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There were two key issues raised by this example question: (a) why hybrid

vehicles were becoming important and (b) why the automakers were making the

quite different choices noted in the article.

Here, it was important to recognise the significant external pressures facing the

auto industry. One means of comprehensively addressing these issues was

through an application of Porter’s five forces framework. This identified intense

competition, rising oil and steel prices and growing environmental concerns as all

placing great pressure on automakers. These pressures had been evidenced in

poor profitability and through the ongoing rationalisation of the industry, with many

players being acquired or merging with other automakers. Hybrid vehicles are a

natural response to current pressures, in that they improve fuel efficiency and also

appease environmentally conscious consumers. However, it is important to

recognise that this is only a partial solution, as petrol remains the core power

source such that its suppliers are likely to be able to extract much value from

automakers and their customers. There are also significant cost-benefit tradeoffs

around the technology. Potentially even more efficient and environmentally

friendly technologies, such as hydrogen fuel cells and high percentage ethanol

fuel could become strong substitutes.

The move to hybrid vehicles seemed to offer the potential for first-mover

advantages. Toyota’s early lead through the development of the technology used

in the Prius suggested that it might have developed a resource that could provide

competitive advantage through learning curve effects. Moving first also provided

a valuable marketing advantage in the mind of consumers, especially through its

adoption by “environmentally conscious celebrities”. The best reports also

recognised how the different carmakers were likely to be affected in different

ways. Toyota with its focus on family cars felt the impact of petrol prices earliest

(and unsurprisingly moved first), while the US manufacturers who had focused on

SUVs seemed to have acted more slowly. This seems to have been a rational

choice, as Ford’s experience with its Escape SUV has been less than spectacular,

suggesting that hybrid won’t dominate in all product segments.

Another interesting issue surrounded the role of alliances. These related to the

ability to share the large R&D costs present as well as the impact that economies

of scale would have on the manufacture of the specialised parts used in hybrid

systems. This had led to GM, DaimlerChrysler and BMW forming an alliance.

Such alliances might also reduce competitive intensity through tacit collusion. On

the other hand this also raised the potential for hold-up if any of the alliance

partners controlled key resources. This is seen in Ford’s reluctance to totally

commit to Toyota, despite basing its design largely on Toyota’s patented

technology. The role of suppliers, such as Toyota’s 60% stake in Panasonic EV

Energy Co, was also relevant here, as it heightened the potential for hold-up. The

threat that Toyota could raise battery prices to extract the value being created

Pierre Richard 2006 3

from alliance partners was a serious risk and explained the reluctance of other

automakers to adopt their more advanced technology. These alliances could also

heighten price competition, in that using the same technology might reduce

differentiation between vehicles.

The article also raised the “format” or standards war being observed. This

provided the opportunity to compare and contrast the differences between the

current standards war observed, and the battle between Sony and Matsushita

with the Betamax and VHS. In particular, the network externalities are likely to be

far weaker for hybrid vehicles. The standardisation of fuel pumps means that all

hybrid technologies can share the same power source (which is still fuel). This

standardisation also suggests that consumer switching costs will be relatively

weak so that the risk of hold-up to consumers is relatively low. Network

externality issues are likely to become more prominent in the development of fuelcell

technologies, rather than fuel-electric hybrids.

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. Use Porter’s �Five Forces of competition’ framework to show how the structure of the airline industry has caused low profitability during the past twenty years.

Since domestic deregulation occurred in 1978, competition in the airline industry has intensified and become more concentrated. This situation can be analyzed through Michael porter’s framework of the five forces of competition. This framework views the profitability

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