SECTOR 1 – AUTOMOTIVE SECTOR

PORTERS FIVE FORCES

1. Bargaining Power of Buyers: Customers can influence the way

competitors rival against each other for profit. They hold what is
considered bargaining supremacy, which enables them to demand higher
quality of products and force down pricing. The force of bargaining
supremacy of customers often results in playing competitors off each
other in the fight to make profits. Most of the time it is done so at the
expense of industry profits. This force is clearly evident in the auto
industry, as we see companies such as Honda deliver vehicles exhibiting
the similar qualities of luxury in comparison to Lexus for a price that is
far less. Their efforts are all driven by the expectations of the customer,
which gives them the advantage of controlling price and quality.

The force behind the bargaining power of customer accumulates

when the company purchases in large volume, enabling cost efficiency.
Also, when they lower their profits, which not only creates an incentive
of lowering purchase cost, but attracts the customer through added
value. The customer is always thinking about what is in it for them.
When they see added value towards their purchase, it attracts them more.
Although the company lowers their profits, there exists the potential of
increased sales from attracting more customers, making it a reasonable
decision to sustain and even increase business revenue.

2. Bargaining Power of Suppliers: The automotive industry has

many suppliers. Five of the world’s biggest suppliers are Bosch, Denso,
Magna, Continental and ZF Friedrichshafen, according to the
Automotive News list of 2018 (Chappell, 2019). How suppliers strive to
maintain control in bargaining is through rising prices or reducing the
quality of goods for cost efficiency. Costs in materials has gone up over
the years, and the struggle to reach a happy medium between customers
and managers is an ultimate challenge.

One of the factors which makes suppliers powerful in bargaining

is when they are dominated by few companies. This gives them more
leverage in negotiating costs and pricing. They also have the advantage
in bargaining when they have built up switching costs, which are
basically fixed costs the buyers face in changing suppliers. This
discourages companies from turning to another supplier immediately
after a simple dissatisfaction in negotiations. Suppliers rely on strategy
to stay ahead in the market, and technology is currently the dominating
factor in their strategy (Chappell, 2019).

Suppliers are currently facing the challenge of fulfilling the need

to support the evolving changes within the automotive industry –
electronic vehicles and autonomous driving. The automotive industry is
going through major changes as they move from traditional auto
manufacturing to more technically advanced production. Four sources of
change as of today are the electric vehicle (EV), autonomous vehicles
(AV), connected cars, and transportation as a service (TaaS) (Teece,
2018). One of the most successful emerging companies to enter the
market with these changes is Tesla. The company managed to rise in
revenue through the sales of their electric vehicle (EV).

3. Rivalry among Existing Competitors: ‘Competition breeds

excellence’ is a mantra I have always utilized to strive persistently for
success. The competitiveness within the automotive industry in the
United States is relatively large. There are laws and regulations set to
enforce fairness competition between businesses, however, the rivalry
between entities can often be intense. One of the major factors that
intensifies rivalry in competition is when there are numerous
competitors equal in size and power. General Motors, Ford and Chrysler
are prime examples of large competitors striving to dominate the market
(Porter, 1979).

Strategy is what drives business leaders in their strive for

maximum profits. Rivals often break out between competitors due to the
diversity in strategy and personality. Business leaders are determined to
develop different ideas on how to compete and stay ahead of the game.
These struggles affect the industry and the market in some shape or
form. Ultimately, the competitiveness of companies can sometimes
bring forth change within the industry.

Autonomous vehicles (AV) is an idea under development that is

literally changing the mindset of competitors within the industry. The
grasp of just imagining the ability to travel long distances without the
hassle of having to drive is currently what is attracts most customers of
today. The idea of saving time commuting from place to place in a much
more productive method is highly valued and what many business
leaders in the automotive industry are slowly pursuing. Debates are
ongoing whether autonomous vehicles (AV) have sufficient potential to
change the economics of the industry. The fixed costs for autonomous
vehicles (AV) are just too high, which becomes another factor of intense
rivalry in competition. In my opinion, its only a matter of time.

4. Threat of Substitutes Products: When auto manufacturing

companies make their product, they face the threat of product
substitution by their competitors. General Motors’s challenge was to
ensure the quality and uniqueness of their vehicles was more than
sufficient to surpass their competitors, regardless of pricing. Customer
loyalty is earned when a company provides quality in resources for
reasonable pricing. However, competitors gain the advantage when the
product can be substituted and provide equal utilization for a lesser
price. This occurs when products lack uniqueness and quality.
 The problem General Motors faced during the economical
recession was how their senior leadership allowed the company’s
vehicle portfolio to lag in quality, becoming less relevant to customers
(Senter Jr. & McManus, 2013). They continued to create products
regardless of the socioeconomic changes in the population. Income
distribution tightened up during the economic recession, and customers
were driven to purchase economy vehicles, which had very few to offer
in their product line. General Motors focused on the distribution of
larger vehicles, such as SUV’s or Trucks, which were higher in price
range for consumers. They were able to eventually overcome the threat
once their product line was addressed, and began to align products
closely with the income distribution in the national market.

5. Threat of New Entrants: Importance of reputation or brand

loyalty:

Reputation is a crucial barrier to entry.

1. Already established brand equity of major players.

2. For those players customer has high willingness

3. Other established company can enter through mergers

Entrance access to location/ distribution channel

1. Factors like access to raw material, technology and distribution

channel are concerned and are not easily accessible

2. New regulating policies pertaining to fuel emission, efficiency and a

projected efficiency rating, recession etc, act as a barrier to new entrant
4. New entrant has to compete with major players like Maruti, Hyundai,
etc. which provides dealership or service network for their vehicles in
remote areas of country.

5. Saturated urban demand and huge market of countryside the

distribution channels going to play a significant role in future.