Term Paper on "Porter's Five Force in Auto Industry"

Term Paper 7 pages (2221 words) Sources: 4

[EXCERPT] . . . .

Porter's Five Forces In Auto Industry

Industry definition

Industry profile

Industry structure

Future outlook

Porter's Five Forces Strategy Analysis as it applies to the Auto Industry

Bargaining Power of Suppliers

Threat of New Entrants

Bargaining Power of Buyers

Threat of Substitutes

Competitive Rivalry in the Industry

The American Auto industry is about to lose some of its key players; Detroit. This follows an ultimatum issued by Congress for a lifetime change in their business operations. While previous fiscal or monetary policies have played an integral role in the demise of Detroit, it is evident that the auto industry has not paid any attention to the prevailing market influences. The market is demanding vehicles that are fuel efficient, environmentally safe, and reasonable prices. The automakers must gather the pieces and re-construct the industry from scratch. Failures to achieve this, the automakers are poised to become extinct in the industry formed with the philosophy of survival for the fittest (Yates, 2010).

Porter's Five Forces in Auto Industry

2.0 Introduction

The American auto industry, which has hit a barn, is experiencing a modest growth as makers of auto products are witnessing decent sales profits. Despite the issues over increased gas prices and taxes, the industry is boasting of a solid momentum as consumers continue to hit the auto showrooms. Improvements in the housing markets have driven the sale of auto motives, even in the sluggish economic condition. Automakers in the sector are experiencing a significant growth trend. In fact, companies such as General Motors are blowing increased expectations in sales gains (Weintraub & Sands, 2008). For the purpose of this report, the American auto industry encompasses stakeholders, suppliers, buyers, and competitors. Competitors include manufacturers who sell automobile products such as sport utility vehicles, trucks and cars. Buyers include buyers such as firms making bulk purchases (rental, taxi, and delivery car companies). Suppliers include vendors specializing in raw materials such as metals and other automotive and electronic parts. Stakeholders include agencies of the U.S. government (Rubenstein, 2011).

2.1 Industry definition

In the recent years, the U.S. industry of the automobile has been suffering greatly because of financial challenges. High unemployment rates have led to cost sensitive consumers and a decline in the sale of automobiles due to low demand in the past years. This has precipitated to suppliers and manufactures filing bankruptcy while others re-engineer to remain in the market. Some manufacturing firms have dominated the sector, as barriers to enter the market remain high. In addition, existing barriers have been orchestrated by extraneous overhead costs. Therefore, the automobile industry must step up efforts to maintain their market share and this analysis will prove that the U.S. automotive industry continues to be highly competitive (Beecroft, 2008).

Corporate reputation and brand have led to buyer loyalty and created entry barriers in the U.S. auto industry. New entrants require adequate resources to avoid difficulties of accessing appropriate channels of distribution to survive in the market. High capital is a pre-requisite for maintaining and obtaining automobile and expertise in their manufacturing processes. The American auto industry forms the main backbone of the economic development with enormous interconnections across the cultural and industrial fabric of America (Weintraub & Sands, 2008). The industry is one of the major sectors in America. Historically, it contributes approximately 5% to the overall American GDP.

Similarly, the industry has created over 1.8 million job opportunities; it has engaged people in servicing new motor vehicles, selling cars, assembling vehicle components, supplying parts, manufacturing, engineering and designing parts. Additionally, the American auto industry remains to be a huge consumer of services and products from various sectors. They include healthcare, advertising, financial, semi-conductors and computers, legal, machinery, construction, and raw materials. The American auto industry spends approximately $18 to 21 billion every year on researching and developing new products; reports indicate that 89% of the costs are self-funded by the company. Because the industry consumes products from various manufacturing industries, it remains to be a key driver in GDP contribution across the manufacturing sector. Without the existence of the American auto industry, it would have been impossible for the manufacturing industry to survive in America (Cooney & Yacobucci, 2009).

