The Threat of Substitutes for the Automotive Industry - Case Study Example

International Sustainability Management – Analysis of Sustainability Issues for the Automotive Industry School: A. Sustainability analysis Industry analysis using Porter’s five forces model Porter five forces include the degree of competition, the threat of alternative products, barriers to enter the industry, the power of buyers, and the power of industry suppliers. Degree of competition between players The rivalry between industry players in the global market is intense, noting that the dominance of a few players, including the big 3 automakers (Ford, General Motors and Daimler Chrysler) in the US market was broken by international companies like Toyota and Honda. Market growth has also slowed down for established markets including those of Western Europe and the US, which has intensified competition (Porter, 2008). The threat of substitute products The threat of substitutes for the automotive industry is relatively low, as none of the transport means available offer the independence, convenience, the utility and the value offered by vehicles. The safety of the industry derives from the high costs of switching to other modes of transport (Porter, 2008). Barriers to entry The barriers to new entrants in the industry are considerable, including that new players require huge start-up capital and considerable experimentation to attain production efficiency. All of the industry players have entered foreign markets and globalised to varied degrees (Porter, 2008). The power of buyers and suppliers From the exploration of the relationship between the automotive industry and the available suppliers, power is more oriented in favour of the industry, as automakers dictate the terms for their suppliers (Porter, 2008). From the relationship between the industry and its customers, power is highly inclined towards the side of the consumer, due to the huge availability of substitute products and the low costs of switching from one producer to another. However, the industry remains relatively powerful, due to the high customer-producer ratio that characterises the industry (SMMT, 2013). Global automotive trends The review of major players in the industry has shown that their success will be highly dependent on a variety of attributes, including cost structure outlook and production efficiency, which has made Toyota an industry leader; Toyota has used the JIT system, TQM (total quality management) and the automation of production to improve designs and production. The change of Toyota’s strategy can be explained using the Triple Bottom Line model, which can explain the company’s incorporation of consumer safety and environmental protection into its profit-making business (Savitz and Weber, 2006). Other attributes influencing the success of industry players include brand management and distribution; attending to underserved markets, the reputation of products and brands and the focused nature of the company’s strategies. The trends playing a primary role in determining the sustainability of the industry include international expansion, which offers industry players one of the best avenues for growth. Automakers will benefit through increasing their focus to unsaturated markets like China, which had a number of cars-to-1000 people ratio of 10, as opposed to 765 for the US in 2003 (Bradley et al., 2005). The second trend that will determine the sustainability of the industry is the conglomeration of players in mature markets and the competition maintained at emerging markets. This trend led to the merger between European, American, and Japanese automakers during the 1990s; strategic partnerships included the merger between Chrysler and Daimler-Benz in 1998 and the strategic alliance between Renault and Nissan in 1999 (Bradley et al., 2005). Other trends that will greatly influence the sustainability of the automotive industry include the imposition of higher energy constraints and environmental protection regulations. Stringent emission regulations are increasingly taking force, and the trend will continue in the coming years (Yasten Associates., 2011). These policy restraints are reflective of the five capitals model, which emphasizes the importance of limiting the flow of resources, so as to make development more sustainable; in this case, the reducing oil reserves are under the spotlight (Goodwin, 2003). The weight and the reliability of cars has also been subjected to scrutiny, which has led to the emphasis placed on the use of recyclable materials and sustainable drive systems, including electricity driven-systems, and the replacement of heavy components like steel, with advanced polymers (Yasten Associates., 2011). In response to these pressures, and the financial implications of the financial crisis, the industry has come up with a distinctive, positive outlook towards sustainability. The areas offered central attention include the production of cleaner, lighter and more efficient vehicles, which are less strenuous to the fuel economy and less implicative to the problem of climate change (EPA, 2014). The changing fuel and energy consumption standards have been incorporated into the production of more recent vehicles model, including the Toyota’s Prius sedan. Product safety has been highlighted as a major risk facing the industry, following the recall of more than 8.5 vehicles by Toyota and a similar case for Ford Motors. Following the attention offered to safety, companies like Toyota have increased their corporate sustainability coverage and CSR, through the enhancement of quality management and the improvement of disclosure about the safety of vehicles (Epstein, 2008). Recommendations for the sustainability of the Automotive Industry 1. Industry players should adopt a proactive outlook, where they source and communicate information on sustainability issues, prior to the imposition of regulations. One of the areas to benefit from this approach is environmental conservation. 2. Industry players should invest in the development of new and green processes, which will improve the sustainability of the industry. 3. The automotive industry should channel production capacity towards the development of renewable energy systems, including the electric drive system, and the recycling of vehicle components, so as to improve the sustainability of industry capacity. 4. Industry players should invest in the improvement of the safety profile of new vehicles, including reducing the safety features of new car designs. 