Application of Porter's Five Force Strategy to the U.S. Auto Industry
- Miguel Virgen, PhD Student in Business
- Mar 14, 2023
- 7 min read
Updated: Apr 26
March (Doctors In Business Journal) - The Auto industry in the U. S. has been a symbol of the strength and innovation of the American economy for over a century. In analyzing the competitive environment of this industry, this article adopts Porter’s Five Forces framework to enrich its analysis. Thus, the analysis is useful because it defines the industry, looks at the market structure, and considers the industry’s possibl development. These include buyer power, supplier power, competition intensity, new entrants’ threats, and substitute threats. This integrated research paper in its examination points out the key strategic issues and prospects of the US auto industry, including shifting consumer demands and innovative solutions. This research gives a deep analysis of the forces influencing the industry and guides stakeholders on the direction to take.
The auto industry in the U.S. includes all companies and processes related to the manufacturing and marketing of automobiles such as cars, trucks, vans, SUVs, and EVs (electric vehicles). The industry includes domestic giants like GM (General Motors), Ford, and Stellantis, along with numerous global players operating in the U. S. (Covarrubias & Perez, 2019). The automotive industry encompasses design, research and development, production, marketing, sales, and aftermarket services like repairs and spare parts. Further, there is a large number of suppliers that supply the essential components and materials required by the industry. Another important stakeholder is the regulatory agencies, which are responsible for adherence to safety, environmental, and consumer protection laws. Being a strategic industry, the auto industry provides the impetus for technological advancement, creates employment opportunities, and plays a pivotal role in the U.S. economy.
The U. S. auto industry is an oligopolistic market characterized by industry giants such as GM, Ford, and Stellantis, together with other substantial global competitors such as Toyota, Honda, and Volkswagen. These companies possess large market shares and determine the price, quantity, and innovation of products in the market (Covarrubias & Perez, 2019). First, there are high barriers to entry characterized by huge amounts of investment in plant and equipment, research and development, as well as the cost of compliance with industry regulations. The structure of the market means that fixed costs are high, and there are increasing returns to scale, so competition is intense between existing players. The nature of the industry involves vertical integration, where most automakers have close relations with suppliers. It is also very large and has a large number of dealers and service providers, which makes it very saturated and competitive in nature.
Technological change and shifting consumer demand determine the future of the U. S. auto industry. The current shift to EVs is due to factors such as pollution awareness, incentives given by governments, and improvements in battery technology. Autonomous driving technology is also expected to revolutionize transportation, with major automakers investing heavily in self-driving systems (Grieco et al., 2021). Connectivity and artificial intelligence are making cars as smart and integrated tools. Disadvantages include high capital requirements, fixed assets, and compliance costs. It also has to be able to respond to shifts in trade policies and the general economic climate of the world market. Nevertheless, the occurrence of such factors as innovation and sustainability helps the auto industry grow in new markets and technological leadership.
The buyers' bargaining power is very high in the auto industry in the U.S., as attributed to the following factors. First, the market provides consumers with numerous brands and models, which results in higher choices and increased competition among companies. With the adoption of the internet and digital platforms, the buying process has been eased, whereby buyers can easily access detailed information on price, features, and customer reviews (Roch et al., 2022). This, in turn, assists consumers in avoiding being exploited and puts them in a position to negotiate for better prices. Furthermore, consumers are becoming more conscious of the technology systems employed, sustainability, and design, which put pressure on auto manufacturers to adapt to these changes (Bruijl, 2019). Other financial incentives, including rebates, low-interest financing, and lease options, also increase buyer power by making the vehicle affordable. However, brand equity and product differentiation that come along with unique features, advanced technology, and superior quality can also be used by the manufacturers to offset this power, hence charging high prices even in a competitive environment.
The suppliers' bargaining power in the auto industry of the United States is complex and depends on the type of parts supplied. The essential and unique components that are difficult to source from other suppliers, including semiconductors and batteries for EVs’ high-tech electronics, provide relatively high bargaining power to the suppliers. This may result in increased costs and more stringent conditions with key inputs, which are vital to auto manufacturers (Yeung, 2023). On the other hand, suppliers of non-branded and less differentiated products, which include basic hardware and raw materials constituting automobiles, can be easily replaced by automakers, implying that they have low bargaining power. Key supply chain strategies used by major auto manufacturers include Vertical integration, where the auto manufacturer directly controls key suppliers to minimize dependency and cost. Again, through the adoption of long-term contracts, strategic partnerships, and alliances, automakers can control supplier power by ensuring supply reliability, reducing risks, and fostering co-innovation.
The rivalry in the industry is high for the following reasons, which explain the high dynamics of the industry. Key competitors include General Motors, Ford, and Stellantis, along with experienced global rivals like Toyota, Honda, and Volkswagen. They always try to perform more than the other in innovation, quality, and pricing to gain and maintain market share (Timlon, 2023). High initial costs and heavy investments in production and new product development increase competitive intensity since firms aim to achieve bulk discounts. Today, competition has elevated with the inclination towards electric vehicles and the development of self-driving cars. Some approaches employed include advertising, customer promotions, and frequent model change. Also, changes in the economic environment, legal requirements, and customer preferences further contribute to the competition and keep rivalry as the dominant factor influencing strategic management of the industry.
