porter's five forces & porter's value chain model

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Five Forces Model Value Chain Model (AUTOMOTIVE INDUSTRY) Prepared By: Mohd Shahril Bin Mat Nordin GP02684 National University of Malaysia TTTU6414 | Information Technology Management Porter’s| Analyses &

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Page 1: Porter's Five Forces & Porter's Value Chain Model

Five Forces ModelValue Chain Model

(AUTOMOTIVE INDUSTRY)

Prepared By:

Mohd Shahril Bin Mat Nordin

GP02684

National University of Malaysia

TTTU6414 | Information Technology Management

Porter’s|Analyses

&

Page 2: Porter's Five Forces & Porter's Value Chain Model

OUTLINE1.Overview of Porter’s Five Forces Model

2.Porter’s Five Forces Model Analysis for TOYOTA

3.Overview of Porter’s Value Chain Model

4.Porter’s Value Chain Model Analysis for PERODUA

5.Conclusion

6.References

Page 3: Porter's Five Forces & Porter's Value Chain Model

Porter’s Five Forces Model Overview

Page 4: Porter's Five Forces & Porter's Value Chain Model

• Also known as competitive forces model developed by Michael E. Porter in 1979 to understand how the five competitive forces impacting an industry.

• An analysis tool to determine the profitability of an industry and develop a firm's competitive strategy.

• As a framework that classifies and analyses the most important forces that affect the intensity competition in an industry and its profitability level.

Figure 1 : Porter’s Five Forces Model

Porter’s Five Forces Model | Overview

Page 5: Porter's Five Forces & Porter's Value Chain Model

.

THREAT OF NEW ENTRANTS

BARGAINING POWER OF BUYERS

BARGAINING POWER OF SUPPLIERS

THREAT OF SUBSTITUTES

RIVALRY AMONG EXISTING COMPETITORS

This force determines how easy (or not) to enter a particular industry. If an industry is profitable and there are few barriers to enter, competition soon intensifies. When more organizations compete for the same market share, profits start to fall. It is important for existing organizations to build high barriers to enter in order to prevent new entrants.Possible Factors :• The existence of barriers to entry • Government policy• Capital requirements• Absolute cost• Cost disadvantages independent of size• Economies of scale• Product differentiation• Brand equity• Switching costs or sunk costs• Expected retaliation• Access to distribution• Customer loyalty to established brands• Industry profitability

Buyers or customers have the power to demand lower prices or higher quality products from industry manufacturers when their bargaining power is strong. Lower prices mean lower revenues for the producers, while the high quality products typically increase the cost of production resulting in lower profits for the producers. Possible Factors :

• The Buyer concentration to firm concentration ratio

• Degree of dependency upon existing channels of distribution

• Bargaining leverage, particularly in industries with high fixed costs

• Buyer switching costs relative to firm switching costs

• Buyer information availability• Force down prices

• Availability of existing substitute products• Buyer price sensitivity

• Differential advantage (uniqueness) of industry products

• The total amount of trading

This force is the main determinant on how competitive and profitable of a particular industry. It is most likely to be high when entry barriers are

low, threat of substitute products is high, and suppliers and buyers in the market attempt to

control.

Possible Factors :• Sustainable competitive advantage through

innovation• Competition between online and offline

companies• Level of advertising expense• Powerful competitive strategy• Firm concentration ratio• Degree of transparency

Strong bargaining power of suppliers will allow them to sell higher priced or low quality raw materials to their buyers. This directly affects the buying firms’ profits as it has to pay more for materials.

This force is mainly threatening when buyers or customers can easily find substitute products at attractive prices or better quality and when they can switch from one product or service to others at low cost.

Possible Factors :• Supplier switching costs relative to firm

switching costs• Degree of differentiation of inputs• Impact of inputs on cost or

differentiation• Presence of substitute inputs• Strength of distribution channel• Supplier concentration to firm

concentration ratio• Employee solidarity (e.g. labour unions)• Supplier competition: the ability to

forward vertically integrate and cut out the buyer.

