ANALYZING INDUSTRY STRUCTURES

Industry Analysis II: Five Forces (a)

Learning Objectives

Foundations
Understanding Michael Porter’s Five Competitive Forces

Application
Analyzing the first three competitive forces in the automotive industry

2
Michael Porter distinguishes five competitive forces
Threat of New
Entrants

Rivalry
Bargaining Power of Among Bargaining Power of
Suppliers Existing Buyers
Competitors

Threat of Substitute
Products or Services
[2]

Porter (1980) 3
Rivalry among competitors is the first competitive force

Determinants Automotive
Market concentration • Around ten dominant global vehicle
manufacturing group
Diversity of competitors
• High overlap of product portfolios
Product or service differentiation
• Excess production capacity
• Slow market growth
Excess capacity levels
• High exit barriers
Cost conditions (if high share of fixed costs)

Barriers to exit High rivalry among competitors

[3] [4] [5]

Porter (1980), Grant (2015) 4

Competitive intelligence seeks to predict competitor behavior

Strategy
How is the firm competing?

Objectives & Values

What are competitor's current goals?
Predictions
Is actual performance meeting these goals?
How are its goals likely to change? What strategy changes will the competitor
initiate?
Assumptions & Representations
What assumptions does the competitor How will the competitor respond to our
strategic initiatives?
hold about the industry and itself?

Resources & Capabilities

What are the competitors' key strengths
and weaknesses?

Porter (2008), Grant (2015) 5

The bargaining power of suppliers is the second force

Determinants Automotive
Availability of substitute suppliers • Large number of suppliers

Firm backward integration • High switching costs due to initial investment in

part design
• Low threat of supplier forward integration
Supplier concentration
• Supply of entire modules
Associations and labor unions
• High value contribution of suppliers (>80%)
Switching costs for focal firm
Moderate but increasing bargaining power of
Supplier forward integration suppliers

Value contribution of supplier

[6] [7]

Porter (1980), Grant (2015) 6

The bargaining power of buyers is the third force

Determinants
Buyer switching cost
Firm forward integration
Product/service differentiation
Value contribution of focal firm
Buyer concentration
Availability of substitute products
Automotive
• Large number of buyers (individuals, fleet
managers, rental firms)
• Increasing availability of substitutes
• Low switching costs
• High price sensitivity in most segments
• No threat of backward integration
Moderate but increasing bargaining power of
buyers

Buyer price sensitivity [8] [9] [10]

Buyer backward integration

[11] [12]

Porter (1980), Grant (2015) 7

Summary

Foundations
Understanding Michael Porter’s Five Competitive Forces

Application
Analyzing the first three competitive forces in the automotive industry

8
Sources
Image Sources
[Cover] Compass <https://pixabay.com/de/photos/magnetkompass-navigation-richtung-390912/>

[2] Michael Porter <https://commons.wikimedia.org/wiki/File:Michael_porter.jpg>

[3] Toyota <https://commons.wikimedia.org/wiki/File:2019_Toyota_Corolla,_Front_Left,_09-17-2020.jpg>

[4] Cadillac <https://commons.wikimedia.org/wiki/File:2005_Cadillac_Escalade_Front.jpg>

[5] Volkswagen <https://commons.wikimedia.org/wiki/File:Volkswagen_Passat_B6-1.jpg>

[6] BMW <https://diminishedvalueofgeorgia.com/bmw-7-series-suppliers-for-2016/>

[7] Renault <https://europe.autonews.com/article/20170202/CUTAWAY01/161229952/suppliers-to-the-new-renault-megane>

[8] Avis <https://commons.wikimedia.org/wiki/File:Avis_logo.svg>

[9] Share Now <https://commons.wikimedia.org/wiki/File:SHARE_NOW_company_logo.png>

[10] Budget <https://commons.wikimedia.org/wiki/File:Budget_logo.svg>

[11] TeilAuto <https://de.wikipedia.org/wiki/Datei:TeilAuto_Logo.svg>

[12] Advantage <https://commons.wikimedia.org/wiki/File:Advantage_Rent_A_Car_logo.svg>

Content Sources
• Porter, M. E. (1980). Competitive Strategy. The Free Press.

• Porter, M. E. (2008). The five competitive forces that shape strategy. Harvard Business Review. 86(1), pp. 78–93.

• Grant, R. M. (2015). Contemporary Strategy Analysis. John Wiley and Sons. 8th Edition.