Automobile Industry

1. The average return on equity for the World’s twelve largest Automobile Manufacturers was approximately 10% during 1965-1972, but declined to just 4.2% during 2000-2006.

a. Use Porter’s Five Forces Framework to explain the declining profitability of the World Automobile Industry.

b. Which of the five-forces has had the biggest effect on depressing profitability? Briefly explain your answer.

Answers

a. Porter’s Five Forces Framework

In order to explain the decreasing average return on equity of the World Automobile Industry (10% during 1965-1972 declined to 4.2% during 2000-2006), the industry environment should be analysed by Porter’s Five Forces Framework with the aim of evaluate potential profitability and identify the sources of competitive advantages. This approach comprises five main factors mentioned below:

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• Industry competitors

Since 1880s when the first internal-combustion powered vehicles were produced in Europe, the automobile industry has been developing at different rates in different parts of the world. It can be seen that the industry is highly concentrated until 1990 when the automobile industry’s leading manufacturers are in US, Western Europe (France, Italy, Germany, UK with the later Japan and Korea). Because of internationalisation, globalisation, the industry becomes more competitive as “there are now far fewer automakers in the world as a whole, concentration has declined in most national markets” (Grant, R. M, 2010). All companies following the trend to become multinational companies want to compete in both domestic and foreign markets through strategic partnerships or through buying out or merging with other companies; hence, the barrier of entry is strengthened. However, differences in cultures, geography, or economic growth between nations can be disadvantages for established firms to expand their global market; but they can be advantages for potential entrants to enter the industry. That is why...