Managerial Economics

The threats described in the Five Forces model (see Besanko’s Chapter 8 and Porter) that the company faces from: 1. Industry competitors 2. Potential entrants into the industry 3. Substitute and complement goods or services 4. Bargaining power of suppliers 5. Bargaining power of buyers D:FIVE FORCES ANALYSIS Internal Rivalry There are more than 10 ATV firms in the US market. Yamaha’s major competitors are Arctic Cat, Can-Am, Honda, Polaris and Suzuki (“All-terrain vehicle,” 2013). The internal rivalry among the ATV industry is intense as firms compete to gain and maintain their market position. In the ATV industry, fixed costs seem to be high because engineering performance and technology are involved as the main factors in production (Yamaha Motor Co., Ltd., 2012). Therefore, there are strong exit barriers for the all-terrain vehicles industry. Moreover, vehicles in this industry are indifferent when comparing utilizations, features and characteristics. The customer switching cost is low since ATVs’ price of each firm is not too different. Manufacturers attempt to maintain and attract their customers to increase market share. Instead of price competition, firms emphasize technology and quality development in order to improve their product’s utilization. They attempt to increase market share by engaging in non-price competition. System development is a significant strategy used to compete in this industry. Polaris and Can-am developed the full-time 4x4 system that allows drivers to use the vehicle in 4x4 at all times while rival’s vehicles have part time 4WD system. (“Who has the best 4-wheel drive system?,” 2012) Yamaha has launched a strategy for engine procurement and has improved its body production in order to gain advantages in competition. The firm also worked to enhance customer service and public relations in order to gain competitive advantage. They focus on creating relationships with customers and building brand loyalty. (Yamaha Motor Co., Ltd., 20132) Entry The ATV industry is not attractive to potential entrants because the hybrid vehicle market requires significant costs to get into. A large number of manufacturers in the ATV industry discourage new entrants to enter this intense competitive market. Existing firms have cost advantages and more efficient marketing that would be structural barriers to deter entry. Processes used to produce the vehicles require special knowledge and expertise including engineering and technological procedure. (Yamaha Motor Co., Ltd., 2013) The special know- how of incumbent firms in ATV production could be one significant factor helping to deter entry. Another efficient efficiency barrier is advantages associated with economies of scale that incumbent firms could adopt in order to produce ATVs at a lower cost. Incumbents would learn the economies curve and discover the most efficient quantity of output and price. Existing firms could also utilize umbrella marketing to create brand awareness for their products. Umbrella branding also allows for lower marketing costs. (Besanko, at el.,et al.2013, pp. 202-205) For instance, a marketing plan for a Yamaha motorcycle would be more efficient as customers associate the firm as producing high quality ATVs. In contrast, new firms would experience great costs in creating brand recognition for their products and this would erode profits. If structural barriers were insufficient in deterring new entrances, incumbent firms would create strategic barriers to prevent it. Incumbent manufactures are able to apply limit pricing by reducing prices in order to discourage entry. They also have sufficient excess capacity to satisfy demand of the market. Incumbent firms have worked hard to create brand loyalty and maintain a good relationship with their customers. Sporting activities and dealer meetings are created continuously. (Yamaha Motor Co., Ltd., 2012) Brand loyalty could be adopted by existing firms as a significant strategy to deter entry because it helps to reduce the chance for new sellers to steal customers. Therefore, entry seems to be risky and unsuccessful in this market. Substitutes and Complements ATVs are four-wheeled vehicles used to travel on unpaved routes including sand, snow and rough ground. They are also used as off-road vehicles in sport activities. When focusing on the characteristics and utilization, the main substitutes in ATV industry are side-by-side vehicles (SSVs), snowmobiles, golf carts and off-road motorcycles. These vehicles are defined as substitutes because they have same performance and uses as ATVs, and they can satisfy similar needs. (Yamaha Motor Corporation, 2013) Side-by-Side vehicles or SSVs are close substitutes that have similar performance characteristics as they work on unpaved roads and can be used as sport vehicles. One difference is that they include a side seat. In