Having survived the financial crisis of 2008/2009 as a robust competitive member of the world’s leading car manufacturers, Ford is now trying to sustain its strong financial performance. To what extent this is dependent on the state of the world’s automobile industry and what structural features of the global industry are driving competition and profitability will be analyzed in this paper, as well as the question on how the industry will evolve in the future and what the implications of these trends will be. The automotive industry is considered to be an oligopoly. There are few large firms capturing the majority of the market share. There are significant entry barriers and there is potential for product differentiation and imperfect availability of information. Being an oligopoly makes it a highly competitive market with immense price competition and therefor weak profit margins. Having used the Porter’s 5 forces model (see Table 1), two main driver of competition could be identified. The convergence of technology and design within the industry led to an increase in competition. The former distinctive differences and the variety of technologies that once distinguished different cars from different manufacturers were now gone due to the promotion of global models.
All large car manufacturers were now offering a more similar product concerning technology and design. The second driver of competition was a broader competitor base that accompanied the capture of emerging markets. Even though the entry barriers in the global automobile industry are high due to huge capital requirements, economies of scale and technological know-how, there were still companies who managed to enter the market. Above all, this was possible due to cheap labor cost in those regions. Especially Toyota, that introduced the Lean production system that later became industry standard was very efficient in cost saving. Having a regional advantage of producing at low cost and therefor being able to offer cars at a reduced price compared to their western competitors, they managed to capture market share and therefor contributed to increased competition and constrained profitability. Due to their cost advantage, it became even more important for the industry to efficiently use economy of scales in component production and product development.
This now led, that demand is declining in the industrialized countries to overcapacity which is furthermore constraining profitability. Economies of scope got also more important since overhead costs could be exploited across different models, which in turn led to stronger competition since all large car manufacturer offered products within the same segments. A further aspect that constrained profitability is the huge buyer power. Offering a similar range of products with equal technology standard and design the manufacturers need to provide additional incentives in order to distinguish from their competitors and attract customers. It is the emerging markets that will drive global automotive growth in the future where car manufacturers should put their main focus (PEST-Analysis, see Table 2). Competition will even more increase, especially from manufacturers from China and India and the overcapacity will lead to intensified price cutting. In order to achieve greater profitability by cutting costs, a major issue will the improvement of manufacturing efficiency be and the elimination of overcapacity.
Car manufacturers will have the possibility to increase profitability by focusing even more on collaboration that will range from joint ventures in technology, component supply agreements and marketing agreements to mergers and acquisitions. Supplier will play a more important role since worldwide outsourcing will further increase in order to keep up with the cheap manufacturing in low-cost countries. Technology and brand image will be the two key success factors (Identifying Key Success Factors, see Table 3) for the automobile industry. By developing new technology that will encounter new environmental standards (PEST-Analysis, see Table 3) the problem of overcapacity in industrialized nations can be reduced. Mature markets can be boosted if advanced technology in efficiency is developed to meet steadily rising prices of fuel. The introduction of all-electric cars will further intensify competition since it forms a possibility to enter the market (PEST-Analysis, see Table 3). Since the technological standard among all competitors is similar, especially western car manufacturers need to differentiate from its competitors by a unique brand image that makes customer willing to pay a premium (Identifying Key Success Factors, see Table 2). Ford itself can enhance its current position by continuing to focus on small cars and differentiate from its competitors by offering mass customization to meet all customer’s needs and preferences.
Appendice to the Ford and the World Automobile Industry in 2012 case study
Table 1:Porter’s five forces
There is huge rivalry among existing firms. Having reached the mature stage through the increased longevity of cars that damped the market in the industrialized countries, car manufacturers were entering the emerging markets in Asia, Eastern Europe and Latin America. This was accompanied by the emergence of competitors from those regions. Major car manufacturer were nevertheless unable to compete with its Asian competitors that had cost advantage over US/European firms. The convergence of technology and design within the industry led to an increase in competition. The former distinctive differences and the variety of technologies that once distinguished different cars from different manufacturers were now gone due to the promotion of global models. All large car manufacturers were now offering a more similar product concerning technology and design. Potential entrants:
Despite huge capital requirements there were still new entrants entering the market at the beginning of the industry, mainly from the growing markets like Asia. Due to the cost advantage producing in the low-cost markets they managed to be sustainable. The potential entrance of new competitors is nowadays relatively low since the only way of staying profitable using economies of scale. Even established companies are forming joint ventures or strategic alliances in order to share R;D expenses and therefor use economies of scope. However, there is still the risk of new entrants entering the market of electrical or hybrid cars. Supplier power:
The supplier power remains relatively low. In order to effectively use economies of scale, companies reduced their supplier base and increased their orders with them. Also the companies adapted very close, collaborative long term relationships with their suppliers. This new system resulted in increased responsibility for technological development on the supplier side. Outsourcing as an important source of cost cutting of not only individual components to major subassemblies has led to increased responsibility concerning the technological development for suppliers. Buyer power:
Buyer power in the industry is relatively high. All car manufacturing companies are offering a similar range of products with minority differences, therefore the manufacturers must provide other incentives like extended warranty in order to attract customers. Substitutes:
There is no real substitute for cars, but might be a threat of electric cars in the future.
Table 2:Identifying Key Success Factors
Analysis of Demand:
What do customers want?
Analysis of competition:
How does the firm survive competition?
Main drivers are converged technology and buyer power
Competitive position can be reached through advanced technology
? Technology ; Brand image in order to differentiate from competitors
PoliticalNational government refuses to close plants
Emerging Environmental laws and regulations concerning CO2 reduction EconomicalWorldwide automobile sales forecasts pointing a 5% growth rate between 2012-2016, the only depressed market being Europe Main focus on the emerging market in Asia
Socialno information given
TechnologicalThere is the chance of a technological change to the introduction of all-electrical cars Innovation of more fuel efficient cars