An Environmental Analysis of the Automobile Industry

The automobile industry consists of various organizations which are involved in activities such as designing, selling, manufacturing and marketing of motor vehicle. Some of the leading Automobile companies include BMW Group, Honda Motor, General and Toyota Motors. Most members of the industry sell their products worldwide by offering a wide range of models. The market structure in the automobile industry is of an oligopolistic nature. Market structure refers to the level of competition that exists between organizations in the same field (Baldwin & Scott 2001, p. 59). Conducting an environmental analysis of the sector is crucial due to the changing demands of the customers as well as government consciousness of the environment (Carl 2013, p. 34).

Based on the ever changing developments and innovations in the industry, there has been a variance in the level of acceptance of the products offered. Many customers for example have varied opinions about the autonomous cars. While some may feel that life will be better since no driving is required, others have shown concerns on such issues as their safety as well as car ownership (Meyer 2016, p.402). To address the ever changing demands and concerns of customers, members in the industry are engaging in extensive research in order to remain up to date and competitive. Moreover, there have been notable developments in the sector that are aimed at ensuring Sustainability in the industry. Some of the practices include; reduction in the emission of greenhouse gases, eco-innovation, lifecycle assessment or analysis and reverse logistics (Seliger 2012, p. 257).

Since its foundation, the industry has been a major source of revenue to the economy. Its growth is influenced by various factors such as financial crisis, technology, innovation, environmental friendliness and fuel efficiency (Law 2017, p.164). Financial crisis for example contributed to the down-fall of many companies which are now recovering after the global recession. The use of technology and innovation has also resulted to massive competition among various manufactures. Moreover, all manufacturers aim at selling fuel efficient vehicles with minimum carbon emission.

2.0 Environmental Analysis

2.1 PESTLE Analysis

PESTEL analysis will focus on the “political, economic, social, technological, environmental and legal factors” (Rao et al. 2008, p.14) which affect the Automobile industry. Political factors influence the profit gained in the Automobile industry. According to Gupta (2013), the industry as a whole has no control of the factors (Gupta 2013, p. 35). Many governments have put in place standards on low emission of carbon dioxide. Some markets such as European Union as well as United Kingdom give subsidiary for the low emission vehicles (Wit & Meyer 2010, p.467). Such environmental standards directly affect automobile companies since they have to comply with the change.

The industry is easily affected by the economic forces such as an economic crisis. When the economic conditions at a given time are good, there are increased sales due to a higher purchasing power of the customers (Consentino 2009, p. 48). On the contrary, a low economic condition such as a crisis will result to reduced sales due to a low purchasing power. The economic condition directly affects the rate of purchase by the customers (Gillespie 2016, p.24).

Social and cultural factors greatly determine the preferences of the customers to automobile products as well as the growth rate of the automobile industry (Luger 2005, p. 14). Different customers have different preferences for such factors as the price, safety as well as space in the car. They purchase different models of cars based on the purpose of the car such as family or business (Luger 2005, p, 24)

Advancement in technology is a major determinant of the profits generated by an automobile company as well as the sales received. According to Irawati (2012), when a company becomes more innovative in its products, its market share also increases (Irawati 2012, p. 42). For this reason, many companies in the automobile industry are investing in research and development since it gives them a competitive advantage over other organizations (German 2011, p.34).

Environmental factors are also called the ecological factors. Laws on the environment are becoming stricter with increased globalization with the aim of reducing such problems as global warming (Wippel 2014, p.10). As a result, most governments have put in place various laws on the limit of carbon dioxide emission by automobile industries. Following the establishment of this rule, many companies are now manufacturing cars which are friendly to the environment. Such cars include the electric and hybrid cars (Wippel 2014, p. 18).

The existence of law determines the performance as well as profitability of different vehicle brands. Some of the laws that affect the profit earned by companies include environment compliance laws, tax laws and product safety and quality laws. Companies which sell their products in the international market have to be compliant with the various laws to promote the sales of their products (Macrory et al 2005, p. 46).

