Auto Industry-Porter's 5 Forces

Running head: WEEK 8 – REPORT PROJECT 2 Week 8 Report Project 2 Brian McMullen American Military University ECON600B August 25, 2022 Professor Fereidoon Shahrokh


Identifies the strength's and weaknesses of the automotive industry as a major economic indicator.

Transcript of Auto Industry-Porter's 5 Forces

Page 1: Auto Industry-Porter's 5 Forces

Running head: WEEK 8 – REPORT PROJECT 2

Week 8

Report Project 2

Brian McMullen

American Military University


April 7, 2023

Professor Fereidoon Shahrokh

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Executive Summary

The automotive industry has been in a transition period over the last decade. In this paper, I will

discuss the current state of the industry and recommendation for improvement through the

analysis and utilization of Porter’s Five Forces Strategy analysis. I will identify the strengths and

weaknesses of the American automotive industry and the Big Three; Ford, General Motors, and

Chrysler. The automotive industry is a major economic indicator. A strong industry is indicative

of a healthier economy. The economic trends of recessions, unemployment, expansions, and

contractions will cause suppliers to close shop, unemployment to increase, or plants to close.

Recent company bailouts and Chapter 11 reorganization of GM and Chrysler have given

the companies new life. The restructuring has enabled the refocusing of priorities and assessment

of industry position and potential. Chrysler was bought by Fiat and has benefited through an

introduction into new international markets. Future growth of all three companies will be based

on understanding and integrating into the global market. A truly competitive company will

provide superior alternatives.

The Automotive Industry

Introduction to the Industry

The American automotive industry brings up iconic imagery of the early twentieth

century and the great transition from the agrarian society to an industrial society. The growth of

America in greatly indebted to the automotive industry, with the advent of the mass-market

automobile presented a new image of the Americans and a new means of business. In the early

twentieth century, Henry Ford created the first American automobile company to mass-produce

the cars. In 1903, Ford developed the large-scale manufacturing plant that allowed the assembly


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line construction of automobile. The American auto manufacturing companies formed what is

known as the Big Three.

Ford, General Motors (GM), and Chrysler automobile manufacturers have dominated the

industry for almost eighty-years. All massed produced the consumer automobile as well as the

commercial vehicles that allowed America to become a mobile country. The horse and buggy

where soon replaced by the car. The movement of America and the transition into an

industrialized county soon created a completely new means of moving people and goods across


Recent years for the American automobile industry have proven to be financially

challenging. The recession has placed strain on consumers and businesses. The economic

environment caused GM and Chrysler to file Chapter 11 bankruptcy reorganization in 2009 and

seek federal bailout money or additionally, Chrysler case, create a partnership with Fiat in order

to maintain operations. The automotive industry has proven to be a major indicator for economic

change for the US economy. The growth and contraction of the economic indicators (i.e.

employment, GDP,

Industry Definition

The automotive industry provides transportation of people and goods and service for

consumers and businesses with vehicles ranging from the low-end transportation to high-end

luxury vehicles, and trucks for all uses. The goods and services provided by the automakers

The Big Three automakers:

1. Ford,

2. GM, and

3. Chrysler


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have dominated the automotive manufacturing for years. However, the international automotive

market of Honda, Toyota, Volkswagen, BMW, and Nissan have garnered substantial market

shares and in some cased surpassed the Big Three in volume sales and revenue. This has proven

a major challenge to the Big Three and forced them to reconsider their industry positioning

forced change through necessity of survival.

Industry Profile

The automobile industry provides goods and services that support a wide range of

manufacturers, wholesalers, suppliers, and retailers. The industry is a multinational provider of

vehicles and parts that are sold through third-party retailers throughout the world. The industry

produces automobiles, cross overs, SUVs, utility trucks, heavy-duty commercial trucks (Bureau

of Labor Statistics, 2011c) that support both consumers and commercial industry. In addition to

the sales of goods, the industry provides maintenance services and wide variety of financial

services. The industry functions through multinational manufacturing process that includes a vast

number of suppliers and logistical support channels and manufacturing plants located throughout

the United States and internationally.

There are 5,784 businesses that providing employment for more than 415,180 workers

(Bureau of Labor Statistics, 2011a) (see Figure 1). These businesses manufacture parts and

provide services that contribute to the overall production process of for the industry. The

manufacturing of vehicles is centralized through various plants located in the US and

international markets. The parts for the vehicles are made by numerous suppliers and shipped to

the plants for assembly. A majority of these businesses are located in the Midwest. They produce

everything from interior, exterior, to engine components. The interconnected logistical support


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needed to produce one automobile requires high levels of efficiencies that minimize cost,

resource waste, time, and redundancy.

Figure 1.

The Big Three automakers are major supplies of vehicles in the world. Vehicles sales

increased for Ford, GM, and Chrysler in 2011. The sales numbers are an increase compared to

September 2010 to September 2011; Ford +13%, GM +20%, Chrysler +27% (Lorio, 2011)

clearly show that the companies are on the right path after weathering a tough economic period.