Possible Factors :• Buyer propensity to substitute

• Relative price performance of substitute• Buyer switching costs

• Perceived level of product differentiation• Number of substitute products available in

the market• Ease of substitution• Substandard product• Quality depreciation

Porter’s Five Forces Model | Overview

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Porter’s Five Forces Model Analysis for TOYOTA

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The CompanyCompany Name Toyota Motor Corporation

President and RepresentativeDirector

Akio Toyoda

Company Address  

Head Office1 Toyota-Cho, Toyota City, Aichi Prefecture 471-8571, JapanPhone: (0565) 28-2121

Tokyo Head Office1-4-18 Koraku, Bunkyo-ku, Tokyo 112-8701, JapanPhone: (03) 3817-7111

Nagoya Office4-7-1 Meieki, Nakamura-ku, Nagoya City, Aichi Prefecture 450-8711, JapanPhone: (052) 552-2111

Date founded August 28, 1937 (by Kiichiro Toyoda)

Capital 397.05 billion yen (as of May 2014)

Shareholders Shareholder Composition

Fiscal Year From April 1 to March 31 of the following year

Main Business Activities Motor Vehicle Production and Sales

Business Sites Information on Business Sites

Number of employees (consolidated)

338,875 (as of March 31, 2014)

Porter’s Five Forces Model Analysis

Page 8: Porter's Five Forces & Porter's Value Chain Model

1 | Threat of New EntrantsThreat of new entrants to the Toyota and the automotive industry is Weak.

Toyota is not only a company that established in Japan but has been operating around the world and standards for cars have been universally accepted.

It epitomizes the global market and very experienced and knowledgeable in automotive industry.

It is almost impossible that a new company would appear to be a new threat to Toyota and its target markets around the globe according to research conducted.

Toyota has been around and well established for many years, strengthen its reputation, experience and knowledge.

There are many barriers to enter in this industry as stated below :

Large amount of capital required

High retaliation possible from existing companies, if new entrants would bring innovative products and ideas to the industry

Few legal barriers protect existing companies from new entrants

All automotive companies have established brand image and reputation

Products are mainly differentiated by design and engineering quality

A firm has to produce at least 5 million (by some estimations) vehicles to be cost competitive, therefore it is very hard to achieve economies of scale

Governments often protect their home markets by introducing high import taxes

Porter’s Five Forces Model Analysis

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2 | Bargaining Power of SuppliersThe bargaining power of Toyota’s suppliers is Weak.

Toyota has many suppliers in its automotive manufacturing sector. Resources like metal, raw materials, leather, plastic, computers, cooling system, electrical system, braking system and fuel supply system are all bought from hundreds of different suppliers and different bargaining prices distributed across the globe..

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

In addition, most vehicle manufactures own many interchangeable suppliers, and also have the ability to produce the components by their own in the short time. Thus, the suppliers do not own the power to change the price.

Porter’s Five Forces Model Analysis

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3 | Bargaining Power of BuyersThe bargaining power of Toyota buyers is Moderately Strong.

Toyota has fierce competition because there are quite a few companies that have similar cars that can target similar markets (Eg. : Honda, Nissan, Ford, Volkswagen, etc.).

There are many buyers and most of the buyers are individuals that buy one car, but corporates or governments usually buy large fleets and can bargain for lower prices.

Since the choices in the car market are abundant, it doesn’t cost much for buyers to switch to another brand of vehicle or to start using other type of transportation.

The recent trends indicate that the customers 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.

However, the cost cutting practices implemented by Toyota in its operations lowers the buyer power and puts its cars into a more advantages position compared to its competitors.

Porter’s Five Forces Model Analysis

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4 | Threat of SubstitutesThere is a Moderate threat from substitutes for Toyota.

Cars or automobiles are still the most convenient way of transport for the majority of the market who lives in suburban areas.

Numerous other forms of transportation are available, but none offer the utility, convenience, flexibility, independence, and value afforded by automobiles.

