Classical Conditioning on Consumer Behaviour

The Effect of Classical Conditioning on Consumer Behaviour

Classical conditioning is a source of learning that influences an individual’s behaviour psychologically, habitually and perceptually. The concept of classical conditioning is discovered by Ivan Pavlon and is defined as a learning process that is created by crafting a connection between a neutral stimulus and an environmental or physical stimulus. However, it emphasises on placing neutral stimuli before the naturally occurring reflex.

The very well-known example of classical conditioning is of a dog, where the dog was exposed to a sound as neutral stimuli which triggered salivation as the reflex in anticipation of food (Cherry, 2017). Nevertheless, a study by Pornpitakpan (2012) states that there is no significant evidence that classical conditioning have any effect on consumer behaviour and its use in the advertisement is a waste. Therefore, this report will analyse the impact of Classical Conditioning on Consumer behaviour through Coca Cola’s advertisement in United Kingdom.

Classical Conditioning at Coca Cola

Coca Cola is among the top selling and manufacturing soft drink Companies in the world, it was established by John Pemberton in the 19th century. Perhaps it is run by Asa Griggs Candler, an extraordinary marketer who has got Coca Cola to this dominating position. Coca Cola is a Global brand but this report talks about its Coca-Cola Great Britain (CCGB) division, which manages 20 different brands and 80 or so drinks. Its brands in the United Kingdom include a variety of still and sparkling drinks, four colas, herbal teas, sports drinks, waters, juices and also no calories, caffeine and sugar drinks in the range of flavours (Coca-cola, 2017). Nonetheless, the advertisement of Coca Cola is a great choice to demonstrate the impact classical conditioning on consumer buying behaviour.

Coca Cola’s Advertisement History

Coca Cola has a unique way of marketing its drinks ever since it’s first on-screen advertisement in 1950, where it associated its brand to festive occasions from red trucks in Christmas holidays to hilltop singers by creating an association. Similarly, in another advertisement in the 1950s featuring Julie Reaby and Alf Davies (the winners of British Ballroom Dancing Open Championship of 1956) with the slogan “Coca‑Cola puts you at your sparkling best!”. Coca Cola has been seen to create its brand image as the source of happiness.

Like most of the well-known brands in the 1960s, Coca Cola featured celebrities in its advertisement to air in the UK because it tends to influence consumer’s buying behaviour. Then there were also some ads where it introduced cartoons to show how characters call truce using a bottle of Coca Cola. Furthermore, it uses appealing jingles like “Only Coke will do when you’re thirstiest”, “Coca‑Cola refreshes you best!”. Likewise, Coca Cola has evolved tremendously by associating coke with appealing notions and trends like it introduced can opener named Churchkey in the mid-1970s with the demonstration of how to open cans. The Coca Cola ads at times introduce its campaigns, to help a cause or demonstrate a new idea but with the aim to attract more and more consumers (Coca Cola, 2017).

Use of Classical Conditioning in Coca Cola’s Advertisement

Understanding the consumer behaviour is a crucial aspect of today’s market, especially for effective marketing and branding of the products. In fact, when a new product is launched the consumer behaviour changes and its psychological understanding becomes important because it requires new association. Under classical conditioning, many brand use liked or disliked music in their advertisement to affect consumer’s product preference (Gorn, 1982). However, Coca Cola uses classical conditioning in its advertisements very effectively for creating an association of its products with a likeable factor.

As thirst is an unconditioned response of the consumers in a hot season and it is triggered by many physical and environmental factors like sports, heat, dehydration, workout etc. which are used by Coca Cola as unconditioned stimuli in its marketing and branding functions very strategically. Moreover, the keywords of these unconditioned stimuli are used in slogans to appeal consumers and influence their purchase decision such as “Thirst Knows No Season”, The Pause That Refreshes”, Open Happiness etc. (Ryan, 2017).