5. Industry players should invest in the redesigning of production processes, towards the reduction of waste and the production of hazardous syntheses. B. Present state of the automotive industry sector Consumer demand remained a challenge, particularly due to the drastic increment in the prices of oil products and the financial implications of the financial crisis (KPMG, 2013). The consequences of the changes and the effects of the recurrent crises changed the outlook of the market. The compounded impacts included an increase in the preference of fuel economy as the number one buying criteria. The best practices adopted by industry players in addressing the situation and reducing the pressure included the development of the hybrid drive train by Toyota motors (IPCC, 2007). This innovation reduced the amount of fuel consumed by the vehicles produced. In relation to the global competition for market share, market share control changed for different industry players, including that Toyota’s market share increased by 24 percent and the producers of low-consuming vehicles saw an increase in market share. In response to the market share competition, companies like Ford Motors leased the hybrid drive technology from Toyota motors, and also emphasised the production of low-fuel consuming vehicles (Zaun, 2004). The best practices adopted by industry players to address this challenge included, increasing the investments channelled towards research and development (R&D), particularly, in the area of increasing the usage of renewable components and the search for alternative fuel sources (KPMG, 2013). Due to the challenges facing the industry, future investment patterns and prospects have changed considerably. These changes have seen companies going into corporate strategic partnerships as the key to financial success; more than half of the suppliers serving the industry are redirecting their efforts towards the diversification and the expansion of their value chains. One of the best practices adopted by industry players towards improving the satisfaction of their customers, include that vehicle manufacturers are investing in the value chains that supply them with renewable production inputs, including the batteries used by hybrid vehicles (Canis, 2013). C. The sustainability challenges that the automotive sector faces 1. Demographic change Demographic change is one of the challenge areas facing industry players, in their push to adopt sustainable strategies and operations. This area has presented challenges to industry players, as they have not been able to clearly understanding the changing demands of consumers (Subic et al., 2012). This is a major area of challenge, taking into account that consumers are a primary change driver. This challenge became evident through the uncertainties developed around the impact of the social and environmental concerns influence buying behaviours. For example, the leaders of automotive industries were uncertain whether the ethical values involved in shifting demand to that of greener vehicles would last (Subic et al., 2012). This is particularly the case, taking into account that some consumers are attracted by the financial benefits yielding from sustainable cars, and not the environmental impacts of sustainable vehicles. Following population explosion in many urban areas, demographic change has presented a challenge, noting that the reconciliation of public and private transport has been a primary agenda. These policies discourage customers from purchasing more cars. The financial crisis left many people unemployed, and that has affected the availability of the money that could have been available to buy more cars (Subic et al., 2012). 2. Ecosystem change Changes in the ecological balance of the earth have remained a major challenge limiting the sustainability of the automotive industry. The issues surrounding carbon dioxide emissions has been one of the constraint areas, as industry players are subjected under heavy pressure to produce vehicles meeting specified carbon emission levels (Wells, 2013). Advances in this area have included the production of fuel cell power trains and hybrid vehicles. Resource consumption has also been subjected to scrutiny, noting that governmental regulations have been put in place, compelling industry players to adopt cleaner manufacturing processes. Industry players have also been required to engage more funds in R & D (research and development), which affects the profitability of automotive companies (Wells, 2013). 3. Climate change The problem of climate change has featured in many social spheres, and one of the major contributors blamed for the increased threat has been the carbon emissions produced by vehicles (Blowfield, 2013). It is estimated that the automotive industry contributes about 15 percent of the globe’s carbon emissions, which is about eight billion metric tonnes annually (Austin et al., 2003). The problem of carbon emissions, together with the overconsumption of fossil fuel resources has intensified the pressure to reduce the emission levels of vehicles and the use of alternative, renewable energy. Following the pressure from different social and political agents, automotive companies have invested irrecoverable amounts in the research and development of alternative drive systems, and alternative vehicle fuels (Austin et al., 2003). As a result, the divergence of financial resources to these other areas, as well as the restrictions imposed on the sale of vehicles has become a major area undermining their sustainability. D. Recommendations made to the CEO of an automotive Company, in relation to sustainability Taking into account, the fact that the automotive industry has been a victim of the financial crisis and environmental protection, the recommendations offered through this paper will encompass the entire scope of the company, and its business strategies. This approach is necessary, taking into account that the problem of climate change and global warming are global crises, which makes environmental protection an ethical duty of the company. 1. Ethics should be incorporated into the business model of the company, decision making processes and also its organizational strategy. 2. The CEO, among other managers at the company must show commitment to the ethical approach to business by example. Leading by example will serve as an incentive to the fact that the adoption of the ethical duty and to foster the creation of the change culture will be welcomed, supported and rewarded among junior and middle-level managers. 3. Non-executive managers and directors should serve as sustainability custodians, where their role will entail ensuring that the executive team is active in increasing the sustainability of the company’s business. 4. Governance frameworks should engage the groups and the individuals with the skills required during the process of scrutinizing strategy and performance across ethical, social and environmental issues. 5. Manager should address sustainability issues and problems with an open mind, so that they can explore the ways through which the company can advantage from the adoption of the ethical approach, instead of depending on compliance and cost cutting narrowly. Reference List Austin, D., Rosinki, N., Sauer, A. and Le Duc, C., 2003. Changing Drivers: The Impact of Climate Change on Competitiveness and Value Creation in the Automotive Industry. Wahsington, DC: Sustainable Asset Management and World Resource Institute. Blowfield, M., 2013. Business and Sustainability. Oxford: Oxford University Press. Bradley, D., Bruns, M., Fleming, A., Ling, J., Margolin, L. and Roman, F., 2005. Automotive industry Analysis. [Online] Gatech. 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