With the rise of foreign competitors like Toyota, Honda and Nissan in the 1970's and 80's, rivalryin the American auto industry has become much more intense. Firms compete on both price andnon-price dimensions. The price competition erodes profits by drawing down price-cost marginswhile non-price competition (e. g. , new car rebates and interest free loans) drives up fixed cost(new product development) and marginal cost (adding product features). One of the other reasonsthere is such high rivalry is that there is a lack of differentiation opportunities.
All the companiesmake cars, trucks or SUVs. The competitors are compared to one another constantly. In recentyears there has been significant market share variation, another indication of rivalry and its verystrong threat to profits. 2. Threat of entry by new competitors The presence of new firms in an industry may force prices down and put pressure on profits. Thereare, however, barriers to entry that tend to protect established firms. One would expect the production of automobiles to require significant economies of scale, an important barrier to entry.
The new entrant would have to achieve substantial market share to reach minimum efficient scale,and if it does not, it may be at a significant cost disadvantage. While the evidence suggests thateconomies of scale in the auto industry are substantial, there are also indications that large sizemay not be as important as commonly assumed. Nevertheless, entry would represent a large capitalinvestment to any new firm and the body of research still indicates that economies of scalerepresent a substantial barrier to entry. Consequently, entry is currently a weak threat to profitability. 3.
Price pressure from substitute or complementary products While five-forces do not directly consider demand, it does consider two factors that influencesdemand ? substitutes and complements. Although new cars generally are slightly price elastic,suggesting few real substitutes (e. g. , bus and rapid transit), the demand for a particular model ishighly sensitive to price because of the availability of close substitutes for a given model. A changein the price of a complementary product (e. g. , gasoline, batteries, and tires) could have asignificant impact on the demand for automobiles.
The rising price of gas, an importantcomplementary product, is likely to affect some firms more than others depending upon thevehicle composition. Recent rising fuel prices are likely to have a greater impact on the big three(GM, Ford Motor and Daimler-Chrysler) whose most profitable models are energy inefficient pick-up trucks and sports utility vehicles. On balance, the overall impact on "industry" profitabilityfrom substitutes and complements is weak to moderate. 4. Bargaining Power of Buyers Buyer power refers to the ability of individual customers to negotiate prices that extract profit fromthe seller.
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. Furthermore, customers now have access to market information (prices and costs) from theInternet that enhances their negotiating power. But when you have many individual customers,each representing a small proportion of total sales, they will have little bargaining power withmanufacturers and therefore pose a weak threat to industry profit.
5. Bargaining Power of Suppliers Amrita School of Business General Motor’s Strategic Analysis Auto manufacturers require inputs-labor, parts, raw materials and services. The cost of these inputscan have a significant effect on profitability. Whether the strength of suppliers is weak, moderateor strong depends on how much bargaining power they can exert. The auto manufacturers havelarge supplier networks that appear to exert little bargaining power. Nevertheless, the United AutoWorkers (UAW), the only supplier of labor, has historically exerted a great deal of leverage over the benefits and wages provided by the big three.
Because of this historical dominance by theUAW and the uncertain results of their current negotiations with the big three, one has tocharacterize supplier power, at least in this segment of the American market, as a strong threat to profits. The following table summarizes the results of a five-forces analysis of the automobile industry. Five-Forces AnalysisFORCETHREAT TO PROFIT Internal RivalryStrongEntryWeak Substitutes and ComplementsWeak to ModerateBuyer PowerWeak Supplier PowerStrong Core Competence The core competence of General Motors is innovation.
This is the driving force behind its $190above turnover. General Motors has been utilizing innovation in service ad technology to secureitself a dominant position in the automobile industry, since 1908. In 1911, it conceptualized,engineered and commercialized the self-starter engine for the first time. Then in 1926, its productCadillac was the pioneer in devising a nationwide service strategy. In 1996 General Motorsintroduced OnStar satellite technology which allows equipped vehicles to be tracked in case of anemergency or theft and allows the passengers to communicate with OnStar personnel.
Other newcar concepts include minicars such as Chevy Aveo. However in the case of hybrid vehicles, General Motors was unable to keep up to the pace of themarket demand. Financial Results Based on the GM’s consolidate net sales and revenue, it shown that General Motor Corporationrevenue has been falling to $ 192. 6 billion in 2007 from 193. 5 billion in 2004. GM incurred aconsolidated net loss in 2007 of $ 10. 6 billion, compared to net income of $ 2. 8 billion in 2004. In the last 1990s, GM had regained market share up $ 80 a share.
In 2000, the interest went up bythe Federal Reserve to quell the stock market and a severe stock market decline following theSeptember 11, 2001 attacks. Due to this factor, it affected a pension and benefit crisis at Generalmotors and many other American companies. The current stock market price of General Motorsare falling between $28- $29 per share. It has been falling down gradually in the past six years. Amrita School of Business General Motor’s Strategic Analysis General Motors North America market share in 2007 fell to 25. 5% compared to 26. 7 in 2004.
Decreased in market share also due to sales declines in segment where GM has high volume suchas large sport utilities, mid-sized utilities, and mid-sized cars. The unfavorable results of GM’s consolidate net loss in 2007 were driven primarily by losses atGMNA due largely to unfavorable volume and product mix. Suggested Strategies Below is a list of possible strategies General Motors could use to redirect profits and be able tomaintain survival for the future. 1. Market Development2. Market Penetration3. Product Development4. Restructuring5. Retrenchment6.
LiquidationImplementations: Recommended strategies for General Motors would start with product development then marketdevelopment, liquidation, and restructuring. Reasons for product development being at the top of priorities is that GM has to create a type of Hybrid vehicle that will allow it to keep up with the pace of the competitive environment, but must be a product that stands out from the crowd at thesame time. Prime example of their idea for a Hybrid SUV, it fits the GM profile with maintainingthe SUV portion, but allows the firm to stay with trend patterns.
GM must also re-evaluate the market they are trying to approach, because for so long they havecontinued with a tradition outlook for automobiles, but now that times are changing their originaltarget market is not looking for what they once were. General Motors needs to take a step back andtake look at how they want to position themselves and towards what market since what they have been doing is no longer in favor for the company. An example of what GM could possibly do is produce a futuristic vehicle, which has been heard in rumors from Toyota about their next plan of action.
If General Motors could provide a "futuristic" vehicle before Toyota has the chance to hitthe market with theirs GM would be a step ahead of the competition. Liquidation is important toGM because their assets are a lot higher than revenues, and if GM could turn assets into cash thentheir would be more readily available funds and then GM would not have to depend some much ontheir U. S. sales, which only include 2/3 of that market and their financing tactic wouldn't be asmuch of a risk. Liquidation would clearly help out the financial parts of the organization.
Last but not least is restructuring, which General Motors most desperately needs to review possibilities. The company has taken a large hit in recent years and needs to find a way back to thetop. This is only going to be achieved if something drastic is changed. Restructuring the productdevelopment pace would be a start as well as cutting back on employees because the company isgrowing in size but not in profit, which causes a red flag for GM. The company needs to be re-evaluated in many ways, but GM has been strong for many years that it is very possible for thecompany to come above these issues.
Evaluation: The biggest thing for General Motors is to develop a Hybrid vehicle that will maintain the pace of the competition for the firm as well as one that will stand out from the crowd to make the product Amrita School of Business General Motor’s Strategic Analysis new and exciting. Creating a Hybrid SUV is a brilliant idea and if GM can pull that off by the endof 2007 the future could look very bright for them. The company has a huge background provingthat they can maintain being number one, it's just a matter of product development beingmaintained and refocusing products to the correct target markets