• An analysis was carried out to assess the industry attractiveness of the automobile industry using Porters Five Forces; as well as further analysis on the competitive pressures on Ford that have arisen due to the digitalization of the industry.
• Five Forces analysis concluded that the industry is unattractive to potential entrants due to the maturity of the market, which includes factors such as high entry and exit barriers.
• Digitalization and tech firm's emergence in the market is a significant threat for Ford and other major competitors.
• Ford needs to focus on a tech-driven overhaul of its business model and potentially partner with an established tech firm to fill their technological gap.
TABLE OF CONTENTS
Executive summary 2
Industry Analysis 5-8
Competitive pressures 9
Works Cited 11
The Ford Motor company spearheaded the automobile industry's boom in the early 1900s and has been a major player ever since. The company survived The Great Depression and is the only one out of ‘The Big 3' in the U.S that survived the Great Recession in 2009 without needing a government bailout; unlike General Motors and Fiat Chrysler who were both forced into liquidation. Since the recession has passed, Ford and the industry as a whole has been flourishing; innovation is at the forefront with technologies that make cars both safer and easier to drive but we're also seeing an increased introduction of ‘zero emission' electric cars that stack up to their combustion engine counterpart and the promise that fully autonomous vehicles are just around the corner. We are also seeing increasing pressures from Governments to fast-track the popularity of electric cars with stringent regulations and increases in taxes for those produce or use cars that have high emissions. This is strong-arming consumers to be more conscious of their carbon footprint and leading to an increase in the popularity of electric cars and other forms of transport. This has increased the threat of new entrants such as Tesla, who exclusively produce ‘zero emission' vehicles and have a reputation being one of the most innovating companies in the industry. How significant is this threat to an industry veteran like Ford who has proved to be resilient in the past and how can they ensure they maintain its market position in this new day and age of automobiles? The following analysis focuses on the attractiveness of the automobile industry today, the threat posed by new entrants and the strategies Ford can implement to maintain their competitive advantage and position in the industry.
Since the 20th century, the automobile industry has always been at the forefront of the global economy, with a 1% growth in the automobile industry causing a GDP growth of 1.5% in developed countries (Saberi, 2018). It creates millions of jobs and uses massive amounts of inputs (half the world's consumption of oil and rubber is from the automobile industry alone) which also strengthens the related industries. It is clear that this is a very profitable industry for the current market shareholders, with Ford generating $145.7 billion in revenue worldwide at the end of 2017 (Ford, 2017) alone, but how attractive is it to a new entrant? By using Porters Five Forces analysis, we discuss the bargaining power of suppliers and buyers, the threat of substitutes and new entrants, as well as the rivalry amongst firms. we will be able to determine how attractive the automobile industry is for a new entrant and how likely it is for them to enter the industry depending on the strength of these forces.
Five Forces analysis
Looking at figure 1 below, which represents the percentage of worldwide sales by the manufacturer in 2017, we can see that the global automobile industry is dominated by few manufacturers that combined; make up over 76% of global sales, with the top three players accounting for 34% of total sales. From this, we can see that the industry is oligopolistic and highly concentrated.
Competitors differentiation is moderate, established players have similar cost structures and marketing techniques. However, firms are competing on several different factors such as price, design, technology, and quality. If a firm stops improving and innovating, it will fail very quickly. Switching costs are low as when a consumer is in the market for a new car nothing is stopping the consumer from switching to a different brand, this reinforces the point that if firms don't keep improving their products, consumers will quickly switch to a different brand; increasing rivalry between players.
The rivalry has also become more intense because of the globalization of car manufactures. Exports of automotive products grew from $319 billion in 1990 to $1.18 trillion in 2007 (SOCCO, 2017). This allows car manufacturers to capitalize on lower manufacturing costs of auto parts by manufacturing in developing countries, send parts to another country for assembly and sell the finished car in any nations market. Usually, a firm will have identical factories around the world with the same cost structure, allowing them to localize their product mix to suit each region (Schifferes, 2007). As we can see in Figure 2 below, regions are outproducing their local sales (bar N.Ameica which has a very high import rate, due to production being moved to cheaper Mexico by big firms) with Southeast Asia producing nearly 9 million more cars than are being sold in the region, implying a high export rate from these regions. This greatly increases rivalry, as only the most competitive firms will be able to survive in globally competitive markets.
The industry also has very high exit barriers due to the vast infrastructure needed that comes with high sunk costs, which is what makes the industry so hard to exit. This was a reality for Ford when they had to pay $750 million in severance costs to shut down its plant in Genk, Belgium (Kallstrom, 2015). These factors intensify rivalry even further.
Overall., all these factors make the competitive rivalry a very strong force in the automobile industry.
The threat of entry:
This threat is generally low in the industry and explains why there is such a high concentration of competitors that was discussed previously. The industry has very high entry barriers. Economics of scale plays a major part in this, established players have a vast infrastructure, access to suppliers and technology, while running on very lean cost structures to maintain low costs, which would be very hard for a new player to reproduce without a large upfront cost. Even if a new player is able to set up the infrastructure to compete with the incumbent firms in the market, the brand recognition the established firms have worldwide would be very hard to overcome; as for most people, a car is a high-value purchase they usually wouldn't risk making with a newly established firm. If a new firm, however, can overcome all these disadvantages and provide a new and innovated product it is possible to enter the market (A very good example being Tesla Motors). The threat, therefore, does exist but is a weak force overall.
