08/03/2018 Internal and external analysis of the automotive industry

Internal and external analysis of the automotive

industry
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Published: 23rd March, 2015

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Automobile industry is a global industry with the market size of 5.6 million units' annually .There are six
competing manufacturers in this industry: Amazing cars (A), Best Motors work(B), Cool Cars(C), Driven
Motors Co. (D),E cient Motors(E)and Fast Cars(F).

These annual sales of 5.6 million units are expected to grow slightly next year if the economy performs as
this year. The market shares for all competing manufacturers are the same except for Fast Cars (F) which has
a slightly higher market share. This industry is usually broken down into seven vehicle classes which are:
Economy (E), Family (F), Luxury (L), Sport(S), AEV (A), Minivan (M), Utility (U) and Truck (T).

The vehicle manufactured by the industry share six common benchmarks which customers' uses in making
purchase decisions, which are: Price, size, Performance, Interior, Styling, quality and Safety.

These cars are sold by various contracted auto dealerships. These auto dealerships are also required to
provide after sales services. Besides optimum dispersion of dealership in the market sales are also driven by
e ective marketing campaign by industry such as advertising and below the market nancing.

These rms ensure they maintain their market share and growth by investing in research centers, making
small to major upgrade, retooling of factories and even building extra capacities to mention just a few. But
that can only be achieved by shrewd cash management skills because most of those investment start
generating cash ows two to four years after the money had been invested in the rst place.

Fast Cars (F) has four product lines which are: Fanagan, First class, Fly and Futile.

STRATEGIC PURPOSE

Firm F mission is to continue being pro table through provision of high quality cars for people with slightly
high disposable income.

The rm F objectives are: to continue being a market leader in luxury, sports, utility and Minivan market
segments, continue being pro table for foreseeable future and invest in research and development of cars
which shall ensure top quality product for foreseeable future.

Fast cars (F) strategy is for ensuring sustainable sales each model shall undergo minor upgrade after two
years of being introduced into the market and major upgrade after ve years of being produced. Fast Cars
shall produce new products within served market segment after Eight years of rst introducing the product
into the market.
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08/03/2018 Internal and external analysis of the automotive industry

3.0: EXTERNAL ANALYSIS

External analysis is very important in making informed strategic decision in any organization (Robbins,
2007).For any strategic decision to be successful it must at least be an informed decision. There are various
External analysis techniques with each providing di erent yet useful set of information. They include PESTEL
analysis for analyzing macro environment; SWOT analysis which allows analysis of the opportunities and
threats; Michael Porters 5 forces and industry life cycle from industry analysis, the critical success factors and
industry groups to identify the competitors.

3.1: PESTEL

PESTEL analysis provides the most comprehensive analysis of the macro environment in which a Fast car
operates (Johnson G, 2008). Understanding of the information provided by PESTEL is key in ensuring success
of the rm product and even going concern of it. PESTEL analysis include: Political risk analysis, Economic risk
analysis, Social analysis, Technological analysis, Environment analysis and Legal analysis.

3.1.1: POLITICAL RISK ANALYSIS

Political risk analysis includes analyzing the risk of political stability both in terms of occurrence of wars but
also in term of stability of legislation. For example the country that changes the same law frequently will be
perceived to have a signi cant high political risk.

Apart from political stability other factors which are part of political risk analysis includes: tax laws,
employment and labour relations laws, environment laws and regulation, trade restriction and tari s.

3.1.2: ECONOMICAL RISK ANALYSIS

Economic risk analysis involves analyzing the potential for economical growth, foreign exchange rate,
population unemployment, in ation rate, interest rate and availability of credit. As a general rule the industry
is expected to sale more cars during the good economical times and less cars during the recession and
prolonged period of economical contractions.

3.1.3: SOCIAL ANALYSIS

Social analysis this includes environment, car culture, taste, fashion, health consciousness, age distribution
and population growth rate. Today car customers especially in major cities in western Europe and America
prefers cars that are environmental friendly and are even prepared to pay a premium for that.

3.1.4: TECHNOLOGICAL ANALYSIS

This involves research and development of new product or upgrading either minor or major ways to existing
products. It also includes production technologies such as automation .While conducting technological
analysis it is crucial to analyze technological change in the economy and how it will likely impact the industry.

3.1.5: ENVIRONMENTAL ANALYSIS

Environmental analysis has become very important now days because of car customers and government
environmental consciousness .Most government have legislated maximum acceptable carbon dioxide
emission for a cars to be sold in their market. Besides customers takes into account the car fuel
consummation before making a purchase decision.

3.1.6: LEGAL ANALYSIS

Automobile industry like other industries is regulated by the government. This requires them to obey all of
the law as enacted and enforced by the government of the land. A good hypothetical case is carbon dioxide
emission target per car which illegalizes the sale of all cars in the market which does not meet this criterion.

