Pestle Analysis Of The Car Industry

ENVIRONMENTAL ANALYSIS OF
AN INDUSTRY

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................2
TASK ..............................................................................................................................................2
A) PESTEL analysis of car manufacturing industry....................................................................2
B) Porter's 5 force of Volvo.........................................................................................................5
CONCLUSION ...............................................................................................................................7
REFERENCES ...............................................................................................................................9
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INTRODUCTION
Environmental analysis is an essential factor companies need to keep in mind in
manufacturing their products (Victor, 2017). It is a process of identifying external and internal
factors which affect organisation performance. Environmental analysis benefits in identifying
various opportunities and threats of the company. It refers to the process of scanning, observing,
analysing and predicting business situations. It is beneficial for management of company in
decision making and expanding the business in the are where environment is favourable. Present
report is based on Volvo cars, it is a premium car maker. Company want to introduce electric
cars in Europe. In the report PESTEL analysis and porter's five force analysis is done so that
company makes strategic decisions.
TASK
A) PESTEL analysis of car manufacturing industry
Volvo cars want to enter in Europe by introducing electric cars and destroying the
markets of fuel cars. Company want electrification as its core business. There is a great scope of
electrification in the future economy. Here is a PESTEL analysis which will help company in
analyzing and decision making (Grant, 2016).
 Political factor: Automotive industry is very fast growing company and has grown
continuously over a period of time. Cost of automobiles is increasing and common man is
not able to afford the cars. Political instability in the economy also affects the company in
expanding its business. As Volvo company want to introduce electrification in the
automobile industry, there is a big support of government in introducing it. Political
factors are positive through which company easily enter in Europe. There is a national
support for electric vehicles like government is providing subsidies to customers who are
purchasing electric vehicles (Electric vehicle in Europe, 2016). They are exempted from
tax, higher authorities has increased tax of fossil fuel which have indirectly made electric
vehicles attractive. Local government has also taken various steps in promoting electric
vehicles such as free parking for electric vehicles, opening of individual lane for the
parking of electric vehicles, access in restricted are because of pollution, tax exemption
and discounts. Government is putting its best effort and supporting electrification through
giving funds to the companies. There is a huge pressure by government on automotive
industry in order to control pollution and thus, in future there will be increase in demand
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for electric vehicles in order to save environment. So there is a great opportunity for
Volvo company to expand its business and develop new products which are Eco-friendly
(Ciambrone, 2018).
 Economic factor: These factors are also important for the companies in automotive
industry. In past years, this sector has adversely affected the automotive industry. If
economic conditions are not good than sales of the vehicles will fall, price of higher
priced vehicles was a;so affected. If economic condition is good than sales of the industry
are good. In UK, cars has increased the pollution in the country which is causing air
pollution. People of UK are now changing their preference to low emition electric cars.
Poor economy has has declined the performance of the companies. Rise in the price of
fuel has change the consumer buying behavior. Thus there is an increase in the demand of
electric vehicles. Change in the economic condition such as purchasing power, inflation
rate, foreign exchange rate etc. affect the industry. Volvo has an opportunity in expanding
its business in Europe as their economic conditions are good and customers are preferring
electric vehicle instead of fuel cars. Company will benefit as the cars will be electric, it
will not pollute the environment and it will be affordable to customers as production cost
is low (Sarooghi, Libaers, and Burkemper, 2015).
 Social factors: The factors which are affecting environment are culture, religion, values
and customs. Automotive industry is facing major problems like change in the demand of
customers their preference such as luxury cars to electric vehicles. There is a cultural
difference which affect the style and preference of people. One of the reason behind
shifting customer preference is rise in the price of fuel. Rise in the price will affect the
purchasing power of customers. They prefer fuel-efficient cars, companies need to
consider social factors in manufacturing the products. Government also supports
customers in purchasing electric vehicles such as providing subsidies, exemption from
tax, free parking facility to customers, access to restricted areas etc. Customers get
attracted to these offers and change their preferences. Government has also increase the
tax of fossil fuels thus customers prefer electric vehicles. Volvo company has considered
social factors which is beneficial for company as there is an increase in demand for
electrification, company need not to invest in marketing activity so much. Trends in
social factors keep on changing which affect the business model of company (Li and
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et.al., 2016). Company need to be regularly updated and adopt change quickly. There is a
drawback for the people as well such as they need to charge the vehicle regularly which
may increase their electric bill.
 Technological factors: Technological diffusion has affected the automotive industry
very badly. Replacing technologies and new innovation has increased the cost of
production. If company adopts the technology fast and fulfill the needs of customers, its
market share increases. There are many companies who are introduced electric vehicles
and gain market share. In UK government has recently taken initiative in providing funds
to the companies who are manufacturing electric cars and promote renewable energy.
