Porter’s Five Forces Model
Automobile Industry: the case of BMW
Introduction
Fundamentally, the automobile industry is a textbook example of an industry where economies of scale pay a very important role. While there may be dozens of players around the world who produce, support and work with the industry, there are only a few producers who can claim to have a significant share of the market. Similarly, even though cars are produced in almost every developing and developed nation, only a few countries contribute in a significant manner to the global car production and consumption statistics. This can be attributed to the fact that the first automobiles were produced and developed soon after the industrial revolution by countries that had the required infrastructure and engineering skills. For example, the first steam powered three wheeler was built in France in 1769 and the first internal combustion engine was built in Belgium while the Germans made the predecessor of the modern car in 1885. Ford started his assembly line plans in 1896 and the mass production of motor vehicles was created as an established industry (Baki, 2004).
Car industries are noted to be one of the most essential means in the major part of the market worldwide. Nevertheless, with the existence of business environment of globalization and the competition in the automobile industry, the competition has become fierce. Primarily, this paper will analyze BMW and the competitive environment through the use of Porter’s Five Forces Model.
Overview of BMW
The BMW Group is the only automobile and motorcycle manufacturer in the global market which focuses entirely on premium standards and excellent quality for all their brands and across all significant segments. With their brands like MINI, BMW, and Rolls-Royce Motor Cars, the industry has been emphasizing on selected previous segments in the global auto markets since the year 2000. In the succeeding years, the introduction of the BMW 1 Series meant an extension of the model range in the premium segment of the lower and average class and the BMW 6 series did likewise in the segment of the Large Convertibles and Coupés. The MINI marque was introduced in 2001 and the production started in the Oxford plant. In 2003, this automobile industry assumed marque accountability for Rolls-Royce Motor Cars.
BMW is a global brand and it has to position itself according to the global market requirements for high end cars. The automobile industry was established during World War 1 to produce engines; in year 1945, the industry was still considered as the leading manufacturers of aero-engines in Germany. However, the company diversified into what in 2000 to produce cars and motorcycles. After their diversification, the company has maintained its position to be the largest and most successful German companies. However, the road for sustainable advantage for the company has been affected by various market environmental factors. In this regard, it is important to analyse competition in automobile industries in 2004 through the use of Five Forces Model by Porter.
Porter’s Five Forces Model
Accordingly, an industry is a group of firms that market their products nearly related and substituted from one another (Porter, 1980). It has been stated that some industries tend to become more profitable and competitive than their rivals; thus, industries like automobile industry should be able to maintain competitive advantage through their business strategies (David, 2001; 2008) to sustain their competitive position. Porter’s (1998) competitive analysis identifies five fundamental competitive forces that determine the relative attractiveness of an industry: new entrants, bargaining power of buyers, bargaining power of suppliers, substitute products or services, and rivalry among existing competitors. Competitive analysis leads to insight in relationships and dynamics in an industry, and allows a company or business unit to make strategic decisions regarding the best defendable and most economically attractive position.
New Market Entrants VERY LOW
The first factor to be given emphasis in the market environment is the threat of threat of new entrance of new automobile industries. With the emergence of globally competitive automobile industries naming BMW, Honda, Ford, Toyota or General Motors, the threats of entry in the car industry can be considered to be very low. New entrants threats is very low since a new car industry will need more capital investment and financial resources to pursue the business along with high proprietary technology to manufacture or product automobiles that would compete strongly with the existing models made by the industries mentioned above. Moreover, new entrant threats are also very low because of the strong brand identification of companies like BMW in the global market.
BMW is an automobile industry which is a prime example of how economies of scale and costs to entry act as a barrier to entry for new manufacturers and it is unlikely that too many companies in the world would have the finances to take on the giants in the industry. However, it can be said that entering into the market as a niche producer of super luxury, super utility or super cars for that matter might be possible. This is because establishing a niche in the market where everyone else is factory producing their cars could be one of the only ways in which brand differentiation can be established. Even then, a company would need to establish itself as a brand over time and custom produce cars until they could get to a point where mass production is possible.
It can be said that entering in automobile industry In the automobile industry is very complex since there are different barriers for entrants. Although in the case of car industries, the barriers to entry has lowered, specifically in year 2004, the remaining competitive industries proves to be a great source for the needs of the nation in terms of economic aspects. The more automobiles have been imported, the more are the opportunities of negative balance payment. Hence, to prevent such situation, government usually secures their own industry by measures like subsidies to local producers, high import tariff and others. Such measures have been considered to be one of the barriers for entries for the foreign auto industry players.
In addition, there are a considerable number of barriers for the local producers too. One of these is one is that of economies of scale. In the startup phase, it is quite expected that the sales would be low for a new industry; this situation is fatal in the industry where economies of scales are the key to survive. Moreover, it may be possible that the ‘big fishes’ having strong ties with suppliers might make the access of raw material for the new firm difficult. Above all, there is an all-time need of high initial investment and constant R&D to succeed in this industry.
Supplier Power (LOW)
In year 2000, the system and condition of industries like BMW largely set up the extent in which effective and strong competition can be attained. In these industries, suppliers have high power. One of the reasons for such trend is that, there are various suppliers in the global market and there are only few manufacturers which enable suppliers to have the power for controlling the price of the raw materials needed or demanded by automobile companies.
