“Porter five forces analysis is a framework for industry analysis and business strategy development formed by Michael E. Porter of Harvard business School in 1979. It draws upon industrial to derive five forces that determine the competitive intensity and therefore attractiveness of a market. Attractiveness in this context refers to the overall industry profitability. An “unattractive” industry is one in which the combination of these five forces acts to drive down overall profitability.”
Below is Porter’s 5 Forces analysis in regards to the Luxury Auto Business. Below we will give a scale 1-10 in regards to threat towards the industry. 1 on the scale means very low threat. 10 means a very high threat. Lastly a 5 means there is medium threat.
Threat of New Entrants and Barriers to Entry:
The threat of new entrants is relatively low. Our analysis shows the threat to new entrants on a scale 1-10 is a 2.5. Current industry incumbents have a stranglehold on the industry as a whole.
Initial investment into a car industry is colossal. The amount of capital needed first for R&D is substantial. The only way for a company to enter the market is most likely to be in the car industry currently but not in the luxury auto industry. This is the approach some of the biggest car companies have used in the past. Good examples are Toyota and Honda by having created the brands Lexus and Acura respectively.
Economies of Scale
Companies who have a firm place in the luxury auto industry have achieved almost perfect economies of scale. The firms are so big that fixed costs are limited and revenues and profits can be maximized. New entrants into the luxury auto industry will struggle to attain economies of scale.
Before entering an industry their are strict regulations when entering an industry. For companies already in the car industry this makes it easier for companies to transition from, for example, the value car industry to the luxury car industry. This is a small threat for firms in the luxury auto industry. This is why a threat level of 2.5 is appropriate.
Threat of Substitutes:
The threat of substitutes is medium-moderate. Our analysis shows the threat of substitutes on a scale 1-10 to be a 5. Current industry incumbents should be somewhat concerned.
According to reputable internet website, The Guardian, has reported that sales in early 2013 have seen a rise in luxury automotive sales. This is big new because in the past half decade, the luxury automotive industry has seen sales drop repeatedly. Our conclusion is consumers were looking for cars that provided value, especially in tough economic times when peoples disposable income is limited.
Technology is growing at a rapid pace and the price of luxury features is coming down each and every year. Three years ago it was considered “luxury” to have a touch screen on the deck of a car. Today that is not the case. Many “value” cars such as Ford and Honda are featuring cars with built in touch screens on their deck. This is another reason we believe our assessment of a threat to substitutes of 5 is appropriate.
Bargaining Power of Suppliers:
The bargaining power of suppliers medium-moderate.Therefore, our analysis shows that the threat for the luxury automotive industry on a scale 1-10 is a 6.
Quality of Parts
Suppliers of luxury vehicles have a good amount of power. The inputs of luxury vehicles are going to be different than those of lower end, value vehicles. Lower end, value vehicles use plastic, fake wood, and fake leather in many of their cares. When it comes to luxury brands they use real leather, real wood, and rarely will use plastic in their consoles. There are a minimal amount of suppliers in the industry and this is another reason why suppliers hold a decent amount of power.
Bargaining Power of Buyers:
The bargaining power of buyers is high. Therefore, our analysis shows that the threat for the luxury automotive industry on a scale 1-10 is a 6.5.
One of the biggest threats of the luxury automotive industry is substitutes. Customers who shop for luxury automobiles know they are looking the best car money can buy. The previous statement is true in a good-great economy. The economy has been struggling the past couple years has had an impact on luxury car sales. Although there are consumers who would normally be in the market for luxury cars they are forced to buy cars that are less costly.
Today more than ever customers have more information at there fingertips than ever. It is important for the luxury automotive industry to realize this. This fact is critical. One area the luxury automotive industry has been slacking is the miles per gallon category and durability. In a recent study, although Mercedes was ranked as having one of the highest rated cars when it came to overall quality it ranked 23rd in actual overal quality. If consumers are able to do their research and find out this information the luxury automotive industry can be facing a serious threat towards potential buyers.
Degree of Rivalry:
The degree of rivalry within the industry is high. Therefore, our analysis shows that the threat for the luxury automotive industry on a scaled 1-10 in a 9.
Market Share and Market Growth
The luxury automotive industry is well established. Consequently, there is not much more new market share to grab hold of. Luxury car companies must take market share away from one another. Many times in on television it is not uncommon to see comparative advertisements between car companies. Audi compares itself to BMW and Mercedes very frequently.
For a company to leave the luxury automotive it would have to take devastating losses. The reason for this is that entering the market demands a high initial investment. Even if a car company is losing a small amount of money each year it does not make sense to exit the industry. This being said, this is a reason why degree of rivalry within an industry is so high, it is highly unlikely a luxury car company will exit the industry. It is only a fact.