Business Environment Assignment (BSM029)
Analysis of the Business Environment of British Car Industry
Submitted by: Student
ID: 0610641
Department: International Marketing Management
Course: Business Environment
Aberdeen Business School
Date: October 30, 2006
Executive summary
This report will have a screening of the business environment
of the British car industry. This will be achieved by
analysis by setting industry boundaries and then using
data of various sources to examine its status quo and
identify the development trend for the future. It will
reveal that car industry in the UK is with competition
and with great potential market with changing technology
like replacement energy and economical factor like the
strengthening of pound.
Table of contents
| |Part |Page | | |I. 16Introduction
|4 | | |1.1 |Background | 4 | | |1.2 |Layout for this
paper | 4 | | |II. Method and Assumptions to be used |4
| | |III. UK Car Industry Environment Analysis |5 | |
|3.1 |Identification of Industry Boundaries |5 | | |3.2
|Car Industry Structure |5 | | |3.3 |Broad Nature of the
Car industry |7 | | |3.4 |Profitability Projection for
Future |7 | | |3.5 |Main Issues |7 | | |IV. Evaluation
of Source Data and Criteria |8 | | |V. Conclusion 13|8
|
Appendices
Appendix 1
Appendix 2
Appendix 3
Appendix 4
Appendix 5
References
I. Introduction 1. Background Business environment scoping
is an important ingredient in establishing competitive
advantage. By analyzing relevant industry structure, competition
situations and key issues, future patterns and trends
can be identified. This tool also applies in the car industry
in the UK.
2. Layout for this paper
This report comprises five main parts. First, it introduces
the method, then by boundary analysis and then structural
analysis will be conducted. Next it gives evaluation of
the current status, key issues and data reliability. Conclusions
will be made in the final part.
II. Method and Assumptions to be used The author first
collected data from various sources. After checking the
credit worthiness and reliability against criteria, the
author uses the fundamental business environment scoping
skills in scanning UK car industry.
It is assumed that current profitability is an indicator
for the future when properly analyzed. We can use the
structure of 17the
UK car industry to forecast the
likely changes in competition and profitability.
This can be done by examination of status quo, identification
of trends of the possible car industry structure change
and how the change will affect the profitability of the
car industry.
III. UK Car Industry Environment Analysis
1. Identification of industry Boundaries Car industry
is defined as passenger vehicle for individual consumers.
It is the key part of the auto industry as a whole. As
far as horizontal boundaries (product and geographical
scope) are concerned, UK car industry includes not only
manufacturers of British origin like Rolls Royce, but
also foreign brands produced in UK and imported cars to
UK.
2. Car Industry Structure 6An
industry as 'a set of organizations that
produce similar products or services, using similar technologies
and sell these into similar markets' (Johnson, Scholes
and Whittington, 2005).The first stage of analysis
is to identify core elements of the industry's environment:
customers, suppliers and competitors. One key aspect for
this is product substitutability. For most car producers
in UK, they have different models to suit consumers at
different levels, thus the substitutability on the product
side is very high. For example, Juguar of Ford competes
with Audi of BMW on the luxury market.
2Carmakers
worldwide have been suffering amid slowing global growth,
high raw material costs and fierce competition (BBC
Business News report, Dec 23, 2005).[1] Likewise, the
UK car industry is in deep trouble. Rover was broken up,
Ford closed its Dagenham plant, others are moaning about
over- capacity (BBC Business News report, April 10, 2005).[2]
The suppliers are many for car producers, including tires,
stereos, electronic parts etc. The intensified competition
of the UK car market has brought great pressures to the
component suppliers for lower prices, higher quality and
quick delivery. Therefore some producers in the UK like
Toyota either adopted vertical integration to cut cost
or switch to suppliers in eurozone (BBC Business, 21 March,
2002).
3. Broad Nature of the Car industry
. Capital requirement Capital requirement is very high
in the car industry. The huge capital is required in establishing
R&D, production equipment, test equipment, etc. This
presents uncertainties to potential entrants.
. Economy of Scale Car industry is capital intensive and
economy of scale is essential to recover huge initial
cost. As a whole it is reckoned that to be a low-cost
car producer, minimum annual of quantity of 4 million
is required. Grant (2002) identify the main source of
scale of scale economies is new product development cost
and a new model car cost about L1 billion.
3.4 Profitability Projection for Future
Motor industry consultant, Karl Ludvigsen, holds that
"British auto-makers 4adopted
a fortress UK policy, focusing on the domestic market
and not adequately developing products for the globe...4to
be able to cost your cars at a reasonable level."
(BBC Business News, December 6, 1999)[3].