2.2 SWOT Analysis

Sarsby (2016) argued that the continuous innovation of new products as well as advancement in technology is a major strength of the industry. Such is demonstrated by the development of fuel efficient and low emission cars (Sarsby 2016, p.6). Moreover, there is a high demand for Value for Money (VFM) products such as cars (Sarsby 2016, p.8). These are products that are specific to the needs of the customers such as fuel efficient and low emission cars. On the other hand, the industry promotes economic growth since there is generation of revenue due to the sale of products (Kamel 2006, p.32).

Some of the examples of weaknesses include the recalling of cars due to such factors as non-abidance to various government rules and technical dis-functionality. Moreover, there is a higher bargaining power of customers which is due to the change from demand market to a supply one. As a result, there is a high competition among manufacturers due to the various products available for the customers (Dyck and Neubert 2010, p.267).

The manufacturing of fuel-efficient cars is a great opportunity for the companies in the industry since they form a major proportion of the emerging market. More importantly, there is a change of lifestyle as well as consumer groups which has resulted to change in the consumer demand, enhancing accessibility of information and extended regulatory needs on wellbeing and fuel economy (Peng 2009, p.34). There is also a continuous expansion of markets in areas such as Asia and there are higher chances of further growth.

There is intense competition among the players due to their large numbers. The result is reduced market share for them. Moreover, the high volatility of fuel prices is a major determinant for the growth of the industry as well as government regulations which relate to the use of alternative fuels (Shang and Low 2014, p.66). The slow-moving economy due to such factors as unemployment and recession also deters the industry from progressive growth since it directly affects the sales.

2.3 Porter’s Five Forces Analysis

Threats of new entrants are weak due to the huge investments needed when setting up manufacturing facilities as well as hiring staff members. On the other hand, there is intense competition in the industry hence making it difficult for new members to acquire a market share. Moreover, a low market share is experienced due to low brand recognition of the new products as well as the inadequate access to markets which increase the likelihood of increased profits.

According to Roy (2009), the bargaining power of suppliers is weak since most of them are small scale in nature while only a few are large scale (Roy 2009, p. 60). In addition, the suppliers have to comply with the rules set by the various brands. Hill and Jones (2010) also proposed that it is rare for companies to change their suppliers, thus the bargaining power of suppliers is really low (Hill and Jones 2010, p. 42).

On the other hand, the bargaining power of the buyers is reasonably strong. According to Porter (2008), there exist small individual buyers as well as corporations and government agencies that purchase convoys of cars from the brands (Porter 2008, p. 54). The buyers have the freedom to switch to a new brand depending on the prices offered. Low prices attract more buyers than high ones.

The threat of substitutes is weak since many individuals prefer to have their own cars other than using the alternative modes of transport such as buses and trains. This is because they are more convenient and are accessible at all times. According to Magretta (2012), the costs associated with maintenance are minimal and their impact is not costly to the customers (Magretta 2012. P. 74).

Additionally, the competitive rivalry in the market is strong. According to Henry (2018), different brands are competing on the basis of such factors as technology, price, customer safety, quality and technology Henry 2018, p. 89). Their target markets also overlap despite attempts to have different market segments that are distinct to a company.

2.4 BCG Matrix

Source: (Juneja, Management study Guide)

According to Plunkett (2007), the cash cows refer to those factors that bring high profits in the industry with low usage of cash (Plunkett 2007. p. 26). Some of the cash cows in the company include Ford F series, GM pickups and Dodge Ram. The cash cows are however distinct to the various brands in the automobile industry. It is important for companies to invest in cash cows since they not only profit the company but also help in financing other business units. Stars on the other hand, refer to the business units whose market share is large and require huge investments since they also generate a high amount of cash. Some of the stars in the industry include different series of BMW series such as Sedan and Touring. The star products however differ across companies. Different brands should expand the star products to strengthen its product and increase sales (Plunkett 2007, p.38).

