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The automotive industry is a term used to refer to a range of organizations and companies involved in designing, developing, manufacturing, marketing, and selling of motor vehicles, motorcycles, and towed vehicles. This industry is the core of the transport industry around the world, making it one of the most significant economic sectors by revenue in the world (Vekstein, 1993). However, the automotive industry does not involve industries that concentrate in the maintenance of automobiles after delivery to the end-users, like fuel filling stations and repair shops. This industry began in the 1890s when a number of manufacturers founded the horseless carriage, with the United States leading the world for many decades in total automobile production (Orsato & Wells, 2006). By 1929, before the Great Depression, there had been approximately 32,028,500 automobiles in operation around the world, of which 90% were produced by the U.S. automobile industry. The U.S had continued this lead after the WWII by producing an estimated 75% of world automobile production until 1980 when it was surpassed by Japan, before taking the lead again in 1994 (Orsato & Wells, 2006).
It is worth stressing that competition among countries continued. In 2006, Japan overtook the U.S. in its production and maintained the lead until 2009 until China took over the top position after producing 13.8 million units. China produced 18.4 million units in 2011, more than double the number produced by the United States in the second with 8.7 million units while Japan was the third with 8.4 million units (Abbott, 2003). Today, more countries like Germany, U.K, South Korea, India, Brazil, among many others have joined the motor vehicle industry and are currently graded on more strict and more precise safety, weight and durability standards. Automobile makes one of the most convenient means of transportation with the ability to move millions of people around the world. Globalization, expansion, and increased competition within the countries force companies to enter foreign markets (Vekstein, 1993). For example, in Germany, BMW and Volkswagen are leading companies while in America there is General Motors, Daimler Chrysler and Ford, the three major automobile producers (Orsato & Wells, 2006). In the international markets, the U.S and Germany manufacturers face stiff competition from Japan’s Toyota and Honda. This study aims at analyzing and reviewing the automobile industry with a focus on Germany’s BMW and Japan’s Toyota Motor Corporation.
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Background Information of Toyota
Toyota was established in 1926 by Sakichi Toyoda as Toyoda Automatic Loom Works (Advancebusinessconsulting.com). In the beginning, Toyoda entirely produced automatic high-speed looms with numerous other innovations, including the ability to change shuttles without stopping. This advanced technology made Toyoda the world's leading loom producer that offered dramatic quality improvement and a twenty-fold rise in productivity. In 2007, the loom machine was listed as an item number 16 in the Japans Mechanical Engineering Heritage as a result of its massive contribution to the global textile industry and the foundation it laid for the growth and development of the Toyota Group.
The Toyota automobile group currently known as Toyota Motor Corporation was established in 1933, under the leadership of Kiichiro Toyoda, son to Sakichi Toyoda. It is one of the 13 core companies forming the Toyota Group. The multinational automaker is headquartered in Toyota, Aichi, Japan (Abbott, 2003). Currently, Toyota Motors holds 23.5% of the main company Toyota Industries common stock, a strategy that was a countermeasure to guard against hostile acquisition and merger attempts. The sales of Toyota vehicles have steadily gone up to extent that in 2008, its sales surpassed those of General Motors, making Toyota the brand number one in the world (Advancebusinessconsulting.com). In 2010, the company had 300,734 employees worldwide and became the third-largest automobile manufacturing company in 2011 behind General Motors and Volkswagen Group respectively, and ranked eleventh-largest company worldwide by revenue (Advancebusinessconsulting.com).
Background Information of BMW
Bavarian Motor Works (BMW) is a German automobile company that was founded in 1917 and is headquartered in Munich, Bavaria, Germany. It also manufactures motorcycles under BMW Motorrad, produces aircraft engines, and manufactures the Mini marque (Bmw.com). BMW Company became an automobile producer in 1929 when it acquired Fahrzeugfabrik Eisenach. The company’s team of engineers gradually developed their vehicles from small seven-based cars to six-cylinder luxury cars, and in 1936, the automobile began manufacturing the BMW 328 sports car. With the progress, the company concentrated on manufacturing of automobiles, aircraft engines and motorcycles as their main products until the World War II when automobile industry stopped completely, leaving the company to concentrate on the production of aircraft engine as the main product and motorcycles as a side line (Bmw.com).
Later in 1966, BMW acquired the Dingolfing’s Germany based Hans Glas company, a move that was believed to be strategic mainly to gain control of Glas' development. The Glas vehicles continued to be badged as BMW until the full absorption of the company. Equally, in 1995, BMW fully acquired DesignworksUSA, which is an industrial design studio based in California, in its strategic move to enter the United States’ automobile market. BMW continued the acquisition strategy, and in 1994, the company bought off the British Rover Group, which comprised the Land Rover, Rover and MG brands. Further, it took control of the former defunct brands that included Austin and Morris for six years. However, in 2000, BMW opted to sell Rover and MG brands to the Phoenix Consortium as a result of the huge loss the brand incurred while Land Rover was sold to Ford (Bmw.com).
