Dissertation

1. Dissertation on Automobile Industry
The world automobile industry had experienced near constant growth through to the mid-
1980‟s. The transition from horse carriages to automobiles brought about uncertainty over the
development of the product during the industry‟s infant years. As the automobile evolved,
demand for automobiles soared at different points in time throughout the world. However,
depressed demand eventuated two decades ago after the saturated markets of North America,
Europe and Japan. This consequently left industry profitability at a recession. The reasons to why
such an occurrence was brought about are explained below.
Porter’s Five Forces
Threat of Substitutes
The competition of substitutes has remained calm within the industry (Grant, 1998). In the
absence of close substitutes for a product, consumers usually will not react to price increases and
switch to substitutes (Grant, 2002). Consumers‟ reasons for demand for an automobile can differ.
Fundamentally, motor vehicles serve the purpose to deliver passengers from the departing
location to a particular destination. Grant (2002) says, “the more complex the needs being
fulfilled by the product… the lower the extent of substitution by customers on the basis of price
differences”. If the intent is solely transportation needs, such a need can be simply satisfied by
the substitutes of public transport. On the other hand, more complex needs, such as consumers
desiring a more flexible, comfortable, and personal means of transportation, decrease consumers‟
propensity to switch to substitutes.
Threat of Entry
New entrants in an industry intensify competition in their respective markets. However, they are
usually disadvantaged in respect to competing at the competitive level (Grant, 2000). Established
manufacturers can hold several abilities gained from survival in the industry that entrants cannot
instantly acquire, and these further create barriers to entry into the industry.
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It is estimated that over four million vehicles should be produced per year to qualify as a low-
cost producer in the automobile industry (Grant, 2002). “Economies of scale remains an essential
determinant for cost-efficient production, and that without it, high levels of flexibility alone
cannot translate into world competitive production” (Husan, 1997). The inability refrained most
potential new entrants from entering the industry with the exception of Proton (Malaysia) and
Maruti (India). Settled in protected markets with acquisition to licenses and support from its
government, permits access to required technology and designs of automobiles. This enhanced
their ability to produce at low-cost and reduced the distance from established manufacturers.
As a result of increased competition, established manufacturers‟ absolute cost advantages are
important and valuable. From experience and early existence in the industry, manufacturers have

2. acquired cost-specific knowledge to drive low-cost production. Though producing at low-cost,
product differentiation throughout the market is also important.
Rivalry Between Established Firms
Competing on innovation and cost reduction, established manufacturers created a strong wave of
increased competition. As a result of merges, acquisitions, and alike strategic relationships
between manufacturers, of small- and medium-sized producers, the industry became more
concentrated. Many manufacturers internationally expanding caused greater import activity and
construction of foreign plants to accommodate for the foreign market‟s demand and drive for
low-cost (Grant, 1998) and to exploit factors that aid research and development (Kuemmerle,
1999).
Competing in a sole market may not earn profitable returns; therefore manufacturers decide to
participate in other markets. Manufacturers diversifying into numerous segments of the industry
caused the number of competitors in national markets to substantially increase. This increase in
competition was dangerous for producers who compete predominantly domestically, as they
become more pressured by global rivals (Grant, 2000), and are often acquired by larger
manufacturers as a result, or with other alliances formed.
For its competitiveness, manufacturers standardised designs and technologies of vehicles. This
led to great similarity in products between competitors, increasing the difficulty to differentiate
for consumers. Inability to differentiate can increase consumers‟ propensity to switch brands if
they are price insensitive.
The fall in industry profitability was affected by the imbalance between demand and capacity of
automobiles. Excess capacity in depressed demand conditions led offerings of price reductions in
attempt to disseminate costs over a larger scale of sales. Over-investment in production facilities
induced greater capacity, where it grew faster than demand. Substantial exit barriers appeared
due to the relative costs to free excess capacity.
Bargaining Power of Buyers
In the output market, relative economic power of buyers is dependent on their sensitivity to price
and relative bargaining power. The merge of manufacturing designs and technologies inflicted a
low degree of differentiation in automobiles, creating a greater tendency for consumers to switch
suppliers of automobiles on the basis on price. The cost of losing a consumer to a supplier in the
industry is relatively great when the number of buyers in the market is small (Grant, 2002). As a
result, the strength of bargaining power of buyers in markets of the industry increased, with the
greater proportion of value generated from the transaction residing in the buyers.
There are additional buyers in the automobile industry other than those who consume vehicles
for use. Retailers, that manufacturers distribute their products to, also act as buyers. Given that
retailers are the only „homes‟ of manufacturers‟ products and that there are merely any other
accommodations to access the market, their capabilities to negotiate price and to execute specific
commands have strengthened their bargaining power against suppliers.
Bargaining Power of Suppliers

