The Porters Five Force Analysis, Rivalry between Suppliers - Research Paper Example

The Porter's Five Force Analysis, initially propounded by Michael Porter, is a strategic framework applied to analyze an industry. Rivalry between suppliers 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. As a premium brand, the most important factors that drive competition are advanced technology, products, and premium service. Constant investment in better technology is imperative so as to ensure product improvement, differentiate between products and achieve efficiency through economies of scale. 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. Bargaining power of buyers 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 substitutes are the more conventional modes of transport such as walking and bicycling. Though this is not a direct substitute to the luxury car segment, they threaten the car industry as a whole by providing as the most eco-friendly means of transport. With the world becoming increasingly eco-friendly and consumers becoming more aware of the threats of CO2 emissions and global warming, there could be a switch in the future to more ecological means of transport. PEST Analysis of an industry studies the environmental factors that influence the companies operating in that industry. Political Factors There is a shift in the market for cars with the emergence of developing countries as major consumers and competitive producers. With the rapid economic growth in countries like China and India, large car companies now have to compete with more cost- efficient and smaller cars manufactured in Asian countries. The open market policies in many countries have led to mergers and acquisitions, inviting more FDI into the smaller countries. There is also encouragement of competition among companies, leading to better quality products and services. Another challenge for the auto industry is the increasing ecological awareness of consumers in matters of environmental issues such as CO2 emissions and global warming. Economic Factors Marketing strategies have evolved from a supply-push philosophy to focus on diversified segments, more geographical reach, developing markets and better customer service. Companies are now promoting safety and security investment opportunities such as financing & insurance for better customer satisfaction. Manufacturers have realized the potential of Asian and other developing markets and the need to tap these markets. Increasing price of oil and other raw materials are another challenge to be faced by the auto makers. The challenge would be in balancing price and increasing cost of production. Social Factors The crux of selling premium cars has now shifted to building better customer relationships through improved customer-oriented services. Products are taken to the customers and desires created instead of waiting for them to approach the companies. There is also better purchase access thanks to more distribution channels and better geographical reach of these companies. Families with more working members have increased spending money of the population considerably over the past years. Focus has also shifted to individuality and catering to personal and specific needs. Companies now study a new market and get a general idea about their culture so as to manufacture cars that fit their socio-cultural needs. . Technological Factors Customers today have the advantage of choosing low-cost cars with superior features. It is up to the car makers to constantly invest in technology so as to provide a perfect blend between innovation and economies of scale. The dramatic growth and power of internet technology have greatly reduced the cost and increased the accessibility of obtaining information on features, price and availability. Many of the important auto industry innovators are developing Web-based services, leading some to predict that the most important automotive company of the next century will be a software-based company. The internet offers new and better ways to perform many sales and marketing functions and makes it possible for manufacturers to have more and richer two-way communications directly with consumers. It has also provided a national and even international market for the premium car segment. Strengths Mercedes Benz is acknowledged as the best quality driven cars ever to hit the market. The merger of Daimler with Chrysler in 1998 allowed both companies to strengthen their position in each other's markets. While Daimler's Mercedes brand rules the luxury car segment, Chrysler is a winner with a huge variety of cars; both holding their numero position with quality and constant innovation. Weaknesses Even though Chrysler has an enormous reach onto various car segments, they are priced higher than most competitors within the segment. There is shift in production to developing countries to take advantage of economies of scale and this has led to corporate cultural conflicts. Opportunities Mercedes holds a huge value in the developing countries like China and India due to the aura it has maintained with superior quality and early entry. Customer-oriented sales and launch of new products under the successful brand of Mercedes will heighten the market value of the company. Threats Competition will be the main threat faced by DaimlerChrysler with more and more companies producing cost-efficient and better priced cars. Increasing costs of oil and raw materials are other threats to be faced by the auto giant. Strengths BMW Group is one of the most successful multi-brand premium car manufacturers in the automobile industry. BMW is the only automobile manufacturer possessing three non-overlapping premium car brands in its portfolio. Their keen focus on research and development is evidenced by the number of new models they bring into the market. Weaknesses The profitability of the company may be at stake in the long run due to its high cost in production and more and more competitors shifting manufacturing bases to developing countries. BMW might be forced to negotiate a balance between maintaining cost competitiveness and its reputation for excellence in engineering. Opportunities The expansion of the EU has given BMW ample opportunities to cash in on its strong European position on the premium car segment and garner more market share across new and expanding markets. Its early foray into the Chinese market has increased the company's earnings as well as secured a profitable future in the fastest developing economy of the world. Threats The continuing decline of Dollar against the Euro threatens to undercut the profitability of BMW in the long run. The rising price of raw materials such as steel threatens to offset the company's earnings. Critical Success Factors Greater geographical reach, superior quality and new models being released at regular intervals have put DaimlerChrysler in a niche of its own. With Daimler's reputation and Chrysler's wide product range, the company has definitely cashed in on their merger since 1999. Besides the potential market opportunities, the merger also presented significant potential for cost reductions and increased profitability. DaimlerChrysler's vision and foresight has led the company to expand into the high potential Asian markets at a very early stage. The company profited considerably from mergers and acquisitions with Asian manufacturers with their superior technology in manufacturing smaller cost- and fuel-efficient cars. All in all, the company's strength lies in its superior engineering and product innovation. BMW on the other hand, has established itself as the driver's car, with its Rolls-Royce phantom holding the number one position in the super-luxury car segment. The company invests a great deal of its revenues in research and development and releases and number of new and fresh models that capture the market. They are pioneers in car manufacturing and have therefore held the respectable position of being the best providers of quality and superior engineering. Even though their manufacturing base is mostly restricted to Germany, they now have better geographical reach through improved distribution channels. Both the companies are the pinnacle of what is popularly known as "German engineering" with their superior technology and indisputable quality. Read More