Introduction
The automobile industry is a major contributor to the economy of the United States. The industry requires diversified supply of raw materials from different parts of the world (Zino, 2010, p. 1). Technological advancements have been of great importance in the automobile industry, because they have helped promote the introduction of new models and contribute to the differentiation of the existing ones.
The global economic recession that was experienced in 2007-2009 adversely affected the automobile industry, because it leads to China overtaking the United States in terms of sales growth (Organization for Economic Co-operation and Development, 2010, p. 11). The main players in the automobile industry in the United States are Ford Motors, General Motors Company, Chrysler, Toyota and Honda (Carfreaks, 2010, p. 1).
Dominant Economic Characteristics of the Industry
There are many customers for automobile products in the global markets, which makes this industry very attractive to many investors. Customers in this industry include individuals, organizations and governments. There is an increasing need for automobile products in the world, especially with the increases in urbanization, industrialization and civilization.
It is notable that the automobile industry has been very profitable, which is another reason that has attracted many investors. Because the cost of raw materials for manufacturing cars is very high, companies in this industry focus on economies of scale. As such, manufacturing many products gives profits to the existing companies in the market.
Barriers of entry to the automobile industry include high capital requirements and legal restrictions. In addition, establishing a good product image in the global markets is important, and this requires operating in the market for many years. New companies find it difficult to overcome stiff competition in the market, because the existing companies have built a strong customer loyalty and brand image for their products.
The learning curve effect explains the causes of this dominance by the existing companies in the industry, because new companies require a lot of time to learn the market trends and establish a solid background about the existing customers (Feenstra, 1989, p. 103). Most of the existing companies in the US automobile industry have established a strong foundation about their position, making it very hard for new firms to penetrate the market.
The pace of technological change is increasing and new technologies are being developed to reduce cost of production and produce better products. It is important to note that new car models are continuously being invented, because most of adoption of innovative technologies by many existing automobile companies.
Efficient and effective manufacturing processes are also continuously being developed, which is reducing the cost of production and minimizing losses (House of Representatives, 2002, p. 29). An example of this is Lean manufacturing, which is a process of innovation that is being adopted by companies in the automobile industry, that are aimed at reducing the losses incurred in production, while improving efficiency in production (Fukuyama, Shulsky, United States Army, and Center, 1997, 24).
Five Forces Model based Industry Analysis
Threat of new entrants
Threats of new firms entering the market are low, because there are many barriers of entry. The initial costs of establishing an automobile company are very high, and they restrict many investors from entering the industry. The existing companies in the industry have established a good product image in the international market, which makes it almost impossible for new companies to enter the industry.
Because the automobile industry requires companies to sell products to many customers all over the world, creating a good product image takes time. Customers in the global markets have become loyal to certain products which they have known for many years, and this hinders new firms from entering the market (Carfreaks, 2010, p. 1).
New companies also find it difficult to work with the existing channels of distribution, which is another major barrier of entry into this industry. These barriers to entry, help the current companies within the industry, because it reduces the possibility of more competition, and increases their potential profitability.
Bargaining Power of the Buyers
Buyers in the industry have a low level of bargaining power. In the United States there are a small amount of companies manufacturing cars that are supplying to the larger amounts of customers in the market.
As such, the customers have no control over the activities of these companies, because they cannot manufacture cars themselves (Carfreaks, 2010, p. 1). Many customers purchase in small units, and there is no single buyer with exclusive control over the industry. The industry experiences intense product differentiation hence, there are a variety of products in this industry, giving the customer even less power.
Products in the automobile industry are not standardized, because different car models are manufactured by different companies and are appealing to different buyers. Customers can purchase from several sellers and the cost of switching from one brand to another is minimal. Although the cost of switching is minimized for the customer, the profit the company retains by holding the power of the pricing of their automobiles is another reason that it is an appealing industry.
