Oligopoly: Toyota Motor Manufacturing - Case Study Example

OLIGOPOLY: TOYOTA MOTOR MANUFACTURING UK] Introduction Amarket organisation with few sellers of a homogeneous or differentiated commodity or service is known as oligopoly (Mukherjee, 2002, p. 443). An ideal example of oligopoly is the sale of automobiles or cigarettes (Tucker, 2010, p. 279). The main characteristics of oligopoly include existence of few firms or sellers and many buyers, homogeneous or differentiated products and difficult market entry due to high barriers. Given that the firms are few they are mutually interdependent (Mukherjee, 2002, p. 443). In an oligopolistic competition market, product differentiation is a form of competition through which companies advertise and carry out sales promotion, as well as, new engage in product launches. In this essay, the automotive industry in the UK, which is an oligopolistic competition market, is analysed on the basis of the major factors affecting the car manufacturing competitive structure. In particular, Toyota Motor Manufacturing UK and its car market are analysed. This economic analysis evaluates some of the components of Porters five forces model as the major factors that affect the competitive structure of the car manufacturing sector of Toyota Motor Manufacturing UK. About the UK Automotive Sector and the Car Market In the UK, the automotive sector is characterised by vibrant and innovative enterprises (Cooke, 2011). Foreign direct investments, high quality management has contributed to the sector’s success in the global automotive market. However, there have been changes in commercial and technological trends, which call for resilience, responsiveness and flexibility. The industry might change to a point where the UK would become a global importer of automotives while its exports will decline significantly (Cooke, 2011, p. 9). Toyota Motor Manufacturing UK competes with some other car manufacturers in the UK such as Vauxhall. For instance, Toyota Motor Manufacturing UK ranked fifth in terms of car production quantities, with a volume of 128,146 cars in 2012 (Appendix 1a). The company also ranked fifth in terms of operations in the UK, with 4,530 locations, during the same year (Foxall, 2012) (Appendix 1b). Firms are said to possess competitiveness if they win in the international market because they are more productive and can compete more and better in the international markets (Vega-Rosado, 2006, p. 96). When a business globalises, just like Toyota Motor Manufacturing UK, the need for positive interaction of market forces increases. Such market forces include suppliers, substitutes, buyers, new entrants and Industry competitors and extent of rivalry and advantage (Robinson, 2009, p. 117; Williams, Hall, & Champion, 2011, p. 117). For instance, Toyota Motor Manufacturing UK engaged in the production of full hybrid model engine to transition to low carbon manufacturing so that it could remain competitive. Therefore, the company produced lower carbon dioxide emission cars (Great Britain Parliament, 2012, p. 26). Factors that Influence the Competitive Structure of the UK Car Market Suppliers Suppliers are important determinants of a company’s competitiveness because they determine the price at which the firm will source its components and the prices at which it will sell its commodities. Toyota Motor Manufacturing UK sources its parts from several suppliers who are located in various locations. For instance, there are more than two hundred and sixty suppliers in the UK and Europe that supply components and parts while about eight hundred suppliers provide supplies and site services to the Company’s UK plants. The suppliers are based in the UK and most of them come from the local areas that surround the plants (Toyota Motor Manufacturing (UK) LTD, 2013). This means that Toyota has access to parts and components at the right time and place to enhance its production. Given that other car manufacturers in the UK compete for components from the same suppliers, there is fierce competition. As a result, Toyota Motor Manufacturing UK has been forced to create superior relations with suppliers to gain their trust and maintain a continuous supply of components. If this were not the case, Toyota Motor Manufacturing UK would not be able to carry out large scale production. This is because without sufficient components and parts, a company cannot produce numerous cars within a short period. Consequently, the company will miss out from benefitting from economies of large scale production. It makes economical sense if a company manufactures large quantities of output because it can sell its commodities at lower prices than its rivals. This is only possible if factors of production are readily available (Eskelinen, Hannibalsson, Malmberg, Maskell, & Vatne, 2002, p. 41). Toyota Motor Manufacturing UK benefits from this aspect because it has access to components and