Abstract
Porter presented a model to analyze strategic and market positions by five aspects: customer bargaining power, supplier bargaining power, the threat of new entries, the threat of substitutes, and competitive rivalry. It is used to evaluate the auto industry in the United States. This field started to develop in the 20th century, when Ford and General Motors became the first major manufacturers. Ford patented the mass production process, while GM occupied a free market niche by increasing a variety of products. The assessment of these processes alongside the current situation is performed by considering the factors per Porter’s framework. They demonstrated the increased customer base significantly affecting the prices and quality of products, the rise in the number of suppliers, and the subsequent reduction in production costs. Meanwhile, the identified threat is the introduction of new products and manufacturers. At present, Tesla is a signal to the opportunity for emerging enterprises to compete with existing companies.
Introduction to the Auto Industry
Industry Definition
The automotive industry encompasses all organizations and activities related to manufacturing automobiles, including engines, bodies, and other components. This field primarily focuses on personal or passenger vehicles, such as saloon cars, SUVs, pickup trucks, vans, sports cars, and buses (Sturgeon et al., 2008). The manufacturers also produce commercial vehicles, including delivery trucks and large vehicles, for industrial purposes (Sturgeon et al., 2008). The auto industry comprises automobiles propelled by internal combustion engines which use fossil fuels. However, in the past couple of years, there have been improvements in technology due to clean energy giving rise to electric cars.
The auto industry in the US picked up during the first half 20th century after its adoption from Europe. At the time, American companies developed mass-production techniques to dominate the world market (Sturgeon et al., 2008). Meanwhile, electric and steam engine cars did not last due to the former’s battery capacity limitations and expensive maintenance (Sturgeon et al., 2008). Gasoline vehicles began to rise and contributed to Ford’s popularity as the most prominent manufacturer using mass production technology (Sturgeon et al., 2008). However, Ford decided to make quality cars with little to no alterations, which created a market gap for customized cars. General Motors occupied this niche by producing various vehicles for individuals (Sturgeon et al., 2008). The activity of GM and Ford on the market laid the basis for other companies’ emergence, but they remain the US’s biggest manufacturers.
Industry Profile
The auto industry faced a downward trend during the 2008 recession due to decreased economic activities, making it hard for individuals to buy cars. The sale of new vehicles dropped dramatically, and the field was likely to collapse (Sturgeon et al., 2008). However, the scope of aftermarket services increased because of the growing need to repair used cars (Sturgeon et al., 2008). Meanwhile, the manufacturing process was becoming more complex with the advancement in technology. This factor resulted in is an increase in hybrid and electric cars (Sturgeon et al., 2008). The most significant shift to this type of vehicle in the market was visible in the rise of Tesla (Teece, 2018). This company is a big manufacturer in the US focusing on electric cars and self-driving technology, thereby filling the market gap.
Demographic factors also influence the situation in the auto industry. Thus, young people are buying more cars than the older generation. The number of cars on American roads is still increasing, with over 250 million cars currently registered, and their average age is currently about twelve years (Sturgeon et al., 2008). However, there is no guarantee that this trend will continue since their lifestyle is gradually changing. The growing attractiveness of ride-sharing services is taking over the previously existing tendency to own cars. In the auto industry, platforms, such as Uber and Lyft, increase convenience due to their availability (Yun et al., 2020). Driving is becoming less important as people find their offers more advantageous. It means that the global shift in customers’ preferences is likely to happen, but the manufacturers have enough time to readjust to new business conditions.
Industry Market Structure
The US auto industry was primarily dominated by four organizations: Ford, Chrysler, General Motors, and Toyota (Sturgeon et al., 2008). Ford is one of the founding companies in the mass generation of cars, which maintained its foothold in the field. Since the industry’s emergence in America, General Motors and Ford were viewed as historical founders and dominant forces. The structure of their operation market is an oligopoly characterized by a few companies’ control (Porter, 1980). In recent years, Tesla has joined this group of manufacturers in dominating the American marketplace (Teece, 2018). It came in with a new product, fully electric cars, thus offering consumers more options and freedom.
The four previous market forces controlled the industry by dictating prices when releasing brands and models. It was performed following other companies’ reactions and formed an interdependence among them (Porter, 1980). Their presence and ability to adjust to numerous changes direct the actions of other competitors trying to enter the market. Thus, GM leads in distribution, making it a very efficient and reliable force, which complicates providing similar options by new enterprises (Sturgeon et al., 2008). Moreover, they continuously release cars with slight variations in engine power or design, and their pricing is very competitive, which adds to the difficulties of new manufacturers on the market (Sturgeon et al., 2008). Tesla managed to beat these strategies by introducing their innovative products but did it at a cost; that is, the company was not profitable for a long time (Teece, 2018). Therefore, the situation in the industry, which seemed relatively stable in the past, has started to change.
