A competitive advantage occurs when organization can offer customers greater value (lower price, additional services and benefit) over competitors in its marketplace (Make 2011). Strategy is a key assisting tool for a firm in any industry to gain the competitive advantages. Business strategy is ‘the long-term purpose and positioning of the organization within its industry’ (Miser 2014). Today business environment is more complicated and more regulated especially in developed countries than in previous business era.
A genuine strategy is always needed when business create a distinctive way ahead, against the influence of the environment by applying whatever core resources and competencies it belongs (Miser 2014).
The firm seeks sustainable competitive advantage through these distinctive capabilities. In this severely violent business world, the automobile industry is extremely competitive, with many large organizations trying to influence their competitive advantages to achieve the majority of market share and position (Business Wire Inc. 2013).
This paper is to study the US automobile industry for Toyota Motor Corporation (Toyota) using five forces analysis that was developed by Michael Porter to identify competitive opportunities and attractiveness effectively within market or an industry.
The framework for Porters five forces analysis consists of these competitive forces such as the threat of new entrants, the threat of substitutes, the buyer power, the supplier power and rivalry among the competitors (Porter Bibb). These five forces shape the strategy of organizations (Porter Bibb).
The automobile industry analysis enables Toyota to understand what forces determine profitability of the automobile industry, what is the current absolute and relative profitability of the industry based on these forces, how these forces re changing and expected to change, and how those changes affect future profitability (Miser 2014).
2. Industry Overview Page 5 The automobile industry is one of the most essential economics sectors and industries. It also represents 3 to 3. 5% of GAP, and creates one in every seventeen jobs in the United States (US). The number of car production in US is almost 2. 7 million and that represents 4. 9% of world production in 2011. The first place of global car production is held by China (24%) and followed by Japan (1 1. 9%) (Worldliest 2014). The US market represents twenty three ere cent of global number of sales of light and passenger vehicles as in term Of 16. 5 million sales units (Euler Hermes Group 2014). The trend of customers demand in a car manufacturing industry is varied with prices of product or gasoline, per capita disposable income, and advancement of technology in vehicle production (Euler Hermes Group 2014).
For example, during past five years, the growth of environmental concerns and dynamic increase of the fuel prices have shifted the preferences of consumers away from fuel- guzzling pickup trucks to more fuel-efficient and smaller cars. As a result, nonusers highly demand more felicitating vehicles. In this century, a company which can innovate and produce more fuel-efficient vehicles than competitors gains competitive advantages and market shares (N com 2013).
Apart from that, product innovation can stimulate demand in regard with more fuel-efficient vehicles such as electric models and hybrids than in the past. Nowadays people are more interested to invest on the car that are fuel efficient. Moreover, vehicle prices are tied to materials and equipment costs. For instance, the higher steel and prices raise purchasing costs, and also retail rice. The affordability for consumers is determined by per capita disposable incomes (Gnomon 2013). Increasing income level and incentives makes users more affordable to buy motor vehicles.
Besides that, the number of financing companies in automobile industry increases significantly over the last few years. Due to this, the number and range of automobile loans are increased and that make industry demand stronger (Gnomon 2013). Furthermore, , according to Michael Porter (1980), instabilities of economic conditions such as material shortages, labor supply shortages; strikes, and purrs in demand can influence the profitability of almost all businesses in an industry for short-term period. Porter (1 980, p. ) also says: “While such factors have tactical significance, the focus of structural analysis is on identifying the stable, underlying characteristics of an industry-its economic and PEP – PROBLEM Page 6 technological structure that shapes the arena in which competitive strategy must be set”. Whether the success or fail of a competitive strategy, it depends on how a firm relates to its environment. The main aspect of the firm’s environment is he industry in which it positions and operates (Make 2011).
The effect of industry structure is eve strong in defining not only the rules of the competitive game but also the strategies potentially available to the organization (Porter 2004). The available potential is not equal for all industries especially in profit potential. Over time, there will be the movement on the structure of industry gradually, and organizations will have unique weaknesses and strengths in dealing with structure (Porter 2004). Therefore, it is crucial for all firms that the strategy analysis must be started through understanding industry Structure (Porter 2004).
In today modern society, automobile is one of the most convenient transportation equipment. As a result of globalization, foreign auto dealers are able to enter American market easily, and thus, competition is stronger and stronger in the market. The US automobile industry is mainly dominated by the ‘big three” domestic automotive manufacturers such as General Motors, Ford and Daimler Chrysler (Shinny 2012). However, the foreign car manufacturers, Toyota and Honda are the biggest competitors in this industry (Business Wire Inc. 013). Due to the higher oil prices, movement towards green technologies, and the global economy, the more fuel efficiency and technological innovation like Hybrid vehicles are being demanded among consumers (Shinny 2012). This is a great opportunity for Toyota to increase market shares by innovating and producing high technological and more fuel efficient vehicles. 3. Toyota Motor Corporation Toyota Motor Corporation is a Japan-based auto manufacturer which was founded in 1937.
