Five Forces Analysis of Retail Car Industry

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Assignment 1
Module Code:PICS01C
Student Number:7305-272-8
Due Date:15 March 2011

a) Five-forces diagram for analysis of the retail car industry in the greater Johannesburg area

1. Competitive Rivalry
Competitive rivalry exists between companies with the same or similar products/services and similar markets. Factors to be considered include: • The number and size of competitors
• The rate of industry growth
• Differentiation and switching costs
• Fixed costs or perishable products
• Expansion
• High exit barriers
• Diverse strategies
Companies have to strife for a competitive advantage over its rivals. Industry concentration is measured through concentration ratios. A higher concentration ratio indicates that a company holds the largest share of the market resulting in a less competitive and more disciplined landscape. Competitive advantage can be obtained by a combination of the following strategies: • Changing prices

• Improving product differentiation
• Creatively using channels of distribution
• Exploiting relationships with suppliers
Companies should formulate a corporate strategy that addresses these areas within the five forces competitive analysis. 2. The Threat of entry
The threat of new competitors entering the market can be managed by restricting the entry barriers through: • Economies of scale
• Capital cost of entry
• Control of distribution channels
• Good relationships
• Time
• Retaliation
• Legal restraints
• Differentiation
A healthy economy should provide freedom for any type of company and competition to enter the market. This should however be closely managed by existing companies in order to stay ahead of its game. The risk of new entrants can negatively affect a market resulting in companies closing down. Increasing and decreasing profits have a direct relation to new entrants in the market. When profits are high you tend to see new companies enter the market and vice versa. A market can be manipulated through collusion to fix prices to deter new entrants. This practice is however illegal. Barriers to entry can be created from different sources:

• Government policy
• Patents and proprietary knowledge
• Assets and specialized technology
• Organizational economies of scale

3. The power of suppliers.
The bargaining power of suppliers determines the supplier opportunity cost. This affects input prices and in effect profitability of competitors. Forces affecting the bargaining power of suppliers are: • Supplier concentration

• Switching costs
• Forward vertical integration
• Lack of substitutes
• Dependence on a single industry
If the supplier concentration is very high the prices will be very competitive has suppliers can be played off against each other. The cost of switching between suppliers will also affect the competitiveness of an industry in that the easier and affordable it is to switch between the suppliers the more competitive the price will be. Substitution poses another challenge in that suppliers can provide substitutes for certain items (Generics) which can make prices more competitive resulting in entry barriers being less. The bargaining power of suppliers determines the suppliers’ opportunity cost.

4. Substitutes
The threat of substitutes constitutes a high risk in that technology can become absolute with the substitution of better technology. Companies have to manage this risk by staying abreast of the changing technology environment. Types of substitutes:

• Product for product substitution
• Substitution of need
• Generic substitution
Customers can substitute your product for another similar product if the products are cheaper, more technologically advanced, etc. IN order to stay ahead of the game a company has to ensure to stay competitive and abreast of technology. Products satisfy a...
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