PORTER’S FIVE FORCES ANALYSIS OF TATA MOTORS

Company Profile -

Established under the parent company, Tata Group, in 1945, Tata Motors Limited has become
India’s largest automobile company. It was the first Indian automobile company to list on the New
York Stock Exchange. Tata Motors began manufacturing commercial vehicles in 1954 with a 15-
year collaboration agreement with Daimler Benz of Germany. This partnership has led Tata
Motors to not only become India’s largest automobile company but also India’s largest commercial
vehicle manufacturer; the world’s top five manufactures of medium and heavy trucks and the
world’s second largest medium and heavy bus manufacturer.

Having just entered the passenger vehicles market segment in 1991, Tata Motors now ranks second
in India’s passenger vehicle market. In the automotive industry, it is becoming increasingly crucial
for manufacturers to stay on top of the technology curve with new problems always rising such as
escalating gas prices and pollution problems. Tata recognizes this and dedicates lots of resources
and time into research and development to be even with or preferably ahead of other competitors,
global trends, and changing economies. In all, an automobile manufacturer must change, adapt,
and evolve to stay competitive in the automotive game, and this is exactly what Tata is doing with
their rapid growth, and extensive research and development. Tata has enjoyed the prestige of
having developed Tata Ace, India’s first indigenous light commercial vehicle; Tata Safari, India’s
first sports utility vehicle; Tata Indica, India’s first indigenously manufactured passenger car; and
the Nano, the world’s least expensive car.
Porter’s Five Forces

Michael Porter observed five forces that have significant impact on a firm's profitability in its
industry. These five forces analysis today in business world is also known as -Porter Five Forces
Analysis. The Porter Five Forces are -

1. Threat of New Entrants

2. Bargaining Power of Suppliers
3. Bargaining Power of Buyers
4. Threat from Substitute Products
5. Rivalry among the existing players.

1. Threat of New Entrants

The automobile industry is a specialized industry that requires enormous capital investment for
factory facilities, machinery, labor and technology. The cost of entering into the market increases
it barriers to enter and exit. If a new entrant entered into the industry, they would have to find
dealerships to sell their automobiles, which builds pressure, increasing the difficulty to enter into
the industry. The some of the barriers are as follows-

a) Economies of scale: Companies like Maruti, Hero Honda etc. are present in market from
many years and achieve the optimum level of production through which these companies are
enjoying the economies of scale. But for a new player it will not be easy to get benefit of these
economies of scale due to high price competition from exiting players
b) Demand side benefit of scale: It is never easy to get the trust of the customer. Company like
Hero Honda, Bajaj and TATA etc. having the large number of customer base and build the
trust in the product. So new players will have made place among the customer to beat the
competition which will not be easy for them.
c) Customer switching cost: Customer in automobile industry has high switching cost. Because
after buying vehicle once they did not replace it before two or three years so the switching
cost in this industry is high. It will be a barrier for new player.
 d) Capital requirements: Capitals require to start an automobile company is very high. Land
and machinery requirement and human resources requirement and after then there is high
competition so it will be very risky for new company.
e) Distribution channels: In automobile industry or in any industry to capture the huge market
you should have a big distribution network not only for sales of vehicles but also for the
services, which is important feature consider for company. Like Maruti due to the oldest
company in India have the advantage over the competitors. Ever existing players are not able
to overcome this who are trying from so many years so a big barrier for new entrance.

(Figure: Porter’s Five Force Model)

The automobile industry is so massive and mature, new entrants would have to mass-produce their
automobiles in order to reach the economies of scale (i.e. lowering the cost incurred in the
 production by producing in huge quantities) thus raising the stakes of entering the market. The
threat of new entrants to Tata Motors in the automobile industry is low/low-moderate because it
involves huge capital investments and setting up of long production lines to manufacture cars. The
threats include-

 A global automotive company could enter into joint ventures with domestic manufacturers of
India and thus started the large-scale production of automobiles in India.
 Threats due to Hybrids/Electric vehicle (Ev) manufacturers.

Threat of New Entrant Low/Low-Moderate

How Tata Motors Limited can tackle the Threats of New Entrants?

 By innovating new products and services. New products not only bring new customers to the fold
but also give old customer a reason to buy Tata Motors Limited ‘s products.
 By building economies of scale so that it can lower the fixed cost per unit.
 Building capacities and spending money on research and development. New entrants are less likely
to enter a dynamic industry where the established players such as Tata Motors Limited keep
defining the standards regularly. It significantly reduces the window of extraordinary profits for
the new firms thus discourage new players in the industry.

2.Bargaining Power of Suppliers

To manufacture a vehicle number of inputs is used like steel, seat covers, technology, and tyre etc.
Input which add value to the vehicle supplier of those inputs are always have bargaining power
like tyres of MRF will add value to the final product so company using the MRF tyres can’t change
the supplier easily due to high switching cost.

