Industry Analysis of luxury car Industry
This memo provides an overview of the Luxury Car industry analysis and discusses the attractiveness of the industry in terms of competition and sustained profitability. The memo provides a background of the industry and the uses the Porter’s five-tool to analyze the industry’s attractiveness (Porter 81). The selected industry is the automotive industry and focuses on global operations of BMW AG. The vast scope of focus is vital because the top 3 competitors in the automotive operations have extensive global presence.
The automotive industry has many firms, but I will focus on three key competitors, which are BMW, Daimler AG, and Volkswagen AG. BMW owns brands such as BMW, Rolls-Royce, and Mini (Company Spotlight 17). Daimler AG owns brands such as Mercedes-Benz, FUSO, Setra, and Daimler Trucks. Volkswagen AG owns brands such as Volkswagen, Porsche, Bugatti, Lamborghini, and Audi. Other key players in the industry might be mentioned, but focus will be on the three players mentioned. According to August 2014 statistics, BMW became the largest seller of luxury cars ahead of VW AG’s Audi and Daimler AG’s Mercedes-Benz Unit (Bloomberg). BMW’s profitability has been increasing steadily over the last four years. The increased profitability can be attributed to increased demand in China.
Rivalry in the industry is very high. The three automotive manufacturers compete on both price-based and non-price based factors. Brands compete on quality and price leading to high competition in absorption of the existing market share (New Cars Industry Profile: Global 11). In overall, there is very high competition among established firms, especially between the top global leaders as they fight for the global market share from the competitors. In terms of brand availability, the threat of substitutes is high because all leading auto manufacturers offer different brands that suit the client preferences. Low switching costs, relatively low prices, and better quality of substitutes has the effect of reducing profits. Additionally, threat from other products such as public transport is high (New Cars Industry Profile: Global 18).
Suppliers have a moderate or medium bargaining power because they provide essential manufacturing equipment and parts necessary for auto manufacturing (New Cars Industry Profile: Global 16). Most of these manufacturing equipment and parts are not easily replaceable. There is a limited number of suppliers because only a limited number of suppliers can deliver high-quality materials needed to manufacture luxury cars. This moderate supplier bargaining power influences profit levels.
Buyers bargaining power is high because of product differentiation, multiple sources, and low switching costs. Retail distributors connect manufacturers to automakers, and for this reason, the retailers determine auto prices based on their estimated profit margins. The buyers bargaining power is negative for the profitability of the industry. A substantial volume of entry barriers exists in the automobile industry. These barriers to entry include large capital requirements, economies of scale, effects of product differentiation, customer loyalty, and government regulations such as protection of local industries and licensing. Overall, the threat to entry are moderate /medium and can hurt the level of profitability (New Cars Industry Profile: Global 17).
Works Cited
"Company Spotlight: Bayerische Motoren Werke AG." Marketwatch: Automotive 9.4 (2010): 17-23.
Bloomberg. BMW Has Best Carmaking Profitability Since 2011 on SUVs. Online. August 5, 2014. Web. September 30, 2014
New Cars Industry Profile: Global. (2014). New Cars Industry Profile: Global, 1-35.
Porter, Michael E. "The Five Competitive Forces That Shape Strategy." Harvard Business Review 86.1 (2008): 78-93. Business Source Premier. Web. 29 Sept. 2014.
