Five forces is a framework for the industry analysis and business strategy development developed by Michael E. Porter of Harvard Business School in 1979. Michael Porter is a professor at Harvard Business School andis a leading authority on competitive strategy and international competitiveness.Michael Porter was born in Ann Arbor, Michigan.
Five forces uses concepts developing, Industrial Organization (IO) economics to derive five forces that determine the competitive intensity and therefore attractiveness of a market. Attractiveness in this context refers to the industry profitability. An "unattractive" industry is one where the combination of forces acts to drive down overall profitability. A very unattractive industry would be one approaching "pure competition".
Five Forces model of Michael Porter is a very elaborate concept for evaluating company's competitive position. Michael Porter provided a framework that models an industry and therefore implicitly alsobusinesses asbeing influenced by five forces.Michael Porter's Five Forces model is often used in strategic planning. Porter's competitive fiveforces model is probably one of the mostcommonly used business strategy tools and has proven its usefulness in numerous situations when exploring strategic management models . Three of Porter's five forces refer to competition from external sources. The remainder are internal threats. It is useful to use Porter's five forces in conjunction with SWOT analysis (Strengths, Weaknesses, Opportunities, and Threats).
A change in any of the forces normally, requires a business unit to re-assess the marketplace given the overall change in industry information. The overall industry attractiveness does not imply that every firm in the industry will return the same profitability. Firms are able to apply their core competencies, business model or network to achieve a profit above the industry average.
Porter's five forces include :
Three forces from 'horizontal' competition
Two forces from 'vertical' competition
Barriers to entry measure how easy or difficult it is for new entrants to enter into the industry. This can involve for example:
Patents, branding, and image also fall into this category.
Every top decision maker has to ask: How easy can our product or service be substituted? The following needs to be analyzed:
If a product can be easily substituted, then it is a threat to the company because it can compete with price only.
In this,we have to analyze the level of competition between existing players in the industry.
Now the question is how strong the position of buyers is. For example,cancustomerswork together to order large volumes to squeeze your profit margins? The following is a list of other examples:
Having a customer that has the leverage to dictate your prices is not a good position.
This relates to what your suppliers can do in relationship with you.
In general, any CEO or a strategic business manager is trying to steer his or her business in a direction where the businesswill develop an edge over rival firms. Michael Porter's model of Five Forcescan be used to better understand the industry context in which the firm operates. Porter's Five Forces model is a strategy tool that is used to analyze attractiveness of an industry structure. Porter's Five Forces modelviews thebusiness fromoutside. It focuses on assessing competitive position within industry .Porter's Five Forces model in the internal view.
The auto manufacturing industry is considered to be highlycapital and labor intensive. The major costs for producing and selling automobiles include:
Labor - While machines and robots are playing a greater role in manufacturing vehicles, there are still substantial labor costs in designing and engineering automobiles.
Advertising Each year automakers spend billions on print and broadcast advertising, furthermore, they spent large amounts of money on market research to anticipate consumer trends and preferences.
The auto market is thought to be made primarily of automakers, but auto parts makes up anotherlucrative sector of the market. The major areas of auto parts manufacturing are:
Original Equipment Manufacturers (OEMs) - The big auto manufacturers do produce some of their own parts, but they can't produce every part and component that goes into a new vehicle. Companies in this industry manufacture everything from door handles to seats.
Replacement Parts Production and Distribution - These are the parts that are replaced after the purchase of a vehicle. Air filters, oil filers and replacement lights are examples of products from this area of the sector.
Rubber Fabrication - This includes everything from tires, hoses, belts, etc.
In auto industry, a large proportion of revenue comes from selling automobiles. The parts market is even more lucrative. For example, a new car might cost $18,000 to buy, but if you bought, from the automaker, all the parts needed to construct that car, it would cost 300-400% more ./p>
A significant portion of an automaker's revenue comes from the services itoffers with the new vehicle. Offering lower financial rates than financial institutions, the car company makes a profit on financing. Extended warranties also factor into the bottom line.
Greater emphasis on leasing has also helped increase revenues. The advantage of leasing is that it eases consumer fears about resale value, and it makes the car sound more affordable. From a maker's perspective, leasing is a great way to hide the true price of the vehicle through financing costs. Car companies, then, are able to push more cars through. Unfortunately, profiting on leasing is not as easy as it sounds. Leasing requires the automakers to accurately judge the value of their vehicles at the end of the lease, otherwise they may actually lose money.