Although the public transport vehicles are possible substitute of automobiles like trains, taxi, busses and airplanes, these substitutes have disadvantages as they mostly only practical in cities and have fixed routes and timetables. The motorbikes and bicycles are also not relevant substitutes as they do not assure the comfort of a car.

The switching costs associated with using a different kinds of transportation may be high in terms of personal time and comfort.

High fuel cost may push more people to public transport but it will not create a real substitute for cars. To solve this problem, Toyota always being innovative to produce fuel-efficient cars for their customers.

Toyota’s competitors are constantly developing themselves in terms technology, design, supply and quality. Toyota has to be on the top of their game to make sure the threat of substitutes is minimum.

The marketing arms of the global automotive manufacturers like Toyota are certainly working very hard and with extraordinary production volumes worldwide, all signs indicate that they are succeeding.

Porter’s Five Forces Model Analysis

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5 | Rivalry Among Existing CompetitorsThe rivalry among existing competitors of Toyota is Strong.

There are several competitors of Toyota in the automotive industry like Honda, Suzuki, Ford, Nissan, Proton, Perodua and so on. These major competitors are so closely balanced that it increases the rivalry.

The competition also exist between the governments because the government will establish protection laws to protect the products of each own production. Product differentiation

Constantly increasing competition is powered by the higher consumer expectations and anticipation for the lower prices.

Lack of differentiation opportunities also will cause high rivalry and the companies will compare to each other constantly.

However, Toyota always try to differentiate their products and services to increase the customer’s awareness and loyal to their brands.

A focus on innovation and forward intelligent has brought Toyota into the lead in areas such as hybrid technology and automation of manufacturing facilities.

Toyota remains a frontrunner in the low cost manufacturing, while its production system caused other car-manufacturers to change their operating approach.

Porter’s Five Forces Model Analysis

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Porter’s Value Chain Model Overview

Page 14: Porter's Five Forces & Porter's Value Chain Model

• Introduced by Michael E. Porter in his influential book “Competitive Advantage” in 1985.

• Can be used by companies to examine all of their activities in the process of converting inputs to outputs.

• How value chain activities are carried out determines costs and affects profits.

• The value that's created and captured by a company is the profit margin (Value Created and Captured – Cost of Creating that Value = Margin).

• The activities conducted can be divided into primary activities and support activities.

Figure 2 : Porter’s Value Chain Model

Porter’s Value Chain Model | Overview

Page 15: Porter's Five Forces & Porter's Value Chain Model

Inbound Logistics : Involve relationships with suppliers and include all the activities required to receive, store, and disseminate inputs

Operations : All the activities required to transform inputs into outputs (products and services)

Outbound Logistics : Include all the activities required to collect, store, and distribute the output

Marketing and Sales : Activities inform buyers about products and services, induce buyers to purchase them, and facilitate their purchase

Services : Includes all the activities required to keep the product or service working effectively for the buyer after it is sold and delivered

1

2

3

4

5

Primary Activiti

es

Porter’s Value Chain Model | Overview

involve the purchase of

materials, the processing of materials into products, and

delivery of products to customers.

Page 16: Porter's Five Forces & Porter's Value Chain Model

Support Activiti

es

Procurement : This is what the company does to get the resources it needs to operate. This includes finding vendors and negotiating best prices

Technology Development : These activities relate to managing and processing information, as well as protecting a company's knowledge base. Minimizing information technology costs, staying current with technological advances, and maintaining technical excellence are sources of value creation

Human Resource Management : This is how well a company recruits, hires, trains, motivates, rewards, and retains its workers. People are a significant source of value, so businesses can create a clear advantage with good HR practices

Firm’s Infrastructure : These are a company's support systems, and the functions that allow it to maintain daily operations. Accounting, legal, administrative, and general management are examples of necessary infrastructure that businesses can use to their advantage

Porter’s Value Chain Model | Overview

support primary activities and can play a role in each primary activity.

It may also support each other within

support activities.