2.2 Industry profile

The American auto industry began in the early 1890s. It is rapidly evolving as the biggest global auto industry courtesy of application of mass production and U.S. domestic market size. In early 1980s, Japan overtook the American auto industry as the largest producers of automobile, which was subsequently overthrown by China. After sharing the second and third positions with Japan, it has repositioned itself, occupying the second position as the largest automobile manufacture with an annual manufacturing volume of up to 12 million automobiles. Although the 2009 financial crisis led to major declines in the volumes, going down to8 million automobiles per year, peak levels of production have hit 15 million since 2005 (Yates, 2010).

The American auto industry started with countable manufactures, but as 1950s approached, the industry became dominated by three major firms like Chrysler, Ford, and General Motors. Immediately after the Second World War and the great economic depression, these manufactures continued to prosper with the U.S. producing a third of the global automobiles. However, from the early 1970s, the combined factors comprising of stiff competition from foreign manufactures of automobiles and high prices of oil had severe impacts on these companies. In the years that ensued, the companies experienced a periodic come back. However, in the early 2008, the industry was plunged into turmoil. Chrysler and General Motors filed for bankruptcy but the federal government bailed them out with investments and loans. Before the 1890s, most firms belonged to domestic producers of the giant tree (Chrysler, Ford, and GM). Nevertheless, this trend has been steadily dropping due to the entry of foreign owned auto firms in the U.S. markets (Rubenstein, 2011).

2.3 Industry structure

The American auto industry is comprised of the big auto manufacturers like Chrysler, Ford, General Motors, Honda, Toyota, and Volkswagen. All these are operating in an international competitive market place. Reports indicate that the automotive industry has been greatly globalized because of establishment of mergers of the leading manufacturers of automotive and construction of vital overseas automotive facilities (Porter, 1989). Experts in the industry have noted that growth in foreign commerce stems from technology transfer and mass production. Advanced industrialization has caused significant developments in the production and growth of German and Japanese markets. This industrialization trend was marked by the exportation of fuel-efficient motor vehicles from Japanese markets to U.S. markets due to the 1970s oil embargo (Cooney & Yacobucci, 2009).

2.3 Future outlook

It is expected that growth in the sales of automobiles will increase rapidly in the coming years. Growth in sales will be driven largely increasing customer demand for new products rather than strong U.S. economic performance. Industry experts believe that production of vehicles will fully recover from levels of pre-recession in the near future. Nevertheless, employment recovery in the automobile industry has slowed down; it is feared that it might not attain levels of pre-recession. A close examination of underlying industry trends suggests that there are no probabilities of high growth rates in the future of outputs in the auto industry. On the other hand, the federal government has mandated an array of key innovations such as future motor vehicles to generate promises for benefits and savings across the economy and the automotive market. However, it remains evident that for these innovations to be accepted by customers and their enduring financial costs as part of the auto market and industry will undergo significant advancements in the near future (Beecroft, 2008).

3.0 Porter's Five Forces Strategy Analysis as it applies to the Auto Industry

The five forces model developed by Michael Porter has been applied in analyzing different environments across varied industries. An industry entails a set of companies marketing products or services that closely substitute each other like the American Auto industry. Porter argues that five forces exist in determining the long run attractiveness and competitiveness of an industry. These five forces include; the Bargaining Power of Buyers, Bargaining Power of Suppliers, Competitive Rivalry in the Industry, Threat of New Entrants and Threat of Substitutes. Michael Porter has identified five forces, which are widely applied in assessing structures of different industries. These factors have been discussed in details in relation to the American Auto industry (Porter, 1979).

3.1 Competitive Rivalry between Existing Players

The auto sector is one of the leading convenient infrastructures of today's modern society. Globalization has enabled foreign manufacturers of auto products to penetrate into U.S. markets easily, which has created stiff competition. America has three giant manufacturers of automobile. They include Chrysler, Ford, and General Motors. On the other hand, these giants are battling stiff competition from foreign manufactures of automobiles such as Honda and Toyota (Cooney & Yacobucci, 2009).

3.2 Bargaining Power of Suppliers

Historically, suppliers bargaining power in the auto industry has remained unchanged. U.S. consumers of automobiles have not been deceived by a variety… READ MORE

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