The Indian automobile industry is the tenth largest in the world with an annual production of approximately 2 million units. Indian auto industry, promises to become the major automotive industry in the upcoming years and the industry experts are hopeful that it will touch 10 million units mark. Indian automobile industry is involved in design, development, manufacture, marketing, and sale of motor vehicles. There are a number of global automotive giants that are upbeat about the expansion plans and collaboration with domestic companies to produce automobiles in India.
The major car manufacturers in India are Maruti Udyog, Hyundai Motors India Ltd., General Motors India Pvt. Ltd., Honda Siel Cars India Ltd., Toyota Kirloskar Motor Ltd., Hindustan Motors etc.The two-wheeler manufacturers in India are Honda Motorcycle & Scooter India (Pvt.) Ltd., TVS, Hero Honda, Yamaha, Bajaj, etc. The heavy motors including buses, trucks, auto rickshaws and multi-utility vehicles are manufactured by Tata-Telco, Eicher Motors, Bajaj, Mahindra and Mahindra, etc.
The new chapter in the automobile industry is that of used cars. The massive demand of used cars indicates that cars are becoming increasingly popular. Those who can't afford the luxury cars and their high prices are opting for used cars. In today's time, customers are conscious and diligently investing on car dealership. Car buyers are investing heavily a lot of time for both to sell a car and buy car. There's also a number of car websites that have offering detailed information on new car prices, used cars, car reviews, Chevrolet cars, jaguar cars and luxury cars.
At present major Indian, European, Korean, Japanese automobile companies are holding significant market shares. In commercial vehicle, Tata Motors dominates over 60% of the Indian commercial vehicle market. Tata Motors is the largest medium and heavy commercial vehicle manufacturer.Car manufacturers in India dominate the passenger vehicle market by 79%. Maruti Suzuki is the largest car producer in India and has 52% share in passenger cars and is a complete monopoly in multi purpose vehicles. In utility vehicles Mahindra holds 42% share. Hyundai and Tata Motors is the second and third car producer in India
The automobile Industry in India is now working in terms of the dynamics of an open market. Many joint ventures have been set up in India with foreign collaboration, both technical and financial with leading global manufacturers. Also a very large number of joint ventures have been set up in the auto-components sector and the pace is expected to pick up even further. The Government of India is keen to provide a suitable economic, and business environment conducive to the success of the established and prospective foreign partnership ventures. $5.7 billion is the investment envisaged in the new vehicles projects.
1. Barriers to Entry - It's true that the average person can't come along and start manufacturing automobiles. The emergence of foreign competitors with the capital, required technologies and management skills began to undermine the market share of many automobile companies. Globalization the tendency of world investment and businesses to move from national and domestic markets to a worldwide environment, is a huge factor affecting the auto market. More than ever, itis becoming easier for foreign automakers to enter the Domestic market .Automobiles depend heavily on consumer trends and tastes. While car companies do sell a large proportion of vehicles to businesses and car rental companies (fleet sales), consumer sales is the largest source of revenue. For this reason, taking consumer and business confidence into accountshould be ahigher priority than considering the regular factors like earnings growth anddebt load .
2. Threat of Substitutes - Rather than looking at the threat of someone buying a different car, there is also need to also look at the likelihood of people taking the bus, train or airplane to their destination. The higher the cost of operating a vehicle, the more likely people will seek alternative transportation options. The price of gasoline has a large effect on consumers' decisions to buy vehicles. Trucks and sport utility vehicles have higher profit margins, but they also guzzle gas compared to smaller sedans and light trucks. When determining the availability of substitutes you should also consider time, money, personal preference and convenience in the auto travel industry. Then decide if one car maker poses a big threat as a substitute.
3. Competitive Rivalry - Highly competitive industries generally earn low returns because the cost of competition is high. The auto industry is considered to be an oligopoly (A market condition in which sellers are so few that the actions of any one of them will materially affect price) which helps to minimize the effects of price-based competition. The automakers understand that price-based competition does not necessarily lead to increases in the size of the marketplace, historically they have tried to avoid price-based competition, but more recently the competition has intensified - rebates, preferred financing and long-term warranties have helped to lure in customers, but they also put pressure on the profit margins for vehicle sales. Every year, car companies update their cars. This is a part of normal operations, but there can be a problem when a company decides to significantly change the design of a car. These changes can cause massive delays and glitches, which result in increased costs and slower revenue growth. While a new design may pay off significantly in the long run, it's always a risky proposition
4. Bargaining Power of Suppliers - The automobile supply business is quite fragmented (there are many firms). Many suppliers rely on one or two automakers to buy a majority of their products. If an automaker decided to switch suppliers, it could be devastating to the previous supplier's business. As a result, suppliers are extremely susceptible to the demands and requirements of the automobile manufacturer and hold very little power. For parts suppliers, the life span of an automobile is very important. The longer a car stays operational, thegreater theneed for replacement parts. On the other hand, new parts are lasting longer, which is great for consumers, but is not suchgood news for parts makers. When, for example, most car makers moved from using rolled steel to stainless steel, the change extended the life of parts by several years.