When we talk about steel major input for the automobile industry and in India steel demand is
more than its supply and most of the steel is imported from the abroad so in this case also
automobile company are lacking.
 But when we talk about the input like seat cover, plastic etc. which can easily switch and cost is
nil of switching. So, in this case bargaining power of supplier will be low.

Power of Suppliers Low

How Tata Motors Limited can tackle Bargaining Power of the Suppliers?

 By building efficient supply chain with multiple suppliers.

 By experimenting with product designs using different materials so that if the prices go up of one
raw material then company can shift to another.
 Developing dedicated suppliers whose business depends upon the firm. One of the lessons Tata
Motors Limited can learn from Wal-Mart and Nike is how these companies developed third party
manufacturers whose business solely depends on them thus creating a scenario where these third-
party manufacturers have significantly less bargaining power compare to Wal-Mart and Nike.

3.Bargaining Power of Buyers

Buyers are often a demanding lot. They want to buy the best offerings available by paying the
minimum price as possible. This put pressure on Tata Motors Limited profitability in the long run.
For the produced which are adding values to the product the switching cost of company will have
low bargaining power because it will directly affect the customers.

Power of Buyers Moderately-Strong

Company have to keep good relation with supplier to enjoy the benefit of discounted prices so they
have to go keep long relation with supplier. So, they can’t change supplier time to time. In that
case buyer will have high bargaining power. When automobile company can go for backward
integration in that case buyer have the high bargaining power. Like Tata which have its own steel
plants so can face the problem of shortage of raw material.
 When buyer power is strong, the buyer is the one who sets the price in the market. Here there are
purchases of large volumes. There is prevalence of alternative options and it specifies the impact
of customers on the product

The smaller and more powerful the customer base is of Tata Motors Limited the higher the
bargaining power of the customers and higher their ability to seek increasing discounts and offers.

How Tata Motors Limited can tackle the Bargaining Power of Buyers?

 By building a large base of customers. This will be helpful in two ways. It will reduce the
bargaining power of the buyers plus it will provide an opportunity to the firm to streamline its sales
and production process.
 By rapidly innovating new products. Customers often seek discounts and offerings on established
products so if Tata Motors Limited keep on coming up with new products then it can limit the
bargaining power of buyers.
 New products will also reduce the defection of existing customers of Tata Motors Limited to its
competitors.

4.Threats of Substitute Products or Services

The substitutes for automobile then there are mainly two substitutes are:

 Railways
 Airlines

But both of these will not be substitutes for every customer and in every situation. Like for a short
journey airline will not be substitutes. And journey to a place where railway can’t reach in this
position railway will not be substitute. But within the automobile industry lots of completion and
substitutes are able like for two wheels any car can be substitute after the launch of Nano the price
factor also remove and owned car or car on rent are the substitute for each other. This is great
advantage to Tata as now two-wheeler customer can also go for car which mean new segment of
 customer. The threat of a substitute product or service is high if it offers a value proposition that
is uniquely different from present offerings of the industry.

Threat of Substitutes Moderate

How Tata Motors Limited can tackle the Treat of Substitute Products / Services?

 By being service oriented rather than just product oriented.

 By understanding the core need of the customer rather than what the customer is buying.
 By increasing the switching cost for the customers.

5.Rivalry among the Existing Competitors

If the rivalry among the existing players in an industry is intense then it will drive down prices and
decrease the overall profitability of the industry. When total costs are mostly fixed costs, the firm
must produce capacity to attain the lowest unit costs. Since the firm must sell this large quantity
of product, high levels of production lead to a fight for market share and results in increased rivalry.
This is happening in the automobile industry all player is big and put huge investment. The rivalry
in the case of Tata Motors is very high/very strong.

Industry Rivalry Very High/Very Strong

Industry becomes unstable as the diversification increases. In this case the diversity of rivals is
moderate as most offer products which are close to standard versions and the competitors are also
mostly similar in strength

The presence of many players of about the same size little differentiation between competitors.
Higher the competition in the industry lower would be the profit margin. To remain ahead in
competition, auto-makers were tempted to offer value added services to the customers incurring
more costs.
 How Tata Motors Limited can tackle Intense Rivalry among the Existing Competitors in
Auto Manufacturers - Major industry?

 By building a sustainable differentiation

 By building scale so that it can compete better
 Collaborating with competitors to increase the market size rather than just competing for small
market.

Conclusion-

By analyzing all the five competitive forces Tata Motors Limited strategists can gain a complete
picture of what impacts the profitability of the organization in Automobile industry. They can
identify game changing trends early on such as International expansion, distributed competition in
new markets, increased environmental regulation, increased energy constraints and increased
operational efficiency and can swiftly respond to exploit the emerging opportunity. By
understanding the Porter Five Forces in great detail Tata Motors managers can shape those forces
in their favor.