Volvo has a competitive advantage in terms of providing safety vehicles to its customers
but company failed to adopt technological advancement and cope up with external
environment. The biggest competitor of Volvo is Toyota, Toyota was successful in
adopting new technologies and implementing into its product (Xuan and Yue, 2017).
Toyota captured major markets and increased its market share by adopting changes in
external environment. In recent years, technology was the main issue faced by the
automotive industry but slowly and gradually companies have adopted technology and
satisfied customers in providing low cost and furl-efficient cars. Technological factors
have proved that it is the most important factor which have affected the profitability and
sales of companies. Volvo need to invest more in technologies in order to increase its
market share.
 Environmental factors: Environmental laws are forcing company to produce products
which are environmental friendly. These laws are growing stronger across the world.
Companies in the automotive industry nee to focus on these laws and change their
business model accordingly (Cantrill and Oravec, 2015). Government provides subsidies
like tax exemption to vehicles which are low emissions and low consumption of fuel.
There are certain pollution tests which companies need to pass in order to sell their
products in some markets. Volvo also need to pass the test in order to sell its products in
the market. Companies who are not able to pass the test are not allowed to sell their
products. As there is an increase in pollution in Europe, customers are shifting their
preference from luxury cards to fuel-efficient vehicles. Customers are also attracted by
the government support which has increased the sales of electric vehicles. In future years,
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there will be a total shift of customer preference to low emission cars. There is an
opportunity for Volvo to expand its business in Europe by considering environmental
laws.
 Legal factors: Government is formulating new laws and policies in order to decrease
pollution in the economy (García-Pozo, Sánchez-Ollero and Marchante-Lara, 2015).
These laws may also affect automotive industry as companies need to change their
production and manufacturing process which incurs huge cost. Volvo's main focus is to
produce vehicles which are fuel-efficient and provide safety to customers. Though flexi-
fuel cars has not shown much profits. Ir has affected the performance of the company.
Government has stricter the rule of environment, companies who are exporting their
vehicles need to pass emission controls. Volvo has a competitive advantage as its
vehicles are emission control. There may be some changes in the policies regarding
environment, companies need to be ready to adopt the changes and meet the requirement
of the economy. It is beneficial in increasing profits and performance of the company.
B) Porter's 5 force of Volvo
It is a model used to analyze competitive environment of the company. It is beneficial for
company in decision making by identifying rivals in the market, potential markets, new entrants,
customers, buyers, substitute products and suppliers (Alrazi, De Villiers and Van Staden, 2016).
These factors influence profitability of company. After using this model Volvo will be beneficial
in strategic decision making and identifying various opportunities and threats. There are 5 forces
in porter's model which are as follows:
 Power of supplier: Bargaining power of supplier reflects the pressure applied by
suppliers on business which affects performance of business. Suppliers forces business by
adopting different plan of action, product unavailability, reducing quality of products,
increase the price of raw materials etc. High supplier bargaining will increase the
competition in the market which in-turn lower the growth potential and profits whereas
low bargaining power will decrease the competition. Bargaining power of suppliers will
be high for Volvo company if suppliers started to supply its products in specific region, if
suppliers are limited and demand of product is high than Volvo will be affected and has
to face tough competition (Xin-gang and et.al., 2016). If suppliers power is low which
means product supplied are low in cost, there is a lack in product differentiation,
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substitute products are available than Volvo has a competitive advantage. For Volvo
company supplier bargaining power is low because there are many suppliers in the
automotive industry. As company has been acquired by Geely (Chinese company), Volvo
has an opportunity to build relations with the Chinese suppliers who will offer lower
price than European suppliers. Therefore Volvo is not dependent on suppliers. Company
has opportunities in making its business global and enjoy various economies of scale.
Company may do product diversification which will help in increasing market share.
Demand of electric car is increasing in every country where there is a rise in fuel price.
Volvo has various advantage in expanding the business and build strong relation with
suppliers (Victor, 2017).
 Power of buyers: Bargaining power of buyers reflects the pressure applied by the
customers on business to get affordable high quality products with good customer
services. Power of buyer forces Volvo in accomplishing the needs of customers and
achieve the objective of business. Companies profitability is decreased if bargaining
power is strong on the other hand profitability will increase if there is low power of
bargaining, it makes less competitive industry and there are many growth opportunities
for business. If power is strong than there is lack of opportunities for business as their
main focus in on fulfilling the needs of customers. Buyer's power is increased when there
is number of buyers against the company, if suppliers are many and buyers are less, there
is a low switching cost (Grant, 2016). There are some factors which decrease the power
of buyers such as lower concentration, inability of customers in creating backward
integration, low price sensitivity, lack of market knowledge and high cost of switching.
For Volvo company, bargaining power of buyers is high, although company is providing
innovative, environmental friendly, safety enhancement and electrification but there are
many substitute products available in the market. Buyers have many option available for
switching the products. Volvo need to attract customers by changing marketing
strategies, company may us penetration strategy in order to attract middle class people
and satisfy them. Company need to build its brand loyalty and provide good customer
service to increase its customer base (Ciambrone, 2018).