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Porter’s Value Chain Model Analysis for PERODUA

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Porter’s Value Chain Model Analysis Company ProfileCompany Name Perusahaan Otomobil Kedua Sdn Bhd, PERODUA

President and CEO Datuk Aminar Rashid Salleh

Company Address (Head Office)

Perodua headquarters is located on an 138-hectare site in Sungai Choh, Rawang, Selangor Darul Ehsan

Date FoundedEstablished in 1993; Perodua’s plant opening ceremony : 1 August 1994

Shareholders

UMW Corporation Sdn Bhd 38%, MBM Resources Berhad 20%, Daihatsu Motor Co. Ltd 20%, PNB Equity Resource Corporation Sdn Berhad 10%, Daihatsu (Malaysia) Sdn Bhd 5%, Mitsui & Co. Ltd 4.2% and Mitsui & Co, (Asia Pacific) Pte Ltd 2.8%

GroupPerodua Auto Corporation Sdn Bhd (PCSB), Perodua Sales Sdn Bhd (PSSB), Perodua Manufacturing Sdn Bhd (PMSB) and Perodua Engine Manufacturing Sdn Bhd (PEMSB).

Main Business ActivitiesMotor Vehicle Production (Compact Car & Mini Car) and Sales

OverseasSold in countries such as the UK, Singapore, Brunei, Fiji, Nepal, Mauritius and Sri Lanka

Factory Area 64,000 square meters

Production Capacity 250,000 units per annum on 2-shift cycle

Fiscal Year From January to December

Total Number of Manpower ~ 9,000 staff (as of June 2014)

Page 19: Porter's Five Forces & Porter's Value Chain Model

Porter’s Value Chain Model Analysis

Perodua has good relationships with suppliers and the company provide the Electronic Supplier Information & Management System (e-SIMS) to reach its suppliers.

The activities required to receive, store, and disseminate inputs done smoothly with good facilities provided at the Perodua plant.

Personnel are well trained for overseeing the smooth transit of goods.

Transparency and monitoring through deployment of IT.

Efficient storage facilities to ease storage and retrieval.

| Inbound Logistics Primary Activities

Page 20: Porter's Five Forces & Porter's Value Chain Model

Porter’s Value Chain Model Analysis

The plant currently has the capacity to produce 250,000 units per annum on 2-shift cycle with Factory area of 64,000 square metres.

Professionalism implemented in all operations.

The manufacturing capabilities of Perodua and local Malaysian component manufacturers have resulted in achieving 75 LMCP (Local material component points).

The manufacturing operations of the Perodua Group are being managed by the PCSB.

Perodua Manufacturing Sdn Bhd is the company responsible for the manufacturing of Perodua vehicles.

Perodua Engine Manufacturing Sdn Bhd undertakes the assembly of the vehicle engines and also manufacturing of selected engine component parts.

Adequate training ensuring stable source of skilled manpower.

Kanban and Kaizen system for continuous drive to improve efficiencies.

Automated manufacturing processes.

Maintenance for technical competence.

Capacity Utilization – In 2004 Perodua started assembling the Toyota Avanza at their plant in Rawang, for sale in Malaysia.

| OperationsPrimary Activities

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Porter’s Value Chain Model Analysis

PSSB has 41 sales branches and 139 sales dealers nationwide to serve its customers efficiently and easily assessable.

Efficient transportation and trained personnel.

Efficient security system for prevention of any kind of pilferage.

| Outbound Logistics Primary Activities

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Porter’s Value Chain Model Analysis

Conduct various campaign and promotions activities.

Advertisement in all media.

Provide panel of finance and insurance for customers.

Structured approach to understanding the requirements of individual customers.

Showrooms available nationwide.

Overseas network and showrooms : UK, Singapore, Brunei and Fiji Island.

| Marketing & Sales Primary Activities

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Porter’s Value Chain Model Analysis

Perodua keep the product or service working effectively for the customers after it is sold and delivered.

The company has 46 service branches and 117 service outlets throughout Malaysia for customers’ convenience.