Products in the question marks category bring a lot of uncertainty and investing in them will bring a financial burden in the company. Companies should therefore analyze the probability of success and failure of the product in order to make the strategic decision as to whether they will meet the strategic and financial goals of the company (Plunkett 2007, p. 46). Dogs on the other hand refer to the products that are non-profitable to the company in terms of sales as well as the revenue generated from them. Companies in the industry should therefore consider if there is need for divestment since any investment in the product maybe cash trap (Plunkett 2007, p. 58).

2.5 Ansoff Matrix

Source: (Author, 2018)

According to Stone (2001), the Ansoff Matrix is composed of four quadrants as shown above (Stone 2001, p. 56). The market penetration category is the safest of all the four options and focuses on the growing the existing market within the existing market. Companies should therefore come up with more creative strategies to encourage to customers to purchase the products in this category. On the other hand, the product development section involves introducing a new product to the already existing market. Companies should therefore put in place strategies such as improving the customer service with the aim of increasing sales. Market development on the other hand involves the introduction of an existing product in to a new market. It involves exploring new geographical markets to attract new customers. Companies should strategize by employing market segmentation as well as the concept of marketing mix in order to target various groups of people and reposition the product respectively. Diversification is the riskiest of all the four options and involves the development of a new product and then introducing it into a new market as well. Though risky, Stone (2001) argued that it is advantageous since when one business suffers from any adverse circumstances, the others do not suffer (Stone 2001, p. 79).

3.0 Discussion on Strategic Options

Based on the analysis above, it is evident that one of the major threats among many companies is constant competition with the aim of obtaining a bigger market share as well improving their profitability. As a result, various companies are constantly releasing new models to further increase their sales. The result is the availability of a wide range of models in the market where customers are able to choose from, depending on their needs (Berggren 2013, p.84). New entrants in the industry may therefore face the challenge of joining the sector because of the difficulties experienced in obtaining a reasonable market share. Absence of a reasonable market share will result to extremely low sales and the loss of huge finances as well (McDonald and Keegan 2002, p.6). Additionally, due to the presence of intense competition, there is competitive pricing of products and focus on new and emerging markets, which may be overpowering for a new entrant in the sector (Weiss and Tribe 2015, p.306).

High cost of operation is also a major factor that prohibits new members from joining the industry. In addition, a high cost is incurred due to constant research and development. In the industry, conducting constant research and development is crucial for the development of high specification cars which are attractive to more customers (Blischke and Murthy 2000, p.471). Moreover, new entrants incur other costs in such sectors as performance, safety and entertainment technology in order to increase their market share amidst well recognized companies. New entrants therefore need to be really innovative with new brands, much superior to those of their competitors to gain favor among customers as well as increase their market share.

Based on the low level of attractiveness for new entrants as discussed above, there is need for formulation of strategic options which will favor the growth of new entrants in the market. A strategic option refers to the alternative act-oriented reactions that are aimed at addressing the external position of an organization (Gavetti & Ocasio 2015, p. 21). First, new entrants would be a better advantage to enter the corporate market if they formed strategic alliances with the existing manufacturers. The formation of strategic alliances with one of existing companies will guide the new entrants in improving their efficiency as well as improving their brand. It is however, important for the new entrants to ensure that the alliance meets the criteria of a strategic alliance. They include; the alliance should be in line with the entrant’s main goal, it should aid in the development or maintenance of a competitive advantage, it should block a competitive threat, maintains the strategic choices for the entrant and diminishes a major risk for the business (Griffin 2010, p.81). New entrants should therefore choose the proper partners for the achievement of the intended goals. Moreover, share the correct information with their partners and agree on a deal that includes both the risk and benefit analysis. In addition, they should agree on the time to market as well as other corporate expectations and have a flexible commitment that allows for change at any particular time.