Nonetheless, Coca Cola products are used as conditioned stimulus by placing along with the unconditioned stimuli in every advertisement. As a result, Coca Cola drinks become a signal of unconditioned stimulus like heat and dehydration for the consumers and they feel thirsty by seeing the ad without actually experiencing the environmental factors. This impact of classical conditioning compels consumers to buy Coca Cola by making them feel thirsty when they actually may or may not be thirsty. In addition to that, Coca Cola also uses festivals to create its pairing with the festive period and influence people to buy coke (Oakley, 2013).

Impact of Advertisement Characteristics on Consumer Behaviour and Pepsi (Rival Brand)

There are numerous characteristics of Advertisement including the use of media, tools, communications means etc. which basically make the brand image. As the brand image is the core driver of the brand equity and it influences consumer perception and choice regarding a product by driving the consumer behaviour. Regardless of the marketing strategies of the companies, the main objective of every organisation is to effect consumer’s perception and buying behaviour towards the brand. Coca Cola establishes its brand image of happiness and refresher in consumer’s mind and stimulates their purchasing decision of the brand (Zhang, 2015).

The first ever print advertisement published by Coca Cola in 1886 had slogan “Delicious and Refreshing” and was marketed on every merchandise including trays, clocks etc. until 1920 to create its brand image as a very refreshing beverage. Which positively influenced consumer behaviour and increased its market share, as a result many similar slogans were used in ads like “Coca Cola is a Delicious Beverage, Delightfully in Harmony with the Spirit of All Outings”, “Coca Cola Revives and Sustains” and “The Great National Temperance Drink” using classical conditioning to create a distinct brand image in consumer mind (Ryan, 2017).

For example, a very well-known and highly anticipated Christmas ad by Coca cola that was aired in 2013 used the traditional factors or view of advertisement to compel consumers to buy that product. In the human mind, events like Christmas are the unconditioned stimulus that tends to bring a positive vibe or sense of happiness, excitement and togetherness as an unconditioned response.

Before the implementation of the classical conditioning, the neutral stimulus or Coca Cola drinks do not trigger any emotion in consumers because of no brand association. Nevertheless, when the same neutral stimulus (Coca cola) is advertised with the unconditioned stimulus (Christmas) in an advertisement, it generates positive feelings among consumers, the emotions of excitement and family re-emergence when they see Coca Cola. These emotions then become the conditioned response of consumers due to the association of Coca Cola with Christmas. Perhaps, the effectiveness of the advertisement cannot be directly measured but the recorded sales of Coca Cola during the Christmas season exceeded to £185m, which shows its very positive impact on consumer buying behaviour (Oakley, 2013).

Furthermore, Oakley (2013) shows the impact of Coca Cola’s same advertisement on Pepsi by highlighting the AIDA (Awareness, Interest, Desire, Action) tool used by Coca Cola in the ad. The tool is discovered by Elmo Lewis and proposes a view of effective advertisement which affects Pepsi’s sales. The tool first grasps consumer attention by awareness, then interests or appeals them to learn about it and consequently convinces them to desire the product. Eventually, it influences their purchasing decision making or consumer buying behaviour and they take action to buy Coca cola. Which perhaps decrease Pepsi’s sales than Coca Cola.

The rivalry between Coca Cola and Pepsi is quite interesting as both have somewhat similar in chemical composition but their advertisement creates preference among their consumers. However, Coca Cola is known as the most popular beverage with 18.6% global market share, whereas Pepsi has 11.9%.

The advertisements of Coca Cola like its 2013 Halloween ad maybe a cheap advertisement tactic (shown in the figure below) as a competition but it is an example of classical conditioning that created the brand association. The advertisement may have worked in favour of Coca Cola but badly affected Pepsi (Oakley, 2013). Not just that the other advertisement characteristics of Coca Cola like media and communication tools also badly affect Pepsi as they both have the same target audience.

