Question

Automotive industry. Describe Porter's five competitive forces and how they manifest themselves in that industry. Detail how two companies in that industry develop and implement business strategy to deal with the five competitive forces.

Answer 1

answer-

Porter's five competitive forces for 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.

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.

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.

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.

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.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.

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.Different companies are providing different incentives to attract customers to purchasing their own vehicles.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.

two companies like Ford and Toyota has to implement business strategy to deal with five competitive forces like following-

for Ford-

strategy of innovative and differentiated cars.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.

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.

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.

Ford to deal with rivalry must put investment on advertisement and promotions.

for Toyota-

Toyota provide cars which differentiate through cost, electronics, fuel efficiency, style, brand image, and other variables.

Low prices cars would make sure that its buyers do not switch to its competitors like hyundai, ford etc.

Toyota should make healthy and good relationship with suppliers so that they can provide supplies on time at low cost or on credit.

these strategies would help these two companies in automotive industry to deal with the five forces of competition.