5. Bargaining Power of Buyers -The bargaining power of automakers are unchallenged. Consumers may become dissatisfied with many of the products being offered by certain automakers and began looking for alternatives, namely foreign cars. On the other hand, while consumers are very price sensitive, they don't have much buying power as they never purchase huge volumes of cars.
There is continuing interest in the study of the forces that impact on an organisation, particularly those that can be harnessed to provide competitive advantage. The ideas and models which emerged during the period from 1979 to the mid-1980s were based on the idea that competitive advantage came from the ability to earn a return on investment that was better than the average for the industry sector. As Porter's 5 Forces analysis deals with factors outside an industry that influence the nature of competition within it, the forces inside the industry (microenvironment) that influence the way in which firms compete .
Time and cost of entry - Time is most essential thing while launching a product in any market. The launch of the NANO is quite viable as the demand of the small car is on the rise in the market. By the cost of the entry we mean the initial capital required to set up a new firm is very high, it makes the chances of the chances of new entrants are very less.
Knowledge and Technology - Ideas and Knowledge that provides competitive advantage over others when patented, preventing others from using it and thus creates barrier to entry. The TATA motors have great knowledge/ experience in the automobile industry and has renowned technological advantage because of the recent acquisition and mergers.
Product Differentiation and Cost Advantage - The new product has to be different and attractive to be accepted by the customers. Attractiveness can be measured in the terms of the features , price etc. At this level the price of the NANO car was one thing that is attracting customers. And above all this the image , trust the name TATA carries with it.
Government Policy and Expected Retaliation - Although government's job is to preserve free competitive market, it restricts competition through regulations and restrictions. The government tried to promote the TATA Motors to start a plant by providing land and tax rebates. But the unexpected retaliation by the local people surface in the setting up of the plant which costed the company a lot.
Access to Distribution Channels - When a new product a launched a well developed distribution is must for its success. The TATA motors had a advantage of well established distribution channel across the world.
Price band - The threat that consumer will switch to a substitute product if there has been an increase in price of the product or there has been a decrease in price of the substitute product. If the price of the NANO car will increase the main expected customers ie the one switching from bike to car will not move to car and will remain in the bike only. Thus the price is kept checked in this manner.
Substitutes performance - The performance of the substitute sector will also play a important role in the success of the NANO car. If the price of the Bike segment increases or the price band of the small segment fall , it will have effect on the quantity required in the market. Its just on the price but also the features and the other services associated or it may be the status symbol story. The success of the electric car segment with player like REVA can also effect the demand of the NANO.
Buyers willingness - Products with improving price/performance tradeoffs relative to present industry products. It will determine the willingness of the buyer to but the NANO car.The willingness of the customers to go forward try the new product in the market ie 'NANO'. They might be willing to go for the test products like Maruti 800 , Santro etc.
Number and Diversity of Competitor - This describes the competition between the existing firms in an industry. the current Business Policy & Competitive Strategy scenario, the small car market in India is very competitive with players like Maruti Suzuki, Tata Motors, Hyundai etc. which was pretty much dominated by Maruti. But with launch of Nano the 1 lakh car the whole momentum of the market has shifted. Now to be competitive in market other companies have to either slash rates of their existing model or have to go back to the drawing board and build again.
Price Competition - Advertising battles may increase total industry demand, but may be costly to smaller competitors. Products with similar function limit the prices firms can charge. Price competition often leaves the entire industry worse off. NANO is the only player so it has the price freedom but as the Maruti and Honda are also planning to launch the car in the same segment the price competition will start.
Exit Barriers - Even if the product fails in the market its not that easy for the company to exit the market just like that because of the heavy investment it has made in the initial stage. If the NANO fails or falls flat the TATA motors will not be in a state to slow done the product even when NANO production line can be used by the other products after few modification as for NANO only the new product line were setup and huge cost were incurred.
Product Quality - Increasing consumer warranties or service is very common these days. To maintain low cost, companies consistently has to make manufacturing improvements to keep the business competitive. This requires additional capital expenditure which tends to eat up company's earning. On the other hand if no one else can provide products/ services the way you do you have a monopoly. NANO enjoys the monopoly are there are no competitors in this segment.
