Michelin Group (MG) is a multinational tire manufacturing company. The company was founded in 1889 and is based in Clermont-Ferrand, France. Michelin is part of the big-four tire manufacturers in the world. Since its inception company, it has led the market with innovation and progressed with time. Michelin has set itself the goal of 100% sustainable tire and has developed a conceptual model to assess its viability (Michelin, 2020). Its other notable innovations include radial tires and removable tires.
Michelin is the second-largest tire manufacturer based on revenue, and in FY 2019, the company earned revenues of $26.55 billion, trailing Bridgestone’s $27.23 billion (Statista, 2021). Michelin has production facilities in 18 countries and automobile tire manufacturing; it manufactures tires for space shuttles, aircraft, and motorcycles. Therefore, Porter’s five forces model is an appropriate analytical tool to evaluate Michelin’s threats and the opportunities it can potentially explore.
Competitive Rivalry in The Market
French tire market is highly competitive; there is domestic tire manufacturer those compete for the market share. Tire sales are expected to be more than 50 million units in 2020 due to consumer behavior change and expanding industrialization (PR Newswire, 2016). The global tire market is highly competitive, with tire manufacturers competing for share. Michelin’s biggest competitors are Bridgestone, Goodyear, and Continental. Michelin has reported a revenue of $27 billion with an annual percentage change of 3.9% and earned a profit of $1.9 billion; the company is ranked at 472nd place in the Fortune 500 companies (Fortune, 2021).
In 2020, Bridgestone reported $28.1 billion and $2.6 billion (Fortune, 2021). In 2020, Goodyear reported revenue of $12.3 billion (Forbes, 2021), and Continental had reported a revenue of $42.9 billion (Forbes, 2021). Thus, there is an intense rivalry in the international tire manufacturing market.
Threat of Substitutes
The threat of substitutes is assessed to be low in the tire manufacturing industry. Lopez-Claros (2017) explained that market displacement risk by present or probable substitutes is determined by, comparative price or Performance trade-off. If the present or possible competitive products or services give a more favorable combination of product attributes or low price, the threat of substitutes is high. There is no natural substitute for tires; tires are an essential component of the automobile industry and imagining a vehicle without them is inevitable.
The only available substitute is the counterfeit products; those are imitated from the real products and are sold as real. These knockoffs save on price, but consumers take a huge risk by compromising quality and safety. Usually, consumers prefer original products. Therefore, the threat of alternatives is low.
The Threat of New Entrants
The threat of new entrants is perceived to be minimal in the tire manufacturing industry. The threat is considered high in the presence of a favorable environment in the industry. There are few limitations associated with the industry that deters new entrants. The major deterring factor is the industry’s capital intensity; massive capital outlay is required to set up the plant, and another significant amount is required to run operations. Greater capital outlays act as deterrents for the new entrants (Caves & Porter, 1977).
Another factor that discourages newcomers is the presence of well-established incumbents; they have a stronghold in the market and have strongly positioned themselves with access to capital and a network of distribution channels. Therefore, the threat of new entrants is low in the industry.
Bargaining Power of Buyers
Generally, buyers have strongly moderate to high bargaining power in the industry. Buyers’ power is directly proportional to their importance for the business, the concentration of the buyers, competition in the market, and the switching cost. Buyers have plenty of options to choose from as there is intense competition in the market, choice among suppliers give them leverage to bargain for the better price and services. The tires are standard products with almost no differentiation, and they only differ in terms of quality.
Buyers who buy from the vendor they are comfortable with should direct the relationship between tires and safety. Another factor that enhances consumer’s bargaining power is the low switching cost that makes an exit easy. High switching cost binds consumer with the service provider and makes an exit difficult (Aydin et al., 2005). However, low switching does the opposite. Therefore, buyers have higher bargaining power.
Bargaining Power of Suppliers
Supplier power varies from industry to industry. It is directly proportional to the importance of the following factors of supplies for the business, the concentration of the suppliers, the nature of the supplies, and the risk of forwarding integration. Suppliers are considered to have low bargaining power in the industry. The primary reason for that is the lack of risk for forwarding integration; it’s not easy for the rubber supplier to start manufacturing tires.
Another reason is that suppliers are not concentrated and therefore do not have much leverage. The raw material used is the commodity in another industry, making it easier for the business to acquire it from multiple sources. Multiple sourcing is a great hedge against the supplier’s risk to the supply chain. (Silbermayr & Minner, 2016). Therefore, suppliers have low bargaining power.
References
Aydin, S., Özer, G., & Arasil, Ö. (2005). Customer loyalty and the effect of switching costs as a moderator variable: A case in the Turkish mobile phone market. Marketing intelligence & planning.
Caves, R. E., & Porter, M. E. (1977). From entry barriers to mobility barriers: Conjectural decisions and contrived deterrence to new competition. The quarterly journal of economics, 241-261.
Forbes. (2021). Continental. Available at: https://www.forbes.com/companies/continental/?sh=783406885833
Forbes. (2021). Goodyear (GT). Available at: https://www.forbes.com/companies/goodyear/?sh=1c934a553982
Fortune. (2021). Bridgestone. Available at: https://fortune.com/company/bridgestone/global500/
Fortune. (2021). Michelin. Available at: https://fortune.com/company/michelin/global500/
Lopez-Claros, A. (2017). Global Competitiveness Report 2007-2008. World Economic Forum
Michelin. (2020). Goal of “100% sustainable materials” with VISION. Available at: https://www.michelin.com/en/news/goal-of-100-sustainable-materials-with-vision/
PR Newswire. (2016). France Tyre Market Forecast and Opportunities 2016-2020 – Competitive Landscape and Strategic Recommendations. Available at: https://www.prnewswire.com/news-releases/france-tyre-market-forecast-and-opportunities-2016-2020—competitive-landscape-and-strategic-recommendations-300220736.html
Silbermayr, L., & Minner, S. (2016). Dual sourcing under disruption risk and cost improvement through learning. European Journal of Operational Research, 250(1), 226-238.
Statista. (2021). The world’s largest tire producers in FY 2019, based on tire-related revenue. Available at: https://www.statista.com/statistics/225677/revenue-of-the-leading-tire-producers-worldwide/