Porter’s Five ForcesFramework Model analyses the competitive forces within the environment in whicha company operates, to assess the potential for profitability in an industry. Porterconsists of the threat of new entrants, the threat of substitute, buyer power,supplier power, and rivalry among existing competitors.
The change in anyforces normally requires firms to observe the marketand make the decision in the overall change of industry information. Threat of New Entrants Profitable industriesthat have high in returns will attract new firms to take involved. Newcompetitors may force existing firms to be more efficient and to learn how tocompete on new dimensions.
The threat of new entrants is high when it is easyfor new competitors to enter a market ad low when there are significant entrybarriers to entering a market. These entry barriers make it difficult for newfirms to enter an industry and often place them at a competitive disadvantageeven when they are able to enter. The domestic cars that have produced inMalaysia are Proton and Perodua. This can seem that in the automobile industry,there have high barriers for new entrants to involve in. The potential factorsthat cause the high barriers of new entrants are economies of scale which is Peroduais able to produce automobiles in huge amount and gain low cost in producingcompany’s products and able to provide flexibility in pricing, differentiationof product which promote special products, requirements of capital referaccording to cars industry which requires high capital capability to open andoperate the business. Furthermore, automobiles business not only need highadvanced technologies support daily manufactures activities, but also requiresprofessional technical staff to manipulate those machines.
Threat of Substitute Products A substitute product is achange that makes which used a different technology to solve the same economicneeds. Threats of substitute products or services are high when they are manyalternatives to a product or service and low when there are few alternatives forthem to choose. The substitute product’s quality and performance are equal toor greater than the existing product while the selling price is lower. Thefactor that confronts is the number of substitute products available in themarket, the intention of buyer substitute, relative price, and quality ofsubstitute and buyer’s switching costs. Therefore, if there have a high threatof substitute products, there is higher the possibility for Perodua to have theloss in advantage and profit of the products.
So, the threat of substituteproducts in automobile industry is low because the substitute product of vehiclesthat have is motorcycle, bus, van and so on. Although there have many types oftransporting vehicles, cars still hardly to substitute by other vehicles sincebus and van are more consider as public transport which means the time anddistance are uncontrollable by single person. For motorcycle, it will affect bythe weather when driving and less safety than cars. So nowadays, most of thepeople will buy car as their primary transportation because of the weatherwhich may be sunny or rainy day and capacity of passenger that can bringcompared to buying motorcycle which in rainy day, need to wear raincoat in orderto prevent get wet in rain and more comfortable than choosing van and bus as theirtransport.
Bargaining Power of Buyers The bargaining power ofbuyers is the ability of buyers to affect the price they must pay for an item.Firms can take measures to reduce buyer power such as given discount by helpsthe company to find out which is firm’s loyal customers. Buyers’ power is highif buyers have many alternatives and it is low if they have few choices given. Whilein automotive industry, the bargaining power of buyers is moderately strong because large parts of buyers are the smallindividual buyers that buy vehicles. Such buyers are in a position to bargain for lower prices whileevery buyer can easily switch to a new brand in the fact of buyers aresensitive towards price and would switch to another brand that offers lowerprice which is Proton. And for the consumers who more concern about safety orspeed, they might chose Volvo or BMW as their primary car brand.
Thus, thePerodua need to focus on building customer loyalty through design, quality andby offering competitive prices. Bargaining Power of Suppliers The bargaining power ofsuppliers is the supplier’s ability to affect the price they charged forsupplies which including of raw materials, labour, and services. The supplier powerswill increases when supplier’s products create high switching costs.
Based onAutomotive News in 2013, there have about 20 largest companies on theAutomotive News list of the top 100 suppliers for 2012. So, there seem inautomotive industry, there gave many suppliers that firms can choose to get theraw material. Therefore, the bargaining powers of suppliers in this industry isconsider as low since Perodua could easily switch to other suppliers thatprovide more benefits and the switching cost might be lower than otherindustries.
Intensity of Rivalry amongCompetitors Rivalry among existingcompetitors is high when competition is fierce in a market and low whencompetition is more complacent. For most industries, the intensity ofcompetitive rivalry is the major decision of the competitiveness of theindustry. Therefore, having an understanding of industry rivals is important topromote a product smoothly. Besides that, a business must be aware of itscompetitor’s marketing strategy and pricing which the reactive will occur ifthere have any changes made. Firms seek to differentiate their products in waysthat customers value and in which the firms have a competitive advantage.Common rivalry dimensions include price, service after the sale, innovation andetc. For example, most automobile industry will promote the similar price ofthe car, the similar service after the sale in the reason to defeat thecompetitors.
So, the lower the rivalry among competitors, the higher the profitthat firms can gain.