The threat of entry depends on the presence of entry barriers and the reaction that can be expected from existing competitors. Firstly, economies of scale in the production of tires represent an entry barrier for potential competitors, as the market leaders have high levels of production allowing scale economies, especially in research and distribution.
The tire industry requires high capital investments which is necessary to build manufacturing sites, to invest in R&D and advertising. Moreover, it seems essential for companies competing in the industry, to own their main raw material plants (vertical integration). These huge capital requirements limit the pool of likely entrants.
In addition, the threat of entry is lowered by product differentiation and innovations. The latter is essential in the tire industry in order to maintain market shares, as tires are commodity products,. The reputation, brand and image of a firm are important sources for differentiation. As the industry is mature, strong brands established distribution networks, patent ownerships, and achieved cost advantages in production operations and processes due to experience, indicating high barriers to entry. Important evidence is given by the fact that the five biggest tire producers of today have been dominating the industry for many years (Case Exhibit 1).
[...] QUESTION 2 Analyse, using an appropriate model, the competitive/business strategies of the major players in the global tire industry The three major players in the global tire industry with regard to its market shares are Bridgestone/Firestone, Michelin and Goodyear. ( Bridgestone/Firestone Bridgestone/Firestone had the highest market share ( in 1998) in the tire industry. With the acquisition of Firestone in 1988 (horizontal integration) Bridgestone's initial strategy was to strengthen its market position in relation to its market shares. It can be assumed that this particular acquisition - although it was disastrous at first - helped Bridgestone to move from its weaker market position in 1978 (rank up to the market leader position in 1998 replacing Goodyear (Case Exhibit 1). [...]
[...] Drawing the strategic implications from the above, tire producers can hardly influence their profits in the OEM segment, as they are highly dependent on the buyers' decisions. Low profit margins are the result of high imposed costs and quality innovation) and low selling prices. In contrast, profit margins in the RM segment is higher, as retailers are not enforcing costly R&D and innovation activities, thus this market is more attractive. However, manufacturers have rather a highly limited ability to raise prices and earn great profits in both - OEM and RM segments, as they are generally highly dependant on buyers and are enormously competition driven. [...]
[...] short competition distances) ( quality demand variations Government regulations and demands vary: differences in restrictions Geographical differences: weather, climate, landscape properties Regional differences: OEM/RM, cars/trucks market segments' significance and market trends vary in different countries (Case page Exhibit Carmakers power: global construction leading to specifically tire design requirements for particular markets VERY HIGH LOW-MEDIUM Source: own illustration The graph below shows the above findings positioning the tire industry in contrast to the automobile industry: Source: Adaptation of the ‘Integration-Responsiveness Grid‘ to the tire industry, Hill & Jones and Prahald & Doz 1987. [...]
[...] Conclusion According to the above findings, the competitive strategies of the three major global players in the tire industry can be illustrated as follows: Competitive Advantage Low cost Differentiation Cost leadership Differentiation Goodyear Cost focus Differentiation Focus Michelin Source: adapted, “Competitive Strategy”, Michael Porter QUESTION 3 Evaluate the strengths and weaknesses of Michelin as at the end of the case [1999]. Michelin's strong global presence is emphasised by its high market shares and its high quality reputation. By offering a broad and specialised tire product range, Michelin provides high customer responsiveness, which results in Michelin's strategy to both focus and differentiate its products. [...]
[...] In contrast to its competitors, Michelin is not producing in low cost countries (specifically Asia), but is rather present in the European and North American market which leads to higher transportation costs. Another aspect implicating higher costs is Michelin's large workforce, which interrelates with its innovation and focus strategy, as more employees are needed for extensive research and development activities. Finally, these high costs lead to a strategic decision of cutting of the company's total workforce in Europe in order to increase productivity by (in 1999). [...]
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