Porters Five Forces Model concerning America’s Automobile Industry
2 abstract
The automobile industry is one of the various sectors that has led to the development of infrastructure as well as the establishment of functional networks of roads that has enabled the access of different parts of the world. This industry has been in the forefront in the exploitation of minds of designers providing solutions to their discoveries as well as the source of employment placing them in a position to earn income used in improving their living standards. With the development of the automobile, it has been the ease in the business sector as their convenience in transportation modes and desirable tome factor
3 Introduction to the Automobile Industry
An automobile is defined as a passenger vehicle developed for operating mostly on ordinary roads; they have four wheels as well as diesel or gasoline internal combustion engine. During the 20th century, the automobiles recorded a change in the United States together with other industrialized nations. Evidenced by the growth of suburbs towards the establishment of complicated road and highway arrangement. Manufacturing, selling, and the servicing of automobiles have been realized as a critical factor in the industrial economy. Despite the benefits realized such as job creation and mobility automobile development has led to the rise of air and noise pollution with the accidents caused by them being the leading cause of injuries and death worldwide (Porter, 1985)p 7. Either good or bad, the 1900s can comfortably be called the age of the automobile, with the cars expected to shape and dominate the performance of the economy and culture in the 21st century. Don't use plagiarised sources.Get your custom essay just from $11/page
Classification of automobiles is based on the size number of doors style and the intended usage. A car or a motorcar, passenger car are designed with four wheels with a carriage capacity of six people, including the driver — larger vehicles developed to carry more passengers referred to as buses, vans minivans or omnibuses. The ones designed for cargo carriage are called pickups or trucks based on their design and design (Porter, 1985) p8. Sport utility vehicles are more rugged than passengers cars with them designed for driving in mud or snow.
The automobile is developed along with the origin of various arrangements supply with the fuel origin cooling system lubrication of the moving part and removal of the exhaust gases it emits. Suspension methods are inclusive of shock absorbers and springs that help in protecting the vehicle from damages by bumps and heavy loads they carry. The wheeling system helps the car on moving forward and backwards. An automobile is designed with an electrical system start which operates the engine and controlling significant aspects of the vehicle’s operation as well as the power components such as radios and headlights (Porter, 1985)p 9. Safety measures are also observed in the designing of automobiles, by the fitting of bumpers airbags seatbelts that helpful to the occupants in case of an accident.
3.1 industry definition
Economists describe an industry as a group of companies that have based relationship on their core business performance. Modern economy classifies industry in several dozens which are then grouped further into larger groups known as sectors. For individual companies to be classified as an industry is based on the largest sources of revenue. Similar enterprises are classified into trades based on the original product that they produce or sell (Porter, 1985)p10. Companies that are operating in a related industry can be compared with each other for the evaluation of the relative attractiveness a company is within that industry.
3.2 Industry profile
Defined as the in-depth documentation that provides the insight of the industry and giving a highlight on where it appears to be headed to (Porter, 1985)p12. The report analyzes the industry leaders, together with the forces that are affecting the industry at the same time analyzing financial data for the industry.
- History
In the industry’s report, there is information that comprises of the history and the evolution of a given industry, for instance, textiles and steel.
- Usage
People mostly access the profile of an industry for the evaluation of the comments that experts have posted on the future of the industry, together with the expected trends and opportunities.
- Technology measures
Inclusion in an industry profile is the details on the recent technology that the industry has adopted for its production purposes together with the evaluation of advancement a sector has put into place in ensuring that they do away with the outdated form of technologies used for production.
- Participants
This includes the list of the primary drivers of the production process of the industry and their particular profile.
3.3industry market structure
Best described as organizational and other characteristics of the market. The main focus is the is on the components affecting the competitive nature and pricing
A.The number of firms in an industry
The shape of the long-run average curve cost pose implications of the performance of firms in a trade, and evaluation of whether the firms found in the industry have similar sizes or are different in sizes (Harvard University. Graduate School Of Business Administration, 1991) p57
B.The market share of the largest firms
This concept is well defined by the concentration ratio, which indicates the firm’s size concerning the industry wholly. Low concentration is an indication of stiff competition among the firms playing in the market. The high concentration ratio is characterized by the development of a monopoly (Harvard University. Graduate School Of Business Administration, 1991)p 55.
