Select an Industry and Analyse it According to Porter's Five Forces Essay

Select an Industry and Analyse it According to Porter's Five Forces - Essay Example However, before venturing into this tiny automobile industry, it is essential to evaluate the competitive forces. If the forces are intense, it becomes difficult to achieve attractive returns on investment (Porter, 2008). However, the company achieves profits when the forces are benign. The strongest competitive forces determine the profitability of the industry and also guide the firm in developing the strategy. Based on Porter’s Five Forces Model, the picture of competition can be build in three stages – identification of the specific competitive pressures with each of the five forces, evaluate the strength of each of the five competitive forces, and determine if the collective effect of the five forces is conducive to making profits within the industry. The five forces that shape strategy have been shown in the diagram below and each of them has been discussed separately: Source: Porter (2008). Threat of new entrants The automobile industry is mature and to survive i n this industry the firm must be able to achieve economies of scale. This requires mass production and heavy investments. Because of low sales consolidation is taking place in the industry. Apart from manufacturing regular innovation is necessary to sustain and this requires heavy investments in research and development as well. The cost of entry into an industry also depends upon the probable reaction from existing competitors (Porter, n.d.). High switching costs also deter a manufacturer from entering an industry. Switching costs in this case may be high because of periodical technology up-gradation to survive in the market. Automobile manufacturing and especially with new technology requires intensive distribution strategy with several distribution channels. This becomes difficult for a new entrant to establish and hence threat from new entrants is low. However, foreign competition, new technology and management skills do pose a threat in the industry. Moreover, the UK government is supportive of innovation in the auto industry which makes the threat from new entrants high. Bargaining power of suppliers The automobile manufacturers now outsource bulk of their auto parts to other manufacturers thereby enabling them to focus on the core products, on innovation and research and development. This is known as the OEM (Original Equipment Manufacturer) principle where the industry brand name works with a large number of suppliers (Molnar, 2009).This implies that one automobile manufacturer is dependent on several suppliers at the same time and these suppliers too may be sub-contracting work in turn. Thus there are several layers of suppliers for each automobile manufacturer. Toyota in fact has two or three suppliers for the same parts which reduces their dependency on one single supplier (SD, 2005). This suggests that the bargaining power of suppliers is low in the industry. However, since this is a new concept with innovative technology the dependency on supplier s may be high initially as more manufacturers enter the market. Bargaining power of buyers The automobile industry is totally dependent on the sale of output by the buyers. Thus the bargaining power of buyers is high. Buyers have become demanding of facilities and are also price