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Industry Analysis of Car industry using the five forces model

Paper Outline


II. Dominant economic characteristics of the industry
III. Five forces model based industry analysis

Bargaining power of the buyers
Bargaining power of the suppliers
Threat of substitute products
Competitive rivalry between incumbent firms


Industry Analysis of Car industry
The automobile industry is a major contributor to the economy of the United States. The industry requires diversified supply of raw materials from different parts of the world (Zino, 2010, p. 1). Technological advancements have been of great importance in the automobile industry and this has promoted the introduction of new models as well as differentiation of the existing products. Global economic recession that was experienced in 2007-2009 adversely affected the automobile industry. The economic recession affected the automobile industry such that China overtook the United States in terms of sales growth (Organization for Economic Co-operation and Development, 2010, p. 11). The main players in the automobile industry in the United States are Ford Motors, General Motors Company, Chrysler, Toyota and Honda (Carfreaks, 2010, p. 1). A comprehensive analysis of the porters five forces for the automobile industry in the United States has been done in this paper.
Dominant Economic Characteristics of the Industry
There are many customers for automobile products in the global markets. Customers in this industry include individuals, organizations and governments among others. There is an increasing need for automobile products in the world especially with the increase in urbanization, industrialization and civilization. In the past, few people owned cars but today many people, especially the middle income earners are buying cars (House of Representatives, 2002, p. 38). This provides a growing market for the automobile industry. Social systems are changing and the lifestyle of many people is changing in that people now prefer traveling in cars more than using bicycle, train or walking. This change in lifestyle creates more opportunities for the automobile industry.
The automobile industry has been very profitable and this has attracted many investors. Since the cost of raw materials for manufacturing cars is very high, companies in this industry focus on economies of scale. As such, manufacturing many products gives profits to the existing companies in the market. Barriers of entry to the automobile industry include high capital requirements and legal restrictions. In addition, establishing a good product image in the global markets is important and this requires operating in the market for many years. New companies find it difficult to overcome stiff competition in the market since the existing companies have built a strong customer loyalty and brand image for their products. Learning curve effect explains the causes of dominance by the existing companies in the industry. New companies require a lot of time to learn the market trends as well as establish a solid background about the existing customers (Feenstra, 1989, p. 103). Most of the existing companies have established a strong foundation about their position in the market. New companies find it challenging to penetrate the market since the existing companies already have created a good image in the global markets and customers have a lot of trust on their products.
The pace of technological change is increasing and new technologies are being developed to reduce cost of production as well as produce better products. New car models are being introduced in the market. Efficient manufacturing processes are being developed in the market and this is reducing the cost of production (House of Representatives, 2002, p. 29). Product innovation has been intensified in the automobile industry since new products are being introduced in the market. Lean manufacturing is a process innovation being adopted by companies in the automobile industry (Fukuyama, Shulsky, United States Army, and Center, 1997, 24). This production system has been adopted to reduce losses as well as increase the profits made by companies in the market.
Five Forces Model based Industry Analysis
Threat of new entrants
Threats of new firms entering the market are low since there are many barriers of entry. The initial costs of establishing an automobile company are very high and this restricts many investors from entering the industry. The existing companies have established a good product image in the international market and this makes it impossible for new companies to enter the market. Since the automobile industry requires selling products to many customers all over the world, creating a good product image takes time. Customers in the global markets have become loyal to certain products which they have known for many years and this hinders new firms from entering the market (Carfreaks, 2010, p. 1). Selling automobile products requires having distribution channels. To work with good channels of distribution is very important in gaining a better market share. New companies find it difficult to work with the existing channels of distribution and this is a major barrier of entry into this industry.
Bargaining Power of the Buyers
Buyers in the industry have a low level of bargaining power. In the United States there are few companies manufacturing cars. On the other hand, there are many customers in the market. As such, the customers have no control over the activities of these companies since the customers cannot manufacture cars themselves (Carfreaks, 2010, p. 1). Many customers purchase in small units and there is no single buyer with exclusive control over the industry. The industry experiences intense product differentiation hence, there are a variety of products in this industry. Products in the automobile industry are not standardized since different car models are manufactured by different companies. Customers can purchase from several sellers and the cost of switching from one brand to another is minimal.
Bargaining Power of the Suppliers
The bargaining power of suppliers is very medium. Suppliers in the industry cannot make cars and this limits their control over the automobile companies in the market. In fact, suppliers in this industry have total reliance on the automobile companies. Raw materials required to manufacture automobile products are sold in packages and there is no particular suppliers who can supply many materials to an extent that they can control the decisions made by the automobile companies in the industry. There few suppliers and this provide them with some power to control car manufacturers (Carfreaks, 2010, p. 1).
Threat of Substitute Products
The industry encounters threat from substitute products since there are many substitutes in the market. The customers in the United States have opportunities to buy cars from other companies in the world. The costs involved when switching from the US-made cars to foreign cars is small. Therefore, customers can switch from none product to another. In addition, there are other means of transport such as trains, bicycles, air transport and other means of transport which people can use instead of motor vehicle (Carfreaks, 2010, p. 1).
Competitive rivalry between incumbent firms
Rivalry among competitors is very high since the industry is not a monopoly and opportunities to differentiate products are minimal. Growth in the automobile industry is limited and this makes it impossible for players to introduce new brands. Rivalry among companies in this industry is high since there are minimal opportunities of differentiating products or introducing new products in the market (Carfreaks, 2010, p. 1). The major automobile company in the industry is General Motors while other companies also compete for market share in the United States and in other foreign markets. Intense rivalry and competition in the industry has caused poor performance for companies such as Chrysler and Ford. The two companies have been supported by the federal government to stop them from closing (Axson, 2010, p. 127). On the other hand, foreign companies have a great impact on the domestic automobile industry and this intensifies the rivalry.
There are challenges and opportunities in the automobile industry in the United States. The industry has experienced a great challenge after the global economic recession affected many customers. The automobile industry is moderately attractive since there are many barriers of entry while on the other hand, the existing companies are making a lot of profits. Rivalry among existing companies in the industry is very high, and there exists many substitutes. The bargaining power of the buyers is low while the bargaining power of suppliers is moderate. It is from these findings that we conclude that the automobile industry in the United States is moderately attractive.

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