Secondly, it is advisable that new entrants who are the Original Equipment Manufacturers to set clear priorities based on their goals and objectives. Hence, this involves prioritizing on the products that are in high demand in the market such as the low emission and fuel-efficient cars which are environmentally friendly (Yunus 2003, p.88). As a result, they should focus on the development of more emission reducing strategies such as hybrids and electric drives. To achieve this objective, it is important for them to collaborate with experts as well as suppliers in the industry to increase their knowledge and expertise in the sector

On the other hand, new entrants have the alternative of reducing the prices for their products which are being introduced into the market. Having lower prices than those of their competitors will attract more customers, especially those from the pioneer companies. The advantage with this strategy is the increased attraction of customers who would have otherwise purchased the same products from other companies (Aurobindo 1972, p.149). In addition, the pioneer companies will face the challenge of reduced customers consequently resulting to the reduction of their products as well. The main disadvantage with this strategy is that the profit margins for the new entrants are considerably low compared to those of the pioneer companies (Cosentino 2009, p.44).

More importantly, new entrants may opt to improve an already existing products by shifting their focus on a given niche market. The strategy will involve the identification of a specific existing product that the new entrant would wish to improve. The step will be followed by the use of innovation to further improve the product and make it more attractive. The new product will either compete with the existing product or can be suited for a smaller group of customers (Friedman 2008, p.241). The result is the attraction of new customers who were not targeted by the existing product. To further achieve the aim, new companies may target new geographic markets in the automobile industry such as Brazil.

Furthermore, new companies have the option of developing new channels of distributing their products. The strategy will enable better penetration into the already existing markets as well as have a better access to new markets (Johnson et al. 2008, p.201). According to this strategy, being global is not the only option available for the new entrants. Therefore, it is less risky for new companies to focus on the markets which the experts have a better understanding of its operations. As a result, there is need for repositioning of products through such moves as constant advertising, marketing as well as improved packaging. Moreover, new companies may come up with new and faster methods of purchasing and delivery of products to customers, more efficient than those of the pioneer companies.

Finally, new entrants should adopt the product innovation strategy as opposed to imitation of the existing products offered by the pioneer companies. The strategy involves a huge investment in Research and Development by new companies. Conducting constant research on the emerging markets will expand markets for new companies as well as reduce the risk of penetration into the already overcrowded mature markets (Johnson 2018, p.105). The main advantage of this strategy is the increased attraction of new customers as a result of innovation of unique products. Despite this, it is costly for new companies since Research and development requires a huge investment, which might be overwhelming for new entrants.

4.0 Strategy Evaluation

4.1 Overview of Strategy Evaluation

Strategy evaluation is the process of assessing the suitability of strategies in helping an organization to achieve its set goals (Grant 1995, p.34). In a capital intensive sector such as automobile industry, there is need for constant evaluation of adopted strategies or even planned tactics of entering the market, simply because the consequences of wrong choices are costly to an organization considering the investments committed into such businesses. As a matter of fact, this section evaluates all the strategies discussed in the foregoing section that can potentially be used by new entrants. Specific focus will be put on the advantages and disadvantages of each identified strategy, while concentrating on the impact on performance of new businesses.

4.2 Merits and Demerits of Identified Strategies

One of the identified strategies is formation of strategic alliances with an aim of surviving stiff competition in automobile industry. As already discussed, this is the situation where a new and young company targeting a certain industry undertakes analysis of the existing players in the market especially the stronger ones in benefiting from their competitive advantage (Sternberg 1949, p.73). Ideally, this kind of partnership should be established after a detailed review of all the players and identifying specific entities that share on the goal and vision of the new company. The critical consideration is the mutual benefit that can accrue to each of the parties, by establishing the specific strengths of the members perhaps in terms of assets which are owned by a party that does not belong to another party. In spite of this, the most challenging fact is that new entrants are more often considered as unsuitable since most of their expertise, assets and management techniques are less advanced than existing players’, making it difficult for them to get strategic partners.

The second strategy was original manufacturers’ priority where the entrants undertake a market research to identify specific needs in the market in a wide range of aspects such as legal requirements, customer demands, market dynamics, economic factors, and competitive directions among other issues (Mintzberg 1994, p.104). The approach helps entities to develop a clear understanding of the untapped niches that can be utilized to gain competitive advantages above the existing firms. Such is a result of intensive market research and innovation, that might require more capital which is of great challenge to new and young companies. However, firms should consider this approach as a means of branding their products by making them unique from the rest in the market, hence commanding the market share on its favor which is a competitive tool.

