Perform a Five Forces Analysis for the industry in which competes the firm you are working with in this course. To do so, recall to the definitive definition you made of that industry according to your analysis in the previous chapter (assignment C4_M1).
To inspire your work, you may use the examples provided in this section’s contents on the application of the 5 Forces Framework to two sectors: the automotive industry in Spain, and the executive search services industry.
The fiver forces are: internal rivalry, entry, substitute and complementary products, supplier power and buyer power. Let us analyze step by step all of them considering our company’s sector, in this case, the industry of cars in Navarra.
Internal rivalry
It refers to the battling for share by firms within a market. In this force, it is key to analyze different factors.
Firstly, we have to take into consideration the degree of seller concentration of the market. In order to do so, the Herfindahl index and the 5-firm concentration ratio are really important. In our case, the Herfindahl index in 2017 is 0,048367 and in the same year the 5-firm concentration ratio is 0,3953. As we predicted in previous assignments, the concentration of this market is not very high.
The second factor that we should considerate is the rate of growth in the industry of cars in Navarra. In order to study this aspect, we have found the number of matriculated cars that were sold in Navarra between 2011 and 2019. The following chart shows us this information.
As we can see, in average the number of cars has increased considerably. The sector tends to grow, although in 2019 seems to decrease a little. The important thing is that, in general terms, the sector is, in absolute numbers, more powerful than previous years, even if we are seeing a change of the direction again. We should wait until the results of 2020 are available, to see if the sector is still growing and 2019 is just an exception of this growth.
Another factor to consider is the significant cost differences among firms and the differentiation. In our sector this is very important, because there are very big differences between the brands of the cars. They are running their advantage differentiation in order to gain the popularity among the customers that they want. There are cars that are cheaper than other because they are “low-range” cars or they offer less services or products incorporated in the car. Because of this, there are huge differences between the costs of the car production between all the producers. However, in this case firms cannot believe that price reductions will generate substantial increases in market share, because there are a lot of differences between their products, they are not undifferentiated. There are lots of competitors, which make the situation of the market to be very competitive; but there is also a lot of differentiation between their products.
Other factors are important, such as lack of quick in adjusting the prices, or infrequent sales orders. This is very true in Tesla’s context. It is not very common to see sales on brands like Tesla or Audi, but sometimes it can be possible. It seems to be an unofficial agreement among the cars’ brands in order to stay in its price, because they focus on some particular customers and some particular necessities, so that the price is different for each brand and both, customers and companies, accept it.
The exit barriers are really high in this case. Producing a car takes a lot of infrastructure and high-qualified workers. This means that a company, once that is producing cars, will probably continue producing them, even if its numbers are not good, because the exit of the market will mean a higher loss to the numbers. The company will think on different options, such as lower prices, less quality, etc. before thinking on closing the production. As we have seen in several assignments, Tesla has a great infrastructure and lots of workers. This capital is very expensive, so that this means that the company has to amortize it during the years.
To sum up, although there are lots of industries and the competition is a reality, because of the competitive advantages of the companies the level of rivalry exists but up to a point.
Entry
In this case, we should mention that entrants divide market demand among more sellers, decrease market concentration and heat up internal rivalry.
As we discovered in past assignments, economies of scale are key in this sector. The infrastructure is very expensive and not only the capital but also the human factors are also expensive, because they have to be really qualified. This means that the entry is more difficult in terms of economies of scale. The company has to achieve an amount of production in order to survive with profit, otherwise the production is not going to be enough to cover the huge fixed-costs that are in this sector. This is directly related to the experience curve. Because of the way this experience curve behaves, the entries are going to be less likely to happen.
Another point that we have to analyze is the government protection of incumbents and the importance of reputation or established brand loyalties in purchase decision. In this case, we have to mention to pieces of information. Firstly, there are some “equality” laws for the industries that in 2007 were implanted in the 35,6% of the cases, while in 2008 were implemented in the 11% of the cases.[1] This means that the there is a lack of government effort to achieve this equality among the companies. Secondly, a very important factor in this market in Navarra is the presence of Volkswagen. This company is very important, not only in the car industry in Navarra, but also in the general industry in this Region. The problem for Tesla here is not only the presence of an important company well-known in the region, but the huge power that this company has in Navarra and in the rest of the world. However, this means that the entry is going to be more difficult to enter this market because the competitors are really powerful.
Volkswagen situation has also something to do with the consumers highly value reputation. For new entrances it can be very difficult in Navarra to stablish a good connection between the company and the consumers, because some of them can be more loyal the Volkswagen company or to others that are already implemented in the region. Being well-known can be very difficult with these huge competitors, it is not very expected from the inhabitants in Navarra to have lots of entries in this market, because they are used to think “cars in Navarra = Volkswagen”.