It can be said that the supplier power of automobile industries is also very high because they also have the power to decline an organizational performance of specific industry. Due to the price increase in the global market, the price of the raw materials also increases, hence give additional cost to manufacturing companies. With this, some of the suppliers in the car industry can possibly control their operational costs.
In addition, in case of the parts of an automobile, the parts from the suppliers are not much differentiated. There are also instances of forward integration by the manufacturers, since there exists bigger players in the market. This is the reasons why supplier power is very high. Despite that, most automobile industries consider their suppliers as partners in the business and try to collaborate with them to ensure successful production.
Power of Buyers (HIGH)
In line with the immediate effects, the buying power of the clients of automobile industry is very high. Based on the given case, even high-end products are able to make it to the global market, like the models offered by BMW. The reason for this is because of the high brand loyalty of various clients on brands like BMW. Furthermore, since automobiles have strong product differentiation among those made by different industries, the buyers have the power to select which automobiles suit their needs. The factors that affects the buyer to purchase a car consists of the appearance, quality, environmental aspects, price and also its fuel power.
Most of the people always want innovative and new cars and those who can afford to buy even the most expensive cars are looking for new released and attractive models. Moreover, the quality of these cars is also an important factor. Clients only avail cars which are efficient in line with gas savings, safety and smooth running. In addition, since there are various automobile industries in the market, clients have more options to choose the most affordable but good quality cards. And last, because of the climate change and global market, most of the automobile industries make their cars more distinct in terms of model but environmental friendly.
Availability of Substitutes (very high)
In line with the substitute products, the car industries like BMW are facing very high substitutes due to the existence of various transportation means like buses, trains and other transportation vehicles. Hence, such force is very relative and it depends on performance and the price of various automobile. When the availability of substitute is being considered, it is essential that ownership total cost should also be given consideration. This means that price purchase aspects is not enough and automobile companies must also note the operating costs. Hence, this makes fuel cost as the most essential and decisive factor in buying cars. Other aspects include status symbol, comfort, convenience, innovation and others. By considering such aspects, BMW and other companies will be able to compete and maintain their competitive position despite of the existence and emergence of substitute products.
Competitive Rivalry (very high)
Based on the given case study, it can be noted that the environment of the automobiles industries can be considered as very high. There are various aspects that keep automobile industries become the most competitive companies in the global market. One of these is because of the competition of price. Accordingly, there exist an oligopoly on the global and also the national level. The companies in the automobile industries like BMW do not compete on price. All of these industries are competing with their established high quality as well as strong brands which make the competition stronger and intense, especially in line with customer loyalty. These industries also compete in car features and model, as they realize that the price based competition would not benefit each company. With the increase of international trade, the rivalry among these industries also increases. Furthermore, the competition is also high due to the large number of customers.
Discussion
In line with the analysis above, it can be said that in line with the threat by new entrants, the high capital expenditure as well as the confidence of the clients represent the significant barriers to entry and the automobile market is also reputation sensitive. Nonetheless, the existence of low cost manufacturer does post challenges and threats. In addition, there is a great opportunity in the low economy/low price (fast) sector. The next is the threat from substitutes or alternative products, as there are many makers and models of other premium branded cars like that of the products of BMW. The third force according to Porter is the threat from the bargaining power of buyers. This is strong for BMW and other automobile companies with large number of substitute suppliers, thus, there is an aggressive pricing strategy, thus results in a very strong competitive rivalry in the automobile industry. This is intensified as an outcome of no differentiation or little varieties in the basic product offered. Lastly, the threat for supplier bargaining power is low in this kind of industry, because of the dual sourcing approaches, using a rang of various sources of supply for automobile parts.
Conclusion
Worldwide, competition driven consumer’s expectations about performance, styling, technological innovation, comfort levels as well as reliability upwards while the expectations of costs have been going downward in the automobile industries. For example, BMW is a global brand and it has to position itself according to the global market requirements for high end cars. In many places, the demand for luxury cars may not be as significant as others and since BMW is primarily a manufacturer of luxury cars the company should maintain its competitive position through the use of different strategies. Perhaps the most structural challenge for the automobile industry and the larger players in the industry is getting to grips with new technology. The challenge does not come from automotive technology but from other areas of technology like digital communications.
Base on the analysis it can be said that that entering in this kind of industry is very stiff and if a company want to stay in the competitive position, they must consider strategic management approach like what BMW has done throughout the years.
In conclusion, it can be said that the automobile is quite an interesting one to watch because of the nature of the industry and the historical background associated with the rivalries between various companies. However, it can also be considered that the future of the industry leads towards cooperation and sharing of information as more companies realise how they can benefit collectively rather than be in constant negative competition against each other.
Reference
David, F. (2008). Strategic Management: Concepts (12th Edition). Alexandria, VA: Prentice Hall.
David, F. (2001). Strategic Management: Concepts and Cases (12th Edition). Alexandria, VA: Prentice Hall.
Hitt, M., Hoskisson, R., & Ireland, R. (2008). Strategic Management: Competitiveness and Globalization, Concepts and Cases (Strategic Management: Competitiveness and Globalization). Mason, OH: South-Western College Pub.
Ingrassia, P., & White, J. (1995). Comeback: The Fall & Rise of the American Automobile Industry. New York, NY: Simon & Schuster.
Klepper, S. (2002). The capabilities of new firms and the evolution of the US automobile industry. Ind Corp Change, 11(4), 645-666.
Porter, M. E. (1980). Competitive Strategy. Free Press
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