pressure from substitute or complementary products, (4) bargaining power of buyers, and (5) bargaining power of suppliers. 1. Rivalry between existing competitors
With the rise of foreign competitors like Toyota, Honda and Nissan in the 1970's and 80's, rivalryin the American auto industry has become much more intense. Firms compete on both price andnon-price dimensions. The price competition erodes profits by drawing down price-cost marginswhile non-price competition (e.g., new car rebates and interest free loans) drives up fixed cost(new product development) and marginal cost (adding product features). One of the other reasonsthere is such high rivalry is that there is a lack of differentiation opportunities. All the companiesmake cars, trucks or SUVs. The competitors are compared to one another constantly. In recentyears there has been significant market share variation, another indication of rivalry and its verystrong threat to profits. 2. Threat of entry by new competitors
The presence of new firms in an industry may force prices down and put pressure on profits. Thereare, however, barriers to entry that tend to protect established firms. One would expect the production of automobiles to require significant economies of scale, an important barrier to entry.The new entrant would have to achieve substantial market share to reach minimum efficient scale,and if it does not, it may be at a significant cost disadvantage. While the evidence suggests thateconomies of scale in the auto industry are substantial, there are also indications that large sizemay not be as important as commonly assumed. Nevertheless, entry would represent a large capitalinvestment to any new firm and the body of research still indicates that economies of scalerepresent a substantial barrier to entry. Consequently, entry is currently a weak threat to profitability. 3. Price pressure from substitute or complementary products
While five-forces do not directly consider demand, it does consider two factors that influencesdemand ― substitutes and complements. Although new cars generally are slightly price elastic,suggesting few real substitutes (e.g., bus and rapid transit), the demand for a particular model ishighly sensitive to price because of the availability of close substitutes for a given model. A changein the price of a complementary product (e.g., gasoline, batteries, and tires) could have asignificant impact on the demand for automobiles. The rising price of gas, an importantcomplementary product, is likely to affect some firms more than others depending upon thevehicle composition. Recent rising fuel prices are likely to have a greater impact on the big three(GM, Ford Motor and Daimler-Chrysler) whose most profitable models are energy inefficient pick-up trucks and sports utility vehicles. On balance, the overall impact on "industry" profitabilityfrom substitutes and complements is weak to moderate. 4. Bargaining Power of Buyers
Buyer power refers to the ability of individual customers to negotiate prices that extract profit fromthe seller. Individual consumers have some influence over price within a given dealership, but little power over manufacturers. Customers can easily, and with little cost, switch to other auto dealers.Furthermore, customers now have access to market information (prices and costs) from theInternet that enhances their negotiating power. But when you have many individual customers,each representing a small proportion of total sales, they will have little bargaining power withmanufacturers and therefore pose a weak threat to industry profit. 5. Bargaining Power of Suppliers
Amrita School of Business
General Motor’s Strategic Analysis
Auto manufacturers require inputs-labor, parts, raw materials and services. The cost of these inputscan have a significant effect on profitability. Whether the strength of suppliers is weak, moderateor strong depends on how much bargaining...