It is also important to consider the accessibility that the new companies can have to raw materials, distribution channels, technology and location. In this case, we can point out two important ideas. Related to the raw materials, the accessibility can be real if we see that there are lots of companies with these materials in the surroundings of Pamplona, the capital city of Navarra. TSF, a global company, is located in Orkoyen and it works with manufacturing, engineering and integral logistics[2]. This is just an example, but there are lots of them. Regarding the location, we should mention that a solar in Landaben, an industrial area in Navarra close to Pamplona, costs around 450.000€[3]. We can see again that the importance is not the lack of accessibility, but the huge investment that a new company has to do in order to enter in this market.
To sum up, the new entries do not seem to be very likely to happen, because of first the huge power of Volkswagen and second the huge investment that requires this market.
Substitutes and Complements
Substitutes behave the same way as entrants, because they steal business and intensify internal rivalry. On the contrary, complements boost the demand for the product and enhance profit opportunities for the industry.
Regarding the substitutes, we should focus on three main ways of transports: the train, the plane and the bus. The three of them have importance in Navarra. The train is run by a company called Renfe. This company is the only one that establishes the trains in the whole country, not only in Navarra, because is in part property of the government. The big station is located in San Jorge, a neighborhood in Pamplona, the capital city. It is possible to travel from the capital city to lots of cities around it and to the most important ones, such as Tafalla or Tudela. However, there are still difficulties to implement some fast trips in concrete villages or towns. There is still work to do in this topic from the government.
It does not seem such a really dangerous competitor, but it can be if the customers use both, the train and the bus. There are some buses that are cheaper than the train and, although the trip is longer, sometimes the people really need or want to use this bus because there are not trains available from the capital city to their towns. This happens a lot with students of the universities located in Pamplona. They may not afford a flat in the capital city, so every day they have to get both, a train and a bus, or just a bus, instead of using the car everyday. In these cases, the presence of these substitutes is really important.
The same happens with the public bus in the area of Pamplona, that are called villavesas. This way of transport is a substitute because every person is able to go from one point of Pamplona to the other one with a price that is affordable. These buses also go to other points around Pamplona, the “comarca”.
The last idea we have to mention about the substitutes is the presence of the airport in Noain, which is very close to Pamplona. However, because of the lack of several “lines”, there are not a lot of flights available and it is mainly in disuse. It does not present in Navarra such a huge substitute to the private car.
Regarding the complements, we can mention different aspects, but we are going to focus on the petrol and the energy suppliers for electric cars. Related to the petrol, in this webpage we can see in real time the price of the petrol: https://gasolinabarata.info/.It offers the cheapest prices in the whole country. Although there can be differences among the several regions in Spain related to general prices and wages, once you take a look on the website you see that the differences in petrol prices are insignificant. This means that the petrol can seem to be cheaper in Navarra compared to other products that are sold in Navarra. This is a good perspective to the cars’ market, because a complementary product that is very important is cheaper in terms of general prices; because Navarra is known as an expensive community to live.
If we focus this time in the energy suppliers, we can see that almost all of them are located in Pamplona. This is not a positive aspect to the electric cars, because this can be a motive for a person that lives in Navarra but not in Pamplona in order not to buy a electric car.
However, if we take a look carefully, we can see that 14 chargers are from Tesla.[4] This is good way to obtain profit from the complementary products.
Finally, we should mention in a complementary product that this time is a service and not a good, which are garages. This website https://www.antrv.com/index.php?m=asociados-60 allows us to know the number of garages that are available in Navarra. As we see in the picture, the number is considerably high, so there is not lack of accessibility in this case. However, it is true that in Navarra, garages are known to be quite expensive, so this can have a negative impact to our company.
Supplier power and buyer power
Supplier power takes the point of view of a downstream industry and examines whether that industry’s upstream input suppliers can negotiate prices that extract industry profits. On the contrary, buyer power refers to the ability of individual customers to negotiate purchase prices that extract profits from sellers.
Firstly, we are going to focus on the bargaining power of buyers. Buyers are going to have less power where they are not concentrated (there is not a monopsony). In this market, it is common knowledge that the potential customers are not concentrated. There are several brands with several preferences and there as many customers as personalities human-beings have. This means that they are going to have huge power, so the price of the cars is not going to depend principally on what the customers want. The companies are not getting used to the customers’ preferences, but the other way around. The customers have to get used to the companies’ prices and decide which car they can afford or which one they want. It seems like a “take-it-or-leave-it” price.
Secondly, we are going to focus on the bargaining power of suppliers. Suppliers are less of a threat when sellers are not concentrated (there is no monopoly). In this market, it is common knowledge that the potential suppliers are not concentrated. There are several companies and brands with several types of inputs. We saw an example of a supplier before and like it, there are lots of them in Navarra and all over the country.
Very good job!
ReplyDelete