Wednesday, March 26, 2008

Porter's Five Forces - Automobile Industry

Five Forces Analysis was developed by Michael Porter to better identify competitive opportunities and attractiveness within an industry or market. Other than a SWOT analysis, this is another analysis tool to identify opportunities and risks before entering an industry. Porter’s model supports analysis of driving forces in an industry. The management can make better decision by using the information that evaluated from detailed Five Forces Analysis.

The five forces that Michael Porter has identified are widely used to assess the structure of any industry. They are:

  • Threat of New Entrants
  • Bargaining Power of Suppliers
  • Bargaining Power of Customers
  • Threat of Substitutes
  • Competitive Rivalry between Existing Players

Automobile is one of the most convenient transportation tools in our modern society today. Globalization enables foreign auto dealers to enter American market easily and also creates competition. In America, there are three major automobile manufacturers. They are General Motors, Ford, and Daimler Chrysler. However, the biggest competitions are the foreign auto manufacturers, Toyota and Honda.

Threat of New Entrants: MEDIUM

It is not that easy for an entrant to enter into a car industry because of the brand loyalty of customers. However, some of the well known foreign companies entered into US car industry easily, for instance, when Honda Motor, Co. opened its first office in Ohio, the major competitions began. The expansion of the foreign entrants decreases the market of American companies.

Bargaining Power of Suppliers: LOW

Suppliers have a little power in an automobile industry. That’s because numerous suppliers rely on some particular auto manufacturers to buy their products. Each manufacturer has many suppliers. For example, Toyota has more than 10 different suppliers in US. The main qualifications of the suppliers are the quality, cost, and delivery of the products. If suppliers can’t meet those basic considerations, it is hard for them to survive.

Bargaining Power of Customers: HIGH

There are various brands and models of the cars to choose from nowadays. The factors that affect consumer to make a buying decision are: the appearance, quality, price, and environmental effect. People always want a new and nice looking car. For those rich people who love cars, they always purchase the new released and attractive model. Besides that, the quality of the car is an important issue. The car has to efficient, which means saving gas, protecting our safety, and running fast. In addition, since there are many competitors, consumer have more choices to select a cheaper, but good quality car. Moreover, because of the global warming and other environmental effects, a lot of the manufacturers make their cars unique in order to protect the environment. Based on a variety of the lifestyles, people choose to purchase a car in a different way.

Threats of Substitutes: LOW

It is true that there are many of transportations substituting automobiles. They are bicycles, subways, buses, and trains. These substitutions really make our life easier if we live in the cities. On the other hand, for those people who live in Utah, upstate NY or suburb area, car is the only transportation tool other than walking.

Competitive Rivalry between Existing Players: LOW

Competition between existing automobile companies is high because there are too many choices for the customers. That may cause the industry earning lower profits when the cost of the competition is high.


Top 20 motor vehicle manufacturing companies by volume 2006
Total motor vehicle production (1000 units)
Group10002000300040005000600070008000900010000
Toyota*



9120
General Motors

8926
Ford


6268
Volkswagen Group

5685
Honda

3670
PSA

3357
Nissan


3223
Chrysler

2545
Renault

2492
Hyundai


2463
Fiat


2318
Suzuki

2297
Daimler



2045
Mazda

1396
Kia

1382
BMW
1366
Mitsubishi Motors

1313
AvtoVAZ
765
Subaru

587
Tata Motors


561
KeyCarsLight Commercial VehiclesHeavy Commercial VehiclesHeavy Buses
Total global production: 68340
Reference: World motor vehicle production by manufacturer: World ranking 2006. OICA (July 2007).
*Toyota total includes Daihatsu production figures, which OICA list separately. Daihatsu is a Toyota Motor Corporation subsidiary.

7 comments:

Alan S Michaels said...

Diana,

Excellent analysis; thanks for posting it.

Cheers,
Alan S. Michaels
Co-founder
www.eCompetitors.com

Egle Jokubauskyte said...

I analyzed the same industry. Few things that I would like to add. First, regarding the new entrants, the attractiveness of the industry in my opinion is low, because there exists strong barriers, such as very high capital requirements, also technology and licensing requirements. Competition between established companies is extremely strong, and it makes the industry very unattractive.
Suppliers, on the other hand make the industry highly attractive, because they do not have any power in the industry. Buyers, have no loyalty and they have lots of power by switching from one brand to another and experiencing no costs. Therefore they make the industry highly unattractive. Also, I think, that substitutes such as buses, trains, motorcycles, bicycles and planes, make the industry medium attractive.
Overall, I would say that the industry is not attractive.

Laura M. said...

Including a table is a great idea!

In regards to the threat of new entrants, I think it is low because I believe it is very difficult for a new company to enter into this industry. Like what you said, brand loyalty is an important factor contributing to a firm's difficulty in entering. I don't know any car companies that have recently entered the market. Most of these "new" car companies such as Scion are not new companies because they are under a parent company (Scion is under Toyota).

Since I live in the city, in my opinion, I think that the threat of substitutes is medium because you don't need a car as transportation. For me, it is much easier taking the train and forgetting about those morning rush hours. Also, I guess it's because I don't even drive at all,(guilty of not even having a permit)which explains my opinion. But like what you said, if you lived in the suburbs, the threat of any substitutes is low. You better have a car in the suburbs or you're going to have to invest in some comfortable sneakers for those 3 day walking trips to the supermarket.

Edmond Esses said...

Diana,

A very interesting post but I did have some comments/questions... I was wondering if you were analyzing the entrance to the automobile industry in general or specifically entrance to the US auotomobile industry. The first rating of Medium for "threat of new entrants" would make sense for foreign companies to enter the US market but for anybody to enter the auto industry would seem low to me; just to build a brand name that people would trust and to have the capital to build a factory would be very hard. The second point I found very interesting was your analysis on "bargaining power of suppliers." Intuitively, I would think it would be High because there are a lot of specialty parts in a car and a lot of raw materials that might be hard to come by. It surprised me but also makes a lot of sense that it would be low the way you explained it. Thank you.

Maria Gabriela Marin said...

Diana,

This was a very interesting industry to analyze and agree with most of your posting. However, I disagree with your rating for the threat of new entrants. I believe that is a low competitive force because even for a well established foreign car company to enter into the US market has been a challenge. The one example that comes to mind is Hyundai. Back in the 90s, when they started to market & sell cars in the US, Hyundai was not successful at first because of the quality of their cars. The cars were cheaper than other imports but they broke down quickly & people did not trust the brand. It has taken Hyundai more than a decade to establish itself as a decent import to buy.

Mabs said...

I read in http://www.coursework4you.co.uk/porter.htm that Porter's Five Forces is crucial in every industry for setting up their long term strategies.

Maxy Theyo said...

It's quite a good one and has help me in doing my MBA assignment. thanks for posting.
regards
Maxy Theyo