The new entrants' threat in the U. S. auto industry is, however, not very high due to the existence of several barriers to entry. A high level of capital intensity remains a major challenge, which includes fixed capital investment in manufacturing plants, research and development of new technologies, and observance of high regulatory standards. Traditional car manufacturers can achieve significant economies of scale and have vast distribution networks in place that new competitors cannot easily replicate. Consumers’ loyalty to brands also fortifies these barriers because long-established brands have cultivated trust and consumer awareness over many years (Goyal, 2020). Moreover, because automotive supply chains are extensive and complex and demand specific knowledge in design, engineering, or safety standards, entry barriers tend to be steep. However, the appearance of electric vehicle upstarts such as Tesla demonstrates that disruptive business models and radical innovations can threaten existing players (Liu, 2021). Such success stories are rare, and the established dominance of major automakers continues to limit the overall threat posed by new entrants in the fiercely competitive U.S. auto industry.
The substitute’s threats in the auto industry in the U.S. is moderate and depends on geographic and demographic factors. The biggest threat in urban areas is the availability of other modes of transport, including public transport, ride-sharing services, cycling, and walking. These options are cheaper and less destructive to the environment as they attract people living in urban areas. Also, the increase in teleworking and working from home may decrease the demand for vehicle use for daily commuting. However, in suburban and particularly rural areas, cars are still essential since public transport is scarce and people need to travel long distances. Substitutes, including electric scooters, e-bikes, and other micro-mobility options, are also entering the market more frequently (Grieco et al., 2021). However, these alternatives are gradually gaining popularity, especially among those concerned with environmental impact and the emerging generations, but a large percentage of the U.S. population still finds personal vehicle convenience and flexibility attractive.
The auto industry in the U. S., once an epitome of American business prowess, is still a fragmented and intensely competitive market influenced by a number of factors. Porter’s five force model highlighted the major strategic issues and opportunities of the industry. The suppliers and buyers bargaining power, competitive rivalry intensity, new entrants’ threats, and substitute’s threats all exert profound influences on the industry structure. Technology and changing consumer trends are key drivers of the industry going forward. The move towards electrification of vehicles, self-driving cars, and intelligent automobiles poses both threats and opportunities for auto manufacturers. Though the capital-intensive nature and stringent rules and regulations act as entry barriers, companies like Tesla have proved that new entrants can alter the established norms. Suburban and rural areas still rely on personal vehicles even with the development of new transport modes in the city and the increase in telecommuting. It should however adapt to these shifting trends and harness technology and sustainability to ensure that it remains a key player in the US economy.
Bruijl, G. H. T. (2019). The Relevance of Porter's Five Forces in Today's Innovative and Changing Business Environment. (n.p.): SSRN. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3192207
Covarrubias, V. A., & Perez, S. M. R. (2019). New Frontiers of the Automobile Industry: Exploring Geographies, Technology, and Institutional Challenges. Retrieved from https://openlibrary.org/books/OL28231191M/New_Frontiers_of_the_Automobile_Industry
Goyal, A. (2020). A critical analysis of Porter’s 5 forces model of competitive advantage. Goyal, A.(2021). A Critical Analysis of Porter’s, 5. http://doi.one/10.1729/Journal.25126
Grieco, P. L., Murry, C., & Yurukoglu, A. (2021). The evolution of market power in the US auto industry (No. w29013). National Bureau of Economic Research. https://www.nber.org/system/files/working_papers/w29013/w29013.pdf
Liu, S. (2021, March). Competition and valuation: a case study of Tesla Motors. In IOP Conference Series: Earth and Environmental Science (Vol. 692, No. 2, p. 022103). IOP Publishing. https://iopscience.iop.org/article/10.1088/1755-1315/692/2/022103/pdf
Roch, S., Fowler, J., Smith, B., & Bourgeois, D. (2022, February 24). 2.7. Porter’s Five Forces. https://ecampusontario.pressbooks.pub/informationsystemscdn/chapter/2-7-porters-five-forces/
Timlon, J. (2023). Porter's Five Forces. United States: SAGE Publications, Incorporated.
Yeung, G. (2023). Competitive dynamics of lead firms and their systems suppliers in the automotive industry. Environment and Planning A: Economy and Space. https://doi.org/10.1177/0308518X231202390
KeyWords:
Business strategies, Business growth, Doctors In Business Journal, Business planning, Business development, Entrepreneurship, Business trends, Business management, Corporate innovation, Digital marketing, Social media marketing, Content marketing, Lead generation, Marketing automation, Branding for businesses, SEO for online businesses, Cash flow management, Business investment opportunities, Business profitability, Financial forecasting for businesses, Effective business management, Organizational development, Strategic decision-making, Business operations efficiency, Technology solutions for business, AI in business, Digital transformation in business, Business tech trends.
Boost your business operations with our expert Marketing Services, Call Center Solutions, and Virtual Assistant Support. Whether you need to increase sales, enhance customer service, or streamline daily tasks, we’ve got you covered. Let’s take your business to the next level. Browse the services we offer to see how we can help your business grow.
