Porters Five Forces of the Automotive Industry

The automotive industry globally is a multi-billion dollar industry, though it is extremely competitive, with many large players trying to leverage their competitive advantages to gain majority or complete market share. Let us set the stage by discussing the key factors that are imperative for any motor vehicle manufacturer to be successful. These factors will be important in the subsequent analysis of the industry forces.

Industry environmental factors play an increasingly important role and so automobile manufacturers cannot rely on just safety and reliability to stay competitive, especially given the maturity of this industry. Let us now examine Porter’s five force model (Porter, 2008) to discuss threats and determine the attractiveness of the industry.

Porter's 5 Forces

1. Threat of New Entrants

There are absolute high barriers to entry in this industry, making the threat of new entrants low. Very few new players or entrepreneurs are capable of venturing into the automotive industry because it requires a high capital investment to set up manufacturing facilities and a distribution network. In addition, the fact that existing multi-national major competitors benefit from economies of scale and scope, makes it very difficult for a new entrant to offer competitive pricing. Finally, because the issues of safety, reliability and durability are so salient, and because buyers base their impressions of a model on the manufacturer’s previous performance on these issues, a new entrant will have extreme difficulty competing. It takes many years for a new entrant to build a strong enough reputation to be competitive. All of these factors make the threat of new entrants in this market very low.

Therefore, there is no significant threat to Ford from the entry of new automobile manufacturers on a global or domestic scale. Entry into the automobile manufacturing market requires significant capital, technical and managerial expertise and the time needed to gain market acceptance that will generate sales and sufficient revenue for operations without the need of cash infusions from investors and finance activities. Even the entry of the Chinese manufacturers will require time. (Grant, 2008) This gives Ford the opportunity to gain market share before these new entrants gain popularity.

2. Competition from substitutes

The threat of substitutes on the other hand does exist. Increasing fuel prices have been pushing some urban drivers to use public transportation. Most vehicle owners still agree that the convenience of using a personal vehicle offsets increases in fuel prices, however if this trend continues and automobile manufacturers are not able to provide a more cost-efficient solution, this threat will increase.

Ford Motor Company did put effort into easing the pressure of substitutes like public transport. Customers will get the benefits of Ford’s largest-ever investment in fuel-efficient power trains. In 2010, Ford launched nine new engines and six new six-speed transmissions. The company is on track to deliver fuel-saving six-speed transmissions across most of its lineup of Ford brand vehicles by 2013 (Automotive 2011).

There is no realistic substitute to motor vehicles with the exception of large scale transportation that railways provide. The evolution of consumer reliance on motor vehicles began with the mass producing of automobiles by Ford in 1910. (Grant, 2008, p. 41) Starting almost 100 years ago, people worldwide became more and more reliant on motor vehicles. With a steady supply of motor vehicles becoming available after World War II, transportation by automobile has surpassed other forms of personal travel and the movement of manufactured goods. As a result, we will qualify the threat of substitutes as moderate.

3. Bargaining Power of Suppliers

The power of suppliers is mitigated by the number of existing potential suppliers in this industry, but switching costs are high because establishing part designs and specification requires a fair initial investment. On the other hand, there is little threat that these suppliers will integrate forward. Auto manufacturers require inputs-labor, parts, raw materials and services. The cost of these inputs can have a significant effect on profitability. Ford was depended on different suppliers for various parts but soon it had the problem with the quality of equipments and compatibility of parts made by different manufacturers became too expensive as it was costing more comparing to buying from suppliers.

Ford, as well as most other manufacturers, followed the Japanese lead by divesting themselves of their organic parts makers through the use of outsourcing their parts requirements and/or spinning off their parts divisions to separate entities that would then supply them in return. With overall sales of $254 billion among the top automobile component suppliers have the ability to leverage their buyers to accept engineering changes that affects their production, dictate supply availability and dates, and set prices in line with their own profitability requirements. If a manufacturer is reliant on one supplier almost exclusively, this creates a monopolistic situation that requires that the manufacturer keep the supplier satisfied, especially if they are exploring other manufacturing opportunities with rivals. In sum, the power of suppliers average – not particularly high, but not low either.

4. Bargaining Power of Buyers

Buyer power refers to the ability of individual customers to negotiate prices that extract profit from the seller. Private individuals, commercial companies and governments are the primary buyers of motor vehicles. With few exceptions, buyers have the power to walk away from a purchase that they don’t like and take their purchase elsewhere to a dealer of the same manufacturer or to a completely different manufacturer or platform. Individual consumers have some influence over price within a given dealership, but little power over manufacturers. Customers can easily, and with little cost, switch to other auto dealers.