C.The structure of buyers in the industry
Economists want to understand the balance of power and the changes between the buyers and sellers in differentiated markets and how this affects profit margins incentives and pricing as well as evaluation of effects and causes of monopsony availability in an industry (Harvard University. Graduate School Of Business Administration, 1991) p54.
3.4 future outlook
This is represented by checking on the potential problems that need to be solved or sort solutions for to ensure that the industry success, in the long run, is achieved.in the automobile industry future outlook is made by trying to evaluate where the industry is standing now. The development of possible future performances that are linked with the achievement of the vision and mission which is electrification shared connected, and yearly updated, objectives of the industry (Harvard University. Graduate School Of Business Administration, 1991)p 50.
4 Porter’s Five Forces Strategy Analysis as Applied in the Auto Industry
The five forces strategy analysis is used according to Pratap, to keep track of competition and to generate a competitive platform. The primary purpose of this model is for the study of the level of competition and tracking the profitability levels of the firms. Porter developed the forces in the year 1979 for better identification of the five fundamental competitive forces that are fundamentally affecting the industry. The five effects under discussion include the following: bargaining power of suppliers; the bargaining power of the buyer, competitive rivalry in the industry, the threat of substitutes and threat of new entrants. For an enterprise to be termed as attractive, it should be opposite of the previous statement. Proper utilization of the framework for the analysis it is required that one gathers data, conduct a summary of the results and formulate strategies based on the results (Porter, 1991) p38. Based on this framework, suppliers, customers, substitutes and the potential entrants are described all as competitors and likely to be more or less dependent based on individual circumstances within the sector.
4.1Bargaining power of buyers
In the discussion of the bargaining power of buyers, various information is required for evaluation since customers solely decide on the proportion that they will spend on a given product. In this case, on automobile purchase are the costly item, and in case of underperformance of the economy will frustrate and scare people from committing much for spending on automobiles. At these moments, when the buyers are unwillingly to spend or spending less as it can be possible to divert their spending on other functions.in our current society. A vehicle is an essential mode of transporting people to their desired destinations, with the decision of the expenses for the transportation dependent on their budgets. The choice of selection of type and model of vehicle for commuting concerning prices is according to the payoffs they expect in return.
The other fundamental factor considered apart from money is the quality of the vehicle and sustainability, this is because most of the consumers of the automobiles have become environmental friendly thus opting for the purchase of cars that are either green, electric or hybrid. If the producers have the capability of including the mentioned specifications, it assures them a better opportunity for increasing sales (Porter, 1991)p 39.in the recent years the united states more emphasis has been placed on the customers’ preferences for the enhancement of production on the specification of customers. The significant opportunity that producers are focusing on is on the fuel efficiency as well as sensitivity in the pricing of the vehicles produced: small or large
4.2Barriers to entry
Conveniently, an average person cannot come from anywhere and then start the manufacturing of automobiles. With the availability of foreign investors with the capability, capital and required technology skills posed a significant threat and beginning of the undermining of the market share and dominance of United States companies. Globalization has led to the tendency of businesses and world investment to move from domestic market structures, and national environment to the worldwide environments.which is a significant factor that is affecting the auto market, by making it so easy for foreign automakers to venture into the domestic with their makes which are instantly preferred by the customers as they pose the qualities and the standards that the customers are looking for this threatening the operations of the domestic auto industry. While the car companies are making sales in a significant proportion of vehicles to businesses and car renting companies, the consumer sales provide the largest source of revenue (Porter, 1991) p 40. For this reason, it advisable to consider consumer and business confidence priority before considering the other regular factors like the growth of earnings and the debt load.
