Entry Barriers –
New automakers entering the market will experience a high barrier to entry due to large financial resources required. In addition, a major advantage that Toyota possesses is their experience and understanding of how the market works. Toyota has also reached economies of scale through mass-producing, spreading marketing and advertising costs over a large volume of output, and receiving discounts on bulk purchases of raw materials.
Although the barriers to new companies are significant, established companies like Toyota entered the US market in the early 1980’s quite easily. This was because GM, Ford, and Chrysler failed to offer quality vehicles in the lower price markets. Also, there isn’t much brand loyalty in the automotive industry. ...view middle of the document...
Toyota purchases in large quantities and can use their purchasing power as leverage to bargain for price reductions.
Although Toyota seems to have a lot of buying power, they can not easily switch to another supplier.
Bargaining Power of Suppliers –
The supplier in this case is Toyota itself. The vehicles that Toyota sells have many substitutes, which give Toyota less power. Consumers have more power due to the fairly standardized nature of the vehicle, and the low switching costs associated with selecting from among competing brands.
The bargaining power of the suppliers is considered to be low because they mostly rely on the automakers to stay in business. However, why did Toyota offer to bail out General Motors when they were in trouble? When General Motors filed for bankruptcy, Toyota Motor Company offered to assist with the financial resources required to keep GM in business because they knew that if GM went under, their suppliers wouldn’t be able to stay in business and it would in turn affect Toyota. In addition, there are many parts used to produce a vehicle, so many suppliers are used. Toyota produces about 25% of its major components in-house; the rest is contracted out to independent suppliers.
Threat of Substitutes –
The threat of substitutes is considered moderate because there are many more options of transportation for their consumers that also include low switching costs. However, this depends on the geographic location of the consumer. For example, if someone lives out-of-town than it may be too far to walk or bike, and a train may not be an option. Places where a car is not necessary would be New York or Chicago. Also, other forms of transportation do not offer the utility, convenience, independence, and value afforded by automobiles.