Porter’s five forces is the famous model that we have used to assess the attractiveness of the tire industry. They are explained as below:Rivalry within industry* Number of Players: According to Porter, if the number of players in an industry is large, then attractiveness of that industry goes down. The Tire Industry in the United States was dominated by five major companies: Goodyear, Firestone, Uniroyal, BF Goodrich and General Tire.
Again, foreign competition and import of passenger tires made the industry quite competitive. Tire is almost a necessary product but not quite frequently bought. In such an industry, five is quite a good number. From the perspective of number of players, the tire industry seems to be quite unattractive.
* Industry Growth: The U.S. Tire industry had experienced some major changes in the 1970s and in the 1980s. Overall growth of the entire tire industry has been quite slow.
Cost of manufacturing tires had increased and demand from consumers also changed over time. Due to reduction of new tire prices and high processing cost, the overall profitability of the industry went down.* High Investment: Requirement of high investment is an essential component in entering the industry as well as to convert factories to produce different type of tires as radials.* Product Differentiation: Tire as a product is hard to differentiate.
Still there are some variations under different brand names. And companies have to spend in huge number to make their products identifiable to the customers. Moreover they not only want to keep their existing customers but also want to acquire their competitors’ customers.* Exit Barriers: As huge amount of investment is required to set up a manufacturing plant and to shift to new business, it is extremely difficult to exit from the tire industry.
Companies like Uniroyal, Goodrich had to merge due to high exit barriers.Buyer’s PowerIt refers to the bargaining power of the customer. According to Porter, if the bargaining power of the buyers’ is strong, then the attractiveness of the industry goes down.* Buyer concentration: Buyer concentration is very high in the U.
S. tire industry in US and the market is quite huge.* Switching cost: As there are quite a number of players in the tire industry and the price differs less between two or more brands, it is easy for the customers to switch brands without incurring much loss. Moreover, customers emphasize more on price than brand while they make a purchase.
Price conscious customers represent higher percentage than brand oriented customers. Therefore, switching cost is low as customers frequently change their loyalty.* Threat of backward integration: Threat of backward integration is almost nil in this industry. It is not at all possible for the customers to make tires for their vehicles.
They neither have the technology nor have the expertise.Number of SubstitutesSubstitutes are the products that fulfill the basic functions of tires. The number of substitutes is zero in the tire industry and according to Porter it increases the attractiveness of the industry.Suppliers’ PowerIt is the ability of the suppliers’ to negotiate on price with their buyers.
* Number of buyers: In the tire industry there are only 5 to 6 major players, who could be the potential customers for the suppliers. Thus competition is very high among the suppliers. And as there is fewer numbers of buyers they have little ability to have any significant impact on price negotiation. That increases the attractiveness of the industry.
* Switching cost: As there are few numbers of manufacturers acting strongly in the tire industry the switching cost for suppliers is fairly high. Suppliers are greater in number than their buyers. So there is no guarantee that a supplier will immediately get another buyer.* Substitute raw material: There are no substitute raw materials for tires.
Suppliers have an advantage in that aspect.* Threat of forward integration: Threat of forward integration is low for suppliers. Huge amount of initial investment is required to set up a tire manufacturing plant. In addition, suppliers would not be able to compete against the large brands.
Threat of new competitorsThis actually identifies the entry barriers of the tire industry.* Economies of scale: Economies of scale indicates when companies does huge production, their per unit costs comes down. The tire industry produces in bulk. A new entrant must consider whether it has got the ability to produce in bulk from the very beginning.
Moreover, it could not achieve economies of scale from the moment it starts. It has to have the financial ability to hedge the time period between its production and sales.* Absolute cost advantage: If the new competitor comes up with technological advancement in the manufacturing process than the existing players, then absolute cost advantage can be possible. It may also be possible for those who have favorable access to raw materials.
For example, if a rubber producing company decides to launch its business in tire industry, it would certainly have much better position than its competitors who solely depends on their suppliers.* Brand consciousness: Brand conscious customers are reducing day by day in the tire industry. That makes the industry attractive for a new entrant, as brand loyalty is not that high.* Regulatory Barriers: There are no strict rules and regulations that could prevent a company to get into the tire business.
