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The Porters Five Force Analysis - Research Paper Example

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As the premium car segment caters to the elite and the fortunate few who can afford this luxury, pricing has not yet become the source of competition. Top brands such as Audi, BMW and Mercedes Benz are more immune than their economy counterparts to price wars as they draw interest from the upper crust…
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The Porters Five Force Analysis
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The Porters Five Force Analysis

Product innovation and wider range of products is another platform for competition. Companies need to expand their reach to cater to more and more customers, both geographically and demographically. Competition will intensify in relation to environmental measures and energy use, as customers' attitudes to the environment become gradually more important. In this scenario, basic technological trends will lead to a variety of technical vehicle-related innovations.
With the shift in focus to customer retention and loyalty, companies now have to invest in better customer service to ensure customer satisfaction. Better service also includes better geographical advantage to serve where the customers are located.
There is little bargaining power for buyers in the luxury car segment as there are numerous buyers scattered all around the globe. There is better transparency and huge amounts of information available to buyers regarding the pricing and cost of manufacture of cars and hence they have some leverage in negotiating the purchasing price. This advantage is mostly over-ridden by the fact that buyers for this segment are mostly individuals and are not grouped together for a collective advantage. Since luxury cars are sold typically by the company or direct dealers, there are few players in the distribution channel at present. Luxury cars have lower or no resale value as compared to economy cars. This is an enormous factor that influences buying decisions in the case of luxury cars.

Bargaining power of suppliers
The suppliers to large premium segment manufacturers would typically be large and medium manufacturers themselves. Since quality is the biggest product differentiator in this segment, it is imperative that companies choose their suppliers with care and efficiency. In such a case, it would be difficult to replace or change suppliers with ease. As a result they have some flex in determining product pricing, delivery and distribution.

Threat of new entrants
The threat of new entrants in this segment is very low due to the many entry barriers that exist in this industry. There are too many well established companies with stiff competition among them. A huge amount of capital is required to enter into this sector. There should also be tremendous amount of tacit and explicit knowledge of products and constant innovativeness to compete in this industry. The luxury car segment is driven by quality and goodwill as well and this comes with time and experience in the sector. With all the above barriers, few companies would look into entering this industry .

However, there is the threat of companies already existing in the auto industry, entering into the luxury car segment. Many companies, which originally were small and economy car makers, have now entered into the luxury car segment and are giving the bigger and better established giants in this segment a run for their money.

Threat of substitute products
The most prominent substitute to cars is public transports such as buses, taxis and aircrafts. The bigger companies in the premium car segment have taken steps to compete with public transportation by manufacturing luxury buses and providing pick-up service in their premium cars as part of the hospitality sector. The other ... Read More
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