Market Environment and Structure of Automobile Industry

Market Environment and Structure of Automobile Industry 1.1. Market Environment The market environment is the combination of actors and forces that affect an organisations capability to operate its operations effectively in order to provide its products and services to its customers. (Jobber 2004) According to Jobber (2004) these forces can be classified into internal or external environment and these will act in accordance with the companys position in the market as shown in appendix A. As this analysis is about the automobile industry and companies operating within this industry are also facing these forces. Some of these factors are explored later on in this report. 1.2. Market Structure Chris Britton (2003) defines market structure as the amount of competition that exists between the rivalry organisations. According to him the market structure can be perfection competition; monopolistic competition; oligopoly; or monopoly depending on the nature of business. As the automobile industry in not mainly dominated by one single firm and in different parts of world there are different market leaders. So, in bigger picture the global automobile industry is having an oligopolistic structure where many player are there to share profit and for competition. 1.3. Brief Profile of Automobile Industry The automotive industry is the industry involved in the design, development, manufacture, marketing, and sale of motor vehicles. According to Datamonitor (2009), more than 40 million cars were sold across the globe which means the market shrunk by 5.3% as compared to 2007. As Europe is biggest consumer of new cars with 42% while Asia-Pacific and America accounts for 32% and 26% respectively (Datamonitor 2009). The plunge in the consumption of new cars is caused by the recent recession and the motor crises which are widely affecting the auto industry. Meanwhile the rising fuel prices and increasing costs of raw material are another great concern for the manufacturer in order to survive in this turbulent atmosphere. Before the global crises the US market which was the biggest consumer of light vehicles was dominated by the big three GM, Chrysler and Ford, while in Europe equal competition was seen among few companies (Ford, Volkswagen, and BMW) and Asian market was mainly dominated by the Toyota. In recent years the Toyota emerged as a big threat for US companies in the international market through its hybrid technology and is giving tough competition. The Tata has launched the world cheapest car Nano in 2009, India is the focus of all major car manufacturers due to its consumption of small cars and it is also described as For small car, India is the centre of the Universe by Alan Mulally, Ford President and CEO (Business Today Sep 2009). 2.0 Looking at Company (Ford) 2.1. Company (Ford Motor ) Profile Ford Motor Company is a globally recognized company based in United States and it operates across the globe in six continents with its four brands (Ford, Mercury, Lincoln and Volvo). It operates primarily through its automotive business and secondarily through its financial services. Its automotive sector consists of manufacture, design, sale service of small vehicles and large trucks, development and spare parts. The financial services are restricted to insurance and vehicle related finance and leasing. According to auto evolution (Dec 2009) ford was the only one to survive among the three US car manufacturers without any aid or government help and not only survived but also pocketed the $1 billion net income in the third quarter of 2009. Ford is known for its innovative design and technology which is gained through its reverse engineering methodology. The chairman of Ford, Bill Ford is following a simple strategy which is, Our vision for the future is simple: We want to build great products, a strong business, and a better world. (Ford.com) 2.2. History of Company (Ford) Ford Motor Company was founded in US state Michigan in 1903 by an automotive pioneer Henry Ford which was first of its kind in the auto industry. The Model T developed in 1908 and resulted in the sales of over 15 million units. By the 1920s it has captured the 50% of the market share. After going into public in 1956, the company has reached the global market with significant success. 3.0 Macroeconomic Analysis of Ford (Pest Analysis) According to Ian Worthington (2003) organisations operates their operations in an economic environment which is shaped by these operational activities. There are number of factors that influence the decisions of a business organisation although these are not under the control of that particular organisation. These factors can be political, social, economical or technological. These factors have the wider influence on the Fords decision making as Ford is also a business organisation which operates through its auto manufacturing operations and financial operations. How these factors influence Fords strategies is discussed below: Political Aspects Ford Motor Company operates in 50 different countries so it has to fulfil the legal and safety requirements in accordance with their rules and regulations. Economic Aspects Social Aspects Technological Aspects 4.0 Micro-Environment Analysis of Ford (Swot Analysis) 4.1. Strengths to Build Upon Strong Engineering and Design Capability The one of the reason behind the success of Ford is its strong design and engineering capabilities. Ford every new depend on the success of its RD projects which are run through 50 engineering and design centre which are located in many countries across the globe. According to Datamonitor (2008) Ford launched Blind Spot Mirror in its cars in order to remove hazards and build the more traffic views for drivers. Ford also introduced the accident-assistance feature in coordination with the National Emergency Number Association (NENA) in order to improve the emergency service in the same year. This shows how technology and innovation matters at Fords in order to remain competitive in the market High Employee Productivity Ford has employed a strong work force that contributes towards the company operations in order to achieve its goals. It has recorded higher revenue per employer ($1.8m) in 2008 as compared to its rivals (GM, Toyota, Honda, and Chrysler) its 3 times more and this simply because of the training and efficiency achieved by its employees. Fords Extensive Dealers The dealer network acquired by Ford is wide spread in all parts of world especially in rural areas represents Ford through its range of products that included Ford, Mercury, Lincoln and Volvo. 