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Global Automobile Industry in 2009

Essay by   •  October 18, 2011  •  Case Study  •  957 Words (4 Pages)  •  2,826 Views

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Introduction:

The most important issue in this case arises from the economic challenges that faced the global automotive industry by the end of the 21st century and how the individual automobile companies were able to use their distinctive competencies to not only stay in business, but also gain a competitive advantage in this globally competitive industry during a time of declining demand and economic uncertainty. This paper will use Michael Porter's five forces as a framework for analyzing the shape of competition within the automobile industry at the time and to identify strategic opportunities and threats. This is particularly interesting to me because the automotive industry has for a long time been considered to be the "industry of industries". It gives a perfect example of how effective strategic leadership is a crucial component to success in this ever-changing global economy.

Risk of Entry by Potential Competitors: Weak

The barriers to enter the automobile industry are substantial. New entrants face strong barriers, such as very high capital requirements, also technology and licensing requirements. Established automobile companies have acquired economies of scale and an absolute cost advantage. In order for a new company to enter the industry, it would have to start off on a larger scale to gain these cost advantages. Increased initial capital investment is needed to build large-scale production capacities that prove to be risky with no guarantee of mass sales and profits. Government regulation also makes entry into the industry difficulty for new entrants. There are numerous constraints such as safety and emission requirements. The substantial barriers to enter the automobile industry provided a strategic opportunity for established automobile companies to enter new and emerging markets, such as China and India.

Rivalry Among Established Companies: Strong

The competitive structure of the global automobile industry is consolidated having a small number of large companies that are interdependent of each other. With demand decreasing, the rivalry among existing companies strengthened since the companies had to fight to maintain their market share and revenues. In addition, many foreign automakers were realizing costs are much higher when importing a fully built vehicle. With states offering financial incentives for inward investments, many of those foreign competitors were now setting up assembly facilities within the US. With the addition of foreign capacity in the US, the American market was left with excess capacity. This resulted in major price competition. Furthermore, with fixed costs being high, the profitability is highly leveraged to sales volume. As such, there is a strong competition with the desire to produce more volume. The automobile industry also has high exit barriers. The American big three automobile companies have pension and health care obligations with their current employees and retirees enforced by the Union of Auto Workers. Raising the barrier even higher is the need to maintain expensive assets in order to compete effectively within the industry. American plants had to be reengineered to accommodate new innovations in production systems such as Toyotas lean production system.

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