But the regulation that disables manufacturers to control the retail price has an inverse effect on the overall profit margin of the industry.Market SegmentationWe have divided the market in the following ways:Types of tiresAccording to the information provided Performance tires are wider than broad-line tires, more expensive & give better traction. Consumers usually don’t replace performance tires by broad-line tires although there is an option available to replace.On other hand, Replacement tires are for individual consumers, while OEM tires are mainly for car manufacturers.
Tire manufacturers sold replacement tires to wholesalers ; wholesalers resold the tires to a variety of retailers ; dealers, who then sold the tires to consumers. On other hand OEM tires means Original Equipment Manufacturer. OEM does not necessarily add anything except their name to the product.Brand classificationsWe can also segment the market according to different types of brands, which basically includes major brands ; minor brands.
Major brands carried the name of a major tire manufacturer ; it has the highest recognition among consumers. Minor brands include tires made by small manufacturers as well as tires made by major manufacturers but sold under a different name. Minor brands are also often recognized by consumers. Besides major ; minor brands there is another type of brand known as Private label brand.
Private labeling occurs when a manufacturer produce same product for its competitors. Some large tire manufacturers use excess capacity to service the private label market.Consumer groupThe consumer group refers to different size of consumers. The purpose of the tire is same, which is to support a vehicle to move from one place to another.
As I have already mentioned, size of the consumer is different. There are OEM, whole sellers, retailers etc. Compare to OEM retailers buy a small amount of tires for selling. This is another way of market segmentation.
Demographic* Income Level: The level of income of consumer is a very vital factor in market segmentation. Depending on this they make their purchase decision. In this case it has been mentioned that price constrained buyers buy the brand they can afford within their budget.* Age: Young buyers are another segment.
Typically they are known as bargain hunters, with little brand preference ; loyalty.Socio-economic* Class: There are different classes of people. Normally people of high class are known as quality buyers. Their main target is to achieve quality goods at a reasonable price.
* Geographic factor: The person live in Sahara desert ; the person lives in Switzerland will not buy the same tire for their car. Sahara is covered with sand ; tracks of Switzerland are more or less covered with ice. Point is geography plays a very important role in market segmentation. Tread life, wet traction, handling, snow traction and dry tractions are the different tire attributes that are necessary for different geographic region.
For example Aquatred’s wet traction is better than any other tire.Physiological factor* Consumption pattern: The average time between purchases of tires is 2.5 years. Purchases of four tires at a time can be segmented as heavy consumption, two and three is moderate and purchases of one is light consumption.
* Lifestyle: Lifestyle of different individuals is also a critical factor in market segmentation. For example quality buyers buy only from their preferred outlets. On the other hand, the price constrained buyers and the bargain hunters have a tendency to shop around extensively and that is their lifestyle.Marketing Challenges faced by GoodyearThe Aquatred Launch* Timing: The timing of the Aquatred launching was a big problem for Goodyear.
They wanted to launch it during the Winter Olympics in January of 1992 as they could use the commercial time that they had already made commitment to. But, there initial inventory had been made to fit domestic cars so they would not be able to supply tires for the imported cars and the survey from the test-market showed that the Aquatred buyers were more likely to drive imported cars. So, they would miss out on a big customer segment, which is 26% (Exhibit 9).* Price: Goodyear positioned the Aquatred at the top of the broad-line segment.
So, the price of tire was higher than earlier tires. But, the survey in 1991 (Exhibit 7) showed that 16% of the price constrained buyers and 10% of the commodity buyers were loyal to Goodyear. That means they had a more favorable image in these two segments, which is more receptive to lower price. So a higher price would not help their image at all.
On the other hand the survey in the test-market shows that consumers are treating both the Aquatred and the Invicta GS in almost same manner. So, whether the customers would be willing to pay this high price is a big question.* Distribution: Selection of the distribution channel was another major issue. Goodyear could expand their channel or continue their existing strategy.
If they expand their channel then it would increase their sales but, on the other hand it would also erode the value of Goodyear brand, cannibalize sales of existing outlets and might cause dealers to take on additional lines of tires.* Tire life: Goodyear was planning to give 60,000 miles warranty on the Aquatred. But, the most important attribute of a tire according to the customers was tread life and Michelin and Bridgestone both planned to launch new tires with 80,000 miles warranties backed by heavy advertising. So, convincing the dealers and customers would be a big challenge.
