Porter's 5 Forces Analysis of French Automobile Industry and Extent of each competitive force The five forces are environmental forces that impact on a company’s ability to compete in a given market. The purpose of five-forces analysis is to diagnose the principal competitive pressures in a market and assess how strong and important each one is.
Threat of new entrants | small It's true that the average person can't come along and start manufacturing automobiles. There are substantial commercial (distribution network and brand reputation) as well as competence barriers (advanced technology and experience) to enter the car market. The industry is capital intensive and economies of scale are important. Japanese companies faced large barriers when entering the European markets and only by applying a low price strategy was it possible for them. The development of a new brand is very difficult.
The luxury sector has even greater entry barriers and except for some exceptions (e.g. Toyota with the introduction of Lexus) the attempt of entering the luxury sector often ends in failure (e.g. Renault-Peugeot’s failure to launch premium models under their existing brands). The strategy used by automobile companies to penetrate the luxury market has so far been to buy already existing brands (e.g. Jaguar by Ford, Bentley by Volkswagen, Rolls-Royce by BMW).
Power of Suppliers | medium The supplier industry of car manufacturers has experienced a concentration process during the last decades. High standards in quality have led to a situation where only the most profitable, high quality providers could survive. The result of this concentration process is that the surviving suppliers have large ordering volumes and therefore notable bargaining power. Switching costs can be considerable and have an effect on the product quality. There is also a trend towards outsourcing large parts of the production cycle in order to reduce operational risk.
Power of buyers | high Single clients in the automotive industry have a medium bargaining power, there are substitute products as trains, buses and motorcycles, but the car
itself is an integer part of French culture and a status symbol. There are relatively small transfer-costs imposed on the client and the development of leasing as a means of financing for the private market lead to consumers being more flexible in their decision to switch cars. Buying a car is often not a huge investment anymore, but the financing costs are part of a monthly budget. The over-supply of cars on the market leads to customers demanding good after-sales service, reliability and quality.
Threat of substitutes | small As a means of transportation, the car is not subject to substitute threats, but the technology used is in permanent question. Therefore the industry is put under permanent pressure on innovation and research and development expenses are high.
This aspect should be carefully analyzed as we are not just talking about the threat of someone buying a different car but also look at the likelihood of people taking the bus, train or airplane to their destination. The higher the cost of operating a vehicle, the more likely people will seek alternative transportation options. The price of gasoline has a large effect on consumers' decisions to buy vehicles. When determining the availability of substitutes you should also consider time, money, personal preference and convenience in the auto travel industry. Then decide if one car maker poses a big threat as a substitute.
Competitive rivalry | high Highly competitive industries generally earn low returns because the cost of competition is high. The auto industry is considered to be an oligopoly, which helps to minimize the effects of price-based competition. The automakers understand that price-based competition does not necessarily lead to increases in the size of the marketplace; historically they have tried to avoid price-based competition, but more recently the competition has intensified - rebates, preferred financing and long-term warranties have helped to lure in customers, but they also put pressure on the profit margins for vehicle sales. These factors attribute to a very high competitive rivalry among international carmakers.