parts, which are a crucial resource in car manufacturing. Other companies that do not enjoy a large number of suppliers of components and parts do not benefit from large scale manufacturing of cars. Therefore, they cannot enhance precision and speed as they seek to ensure convenience and quality. Such companies cannot sell their cars at lower prices and compete in the car market effectively. Technology Changes in technology in the global car market, as well as, the UK car market have had significant effects on the competitive structure of cars manufactured by Toyota Motor Manufacturing UK. It is only through the adoption of new technology that car manufacturers can manufacture cars that meet the needs of the current consumer (Mi, Masrur, & Gao, 2011). UK based companies that produce cars compete in the market by seeking to measure up with the current trends. Consequently, the competitive structure of Toyota Motor Manufacturing UK cars has been affected. Toyota Motor Manufacturing UK has invested heavily in research and development to ensure that it improves the quality of it cars. For instance, Toyota Motor Manufacturing UK had to embrace new Technology, and it has managed to manufacture electric or hybrid cars. Consumer Tastes The current consumer tastes are different from those of the previous consumers. For instance, current consumers prefer smaller cars that are fuel economical and efficient. On the other hand, some consumers prefer large and luxurious cars. Preference of smaller cars and those with greener themes has an impact on the competitive structure of Toyota Motor Manufacturing UK cars. Competitors in the UK car market seek to meet the requirements of consumers and this has changed the competitive arena. The car market consists of low income earners who can afford cheap cars and high income earners who go for large luxurious cars. The need to balance these requirements has influenced the competitive structure of cars manufactured by Toyota Motor Manufacturing UK. However, the company has capitalised on its technological capability and resource abundance to design both large family cars and smaller cars that suit the needs of people with different income earning levels. Quality and Pricing Most consumers in the UK car market yearn for high quality cars. The need for high quality cars by consumers has led to high levels of competition among car manufacturers based in the UK. For instance, some companies such as Toyota have invested in research and development so that they can manufacture cars that suit the required quality standards. The company also seeks to ensure that it stays upfront in the market by manufacturing cars of superior quality. Therefore, competition among car manufacturing companies in the UK car market to deliver superior quality has a significant impact on the competitive structure of cars manufactured by Toyota Motor Manufacturing UK. In terms of pricing, Toyota Motor Manufacturing UK has adopted a strategy that can be beneficial to it and other car manufacturers. The company considers the reactions of other car manufacturers before setting its prices. For instance, given that the Toyota Motor Manufacturing UK benefits from economies of large scale production, its average total cost is lower than other car manufacturers. If the company decides to sell at a price that includes the average total cost and a specified mark up, it will make a profit (Appendix 2a). If it lowers its price further, it will still make a profit, provided it the selling price does not go below the average total cost (ATC). However, Toyota Motor Manufacturing UK ensures that it sells its cars at a price that is slightly above the average total cost, but still remains competitive because it benefits from economies of large scale production. In the presence of other car manufacturers, Toyota Motor Manufacturing UK can produce quantity Q and sell at price P, which is depicted by E (Appendix 2b). Consequently, revenues earned by the company will go up. However, given that the cost incurred by Toyota Motor Manufacturing UK in car manufacturing is low, the company can compete by charging lower prices. When Toyota UK charges the conventional price, PA, a kink occurs at this price. This is because PA is an acceptable price, which does not force other car manufacturers to adjust their prices or marketing arrangements, if Toyota UK charges such a price or a price higher price (Appendix 2c). However, if Toyota UK charges a lower price than PA, such other car manufacturers will tend to reduce their prices or match their price with that of Toyota UK. They may even make their prices lower than that of Toyota UK. This results into a steeper demand curve at the lower part than that shown on the upper part. This is what is called a kinked demand curve, which implies that marginal revenue curve is discontinuous. Creation of Barriers to Entry Every market is characterised by entry of new