.contracthireandleasing.com/car-leasing-news/index.php/britains-car-industry-needs-the-green-light-from-the-government/ [Accessed 14 January 2012] Read More