The main business engine of Toyota is producing and selling different types of cars and vehicles which suit to different size of households ND corporate uses around the world. Toyota also sells the related parts and accessories to meet the market’s needs and wants (Gnomon 2013). The primary market areas of Toyota Motor PEP – PROBLEM Page 7 Corporation are Japan, Europe, North America, and Asia. Toyota, Lexus, Hon…, and Dadaists are current brand of Toyota Motor Corporation, the leading auto manufacturer, which competes in the automobile industry and also is the eighth largest company in the world (Toyota Bibb).
As of March 31, 2014, the annual revenue of Toyota Motor Corporation was 25. 69 trillion yen, an increase of 16. % compared to the last financial year. Operating income before tax increased from 1. 32 trillion yen in 201 3 to 2. 29 trillion yen in 2014 due to the major factors – Currency fluctuations of 900 billion yen, marketing activities of 1 80 billion yen, and cost reduction efforts of 290 billion yen. The consolidated vehicle sales increased by 245,369 units from 2013 and the vehicle sales totaled 9, 1 16,033 units in 2014 (Toyota AAA).
Industry analysis empowers an organization to develop a competitive strategy that leverages the competitive forces in its favor and best defends against hem (Clark 1 991 Understanding the sources of the competitive forces is essential to develop a competitive strategy (Make 201 1). From this understanding of these competitive forces, the company can emphasis areas where industry trends indicate the greatest significance as either opportunities or threats (Industry analysis and competition: porter’s five forces 2014). 4.
Porter’s Five Forces on Automobile Industry When the rates of return are higher than the adjusted free market return, it spurs the inflow of capital into an industry either through additional investment by existing competitors or through new entry. Michael Porter (1980, p. L ) stated that ‘the strength of the competitive forces in an industry determines the degree to which this inflow of investment drives the return down to the free market level, hence the ability of firms to sustain above average returns. The state of competition in an industry depends on five basic competitive forces”.
Porter’s five forces is a framework that analyses how five key competitive forces affecting the profitability level of an industry and shaping the competitive strategy Of a firm (Porter Bibb). Moreover, these five forces determine the structure of an industry too. The weaker the competitive forces in the industry are the more profitable it is. An industry With high PEP – PROBLEM Page 8 buying power and supplying power or few buyer and suppliers but many substitute products, weak barriers for entry and competitors will become aggressive and strongly competitive, and thus, not so attractive because of its low profitability (Gnomon 2013).
Evaluating company’s competitive position in the industry and identifying the weakness and strengths that maintain and strengthen that position is the major duty of every strategist (Clark 1991). Porters five forces model, the analyzing tool, is very useful to develop the strategy of company in enhancing its long-term profit as it discloses how powerful each of the five forces is in a particular industry (Industry analysis and competition: Porter’s five forces 2014).
This model can provide an analysis of IIS automobile industry competitive nature in details and assist in assessing the strength of competitive and the position of the company in the market. A successful competitive strategy is also a purpose of the attractiveness of the industries in which the firm competes and of the firm’s elated position in those industries. Porter’s five forces are the threat of new entrants, the threat of substitutes, the bargaining power of buyers, the bargaining power of suppliers and the rivalry between the existing competitors (Porter Bibb). 4. Threat of new entrants All entry barriers can and do change the conditions of industry. In the auto industry, economies of scale increased extremely with post-war automation and the successful new entry is being stopped due to the vertical integration in the market. Economies of scale are very hard to be achieved by small companies. Company strategic decisions mainly impact on entry barriers if the changes of entry barriers are beyond a company’s control (Grungy 2006). Therefore it is very important for every company in any industry to understand the level of threat for entry.
The main factors contributed into a barrier to entry caused are an initial capital investment, switching costs, financial prudence, government policy, unregulated technology matters or the role of buyers and suppliers of the particular industry. The automobile industry is protected by the high barriers of entry to introduce new products. There are very few new players who could successfully venture into the automobile industry because of the large amount of capital investment requirements PEP – PROBLEM Page 9 to set up producing facilities and a distribution network.
Moreover, the achievements of existing global major competitors from economies of scope and scales cause difficulties for a new entrant in offering competitive price. In auto industry, the brand equity is one of the most significant barriers for new entrants. Due to the issues of reliability, durability and safety are important, consumers made the decision based on the impression of a model on the manufacturers previous performance on these issues (Shinny 2012). Therefore, the reputation and image of the brand is extremely crucial to customers.