Classical Conditioning Consumer Behaviour Dissertation
Classical Conditioning Consumer Behaviour Dissertation

Conclusion

After the above thorough analysis of Classical Conditioning and its effect on consumer behaviour in advertisement using Coca Cola’s Great Britain advertisement, it is proved to be quite evident. There are many brands like Coca Cola who use the unconditioned stimulus along with neutral stimulus to create conditioned response by associating the brand or product with an emotion. 

The effect is proven significant using various Coca Cola’s advertisement examples, from its first ever print ad to on-screen advertisements that create its association with freshness, happiness, togetherness etc. and Influence its consumer’s buying behaviour and increases its sales. The example of its Christmas ad is used to show the effect of classical conditioning on Coke’s consumers and their purchase decision which show an immense increase in sales during Christmas period.

Furthermore, the effect of advertisement characteristics on its rival brands is also significant. Which is proved using its 2013 Halloween advertisement that created the brand association (using classical conditioning) and through AIDA communication tool, which anticipates and influenced most of the cola consumer market at the time.

The effect of classical conditioning on consumer behaviour is noticed because of the association that this theory help creates, condition human brain to respond similarly to the unconditioned response (heat, dehydration or thirst) at the sight of a neutral stimulus (Coca Cola). A study by Till, Stanley and Priluck (2008) states that the celebrity enforcement used to condition consumer behaviour is very effective. For example, when a celebrity endorses a brand, his followers are likely to buy that brand to create a sense of belongingness.

Classical Conditioning Recommendations

According to the above analysis Coca Cola uses Classical Conditioning to influence its consumer behaviour, perhaps there are numerous other ways of influencing consumer behaviour. Few of them are as follows:

As nowadays consumers are flooded with the information than the last decade which gave them the power to switch brand due to excessive sugar or any other property of the product. Moreover, there are the variety of substitute brands using same classical conditioning factors.

In fact, Conlon (2021) states that four out of five customers don’t come back if they do not like a single thing about the product. Therefore, it is recommended to onboard technologies and personally engage with the consumers to influence their buying behaviour and offering the personalised experience. There are latest technologies like social intelligence and customer analytics that would assist in delivering the premium experience.

As technology has empowered the brands, it has also empowered consumers to disengage and unsubscribe, which means that Coca Cola cannot merely rely on its festive and refreshing drinks advertisement. Some consumers demand ‘boosting drinks’ or the healthy drinks that do not increase their sugar intake and obesity level. Thus, it is recommended to create smaller consumer segments to cater all consumer preferences and influence them by targeting their insecurities like weight, health consciousness, energy etc.

Furthermore, Redsicker (2014) say that today’s consumers are super connected, thus understanding individual groups that tend to influence each other’s buying behaviour must be studied to anticipate their purchasing decision. By learning about their cultural aspects or latest trends or celebrity hype, is likely to alter consumer behaviour.

Another recommendation is to use the ‘on rader’ issues or social causes instead of festivals because these factors resonate more than anything. The issues like recycling, animal welfare, personal energy source etc. tend to attract young people to use those brands that support human welfare. It is also likely to create loyal customers by accessing more and more consumer insight to influence them and anticipate their demand or decision making (Lee, 2011).

References

Cherry, K. (2017). How Classical Conditioning Works: An Overview With Examples. [online] Verywell.

Coca Cola. (2021). Coca‑Cola adverts from our archives.

Coca Cola. (2021). Coca-Cola GB.

Conlon, G. (2021). What Change in Customer Behavior Will Impact Marketing Most in 2020?

Gorn, G.J., 1982. The effects of music in advertising on choice behavior: A classical conditioning approach. The Journal of Marketing, pp.94-101.

Lee, S. (2011). Influencing Consumer Behaviour Sustainability.

Oakley, T. (2013). Why do Coca-Cola advertise?