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08/03/2018 Internal and external analysis of the automotive industry

3.2: MICHAEL PORTERS 5 FORCES ANALYSIS

Michael Porters 5 forces analysis is a very important technique in understanding competitive forces within
any industry (Johnson G, 2008).Car industry like all other industries needs to understand competitive forces
within the industry. It is only this understanding which shall ensure the success and failures within the
industry as a whole.

3.2.1: THE THREAT OF NEW ENTRANTS

The threat of new entrant in this market is low because of higher barrier of entrance and high barrier of exit.
There is a high barrier of entry because setting up a car company is very capital intensive venture.

Apart from that there are idle capacities within the industry which makes it very di cult for anyone going out
of the business to nd anyone interested in buying used up plants and equipment.

These two factors are deterrent for most people to enter the car industry as the manufacturer because of
di cultness of ensuring the creation of value to shareholders.

3.2.2: BARGAINING POWER OF SUPPLIERS

The bargaining power of the supplier is low because most of the suppler are very small companies
comparing to car manufacturers. Besides in most country car suppliers are unorganized but even if they are.
Manufacturers source material from various parts of the world. This paper argues that the bargaining power
of supplier is almost insigni cant in the car industry.

3.2.3: BARGAINING POWER OF BUYERS

In this industry the bargaining power of buyers is very high because buyers have no switching cost and the
industry is very price competitive. Most of the buyers make price comparisons on the internet in the
purchase decision on: type of a car, dealer from whom to buy, and nancing for the purchase o ered.

3.2.4: THREAT OF A SUBSTITUTE

There is insigni cant risk of substitute in cars today as just when there were rstly mass produced in
1920(Cramers, 2005). Cars remain to be the most convenient means of transport within geographical
con nement. People use cars to commute from their residence in the morning and return in the evening the
only available substitute is riding a bicycle or walking and who do you think is prepared to do either of the
two if the distance to be covered is at least fteen kilometers.

3.2.5: COMPETITIVE RIVARLY

This is one of the most competitive industries in the world. Any production technique which is expected to
delivers competitive cost advantage is just copied on its knowledge. There is no signi cant product
di erentiation within the industry. However, Fast cars industry has absolute market share in all segments
which it operates.

3.3: CRITICAL SUCCESS FACTORS

Critical success factors refer to the features which are used by the industry as the benchmark for evaluating
a product. They include Price, Performance, Size, Styles, Safety, Interior and Quality. A company with higher
weighted average on mastery on production of features of Styles, Safety, Interior and Quality (SSIQ) can
produce a car of similar speci cation at a considerable low cost than the one with low weighted average of
SSIQ.

3.4: OPPORTUNITIES, THREATS, STRENGTH AND WEAKNESS (SWOT) ANAYSIS

Opportunities:

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08/03/2018 Internal and external analysis of the automotive industry

At the beginning there was an opportunity to decide the course of taking the rm in any direction the
management felt would ensure success for the rm. At period 0 all rm had the same resources. It goes
without saying that the positions the rm where at period 2 and subsequent periods were the result of
managerial decision of those rms.

Threats:

The major threat at period 0 was that Firm F had a signi cantly lower weighted average of SSIQ. This had a
potential negative pricing ability as on average the production cost per unit for any car which we intended to
produce was signi cantly higher than all other competitors. It was for this reason we decided to make cars
for targeted consumer with signi cant higher disposable income.

Strength:

The strength in rm F is quality of its product and Brand. Firm F has managed to ensure it is associated with
successful and yet powerful individual. This explains its absolute dominance in Luxury and sports market
segment. Besides it is known as producers of safer and reliable vehicle which again explain its domination on
minivan and utility segments.

Weakness:

Due to lower weighted average of SSIQ the company is vulnerable if any of the competitors enters in the
market segments which rm F operate .As the competitor can o er the cars of the same quality at a
considerable lower price. This will result in decline of pro t margin per unit for rm F and eventually will
cause decline of overall pro tability.

4.0: INTERNAL ANALYSIS

4.1: Resource and Capability:

These refer to materials (i.e. inputs) and abilities which are required for the rm to survive and prosper
(Johnson G, 2008).There is four types of resources: physical, nancial, intellectual and human.

Physical Resource: It includes: manufacturing plant, raw materials and nished products.

Financial Resource: This includes; company nancial assets such as cash in bank, collectables and availability
of credit lines from various nanciers and sales of nished products which are the major source of cash
in ows for any company.

Human Resource: This is the resource which organizes all other factors of resources in the course of
operation cycle. Each rm in case of Stratsim environment employs 3 to 4 people.

Intellectual Resource: This refers to skills of the workforce, production technique and technologies. In car
industry now day's intellectual resource is a single biggest provider of competitive advantage.