3. Manufacturers play the role of buyers when acquiring vehicle components to produce their
products from their suppliers. Manufacturers abandoned backward integration to production and
tended towards the Japanese way of production. That is, manufacturers established long run
relationships with a particular number of suppliers, creating symbiotic strategic alliances where
there is an interdependence between car makers to control suppliers (Banerji & Sambhorya,
1998). However, ultimately these suppliers were able to elevated their size and power
capabilities. Technology development, being brought about by component suppliers (Grant,
1998), has allowed greater power in negotiation and bargaining in their position. Powerful
suppliers increasing prices decrease manufacturers profits and/or drive manufacturers to draw
more attention on the suppliers rather than their own needs (Cummings & Worley, 2001).
The above competitive pressures of Porter‟s Five Forces (Grant, 2002) provide judgment on the
levels of competition and profitability within the industry. Profitability levels were reduced
mainly due to the intense rivalry between established manufacturers and the increased power of
buyers and suppliers in the industry. Additionally, international expansion of manufacturing
companies found fierce competition in national markets, threatening domestic competitors.
These occurrences affect the future prospects of the automobile industry. Predictions towards
this will differ depending on the time period the forecast is made upon.
Predictions on the Industry Future
It is predicted that rivalry between competitors in the industry is to continue into the future.
National markets of competitors are becoming more concentrated, increasing the difficulty for
individual manufacturers to capture market share. This would cause fight for market position and
in affect, drive price cuts, decreasing profit margins. A firm gaining some form of competitive
advantage is beneficial and important to survive and perform well in the industry. One is cost
advantage. Worldwide outsourcing, many to lower-cost locations, produces lower-cost
development that new entrants are incapable of and simultaneously, forms a higher barrier to
tempted entrants.
Excess capacity occurred due to decreased demand and over-investments in manufacturing
facilities in the industry. Potential for market growth is said to appear within the next ten years in
Eastern Europe, Russia, China, India, and Latin America. Excess capacity will persist and
possibly surface as a major problem if this phenomenon does not occur. Demand was also likely
to drop in Japan, Southeast Asia and North America (Grant, 2000). With slowing demand also
caused by the durability of vehicles and the continuous innovation of designs and technologies,
the control between excess capacity and demand will be difficult.
The bargaining power of both buyers and suppliers are predicted to strengthen. Manufacturers,
being largely dependent on suppliers for their production efficiencies and quality, were
“unconcerned about losing control over production and technology so long as they could control
marketing and distribution” (Grant, 2000). Furthermore, as mentioned previously, technology
development occurred through suppliers. These developments enhanced manufacturers‟
production efforts and therefore, they have seemed to delegate certain decision-making to
suppliers.
The foreseeing of buyers also having greater bargaining power originates from minimal product

4. differentiation of manufacturers‟ vehicles. Similarities in products force manufacturers to apply
other marketing strategies to appeal to its market. Buyers in society, compared to many years
ago, are exposed to more information about products. Educated buyers learn to expect certain
features as standard in the product and, furthermore, their expectations towards the product also
rise (Czinkota, 2000). Manufacturers strive to meet buyer expectations and therefore, lose certain
power to their consumers.
Key Success Factors of the Industry
Despite the fact that overall profitability in the automobile industry has declined, it does not
signify that all individual manufacturers are performing equally not well. There are reasons to
why some manufacturers are performing better than others in the same industry. Some
manufacturers may have access to certain resources and perform activities in such a way that
permits them to exceed competitors. These elements that drive their performance are sometimes
known as key success factors, factors in the market environment that determine a company‟s
ability to survive and thrive in that market (Grant, 2002). They are key success factors when
manufacturers end up supplying the product of customers‟ and when they can survive
competition. This proceeds on to identification of key success factors of manufacturers at
competitive positions in the industry.
The ability to be a low-cost manufacturer in the intense market creates competitive advantage.
Producing at low cost requires manufacturers to attend to several different aspects of an
automobile manufacturer‟s value chain – the activities of the manufacturer‟s separated into a
sequential chain (Grant, 2002). Segments of the chain, from supplies of components and
materials to the dealer and customer support, allow closer discussion of cost-reduction in the
industry.
Many manufacturers now acquire their components by means of outsourcing throughout the
world. Not only does this induce lower cost to manufacturers, but it also offers opportunities for
them to focus, and possibly specialise, in fewer activities in the value chain. Bramorski et al.
(2000) notes that “Manufacturers no longer compete based entirely on their own
strengths…Instead, they compete based on strengths of the entire value chain involving their
own organization and their suppliers”. For instance, manufacturers concentrate on specialisation
in new product development to produce better vehicles in attempt for greater market share.
The adoption of Just-in-time (JIT) manufacturing systems reduces inventory holdings and hence,
reduces the costs incurred in the process. Applying such a system lowers carrying costs and
investments in inventory. Each is retrieved and pulled from downstream when and only when it
is required to replenish vacancies upstream. JIT systems enforce long-term relationships with
few suppliers. Consequently, costs are furthered reduced by trust and confidence that suppliers
will deliver defect-free, quality components (Davis, Aquilano & Chase, 1999).
Mergers, joint ventures and alliances are also seen as a factor consolidating the competitive
advantage to success in the industry (Passernard & Kleiner, 2000). Such relationships permit
exploitation of companies‟ core competences (Wild, Wild & Han, 2001). By doing so,
manufacturers reduce research and development (R&D), production and/or distribution costs.
Manufacturers have also used this strategic move to get a foothold in a new geographical market.

5. A successful example is a joint venture between Japan‟s Suzuki Motor Corporation and the
government-supported Maruti in India (Grant, 2000). Their initial production of small-engine
cars extended to light trucks and now, the manufacturer from the Maruti-Suzuki joint venture is
successfully the leader in its market.
Manufacturers grasp the essence of the approach to low-cost production, but put considerable
investment into new product development (NPD). NPD has transpired into a very important and
valuable capability that a manufacturer can possess in the last decade (Grant, 2000). This enable
manufacturers to differentiate their products, and in a market where products are growing
increasingly similar, NPD is a critical factor to success. For instance, Japanese manufacturers
have been successful with NPD, and by the 1990‟s, their advantage over other manufacturers
was shorter NPD times in the industry (Grant, 2000). Japanese manufacturers attained higher
positions within their markets with the access to certain resources and capabilities.