companies. Barriers to entry in an oligopolistic competition market are enhanced in a number of ways. These barriers to entry determine the competitive structure of cars in the UK. It has become either extremely expensive or difficult for new car manufacturers to enter the UK car market because large scale production is a requirement. Also, car manufacturers like Toyota Motor Manufacturing UK, which have already established own and control resources such as suppliers and technology. The start up costs and costs associated with research and development are also very high. It means that new entrants have to measure up with this level of spending or exceed it, if they are to succeed. Separately, some existing car manufacturers may push prices so low that new entrants and other rivals are forced to leave the market (Economics Online, 2014). Toyota Motor Manufacturing UK has managed to impose barriers to entry into the car market for new entrants. Despite the existing barriers to entry into the oligopolistic car manufacturing market, additional barriers to entry that limit even the existing car manufacturing competitors have been exhibited by Toyota Motor Manufacturing UK. The normal barriers to entry into the car manufacturing market include high start up costs and enormous research and development investment requirement. However, Toyota Motor Manufacturing UK has been able to create barriers to entry for new companies through the new auto carbon emission standards or regulations and the preference of the green car market. Also, the requirement to design a new engine system for green themes and economical purposes has created barriers to entry for new companies. The company has adopted hybrid engine technology, which is a barrier to other companies. These barriers to entry have influenced the competitive structure of Toyota Motor Manufacturing UK cars. Development of New Products As much as most of the car manufacturers in the UK car market have a unique brand, design and price, they are influenced by the need to develop new products (Hanson, 2010). Given that the car market demands for the development of new car models to enhance demand, Toyota outperforms its rivals in the development of new car models. Consequently, many consumers desire cars made by Toyota while others yearn to purchase cars from the company again. The car market has been shaped by the development of new car designs and models that introduce new features, which current consumers will be attracted to. This has influenced the competitive structure cars manufactured by Toyota Motor Manufacturing UK. Fuel Costs Increases in fuel prices have threatened car manufacturers globally (Hoque, Faruque, & Shahid, 2013, p. 229). The price of petroleum products, which are the main components of fuel for cars, has been increasing everyday. This increase in fuel costs also impact the car market in the UK. Most consumers of cars have opted to purchase car models that are economical in fuel consumption. Given that there some other car manufacturers in the UK car market, it has become a requirement to compete in manufacturing cars that can help consumers reduce the cost of fuelling. Consumers require cars that are efficient in terms of saving fuel. Consequently, the competitive structure of Toyota Motor Manufacturing UK cars has been affected. However, the company competes efficiently by manufacturing car models that match these client needs. Suitability High levels of rivalry that are exhibited in the car market are also exhibited in the UK car market where Toyota Motor Manufacturing UK operates. Therefore, car manufacturing companies should ensure that they are in line with the pace of new developments. As for Toyota Motor Manufacturing UK, extensive research nd development has enabled the company to lead in technological innovations. For instance, the Toyota Prius was introduced to the market, courtesy of research and development. Other fuel economical and efficient cars have been developed by Toyota Motor Manufacturing UK through research and development. The need for Acceptability The prices of fuel have been rising as time goes by. This has called for the need to cut costs by consumers. Therefore, consumers require cars that are environmental friendly. As a result, car manufacturers in the UK have been seeking to meet this requirement. This has resulted into fierce competition among the car manufacturing firms in the UK. Toyota Motor Manufacturing UK has chosen its course to ensure that it meets customer requirements by carrying out intensive research and launching hybrid cars. This also meets the government requirements of cars that provide innovative fuel alternatives. Toyota UK has sought to avail its presence to all consumers so that it acquires a greater share in the UK car market. Substitutes In an oligopolistic market, few large firms produce identical or slightly different products while entry is difficult, but not