Dealers are another part of the buyer equation. Dealers-buyers typically purchase their car inventory from the manufacturers through special financing. In the case of Ford, dealers purchase their inventory through Ford Motor Credit. If dealers do not buy inventory from the manufacturing plants, Ford must contend with excess supply.

Therefore, the power of buyers is high. New vehicle buyers like to shop around, collecting a wealth of information on the internet and using it to haggle with many dealers. In addition, because switching costs are low and new designs are well differentiated, it is possible that market trends lure large shares of the buyer market from one auto-maker to another. The net effect is high buyer power.

5. Rivalry among Competitors

With the rise of foreign competitors in the 1970’s and 80’s, rivalry in the automotive industry has become much more intense as Firms compete on both prices and non-price dimensions. Serious competition began to emerge in the 1990’s with a flood of new vehicles, designs and concepts (Adam, Brock 2005.)

Different companies are providing different incentives to attract customers to purchasing their own vehicles. Ford in the past was very successful due to their advantages relating to volume and scale and it was anticipated that they would become the biggest player in the industry taking the place of General Motors. However, due to the actions taken by their arch rival, General Motors, Ford continues to remain in second place (Taylor III, 2003) Ford experienced adverse publicity due to the tire scandal and also the poor marketing.

The fact that the automotive industry is a mature one means that competition is fierce and rivalry will only increase over time. Industry growth is flat, and numerous competitors with similar market shares are fighting for leadership, and all the players have huge capital leverage. Japanese competitors have cost leadership advantages, something that North American manufacturers such as GM and Chrysler are recently trying to imitate. This type of cost advantage is paramount to manufacturers staying competitive at the current stage of the automotive industry’s life cycle. Exit barriers are high because these companies have already made the investment in machinery and facilities and so it makes more sense for them to remain in the industry and continuously decrease prices than to exit altogether. All these factors create an extremely intense rivalry.

The above discussion highlights that the motor vehicle manufacturing industry is unattractive new entrants because of its numerous important threats, but opportunities does exist for. In the case of Ford Motor Company, the automotive industry does seem attractive because Ford has been an existing company for a long time. The Figure below shows that, rivalry, barrier to entry and buyer power is rather high and both supplier power and threat of substitutes are moderate.

The market seems to be demanding innovative designs that are in line with emerging socio-cultural trends, and the winning competitors will be those who use newly available technologies to capitalize on this trend, designing vehicles that are fuel-efficient and eco-friendly, but also stylish. In addition, although the North American market does not leave much room for growth, other parts of the world (parts with much larger populations) are developing and individuals have increasing amounts of disposable incomes. More individuals are purchasing new vehicles in Asia, Central and South America, and Eastern Europe. Opportunistic companies will have to develop strategies that fit with those cultures in order to seize foreign growth.

Strategic Group of Automotive Industry

Strategic group is a concept used in strategic management that groups companies within an industry that have similar business models or similar combinations of strategies. The number of groups within an industry and their composition depends on what dimensions you use to define the groups (DeSarbo, Grewal, Wang 2009). Strategists often use a two dimensional grid to display the position of each company along to the two most important dimensions. Strategy is the Direction and scope of an organization over the long term which achieves advantages for the organization. Strategic Group Analysis (SGA) aims to identify organizations with similar strategic characteristics, following similar strategies or competing on similar bases.

References

Grant, R.M (2008). Cases to Accompany: Contemporary Strategic Analysis (6th Ed.). Malden: Blackwell, pp. 47-48.

Automotive; Ford Delivers 12 Fuel Economy Leaders Across Its Lineup; Unrivaled Four Models in the Forties. 2011. Transportation Business Journal, March 20, 54.  http://www.proquest.com.dbgw.lis.curtin.edu.au/ (accessed April 9, 2011).

Adams, Walter & Brock, J, 2005, The Structure of American Industry, 11th end, Pearson Prentice Hall.

Taylor III, A, 2003, Getting Ford in gear, Fortune, pp.42-5

DeSarbo, W., R. Grewal, and R. Wang. 2009. Dynamic strategic groups: deriving spatial evolutionary paths. Strategic Management Journal 30, no. 13, (December 1): 1420.  http://www.proquest.com.dbgw.lis.curtin.edu.au/ (accessed April 10, 2011).