Porters 5 Force Porter (1980) illustrates in this analytical tool 5 variables that determine the attractiveness of an industry for organisations in terms of profitability in their immediate environment. Using the forces in this model we can analyse how attractive the global car industry is to enter, the 5 forces are as follows. The threat of potential new entrants High barriers to entry is one of the determinants of whether a firm can enter into the industry or not, the higher the barriers the more likely entry is discouraged.
Ita€™s not possible to enter into the global car market as a major player since barriers to entry are much too high, unless the potential entrant has the capital requirements to match of those such as GM, Ford, Honda, Toyota and Nissan to develop a market presence. Investment in equipment, factories and plants, raw materials, R&D, advertising, access to distribution channels and technology are all major costly elements to consider when entering this industry.
Any new entrant moving into this industry is likely to face the high level of responsiveness from global competitors. Looking at the experience curve (1960: Boston Consultancy Group) a new entrant must have the investment needed to achieve cost parity with existing firms in the industry so it can achieve the economies of scale needed to compete on cost advantages along side the competition. New entrants need to have the same or better cost margins against similar levels of output.
Other barriers to entry depend on the new entrants being able to achieve an individual level of product differentiation, this would either require heavy promotions and costly advertising in order to gain exposure which the new entrant has unique product that gives it a better competitive advantage in the global car industry. For example technological innovations such as hybrid fuel and electric cars may be able to undercut fuel based engine cars and attain market share. In a recent news article an Australian designed electric car to be built in china, plans to take on the world with a price under $10000 (Nov 27th 2010: Factiva).
This is an example of emerging foreign competition with capital and technology to destabilize major players in the global car industry. The threat of potential entrants is Low in the classic motor industry. The bargaining power of buyers The bargaining power of buyers depends on the size and concentration and most importantly who the customers are, if the buyers are large and fewer in number they are more likely to have more power, this way buyers can dominate supplying companies.
However in the Global car industry, the concentration of buyers is lower so numbers are higher, on an individual basis a customer has less bargaining power with a car company although has low switching costs so they have slightly more power to switch to alternative suppliers in the market, additionally products are undifferentiated in the market which increases buyer power and switching costs so long as quality is not affected by the alteration.
In addition the pressures of the current economic climate has lead to rebates, warranty deals and price schemes and left car companies fighting for sales which gives even more power to buyers through choice and payment options. For example the most common incentive is 0% financing by Ford, Nissan, Toyota and Chevrolet models with some offering cash rebates of $5000 (www. realcartips. com: date accessed Nov 17th 2010).
Buyers can also have more power if their own purchasing power is larger, for example if an organisation is ordering a large quantity of cars they are able to bargain with the supplier using their purchasing power as leverage for price reductions. Furthermore buyers are likely to have more power if they are able to backward integrate and position themselves as the supplier to meet their own needs, however this does not work in the global car industry, if an individual was to purchase all the necessary car parts and components himself it would costs up to 400% more than the original cost of the manufacturer.
The extent to power buyers have in this industry is medium to high. The bargaining power of suppliers The power of suppliers in the global car industry is very dependent on the supplier itself. All the sources that contribute to the output of the car industry such as steel, iron, rubber, textiles, plastics and most importantly energy suppliers are all important in the production of motor vehicles, availability of cheaper substitutes for these are less likely as they are commodities.
In terms of energy and steel, these suppliers are likely to have more power as there is a higher concentration of them. Powerful suppliers are able to squeeze profits out of an industry by raising the costs of companies in the industry (Hill and Jones: 2008: essentials of strategic management) for example a€? fears of a hike in steel pricesa€? raised many concerns over recovery early April 2010, posted by Guardian and Financial Times.
Industry executive Stuart Fell chairman of Rover voiced his worries about steel prices expected to rise by about a third after miners and steelmakers in Japan and China agreed to a change in iron ore prices. In addition if energy companies were to increase prices this would have a bigger effect on steel companies and car manufacturers because it takes a great deal of energy to produce the products for both industries. A classic example of monopoly Energy Company is EdF in France, price hikes would affect costs for French car companies as they would have less power to bargain with alternative energy suppliers.
A supplier is able to become more powerful in an industry if it is able to forward integrate, thus being able to compete directly with those who are already in the industry. An example of this is Tata group who own Tata motors, Indiaa€™s largest automobile company with subsidiaries in many companies worldwide, Jaguar Land Rover being one of them. Tata Group also own Tata steel who are the worlds 6th largest steel manufacturers, operating and having a commercial presence in over 70 countries.
Furthermore Tata Steel Europe (formerly known as Corus UK) is the second largest steel maker with major operations in the UK and continental Europe, manufacturing for construction, automotive, packaging, engineering and other markets worldwide (www. tata. com: date accessed November 17th) Tata have the power and show that they has been able to forward integrate into the global car industry. Suppliers who stand in a weaker position against the automotive giants of the industry are the small auto component suppliers, the buyers stand in a powerful position against
these suppliers because they are low in numbers and highly concentrated. They are also in a position to forward integrate themselves by manufacturing their own components which is a major threat to suppliers and given the nature of car companies to drive costs down they play suppliers off each other to suppress prices and increase quality of components (Hill & Jones: 2008: essentials of strategic management). These types of smaller suppliers tend to show low concentration levels and high numbers, meaning they have less bargaining power against the large car companies compared to suppliers who supply commodities.