 Threat of new entrants: It reflects how new companies bring down threat to the existing
companies in the market. It is a time consuming and risky for companies. Automotive
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industry is a fast growing industry that is why there is a huge competition and entry an
exit of companies. Automotive industry is attractive , there is not much threat for
entrants. There are some factors which reduces the threat of new entrant for Volvo such
as companies requires huge amount of capital and resources to invest, there is a loss if
customers prefer product differentiation and want to experience unique products. Volvo
will face low threat of new entrants if government of the economy impose challenges to
enter in markets such as according to the strictness of environmental friendly products
companies need to pass certain test which ensures that products are of low emission
(Sarooghi, Libaers, and Burkemper, 2015). If companies fail to pass the test then they are
not allowed to enter in the market. Companies need to change their business model which
may be costly. There is no threat for Volvo as company's target audience is families who
has higher need of buying a car. Company provide low emission cars which is mostly
preferred by customers.
 Competitive rivalry: The competitive rivalry in the automotive industry is very high.
There are many competitors that give competition to Volvo company. High rivalry shows
company has strong rivals which end growth potential of each other. Firm adopt different
marketing strategies and pricing strategies which leads to low profitability. There are
different factors in increasing rivalry for Volvo such as competitors are diversified and
target same customers, customers are not loyal and change their preference quickly,
competitors provide products which are of similar features therefore there is slow growth
of industry (Li and et.al., 2016). Company is providing safest car along with there are
many companies that are providing safest cars which increase the rivalry in the market.
Volvo need to adopt new pricing and marketing strategy in order to attract new customers
and retain them for longer period of time. Company need to provide good customers
service and ensue that the quality of product if high at affordable price.
 Threat of substitute products: There is availability of secondary option which creates
challenges for Volvo. Increase in the substitute products give a chance to customers to
switch the product in order to meet their needs. The threat of substitute product increases
when there is availability of cheaper rates of products, switching cost is low, substitute
products are of good quality. Volvo need to emphasis on how its products are
communicated in the market i.e. create brand equity, company need to provide benefits
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and features of product through promotion and advertising, firm also need to improve the
quality of products by innovating and investing in new technologies to reduce the
production cost (Li and et.al., 2016).
CONCLUSION
From the above report it is concluded that environmental analysis is necessary to perform
for automotive companies so that they identify various opportunities and threat that is used in
strategic decision making. From the PESTEL analysis of the company it is said that company has
various opportunities in expanding its business in Europe because there is a good support of
government, authorities are providing funds to company if their products are low on emission on
fuels. Company need to invest its money in adopting new technologies and produce quality
products at affordable price to sustain in the market and retain customers for longer duration.
There is high competition in the market and risk of substitute product is high. Organization need
to formulate new marketing strategies and pricing strategies to attract customers and create
strong brand image.
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REFERENCES
Books and journal
Alrazi, B., De Villiers, C. and Van Staden, C. J., 2016. The environmental disclosures of the
electricity generation industry: a global perspective. Accounting and Business Research. 46(6).
pp.665-701.
Cantrill, J. G. and Oravec, C. L. Eds., 2015. The symbolic earth: Discourse and our creation of
the environment. University Press of Kentucky.
Ciambrone, D. F., 2018. Environmental life cycle analysis. CRC Press.
García-Pozo, A., Sánchez-Ollero, J. L. and Marchante-Lara, M., 2015. Eco-innovation and
management: An empirical analysis of environmental good practices and labour productivity in
the Spanish hotel industry. Innovation. 17(1). pp.58-68.
Grant, R. M., 2016. Contemporary strategy analysis: Text and cases edition. John Wiley & Sons.
Li, S. and et.al., 2016. Proactive environmental strategies and performance: role of green supply
chain processes and green product design in the Chinese high-tech industry. International Journal
of Production Research. 54(7). pp.2136-2151.
Sarooghi, H., Libaers, D. and Burkemper, A., 2015. Examining the relationship between
creativity and innovation: A meta-analysis of organizational, cultural, and environmental factors.
Journal of business venturing. 30(5). pp.714-731.
Victor, P. A., 2017. Pollution: economy and environment. Routledge.
Xin-gang, Z. ans et.al., 2016. Technology, cost, a performance of waste-to-energy incineration
industry in China. Renewable and Sustainable Energy Reviews. 55. pp.115-130.
Xuan, Y. and Yue, Q., 2017. Scenario analysis on resource and environmental benefits of
imported steel scrap for China’s steel industry. Resources, Conservation and Recycling. 120.
pp.186-198.
Online
Electric vehicle in Europe. 2016. [online]. Available through <
https://smartnet.niua.org/sites/default/files/resources/Electric%20vehicles%20in
%20Europe.pdf >
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