Pornpitakpan, C., 2012. A critical review of classical conditioning effects on consumer behaviour. Australasian Marketing Journal (AMJ), 20(4), pp.282-296.

Redsicker, P. (2014). 5 Ways You Can Influence Consumer Purchasing Decisions: New Research : Social Media Examiner.

Ryan, T. (2017). Coca-Cola Slogans History.

Till, B.D., Stanley, S.M. and Priluck, R., 2008. Classical conditioning and celebrity endorsers: An examination of belongingness and resistance to extinction. Psychology & Marketing, 25(2), pp.179-196.

Zhang, Y., 2015. The Impact of Brand Image on Consumer Behaviour: A Literature Review. Open journal of business and management, 3(01), p.58.

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Purchasing Power Parity Dissertation

This dissertation examines long-run purchasing power parity (PPP) between the United States and other competing countries and regions using monthly data from 1960 to 2019. Mainstream methods of PPP test and most influential researches are reviewed.

Three methods of PPP testing – Unit Root Test, Cointegration Test, Panel Unit Root Test have been applied in this paper. We identify that PPP holds between the US and a certain number of countries by analysing the test results. Also, the results of PPP test between the US and its top 10 trading partners have been specifically investigated and elaborated.

This dissertation highlights that both the Multivariable co-integration tests and the bivariable Cointegration tests are applied in order to find out the effect of prior restrictions on the results. Then, this chapter examines whether the PPP holds between the US and its top 10 trading partners countries minus China with the panel unit root test. Finally, in the sixth chapter, this paper concludes that PPP holds in 41 countries out of 176 countries, and among the US top 10 trading partners, only China, Canada and India do not have solid evidence supporting PPP.

The purchasing power parity (PPP) theory, as one of the most influential economic theories, has been widely used in macroeconomic analysis. It states that the price of the same commodity or a basket of products in two countries should be proportional to the exchange rate between the two countries. The exchange rate is crucial to the economic development of a country, not only because it affects the volume of imports and exports between countries, but also because it is highly correlated with other economic indicators, such as GDP and interest rate. Therefore, it is necessary to study the PPP theory to determine the equilibrium exchange rate as well as assist governments in adjusting exchange rates based on empirical evidence.

This dissertation will be structured in the following way. In chapter 1, this paper introduces the definition of purchasing power parity and then explains the significance of PPP studying. A brief history of the stages of the PPP study is also covered in this chapter. The second chapter is the literature review. It reviews the origin and evolution of PPP theory and common test methods. Sample testing results using different methods are also discussed in this dissertation and they also give us a broad view of PPP tests conducted for various countries using data from different time spans.

Purchasing Power Parity Dissertation
Purchasing Power Parity Dissertation

In the meantime, critiques and strengths of each test method are covered to provide a comprehensive view of each PPP test method. Besides, previous studies on the US are reviewed as well. In the third chapter, this paper presents a series of econometric methods and models to be used in this thesis, including unit root test, cointegration test and panel unit root test. In the fourth chapter, it explains the data source in detail. For EU countries that miss data due to the adoption of EUR, this paper also describes how the equivalent data is generated to fill the holes. The fifth chapter is the empirical analysis. This chapter first plots the real exchange rate for the US and its top 10 trading partners, and by presenting the graphs, the trend will be analysed.

In general, the purchasing power parity (PPP) theory works miserably when applied to real-world data. In other words, it is rare for the PPP relationship to hold true between any two countries at any particular point in time. In most scientific disciplines, the failure of a theory to be supported by the data means the theory is refuted and should be thrown out or tossed away.

However, economists have been reluctant to do that with the PPP theory. In part this is because the logic of the theory seems particularly sound. In part it’s because there are so many “frictions” in the real world, such as tariffs, nontariff barriers, transportation costs, measurement problems, and so on that it would actually be surprising for the theory to work when applied directly to the data.