Industry profitability is determined by competition of
two markets: product markets and input market. Due to
fierce competition, the UK car industry has been 'struggling
and ... expected it to lose more money this year' and
as per a report from Competition Commission of DTI, UK
prices for new cars is 12% higher than in other European
countries (BBC Business News, September, 2006)[4]. This
makes the profitability projection poor and encourages
import (See Appendix 4).
5. Main Issues
By checking and comparison with other industry, UK car
industry has the following nature at this point of time:
. Economic Issues. Since
UK has not joined the Euro zone, thus the car industry
is huge affected by the exchange rate between the euro
and pound. The bankruptcy of MG Rover was partly result
from this (BBC Business News, March 21, 2002)
. High barriers for entrant
due to huge capital, economy of scale. Some consolidations
have been made in the industry in the past years. The
exit barrier for existing players is also high, UK car
manufacturers are 2'lumbering
under the weight of falling sales, high raw material costs
and soaring wage bills' (BBC Business News, March
21, 2002) (See Appendix 5).
. Environmental issues.
Global environment deterioration has some influences to
the car industry. How to make green cars (less emissions,
fuel efficiency and replacement non-fossil fuel) give
some indications to the future development trend.
IV. Evaluation of Source Data and Criteria
Since the reliability and accuracy of data used is very
important for the result, therefore it is important to
check the information and data to make sure that they
are objective and reliable in the analysis.
The data used in the article are from BBC New report,
DTI and UK auto industry website. The data was codified
under the uniform standard and therefore it is more reliable
with less deviation. Also the data are reliable due to
the following reasons:
. coverage is complete
enough with most of UK producers . The data was collected
periodically with continuity . The currency is in pound
sterling and there is less discrepancy . High transparency
and easy to access and retrieve
The sources of information used in this paper are from
those reliable sources.
V. Conclusion
This report has a screening of the car industry structure.
It is found that the car industry in UK is full of competition.
Economic factors like exchange rate, economy of scale
and environmental factors like replacement fuels and low
emission has influence in the car market. It is predicted
that the profitability will be stuck low for the generic
car market and there is good profitability expectation
for those with innovation in fuel efficiency and low cost.
Appendix 1
Table of Gross Value Added for the UK Car Industry
Gross Value Added
Cars |9,745 |10,946 |13,432
|13,873 |14,737 |13,674 |16,840 |17,891 |18,589 |18,858
| |CVs |1,668 |1,532 |1,844 |2,296 |2,233 |2,694 |2,722
|3,014 |3,319 |3,493 | |Parts and accessories |8,539 |9,599
|8,155 |8,056 |8,930 |8,753 |8,775 |9,894 |10,559 |11,102
| |Other |656 |650 |673 |734 |748 |753 |758 |837 |927
|1,058 | |
Note: As we can see from the table, in the past years
the import of cars from overseas to the UK is increasing
and the import far exceed the export. This demonstrates
the declining competitiveness of UK made cars due to the
influence of pound exchange rate and the lack of economy
of scale.
Source: 14Society
of Motor Manufacturers and Traders (As quoted by
http://www.autoindustry.co.uk/statistics/
accessed on 21.10.2006)
Appendix 5: Number of
Employees (Annual average data, figures in 000s). |1995
|1996 |1997 |1998 |1999 |2000 |2001 |2002 |2003 |2004
| |Vehicles and Engines | |121 |120 |123 |116 |106 |94
|95 |91 |89 | |Bodies | |31 |31 |31 |30 |28 |29 |28 |28
|26 | |Parts | |101 |103 |103 |99 |103 |99 |99 |95 |88
| |Tyres | |17 |17 |17 |14 |13 |12 |10 |9 |8 | |Vehicle
electrical | |19 |19 |19 |15 |13 |12 |11 |11 |10 | |Components
Sub-total | |167 |169 |170 |158 |157 |152 |148 |143 |132
| |Total | |288 |289 |293 |274 |263 |246 |243 |234 |221
| |total UK manufacturing | |4,397 |4,410 |4,416
|4,269 |4,143 |3,969 |3,762 |3,533 |3,409 | |auto as %
of
12manufacturing
| |6.6% |6.6% |6.6% |6.4% |6.3% |6.2%
|6.5% |6.6% |6.8%
| |
[pic]
As we can see from the chart, due to the losing competitiveness,
there has been more redundancy and the total number of
people has been steadily declining. This also refection
the car industry is fierce competition with rising cost
as it happened to MG Rover.
Source: 11Office
of National Statistics: Annual Business Inquiry, published
December, 12 months in arrears, (As quoted by http://www.autoindustry.co.uk/statistics/
accessed on 21.10.2006)
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----------------------- [1] BBC Business News Report,
Ford bails out Jaguar with L1.2bn, available at 1http://news.bbc.co.uk/1/hi/business/4555468.stm,
accessed on 25.10.2006, see also 7http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2006/08/03/cnford03.x
ml
[2] BBC Business News Report, 10 April 2000, Car firms
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