Toyota Industry Environment Analysis - Case Study Example

Toyota – Case Study College: Name: Students ID: Date: Course Name: Unit Code: Time: Instructor: Industry Environment Analysis This section covers the analysis of the automotive industry in a global perspective. The parts covered include the characteristics of the automotive industry, external analysis of porter’s five forces and attractiveness of the automotive industry. Characteristics of the Automotive Industry The automotive industry is multifaceted. It entails complex product development and manufacturing procedures. The automotive supply chain entails different levels of suppliers as described below (Humphrey & Memedovic, 2003). Suppliers can be generally be classified into three tiers; First-tier suppliers: They put together complete systems such as brakes or interior seats for direct delivery to Original Equipment Manufacturers (OEMs). They offer a high level of research and development as well as product development as part of the integrated services they tender. Second-tier suppliers: They supply modules and constituent parts or support services to the first-tier suppliers for incorporation into the systems supplied to vehicle manufacturers. Third-tier suppliers: They supply raw materials for the supply chain or more generic engineering parts and services such as metal castings, mechanical tools, rubber and plastics. Figure 1: Types of Companies in the Automotive Industry Source: Autoindustry Market growth in the automotive industry is sluggish in the reputable markets such as the U.S. and Western Europe. However, with the emergence of globalisation, vehicle manufacturers have real and potential growth in emerging economies such as China and India that offer cheap labour. In fact today companies are moving manufacturing operations to these countries from where they then export to other markets as they try to scale down production costs. Other potential markets include Brazil, South Africa and Russia that are whose economies are posting strong growth (Humphrey & Memedovic, 2003). The automotive industry is also characterised by a very strong firm structure where a few big companies exert control over smaller companies. The biggest automotive companies are based in only three countries, Japan, the United States of America and Germany. These companies control production in the main markets. Moreover, in the automotive industry, final vehicle assembly as well as the production of parts is for the most part been kept close to end markets due to political factors. Market infiltration, high levels of motorisation plus the trend for vehicle manufacturers to ‘build where they sell’ have supported the scattering of final assembly, which today takes place in many more countries. For example, Toyota has set up manufacturing operations in more than 210 countries at present. In light of this, the companies have set up strong regional structures (Humphrey & Memedovic, 2003). External Analysis-Porter’s 5 forces Michael Porter (1980), in his book ‘Competitive Strategy: Techniques for Analyzing Industries and Competitors’, analysed the market forces that directly influence organisations’ profitability and repute, hence organisations have to respond to them. He was able to identify five forces. The forces form an awful model that is nowadays used in strategic management and planning to evaluate a company's competitive position. The model is based on the thinking that a corporate strategy should congregate the opportunities and threats in the organisation’s external environment. In particular, the competitive strategy should be based on an understanding of industry structures and the way they change. Michael Porter’s model can as well be used to analyse an industry. In fact, the model is a more common business strategy tool today and is widely employed in business strategy formulation. The model has demonstrated its efficacy in various situations measured up against other strategic management models. A change in at least one of the five forces in general requires a business to have another look at the market owing to the change introduced in the industry (Porter, 2008). Figure 2: Michael Porter’s Five Forces Model Source: Author (2014) Out of the five Porter's forces, three analyse competition from an external perspective ('horizontal' competition). These are: (1) Threat of new entrants or barriers to entry; (2) Threat of substitute products or substitutes; and (3) Threat of established rivals or competitive rivalry between existing players. The remaining two forces analyse a company’s internal threats ('vertical' competition). These are: (4) The bargaining power of buyers and (5) The bargaining power of suppliers (Porter, 2008). 