These are one of the factors makes a new entrant difficulty in competing. In order to overcome this barrier, it takes many years for a new entrant in building a strong enough reputation and image to be competitive. Since Toyota is the well-known Japan car brand, large size, and unshakable market presence in various segments, Toyota gains a competitive advantage over new entrants in the automobile industry (Baggage 2001 In addition, the age sum of capital is required for initial investment.
It is very costly and risky to enter a car manufacturing market as the competition between the companies is very intense and the well established companies dominated the market. In US car manufacturing industry, the big three domestic companies (General Motors, Ford and Daimler Chrysler) hold the most Of the market shares. US Government Even if new entrants could achieve the market share with bringing innovative ideas and products to the industry, they may expect to face high retaliation from existing companies.
However, some players may have special skills or resources that aid them to overwhelm barriers to enter an industry more easily and cheaply than most other players. As a result of the increasingly global nature of economy and emergence of foreign competitors who belong to the capital, management and marketing skill and technology, there is an increase in the threat to the domestic industry. In the case of Toyota entry to US market, Toyota can use the cost advantage of the Toyota Production System (TAPS) to plunder into US market.
The tactic of the TAPS system is less of everything usage: less human effort in the factory, less – investment tools, less manufacturing and storage space by using Just-in-time system, and half the engineering hours to develop new products compared to European and American manufacturers (Takeover & Petersen 2006). The commitment of Toyota to quality, fuel PEP – PROBLEM page 10 efficiency, and low cost made Toyota cars more demand and preferable than German and American cars. As an evidence of increasingly global nature, the table of global car production rates can be seen in Appendix 1 . . 2 Threat of substitutes All firms in an industry are broadly competing against each other by reducing substitute products. Substitute products and services limit the profit potential and attractiveness of an industry’ with the cap of price level. As the price-performance trade-off offered by substitutes became more attractive, it became more difficult to gain the industry profits. The US industry trends indicate that a significant part of car demand is taken by the used car market as the consumers still have a confidence with the used car.
In order to gain the market share from the used car industry, Toyota has narrowed the price gap between its own automobiles and the used cars with TTS ability of efficient price cutting system. Substitutes often became more active as long as the industries’ development became more competitive and causes price reduction or performance improvement. The factors contributed in the search of substitutes are switching costs, price, quality, government regulations, tax policies, government grants and subsidies (Monteverdi & Tech 1982).
Currently, an example, the U. S government is promoting solar heating by granting the research funds and tax incentives. In addition, there are the effect of safety and pollution standards on relative cost and quality of substitutes. A shift towards a knowledge economy and rise of online system reduce the need for a two or more vehicle household. According to the Center Of Automotive research, current the number of cars at 2. 1/ household will be the highest point and it is estimated to drop the level to 2. Peer household or less by 2025 (Shinny 2012).
The result of this research also highlighted that the market opportunities of US domestic companies rely on segmenting into market which supplies alternative transport or hybrid vehicles with low cost (shinny 2012). Another risk to become substitutes is an availability of several alternative hypes of transportation such as trains, buses, bicycle, planes or motorcycles available. These _ probative Page 11 substitute transportation almost always cost less and sometime are more environment-friendly but rarely offer the same level of convenience. . 3 Bargaining power of buyers As buyers have an ability to bid down prices, play competitors off against each other, and demand higher quality or more service, buyers are the representatives of a competitive force. The conditions making buyer powerful are a number of characteristics of its market situation and how important its arches is by being viewed as an industrial level. The Lager volume Of purchase relative to sellers’ sales become, the more powerful buyer group will be (Grungy 2006).
In the auto industry, most of the buyers are individual and the bargaining power is higher for corporate or governments who usually buy large fleets compared with individual consumers. Moreover, consumers will easily switch to other suppliers if industry products are standardized and undifferentiated, and the switching cost is also reasonable low (Monteverdi & The recent trends of automobile industry indicate that the consumers are seeking more fuel-efficient cars as the impact of the rising oil prices.
This also results in an increase of hybrid cars demand because it offers cheaper alternatives for operating the vehicle (using battery to run the car if the running speed is under 60 to km) together with higher expectations of product quality (Takeover & Petersen 2006). Moreover, since there are plenty of choices for buyers in car industry, the bargaining power of buyer is quite strong and buyers can easily choose other car brands. Buyers can also use alternative types of transportation with low cost.