The third strategy considered is price reduction, which enables new firms to price their products below the existing rates in order to attract new and existing customers. Pricing is one of the P’s of marketing philosophy that promotes the product’s performance a part from product quality, place, and promotion among others (Steinfield 2003, p.111). The main disadvantage of this approach is the profitability levels and sustainability of new firms based on the fact that there are certain lower levels of prices that cannot be exceeded in order to break-even, hence making it unsuitable for new firms. Price reduction is considered suitable for large firms that have higher sales volume which makes it possible to achieve revenue goals by selling more units.

Fourthly, targeting new geographic markets is one of the strategic options that can be adopted by new entrants. In this case, the entities improve their products by tailoring them to meet certain needs in identified market niche especially which are not served by existing competitors. For instance, most developing nations import their automobiles from countries such as Japan and Germany among others. In this regard, if manufacturing can be set up in such regions like Africa, it will be possible to make the products cheaper and hence competitive. However, the main demerit is the accessibility of the raw materials, which may need to be imported making the production costs to go up. Once production cost is high, the end product’s price is also high making it less competitive in the market comparing to other alternatives that customers have accessibility to (Patrizi and Patton 2010, p.25).

The fifth strategic option discussed is considering the development of new distribution channels. A distribution channel involves all the middlemen that are involved in distributing the products right from the manufacturers to the consumers. Such middlemen mostly lead to an increase in the product price, implying that the more the middlemen the costly the end product can be. Based on this, one of the approaches is identification of the channels used by existing players in the market and then developing strategies of identifying new ones with an aim of reducing them as well. Thus, this makes a firm’s products to be cheaper in the market enhancing competitive strengths. Despite this advantage, the approach needs heavy investment in research and development in order to understand market dynamics and relevance of the middlemen respectively (Johnson 2018, p.49). Moreover, it is not always a guarantee that using different channels leads to better performance as in some situation it might be profitable to utilize the same middlemen in order to reach a certain market.

Finally, another important strategy option is innovation where new products are developed creatively as opposed to being imitated from existing models. For a long time in the automobile industry, products have been manufactured with considerations of the models that are already in the market. However, it is important to appreciate the fact that as generations continue to develop different tastes and preferences, the manufacturers should consider such trends in developing the products. The strategy is one of the P’s of marketing (product quality) where needs are identified and innovation employed in satisfying the market demands. Besides, the strategy can help new entrants to be more relevant in the market by concentrating on a certain market segment, through effective segmentation and knowing the precise needs that must be satisfied (Johnson et al 2008, p.46). The approach is one of the ways that firms can utilize in accommodating the developments in technology in which case new manufacturing techniques are invented from time to time (Steinfield 2003, p.77).

5.0 Recommendations and Justifications

5.1 Recommendation

From the above strategies that are evaluated, recommendations can be drawn based on the suitability, acceptability, and feasibility of each of the reviewed options. In this analysis, it is recommended that new entrants in the automobile industry should adopt strategic alliances so as to gain dominance and competitiveness in the market.

Firstly, strategic alliances are of superior benefit to new entrants especially if appropriate partners are identified and successful associations developed based on new firms’ main goal and objectives. The primary foundation of effective partnerships should be the “keys of creating successful strategic alliances”, as asserted by Segil (2002) in his online publication. As a matter of fact, it is paramount that entities must first identify their strengths and weaknesses before committing themselves into any form of partnerships. New organisations can achieve this through SWOT analysis, which helps them to understand their internal environment as well as external environment respectively. Consequently, they should seek to select the specific firms that can help them minimize the effects of their weaknesses and threats so that they can achieve growth and superior performance. One of the suggestions is selecting partners based on the goals of the firm. Segil further provides that firms should seek to know which information should be shared and which one should not be “sharing the right information” (Segil 2002). As a matter of fact, it is important to comprehend that selected partners are potential competitors in case the association is broken and therefore the kind of information shared should be one that cannot be used against an entity at any future time.