Purchasing Power Parity Dissertation Contents

Chapter 1 – Introduction

Chapter 2 – Literature Review
Two Versions of the PPP Theory
Evolution of PPP Test
Simple Static PPP Test
Unit Root Test
Cointegration Test
Panel Unit Root Test
Non-linear Test
US & Related Tests

Chapter 3 – Empirical Framework
Tests for a Unit Root in the Real Exchange Rate
Cointegration Test
Panel Unit Root Test

Chapter 4 – Data Description

Chapter 5 – Empirical Analysis
Real Exchange Rate Observation
Unit Root Test
Cointegration Test
Multivariate Cointegration Test
Bivariate Cointegration Test
Panel Unit Root Test
Analysis of the US Top 10 trading countries’ Test Result

Chapter 6 – Conclusion

References

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Contactless Payments Economics Dissertation

Contactless Payments Economics Dissertation – Has the Uptake of Innovative Payment Methods affected UK Student Spending Habits? Emphasis on Contactless Payments

This dissertation analyses the current payment landscape in the UK in a period of increased digitisation and use of contactless payment. The aim of this dissertation is to understand how innovative payment instruments like contactless cards and mobile payments, have affected the spending behaviour of students age 18 – 24.

It investigates the rationale for such behaviour and explores the differences that arise when using traditional methods such as cash. Using qualitative semi-structured interviews and questionnaire responses, this study builds on existing research and applies thematic content analysis to identify trends in student spending patterns when exposed to innovative payment methods.

Further illustrated by quantitative regression analysis, the use of contactless payment methods, significantly influenced student spending habits. Common themes apparent from the analysis included a subconscious accumulation of small, impulsive purchases, as well as a reduced sense of guilt when using contactless payments. This was primarily attributed to the theory that in comparison to using cash for payments, contactless transactions are intangible and therefore do not feel like using real or tangible money.

Dissertation Contents

Chapter 1 – Introduction

Chapter 2 – Literature Review
History of contactless payment
Contactless Payment Technology
Mobile Proximity Payment
Adoption of Technology Model
Consumer Payment Choice
The Preference for Innovation
The Transition to a Cashless Society
Student Spending Habits
Psychological Aspects
The Pain of Paying

Chapter 3 – Methodology
Research Design
Research Style – Qualitative
Semi- Structured Interviews
Investigative Questionnaire
Data Analysis
Quantitative Analysis – Probit Regression
Bank Balance
Financial Fluency

Chapter 4 – Data Analysis and Discussion
Description of Sample
Qualitative results and Descriptive Statistics
Initial Observations
Payment Tangibility
The Effect of Contactless Adoption on Spending
Mobile Proximity Payment (MPP Adoption)
Inhibitors to Contactless Adoption
Student Debt Contributors
Implications of a Cashless Society
Quantitative Regressions
Awareness of Current Bank Balance
Financial Fluency
Limitations of the Dissertation

Chapter 5 – Evaluation and Conclusion

References

Appendix

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Globalisation Patterns of Consumption

According to UK Finance (2020). “We all tend to reach for the payment methods that we are accustomed to using, forming habits over time that can be quite strong. Once we have found a set of payment methods that we are comfortable using and that help us to manage our finances effectively, it can take a great deal for us to change to a different way of doing things. As a result, payment markets have historically tended to evolve slowly. Despite this natural inertia, technological change and significant innovation in payment methods have brought greater choice for people and businesses in how they pay for things.

Contactless Payments Economics Dissertation
Contactless Payments Economics Dissertation

This has been led by the popularity of the smartphone, which has revolutionised many aspects of modern life in just over a decade. Also, innovations such as contactless payments, mobile wallets, online banking and mobile banking have had a significant impact on the way that we now choose to pay for goods and services and manage our finances. As people have realised the value to them of doing things in a different way, so their payment habits have evolved, resulting in a gradual revolution in payments in the UK.

