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PSA Peugeot-Citroen - Industry Environment

1.  Introduction

PSA Peugeot-Citroen was the third largest car manufacturer in Europe and the largest French exporter of automobile industry in 1995.  As the automobile industry had reached its maturity stage and the economic downturn of current markets, the company faced serious challenges from the intense competition.  This report was to assess the company・s industry environment, its current competitive strategy and finally to outline the options available for the future.

2.  The Assessments

The assessments were made in two areas: the company・s industry environment and its current competitive strategy.

2.1 The Assessment of Industry Environment

The Porter・s Five-Force Model (Johnson et al, 2002) was used to assess the industry environment to discover the nature of competition and the range of competitive advantages available in the automobile industry.

2.1.1 The Porter・s Five-Force Model

The model examined the profit potential and the five forces that determined the competitive nature and structure of automobile industry.  The evaluation was shown in Figure 1:

Threats of entrants 

The potential entry of new competitors was low because automobile industry required huge capital in setting manufacturing plants and building up distribution networks.  Economies of scale and product differentiation were important barriers, as new entrants would suffer a significant cost disadvantage if they established smaller-scale production against larger companies.   

Strong brand preferences appeared due to its high price, which posed a barrier also since heavy investment would be required in advertising, service and product quality to establish brand awareness.  For example, the Japanese automakers such as Toyota, Nissan, and Honda spent large sums on advertising and new product development to overcome the American consumers・ preference for domestic cars during 1960s and early 1970s (Pitts et al, 1996).   

Finally, many markets closed to foreign producers such as Japan, South Korea, Taiwan and certain automakers established close links with some governments, so creating a barrier to entry for other car manufacturers. 

Pressure from substitution 

The substitute products from other industries were weak.  Current substitutes were likely the public transportation such as railway, bus, train etc, which were not the threat of substitutes in automobile because they could not perform the function at lower cost. 

The bargaining power of suppliers 

The power exercised by suppliers was weak.  Suppliers like steel and aluminum companies were less powerful since automakers were easy to switch from one supplier to another due to low supplier concentration. 

The bargaining power of buyers 

The power exercised by buyers was weak.  In this respect, the buyers referred to automobile dealers and retailers.  Dealership was not easy to switch as they were usually bounded by dealerships with the automakers.  Car was differentiated product so the bargaining power decreased commensurately.  

Competitive rivalry 

The intensity of rivalry was high.  According to the life-cycle model (Johnson et al, 2002), the automobile industry was in its maturity stage with slow growth due to saturation of users and repeat purchase reliance, so it was difficult to gain and take additional market share.  There was also oversupply and some niches became overcrowded. 

The automobile was in an oligopolistic market in which a few firms competed against each other and each was able to gain competitive advantage by exploiting scale economies by product differentiation.  Competition was fierce when competitors were similar in size, skills and market power.  Hence, how to produce value added products would lead to success in the competition. 

Finally, the industry was dependent on the state of the economy.  The economic depression in Japan, Western Europe and North America pushed automakers to cut prices to boost sales and keep their market share.  Rivalry also increased when competitors were diverse in strategies, origins, and culture, especially mergers and acquisitions were common in the industry.  Although the competition was so high, it was difficult for automakers to leave the industry due to high exit barriers from their highly specialized assets of little value to any other industries. 

2.1.2 Range of Competitive Advantages Available 

The Porter・s Five Forces Framework provided a useful basis for categorizing and understanding the industry economics that lied behind competitive advantage (University of Warwick, 2002).  Competitive advantage was the delivering of superior value to customers and in doing so earning an above average return for the company and its stakeholders (University of Warwick, 2002).  So based on the above analysis, the range of competitive advantages available in the automobile industry were listed as following: 

P        Scale economies and experience

P        Product differentiation

P        Brand identity

P        Strong financial background

P        Strong distribution network and relationship

P        Absolute cost advantages

P        Ability to influence government policy

P        Strong R&D

P        Ability to expand new terrains

P        Value added

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