4.2. Weaknesses to Overcome Poor Financial Performance Ford didnt perform very well in FY2008 as compared to 2007 and its income statement seen a decline of 15.3% (Table 4 Appendix D) which was widely due to the recession and lower revenues of Jaguar and Land Rover. The Jaguar and Land Rover was sold later that year in order to control companys financial situation and to regain the investors trust. Sluggish Performance of Company The best performing markets of the world for Ford saw a steep decline in 2008. North-America that accounts for almost half of the companys revenue saw downfall of nearly 24% according to Datamonitor (2009), other parts of world saw the same picture. Poor Cash Flows According to Datamonitor (2009) Fords cash flow declined badly endangering companys position at one stage. Although it came out of recession without the US Governments help but it shows ineffective cash management by the company. So, Ford still need to do a lot in order to gain its pre 2007 state. 4.3. Opportunities to Exploit Potential Asian Market Everybody is aware of India and Chinas importance as a developing market for small sized vehicle and it is also mentioned by Fords CEO Alan Mulally in one his interview as For small car, India is the centre of the Universe.(Business Today Sep. 2009) According to Market Watch (2009) in 2008 the Chinese new car market reached $98 billion which grew by 14% which is expected to grow to $155 billion by 2013. On the other hand India is also rising as a strong economy which means consumption of more vehicles. This is a potential opportunity for Fords to capture this part of world through its strong presence in the market and through its high class manufacturing capabilities. Hybrid, Electric and Hydrogen Vehicles The high fuel price increased the demand for fuel efficient vehicles and as everybody is switching to hybrid cars which means next few years are vital for Ford in order to cope the demands of hybrid vehicles. The worldwide demand for hybrid vehicle is 800,000 units in 2009 and is estimated to grow at 4.5 million units by 2013 (Market Watch 2009) In 2012 Ford is expecting to launch in third generation of hybrid vehicles including a plug in version (Ford.com). Also there is significant opportunity to invest in electric and hydrogen vehicles which seems to be next car after the hybrid cars. 4.4. Threats to Overcome Intense Competition Ford is having intense competition from its rivals especially Toyota which is trying to get a grip on US market. Another factor behind this competition is increasing fuel and raw material prices which are giving hard time to keep the production cost low and prices competitive Recession Although economists are saying that the recession is over but actually not for the auto industry as more people are losing jobs, revenues are getting lower and more companies look towards government help in order to survive. Ford was the only company among the big three in US that survived without the bailout but recession did affect its cash flows. 5.0 Porters Five Forces Model for Ford 5.1. Bargaining Power of Suppliers The automobile industry has a huge supply market which relies on few car makers to sell their products in order to survive in the competitive market. The key inputs required by the manufacturer are not much differentiated by the other supplier and it shows the little switching costs and wider choice of supply. This shows a little power in the hands of supplier but the only thing strengths the power of supplier is the quality of their products which give them a little edge on car manufacturers but overall, supplier holds moderate powers over their buyers. 5.2. Bargaining Power of Customers Before the recession auto crises the market was dominated by the few players and people were mainly relying on local firms mainly in the US with the choice of few, but as the international firms made their way into the global market (Toyota Honda in US) the customers start getting more choices. People dont often buy a car neither buy them in bulk which shows a little or no power in terms of bargaining and on top the strong brand names in the market even further weakens their power. There is huge potential market for new cars, although there is a little switching cost but consumers are price sensitive and brand conscious too, therefore, this results in reducing their bargaining power. There is another factor affecting their power is polypsony nature of market which means large number of buyers with little power to influence the price. All these factors show a moderate power in hand of customer. 5.3. Threat of New Entrants North-American seems to be the heaven for the big three until the arrival of Honda into US market and saw a plunge into the share of US manufacturers. Although it is still believed that to get entrance into the auto industry needs not only the large amount of capital but also the innovative engineering and technology. Due to this factor it is hard seen that a new player emerged into the market. Recent recession also gives the assurance of no more new arrival in the auto industry for a while. Even it has forced few companies to leave the business and many others to tumble. Therefore, it clearly shows the little or no threat to the existing market. 5.4. Threat of Substitutes Although there is no alternative of having your own ride but due to increasing fuel prices, job losses, and increasing car prices are forcing people to move towards the cheaper transport alternatives. Mainly used cars, public transport and somehow cycles are appearing as potential threat for the auto industry. Although these methods are less convenient but due to the recession customer are getting more and more conscious towards money saving and cutting costs. Overall, it shows the strong threat of substitute at least for time being. 5.5. Competitive Rivalry between Existing Players The auto industry is highly competitive in terms of return on investments and it is considered as an oligopoly market. In the past this competition wasnt exactly about the prices of cars but only to capture more market share through the innovative design and technology. Most of the firms tried to avoid price based competition but now its comes to the survival of business which lead towards the price war between rivals and it also resulted towards the lower profit margins. Even this competition has intensified; firms now offer longer warranties, lower interest rates and better after sale support in order to attract more customers. So, this results as the strong market competition. According to Ebsco (2009) the auto industry is occupied by small number of companies who having a battle of survival. Although there is a little threat of new entrants in the market but the competition among the existing firms is quite intensive. All the other forces are either week or moderate apart from the one (Threat of Substitutes) which can impose danger for a time being. The market has changed its shape due to the recession and many firms including GM is having a tough time and others are having a loss or less profit but there are still opportunities in the market to grow and bounce back. 6.0 Strategies 7.0 Conclusion References http://www.autoevolution.com/news/2009-auto-industry-wrap-up-14948.html#Ford http://www.ford .com business today 6 sep 2009 N Madhavan (Alan Mulally Interview) Auto Sales: Sales and Share of Total Market by Manufacturer, Wall Street Journal Markets Data Center, Nov. 3, 2008 http://bigthreeauto.procon.org/#Chart