Car Industry

Topics: Renault, Automotive industry, Tata Motors Pages: 7 (2408 words) Published: February 10, 2013
Car Industry

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. It’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 ( 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...
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