Switching Costs - If switching to another product is simple and cheap the customers does not think much before doing it. In case of NANO car the switching cost from bike to car is too high. Thus increasing the demand of the car many fold.
Number of customers/ Volume of sales - If there are few buyers then they are able to dictate the terms. They pull down the cost by Bargaining. The bargaining power of buyer is high as there are lot of choice available to the buyer and the service do not vary from one manufacturer to the other. They force the manufactures to improve the quality. All this can be clearly seen in the case of NANO car the price tag at which it has been offered or the quality of the NANO car no compromises has been done at any front.
Brand Image - The brand image of the TATA and the segment in which the NANO has been the most attractive thing in the entire package.
Number and Size of Suppliers - A company to manufacture its products requires raw material, labor etc. If there are few suppliers providing material essential to make a product then they can set the price high to capture more profit. Powerful suppliers can squeeze industry profitability to great extend. In case of NANO the supplier are limited and the size of the suppliers are big enough to bring about the controlling power in the price of the car. The NANO car has more than 128 suppliers in all and the major portion of the building cost of the car is the parts supplied by the suppliers.
Unique Service / Product - Suppliers' products have few substitutes. Supplier industry is dominated by a few firms. The some parts of the NANO car are obtain from the supplier who them are big enough and limited substitutes are available against them. So the entire production line depends upon them only.
Ability to substitute - Suppliers' products have high switching costs. In many case even when substitute are available its not that easy to opt for substitute as the next product in the assembly line depends upon it. If the change in the any part is brought about the long list of depended parts also have to be changed , which in most cases is not feasible to do.
The internationalisation strategy so far has been to keep local managers in new acquisitions, and to only transplant a couple of senior managers from India into the new market. The benefit is
that Tata has been able to exchange expertise. For example after the Daewoo acquisition the Indian company leaned work discipline and how to get the final product 'right first time.'
The company's passenger car products are based upon 3rd and 4th generation platforms, which put Tata Motors Limited at a disadvantage with competing car manufacturers.
Sustainability and environmentalism could mean extra costs for this low-cost producer. This could impact its underpinning competitive advantage. Obviously, as Tata globalises and buys into other brands this problem could be alleviated.
Economic reforms and deregulation have transformed that scene. India has already become one of the fastest growing automobile markets in the world. The Indian automobile industry is going through a technological change where each firm is engaged in changing its processes and technologies to maintain the competitive advantage and provide customers with the optimized products and services. Starting from the two wheelers, trucks, and tractors to the multi utility vehicles, commercial vehicles and the luxury vehicles, the Indian automobile industry has achieved splendid achievement in the recent years.
In the Indian economy, auto industry maintains a high-flying place. Automobile industry has a strong multiplier effect and is capable of being the driver of economic growth. A sound transportation system plays an essential role in the country's rapid economic and industrial development. The well-developed Indian automotive industry skillfully fulfils this catalytic role by producing a wide variety of vehicles: passenger cars, light, medium and heavy commercial vehicles, multi-utility vehicles such as jeeps, scooters, motorcycles, mopeds, three wheelers, tractors etc.
The automotive sector is one of the core industries of the Indian economy, whose prospect is reflective of the economic resilience of the country. Continuous economic liberalization over the years by the government of India has resulted in making India as one of the prime business destination for many global automotive players. The automotive sector in India is growing at around 18 per cent per annum.
The auto industry is just a multiplier, a driver for employment, for investment, for technology. The Indian automotive industry started its new journey from 1991 with delicensing of the sector and subsequent opening up for 100 per cent FDI through automatic route.The automobile sector has been contributing its share to the shining economic performance of India in the recent years. With the Indian middle class earning higher per capita income, more people are ready to own private vehicles including cars and two-wheelers. Product movements and manned services have boosted in the sales of medium and sized commercial vehicles for passenger and goods transport.
Side by side with fresh vehicle sales growth, the automotive components sector has witnessed big growth. The domestic auto components consumption has crossed rupees 9000 crore and an export of one half size of this figure.
India is on the peak of the Foreign Direct Investment wave. FDI flows into India trebled from $19 billion in 2006-07 and $25 billion in 2007-08. By AT Kearney's FDI Confidence Index 2006, India is the second most attractive FDI destination after China, pushing the US to the third position. It is commonly believed that soon India will catch up with China.
India is up-and-coming a significant manufacturer, especially of electrical and electronic equipment, automobiles and auto-parts . The country is expected to witness over Rs 30,000 crore of investment by 2010.Over the next one year, some 20 new cars will be seen on Indian roads.
