Toyota has unfailingly remained within the top five list of the largest automakers in the world in terms of revenues and sales, production output, and market valuation or market capitalization. However, despite its accomplishments and global prominence, the company faces tough competition from other incumbents and even newcomers. Disruptions in the automobile industry also threaten its market standing. This article explores and analyzes the industry and competitive positions of Toyota using the Five Forces Model of Michael E. Porter.
An Analysis of Toyota Based on Porter’s Five Forces Framework: Understanding Its Industry and Competitive Positions
1. Industry or Competitive Rivalry
The competitive rivalry in the global automobile industry remains intense. This is evident from high levels of marketing activities and advertising expenses, significant investments in research and development, continuous pursuits related to business expansion, hiring of global talents, and the creation and utilization of competitive advantages among the participants. Most automakers need to pursue these undertakings to ensure market reach and market relevance.
It is interesting to note that there might be few automakers in the world when considering the number of potential customers but the fact remains that are about 80 automobile manufacturers and brands competing in a market where brand awareness, brand reputation, and brand loyalty are important determinants of preference. Each of these companies has its respective value propositions, strengths, and competitive advantage.
Nevertheless, based on the aforementioned, the intensity of rivalry is a strong force for Toyota. It compels the company to allocate resources for innovative pursuits aimed at developing and deploying new vehicle technologies, expand and improve further its manufacturing capabilities and global distribution reach, spend on global and localized marketing campaigns, and maintain its strengths and sources of competitive advantage.
Below are the factors that explain why the intensity of competitive rivalry is a strong force for Toyota:
• High Levels of Research and Development Investments, Marketing Activities and Advertising Expenses, and Business Expansion Pursuits, and High Significance of Branding
• Moderate Firm-to-Customer Concentration Ratio, Moderate Levels of Entry and Exit Barriers, Moderate Rate at Which the Market Grows, and Moderate Degree of Differentiation Potential
2. Threat of Substitutes
Substitutes for automotive vehicles are dependent on a particular geographic market. Remember that a substitute product is a product that can be purchased or used in place of another product to meet the same needs. Nevertheless, when it comes to general vehicle ownership, the substitute would be public transportation or other sustainable modes of transportation. Some markets need private vehicle ownership because public transportation is inefficient.
Other substitutes for four-wheeled automotive vehicles are motorcycles and bicycles. Countries like Vietnam or areas like Bali in Indonesia use motorbikes as the main mode of transportation. Denmark and Netherlands have bicycle-focused transportation. Smaller and more economical vehicles like lightweight electric bikes and motor-powered scooters are also becoming popular in urban areas like Paris and even in villages in Southeast Asia.
Of course, in considering the sub-categories of four-wheel vehicles, it can be considered that substitutes are present within the entire vehicle category. An example would be battery-powered electric vehicles. These are substitutes for vehicles based on combustion engines and even hybrid electric vehicles. It is important to note that Tesla has dominated the electric vehicle segment and its marketing strategy has made these vehicles popular.
The threat of substitutes represents a moderate threat to Toyota. This comes from the fact that it targets geographic markets where private vehicle ownership is a necessity. Furthermore, despite the emerging popularity of electric vehicles, the fact remains that the world is still dependent on fossil fuels. The company also has its hybrid electric vehicle technology and hydrogen fuel cell technology to compete against battery-powered electric vehicles.
Below are the factors that explain why the threat of substitutes is a moderate force for Toyota:
• Moderate Number of Substitute Products, Moderate Propensity of Buyers to Switch to Substitutes, and High Level of Perceived Product Differentiation,
• High Ease of Choosing Substitutes, Low Switching Costs for Customers, and Low Relative Price of Most Substitutes
3. Threats of New Entrants
Automaking is a capital-intensive business. It requires investment in production facilities, significant marketing expenses to create brand awareness, creation of distribution channels, and hiring of relevant talents. The capital requirement increases if the new entrant intends to target a wider geographic market outside its home country. A wider market reach is essential to take advantage of production capabilities and maximize sales potential.