The sales have dramatically changed in one year:


2011 Sales YTD

2010 Sales YTD

Change %

Ford 1,933,654 1,741,343 9.95GM 2,269,446 1,986,944 12.45Chrysler 1,231,095 984,509 20.03

Source: (Motor Intelligence, 2011)


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The American automotive industry is creating vehicles that meet the need of consumers

and providing innovative solutions through a new product. The advent of the energy efficient

vehicles electric and hybrid vehicle are providing a challenge to the foreign car market (i.e.

Honda, Toyota, and Nissan).

Industry Structure

The American automobile industry consists of an oligopoly of three major players in the

market, that is, Ford, GM, and Chrysler. The shared nature of the auto industry and the changes

that affect each company have a causation effect throughout the industry. This mutual

interdependence of the companies is relative to pricing along with supply and demand and

directly affects the decision-making process of each company (Samuelson & Marks, 2010). For

instance, all three companies sell 300 units (100 for each company) of their midsize auto and

charge $20,000 for each unit. Ford decides to lower the price of its midsize best seller to $15,000

and offer a rebate of $1,000 to veterans; this will result in Ford selling 150 units to GM and

Chryslers 75 units respectively. GM and Chrysler may decide to match the pricing to gain back

consumers, wait for Ford to revert back to the standard pricing, or do nothing. This

interdependency of the three automakers drives the decision-making process. A company that

acts alone in their pricing will gain or lose based on the other company reactions.

Future Outlook

The future outlook for the American auto industry looked good. Sales and revenue have

increased over the last few years. Ford US auto sales are up 14% while revenue is $18 billion up

$1.8 billion for the third quarter of 2011 over the same period in 2010 (Ford Motor Company,

2011). GM US auto sales are up 7% in the third quarter over the same period in 2010 (General


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Motors, 2011). Chrysler worldwide sales for third quarter are up 24% over the same period in

2010 (Chrysler, 2011).

The future outlook for the Big Three is directly related to the economic recovery and the

US and the European Union. The uncertainty of the monetary stability of both will influence the

balance sheet through available financing and overall revenue. Furthermore, the economic

conditions of unemployment and consumer positioning will limit the buying power of

consumers. The current debt payoffs will allow the stabilization of the companies and allow

reallocation of money for investment in growth opportunities.

The future market opportunities of the companies look promising. Growth opportunities

in Asia, Europe, and South America are promising. The increased efficiencies that drive the

supply chain provide a value-added opportunity. The facilities that support the companies will

need to be internationally and regionally based to meet the unique demands of each market.

However, recent natural disaster have proven to greatly affect the production capability of

competitors and must be considered in the operation of facilities. Product continuity and

sustainment through contingency plans need to be part of the strategic business plan and model.

The competitive regional marketing and brand identity will need to be incorporated into new and

emerging market strategies.

The green vehicles is a growth market the will need to be increased substantially in order

to meet consumer and regulatory demands. This market provides an excellent opportunity to

enhance the product line and show corporate responsibility through environmental concern.

Economies of scale for this growth market will increase over time.


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Porter's Five Forces Strategy Analysis

Bargaining Power of Buyers

The buyers (i.e. consumers) are providing a wide variety of products from a limited

number of automakers. The demand of new vehicles, product innovations, green cars, and

regionally unique vehicles has broadened the product selection for buyers. This and the increase

buyer knowledge of products through information availability has made the buyer very select in

their purchases. This places pressure on the automakers and drives the competition to adapt to

the buyers demands by providing incentives, discounts, and specials (i.e. product value retention

and buy back guarantees that Hyundai offers).

Buyer power comes from over production due to poor planning and over estimation of

demand. The current world economic hardships have challenge automakers in insuring that

production meets the market demand. Buyers have suffered from lost wages, unemployment,

repossession of assets that have strained their purchasing power. The current economic recovery

and unemployment finally less than 9%, currently 8.6% as of November 2011 (Bureau of Labor

Statistics, 2011b) will increase the number of buyers. Though the need for a new vehicle may not

be a primary concern for many buyers, a strong presence of brand identity, price sensitive

models, and substitution that meet a lower income buyers need be considered.

Product differentiation will prove to be a strong selling point for buyers. The introduction

of new product lines and green cars are highly sought by consumers. Rebates and trade-in

guarantees will gain customers. Brand loyalty and ‘buy American” ideas have brought the Big

Three back from crisis points, financial uncertainties and government bailouts. The progressive

increase in sales from 2009 to 2011 are making Ford, GM, and Chrysler profitable again.

Competitors, such as, Honda, Toyota, and Nissan have struggled through natural disasters and


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product defects that have hurt sales. Taking advantage of a change in buyers perception of the

American automakers and the product lines have breathed new life into and once stagnant

industry. The quality differentiations and concerns of past of less defined and have leveled the

playing field for automakers.

Bargaining Power of Suppliers

The suppliers to the automakers have suffered through layoffs, downsizing, and closures.

Automakers have adapted to the economic crisis through assistance by the federal government;

suppliers have not fared as well. He supply chain will suffer as the suppliers suffer. The strength

of the distribution channel is based on a stable supply chain. Economic hardships will force

automakers to reconsider substitutions and alternate resource outlets in order to meet production

runs. Increasing the manufacturing efficiencies through technology advancements and modeling

for a more unified, multi-model construction process will prove beneficial and cost effective.

