Porter’s Five Forces, Research Paper Example

Application of Porter’s Five Forces for Assessment of the US Automotive Industry

Executive Summary

The present paper examines the US automotive industry in terms of the Porter’s Five Forces analysis applied to industrial sectors. The first part of the paper is dedicated to the overview of the industry in general terms, its definition, the structure and recent changes in it deriving from the current changes in the competition profile, the industry profile regarding sales, problems and recent changes in representation in the market, as well as some prospects for the future taking into consideration some suggestions of experts, as well as conclusions made from the current state of affairs in the sector.

The second part of the paper refers to the discussion of the effect that the five forces indicated by Porter produce on the automotive industry in the USA. The bargaining power of buyers and suppliers are identified as moderately strong indicators for the US industry, while the threat of new entrants, the threat of substitutes and the competitive rivalry in the industry are seen as much stronger factors affecting the competitive position of the Big 3. The conclusion is made that the intensifying competition from the side of Asian car makers aggressively occupying the domestic car industry, alongside with the rising prices for gasoline, are the main contributors to the crisis of the US automotive industry, and the possible range of solutions that may be utilized by US producers is innovation of production facilities, introduction of innovative technologies and upgrades in their cars, production of fuel-efficient vehicles, and changes in the bureaucratic corporate, unionized structure of the US industry.

Introduction to the Industry

Industry Definition. The automotive market of the USA has conventionally been dominated by several automotive giants-oligopolies that shaped the profile of the industry. The American cars have always been considered of very high quality, and taking into account the low prices for gasoline for the major part of the 20^th century, powerful and plain cars were the points of utmost priority by the consumers. The total leaders in the US market were (and are, in terms of domestic American production) General Motors (GM), Ford and Chrysler. However, the oil crisis and skyrocketing prices made it much harder for the Big 3 to sustain their competitive position. The increased entry of Asian automobile producers to the US market has only aggravated the situation (Emmons, 2006).

As Emmons notes, the automotive industry in the US was a part of the nation’s profile. The huge, branched companies gave jobs to millions of blue-collar workers of the middle class, and shaped the way Americans lived, thought and worked (Emmons, 2006). It occupied a highly influential position as a key player in the manufacturing sector, but unfortunately lost that position several decades ago because of the intensifying competition, loss of customer loyalty, rise of gasoline prices, and finally the financial crisis of the recent couple of years.

The automotive producers are known as active participants of the political life in the USA, attributing large sums of money for federal lobbying and campaign contributions. The crisis of the past two years has also produced a substantial effect on the position of the US automotive industry, as it turned out the most vulnerable for the financial recession. Only with the rescue of the federal government, GM and Chrysler received tremendous sums for the federal bailout and were saved from bankruptcy, being transferred into partial governmental ownership (Automotive, 2010).

Industry Profile. The traditional position of the automotive industry in the USA has been very strong, with the Big 3 (General Motors, Ford, and Chrysler) indisputably dominating the market. According to the estimate of the HBS professor Malcolm Salter, the industry has been a highly protected one because of the extremely low prices for gasoline. Hence, only in 1980s some significant changes in the companies’ competitive position emerged. The three mentioned giants ruled the US economy, shaped the national development, and influenced the American culture, determining values and social mores (Emmons, 2006).

Nowadays one can still say that the Big 3 is still dominating the US market, but they have to face a set of challenges preventing them from gaining their previously strong position. First of all, they include falling sales (because of the increased assortment of cars in the US raising the competitive standards), financial obligations (deriving from their corporate structures, and later, from the bailout obligations after the economic recession), pressure of globalization (Emmons, 2006).

The present-day profile of the US automotive industry has many drawbacks at the background of the contemporary market: globalized, competitive, dynamic and turbulent. The US auto-producers are said to be lagging behind because of their excessive corporate bureaucracy, arrogance, and insularity, union obstinacy, huge healthcare costs etc. The level of technological advancement is high, but it has not yet been optimized in terms of expenditures. Hence, the industry looks rather old-fashioned as compared to innovative Asian producers that grasp the American customers.