However, despite capital serving as the main barrier to entry, it is interesting to note that a lot of newer automakers have emerged in recent years. Tesla is a relatively new player but has since become the most valuable automaker in the world. There are also newer automakers emerging in countries like China and India that offer edgier and feature-packed vehicles. Several of these automakers also produce battery-powered electric vehicles.
The threat of new entrants is a moderate force for Toyota. Companies like Tesla have demonstrated that the entire automobile industry can be disrupted with technological innovations and novel business models. The company manages this threat by focusing on the strong demand for vehicles based on combustion engines and leveraging its hybrid electric vehicles through expansion of production, distribution, and marketing activities.
Below are the factors that explain why the threat of new entrants is a moderate force for Toyota:
• High Level of Capital Requirement, High Dependence on Economies of Scale, and High Impact of Cost Advantage and Cost Leadership
• Moderate Importance of Brand Equity and Brand Loyalty albeit High Importance of Branding and Marketing Activities
• High Level of Geographic Barriers, High Importance of Distribution, and High Importance of Regulatory Barriers
4. Bargaining Power of Buyers
Nevertheless, despite the considerably high barriers to entry, a successful entrant can stir the competition in the automobile industry further. Remember that there are about 80 automakers and brands in the world. This means that there are alternative vehicles to Toyota vehicles. Adding to this is the fact that there are also substitutes for fuel-based four-wheel vehicles like battery-powered electric vehicles, motorcycles, and bicycles.
It is also important to note that the development and deployment of new technologies, novel trends in designs, and sophisticated vehicle features or functionalities also create some level or moderate degree of differentiation or unique selling propositions that can affect purchasing decisions. The growth of the used car market gives customers another option and a more affordable alternative to brand-new vehicles.
Switching to alternatives or substitutes has low to negligible costs because of the availability of options and access to market information. The target market of companies like Toyota can also be sensitive to prices. Price sensitivity can be influenced by income level in a particular geographic market and economic conditions. The market expansion of incumbents and new entrants makes switching easier for consumers.
The bargaining power of customers is a strong force for Toyota. The presence of alternatives and substitutes means that these customers have more options. These options can influence the product strategy and pricing schemes of automakers catering to the general market. Toyota tries to manage this force through its reasonably-priced vehicles, loan or financing options, after-sales services, and consistent marketing activities.
Below are the factors that explain why the bargaining power of customers is a strong force for Toyota:
• Lower Buyer Switching Cost, High Buyer Information Availability, and Moderate Level of Firm-to-Buyer Concentration Ratio
• High Sensitivity to Prices, Moderate Level of Alternatives and Substitutes, and Moderate Level of Product Differentiation
5. Bargaining Power of Suppliers
Automakers are dependent on suppliers of raw materials. Most of them are also dependent on dealerships for product distribution and sales. Tesla is one of the few companies in the automobile industry with a strong vertical integration within its manufacturing activities and distribution strategy. Reliance on third parties and the presence of several automakers chasing the same supplies and distribution channels create risks.
However, because of the size of the industry, it is also important to note that there is a large number of suppliers. This gives companies like Toyota more options. It also lowers their switching costs to other suppliers while heightening the cost for suppliers to switch to another business customer. It is also important to highlight the fact that prominent automakers are attractive to dealers because of their established branding.
The bargaining power of suppliers is a moderate to weak force for Toyota. The company has managed to control the influence of suppliers through large transaction volume. It also has some level of vertical integration. It owns and operates steel mills, rubber plants, and electronic factories. Toyota also invests heavily in marketing activities and advertising to maintain and expand the level of public awareness toward its brand.
Below are the factors that explain why the bargaining power of suppliers is a moderate force for Toyota:
• Low Switching Cost for the Firm, High Switching Cost for the Supplier, and High Availability of Market Information
• Moderate Impact of Inputs on Costs and Differentiation, and High Availability of Alternative Suppliers and Substitute Inputs
• High Supplier-to-Firm Concentration Ratio, and Moderate Level of Vertical Integration and Forward Integration Possibilities