A thorough analysis of the external forces that shaped the global automotive industry in 2009 reveals how the rivalry between established car makers set the stage for some to successfully survive the global recession while others were forced to seek Chapter 11 bankruptcy. A closer consideration of the impact of consolidation, demand and supply, fixed costs, product differentiation, and exit barriers on rivalry within the industry reveals how new entrants and weaker competitors were able to take advantage of environmental opportunities during the recession and gain profit shares. These considerations illustrate the critical importance of analyzing the forces that shape competition in an ...view middle of the document...
As it relates to the competitive structure, or the number and size distribution of companies within an industry, the automobile industry is considered a consolidated industry, where a small number of large companies dominate and are able to set prices. Traditionally, in America, these companies were called “The Big Three,” Chrysler, Ford, and GM, but Toyota, was also a major rival during the recession. “In consolidated industries, companies are interdependent, because one company’s competitive actions or moves (with regard to price, quality, and so on) directly affect the market share of its rivals, and thus their profitability” (Hill & Jones, 2012, p. 62). The relative power of consolidation on the automobile industry was high.
Demand and Supply
A second point of consideration relating to the intensity of rivalry within the industry was the level of industry demand. “Demand declines when customers are leaving the marketplace or each customer is buying less” (Hill &Jones, 2012, p. 62). This was the case in 2009 in many developed nations due to the recession, which was marked by job loss, credit problems, and high gas prices that increased the demand for fuel-efficient vehicles or left consumers unable to purchase vehicles altogether. At the same time, growth was expanding in China and some other developing nations, which opened the doors for automobile companies in these countries to expand at home and overseas, taking market share away from and increasing the intensity amongst established rivals. The relative power of this shift in demand on the industry was high.
Where fixed costs are high in an industry, as they are in the automobile industry, “profitability tends to be highly leveraged to sales volume, and the desire to grow volume can spark off intense rivalry” (Hill & Jones, 2012, p. 62). For automakers, high fixed costs coupled with low demand and “the fact that between 2004 and 2008, some 19 million units of new productive capacity had been added to the global industry,” meant that some carmakers, especially Chrysler and GM, faced substantial losses that forced them to seek government intercession and, ultimately, bankruptcy. The power of fixed costs has a high relative power in the automobile industry.
Exit barriers are economic, strategic, and emotional factors that lock companies into an unprofitable industry where demand is static or declining and results in excess productive capacity that leads to even more intense rivalry as companies attempt to cover fixed costs (Hill & Jones, 2012, p. 63). Exit barriers in the automobile industry include machines, equipment, and operating facilities that are of little or no value in alternative uses or cannot be sold off. Additionally, high fixed costs of exit, such as severance pay, health benefits, and pensions that have to be paid to workers make it difficult to leave the industry. For example, it was estimated that GM had more than $45...