1) Threat of New Entrants or Barriers to Entry If an industry faces high competition, it is easier for other companies to enter if there are no barriers to entry. The new entrants may well at any time modify key determinants of the market environment (such as market prices, customer loyalty). Existing players then tend to react and transform accordingly (Porter, 2008). In the automotive industry threat of new entrants is low down; the barriers to enter the industry are extensive. Entering the automotive industry calls for enormous initial capital investment, intellectual capacity as well as well established supply networks to set up manufacturing capacity and attain minimum production efficiency. Even though the barriers to new companies are extensive, mature companies can penetrate new markets through strategic partnerships, buy outs or mergers. Leading car manufacturer companies have globalised and penetrated foreign markets with different degrees of success. Therefore, for established companies, the barriers to entry to new markets may well be fairly low. For example in the 1980s, US car manufacturer companies practically invited Japanese makers to help them provide quality cars to the low-income groups (Sturgeon & Richard, 2000). 2) Threat of Substitute Products or Substitutes This arises once there is an alternative product that is cheaper or better or the products are complementaries. It is somehow similar to the threat of new entrants (Porter, 2008). Also, just like in the threat of entry, threat of substitution in the automotive industry is minimal. Although several other forms of transport exist, none can offer the efficacy, independence, convenience as well as value afforded by automobiles. Moreover, the switching expenses associated with using a different means of transport possibly will be high in terms of personal time, convenience, and utility but not essentially money-wise. However, in urban areas with high population densities substitutes such as mass transit, walking, and bicycles are available and can cost less than automobiles and therefore preferable. 3) Threat of Established Rivals or Competitive Rivalry between Existing Players This defines the force of competition stuck between existing players which could affect organisational margins and therefore profitability (Porter, 2008). The automotive industry is characterised by a high level of competition. Global companies compete intensely to gain large shares in the international market. The great multiplicity of rivals culturally and in philosophy has set up stage for intense competition in the industry. The level of competitions in the automotive industry is further escalated by towering fixed costs associated with manufacturing cars and trucks as well as the stumpy switching costs for patrons when buying from diverse makes and models. The leading players in the automotive industry are General Motors (GM) and Ford from the United States of America, Toyota from Japan and Volkswagen from Germany. Other key players include Hyundai (India), Mercedes Benz (Germany), Chevrolet and Daimler Chrysler (USA), Honda and Nissan (Japan). 4) Bargaining Power of Buyers Buyers can exert pressure on organisations’ margins as well as volumes. This is particularly when they order large volumes or the product is homogenous and can be substituted (Porter, 2008). In the automotive industry buyers yield strong power because of the somewhat standardised nature of the automotive commodity and the low switching costs associated with choosing from among competing makes and models. However, the automotive industry is still a little bit influential given the large buyer to producer ratio. 5) Bargaining Power of Suppliers Suppliers are the providers of inputs required in the production process. If the bargaining power is high, suppliers exert high pressure on organisational margins which may well shrink organisations’ strategic options (Porter, 2008). As regards the power of suppliers in the automotive industry, the industry seems to have power over its suppliers. The industry can dictate their terms to their suppliers. This is because automotive companies are quite few and use standardised parts that are only meant for automobiles. There is also the element of backward integration as experienced in 2005 when Ford bought Visteon that was struggling. Attractiveness of the Automotive Industry Michael Porter’s model makes use of concept development Industrial Organization (IO) economics to develop the five forces that establish the competitive intensity and consequently the attractiveness of an industry. Attractiveness from this perspective refers to the lucrativeness of industry in terms of making profits (Radke, 2004). An ‘unattractive’ industry is the one in which the blend of the five forces acts to bring down overall profitability. Moreover, the general attractiveness of an industry does not mean that all firms in the industry will generate the same amounts of profit. Companies develop core competencies, business models or networks that enable them to pull off profits higher than the industry average. The outlook of vehicle demand has been increasing steadily from the 1990’s and is expected to continue increasing as emerging and developing economies continue to post strong growth in incomes (English.people, 2004). Figure 3: Global Vehicle Demand from the 1990’s to 2013 Source: Detroit.com (2014) Even though venturing into the mainstream vehicle manufacturing is painstaking capital and labour intensive and involves huge expenses, the sale of auto parts is a lucrative area within the automotive industry (Innerauto, (2014). The main areas of auto parts manufacturing are: Original Equipment Manufacturers (OEMs) – These are the biggest auto parts manufacturers. They specialise in producing different parts of vehicles but they cannot produce