* Misrepresentation: A male mystery shopper visited nine independent Goodyear outlets during October 1991 and found out that there was variation in the presentation and pricing of the Aquatred. This could hamper the launching of Aquatred as most of the dealers did not present the qualities of Aquatred explicitly. On an average, in 5 out off 6 outlets the price of Aquatred with Black Sidewall was lower by $7.57 per tire and the price of Aquatred with White Sidewall was lower by $10.
17 per tire (Exhibit 10 & Appendix A.1). But, Goodyear could not do anything as they did not have enough control over the dealers.Other ProblemsOther than the problems regarding Aquatred launching Goodyear faced some problems in operational and distributional level.
They are-* Private label tires: In past years Goodyear produced two lines of private label tires: the All American and the Concorde. In 1991 Goodyear replaced these two tires as they felt that they (private label tires) were cannibalizing the sales of branded tires. But, the independent dealers felt that these two brands were actually helping Goodyear as it gave a lot of choices to the customers. As we can see form Appendix A.
2 that on an average 35.33 % of the total retail sales was generated from the sale of private label tire. So, the private label tire was a big segment and Goodyear was actually losing some market share.* Tire diversion: Goodyear followed a selective distribution strategy i.
e. they relied on three types of distribution channels. They intentionally avoided low-priced outlets as it could have a bad effect on their image. But, these low-priced outlets such as warehouse clubs, mass merchandisers and auto supply stores, sporadically obtained Goodyear’s tires and their price-based ads and frequent discounting angered Goodyear’s independent dealers.
Goodyear could not stop this diversion as they were prohibited by law from dictating either retail selling prices or to whom their tires could be sold.* Billing problem: Goodyear’s dealers frequently complained about billing problems. So, they should look into the matter.* Services to the independent dealers: Goodyear provided services to the independent dealers through area sales manager.
But, the area sales manager could not visit all the outlets though it was very important for the dealers. So, the dealers were always facing problems and could not contact the area sales manager.Goodyear also provided many promotional services like wholesale allowance, merchandise allowance, advertising accruals to the dealers. But these services were not free.
So, the dealers did not like all these services as the needs of small and large dealers were not same. This could create a problem among the dealers.* Conflict with independent dealers: Goodyear placed some of their own outlets in the locations of their independent dealers. So, these Goodyear owned outlets directly competed against the independent dealers which displeased the dealers and as the independent dealer were getting more powerful over time it was big problem for Goodyear.
* Less control over the distribution channel: During the 1980s the structure of the distribution in the US tire market changed. Independent dealers had the major market share in the early 1990s. So, most of the tire manufacturers closed their own outlets and depended on independent dealers. The bill of rights in 1992 passed by National Tire Dealers and Retreaders Association (NTDRA) made the independent dealers more powerful.
So, tire manufacturers were prohibited by law in interfering in the operations of the dealers. The dealers could set their own price and inventory policies. This also meant that the dealers were keeping other branded tires with Goodyear in their outlets, which increased from 30% in 1989 to 50% in 1991.Marketing StrategyStrategy for the Aquatred launchingGoodyear was facing problems regarding the launch of the Aquatred and we feel that pursuing the following strategies would make this possible:* Market Target Strategy: Goodyear should target value-oriented and quality buyers (Multi market strategy) for the Aquatred tire.
Exhibit 9 shows that in the test market (23+61) % = 84% of the customers belong to these two segments. Exhibit 7 shows that in these two segments Michelin is stronger than Goodyear and we can also see from Exhibit 8 that 44% of Michelin customers are loyal to their brand, which is the highest. So, it would be hard for Goodyear to attract their customers but now they have a very good product, which suits these two segments perfectly.* Market entry time: Goodyear should launch the Aquatred in January 1992 during the winter Olympics.
Though they would lose some potential customers who drive imported cars but the promotional opportunity is too good to lose. The buyers of Aquatred who drive domestic cars are 74% of the total which is quit large. As Michelin and Bridgestone are introducing new products in 1992 with a higher warranty and heavy advertising, Goodyear must advertise in a big stage to attract the customers. If they can achieve a favorable image in the minds of the customers then they would be able get the market of imported car drivers after some months.
