Despite the changes wrought by the recent recession, the forces acting on the automotive industry have not changed much over the years. Michael Porter’s five forces model describes an industry’s profit potential in terms of five forces: threat of new entrants, bargaining power of customers, bargaining power of suppliers, threat of substitutes, and rivalry among competitors (De Kluyver & Pearce, 2012). In the automotive industry, the threat of new entrants is low. The Ford Motor Company was founded in 1903. Since then, the US automotive industry has come to be dominated by three US competitors (Ford, GM, and Chrysler) and a few foreign participants. Not only is the cost of competing with these giants prohibitive, but gaining the knowledge necessary to begin in the industry is also a deterrent for new competitors (Reference for Business, 2002). In 2014, the industry sold over 16 Million cars and trucks in the US. This large pool of buyers weakens the bargaining power of customers (Auto Alliance, 2015). Similarly, there are over 1,000 suppliers of parts for automotive vehicles. The size of this pool of suppliers, coupled with the difficulty of forward integration, decreases the bargaining power of suppliers (MEMA, 2015). Substitutes are products from other industries that can be used as a replacement for in the automotive industry (De Kluyver & Pearce, 2012). An example of this for the automotive industry would be public transportation. As US auto sales have shown, this does not appear to be a factor. Specifically, public transportation is a regional concern, and does not affect the entire market. Finally, the rivalry between competitors is fairly high. There are a limited number of competitors, new buyers are infrequent, and costs of entry are high.
McGahan provides a framework in which to analyze the evolution of an industry. Based on her findings, an industry’s evolutionary path is derived from threats to its core activities or assets. If there are no threats to assets, but many of the activities are becoming obsolete, an industry is said to be experiencing intermediating change. In these situations, the assets in the industry retain their value, but the existing activities must be changed (De Kluyver & Pearce, 2012). In her groundbreaking Harvard Business Review article, McGahan pointed out that the automotive industry was undergoing this sort of intermediating evolution thanks to changes customer relations and the introduction of online sales (McGahan, 2004).
After more than a decade, the automotive industry has moved from a period of intermediating evolution to progressive evolution. In this situation, neither the assets nor the activities of the industry are under threat. In this situation, the best strategy is often to focus on achieving lower costs and better economies of scale (De Kluyver & Pearce, 2012). After seeing sales slump lower than they had been in 30 years in 2009, the industry has rebounded and sales are once again at a near 30 year high. Automotive innovation is slow, with each competitor adopting the product features of the other. In fact, it appears that many of the advancements of one company are shared with others to improve the safety of all vehicles on the road. With little threat to their assets or activities, it is only natural for automotive manufacturers to begin working to lower costs and improve economies of scale. With 44 final manufacturing plants around the US, the scale of the industry is vast (Auto Alliance, 2015).
Auto Alliance. (2015). Cars Move America. Retrieved September 9, 2015, from http://www.autoalliance.org/files/AA_CarsMoveAmerica.pdf.
De Kluyver, C. & Pearce, J. (2012). Strategy: A View From the Top (4th ed.). Boston: Prentice Hall.
McGahan, A. (October 2004). How Industries Change. Harvard Business Review. Retrieved September 9, 2015, from https://hbr.org/2004/10/how-industries-change.
MEMA. (2015). Learn About the MEMA Network. Retrieved September 9, 2015, from http://www.mema.org/Main-Menu/About-Us.
Reference for Business. (2002). SIC 3711 Motor Vehicles and Passenger Car Bodies. Retrieved September 9, 2015, from http://www.referenceforbusiness.com/industries/Transportation-Equipment/Motor-Vehicles-Passenger-Car-Bodies.html.