Assignment 2nd porter model of michelin company
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This document summarizes an assignment submitted by Mirza Ghalib Ali on Porter's model analysis of Michelin according to geographic segmentation. It discusses Michelin's strengths, weaknesses, opportunities, and threats. Specifically, it notes Michelin faces increasing raw material costs and intense competition but opportunities in emerging passenger car and truck tire markets in Asia and a positive outlook for the aircraft industry.
Assignment 2nd porter model of michelin company
- 1. ASSIGNMENT-2ND NAME MIRZA GHALIB ALI REGISTRATION NO FA15-BBA-015 SUBJECT STRATEGIC MANAGEMENT TOPIC PORTER MODEL OF MICHELIN COMPANY ACCORDING TO GEOGRAPHICSEGMENTATION SUBMITTED TO SIR TOQEER AHMED SUBMISSION DATE 7-11-2018
- 2. PORTER MODEL OF MICHELIN COMPANY ACCORDING TO GEOGRAPHIC SEGMENTATION Power of Suppliers • Highly sensitive to fluctuation of raw materials – Natural rubber – Petroleum Derivatives • Existence of cartels for natural rubber and petroleum – INRO – OPEC • Presence of strong labor unions in European plants Power of Buyers • High buying power of car and truck makers in the OE market • High buying power of independent dealers through group purchasing – Large retail chains i.e. Kwik-Fit, Speedy – Small Dealers Potential Entrants • High capital requirements • Need for economies of scale • Limited access to distribution channels • Governmental and legal barriers
- 3. Substitutes • Growing refurbishment market • No viable substitute for natural rubber • Emergence of nanoparticle technology Industry Rivalry • Highly concentrated industry, with C4 over 60% • Products not highly differentiated – leading to market consolidation • 1999 industry-wide over capacity of 30% • Diverse competitors in terms of national origin, cost strategy and management style Market Segmentations Geographically, the European market is the leading revenue source for the global replacement tires and rubber market, accounting for revenues of $9.3 billion in 2005. This is equivalent to 33.5 percent of the overall market value. In comparison, the Asia- Pacific sector is on a fast rise, generating as much as $8.6 billion or 30.9 percent of the overall market value. The Chinese market is forecasted to grow strongly as income levels rise and make car ownership and maintenance accessible to more consumers there. This is likely to increase the Asia-Pacific contribution to the global market.
- 4. The market is also segmented by tire category. The market consists of 75 percent replacement tires (RE) and 25 percent original equipment (OE). Passenger cars and light trucks account for 63.30 percent of the total market segment, and trucks account for 25 percent market share of the replacement tires. Competitive Landscape After a trying decade, the outlook for the tire and rubber market is positive once again due to strategic acquisitions, innovative solutions, and reinvigorated consumer demand. The market therefore is concentrated. Bridgestone is the leading player, with a 20.9-percent market share while Michelin follows closely with 20 percent. Sixty-six percent of the market‘s total revenues are generated by the four leading players in the industry. One reason for this level of consolidation is that the market has fairly low margins. The original equipment manufacturers (OEM) market is dominated by a few large buyers (automobile manufacturers), who place pressure on tire manufacturers to innovate and also keep prices down. Smaller companies are unlikely to compete because of insufficient scale economies to cope with the large buyers. While the aftermarket has more buyers, the largest tire companies are active in both OEM and aftermarkets. Despite the decline in the European market, growth opportunities can be found in other regions such as the US and Asia-Pacific. The commercial aftermarket is growing in the US, where replacement tires now form the market‘s most lucrative sector. The original equipment truck tire market is showing renewed growth after the stagnation of the last few years, and the North American passenger car and light truck replacement markets are increasing as is the demand for aircraft tires. There has also been a surge in demand for non-tire rubber, which is now outperforming the tire sector on a global scale. Tire manufacturers, as with other companies within the automotive aftermarket, are experiencing raw material and energy-related cost increases, which they have been unable to offset by increases in efficiencies and productivity. Many companies have begun to recycle rather than scrap defective products, preserving margins through decreased raw material usage. Maintaining a diverse range of consumers also preserve
- 5. margins by insulating companies against specific market fluctuations. Innovation aids companies: the introduction of electronic stability control systems means that companies that are diversified enough to produce them can also protect their market share. In addition, a number of acquisitions have also taken place in the last decade. For example, Goodyear acquired South Pacific Tyres, and Michelin acquired Shanghai Tire and Rubber Co. Most acquisitions and partnerships are now made in the Asia-Pacific region where production costs are generally lower. This has also enabled manufacturers to differentiate their operations between low- and high-margin tires. As a result, many of the low-margin tires available in the US and European markets are now produced in China where labor is cheaper. In January 2006, Bridgestone has established a new subsidiary in Guangdong Province, China, that begun operations at the beginning of 2008. Generally, low-margin tires are branded separately from the high-margin alternatives in order to strengthen the ability of players to increase prices. SWOT Analysis Opportunities Booming car tire sales in emerging markets. Passenger car tire sales in emerging markets are forecasted to grow rapidly in the next five years. Passenger car tires are expected to post an average annual volume growth of 7 percent in emerging markets such as Russia, China, Mexico, and Brazil during this period. Michelin, with a strong market position in the passenger car segment, is likely to benefit from the growing demand for passenger car tires in emerging markets. Growing truck tire demand in Asia. Demand for truck tires is rising in Asia, partially driven by a shift to radial technology and strong economic growth in countries such as India and China. Asia has now become the world‘s largest tire market in terms of volumes. Annual average growth rate in the Asian truck tire market (excluding Japan) is expected to increase from 33 percent in 2004 to 34 percent in 2008. Michelin has a strong position in many Asian countries. Growing demand for truck tires in Asia provide an opportunity for Michelin to boost revenue growth. Positive outlook for the aircraft industry. The aircraft industry has been witnessing strong growth in recent times. Orders for large commercial aircraft exceeded 2,100 units in 2005, an all-time record and over three times the number ordered in 2004. Robust 2005 orders helped in pushing backlog of large commercial aircraft to over 3,600 units. Working off the existing backlog of undelivered aircraft is expected to keep
- 6. production line busy through 2009. Michelin is a global leader in aircraft tires. A positive outlook for the aircraft industry would lead to higher demand for aircraft tires of Michelin. Threats Increasing raw material costs. Higher raw material prices are adversely affecting the bottom line of the company. The prices of natural rubber rose by nearly 29 percent in 2003 and by over 18 percent in 2004. In 2005, the rise in natural rubber prices remained below 10 percent, but synthetic rubber prices increased by more than 18 percent. In 2006, natural rubber prices are forecasted to increase by 25 percent and petroleum- based products are forecasted to witness a price increase of 18 percent. This is likely to impact the margins of the company. The impact on Michelin‘s margins would be more if crude oil prices and natural rubber prices soar to higher levels (Michelin, 2006). Intense competition. Michelin faces stiff competition from global companies such as Bridgestone and Continental. In many emerging markets such as India, the company faces competition from regional companies. Moreover, most of these regional companies have formed strong relationships with regional vehicle manufacturers. These regional companies also have better distribution and brand recall in the replacement market. Intense competition from global and regional tire manufacturers could force the company to reduce prices, which would depress margins (Michelin, 2006). Decline in North American CV market. The North American commercial vehicle (CV) market is expected to record a decline in 2007. Volumes in the North American commercial vehicle market, currently robust, are expected to decline by anywhere between 16 percent and 25 percent in 2007. Overall, North America accounted for 35.5 percent of the company‘s revenues in fiscal year 2005. A decline in the North American commercial vehicle market in 2007 could lead to lower revenues and profits.