impossible (Boyes & Melvin, 2013, p. 240). Substitutes exist in the sense that customers can go for a different model of car, which has been manufactured by a rival company. Therefore, product substitutes are products that come from companies in the same industry. Existence of close substitutes to a company’s products affects profits, adversely (McGeehan, Moyer, & Harris, 2008, p. 348). However, the companies in the oligopolistic car market do not subject their competitors to loss of profits by lowering their prices beyond an acceptable level. The reason for this is that all firms may end up making losses while consumers benefit from price cut downs. Therefore, companies ought to safeguard their profits because lowering of prices as a form of competition will lead to responsive actions by rivals, which involve lowering of prices. Further lowering of prices will result into a situation whereby companies will sell at price that is below their cost price. Consequently, car manufacturing firms will make losses through this form of price competition. However, existence of substitutes has led to adoption of differentiation as a form of competition. As for Toyota Motor Manufacturing UK, product launches, advertising and sales promotion has been a vital strategy. Extent of Rivalry As noted, there are many rivals in the UK car market. This implies that Toyota Motor Manufacturing UK faces fierce competition from other car manufacturers. This nature of competition has influenced the competitive structure of cars manufactured by Toyota Motor Manufacturing UK. Existence of numerous companies in the UK car market has led to the introduction of new ways of doing business to enhance their success. Some companies have introduced new technologies and activities that enhance client satisfaction. This has shaped the competitive structure of cars. Toyota Motor Manufacturing UK has also introduced the manufacture of hybrid cars, smaller cars that sit the needs of low income earners and large cars for families. In addition, the company manufactures cars that are fuel efficient and economical. Strategy Given that the UK car market is oligopolistic and highly competitive, the use of rewarding strategy is paramount. Therefore, the car market in the UK has been shaped by the need for strategies by major players such as Nissan, Honda and Vauxhall Motors. It is also evident that the nature of the UK car market limits independent action by a single car manufacture because rival companies are likely to react to any action that such a manufacturer takes. Such activities include lowering of prices or launching non-price activities. Therefore, a a car manufacturer has to carry out a critical analysis of the possible responses by rivals to every strategic decision that is taken. For instance, Toyota Motor Manufacturing UK had to consider whether it was beneficial to be the first car manufacturer to implement a new strategy. Given these factors, Toyota Motor Manufacturing UK became the first to introduce hybrid cars and smaller cars with high fuel economy. Conclusion It has been established that an oligopolistic competition market, few large firms produce identical or slightly different products while entry is difficult, but not impossible. In the UK car market, major car manufacturers engage in fierce competition to acquire a large market share. Some of the factors that influence the competitive structure of the cars manufactured by Toyota Motor Manufacturing UK include suppliers, technology and the changing consumer tests. The need to manufacture high quality cars that meet client preferences also influences the competitive structure of Toyota Motor Manufacturing UK cars. In addition, the pricing strategy that has to be adopted in the oligopolistic competitor market has a significant impact on the competitive structure of cars manufactured by Toyota Motor Manufacturing UK. Other factors that have an impact on the competitive structure of cars manufactured by Toyota Motor Manufacturing UK include, rivalry, barriers to entry, new product development, fuel costs, suitability and acceptability and strategy. Appendices Appendix 1a: Companies that Produced Most Cars in the UK in 2012 Source: (Foxall, 2012) Appendix 2a: Companies that had Most Operations in the UK in 2012 Source: (Foxall, 2012) Appendix 2a: Selling Price Determination in Oligopoly Appendix 2b: Profit Maximisation in Oligopoly Key The SS is the supply curve or the marginal cost curve of the whole industry, which is derived from the total sum of marginal cost curves of all firms. The demand curve of the industry’s product is represented by curve DD while the dominant firm’s demand curve is represented by curve dd. Appendix 2c: Kinked Demand Curve in the Oligopolistic Competition UK Car Market References Boyes, W., & Melvin, M., 2013. Microeconomics. Mason: South-Western Cengage Learning Press. 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