Future Outlook
The auto industry’s future will be the production of electric cars, as follows from the rise of Tesla. In the last couple of years, it became the biggest car manufacturer in the US. At present, Tesla is the leading distributor of vehicles in the country, having manufactured over 500,000 units in 2020 (Teece, 2018). In that year, the auto industry faced a dip due to the coronavirus pandemic, which led to lockdowns in many manufacturing facilities and slow paces of operations (Sturgeon et al., 2008). The worsening of individuals’ economic status due to the loss of jobs resulted in fewer purchases of cars. Nevertheless, Tesla was not affected by this market slump as they surpassed their projection of sales (Teece, 2018). This upward trend of the company proves that the industry’s future is the production of electric vehicles.
Other major manufacturers also have begun moving towards eco-friendly vehicles. Hence, GM, Ford, and Toyota pioneered hybrid cars’ production to enter this market segment (Teece, 2018). Their vehicles use electrical and petroleum products and address the challenge of battery power in electric cars alongside the lack of charging stations (Sturgeon et al., 2008). However, their electric cars need a larger battery capacity to knock out petroleum-based vehicles from the market. Currently, Tesla’s offers have the most extended battery capacity and a vast network of fast charging points across the country (Teece, 2018). In the long run, opening new stations will increase the viability of their electric cars in the market.
Porter’s Five Forces Strategy Analysis as it Applies to the US Auto Industry
Michael Porter developed a strategic and competitive analysis model, which can be used to assess the competitive strengths and the strategic position of businesses. This framework proposes five forces, which define the attractiveness and the competitive position of companies in the market. The indicators proposed by Porter include the bargaining power of buyers, the bargaining power of suppliers, competitive rivalry in the market, the threat of new entrants, and the threat of substitutes (Porter, 1979). They affect enterprises’ ability to manufacture products, satisfy their customers, and make profits to continue operating.
Bargaining Power of Buyers
The bargaining power of buyers represents their ability to dictate and drive down commodities’ prices (Porter, 1979). It also determines their chances to affect the designs of companies’ products depending on their needs. This indicator correlates with the number of clients of enterprises and the amount of money these manufacturers have to spend for attracting new buyers (Sturgeon et al., 2008). The specified factors explain customers’ greater power in this area compared to businesses.
The US auto industry is a large market with over 250 million registered car owners (Sturgeon et al., 2008). This number is significant as it means that every person over sixteen has a car. The field has few manufacturers and distributors of automobiles with four traditional dominant forces, Ford, GM, Chrysler, Toyota, and one rising force, Tesla. These enterprises offer customers different options in terms of prices, models, and designs. This variety provides people with bargaining power, which is more significant than the one of individual brands because of the availability of choices within the same category of cars (Porter, 1979). These companies produce similar vehicles with slight variations, which means that buyers can compare them and select the most suitable offers.
At the same time, Tesla is rising as a monopoly in the electric car market due to its impressive battery power technology, increasing its number of customers. Currently, they do not have significant bargaining power over the manufacturer due to the lack of a variety of cars (Teece, 2018). Tesla can thus dictate prices, quality, and design of vehicles in the absence of strong competitors (Porter, 1985). In this way, the introduction of Tesla created new offers for customers while giving them limited bargaining power in this market segment.
Bargaining Power of Suppliers
Suppliers have a significant impact on the operations of US car manufacturers. The production prices, such as raw material, labor costs, components, and other services, which they establish, influence the products’ final costs (Porter, 1979). The presence of numerous suppliers of various components allows businesses to choose the optimal partners to reduce expenses. The existence of fewer suppliers of different products and services increases production costs because they can dictate the prices in this case (Sturgeon et al., 2008). In turn, the auto industry depends on different components for their offers, including engines, tires, transmission systems, and skilled labor (Teece, 2018). The manufacturers also have varying requirements, whereas companies like Ford and Toyota produce most parts for their cars (Sturgeon et al., 2008). GM being a manufacturer and distributor, requires numerous outside services and thus sources its components from various suppliers.
The significant providers in the auto industry are tire companies. There are many tire manufacturers in the US, but four of them own the most important market share. They are Goodyear, Michelin, Cooper, and Bridgestone, and their limited number in such an essential product restricts the competition in prices affecting vehicles’ production (Porter, 1979). Moreover, the car industry is automated, which reduces the dependence on human labor and thereby lowers costs and contributes to predictability. Automation makes companies limit independent from workers, which diminishes suppliers’ influence on the industry (Porter, 1985). The ongoing transition to electric cars implies the introduction of suppliers of electrical parts and battery packs. Due to the niche of battery technology on the market, the suppliers have bargaining power over the companies and dictate the final prices of cars produced.
Competitive Rivalry in The Industry
Competition is a significant factor affecting the success of an organization. The presence of numerous competitors reduces the influence of a company on customers and suppliers. The availability of partners’ and buyers’ options determines the best possible deal from its rivals (Porter, 1979). Competition can come in the form of prices, quality, and innovative products. The manufacturers can be aggressive or non-aggressive in their activity. Aggressive measures are deliberate moves by an organization to target its competitors by introducing products or prices to challenge them.