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By 2010, the BMW group had been very stable and had manufactured a total of 1,481,253 automobiles and 112,271 motorcycles across all its brands (Bmw.com). Currently, BMW is one of the top three leading luxury car automakers along with Mercedes-Benz and Audi brands. They are presently the three best-selling luxury cars in the world. In June 2012, Forbes.com rated BMW as the most esteemed automotive firm worldwide based on parameters, like customers’ willingness to buy the product, recommendation to other users, as well as willingness to work for and to invest in the company. Out of the interviewed, 60% were driven by their perceptions of the company while 40% - by their perceptions of their products (Smith, 2012).
According to Vekstein (1993), different industries operate in the different industry environment. The automobile industry operates under the different business environment that can be analyzed through the Porter’s five forces of competitive position with consideration that the potential of each force differs from one industry to another.
Porter’s Five Forces of Competitive Position
The five forces include entry by potential competitors, rivalry among current competitors, bargaining power of buyers, bargaining power of suppliers, and the threat of substitute products (Ntpu.edu.tw, 2013). These five forces are vital to ensure that the company succeeds in its operation since they guide strategy formulation within the firm. These five forces jointly define the profitability of the industry through dictating the prices that can be charged, the amount of investment needed to compete in the industry, and the maximum costs of production that can be incurred (Businessteacher.org.uk, 2013). This means that before making any strategic decisions, the managers and directors need to use the Porter’s five forces framework in order to determine and develop the most competitive structure for the industry. The five forces analyse and helps in developing and identifying better competitive opportunities and areas of attractiveness that the company needs to enter to ensure productivity (Businessteacher.org.uk, 2013). This tool is commonly used besides the SWOT analysis tool to assist in identifying industry opportunities and possible risks before entry. These five forces are analyzed below in relation to the automobile industry and with specific focus on BMW and Toyota automobile companies.
Risk of entry by potential competitors. Potential competitors are the companies or organizations which are presently not competing or operating in the industry but have the inherent capacity to enter into the industry given a choice. The entry of new actors often increases the capacity of the industry and leads to competition for market share as well as lowering the current costs (Businessteacher.org.uk, 2013). he threat of a new entry into an industry by a potential competitor is partly a function of the degree of barriers to such an entry. It is noted that an entry into the automobile industry may not be as easy, owing to the level of brand loyalty of customers and the massive cost and technology required in establishing and manufacturing plants. This means that the management of a leading established company needs to analyze the possibility of increased competition from new entrants and find ways of locking the market from new entrants. However, a number of foreign companies, such as Honda Motors, managed to enter into the United States car industry and set up its first office in Ohio. The success of entry may be facilitated by the lack of barriers, geographical advantage factors, incumbents’ resistance methods, the strategies used by a new entrant and the routes used to market the brands (Ntpu.edu.tw, 2013).
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Some of the barriers to entry into the automobile industry include: economies of scale, regulation that may bar new entrants based on the safety and durability standards set by the government, brand loyalty among the users, absolute cost advantage where a competitor enjoys cheaper costs based on the manufacturing capacity, technology and supplies, customer switching costs, which may be very expensive, thus discouraging more customers from switching to other brands, ease in distribution, and strong capital base that gives a competitive advantage (Ntpu.edu.tw, 2013). For example, Toyota may find it very difficult to penetrate the market controlled by BMW, especially in Germany and parts of Europe because of the brand loyalty as a result of the strong positive perception people have on BMW. It takes a while for new entrants to position themselves and to wipe away the reputation of their brand companies from the minds of the consumers. For this reason, both BMW and Toyota must analyze the risk presented by the potential entrants in order to control their markets.
Rivalry among current competitors. This force looks at the level of competition for market share between companies in an industry. Usually, an extreme rivalry between the established companies poses a greater threat to profitability. The magnitude of rivalry can be determined by: (1) the number and size of existing firms, meaning that an industry with more competitors shrinks the sales volumes and profitability of the whole industry, (2) the industry size and trends that involve potential of expansion and whether its records a growing or declining trend, (3) the amount of fixed costs versus the variable cost, and (4) product ranges in relation to the product differentiation strategy to satisfy a variety of customers (Ntpu.edu.tw, 2013). Consideration of the competition allows both Toyota and BMW to set up strategies that can facilitate gaining of the competitive advantage.
