Toyota’s Five Forces Analysis (Porter’s Model)

Toyota Motor Corporation Five Forces Analysis, Porter’s model, intensities of external factors, industry environment case study
A Toyota Ractis (CP100) as Pikachu car. A Five Forces analysis (Porter’s Model) of external factors in Toyota’s industry environment gives insight on the company’s strategic direction. (Photo: Public Domain)

Toyota Motor Corporation faces the significant effects of the external factors in its industry environment, as shown in this Five Forces analysis based on Porter’s model. These external factors exert forces on Toyota and influence its strategic direction. Even with the issues and challenges identified in this Five Forces analysis, Toyota remains one of the top players in the global automotive industry. Such success represents the company’s ability to withstand the negative forces in its external environment. However, as indicated in this Five Forces analysis, Toyota must continue innovating for competitive advantage against other firms.

This Five Forces analysis of Toyota Motor Corporation identifies the intensities or strengths of the external factors in the automotive industry environment. Some recommendations for Toyota’s continued success are offered.

Synopsis: Toyota’s Five Forces Analysis

Toyota’s Five Forces analysis shows that the most significant concerns are competition and the bargaining power of customers, which are the strongest external factors in the automobile industry environment. The following are the five forces and their intensities in impacting Toyota:

  1. Competitive rivalry or competition (strong force)
  2. Bargaining power of buyers or customers (strong force)
  3. Bargaining power of suppliers (weak force)
  4. Threat of substitutes or substitution (moderate force)
  5. Threat of new entrants or new entry (weak force)

This Five Forces analysis shows that Toyota must focus on ensuring competitive advantage to withstand the strong force of competition. In addition, Toyota needs to maximize its ability to satisfy the preferences and expectations of customers, who also exert a strong force on the business and the automotive industry.

Competitive Rivalry or Competition with Toyota (Strong Force)

Toyota must deal with the strong force of competition. This component of the Five Forces analysis determines how firms affect each other. In Toyota’s case, the following external factors are the main contributors to the strong force of competitive rivalry in the industry environment:

  • High aggressiveness of firms (strong force)
  • High variety and differentiation of firms (strong force)
  • Low number of large firms (moderate force)

Automotive firms are aggressive against each other in terms of such factors as innovation and marketing. Also, Toyota competes with a high variety of firms, which differentiate through cost, electronics, fuel efficiency, style, brand image, and other variables. However, even though there are many small auto firms, Toyota competes with only a small number of large firms. Still, this part of Toyota’s Five Forces analysis shows that the company must have comprehensive strategies to address the strong force of competitive rivalry.

Bargaining Power of Toyota’s Customers/Buyers (Strong Force)

Toyota’s customers directly affect the business through revenues. This component of the Five Forces analysis shows the influence of buyers on business. In Toyota’s case, the following external factors are the main contributors to the strong force or bargaining power of buyers in the automotive industry environment:

  • Low switching costs (strong force)
  • High quality of information (strong force)
  • Moderate substitute availability (moderate force)

The low switching costs mean that customers can easily change from Toyota to competing firms at no extra cost. This change typically happens when customers buy a new car. In addition, Toyota’s customers can easily choose their best option because they have access to accurate information, such as product information from companies’ websites. Substitutes are available, although cars from firms like Toyota are still better in terms of convenience. In this part of Toyota’s Five Forces analysis, the combined effect of these external factors is the strong force or bargaining power of customers. Toyota needs to ensure that its products match the preferences and expectations of its target customers.

Bargaining Power of Toyota’s Suppliers (Weak Force)

Toyota’s suppliers aim to influence the firm to improve their businesses. This component of the Five Forces analysis reflects the interactions between firms and their suppliers. In Toyota’s case, the following external factors in the automobile industry environment contribute to the weak force or bargaining power of suppliers:

  • Moderate population of suppliers (moderate force)
  • High overall supply (weak force)
  • Low forward integration of suppliers (weak force)

The limited population of suppliers around the world creates a moderate force that influences Toyota. Theoretically, this bargaining power is higher when the suppliers are fewer. However, the high availability of supply used for manufacturing Toyota’s products weakens suppliers’ power. In addition, majority of suppliers in the global automotive industry do not have forward integration or ownership and control of the distribution of materials that reach firms like Toyota. Thus, this part of Toyota’s Five Forces analysis highlights the company’s relative ease in addressing the weak force or bargaining power of suppliers.

Threat of Substitutes or Substitution (Moderate Force)

Substitutes affect Toyota’s business by competing with the company’s products. This component of the Five Forces analysis determines the impact of substitute products. In Toyota’s case, the following external factors in the automotive industry environment are the main contributors to the moderate force or threat of substitution:

  • Low switching costs (strong force)
  • Moderate availability of substitutes (moderate force)
  • Low convenience in using substitutes (weak force)

In most cases, it is relatively easy for customers to shift from Toyota to substitutes. These substitutes to Toyota products include public transportation, bicycles and other modes of transportation. However, these substitutes are only moderately available. In some areas, substitutes to Toyota’s products are absent, such as in some suburban areas where public transportation is not readily available. In addition, these substitutes are usually less convenient than using the products of firms like Toyota. In this part of Toyota’s Five Forces analysis, the combination of such external factors in the automobile industry creates the moderate threat of substitution that Toyota must address by making its products more accessible, affordable and convenient.

Threat of New Entrants or New Entry (Weak Force)

New entrants are potential competitors that threaten Toyota’s business. This component of the Five Forces analysis shows the potential impact of new entry. In Toyota’s case, the following external factors in the automotive industry environment contribute to the weak force or threat of new entrants:

  • High capital costs (weak force)
  • High cost of brand development (weak force)
  • High supply chain costs (weak force)

Toyota faces the weak threat of new entry. The high costs of establishing, maintaining and growing a new firm in the industry are significant entry barriers. These barriers weaken the effects of new entrants on companies like Toyota. This force is less significant than competition and the bargaining power of customers on Toyota’s business. Thus, this part of the Five Forces analysis shows that the threat of new entrants is among the least of Toyota’s concerns in growing its business and maintaining its positions as one of the top automobile manufacturers in the world.

References
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