Running head: PORTERS FIVE FORCES MODEL FOR THE AMERICAN AUTOMOTIVE INDUSTRY 1
PORTERS FIVE FORCES MODEL FOR THE AMERICAN AUTOMOTIVE INDUSTRY 8
Porters Five Forces Model for the American Automotive Industry
Porters Five Forces Model for the American Automotive Industry
1.1 Industry definition
The United States automotive industry is one of the pivotal industries in the manufacturing sector of the country. The industry covers entities involved in the design, manufacturing, testing, marketing and selling of both vehicles and auto accessories. Production covers commercial vehicles and passenger cars. The industry also encompasses distribution of vehicle components. The US auto industry is typified by significant financial and HR investment in product design, extensive R&D, engineering, machinery, tooling, marketing and facilities.
1.2 Industry Profile
The US auto industry is marked by three large American-based manufacturers, including Chrysler, Ford and General Motors. Foreign competitors include Honda, Hyundai, Nissan and Toyota. In response to the unstable global oil market and the adoption of green technologies, the US auto market is evolving rapidly. For instance, automakers are shifting towards energy efficient engines and continue to invest heavily in R&D pertaining to electric cars and self-driven cars. Being part of the global village, the US auto industry is significantly influenced by trends and dynamics of the global market. Some of the significant cost that influence the operation of entities in the united States automotive industry include cost of materials, labor and advertising. The industry is highly competitive constituting production and distribution of light commercial vehicles, passenger cars, components and production system. Revenues of automakers largely come from within the industry. Warranty obligation and product recalls result in direct costs. In the same line, any loss of vehicle sales can have a significant effect on the operations of automakers.
1.3 Industry Structure
The oligopolistic market structure is dominated by a relatively small number of competitors whose strategic activities have a direct impact on each others financial bottom-line. The oligopolistic nature of the US auto industry translates to mutual interdependence. This observation is better illustrated by a retrospective exploration of the 2008/2009 global financial crisis in which the United States Big three faced similar financial challenges. Despite the uniformity in the production of transportation vehicles, there is a significant variation in product features. In other words, companies in the United States focus much on product differentiation to create and sustain competitive advantages.
1.4 Future Outlook
The future performance of entities in the United States auto industry depends on their ability to expand into emerging markets, as well as their ability enrich or diversify their product portfolio. In addition, the industrys future will be marked by competition along the ability of entities to offer innovative products within the existing markets. The future success of automakers will also depend on their ability to increase and sustain their market share.
2 Porters Five Forces Model for the American Automotive Industry
By analyzing the five competitive forces, a company uncovers its opportunities to position itself strategically. That is to say, an automakers is able to sustain its competitive advantages over its competitors by preserving things that are distinctive about it. The competitiveness of a company hinges on its ability to offer different products from its rivals or operate similar to its rivals, but in different ways. Porters Five Forces framework is widely used to analyze the competitiveness of companies within an industry. The ensuing subsections discusses Porters Five Forces shaping the US auto industry and its market structures.
2.1 Bargaining Power of Buyers
Car consumers in the United States expect quick delivery of ordered cars with tailored features and 24-hour service. With the growing access to online information about cars, as well as availability of affordable import, the bargaining power is increasingly shifting towards buyers. The principle factors influencing the consumer vehicle preference in the US auto industry include vehicle design, reliability, safety, functionality, fuel economy, price and quality. Considering that that consumers have many factors to take into account before purchasing a product, more bargaining powers is shifted from the sellers to the buyers. The bargaining power of suppliers is also amplified by the fact that they keep vehicles for long because of the minimal disposable income a situation induced by economic hardships. Keeping vehicles for long translates to a low demand, which is out of synch with the overcapacity of automakers in the United States. With the growing digitization and reliance upon IT networks and systems in modern vehicles, including mobile devices and in-vehicle systems, consumers are increasingly demanding security following the growing cases of cybercrimes . The point in case is that consumers increased awareness of the cyber security breaches in vehicles influences their purchasing behaviors more than before. Strategically, US automakers should focus on price sensitive strategies and fuel efficiency to lure customers with old and fuel-inefficient cars to buy new cars. Additionally, the automakers can consider lowering prices either directly or by providing discounts to influence demand.