all parts and components used to assemble a new vehicle. The parts include door handles and seats, among others. Replacement Parts Production and Distribution - These manufacturers manufacture parts used to replace worn out parts of a vehicle after purchase. These include air filters, replacement lights and oil fillers, among others. Rubber Fabrication - This includes the manufacture of hoses, tires, and belts, among others The industry also could be lucrative through offering additional services such as financing. If a company offers finances at better terms than financial institutions, the company could rake in good profits. Extended warranties also count. Leasing is also another viable option of boosting sales revenue. Leasing helps reduce worries customers may have regarding the vehicle’s resale value. It also makes the vehicle to appear more affordable and therefore customers can manage the expenses well. It is also a good way through which the manufacturer can cover the true price of the vehicle through financing expenses. By this means, vehicle manufacturers can boost their business. However, leasing requires a lot of attentiveness as it may not be easy to implement. Competitors Environment Analysis This section analyses competition Toyota faces in the global arena. Toyota is at present the third largest vehicle manufacturer company in the world. The company’s main competitors are General Motors and Ford from the United States as well as Volkswagen from Germany. However in 2013, Toyota controlled a bigger share of the international market share (Christine, 2014). Figure 4: Global Market Share in Vehicle Manufacturing Companies 2013 Source: Christine (2014). Toyota acquired a big market share in the automotive industry, a position it reacquired in 2012 after losing to General Motors in 2011. Toyota has since then been posting good sales but is ahead of General Motors by a small margin. This indicates that the company faces stiff competition from General Motors (figure 5). The company has as well been posting strong net incomes in the recent times following the appointment of Toyoda as the Chief Executive Officer of the company (Griemel, 2014). Toyoda instituted measures that saw the company start to make good profits as indicated in the figure 6 below; Figure 5: Sales between the Four Big Vehicle Manufacturers 2009 - 2013 Source: Market Watch (2014) Figure 6: Net Income between the Four Big Vehicle Manufacturers 2009 - 2013 Source: Market Watch (2014) The share price of Toyota rotated between $110 and $60 between 2009 and 2013. Volkswagen had the highest share price but it declined considerably in 2010 before rising again in 2012. Ford and General Motors had quite stable but declining share prices over the same period. As of 2013 the share price of Toyota was rising as indicated in the figure below; Figure 7: Share Price between 2009 and 2013 Source: Yahoo Finance (2014) References BERA: Issue 2 Automotive Industry: Global Automotive Industry. Retrieved 14 April 2014, . Christine, T. (2014). Big 3 market share. The Detroit News: Autos Insider. January 5, 2014. Retrieved 16 April 2014, . English.people, (2004). Major changes in auto industry since China's WTO entry. English.people.com, April 6, 2004. Retrieved 13 April 2014, . Griemel, H., (2014). Toyota Still No.1 in Global Auto Sales. Adage.com January 23, 2014. Retrieved 15 April 2014, (http://adage.com/article/news/toyota-1-global-auto-sales/291264/). Humphrey, J. and Memedovic, O. (2003). The global automotive industry value chain: what prospects for upgrading by developing countries? Sectoral studies series, United Nations Industrial Development Organization, Vienna. Innerauto, (2014). Inner Auto Parts. Retrieved 13 April 2014, . Industry Surveys: Autos & Auto Parts, (2004). Standard & Poors. 172 (32): 1. McGraw- Hill. Yahoo Finance, (2014a). General Motors Historical Prices. Retrieved 15 April 2014, . Yahoo Finance, (2014b). Toyota Historical Prices. Retrieved 15 April 2014, . Yahoo Finance, (2014c). Volkswagen Historical Prices. Retrieved 15 April 2014, . Yahoo Finance, (2014d). Ford Historical Prices. Retrieved 15 April 2014, . Market Watch, (2014a). GM Annual Income Statements. Retrieved 15 April 2014, . Market Watch, (2014b). TYT Annual Income Statements. Retrieved 15 April 2014, . Market Watch, (2014c). VW Annual Income Statements. Retrieved 15 April 2014, . Market Watch, (2014d). FRD Annual Income Statements. Retrieved 15 April 2014, . Porter, M.E. (2008). The Five Forces that Shape Strategy. Harvard Business Review. Radke, P. (2004). HAWK 2015 Knowledge Based Changes in the Automotive Value Chain. Automotive Cluster of Slovenia, 2nd Annual ACS Convention on Developmental Trends in the Automotive Supplier Industry, Ljubljana, 13 May 2004. Rear View Mirror - automotive industry history, Al Binder, Ward's Auto World, March 1, 2003, Retrieved 13 April 2014, . Special Report: The Global Car Industry - Extinction of the Predator. The Economist, September 10th, 2005, 63-65. Sturgeon, T. and Richard, F. (2000). Globalisation and Jobs in the Automotive Industry Final Report to the Alfred P. Sloan Foundation, International Motor Vehicle Program, Centre for Technology, Policy, and Industrial Development, Massachusetts Institute of Technology, Cambridge, MA. Read More