Body Repair & Paint Centres available nationwide.

Service information and service package provided for the customer.

Easy availability of spare parts.

Customer complaints handling.

| ServicesPrimary Activities

Page 24: Porter's Five Forces & Porter's Value Chain Model

Porter’s Value Chain Model Analysis

Perodua use the Electronic Supplier Information & Management System (e-SIMs) to enable e-business and to reach out to their vendors and negotiating best prices.

e-SIMs aim to establish smart business partnerships and develop more opportunities locally and globally by being able to response effectively and efficiently through supply chain technology.

e-SIMs objectives & imperatives :

To improve communication between Perodua and suppliers in a collaborative environment.

To improve planning and scheduling capabilities.

To ensure accurate and faster processing of transactions.

Improve communication with internal employees.

Increase operating efficiencies.

|ProcurementSupport Activities

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Porter’s Value Chain Model Analysis

Perodua has invested substantially amount in manpower and IT sofware for its R&D activities.

Perodua’s R&D focuses on developing our capabilities in automotive technologies ranging from basic testing, design and styling engineering to manufacturing engineering skills.

The activities include styling / modelling, concept car development and the ability to undertake major facelifts.

The main activities of the R&D are localisation of car parts and components, styling and modeling of future models and facelifts of current product range.

Other R&D facilities are the chamber, engine test lab and test course.

|Technology Development Support Activities

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Porter’s Value Chain Model Analysis

Perodua believe that efficient human resource is vital in achieving the company mission.

Encourage in teamwork and employees to put forth and develop ideas for greater efficiency and productivity.

Focus on the development of our human resources by ensuring that regular specialised training is provided for success through quality human resource. Training provided include:

Perodua Technical Education System (PTES)

Perodua Technical Education System (Advance)

Reward staff performance by constantly reviewing and upgrading the company benefits.

Provide a conducive working environment and ensure staff who has displayed potential be given opportunities for career advancement.

|Human Resource Management Support Activities

Page 27: Porter's Five Forces & Porter's Value Chain Model

Porter’s Value Chain Model Analysis

Perodua headquarters houses among others Perodua corporate building (with accounting, administrative, and general management department), R&D testing laboratories and styling studio, vehicle test track, manufacturing plant, engine plant, pre-delivery inspection area, vehicle distribution stockyard and parts warehouse.

Factory area 64,000 square metres.

Multi location facilities (showrooms and service centres).

Strong leadership.

Accounting, legal, administrative, and general management department

|Firm’s Infrastructure Support Activities

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CONCLUSION• All in all, both Porter’s Five Forces and Porter’s Value Chain models are

very useful for automotive industry and other company or an organisation to evaluate their competitive advantage and to gain more profits.

• Currently, Toyota is world’s largest manufacturing companies by revenue. Net revenues of Toyota increased by 16.5% in FY2014 compared with FY2013, and operating income increased by 105.2%, in FY2014 compared with FY2013. The increase in operating income was mainly due to effects of changes in exchange rates and cost reduction efforts.

• With good value chain management, Perodua has been quite successful in its business ventures. Its minicars and superminis remains popular among Malaysians customers.

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REFERENCES1. Turban, Volonino, Sipior & Wood. (2011). Information Technology for Management, 8th Edition.

John Wiley & Sons, Inc.

2. http://www.strategicmanagementinsight.com/tools/porters-five-forces.html

3. http://en.wikipedia.org/wiki/Porter_five_forces_analysis

4. http://www.mindtools.com/pages/article/newSTR_66.htm

5. http://en.wikipedia.org/wiki/Value_chain

6. http://www.ifm.eng.cam.ac.uk/research/dstools/value-chain-/

7. http://www.ukessays.com/essays/marketing/the-information-system-of-toyota-company-marketing-essay.php

8. http://www.toyota-global.com/

9. http://www.toyota.com.my/

10.http://www.perodua.com.my/

11.http://en.wikipedia.org/wiki/Perodua

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THANK YOU…