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Equally, the strength of rivalry among firms within an industry is associated with the amount of exit barriers in that industry, which discourage exiting the industry or market, high amount of fixed cost that may not be recovered, competitive structure of the industry, the industry growth rate, availability of global customers that guarantees the company market despite losing local market, and the demand conditions (Sun, 2008). Both Toyota and BMW target markets in the U.S, Europe, Africa, and Asia. BMW, to some extent, offers stiff competition to Toyota in Europe, but it is seriously challenged in the Asian and African markets.
Bargaining power of buyers. Buyers are the final customers of the products or the distribution firms that ensure the cars are distributed to the final consumers. In this case, bargaining power refers to the capacity of the customers to bargain down the prices of the products charged by the manufacturers in the industry or their potential to increase the company’s cost of production in the industry through demanding better product quality that call for higher costs (Sun, 2008). This means that strong buyers, especially those purchasing in bulk, have the ability to increase profits of the industry by negotiating, lowering of vehicle prices, and increasing production costs as a result of the manufacturing specifications demanded. Such buyers often purchase the automobile products in large quantities and usually have full information concerning product and the market, in addition to emphasizing on quality of the products. Other factors that determine the bargaining power are the choice of the buyer, the size and number of the buyers, the frequency of buying, and the importance of the product in terms of value (Sun, 2008). The buyers with higher bargaining power are usually big institutions of wholesale distributing companies.
In the automobile industry where Toyota and BMW operate, there are numerous brands and models produced by other automobile companies, such as Volkswagen, GM, Ford, among others. In this analysis, the two companies, therefore, need to understand that the factors influencing consumers buying decision are: the car’s appearance car, price, quality, as well as environmental effect (Strategic Analysis, 2012). Most people prefer new and pleasant cars while the rich who love cars usually prefer purchasing the new released quality models. Equally, the car has to be efficient in gas consumption and meet the safety standards.
Price is increasingly becoming a major determinant of the choices since the existing competition makes consumers have a wide range of cheaper choices to select from, but still excellent quality. The global warming experienced in the current world, in addition to other environmental effects, forces more manufacturers to try to make their car products unique in order to conserve or protect the environment (Vekstein, 1993). This means that both Toyota and BMW must identify and classify their customers to allow high volume buyers and frequent buyers an opportunity of discount in order to lock such customers and to exercise the concept of economies of scale. Similarly, BMW and Toyota are positioned to have an exclusive range of products. This makes the buyers’ bargaining power higher because they may decide about the product depending on the price range (Sun, 2008), having that there are numerous substitutes cars available.
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Bargaining power of suppliers. This force according refers to organizations that supply inputs to the industry. In this case, bargaining power involves the ability of suppliers to surge the prices of inputs, such as labour, services, and raw materials, among other. Strong suppliers who provide unique items and are depended upon by the manufacturing companies may take advantage and extract profits from the industry by increasing the costs supplies (Strategic Analysis, 2012). Changing of suppliers in such scenarios may have high switching cost that impacts negatively the cost leadership strategy that the form may be implementing since their products are vital input to buyer’s final product. The automobile industry needs to understand that such suppliers pose a significant threat to the future growth of the company and may force forward integration. Some of the factors influencing supplier bargain include: brand reputation, geographical coverage of the supplier with the ability to supply all the company’s oversea manufacturing branches, product quality, and their relationships with customers bidding (Sun, 2008).
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However, it is worth noting that in the automobile industry, suppliers have little control since several suppliers depend on certain automobile manufacturers that buy their products. In most cases, each manufacturer has several suppliers making them not over-dependent on a particular supplier. For example, Toyota has qualified over 10 different suppliers in the Unites States based on the quality of supplies, cost, and efficiency in delivery of products. Suppliers are, therefore, forced to adhere to these considerations in order to survive the competition. BMW, on the other hand, has a well-structured supply chain management system and maintains long and a positive relationship with suppliers. This long-term relationship makes the suppliers bargaining power higher, and the suppliers may occasionally dedicate the price for the raw materials.
Threat of substitute products. It is a major threat that should be considered seriously by managers. Substitute products are the products that can satisfy effectively the customer’s needs. Substitutes regulate the maximum potential returns that an industry may enjoy since it limits the price that a company can charge for its product (Strategic Analysis, 2012). This means that the fewer the number of close substitutes products is, the greater the opportunity is for the company to increase the prices of their products and consequently earn greater profits within the industry. The availability of substitute products is also associated to the product and technology development that facilitate new inventions and subsequently improves quality, fashion and trends, as well as changes market distribution and legislative effects. Within the transport industry which is the consumer of automobile, there are numerous transportation means that substitute automobiles. They include: bicycles, buses, subways, and trains. It is also worth noting that BMW has a powerful and luxurious brand image, which is positioned among the exclusive range of car with many substitutes, such as Mercedes, GM, and Volkswage (Ntpu.edu.tw, 2013). This means that the danger of having substitutes is high for both BMW and Toyota in the exclusive range; thus, the companies need to diversify.