The Porter’s Five Forces analysis is designed to evaluate the competitive forces in the industry the firm operates. If it determines that the combination of forces in the industry act to reduce profitability, it is saying the industry is unattractive. Even worse is an industry close to total competition.

Keep in mind that this exercise evaluates the industry, not the firm (General Motors). As such, this assessment would apply to Ford, Chrysler, Toyota, Honda, or any other automotive firm manufacturing and selling cars and trucks in the US.

"...manufacturing and selling cars and trucks in the US" is key. You must think about and clearly define your business unit before starting a P5F analysis. Is it in the US? China? India? Japan? Obviously the threats and forces in these countries will be far different than in the US.

The Porter analysis examines three horizontal forces, or competition in the same industry: Threat of new entrants, threat of substitute products and threat of established rivals. Two forces are from vertical competition, or those from the supply-chain: Bargaining power of customers and bargaining power of suppliers.

This exercise would be relatively easy to perform if the industry were stable and uniform. None of the answers to the degree of threat Porter’s Five Forces pose are black and white or clear-cut. In one case, the bargaining power of suppliers, either extreme could be argued.

Moreover, the table in the appendix which tallies up the criteria for each of the five forces fails to identify many of the current economic conditions and dynamics in the automotive industry today. As a result, the findings may not be completely congruent with reality.

Keep in mind this analysis was written in the Spring of 2009, in the worst of both the automotive shake-up and the global economic crisis. Things have since changed.

A summary of the findings is below:

1. There is low threat of new entrants
2. The bargaining power of buyers/customers is low
3. There is a huge threat of substitute products
4. Suppliers do not have much bargaining power
5. There is a significant amount of rivalry among competitors

The analysis above indicates that the industry is moderately favorable to profitability.

However, in another analysis of the industry, based upon industry-specific news and facts surrounding the suppliers, buyers, competitors, and more, the results are very different. This is not based on the tallied results in the appendix:

Footnote 10: Source, AFP: http://www.google.com/hostednews/afp/article/ALeqM5iXk3cCzM02V62eC50Iizk8S3tJFw

According to this second analysis, the threats of substitute products, bargaining power of customers, and rivalry among competing firms are high, and are unfavorable to industry profitability.

The bargaining power of suppliers and threat of new entrants are moderate, which is not very favorable to industry profitability. It should be noted, however, that the bargaining power of suppliers may be induced upon them by force, as if they stop supplying it is not because they have money and are threatening the automakers, but because they cannot afford to keep assembly lines open. This creates a negative-sum game, hurting both parties. It could force the automakers to rescue the suppliers.

In summary, the industry is unfavorable to profitability.

To see a P5F analysis of the auto industry in India, click here.

To see a P5F analysis of the auto industry in China, click here.