Industry Structure. The traditional automotive industry structure has seriously changed due to the internationalization of competition within the American context. Cooney and Yacobucci (2006) indicate that the change was initiated by the introduction of foreign manufacturers as domestic ones (some Japan-based companies preferred to invest money into building their automotive-building plants in the USA instead of spending funds on import). Therefore, the geographical structure evolved at the beginning of the 21^st century. The automotive industry moved from the traditional location in the Midwest “auto belt” to the Sunbelt and other locations in the South and West (Cooney & Yacobucci, 2006). As a result of that shift, Michigan lost about 10,000 jobs, and the whole Midwest losses resulted from the shift of production and outside supplies. As a result of rationalizing suppliers and assembly parts, the workers of Pennsylvania, New York and New Jersey lost their jobs. It is hard to state whether Ohio, Illinois and Missouri lost or gained jobs because of the marginal estimates of both negative and positive effects. However, one should note that Indiana gained jobs because of the shift, and Kentucky and Tennessee turned out the largest gainers as a result of the shift in the US automotive structure (Cooney & Yacobucci, 2006).

It is also possible to note that the distinguishing feature of the domestic US automotive industry and the foreign producers is unionization of the workforce. The Big 3 have traditionally been employing only members of the United Auto Workers (UAW) Union. This tendency reduced the direct employment by the Big 3 substantially, with no visible unionization trends in the Asian automakers. The latter specificity may be seen as the direct reason for high costs for the US-made cars, since the high pension and health care costs as well as paid time during the contingency stoppages in the work of factories are some of the conditions adding about $1,500 to every vehicle’s cost (Cooney & Yacobucci, 2006). These factors may serve as the main difference between Asian and American automakers, and explain the difference in prices for cars they produce.

Future Outlook. The bloated product lines and overcapacity of the US automakers are surely going to produce only negative effects on the US automotive industry. The industry profile information clearly shows the dramatic impact of the economic crisis that the industry suffered. The demand for a new type of vehicles consuming less fuel (which has been considered irrelevant before, but has come to the fore with the growing prices for gasoline), as well as the innovative market considerations such as fierce competition from the side of Asian automakers, especially Toyota, have to be taken into consideration as the starting point for looking for the solution to the problems of the Big 3.

The way US automakers are able to meet the technological advancement issues also lacks effectiveness as compared to the Asian producers. The Toyota’s key to success in the American market is that it is able to continuously refresh its products, and make the upgrades economically due to the flexibility of factories and equipment. The US producers, nonetheless, fail to gain the customers’ recognition in terms of upgrades, as the US customers seem more conservative about the outlook of the American cars they use (Emmons, 2006). However, some researchers are more optimistic about the future of the US automotive industry: as the HBS professor Rosabeth Moss Kanter argues, it has a great set of assets to regain its leading positions. To do that, it needs true leadership, innovative thinking, and flexibility to address modern problems in a modern way (Emmons, 2006).

Porter’s Five Forces Strategy Analysis

Bargaining Power of Buyers. The force called ‘the bargaining power of buyers’ is rather relevant for the assessment of the US automotive industry, but it retains to the substitutes of the product more, as well as to the product maintenance (price of gasoline in particular). The price sensitivity is not highly relevant because American cars has always been distinguished by particularly high prices; so, one can note than the bargaining power of buyers in constituting pressure on the producer pertains mainly to the changing concentration of buyers (more and more of them choose the Asian cars, thus reducing the volume of the US cars bought).

Bargaining Power of Suppliers. Here the main participant constituting the greatest pressure on the industry is the oil industry supplying gasoline for the country. Since the oil prices have risen substantially for the last couple of decades, the pressure is conducted on the US automakers to start taking fuel consumption into consideration when producing new models. Supplies of labor may hardly be called relevant in the consideration of the bargaining power of suppliers, as millions of jobs were lost during the 2008-2009 crisis, hence the supply of labor is in excess in the USA in the modern period of time. Employee solidarity is strong in the USA, producing centralized influence on the policy-makers and administration of the companies, so their impact is the only serious one in the discussed area.