Bargaining Power of the Suppliers
The bargaining power of suppliers is average . Suppliers in the industry cannot make cars, and this limits their control over the automobile companies in the market. In fact, suppliers in this industry have total reliance on the automobile companies. Raw materials required to manufacture automobile products are sold in packages, and there is no particular supplier who can supply many materials to an extent that they can control the decisions made by the automobile companies in the industry.
There few suppliers to these companies, which provides them with some power to control car manufacturers (Carfreaks, 2010, p. 1). The suppliers also have to keep up with new entrants into their industry, which can cause their prices to fluctuate. If many suppliers are available, the car companies in the industry have more power to get a lower price. But if there are few, the suppliers hold more power because they know there are few competitors that these companies can turn to.
Threat of Substitute Products
The industry encounters a major threat from substitute products, because there are many substitutes in the foreign market. Customers in the United States also have the opportunity to buy cars from other companies around the world, and the costs involved when switching from the US-made cars to foreign cars are small.
This provides them with the opportunity to purchase cars from the dealers with the possibility of more appealing products and/or prices. Another factor that threatens the market, is that there are other means of transportation like trains, bicycles, and air transport (Carfreaks, 2010, p. 1).
All of these substitutes are easily and readily available to customers, which can make it harder to gain and retain buyers. The companies within the industry have to make an impression with potential buyers, as to why they should buy American made cars. An example of this can be seen in the advertising of US car companies, which relate buying an American-made car to being patriotic.
Competitive rivalry between incumbent firms
Rivalry among competitors is very high, because the industry is not a monopoly and opportunities to differentiate products are minimal. Rivalry among companies in this industry is high, because there are minimal opportunities of differentiating products or introducing new products in the market (Carfreaks, 2010, p. 1).
The major automobile company in the industry is General Motors, but other companies still compete for market share in the United States and in other foreign markets. Intense rivalry and competition in the industry has caused poor performance for companies such as Chrysler and Ford, which lead to the of the federal government to help stop them from closing (Axson, 2010, p. 127).
There are dealerships for all US companies located in all areas of the country. It is extremely easy for a buyer to browse easily at multiple domestic companies, especially when most dealerships are usually located in the same areas as one another. Companies must come up with ways to differentiate themselves from domestic competitors, which is usually done through technology, brand association, and even pricing.
Conclusion
From the above analysis, it is observed that there are many challenges and rewards in the automobile industry in the United States. There are many barriers of entry which can make investors hesitant, but the amount of profits that existing companies are making can be very appealing.
Rivalry among existing companies in the industry is very high, and there exists many substitutes, which can make it difficult to be profitable. The bargaining power of the buyers is low while the bargaining power of suppliers is moderate, both of which show that the companies within the industry hold almost all of the power.
If one has the large amounts of capital required, and can successfully enter the market, and keep up with advances in automobiles, they have the chance to be very profitable. It would not be an easy or fast transition, because there would be a lot of learning involved with starting out in the industry. In the end, the barriers to the market, as well as high competition between rivals, make it even less attractive.
Works Cited
Axson, David A. J. Best Practices in Planning and Performance Management: Radically Rethinking Management for a Volatile World. John Wiley and Sons, 2010. ISBN 0470539798, 9780470539798.
Carfreaks. Porter’s Five Forces Analysis – GM. 16 March, 2009. Web.
Feenstra, Robert C. Trade policies for international competitiveness. University of Chicago Press, 1989. ISBN 0226239497, 9780226239491.
Fukuyama, F., Shulsky, Abram N., United States. Army, and Center, Arroyo. The “virtual corporation” and army organization. Rand Corporation, 1997. ISBN 0833025325, 9780833025326.
House of Representatives. Proceedings and debates of the 107th congress second session, Congressional Record, March 11, 2002; Vol. 148, part 3.
Organization for Economic Co-operation and Development. Trends in the Transport Sector 2010. OECD Publishing, 2010. ISBN 9282102718, 9789282102718
Zino, K.U.S. Automobile Industry Makes $500 Billion Dollar Contribution to the Economy. TheDetroitbureau. Apr.22, 2010