Five Forces Model: U.S. Automobile Industry

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Michael Porter’s Five Forces Model is a model used to analyze a particular environment of an industry. An industry is a group of firms that market products which are close substitutes for each other, such as the automobile industry. According to Porter, there are five forces that determine an industry’s long-run profitability and attractiveness. These five competitive forces are the threat of entry of new competitors, or new entrants; the threat of substitutes; the bargaining power of buyers; the bargaining power of suppliers, and the degree of rivalry between existing competitors.

In the auto manufacturing industry, the threat of new entrants is generally very low. For this threat, factors to examine include all barriers to entry such as upfront capital requirements since it costs a lot to set up a car manufacturing facility. They also need to look at brand equity since a new firm may have none. Also, legislation and government policy are considered and this includes safety, EPA, and emissions. Finally, they’ll look at the ability to distribute the product. The emergence of foreign competitors with the capital, management skills, and required technologies began to undermine the market share of North American companies.

The bargaining power of suppliers must be examined. Historically, the bargaining power of automakers went unchallenged. The American consumer, however, became undeceived with many of the products being offered by some auto companies and began looking for alternatives, particularly foreign cars. On the other hand, while consumers can be very price sensitive, they do not hold much buying power since they never purchase a large volume of cars.

If buyers can look at the competition or other comparable products, and switch easily, there may be a high threat competitive rivalry. The switching cost is high with new cars because you can't sell a brand new car for the same price you paid for it. You also need to look at public transportation and the...
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