The effectiveness of Porter’s model for determining industry attractiveness:
Porter's five-forces models concentrates on five structural industry features that comprise the competitive environment, and hence profitability, of an industry. Applying the model means, to be profitable, the firm has to find and establish itself in an industry so that the company can react to the forces of competition in a favorable manner, in that way, it is definitley effective, however, due to the fact that Porter's model was invented 20 years ago, it is somewhat outdated; changes in technology and other industrial shifts and trends have made them somewhat obsolete. Although immediate praise for the five-forces model was exhaustive, critiques of Porter have appeared in business literature. Porter's model does not, for example, consider nonmarket changes, such as events in the political arena that impact an industry. Furthermore, Porter's model has come under fire for what critics see as his under-evaluation of government regulation and antitrust violations. Overall, criticisms of the model find their support in the lack of consideration by Porter of rapidly changing industry dynamics.
The Auto Industry:
In the automobile industry, a great proportion of income comes from selling automobiles. Globalization is the inclination of world investment and business to move from a country and local markets to a worldwide environment, is a major factor that affects the auto market. More than ever, it has been easy for foreign auto dealers to enter the American market creating competition. Competition is a major factor that takes a toll on the auto industry. In America the car making market is driven by what's known as the "Big Three:" General Motors - produces Chevrolet, Pontiac, Oldsmobile, Buick, and Cadillac, Daimler Chrysler - Chrysler, Mercedes, Jeep, and Dodge, Ford Motor Co. - Ford, Lincoln, Volvo, and Jaguar.
Threats of entry posed by new or potential competitors: it's very difficult to enter the auto industry; you need an enormous capital, the brand loyalti of existing companies is very strong, the switching costs are almost non-existing. Attractiveness--LOW.
Degree of rivalry among existing firms: the competition between the existing companies is fierce, prices are as low as ever, and the "big 3" are offering to buy a car now, and pay in 3 years, they are doing everything in their power to cut costs, in order to increase demand. Attractiveness--LOW.
Bargaining power of suppliers: A lot of suppliers depend on a certain automaker to buy a majority of their products. If an automaker decided to change suppliers it could be the end of the supplier's business. Consequently, suppliers have little power. Attractiveness--HIGH.
Bargaining power of buyers: Buyers have some bargaining power; if you already own a car, it easier and cheaper to stay with the same dealer and same brand car(low power), however, if you are leasing(most americans do) it costs nothing to switch brands. Attractiveness--MEDIUM.
Closeness of substitute products: There is always some likelihood of people taking the bus, train, or airplane to their destination. The higher the cost of operating a vehicle, the more likely people will seek alternative transportation options. The price of gasoline has a large effect on consumers' decisions to buy vehicles. Trucks and Sport Utility Vehicles have higher profit margins, but they also us a lot of gas compared to smaller sedans and light trucks. When determining availability of substitutes we should also consider time, money, personal preference, and convenience in the auto travel industry. Bottom line is that people will always use cars, its enough to enter Manhattan during rush our to obserev this peculiar phenomenon. Attractiveness--MEDIUM.
Overall, I must conclude that this industry is unattractive, the competitors are huge and are almost impossible to compete with, it take a lot of capital to get started, its very difficult to reach econonomies of scale, and its even harder to be innovative and creative at low cost.
Overall Attractiveness--LOW.
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4 comments:
I think this was good and interesting analysis, which I basically agree. I guess that porter’s 5 forces model is not all that companies look at. Especially if you’ve heard of Tata motors. Tata, an Indian based company, has recently acquired from Ford the Jaguar and Land Rover brands. This is a good move for Tata who previously targeted sales to India to increase their market exposure. Ford, who has been suffering capital problems in recent years, has been neglecting these luxury brands. Tata has the financial ability to bring these brands back to life with a bounce. Estimations are that they will target sales to developing countries that have many new wealthy potential clients.
This move is something which could shake up things and change the balance of forces.
I agree with your assessment, that the automotive industry is very competitive. The newcomers not only have to worry about the domestic companies, they now have to worry about the foreign companies. Honda, Nissan, Toyota has recently taken way a lot of the U.S. market share. In New York City, governments are in the process of trying to reduce traffic congestion going into city by advocating incoming tolls. With the rising cost of fuel, driving has become unaffordable. There is a lot of factor making this industry unattractive and you done a great job showing why.
Since I tend to agree with your assessment about the automobile industry I won’t reply my respond to that, but to something else you wrote. I find your opinion about the attractiveness of Porter’s five forces very interesting. I still believe that the five forces are essential tool before entering or evaluating a new market, but as you said it’s outdated. Hence from that, new companies can’t take the five forces as absolute, and they must see the entire picture about the industry they are getting in. The whole picture is not only the five forces, but it should take into account government regulation, technology, and the economy stability as important factors. I would say that the five forces are still attractive tool to evaluate any industry today, and in the near future, but it shouldn’t serve as the only indication before entering a new market.
Porter's model is still relevant, IMHO, because it is not a static analysis...meaning that it is useful not only to assess the defined factors, but can and should be used to assess any new or probable developments the industry faces. Therefore, Eliran, the factors you mention are all viable considerations even if they are not explicitly stated in the model. The model's definition and competitive factors evolve as the industry does.
--prof K
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