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Five Forces Analysis

Five Forces Industry Analysis

Relevant Industry


The luxury car industry operates on a global level and distributes cars to regions where the average per capita of the population can support the industry or the demand for the product is high enough. The luxury car industry focuses on satisfying the customer in any way it needs to; some customers require many different features which inevitably cannot be satisfied by any one car manufacturer. Some of the leading manufacturers in the luxury car industry are: Mercedes, Cadillac, Audi, BMW, Acura, Infinity, Lexus, and several others.

Scope of Products


            This portion of the car industry is fairly exclusive with its products. Although the majority of manufacturers only make luxury end vehicles, some other manufacturers, Hyundai, make both luxury and non-luxury products. This multi-industry presence will be discussed in greater depth in the “Potential Entrants” portion of the industry analysis.

Geographic Scope


            There are no prominent geographic barriers to the luxury car industry; the only pronounced barrier is based on whether a region can sustain this type of industry for an extended period of time. If the sustainability of the industry in a specified region is only temporary, it may not be a financially wise decision to occupy that area as a distributor (car dealership). If this is the case, direct sales to the end customers may be the only feasible option.



Participants of Industry

Buyers/Buyer group


            There are two types of buyers in the luxury car industry: Direct Consumer Buyers and Third Party Buyers (Brand Dealerships). Although the Direct Consumer is rare in this industry because of the probability of a dealership within the consumer’s region, there is still a small market of this type of buyer. When performing an analysis on the bargaining power of the buyers in this industry we found that there was a marginally low threat for high bargaining power. The conclusion of a relatively low threat was under the assumption that there are a large number of buyers relative to the number of firms and each customer has a comparatively small purchase (number of units purchased). We also found that the buyers would face many obstacles to manufacture the products themselves and each luxury car on the market offers some sort of differentiation from its primary competition; each of these factors contributes to the buyer having a low threat of bargaining power.

However, if our group had decided to focus on the number of buyers being dealerships rather than end user customers, this would have shifted the bargaining power of the buyer to relatively high because the number of buyers to the number of manufactures is comparatively lower. If our group had decided to analyze the industry using the previous sentence’s method, this would have caused another shift to increase the bargaining power of the buyer. This increase would be connected to the large number of customers (the dealerships) making significantly larger purchases because they are more likely to buy multiple units of luxury cars.





Supplier/Supplier group


            While performing the analysis, our group made the assumption that the suppliers are the businesses that provides the resources to the luxury car manufactures (i.e. – steel corporations, plastic manufacturers, etc.).  The manufactures of all the different luxury car companies have set expectations of what type and quality the materials need to be for their vehicles. These standards correlate to many differentiations between Company A’s luxury car and all the other industry’s vehicles on the market. If the inputs (materials, labor, and services) were standard across the board than the differentiation between many vehicles would be nonexistent. Many of the industry leaders pride their success on these differentiations because they are responsible for the company’s success. The unique inputs do not only make the supplier dependent on the firm, but can be reciprocated from the firm to the supplier. Due to the differentiated inputs that each luxury car manufacturer requires and provides, it would not be easy or quick for them to switch between suppliers; this would incur many switching costs.

            After answering several questions pertaining to the bargaining power of suppliers, our group has found that there is a moderately low threat of the suppliers. This conclusion is reinforced by the facts: the level of difficulty for a new supplier to enter the industry because of the high switching costs to the firm and the amount of capital it would require to enter into the industry; there are already many current suppliers in the industry; and the suppliers find the luxury car manufacturers very important to their business.



Possible Entrants


            The luxury car industry just sounds expensive and that is because comparatively to the “normal” car it is. New firms or manufacturers trying to enter this industry may find it very difficult to try and capture some of the market share because some of the existing brands and reputations that has been well established. Firms that are already established within the industry have a significant advantage over the newcomer because of the firsthand experience and knowledge they have acquired. For the new entrant they must establish themselves as a reputable manufacturer that can differentiate itself in a new way compared to the already existing firms. From the consumer perspective, the newcomer must also show a low switching cost compared to their competitors in order to gain attention; the consumer is taking an inherent risk by moving to a new company that may not have a verified reputation yet so the lower switching cost reduces the risk somewhat.