Maruti Udyog has set up the second car plant with a manufacturing capacity of 2.5 lakh units per annum for an investment of Rs 6,500 crore (Rs 3,200 crore for diesel engines and Rs 2,718 crore for the car plant itself). Hyundai and Tata Motors have announced plans for investing a similar amount over the next 3 years. Hyundai will bring in more than Rs 3,800 crore to India, Tata Motors will be investing Rs 2,000 crore in its small car project.
General Motors will be investing Rs 100 crore, Ford about Rs 350 crore and Toyota announced modest expansion plans even as Honda Siel has earmarked Rs 3,000 crore over the next decade for India - a sizeable chunk of this should come by 2010 since the company is also looking to enter the lucrative small car segment.
Commercial vehicle segment, Ashok Leyland and Tata Motors have each announced well over Rs 1,000 crore of investment. Mahindra & Mahindra's joint venture with International Trucks is expected to see an infusion of at least Rs 500 crore. Hero Honda is about to establish its fourth manufacturing plant. Bajaj Auto and TVS Motors are moving to the excise-free zones of Himachal Pradesh and Uttaranchal for putting up new capacity.
The growth of the Indian middle class along with the growth of the economy over the past few years has attracted global auto majors to the Indian market. Moreover, India provides trained manpower at competitive costs making India a favoured global manufacturing hub. The attractiveness of the Indian markets on one hand and the stagnation of the auto sector in markets such as Europe, US and Japan on the other have resulted in shifting of new capacities and flow of capital to the Indian automobile industry.
Global auto majors such as Japanese auto majors Suzuki, Honda and Korean car giant Hyundai are increasingly banking on their Indian operations to add weight to their businesses, even as numbers stay uncertain in developed markets due to economic recession and slowdown.
Moreover, according to a study released by global consultancy firm Deloitte, at least one Indian company will be among the top six carmakers that would dominate the global auto industry by 2020. According to the study, the car industry would see a massive capacity building in low-cost locations like India as manufacturers shift base from developed regions.
Although the sector was hit by economic slowdown, overall production (passenger vehicles, commercial vehicles, two wheelers and three wheelers) increased from 10.85 million vehicles in 2007-08 to 11.17 million vehicles in 2008-09. Passenger vehicles increased marginally from 1.77 million to 1.83 million while two-wheelers increased from 8.02 million to 8.41 million.
In recent times, India has emerged as one of the favourite investment destinations for automotive manufacturers.
According to figures released by the Society of Indian Automobile Manufacturers (SIAM), domestic passenger car sales have increased 32.28 per cent to reach 145,905 units in January 2010 from 110,300 units in the same month last year. Across all categories, total sale of vehicles increased 44.94 per cent to 1,114,157 units in January 2010, against 768,698 units in the January 2009.
The Indian auto industry is likely to see a growth of 10-12 per cent in sales in 2010, according to a report by the global rating firm, Fitch. According to its report, Indian Auto Sector Outlook, competition in the country's auto sector is likely to increase due to increasing penetration of global original equipment manufacturers (OEM).
The average person can't come along and start manufacturing automobiles. The emergence of foreign competitors with the capital, required technologies and management skills began to undermine the market share of many automobile companies.Rather than looking at the threat of someone buying a different car, there is also need to also look at the likelihood of people taking the bus, train or airplane to their destination. The auto industry is considered to be an oligopoly. Many suppliers rely on one or two automakers to buy a majority of their products. If an automaker decided to switch suppliers, it could be devastating to the previous supplier's business. The bargaining power of automakers are unchallenged. Consumers are very price sensitive, they don't have much buying power as they never purchase huge volumes of cars
Indian automobile industry has achieved splendid achievement in the recent years. India is on the peak of the Foreign Direct Investment. The attractiveness of the Indian markets on one hand and the stagnation of the auto sector in markets such as Europe, US and Japan on the other have resulted in shifting of new capacities and flow of capital to the Indian automobile industry. India is a significant manufacturer of automobiles and auto-parts. Global auto majors such as Japanese auto majors Suzuki, Honda and Korean car giant Hyundai are increasingly banking on their Indian operations to add weight to their businesses .The car industry would see a massive capacity building in low-cost locations like India as manufacturers shift base from developed regions. Although the sector was hit by economic slowdown but it doesn't effect the overall production of automobiles. In recent times, India has emerged as one of the favourite investment destinations for automotive manufacturers. The Indian auto industry is likely to see a growth of 10-12 per cent in sales in 2010.Competition in the country's auto sector is likely to increase due to increasing penetration of global original equipment manufacturers
Source: ChinaStones - http://china-stones.info/free-essays/business/porters-five-forces-model.php