During 2019, card payments continued to grow as consumers and business increasingly used their cards to pay for things, whether online or in the ‘real world’. This growth saw card payments increase to the point of accounting for over half (51%) of all payments in the UK for the first time. Online and contactless payments continued to act as substantial drivers of this growth, with eight out of ten UK adults using contactless payments in 2019.

Strong growth was also seen in Faster Payments as both businesses and consumers increasingly used online and mobile banking to make payments and to transfer money. Mobile banking in particular continues to grow strongly, and users are continually widening the range of tasks that they perform using such services, exploring beyond checking their balances to also make one-off payments and manage other aspects of their finances” Source: UK Finance. UK PAYMENT MARKETS SUMMARY 2020.

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London Housing Market Collapse Dissertation

Predicting Economic Market Failure and Collapse in The London Housing Market and How It Compares to a Collapse in The Wider UK Housing Market – A VAR Approach

The general objective of this dissertation is to (i) test whether a collapse in the London Housing Market would affect the UK economy and (ii) see if its impact on the economy is more significant than the impact of a UK Housing Market shock. We use a Vector Auto-regressive model (VAR) to analyse how GDP, Inflation and Uncertainty might react to a shock in either the London or the UK Housing Market. To do that, we go through the Impulse Response Function (IRF) which helps us identify the sign, significance and duration of the responses of our variables to a simulated shock in one the Housing Market.

We then go through the Historical Decomposition which calculates the contribution of the housing markets to the different structural accumulated shocks of our variables; and, helps us estimate whether the results found through the IRFs make empirical sense. We expect GDP to fall, Inflation to slow down, and Uncertainty to be negatively affected. We also consider the possibility of a recession being created in the economy, if GDP growth is affected negatively for more than three quarters. Lastly, we suppose that the London Housing Market will have a more significant impact on the economy.

London Housing Market Economics Dissertation
London Housing Market Economics Dissertation

London Housing Market Dissertation Contents

Chapter 1 – Introduction

Chapter 2 – Literature Review

Chapter 3 – Analysis
Objectives
Methodology and Data
Empirical Model and the Data
Identification Strategy
Results
Impulse Response
The London Case
The UK Case
Historical Decomposition
Comparing the London case with the UK case
Sensitivity Analysis
Robustness Analysis
Changing the order
Replacing Uncertainty with other variables
Dividing the sample
Results prior to 1992
Results following 1992
Comparing our two sub-samples results
Critics and limitations of our model

Chapter 4 – Conclusion

Bibliography

Appendix

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It is the biggest plunge since the 7.0% annual drop recorded in August 2009, says ONS. “House prices in London have fallen at their fastest pace since the financial crash a decade ago as the capital bears the brunt of the nationwide torpor in the property market. Amid a dearth of potential buyers, the cost of a home in London was 4.4% lower in May than a year earlier, according to the latest official snapshot of the market from the Office for National Statistics.

The ONS said it was the biggest drop in London prices since the 7.0% annual fall recorded in August 2009 – a period that included the near-meltdown of the global banking system in the autumn of 2008” (The Guardian, 2019).

UK House Price Index Dissertation
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Five Forces Model Automobile Industry

Five Forces Model Automobile Industry Case Study Analysis

Title: Five Forces Model Automobile Industry Case Study Analysis. Michael Porter’s Five Forces Model is a simple yet effective business analysis tool that is used to determine whether a strategy has the potential to be profitable in a company’s competitive environment. When carried out in the right way, with the right tools, the Five Forces Analysis can provide invaluable insight into your business’s competition and how much power you hold in the market, so you can adjust your strategy for success. As its name suggests, there are five forces which include the intensity of rivalry, power of buyers, power of suppliers, threat of substitutes and threat of potential new entrants (Porter. 1981).

Intensity of Competitive Rivalry

The key factors that influence the intensity of rivalry in the automobile industry include the number of competitors, the brand recognition of the competitors and the frequency with which new automobile products are introduced by competitors. According to Potter’s case study the global automobile industry is highly concentrated.