The overall extent of supplier power in this industry it is medium to high. The threat of substitutes The overall threat of substitutes is fairly low; there are many forms of transport available to the consumer like busses, trains, and planes or even walking. The fact is that none of these forms of transport may offer you the convenience that cars offer, however depending on geographical location of the customer it maybe be preferable to use other modes of transport in high densely populated city areas.
In some parts of the world however cars are not practical because of geographical or infrastructural constraints and so traditional ways of transportation would be necessary. Referring back to the electric car article, if we assume that as a separate industry then the electric car is potentially substitute to the classic motor car, and according to the article switching costs would be lower too therefore becoming a huge threat to this particular industry. In this case the threat of substitutes will increase to a higher level, otherwise without it is low The extent of competitive rivalry.
The global car industry is a consolidated industry with small number of large companies that dominate market share; growth is slow because products are relatively undifferentiated causing high price based competition. The only way to increase market share is to take it from your competitor which is more than likely to increase rivalry. Furthermore the declining levels of demand in the car market increases rivalry as GM, Ford, Toyota and Honda battle to retain market share. Increase in rivalry means less profitability for companies, as fixed costs are so high car companies must cut prices in order to achieve sales volumes.
Smaller car companies will find it harder to compete because they can not cover their fixed costs. Macroeconomic factors such as the economic downturn has lead to a decrease in consumer expenditure therefore it increases rivalry further in mature markets such as the car industry. In addition price inflation, currency rates and interest rates make it difficult for consumers to borrow money to finance high involvement purchases like automobiles. As demand in the car market declines and becomes more static, it become more expensive to leave that industry as exit barriers are too high.
Therefore companies have to find new ways to reduce costs and innovate their way to success. Overall the extent of the rivalry is very high in the global car industry; standard cycle market holds high competitive pressures which do not always provide long term sustained competitive advantage. Summary Findings for portera€™s 5 forces analysis for the supermarket industry Threat of entrants: Low Buyer power: Medium to high Supplier power:Medium to high Substitutes:Medium Extent of rivalry:High The summary above shows that portera€™s 5 forces model does not favour the Global car market as an attractive profitable industry.
Critique Porter has been subject to many criticisms over the past 30 years, since the model was created the global economy has shifted, changed and become quite unpredictable. Thus making this model unpractical for analysis in current industries, major criticism for Portera€™s 5 forces is as follows, The model assumes static market structures as it does not take into account the environment that affects complex industries and technological forces that are capable of shifting structures, changing business models and entry barriers. For example the electric car could have this effect on the current car industry.
Must also analyse with Strategic group analysis, PESTEL and SWOT for a better analysis. Porter also assumes that firms are only interested in their own profit and is the only reason they operate in industries, however this goes against missions of charitable organisations and other companies whose main mission is survival. (Lynch: 2009) Porter sees all forces as threats and the need for competitive advantage over customers, suppliers and markets, however it does not consider strategic alliances, closer relationship with suppliers and higher level of customer engagement with companies.
Porter forces do not take into account the strength of resources between firms in an industry, declining resources means inability to sustain a competitive advantage against competition (Arnold: 2008) Porter also views all forces to have equal importance; this is not entirely true some forces are more important than others in the micro environment such as customers; they are widely believed to be the most important force affecting an organisation.
Porter sees suppliers as just suppliers, when suppliers can be relative and important to the survival of the company as a partner, if the supplier went bankrupt then this could have major knock on affects. For example if EdF energy went bankrupt then this would have major knock of affects to other industries including car manufacturing companies. The same can also be said for petrol and oil industries.
One of the major industries that must need to be taken into account is the banking industry, they play major roles in industries around the world including the defence industry which is the biggest industry and its biggest customers are the Governments. Portera€™s model does not acknowledge this. According to Downes (Beyond Porter: 1997) states that porter should include 3 more forces to the model; these are Deregulation, Digitalization and Globalization.
Deregulation of an industry reduces the level of authority government can have on an industry, increases in technology can very much restructure industries thus positioning companies to look for alternatives. For example telecommunications technology and deregulation helped collapsed the price of long distance calls in USA, regulation on the other hand still has a major influence in Global car industry. Digitalization is very important as power of information and technology grows companies have access
to far more information thus creating new business models, for example technological advancements in the car industry such as hybrid and electric cars new companies entering have the power to restructure industries. Globalization is also important for factor for an industry, the improvement of communications, logistics and distribution has lowered physical borders to allow businesses to compete on a global level.
Furthermore, determining what an industry is and where the barriers start and end is difficult to conclude. Porter assumes industries have a start and stop line but this is not really true, for example does the car industry begin in the manufacturing plant? Or does it begin with the materials sourced in the steel industry? Barriers are difficult to determine as specificity of barriers is not defined by Porter.
According to Andrew Grove CEO of Intel a sixth force should be in added to the model; power, vigour and competence of complementors, complementors are companies that (complement) add value to the products of companies in an industry so when the products are used together they satisfy customer demand better, his argument has a strong foundation in economic theory as substitutes and complementors influence demand in an industry, more over in high technology industry.
For example major car companies like BMW outsource complementary value added products like sound systems and computer chipa€™s to add value to the product. Porter disagrees with many of the criticisms and retains that the model works subsequently the subject is still open to debate, nevertheless there is still a lack of empirical evidence from Porter to support his ideas and authors and strategists believe it more justification is required. Richard J. Speed (1993)