The buyer power of a single individual may not be that strong, the price of a new vehicle is rarely reduced greatly for a bargaining customer. However, when it comes to governments and corporations who are buying fleets of vehicles, then their bargaining power will be stronger; as firms will want to keep selling their vehicles in bulk to these consumers. Furthermore, there's perfect information in the market and switching costs are low. A consumer can easily see what other firms have to offer and can switch to them easily when purchasing a new car. Some brands may rely on customer loyalty, however, customers are very price sensitive, so if the price of a firm's product is too high or the quality is low, consumers will switch. The collective buyer power is therefore strong, meaning firms have to do their best to satisfy their customers fully while maintaining profits.
Manufacturers rely on many different suppliers to assemble a car. Everything from steel to LCD screens needs to be outsourced by manufactures. In recent times manufacturers have been relying more and more on suppliers. As you can see in figure 3 below, suppliers are adding around 24% more value in 2015 than they were in 1985, this may be due to increased technology in cars that require specialized suppliers.
However, even though manufactures might be relying on suppliers more, this doesn't necessarily mean suppliers are gaining much bargaining power in return. This mainly due to the vast number of suppliers available to manufactures as well as each supplier not making up a significant proportion of the manufacture's total costs. In the case with Ford, they have around 124 suppliers (Levine, 2018), each of them making up a small proportion of fords supply chain. Not only this but the main materials used in the manufacturing process, such as steel; is very abundant and cheap to source. Big firms could even decide to vertically integrate if they believe manufacturers are eating up too much of their profits. This results in the suppliers having a very limited amount of power unless they are creating a sought-after technological component that not many other suppliers can produce, which isn't the vast majority.
The threat of substitutes:
As the automobile industry is in the transportation business, there are many other substitutes consumers can use to get them from point A to point B. Consumers have all the options ranging from a walking to taxi services to private cars and everything in-between. With there being such vast presence of substitute, you may be led to assume they cause a big threat to the automobile industry. That is only partly true, as it mainly does depend on where the consumer is living. In a busy city such as central London, owning a car may seem like more of a hassle than a luxury, due to limited parking, strict congestion charges, and busy roads; so, you may be more inclined to travel by public transport or taxi service. In fact, taxi services such as Über which has around 3.5 million users within London alone (Iqbal, 2018). However, if you live outside of a city, the convenience of a car is second to none. Also, many people see owning a car as a status symbol and a luxury, so would go out their way to purchase and use a car, even if other methods of transport may be cheaper or more convenient. In recent times, however, there has been a push on improving human health and climate change, this may drive more people towards things like public transport or walking (if possible) but the factors such as the luxury and convince of a car still dominate. The threat of substitutes, therefore, is a weak force.
Competitive rivalry is high due to high exit barriers, making it very costly to exit the industry. Lack of diversification also increases the competitive pressure.
Buyer power is strong due to low switching costs and price sensitivity of customers
The threat of Entry is low due to high entry barriers and expensive sunk costs. As well as the brand loyalty of incumbent firms make it difficult to gain market share
Supplier power is weak. The high number of suppliers and the relative ease of sourcing the majority of parts means the bargaining power for the majority of suppliers is low.
There is a vast number of substitutes available, however, none provide the convenience and status symbol of a car. Making the threat of substitutes low
The industry clearly shows signs of one at maturity, profits are high, and costs are low. The industry wouldn't be an attractive industry to the majority of new entrants.
How new technologies are changing the competitive pressures of the industry:
Electric cars have for a long time been the future of the automobile industry, high taxation on high emission vehicles, subsidies for electric cars and the increasing ethical concern of climate change are just a few of the reasons why. Not only has the focus shifted onto electric cars but cars that provide most of their value through software that provides digital utility.
The digital transformation of the industry has forced competitors to focus on technological advancements and to start spending more than ever in research and development to keep up.
The transformation has allowed non-traditional, technology-based firms such as Google, Apple, and Amazon to enter at various points along the automotive value chain (Mitchell, 2016). As consumers are starting to expect the same digital utility from their cars as they do from their other digital devices, which would only be met with advanced software implementation into vehicles and firms already proficient in manufacturing digital products are taking advantage. This is putting more pressure on the tradition manufactures to meet this expectation when they have been used to producing hardware rather than software. This change in consumer demand has put traditional players at a big disadvantage compared to technology-centric companies.
Autonomous vehicles which again rely heavily on software, are a very real threat to the industry. However, this may be a while in the future as it could take years for the idea of a computer driving your car would first have to accepted by consumers as well as the government. The introduction of AV will also provide an opportunity for on-demand mobility services like Über to have a fleet of such vehicles that could provide even faster and more efficient form of travel to consumers, leading them away from owning a private vehicle.
The automobile industry from a Porters Five Forces viewpoint is not attractive, the industry is in maturity and the chance for new players to make a substantial profit is slim. However, the digitalization of the industry has allowed new players such as Tesla to overcome the industry Entry barriers due to their smart strategy and innovative products. The digital revolution of the industry poses a significant threat to Ford and other big players in the industry if they do not adapt and keep up with the change in the industry.
Strategies Ford can implement to sustain their competitive position:
Ford is well aware of the threat from the digital revolution of the automobile industry, we can see this from the huge increase in investment in figure 4. They are already focusing on designing more electric cars to compete with companies like Tesla. However, for Ford to maintain their market share in the industry they must shift from traditional production and design models to deal with emerging tech trends.
I recommend Ford either forms partnerships with tech firms such as Google, that can provide the software and technology advancements needed to keep up with changing an industry. Alternatively, Ford can forgo having to rely on a tech giant for the survival of the company by investing even more heavily into R&D, while being efficient and seeking out and forming close relationships with suppliers of tech equipment. This will require a change from the traditional business model that Ford must be willing to make to maintain a competitive advantage.
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