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Porters Five Forces Analysis: Automobile Industry

Paper Type: Free Essay Subject: Marketing
Wordcount: 1154 words Published: 25th Apr 2017

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– Economies of Scale : High

If we take a look at a big player in this industry, for example; Toyota, Ford, GM, or Honda which are the large manufacture of car that sell the products to many countries all around the world including Asia, Europe, America, etc., we could see that they are producing in the large amount. And of course, this lies in the advantage of economies of scale.

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For automobile industry, it is very mature and it has successfully reached economies of scale. In order to compete in this industry a manufacture must be able to achieve economies of scale. it is generally reckoned that to be a low-cost producer, sales of over four million vehicles a year are necessary. For this to happen, manufacturers must have mass-production of the automobiles so that they are affordable to the consumer. This also implies that, the more the company produces the lower cost per unit. This means in term of the fixed cost like the rent, the electricity, the overhead cost, etc. The company can save the advertising cost and the transportation cost as well. As once they pay for the advertising cost or transportation cost, the cost per one unit is less if there are more units produce to sell.

Let’s take a look at Toyota, they has worked on improving their lean manufacturing system in order to spread their fixed costs more over production. They have surpass Ford and GM in production and costs. They can produce 15 cars per worker which is far more then the 4.7 vehicles per employee Ford can produce. By creating more cars to sell, Toyota has effectively spread their fixed costs over more production.

Therefore, for this industry, it requires high economies of scale for the businesses to compete.

– Product differentiation : High

For the automobile industry, for sure there will be high product differentiation. As we can see in daily lives, many brands of cars are in the roads and of course even if in the same brand there will be many models available for customers to choose. Nowadays cars demonstrate a variety of features in which they differ from their predecessors that an entrant has to spend big amounts on safety, motor management, comfort, design, and numerous electronics functions. However, at present which is the time when technology is far more developed than before. The innovative technology (product innovation) can also be one of the tools that established firms use to make their differentiation in products as well as create brand identification and customer loyalties. For example, Toyota in nowadays, the company has been introduced the hybrid technology in many models of their cars. This also helps save the environment. However, Ford also comes up with a new model called “Ford Fiesta” that inventing the new technology that uses driver’s sound to control the cars.

Therefore, in the present day technology and design can be use to create the differentiation between brands and this helps to satisfy the needs of customers as well.

-Capital Requirement : High

The investment in capital is another barrier to entry that it keeps the difficulty and inconvenience for the new entrants to enter in the industry, since it takes an incredible amount of capital to manufacture the automobiles. It takes an extreme amount of capital not only to be able to manufacture the products but also to keep up with the Research and Development (R&D) cost that is necessary for the innovation requirements and product development. So, in order to start the business, it requires quite a high investment. There must be an investment in term of the factory, machines, warehouses as well as other supporting facilities like service facilities.

Let’s take a look at the example of Toyota, in the year 2010 Toyota has invested its fund for the development of environment technologies, maintenance and replacement of manufacturing facilities, and the introduction of new products. And the net cash used in investing with these activities was ¥2,850.1 billion for fiscal 2010.

Therefore, in starting or existing in the automobile industry, high investment in capital is substantial.

-Switching Cost : High

For the automobile industry, the switching cost is high. Let’s say if you would like to change from buying a Honda car to a Mercedes one, this would take you a higher amount of money for you to pay. However, the switching cost is not only mean in term of the money or the amount you have paid, but this also involves your time, energy, and other costs that have been used to search or learn for the information base on the new brand you want to purchase. Since car is a specialty good which is quite expensive and that customers want to find and get the best products, therefore the cost of switching from one brand to another brand is high and the range of price among brands are quite different.

However if we look at the substitute products like the bicycles, motorcycles, or other public transportation like bus, train, van, etc. which is quite much cheaper than buying a car; thus, the range of prices are wide and that make the switching cost becomes high.

-Access to distribution channels : High

Access to distribution channels is another high barrier to entry. A company must find a dealership to sell their automobiles or have their own dealership. Space in the dealerships lots is very limited making it difficult to have a wider variety of inventory.

And of course, to find a dealership is not that easy regardless of brand awareness Limited capacity within distribution channels (e.g., brand reputation), risk aversion by dealer ship, and the ¬xed costs associated with carrying an additional product can result in retailers being reluctant to carry a new manufacturer’s product.

2. Bargaining Power of Buyers

The bargaining power of the buyers is moderately high. The buyers being consumers purchase almost all of the industries output. The manufacturers depend on them to stay in business. The buyers also are a significant portion of the industries revenue. If they can not keep their buyers happy then they risk losing them to their competitors. However, the buyers may go for another brand if they are not happy. All the buyer has to do is sell the car they own and purchase a new one. This can be done in case of the gap between the prices of the new car (the new brand that customer choose to buy) and the old one (the dislike brand) is not so large. For example, like Toyota and Honda which the price is not so different.

The reasons why the power is not completely high is that the buyers are not large and few in number. The buyers do not have the ability to integrate backwards into the industry. If they want a car then they have to purchase it from a dealership


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