Introduction
Porter’s five forces are essential tools for understanding a particular industry’s competitive environment and determining the best strategies for potential profitability. They are important since they provide an understanding of the forces that can hinder success in a business environment. The five forces consist of supplier power, intensity of rivalry, barriers to entry, buyer power, and the threat of substitutes. This paper analyses the forces affecting General Motors and the automotive industry.
Barriers to Entry
The barriers to entry for new brands into the automotive industry are high. Many factors make entrance into this industry difficult. Firstly, the establishment of a brand requires a significantly large amount of investment. During the initial stages, several necessities need cash, including hiring new and skilled staff, setting up the manufacturing facilities, and establishing a distribution network. Also, many resources are required to facilitate marketing and advertisement to inform the consumers of the company’s products.
Another major barrier to entry into the automotive industry is the high level of competition from the existing companies. The companies already in the market have established their customer base and are acquainted with the likings of their customers (Athanasopoulou et al., 2019). Furthermore, the existing brands have an advantage since most have a good brand image and reputation. The chances of a new brand gaining a significant share of the market highly depend on them bringing innovative and unique products into the market.
Moreover, other barriers are preventing new firms from being created and competing with the existing rivals. For instance, legal requirements have recently increased, and they are currently making it difficult for new entrants to succeed. Also, the achievement of economies of scale is challenging for small companies despite the increased availability of raw materials. In addition, penetration into new markets is not easy; therefore, new brands focus mainly on engineering and product quality. Furthermore, existing government regulations discourage foreign brands from penetrating their home markets, such as high import taxes.
Supplier Power
The suppliers in the automotive industry possess a low bargaining power. Their bargaining power is weak since there is a large number of suppliers for the automotive industry. Also, despite the presence of some large suppliers, most of them are small in size. Moreover, the raw materials needed are plenty and do not require a large number of resources. The low threat suppliers pose to forward integration is another reason they have low power over car manufacturers. Companies have no difficulty switching from one supplier to another when the suppliers fail to play according to the rules they have set.
Buyer Power
The bargaining power of buyers is moderately high in the automotive industry. Most of the customers for car manufacturing companies are small individuals who mainly buy only one vehicle. However, there are government agencies or large organizations that purchase fleets of vehicles. Whether small or large, the buyers are in a position to ask for a reduction in prices since they can easily change their brand preference or mode of transportation (Caridade et al., 2017). Most buyers usually prefer to purchase their products from brands that offer lower prices.
Moreover, the bargaining power of customers has been increased by the changing consumer trends and the intense competition that exists among companies in the automotive industry. Companies use various ways to encourage customer loyalty, such as improving quality, creative designs, and providing their products and services at affordable prices. However, the customers do not threaten backward integration, whether they are small individual buyers or a large corporation.
Threat of Substitutes
The goal of companies in the automotive industry is to ensure people can commute with little or no challenge. The threat of substitutes is weak in this industry because, despite the many alternative means of transportation such as trains, buses, taxis, and planes, no one offers the kind of convenience and accessibility received by owning an automobile. The recent rise in trend and demand for possessing a personal car has led to an increase in the manufacture and usage of cars (Genzlinger et al., 2020). In addition, the threat of substitutes is low because there are no effective alternatives that can substitute the current demand for the automobile transport system.
Intensity of Rivalry
The competitive rivalry in the automotive industry is very high. This rivalry is strengthened by the small number of influential and recognized brands and the increase of exit barriers. Many aspects influence the intensity of the competition between existing companies in an industry (Ariffin & Sahid, 2018). Companies usually stay in the industry for a lifetime unless they are bankrupt because they would undergo huge losses if they decide to exit from the industry. Also, the unavailability of other opportunities elsewhere could hinder exit from an industry. The concentration of the industry is another factor affecting competitive intensity since several equally capable competitors offering similar products usually lead to an increase in rivalry.
Moreover, the rate of market growth influences competitive intensity. In a rapidly growing market, the rivalry between companies is not very intense. However, a slow-growing market contributes to high competitive intensity since there are very few customers. The degree of differentiation is another determinant of the competition intensity (Yang et al., 2019). Companies that offer highly differentiated products will have less intensity, while those offering products with little room for differentiation will have increased rivalry. The success of a firm in a competitive market requires a good strategy. A company in this market should implement an aggressive program to make their costs lower than those of the competitors or find ways of making their products more distinguishable from the others.
Conclusion
Porter’s five forces analysis provides an understanding of the competitive environment in the automotive industry. The threat of new entrants into the industry is low because of the large amount of investment required, the difficulty in achieving economies of scale for small companies, the high level of competition from the existing brands, and the legal requirements. Also, the bargaining power of suppliers is low since most of them are small despite their large number of suppliers in the market. Furthermore, the suppliers pose a minimum threat of forwarding integration. On the other hand, the bargaining power of suppliers is moderately strong because they can easily switch brands or choose alternative modes of transport. Also, most of the customer’s decision to purchase is based on the price of the product.
Moreover, the threat of substitutes is weak since they do not offer the same convenience and accessibility owning an automobile provides. However, the competitive intensity is very strong since there are few brands, and it isn’t easy to exit. In addition, there is a high level of customer loyalty since most of the companies in the automotive industry have set aside a lot of resources to maximize the satisfaction of their customers.
References
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