Five Forces Model of Competition for the US Automobile Industry - Essay Example

The European and Americas industries reached respective values of $476.6 billion and $548.4 billion in 2008.

Automobile manufacturers’ sales proved the most lucrative for the global automobile industry in 2008, generating total revenues of $1,698.5 billion, equivalent to 95.19% of the industry's overall value. In comparison, sales of motorcycles generated revenues of $85.8 billion in 2008, equating to 4.81% of the industry's aggregate revenues.

The performance of the industry is forecast to accelerate, with an anticipated CAGR of 4.5% for the five-year period 2008-2013, which is expected to drive the industry to a value of $2,220 billion by the end of 2013.

1) Threat of New Entrants:

A tremendous increase in raw material costs in recent years has resulted in pressure on both market players and suppliers. The diverse markets in which suppliers operate have reduced their reliance on the automobile industry. Barriers such as stern government regulations, high fixed costs, and exit barriers hinder new entrants to the market. Competition in the industry has increased as a result of the economic downturn.

2) Bargaining Power of Suppliers:

Suppliers such as steel and aluminum manufacturers are often large companies who supply to a wide variety of industries, reducing their dependence on the automobile manufacturing market. Supplier power is

strengthened further by the fact that the automobile industry requires raw materials of high quality. However, market players rarely rely on one supplier for the majority of their inputs. Reliance on suppliers is kept to a minimum by using a wide range of companies. For example, Toyota and Honda ensure that no single supplier accounts for more than 5% of purchases of major inputs. Overall, supplier power is assessed as moderate.

Birkinshaw, J. et al., (2005) state, “In other words, if the subsidiary is able to develop some autonomy, presumably through its entrepreneurial initiatives, it is much better positioned to start developing local suppliers and customers of its own, which may subsequently lead to a broader value-added scope.”

3) Bargaining Power of Buyers:

Manufacturers enter into agreements with authorized dealers, agreeing to sell specified product lines at wholesale prices. Buyers may be authorized dealers for a number of manufacturers. The typical financial strength of such buyers is high, meaning that they can make large purchases and put pressure on market players to reduce prices. Brand strength serves to weaken buyer power considerably.

4) Threat of Substitute Products:

Used cars are the most significant substitute-threatening players in the new car market. The volume of vehicles sold in the used car market exceeds that of the new cars market. However, as the affordability of new cars continues to increase, the threat to the market from used cars decreases. However, the growth in awareness of environmental issues and the growing desire to prevent climate change could result in more people substituting automobiles for more environmentally friendly forms of transport e.g. walking/cycling/ public transport.

5) Intensity of Rivalry among Competitors:

As consumers become more conscious of environmental issues and tough new ceilings on pollution and fuel efficiency standards being introduced in both the US and Europe, the growth of these ‘green’ trends puts further pressure on car manufacturers, particularly those who produce 'luxury' cars. However, many market players operate in a diverse range of markets. For example, Honda manufactures cars, watercraft (e.g. jet skis), lawn and garden power equipment, and engines for jet planes. This reduces their reliance on the automobile industry. Overall, rivalry in the industry is strong.

Weerawardena, J. et al., (2006) state, “It is our view that by focusing on key environmental forces and firm capabilities such as learning and innovation greater gains can be made in understanding firm performance. Such an approach brings together both external and internal determinants and in effect provides a macro industry and micro firm basis to explore competitive marketing strategies.”

            Valenzuela, M. et al., (2006) reveals, “Another interesting model is the Michael Porter’s Competitive Forces Model commonly referred to as Porter's Five Forces Model (Potential Entrants, Suppliers, Buyers, Substitutes and Industry Competitors) is by far the most widely used framework for an assessment of the profit potential in the company (Porter, 1998). The collective strength of the so-called five forces differs from company to company. Each of those five forces is based on structural features (dimensions) which collectively impact the profit potential. All five forces jointly determine the intensity of the company's competition and profitability. The strongest forces become crucial from the point of view of strategy formulation (Henk de Swaan et al 1999).”