Porter’s Five Forces

This tool is primarily used to analyze the competitive environment in terms of five main categories; the threat of new entrants, bargaining power of both supplier and buyers, threat of substitute products and how intense the current rivalry is among existing competitors. In each of the five categories there are conditions/ sources that further provide insight to each; they will be analyzed in terms the car industry. This model is very helpful in determining what are an organizations next steps.

It provides insight in to whether a particular firm should exit or stay in an industry given its profit potentials. Lastly this model also helps firms to identify areas where they can change the competitive environment, again, to improve future profits. The car industry is a very well known industry. Even more so with the government’s involvement in most of the US car corporations during the economic crisis, as well as due to the current prices of oil and their move toward greener more efficient vehicles.

General Motor’s represents these characteristics therefore analyzing it in terms of Porter’s Five Forces will be a helpful and relevant exercise. First, the threat of new entrants or the barriers to entry in to the industry are very large. The capital requirements to become a new player in the industry are very restrictive due to the large amounts that would be required. Moreover a car manufacturing facility, in the event of failure, can’t be easily adapted to work as something else.

Product differentiation and loyalty is important in the industry, I do no mean loyalty in the sense that people will not change car brands but loyalty in terms of the already established brands. It is not an easy task to gain a good reputation for a new up and coming car brands, in terms of safety, reliability, maintenance etc. these represents large barrier to overcome. Bargaining power of buyers refers to the power consumers have over the price of a car. This power falls on to the consumer rather than to the car industry. Given the cost to buy another car is relatively nonexistent consumers can “haggle” and negotiate the price of a car.

Just think about the percentage of people that pay full ticket price when they buy a new car, not many people. Therefore the bargaining power of buyers in the car industry is relatively high. The bargaining power of suppliers in the car industry lies with the car industry. The car industry is made up of a few key players which hold most of the market. In the US the 3 main car companies hold a very large percent of the market therefore this translates to some suppliers only selling to one or two of the car companies. What this means is that the industry is a very important consumer for the suppliers.

Moreover the parts made by the suppliers are not parts that are useful in other industries. Take some car parts; doors, bumpers, mufflers if these parts are not bought by the car companies, suppliers will be left having them as inventory. Another aspect to consider is the power the car companies have to backwards integrate, it would not take much capital to backwards integrate which further demonstrates how suppliers do not hold much power in this category. The threat of substitute products is relatively low given the substitutes are not other car manufacturers but other modes of transportation.

Substitutes include trains, public transportation, airplane, walking, biking etc. Some are less costly than using a car but analyzing it in terms of convenience, the value of the automobile and independence, in most cases than not, a car is a better alternative than the substitutes. Lastly, the intensity of rivalry in the car industry is very strong. The competition is not only with the domestic car manufacturers but with the international ones as well like, Toyota, Honda, Nissan etc. The car industry is a slow growing one therefore there is very fierce competition to steal market share from the other.

Moreover the industry does have high fixed costs creating pressure on makers to increase their capacity so economies of scale can be achieved. Recommendations: Given the current environment for the car industry: Intense Rivalry among competitors, low threat of new entrants, high bargaining power of buyers, low bargaining power of suppliers, and relatively low threat of substitutes I recommend GM stay in the industry. The two key categories to invest the most capital and time is in terms of competing against the existing competitors and how to have more brand loyalty and thus make the switching cost for consumers higher.

For GM the key here would be to make the Volt a better alternative. At the moment it is too expensive and its reputation is not as solid as it could be. Therefore by investing and improving the brand image as well as the car itself, the Volt could eat away at the market for fuel efficient cars. In terms of gaining power of buyers, this can only be done through reliable products. Therefore, again, by investing in R;amp;D and investing in the current production of their key models as well as by improving the Volt this will result in greater share of the car market as well as greater influence over buyers.