4.3Threat of substitutes
Despite checking on the threat of someone buying a different car, there is also the possibility and likelihood that people may choose to use a train, buses and flights to reach their destinations. The more the cost is incurred in the handling of a vehicle, the higher the chances that customers are likely to seek alternative transportation modes. For instance, trucks and sporty cars are known for high consumption of fuels, and their purchase assures the producers a high-profit margin. Still, their sales are limited (Porter, 1991)p 42.in determination of the availability of substitutes one is required to consider time, personal preference and money inconvenience in the auto industry, hence deciding as to whether the car dealer poses a significant threat as a substitute is.
4.4Competitive rivalry
In highly competitive sectors, low returns are achieved since the competition cost is high. The auto industry is described as an oligopoly, a market condition where sellers tend to be so few with the actions taken by any of them materially affecting the pricing, this is helpful in minimization of the effects of pricing competition basis. The automakers are conversant that in a price-based game, it doesn’t need to lead to increasing in the market place size. From history, they are seen to avoid the price-based competition, despite the match being recently intensified. Each year the automakers are seen updating their cars, which is assumed to be reasonable in its operations, with a problem arising when a company decides to change the car design significantly. The changes introduced can lead to massive delays and glitches, resulting in an increase in costs and slow growth in revenue (Porter, 1991,)p 43. While a new design introduced may, in the long run, bring to a significant pay, a position which is so risky for operations.
4.5Bargaining power of suppliers
The supply of automobiles is quite fragmented, that is the availability of many firms, with most of the suppliers relying on one or two automakers for the purchase of the auto products. A case where a supplier chooses to switch to a different automaker it could be a devastating state for the previous suppliers business. For this reasoning, the suppliers are very susceptible to the demands and expectations of the automobile manufacturer holding minimal power. In the case of parts suppliers, the lifespan of an automobile is sensitive, the longest the car is operational, the more critical the requirement for parts replacement. With the new parts lasting for long is good news for the consumers while the same story happens to be adverse to the part makers as the request for new pieces is reduced (Porter, 1991) p 45. For example, most of the car makers have developed from using the rolling steel technology to the stainless steel technology extending the life parts for a longer duration.
Effects of the five forces model to the American auto industry
The involvement of the porter’s forces to the automobile industry led to drastic fall in sales of the auto industry in the united states with the factors providing a platform for the venture of new investors who happened to set up new production companies for instance in Ohio state. The products happened to be more preferred by consumers as they were classified as having the preferences that the customers mostly preferred destructing the norm of monopoly dominance in the industry.
Introduction of new strategies after the effect of the forces was the saviour to the collapsing American auto industry that is they adopted the use of customer preferences. when making their productions, for example, they complied with the creation of vehicles that were environmentally friendly and reasonable prices for their products. They also embarked on changing the designs of their cars with expectations of small or no revenue in the short run placing their focus on the long-run effects of the new models which guaranteed them income and relevance in the market, therefore, the capability of the enduring the market forces that almost dropped them out of the production industry.
5Conclusion
The auto industry is one of the most sensitive sectors that an investor is likely to lose or make extraordinary profits from their investments, based on the observations of the performances and the effects that the five forces are expected to input in the market structure. The auto industry is therefore required to derive the impact of the bargaining power of buyers and suppliers, evaluate the effects of new entrants in the market structure and derive ways to handle the stiff competition that is likely to arise from the new entrants. Consider the effects the introduction of substitute products will cause to their already developed products and drive mechanism that are likely to attract customers to their products, for instance, conducting of promotions through roadshows providing discounts to their customers and meeting of customers’ expectations in their production to ensure they meet the relevant standards in the market structure despite the competition posed.
references
Porter, M. E. (1991). How competitive forces shape strategy. Boston: Harvard Business School Press.
Harvard University. Graduate School Of Business Administration. (1991). Michael E. Porter on competition and strategy. Boston, Mass.: Harvard Business School Publishing.
Porter, M. E. (1985). Competitive advantage : creating and sustaining : superior performance. New York: The Free Press.