The capabilities of Auto industry are manufacturing of: Quality, Safe, Stylish, with good interior design, at
right prices with good engine performance cars either within local market or even at international markets.

4.2: VRIO

Value: This is de ned as the ability of the rm resource to satisfy customer satisfaction .The vehicle
purchased by the customer is expected to operate smoothly in order for customer to feel he is enjoying
utility which is corresponding to money he has parted with to enjoy the utility in rst place. The company
which o ers value for money can easily create loyal customer base.

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08/03/2018 Internal and external analysis of the automotive industry

Rare: This refers to a unique resource which the rm has created. The good example is the launch of AEV
vehicle ahead of other competitors. The rm will enjoy the rst mover advantage within that new car market
segment.

Immitability: This refers to the ability of the rm developing resources which are not easily copied. Resources
can protect against copying by patenting all of the technologies which are developed by the rm: However; in
case of Stratsim this was impossible as all of rm decision was available to you competitors for review and
scrutiny.

Organization: This refers to the interaction of all resources in attainment of organization goals and targets.
This industry as per stratsim case o ered nothing to attract talent to come and work in this industry instead
of the other industry. The problem of leaving everything to chance in real world the industry might nd itself
struggling with attraction and retention of talent.

4.3: FINANCIAL ANALYSIS

The company nancial performances for the rst four years were very good with collective net income of
1,940,000,000. However; The Company su ered a huge loss on the fth year when the company su ered a
massive loss of 1,689,000,000.

The nancial indicator for the all ve years of the business operation can be is provided in the table below.

Table 1: Financial Indicators Information (Source: Stratsim Game, 2010)

Years

Net income(000,000)

Stock Price

Market Value

Market Share

524

26.6

13,303.00

14.3

610

26.6

13,016.00

14.1

658

22.58

11,292.00

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08/03/2018 Internal and external analysis of the automotive industry

12.3

148

18.94

9,469.00

11.2

-1689

7.57

3,785.00

11.2

This loss which the company had su ered is threatening the very existence of rm F if there are no are no
new capital injections. This may be surprising for a person an uneducated observer that why the company
which has net collective income of 251,000,000 over ve years should should the company be threatened the
loss of its fth year.

The reason is simple the net income in respective years was some portion of them reinvested in :( a) making
minor upgrade on existing product;(b) making major upgrade;(c)investing in new models;(d) in retooling and
expanding production capacities .

The company must understand the reason for the massive loss and must takes corrective measures to
ensure its survival and prosperity.

Besides there have been a signi cant decline in company stock price, market value and market share.
However; this is not surprising as most stock market is driven by past performance. This explains the decline
in those factors starting in the fourth year all the way to fth year when pro tability of the company started
declining.

5.0: DECISIONS

Firm F made upgrade in (a)minor upgrade after every year (b) major upgrade after two years (c) introduced
new product after ve years of production. This strategy was adopted for the purposes of ensuring the cars
maintain their "wow" factor.

This strategy was adopted because it has been tasted time and time again and it has proven to be extremely
e ective in maintaining market share. This strategy was for the rst time employed by GM and it ensured it
surpassed Ford sales in 1920' when ford was only producing module T only (Cramer, 2005) at ultra lower
prices because of Ford massive economies of scale.

Firm F decided to concentrate on production of Luxury cars with its First class brand, Sports vehicle with Fly
brand, Minivan vehicle with Finigan brands and Utility vehicle with its futile brand. All of this cars are
expensive on a relative terms compared to other market segment.

The decision to produce these cars paid of during good economical times but did very poorly during bad
economical times of fourth and fth year. This resulted into massive losses in year ve.

The failure of the management to diversify into other market segment which is serve customers who are
price sensitive must have contributed into massive losses which the rm su ered.
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08/03/2018 Internal and external analysis of the automotive industry

6.0: CONCLUSIONS
1

The rm put tooUK
much emphasis
ESSAYS (/) in leading in Luxury, Sport, Minivan and Utility market segments. The rm  
did very well during the economic boom but poorly during the bad economic period which started in the last
month of third year and dragged throughout the fourth and fth year.

This poor economical condition had two major e ects: First, consumers had less money to spend .and
Secondly, it changed the perception that excess was cool. These two factors combined caused a signi cant
decline in sales as few customers were prepared to buy the type of cars we were selling. Unlike other
manufacturers we could not cut prices too much because unlike them we have a signi cant higher
production cost per unit because of low weighted average of SSIQ.

This strategy of selling expensive cars works very well during good economic period but badly during poor
economic period. We advice the company should invest in training and new capabilities so as to attain
industry standard of SSIQ average. This will ensure that a company has no competitive disadvantage in
terms of production cost per unit. Attainment of industry standard average of SSIQ will ensure the company
is an e ective price competitor in the market and secondly success if it decides to manufacture into cars with
low pro t margin.

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