The Five Forces Model of Competition The model above is known as the Five Forces Analysis which was designed and created by Michael Porter of Harvard Business School. Each shape defines the five forces that shape competitive rivalry and is relevant to industry profitability. Each new entrant to an industry faces competitive pressures from:
• Buyer bargaining power and seller buyer collaboration.
• Companies in other industries to win buyers over to substitute products.
• Supplier bargaining power and supplier-seller collaboration.
• The threat of new entrants into the market.
• Rivalry among competing sellers to attract new customers. For a new entrant to the automobile industry there is generally a very low threat. In order for a new entrant to be successful they must be able to mass-produce. Due to the expense of mass production, a new entrant must have a large amount of capital to compete in the automobile industry. Buyers and customers both have high bargaining power when purchasing an automobile. Buyer power is strong when a consumer has a multitude of products to choose from. An example would be choosing to purchase a Ford Expedition or Chevrolet Tahoe. Both are similar in size, gas mileage per gallon, seating and engine size. Each vehicle is produced by a different manufacturer which gives the consumer the ability to create competition. In addition manufacturers are forced to create quality automobiles in order to maintain customer satisfaction. Supplier power for new entrants is very low. According to the Texas Automotive Industry Report automotive parts and equipment in 2004 were valued at 1.6 trillion worldwide. In order for suppliers to be competitive they must be able to offer products at a competitive price and produce products that change as the market changes. There are many parts that are used to produce an automobile which require a multitude of suppliers. Since there are so many suppliers for a manufacture to choose from there is limited bargaining power. There is a low threat of substitute products in the automotive industry. There are very little substitutes to the automobile. With the exception of a bike or walking the automobile is one of the few non-commercial forms of transportation. Other transportation options are of course the bus, airplane, subway, train. One of these substitutions usually depends on where you live or work. Last but not least is rivalry among competing sellers. As the number of rivals increase they become more equal in size and competitive capability. Since the 1920’s manufactures and sellers have been competing by trying to keep up with the latest innovations. For the automobile industry this has meant responding to customer needs and wants. Whether its luxury or economy, automakers have evolved into industry that depends on customer demands. I would not recommend entering into the automobile industry unless you have a lot of capital and a great product idea. It is very difficult to mass produce a new product unless there is a market that demands it. Producing an automobile is just the beginning of creating a successful product. New entrants must be able to up with research and development in order to improve the quality of an automobile. It’s a wonderful market but one that is difficult to compete in.