Five forces analysis

This week we studied the topic about internal environment and micro environment.

Internal environment relates to people, structure, objectives, and culture etcetera in a company. Refer to the competitive environment, Porter's 5 forces should be treat as a key point and I want to use automotive industry to analyze them.

The treat of new entrants refer to how easily new entrants can go into one certain industry. For new entrants, they need to compete on cost, high capital investment. They also need to overcome the barrier of lack distribution channels, subsides, customer trust. For example, this threat of automotive industry is quite low, since the barriers of entry are significant. To run a company of automobile would require a big amount of startup capital. Moreover, the manufacturing facility of automobile is specialized and they need much money to repair. In the newer, undeveloped markets of Asia, Africa, and South America, the barriers to entry similarly exist.

The bargaining power of buyers is the power of customer to force down the price. When customers buy a large amount of goods or the alternative choices are significant, the power will be high. In automotive industry, the power of buyer is quite high, due to the standardized nature of automotive commodity and the switching cost is low for buyers.

The bargaining power of supplier is the opposite of those applying to customers. When the suppliers are limited, the product is distinctive or the cost of switching cost is high, supplier's power will be high. For some famous brand of automobile such as BMW and BENZ, the supplier's bargaining power is quite high, since these kinds of company must ensure the quality of the components and the they ask for specialized manufacturing skills to fulfill the tasks.

 

The threat of substitute refers to how easily the product will replace by other goods. For example, using cans instead of bottle. In automotive industry, this threat is fairly low. Although there are many transportation substituting cars such as train, subway and bike, none of those can provide the utility, convenience, independence and value offered by automobiles. Furthermore, for some areas such as Utah, upstate NY, car is the only transportation other than walking.

Strong competitive rivalry lowers benefit, and it occurs when there are many firms in an industry; fixed costs are high, exit cost are high or products are similar. In automobile industry, there is a large amount of brands and the expense of both fixed cost and exit cost are high. Therefore, the intensity of rivalry among competitors is significant high.