That is, create automobiles that utilize the same core product, but allow for model differentiation

and uniqueness.

The large number of suppliers allows for the negotiation of pricing that in fare and

competitive. A philosophy of buying American should be implemented in the contracting of

suppliers. This will enhance the company’s economic stability through supporting small

businesses, thus contributing to the overall economic recovery of the US.

Competitive Rivalry in the Industry

The automobile industry is very competitive. In order to gain a competitive advantage,

the Big Three must adapt their product line to the very demanding consumers. Innovation of new

models will increase product differentiation. Ford has the Sync with MyFord Touch, EcoBoost

engines, electric vehicles, and amenities the enhance their products. GM has the Chevrolet Volt


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and hybrid SUVs that give green conscious buyers an excellent variety. Chrysler is proving

highly fuel efficient vehicles and desirable design options that have proven successful.

Product differentiation through brand advertisement and product placement are an

important part of garnering market shares. The global emerging markets are growing are an

opportunity to gain a significant market share. Toyota sales have dropped -10.4% (Toyota,

2011), American Honda drop -8% (Honda, 2011) in September 2011; this leaves an opening for

American automakers to gain consumers that may find product quality and pricing more

ambiguous than in recent past. The quality and innovation of American automakers is strong

incentive to select alternatives over foreign products.

Threat of New Entrants

The threat of new entrants in to the auto manufacturing industry is low. The initial

investments and logistical issues are too great for a new company to start. The Big Three

automakers have been around for over one-hundred years. Brand loyalty and market shares

would quickly force a start-up to reconsider. The oligopoly of the auto industry can be a daunting

mountain to overcome. New companies or companies seeking additional market share in the US

must adapt to capital demands, sunk costs, distribution channels, economies of scale, regulatory

requirements, consumer demands, industry profitability and pricing points that may gain a small

market share.

Company’s such as, India’s Tata Motors has met the demands of the Asian market by

adapting product models to the specific needs of the region. The small vehicle profiles like the

Tata Nano have been very successful. Along with unique products, the merger or acquisition of

establish auto companies will increase revenue and market shares. Tata acquired Jaguar Land

Rover in 2008, making them a global competitor. The Big Three must look into the long-term


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strategic plans and determine the opportunity costs of mergers and acquisitions that broaden the

consumer base and the global market.

Threat of Substitutes

The competitive market of the auto industry has given buyers a wide variety of product to

choices. This allows consumers to seek out substitutions or alternate brands. The lack of product

differentiation, innovation, pricing benefits will drive consumers to competitors. The auto

industry makes it very easy for consumer to substitute a buy decision between companies. Ford,

GM, and Chrysler must prove strong options in an effort to retain and gain customers. The price

of similar vehicles, trade-in value, product quality, and innovation must be selling point that

draw in customers. Maintaining a competitive advantage through new innovative products that

closely consider the consumers demands will gain market shares. A company that does not look

as a buyer as a long-term relationship will suffer on the bottom line.

Each automaker produces various sized autos that are comparable to one another.

However, high-end auto distinguish them from competitors. Opportunities through product

differentiation must be integrating into the product life cycle. This enables the consumer to better

determine the value of a purchase.


The American auto industry is looking promising in the future. The stagnant past and

dated design of American made vehicle is overt. The growth of emerging global markets

provides American automakers a great opportunity to increase revenue. The China market is

growing, Shanghai GM increased sales 10.4% in October (GM, 2011). As the economy gain its

footing and unemployment decreases, the Big Three will increase revenue.


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Innovations will drive the industry and market. Designing vehicles that are green options

and high mileage will provide appealing alternatives for consumers. Electric cars, hybrids, and

multi-fuel vehicles are in greater demand and the consumers become more environmentally

concerned. The foreign competitors have been producing green vehicles for years (i.e. Toyota

Prius) the Big Three will need to invest more research and development into the future vehicle


The economy is continuing to recover for hard times. Government bailouts and financial

reorganizations have left automakers with abandoned plant, laid off employees and restructuring

of business models. The long-term strategic plans will need to reflect the assumptions of

economic trends and their impact on business decisions. Should a new plant be build and refit?

What is the benefit of entering new and emerging markets? Are the economies of scale in line for

pricing and demand in order to maintain profitability? These are just a few of the consideration

in regards to future planning.

The competitive market is global and dynamic. Meaning the ability to meet competitors

on equal ground has never been less difficult. Ford, GM, and Chrysler will need to establish

partnerships and relationship with foreign countries and business to ease the transition into a

global economic model. The cultural differences are an opportunity to adapt vehicles to the

specific needs of the market and utilize in-country resources (i.e. parts manufacturing, labor) to

manufacture vehicles. The will prove to be a substantial cost savings for companies along with

addition revenue streams.

Consumers are seeking lower prices and higher quality products. This is a challenge, but

not impossible. Companies should provide cost saving discount and specials to gain customers.


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Additionally, trade-in will need to have a higher value. Marketing a specific audience through

multiple media outlets will provide visibility and brand recognition.


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