            Recently, there has been a new entrant to the luxury car industry: Hyundai Motor America. Hyundai has already established itself in the economy car industry as a reputable Korean manufacturer and has distribution networks to go along with that. Although Hyundai is new to the industry and lacks brand power, it is making up for its shortcomings with some very unique and innovative marketing ideas. Rather than competing with Mercedes and Acura dealerships to see who has the most granite, Hyundai is bringing the consumer the car if they want to test drive it or buy it or they will come and get it from the customer if it needs servicing (2012 Special Report: Luxury Automotive Outlook, 2012). Hyundai’s entry to the luxury car industry shows that it is possible to enter the market, but it is very difficult.




            While performing this portion of the analysis our group decided to focus on the end user’s perspective of product substitutes rather than the manufactures view of substitutes.  Based on the assessment in our analysis, we have found that there a high threat for substitution for luxury cars. As shown in the charts at the end of the document, there are a vast amount of options for the consumer to choose from if they are not satisfied with their current brand. The probability of a competitor having a similar product, based on performance and standard features, is relatively high due to the number of firms established in the market. Many of these products also have similar price tags if they are relatively comparable. To answer the question, “Is a customer likely to go for a substitute?” is relative to that particular customer and cannot be answered with absolute certainty. From a statistical standpoint though, the majority of people would rather buy something that they know is quality and has a reputable name behind it.

Rivalry Among Competitors


            The luxury car industry is not rapidly growing, but is on the upside for growth. The percentage of affluent consumers (household income greater than or equal to $100,000) who plan to purchase a vehicle in the next six months has trended steadily upward for the past three years…given that the data looks ahead six months ahead, the trend bodes well for the industry (2012 Special Report: Luxury Automotive Outlook, 2012).

Figure 1 (2012 Special Report: Luxury Automotive Outlook, 2012)

Based on the chart above, it is apparent that the market is trending upward, but clearly not as quickly as the industry would like. This “slower” trend strengthens the competitiveness within the industry because many companies are fighting for customers. The rivalry among the firms within the industry is also intensified by the fact that there are reasonably low switching costs for the end consumer if they are unsatisfied by the product that previously purchased. The competitiveness in the market is also increased by the lack of consumer to producer interaction required to functionally operate the product. The average modern consumer is quick to learn about technology and the vast amount of resources at everyone’s finger tips can usually answer any question.

In addition to the preceding contentions about increased rivalry, the fixed costs of manufacturers in the industry are relatively low in proportion to the total costs. This is appeasing to the end consumer because it means that the selling prices are going to be consistent and comparable across the industry as a whole. The rivalry among the competitors within the luxury car industry is quite high due to the slow trend, the savvy consumer, and the sluggish global economy.

Analysis Assessment


            After careful review of our industry analysis, our group has found that the overall attractiveness of the luxury car industry is not very appeasing. The five forces that contribute to the analysis – Bargaining Power of Buyers and Suppliers, Potential Entrants, Substitutes, and Rivalry Among Competitors – displayed a fairly even spread among low and high threats, but the high threats were slightly greater. Some things that would make the attractiveness of the market shift would be: if a firm were to find a way to lower its price on a number of cars while maintaining the quality and value, if a firm were easily and quickly able to switch suppliers, if a firm could significantly have power over the buyer (i.e.- only manufacturer of a differentiated product that is in high demand), and if it were easier for more firms to become part of this industry – just as Hyundai has shown. These are all ways to shift the attractiveness of the luxury car industry to make it more or less appeasing to many individuals and companies looking at the distinguished industry of luxury cars.






National Industry Market Charts 2

Figure 3

Figure 4

Works Cited

2012 Special Report: Luxury Automotive Outlook. (2012). Retrieved from Forbes Insights:



James Martineau,
Feb 19, 2013, 4:23 PM