* Product positioning strategy: Goodyear should position the Aquatred in such a way through advertising that the customers perceive it as a different kind of tire. As we can see from the data of test market that customers do not recognize any difference between Aquatred and Invicta GS. If this does not change then the future of Aquatred is not very bright. Positioning it differently should not be very difficult as this is the only tire that has a tangible, perceptible difference over existing models.
* Pricing strategy: As Goodyear is positioning the Aquatred at the top of the broad-line tires they should convey this message through the price. The price should be a bit higher than the usual tires. This would mean that the quality of the tire is far better than any other tires presently available in the market. They should also back this strategy up by heavy advertising campaigns.
* Training sales people: The test market data in Exhibit 9 shows that only 33% sales people highlighted the wet traction and 41% highlighted warranty feature of Aquatred. Whereas warranty is the weakest point of Aquatred and wet traction is the highest. It also shows that some of the sales people did not inform the customers at all. Another survey on consumer reveals that wet traction is the second most important quality in a tire that customers look for.
So, Goodyear should train and monitor the sales people so that they highlight wet traction and hydroplane feature more. Otherwise the customers would not buy Aquatred.* Distribution: Goodyear was thinking about expanding the distribution channel. This could have two effects.
In one side – it would boost sales and the switching of Goodyear brand would decrease. But on the other side – the price would go down, hurt the Goodyear image, cannibalize sales etc. We strongly recommend them not to expand the distribution. The reasons are -o Lower tire price would not help Goodyear’s sales in our target market.
They mainly look for quality product. But, if the price goes down then it would send a wrong signal to the customers.o In the Appendix A.4 we can see that 94% of respondents in Exhibit 9 said that they bought Goodyear just for the brand image.
So, any negative effect on Goodyear’s image would have a very bad effect on Goodyear’s sales.o According to Exhibit 5 independent dealers (small and large independent dealers) had 63% share of the distribution channel in 1991 whereas the other distributors had 28% share. So, if the independent dealers decide to carry multiple brands then it would harm Goodyear’s sales.* Promotional Strategy: The test market data shows that buyers of Aquatred searched for information prior to purchase.
So Goodyear should run advertising campaigns in newspapers and telephones, as these are the highest searched media for information i.e. 33% and 21% respectively (Exhibit 9).Value marketing Strategy* Time based strategy: A Goodyear survey on consumer behavior showed that the second most important criteria customer’s used to select retailer is fast service.
The distribution structure in the tire industry has changed over the years and independent dealers are the most powerful. As a result the manufacturers have less control over the dealers. So, Goodyear must make sure that the dealers are actually providing fast customer service.Other StrategiesWe have formulated some strategies to tackle the problems in other areas.
These are -* Private Label Tire: Goodyear replaced their private label tires in 1991 because of the cannibalization. But, we have calculated in Appendix A.2 that this is a big segment. We can also see from Appendix A.
3 that the average percentage of switching to private label tires from a major brand (Bridgestone, Firestone, Goodyear, and Michelin) is 40.5%, which is pretty high. So, the private label tire of Goodyear would take some of the Goodyear’s share but it would also take the share of other brands and the total share would actually be greater than Goodyear’s initial market share.* Services to the dealers: The services required by the dealers are not the same for everyone.
So Goodyear should provide the services only to those who wanted it. For example – Goodyear should provide the advertising accruals only to the small dealers and to some large dealers who wanted it. This would help the large manufacturers to procure tires at the lowest possible price. They should also include the auto services in their advertisements.
As the independent dealers derived 48% of their revenues from auto services this would make them very satisfied.* Managing the independent dealers: Goodyear should increase the number of area sales manager in such a way that the dealers can get in touch with the area sales manager whenever they wanted to. They should make sure that the dealers are entertained whenever they faced a problem.* Positioning of the manufacturer owned outlet: Goodyear must make sure that the company owned outlets do not directly compete with the independent dealers.
This would discourage the independent dealers from carrying Goodyear tires in their outlets. They must not see Goodyear as their competitors.