In addition, buyers are price- insensitive and their decision in buying vehicle is impacted by the vehicle cost (Sudsier 2001). However, Toyota implements the cost cutting practices in its production system to offer the price that the buyers expect to pay and to locate its products into a more advantageous position compacted to its competitors. It is proven by the number of Japan brand sales in US auto industry in Appendix. 4. 4 Bargaining power of suppliers page 12 Suppliers can exert a competitive force on an industry because they can raise prices or reduce the quality of the goods they supply.
Increasing price can enemies profitability of an industry due to failure to recover cost increases in its own prices. The factors influencing buyer power have inverse effect on the power of suppliers. If supplier market is monopoly or only limited choices available for buyers, there will be considerable influence on prices, terms and quality (Sudsier 2001). The suppliers in the automobile industry have low bargaining power and are likely to be smaller than manufacturers.
Therefore, numerous suppliers rely on one or two auto manufacturers to purchase the majority of their products. On the other hand, while the automobile supply equines is fragmented, they supply vital parts for car manufacturing and most of automobile manufacturers rely on the timely operations of supplier and stellar quality (Shinny 2012). Based on this fact, it is very common in signing long-term legally binding contract between supplier and manufacture accompanied by strict quality and standards.
If a supplier either does not meet the standard set by the car manufactures or charge the price more than carmakers are willing to pay, auto manufacturer can easily find another supplier and even move its supply chain towards the cheaper supply markets n a different country (Monteverdi & Tech 1982). For example, U. S automobile manufacturers outsource some parts of their product to be produced in China where the labor cost is cheaper than U. S. In the case of Toyota, more than ten different companies from U.
S supply the goods to Toyota. The quality, cost and delivery of the products are the major qualifications that the company must have to be a Toast’s supplier. If suppliers cannot comply with those basic standard set by Toyota, it is difficult for them to survive because losing the big manufacture like Toyota can stop heir whole operation and create financial difficulties as well. Therefore, strong relationship with the suppliers becomes one of the competitive advantages of Toyota. 4. Rivalry between the existing competitors The most of tactics used during rivalry between the existing competitors are price competition, product or service innovation, advertising battles, better customer benefits package, and increased customer services or warranties. Conditions that PEP – PROBLEM Page 13 cause rivalry occurs are one or more competitors who see an opportunity to move up position in the market, industry pressure and an opportunity to expand the market share (Porter Bibb).
In the automotive industry, the rivalry between existing competitors is very strong. There are a moderate number of competitors in this industry. As a large amount of initial capital investment, a firm would incur huge losses if it would decide to leave the auto industry’. Therefore, a firm usually stays in automobile industry for the lifetime or leave the industry if it bankrupts. In the situation that the existing manufacturers will not leave industry easily and new entrants will also come in, it blows up rivalry among competitors in the auto industry.
Competition is also fuelled by the changes of market’s needs and expectations on quality, cost-efficiency and price. In automobile industry, especially in US, the higher consumer expectations and anticipation for the lower price is, the stronger competitive rivalry becomes (Seventy 2012). Offering high sales discounts by Big Three companies puts an additional pressure on Toast’s costs cutting strategies and efficient production. 5.
Recommendation Based on the above Porter’s five forces analysis, the some recommendations for Toyota are as follow: Focus on innovation and technology of fuel-efficient vehicles like Hybrid as true differentiation strategy according to Porter’s three strategy model. Expand market to rapidly developing countries by introducing products as per market’s needs and want. Innovate advance technology for fuel economy, for example, conventional gasoline-fuel engine Improve the value chain to provide the wide range of customer services in order to persuade new consumers and increase brand loyalty.
PEP – PRIMPED page 14 Move the manufacturing facilities to Asia where Toyota can get cheaper cost for labor and factory expenses. Increase innovation and production of energy saving and environmentalists products. Focus on product quality to maintain brand’s image Keep on learning and improvement on manufacturing systems for efficiency. Emphasis on Americanism product design, manufacturing and marketing to expand market share in US automobile industry.
Enforce compliance (laws and regulations) and actively participate in social contribution activities as a one of the missions of Toyota – safety first. Manufacture more running cost-efficient vehicles at a relatively low price to follow the trend of US automobile market. In conclusion, Porters five force model provides a picture of the industry thin larger economic frameworks, especially with regards to the global economy and necessary changes that must occur in manufacturing.
It helps organization to develop strategies for profitability by understanding five forces that shape competition. This will also put Toyota and US industry on a smart trajectory towards success. Moreover, Toyota must sustain its competitive advantages in global and US automobile industry such as strong brand, TOM, value chain, fuel-efficient (hybrid) vehicles and wide range of product offering to retain its position and achieve future success.