Meanwhile, a non-aggressive approach is directed by rivals offering products or services at a reasonable price and quality to remain competitive (Porter, 1980). The auto industry in the US has an oligopoly structure putting the power in few companies. These businesses dominating the industry can compete aggressively against one another. However, the four traditional companies do not adopt such methods of promotion.
The four enterprises depend on one another and release products and services while reacting or expecting a reaction from the others. The companies sell similar vehicles with slight engine power variations as well as design and price changes. An aggressive approach would include a manufacturer releasing a similar product but undermining the others’ offers by establishing extremely competitive prices (Porter, 1979). However, the cars of the companies are almost equivalent, and the price differences are minimal. Nevertheless, this approach still allows customers and suppliers to select more attractive manufacturers. Suppliers will choose among the four and compete for the company with the best offers, thereby increasing production costs of businesses striving for new partnerships. For instance, Tesla has come with a new product, and at the moment, the competition is minimal, and they dominate the electric market (Porter, 1985). However, it creates a challenge for the other companies who have to produce electric cars to avoid losing customers by moving to this new market segment.
The Threat of New Entrants
In every industry, the threat of new entrants is present, and it is up to the existing organizations to challenge their participation or adapt to the changes they bring. Entry into the existing market is difficult due to the influence the existing businesses have and their financial strength. These enterprises use various techniques to prevent new competitors’ increasing activity, including economies of scale, legal requirements, such aspatenting issues, capital requirements, and government policies (Porter, 1979). The new competitors have to come into the industry on a large scale or face the disadvantage of unprofitable operations. The entry’s capital requirement is high as the company needs to comply with all production requirements and advertise to consumers to inform them about the options (Sturgeon et al., 2008). These barriers are visible in the auto industry, and they restrict the participation of new entities. There are many other car manufacturers in the US, but most of them do not reach the dominant companies’ scale.
The threat of new entrants in the field is increasing, especially due to the transition to producing electric cars (Teece, 2018). Tesla managed to enter the market because of offering new products and services to customers. It had capital from the CEO Elon Mask as he had sold other assets, so he had the money to pump into the market (Teece, 2018). The company was successful in the entry because it invested in automation throughout its production process, reducing manufacturing costs and the time required for delivering cars to buyers (Porter, 1985). New startups are also attempting to enter this profitable segment, and other large organizations, such as Apple and Google, have shown an interest in the auto industry. These threats might cause a disruption in the market in the coming years because of the negative reaction of the traditional companies to these trends.
The Threat of Substitutes
Considering the continuing increase in demand for products, companies might be stretched in providing them. This circumstance might lead to a rise in substitutes of existing options (Porter, 1979). Customer preferences in different kinds of offers and services can change due to various factors, resulting in the creation of equivalent vehicles. In the past, the auto industry shifted from steam engines to gasoline because of petroleum products’ availability and the difficulty to maintain the previously common technology. Currently, the threat to the existing companies is the substitution of their products by electric-powered cars. Tesla emerged and surpassed the four dominant companies in the sales of vehicles in 2020 (Teece, 2018). The threat to the gasoline companies is present, and if they do not adapt to these changes, they will be left out of the market.
At present, Tesla has a competitive advantage due to its technology. It allows the manufacturer to produce long-lasting batteries and create vast networks of charging stations (Teece, 2018). The threat of moving to electric vehicles is escalated by companies like Google and Apple involved in the field. Other threats come from introducing ride-sharing options, such as Uber, and a proposition of Tesla to create search services for its fleet of cars (Yun et al., 2020). The former’s activity might reduce the number of people purchasing vehicles as sharing cars will be a cheaper option. In turn, the latter might contribute to the development of this trend.
Conclusion
The US auto industry emerged in the 20th century being dominated by Ford followed by the entry of General Motors, Toyota and Chrysler. In the last few years, Tesla joined them and surpassed their sales. Porter’s model of five forces allowed analyzing their interactions in different aspects and concluded on several tendencies. It showed that customers and suppliers have bargaining power over these companies because of their significant numbers. The increase in buyers’ abilities to affect the final offers and modify their prices and quality. In turn, a variety of suppliers enable manufacturers to choose the best partners and reduce production costs. As for the threats of new entries and the creation of substitutes, the progress in this regard is enhanced by the introduction of electric cars by Tesla and other manufacturers.
References
Porter, M. E. (1979). How competitive forces shape strategy. Harvard Business Review.
Porter, M. E. (1980). Competitive Strategy. The Free Press.
Porter, M.E. (1985). Competitive Advantage. The Free Press.
Sturgeon, T., Van Biesebroeck, J., & Gereffi, G. (2008). Value chains, networks, and clusters: Reframing the global automotive industry. Journal of Economic Geography, 8(3), 297-321. Web.
Teece, D. J. (2018). Tesla and the reshaping of the auto industry. Management and Organization Review, 14(3), 501-512. Web.
Yun, J. J., Zhao, X., Wu, J., Yi, J. C., Park, K., & Jung, W. (2020). Business model, open innovation, and sustainability in the car-sharing industry—Comparing three economies. Sustainability, 12(5), 1883. Web.