Likewise, the deal to be negotiated must take into consideration the benefits and risks associated with it. As a result, appropriate strategies should be identified that can be used to mitigate the risks while improving the benefits. Nonetheless, it is not mandatory that the arrangement should result in an equal gain to all partners, but at least more emphasis should be on the new entrants as they are seeking to gain stability and competition in the market (Segil 2002). There should be a realistic time frame on marketing and corporate engagements that leads towards the attainment of the mutual expectations developed. Above all, flexibility commitment for any possible changes and organizational cultures that might be shared should be agreed upon before committing into the partnership.

According to Segel (2002), the implementation process of the strategy will involve a series of five steps. First, new entrants will establish their objectives early in advance. Secondly, the entrants will formulate the policies that will guide the formation of the alliance (Segel 2002, p. 48). The stage will be followed by the allocation of resources to be used in the formation of the alliance. Having acquired the resources, the new entrants will form the alliance with their preferred partner company. The final step involves the constant checking of performance activities and making amendments where necessary (Segel 2002, p. 50).

5.2 Justifications

Strategic Alliance is justified because it provides a platform on which new entrants can build their competitiveness by sharing the strengths of existing market players. Of great importance is that the approach enables new firms to maximize opportunities for the purpose of their business objectives. While the association can be founded between two parties, it is also possible to have multiple alliances so that in the event a relationship is terminated with one party, the other ones are present to act as pillars for the business before it stabilizes. Secondly, strategic alliance is critical for maintenance and development of core competency and competitive advantages (Wakeam 2003). Competitive advantage and core competency emanate from the foundation that there is sharing of objectives, chances of future competition among the partners are minimized, there is leveraging of methods and processes since the cultures are shared, and there is continuous learning that takes place at the operational, managerial and executive levels due to the established structure of governance that results from the alliance.

Thirdly, even when an alliance does not lead to competitive advantage, it actually blocks the threat of competition. Such an arrangement is suitable in higher end products such as in the automobile and airline industries where low-priced entries are not possible. Fourthly, strategic alliances are appropriate in creating and maintaining firm strategic options for the future. Thus, this helps in improving an organizations’ future sustainability in the market. Fifthly, it is in overall a measure of mitigating risks both on manufacturing and market risks (Wakeam 2003). In this case, a strategic alliance is founded on the premise of Porter’s Five Forces which incorporates threat of new entrants by benefiting the existing firms chosen as partners, reducing rivalry among competitors by allowing firms to share same culture and goals, reducing substitute products’ threat as products are designed to meet specific needs, managing the risks associated with buyers’ bargaining power and suppliers’ bargaining power respectively by developing a competitive advantage that is built on mutual ambitions. In conclusion, strategic alliance is important because it makes it possible to achieve economies of scale through joining forces, enables new firms to utilize networks belonging to large firms, and also passing of significant knowledge down the chain among other merits.

References

Aurobindo, S., 1972. Implanting Strategic Management. Twin Lakes, WI: Lotus Light Publications. https://books.google.com/books?id=PgoPAQAAMAAJ&q=implanting+strategic+management&dq=implanting+strategic+management&hl=en&sa=X&ved=0ahUKEwi598flr57bAhWMOxQKHaWXC5oQ6AEIJzAA

Baldwin, W. and Scott, J., 2001. Market structure and technological change. London: Routledge. https://books.google.com/books?hl=en&lr=&id=-FzDCLqfmYcC&oi=fnd&pg=PP1&dq=Baldwin,+W.+%26+Scott,+J.+(2001).+Market+structure+and+technological+change.+London:+Routledge.&ots=BvOvOWMIaH&sig=-_t9lzKhEKRpTNBxxJRpcwYKoPY&redir_esc=y#v=onepage&q&f=false

Berggren, C., 2013. Knowledge integration and innovation: critical challenges facing international technology-based firms. Oxford: Oxford University Press. https://books.google.com/books?id=5HUVDAAAQBAJ&printsec=frontcover&dq=Berggren,+C.+(2013).+Knowledge