However, none of the companies in the industry has achieved donation of the market. The case study indicates that about seven firms have around 10 to 15 percent of the market share. The reason for this is the high acquisition levels and collaboration activities in the global automobile industry, which minimizes competition regardless the frequency of purchase or recognition of the different brands in the industry.

As a result, the intensity of competitive rivalry in the industry is moderate. The implication of the moderate competitive intensity is that automobile firms still manage to make significant profits especially since the level of competition is suppressed by the joint ventures and alliances among automobile firms in the industry.

Five Forces Model Porter
Porter’s Five Forces Model

Power of Buyers

The factors that shape the power of customers in the automobile industry include the number of buyers in the industry, frequency of purchase, and the size of purchases. According to Potter, the global demand for cars is associated to a nation’s economic performance.

The data on Worldwide Car sales in 2016 indicate that China, which is among the top best performing economies in the world had the largest had a percentage increase of 10.7 in car sales in 2016. This demand can be viewed in the context of the wider process of a country’s economic development which leads to selective ownership that causes mass market volumes of short time cycles that reduce within mass volume causing delays in purchases or consumer changing segments.

This means that buyers demand for automobiles is determined by eternal elements that they cannot control. In this regards, the intensity of the power of buyers is moderately weak, which means, firms are still able to make reasonable profits.

Power of Suppliers

The power of suppliers is influenced by the following factors, the number of suppliers, replaceability of the supplies and the exclusivity of the supplies (Porter, 1980). Potter indicates that suppliers of the global automobile industry have become solution provider and knowledge partners with the automobile firms. Moreover, technology is increasingly becoming more intelligent enabling the suppliers to gain larger economies of scale giving them the power to bargain.

However, in the global automobile industry 33% and 17% of all suppliers have their manufacturing facilities in Eastern Europe and China respectively which raises the issue of Intellectual property rights and theft of technology. These has caused a decline in the power of mot suppliers as this trend is expanding to other parts of the world. For this reasons, the intensity of the power of suppliers is moderately strong, which means that the firms are forced to collaborate and partner with suppliers to minimize most of raw material to maximize profits.

Threat of Substitutes

Threat of substitutes in the automobile industry is determined by technology advancement, affordability and availability of potential substitutes and customer’s acceptance (Porter, 1980). According to the case study, the global automobile industry threat of substitution is mainly due to environment issues and economic consideration, where people see alternatives that are cheaper and greener.

The automobile industry contributes about 70% of the emission of CO2, and consumers are ready to take up alternatives that are more environmentally friendly. However, such substitutes are mostly provided by the same automobile firms. In this case, the intensity of threat of substitutes in the industry is weak making the industry attractive and profitable.

Threat of New Entrants

The threat of new entrants is influenced by the strength of brands of existing competitors, technology and financial requirements and entry barriers (Porter 1980). Potter indicates that there are issues related to the outward and inward direct investment that firms seek to use to expand or grow into new markets affect entry strategies adopted by these companies. However, on a positive note most governments around the world are attracting investors by providing a range of grant aid and subsidised domestic rates, but the capital and cost of production and manufacturing is quite high. For this reason the intensity of treat of new entrant is weak, which makes the industry competitive ad highly profitable.

Five Forces Model Conclusion

From the case study, it is evident that competitive rivalry in the automobile industry is moderately strong, while the buyers bargaining power is moderately weak. It is also evident that the suppliers bargaining power is moderately strong, while the threat of substitutes is weak. The threat of new entrant is weak considering that the firms in the industry have gained strong market positioning that are hard to compete with and the high investment capital needed. Based on this analysis, is evident that the automobile industry is a feasible market especially for the companies that are already operating in the market.

References

Porter, M. E. (1980) Competitive Strategy. New York: Free Press

Potter, N.S. The Global Automotive Industry: The Turbulence Increases

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