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Porter’s 5-Force Analysis of Toyota Essay

Threat of New Entrants – Low

Entering a car manufacturing market is very costly and risky. The initial capital investment is extremely high, while the competition between the companies is very intense and dominated by the well established companies.

The well-known brand, unshakable market presence in various segments, and large size gives Toyota a competitive advantage over new entrants in the auto manufacturing industry.

Threat of Substitutes – Medium

As the industry trends indicate, the customers still have a solid reliance on the used car market. Considering the fact that economy has not fully recovered, a significant part of the car demand is taken by the used car industry.

With the ability to cut costs more efficiently than its competitors, Toyota has narrowed the price gap between the used cars and its own automobiles. Therefore, compared to its peers, the substitution with the used cars is less of a danger for Toyota.

Rivalry Among the Competitors – High

Considering that the automotive industry represents an oligopoly (especially in United States) the constant competition for the market share and industry dominance is prevalent. Continuously increasing competition is fueled by the higher consumer expectations and anticipation for the lower prices.

Want to know where our essays come from or request removal of an essay? Click here. Although Toyota has rather strong cost cutting strategy, the recent natural disaster has put an additional pressure on Toyota’s costs. Recently, the Detroit Three have been offering higher sales discounts to counter price competition, which puts Toyota under a heavier burden of efficient production and cost cutting strategies. Yet, Toyota remains a leader in the low cost manufacturing, while its production system caused other car-manufacturers to change the way they operate.

Buyer Power – Moderate

The recent trends indicate that the consumers are prone to seek out more fuel-efficient cars due to the rising oil prices. This also results in the increasing demand for the hybrid cars that offer cheaper alternatives for operating the vehicle coupled with higher expectations of product quality. Moreover, since the choices in the car market are abundant, the buyer has a quite strong bargaining power and low switching costs.

The cost cutting practices that Toyota implements in its operations lowers the buyer power and puts its cars into a more advantageous position compared to its competitors.

Supplier Power – Low

The suppliers in the auto-manufacturing industry are likely to be smaller than manufacturers and thus tend to sell to multiple automakers. While we see that supplier’s network with automakers is pretty diversified, they provide crucial elements for car making and most of the auto-manufacturers rely on the supplier’s timely operations and stellar quality. For this reason, the long-term contracts accompanied by strict standards or quality on for the suppliers are very common. Usually if a supplier does not comply with the standards set by the carmakers and charge too much it is fairly easy for the car manufacturer to find another supplier and even move the supply chain towards the cheaper supply markets in a different country.

One of the competitive advantages of Toyota Co. is its strong relationship with the suppliers. Its efficient manner of monitoring supply chain places low bargaining power on the suppliers.

(Standard & Poor’s Net Advantage – Industry Survey,)

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