Michelin and the Global Tire Industry in 1999

Résumé du document

The threat of entry depends on the presence of entry barriers and the reaction that can be expected from existing competitors. Firstly, economies of scale in the production of tires represent an entry barrier for potential competitors, as the market leaders have high levels of production allowing scale economies, especially in research and distribution.

The tire industry requires high capital investments which is necessary to build manufacturing sites, to invest in R&D and advertising. Moreover, it seems essential for companies competing in the industry, to own their main raw material plants (vertical integration). These huge capital requirements limit the pool of likely entrants.

In addition, the threat of entry is lowered by product differentiation and innovations. The latter is essential in the tire industry in order to maintain market shares, as tires are commodity products,. The reputation, brand and image of a firm are important sources for differentiation. As the industry is mature, strong brands established distribution networks, patent ownerships, and achieved cost advantages in production operations and processes due to experience, indicating high barriers to entry. Important evidence is given by the fact that the five biggest tire producers of today have been dominating the industry for many years (Case Exhibit 1).

Extraits

[...] it is an oligopoly structure: Bridgestone, Michelin and Goodyear held 54% of market shares in 1998 (Case Exhibit 3). Thus, the industry is now consolidated, in which firms struggle to differentiate their products from the competition. At this stage, price and innovation has become dominant; competitive drivers leading to high competitive rivalry. Also, Asian low cost manufacturers competing on a global scope intensify the price competition. In contrast, small private tire brands do not represent a threat for the market leaders (Case page 8). [...]

[...] The latter is essential in the tire industry in order to maintain market shares, as tires are commodity products,. The reputation, brand and image of a firm are important sources for differentiation. As the industry is mature, strong brands established distribution networks, patent ownerships, and achieved cost advantages in production operations and processes due to experience, indicating high barriers to entry. Important evidence is given by the fact that the five biggest tire producers of today have been dominating the industry for many years (Case Exhibit 1). [...]

[...] Conclusion According to the above findings, the competitive strategies of the three major global players in the tire industry can be illustrated as follows: Competitive Advantage Low cost Differentiation Source: adapted, “Competitive Strategy”, Michael Porter QUESTION 3 Evaluate the strengths and weaknesses of Michelin as at the end of the case [1999]. Michelin's strong global presence is emphasised by its high market shares and its high quality reputation. By offering a broad and specialised tire product range, Michelin provides high customer responsiveness, which results in Michelin's strategy to both focus and differentiate its products. [...]

[...] Brand awareness is an essential component that tire firms have to take into account, especially for car tire replacement and for truck fleets which need efficient technical customer services (Case page 9). Drawing the strategic implications from the above, tire producers can hardly influence their profits in the OEM segment, as they are highly dependent on the buyers' decisions. Low profit margins are the result of high imposed costs and quality innovation) and low selling prices. In contrast, profit margins in the RM segment is higher, as retailers are not enforcing costly R&D and innovation activities, thus this market is more attractive. [...]

[...] QUESTION 4 Assess the pressures for global integration and for local responsiveness in the tire industry. To what extent do you consider the tire industry to be a global industry? The table below illustrates and pinpoints both pressures for global integration and local responsiveness. Source: own illustration The graph below shows the above findings positioning the tire industry in contrast to the automobile industry: Source: Adaptation of the ‘Integration-Responsiveness Grid‘ to the tire industry, Hill & Jones and Prahald & Doz 1987. [...]