Competitive Rivalry in the Industry. This force is seen as the most powerful in the present-day situation with the US automotive industry. The issue is that the penetration of Toyota to the US car market was the initial factor that contributed to plummeting figures of sales, loss of popularity, and path to the crisis in the sector. Toyota was the producer that provided the customers with products that met their need for more economical fuel consumption, for more attractive appearance of cars, for easier and cheaper maintenance etc. Hence, Toyota grasped the US consumers in many terms, leaving the US automakers behind with the high prices, high volumes of consumption and expensive maintenance. Democracy and support for the domestic providers changed for the need to make reasonable decisions.

Threat of New Entrants. The threat of new entrants to the US automotive market has traditionally been considered a low one, with the extremely low prices for gasoline resulting in no serious challenge from foreign car producers. As soon as the oil shock occurred in 1980s, the level of protection fell, and Toyota, the new entrant appeared much more successful because of its aggressive penetration policy, building factories throughout the US and strengthening their competitive position in the conquered market. With the continuous price growth resulting from the economic crisis of the past few years, the risk of other Asian competitors’ initiation of a penetration policy is very high

Threat of Substitutes. The threat of substitutes is as high for the US automotive industry as it is for the entry of new competitors. It is known that the emergence of a fuel-efficient, gas-electric hybrid was the initiating point in the fall of the US dominance in the market. SUV (sports utility vehicle) was a true treasure for Detroit for a certain period of time since it offered serious fuel economy, but with the continuing rise of fuel prices the vehicle appeared unsustainable as well, and its popularity quickly sank.

The cars offered by Toyota and other Asian automobile producers have a set of indisputable advantages as for the fuel economy; the automobiles offered to the American public are initially designed for the countries where consumption of fuel is one of the key characteristics of the automobile influencing the buying decision of consumers. Hence, as soon as the US consumer faced the problem of huge oil prices, and the innovative problem of facing the need to economize fuel emerged, the US automotive industry turned out unable to respond to the need in a flexible and timely manner. The result was evident – the US consumers refused from brand loyalty and chose Asian cars that allowed serious savings for them. Unless the US car industry is able to generate a substantially new model that will fit the innovative needs of the US market, it is hard to predict whether it will retain its leading position. As Jones (2006) has noted, the US automotive producers cannot succeed without making hits, which is now offered by Asian automakers. Hence, the future of the competitive position of US automakers is in the way they respond to the threat of substitutes – at the present moment Toyota is much more innovative and imaginative in the issue of substitutes sold more successfully than American cars, and even SUVs.

Conclusion

As one can see, the US automotive industry is now facing a set of constraints in the area of competing successfully with the Asian producers aggressively penetrating the US market. Upon the completion of the industry analysis according to the Porter’s theory of five forces, one can draw a firm conclusion that it is surely viable for the automotive industry. The competition issues are rather new for the US industry that has managed to remain untouched and protected for a long time; however, now the US and Asian car makers have to compete in terms of prices and attraction of newly offered models, fuel efficiency and popularity of models. It is still a challenge for the US car industry because of a series of shocks it has recently experienced (the oil shock of the 1980s, the financial crisis of 2008-2009 etc.). Hence, the theory of Porter about the main source of problems in the industry being directly correlated with competition is true. The US industry is now going through the period of serious change and innovation in response to the innovative wishes of the customers; the way it will deal with newly posed challenges including fierce competition and oil price rises, will determine the future of the US car production and the future of the Big 3 as well.

References

Automotive (2010). Retrieved October 20, 2010, from http://www.opensecrets.org/ industries/indus.php?ind=m02

Cooney, S., & Yacobucci, B.D. (2006). U.S. automotive industry: policy overview and recent history. New York: Nova Publishers.

Emmons, G. (2006). American Auto’s Troubled Road. Retrieved October 20, 2010, from http://hbswk.hbs.edu/item/5290.html

Jones, R. (2006). American auto industry seen at a crossroads. Retrieved October 20, 2010, from http://www.msnbc.msn.com/id/10642724/