2.2 Bargaining Power of Suppliers
The big three automakers Fiat Chrysler Automobiles, Ford and GM in the United States are moderately threatened by the suppliers bargaining power because they companies have long-term contracts with key suppliers. In fact, the supply chain for automotive part substantially fragmented. That is to say, there are many firms supplying inputs needed to manufacture vehicles. It follows that a single automaker can have a number of suppliers delivering their key inputs. For instance, GM procures most of its system, parts, supplies, parts and components from various sources, with its largest two sources accounting for roughly 11% of their supplier. In that regard, the suppliers power is shifted towards automakers who can switch suppliers with ease. Consequentially, suppliers in the US auto industry are highly susceptible the requirement and demands of the automakers. To recap, suppliers in this industry hold little power.
2.3 Competitive Rivalry
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In line with Porters Five Forces model, the nature of competition among rivaling entities in the US auto industry is the strongest among the models five forces subject to the fact that automakers are compelled to compete from multiple ends. Typically, highly competitive industries tend to earn low or average returns because cut-throat competition affect their financial bottom-line. As noted above, the US auto industry in an oligopoly; thus, intricately cushioning the automakers from the adverse impact of price wars. In acknowledging that price-wars are not sustainable, automakers in the United States are increasingly shifting their price-based strategies to product differentiation to improve their strategic positions and sustain their competitive advantages. Since the competitive structure of the fast food industry is modeled by the interplay of the highlighted forces, the degree of rivalry varies from economy to economy. To sustain competitive and strategic advantages against rivals, the Chrysler, Ford and GM compete along product differentiation and/or pricing strategies. Given that auto makers are mutually dependent, the strategies undertaken to improve their competitiveness are likely to have a direct impact on other automakers in in the United States, resulting in competitive retaliation. Furthermore, the US auto industry is largely affected by seasonal changes in demographic trends, consumers disposable income, economic conditions and consumers preferences. Besides competing for customers, automakers in the Unites States also competes for employees. Besides the local competition, the US auto industry faces competition from other light commercial and passenger car international manufacturers. Furthermore, the industry faces competition from component suppliers and distributors in North America, Latin America, Asia Pacific Region and Europe. These international markets are highly competitive in regards to fuel economy, safety, customer service, product quality, innovation, reliability and financial services offered.
2.4 Threat of New Entrants
Designing, manufacturing, advertising and distributing vehicles demands significant investments in R&D, product design, engineering, tooling, machinery, technology and marketing for automakers to meet both regulatory requirements and customer preferences. Automotive original equipment manufacturers (OEMs) benefit from economies of scale by leveraging their activities and investments in the global business environment across brand and models. Being a capital-intensive and highly competitive industry, the threat of new entrants in the United States auto industry is moderate. Despite the fact that US auto industry is impacted by changes in the national and global economic environment, large OEMs typified by greater access to capital have more diversified revenue base across products and regions. For this reason, existing companies are better positioned to withstand the threat from new entrants and industry downturns. One of the new entrants that is gaining market share exponentially is KIA, a Korean automaker. Its strengths is attributed to the affordability, fuel economy and improved functionality of their brand. In response to such threats, American automakers should synchronize with global trends and low cost strategies to sustain increase and sustain their market share. Another strategy that can be leveraged by domestic automakers in the US is working on loyalty and referrals. This assertion is in line with the observation that brand loyalty in the US auto industry has eroded.
2.5 Threat of Substitutes
In contrast to the moderate threat of entrants, the threat of substitutes is high in the US auto market because the existing well-established brands have the potential of introducing new types of cars customized to meet the local and international demand. Disruptive technologies in the auto industry are increasingly upsetting the status quo because they are rapid than most automakers anticipate. For instance, there is a growing trend towards the adoption of electric cars, which are predicted to cost lower than the existing internal combustion vehicles by 2040. . Competing automakers are increasingly investing in multiple technologies that offer superior levels of vehicle electrification. These technologies creates environmentally friendly substitutes, but they are yet to be adopted fully due to their high prices. For examples, as of January 2016 GM had five models of electric cars in the United States . Automakers also invest in the production of alternative fuels; hence, manufacturing vehicles that can run on a blend of ethanol and gasoline as well as vehicles that run on liquefied petroleum gas and compressed natural gas.
From the analysis above, it is apparent that the United States auto industry is highly competitive and cyclical. In addition, automakers in this industry are likely to face competition from international auto manufacturers, component manufacturers and distributors in North America, Europe, Latin America and the Asia Pacific Region. Given that the buyers bargaining power is high and the pricing pressures continue to intensify, automakers in the United States should respond to these pressure and the low demand by making their vehicles less expensive and more attractive to local and international customers. Congruent with the Porters Five Forces analysis above, company based competitiveness in the United States auto industry can be achieved by addition of vehicle enhancements, offering sales incentives or rebates in targeted markets; reducing the prices of vehicles through discounts; and offering subsidized financing.
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