addition, the prices of these two vehicles are little different. Therefore, a change in SSVs’ price will affect the quantity sale of ATVs. Snowmobiles are also substitutes based on their uses on snowy ground. ATVs and snowmobiles have similar functions and both satisfy a customer’s need of transportation on this particular terrain. Another substitute offered to customers are is the golf carts, which tends to be a selection for customers needing to drive on their own properties. One weakness of golf carts is that they cannot perform well on challenging terrain as well as ATVs can. In addition, golf carts have a lower speed capacity than ATVs. (Yamaha Motor Corporation, 2013) Ultimately, the decision of customers depends on the requirements of the terrain. If the terrain is not a challenge, customers might choose a golf carts, as they tend to be viewed as being more comfortable due to increased seat space and a roof. On the other handHowever, a customer might choose an ATV if their herproperties have a rough landscape. The last major alternative for customers is off-road motorcycles. Off-road motorcycles satisfy a customer’s need in recreation, especially related to sport activities. ATVs and off-road motorcycles are in the same product line of sport vehicles. Off-road two wheel vehicles fulfill a customer’s need of a sport activity vehicle similar to the way ATVs do. The customer switching cost is low as motorcycles have a lower price. (Yamaha Motor Corporation, 2013) Off-road motorcycles tend to be more popular with customers looking for the lowest price. There are also complements to ATVs in the industry. Helmets, gloves, jackets and sport shoes are main complements (Yamaha Motor Corporation, 2013). Drivers use this apparel for safety when driving ATVs. They are sold either together with vehicles or offered for purchase with the vehicles. Therefore, their price and demand are relative. Supplier Power. There is a great deal ofManyinputs and raw materials are used to produce ATVs, such as motors, break systems, engines, tires and aluminums. Yamaha produces some materials parts themselves itself, in order to achieve a more efficientlowercost. However, they it also obtains some raw materials and parts from outside suppliers. Suppliers have a medium amount of power over Yamaha because the cost is determined by suppliers. If suppliers increase their prices, it would erode the firm’s profit. Substitute inputs are not available because the production of ATVs requires specific materials. Furthermore, because Yamaha focuses on high quality products, substitute materials might not be sufficient due to the fact that they might alter quality. (Yamaha Motor Co., Ltd., 2013) Another significant supplier of ATV firms is employees. Yamaha Motor Co. Ltd. hires approximately 3,700 employees that are both foreign and American (“Yamaha Motor Corporation Usa USA in Cypress, California,” 2013). Employees in this industry are unionized and therefore have power over the firm (“Yamaha Corporation History, ”n.d.). It is unclear how many employees are unionized. The union provides a bargaining power to employees to negotiate with the firm about their wage and welfare. An unsatisfactory offering or policy could lead them to strike and this would affect the profit of a firm. (Besanko, at el., 2013, pp. 273-274) Buyer Power There are two groups of ATV buyers. The first is individual customers that buy ATVs to satisfy their personal needs. The dealerships that retail and sell the product to individual customers are the second major category of buyers. The ATV industry focuses on dealerships as main customers, specifically sport vehicle dealerships. The demand for ATVs in the United States makes up 43.6% of the demand worldwide. Because of this high demand, there are many ATV dealerships in the United States responding to the needs of customers. (Yamaha Motor Corporation, 2013) They obtain the vehicles from manufacturers and sell them to individual customers. The large amount of vehicles ordered by dealerships allows them to have a fair amount of bargaining power over the ATV manufacturers. They could request the promotion or price reduction, but it would depend on their quantity of order. Moreover, ATVs are an experience good that some customers prefer to try before purchasing. Therefore, sensitivity to price seems to be low as ATVs are focused on quality and system rather than price. (Who has the best 4-wheel drive system? 2012) Another factor that supports the bargaining power of buyers is that the customer switching cost is low. However, this is not a powerful threat because customers will compare systems and performance functions of alternative ATVs and choose the best one that offers the best function and quality to meet their own requirements. In this industry, customers are willing to pay more for higher quality. Brand image is likely to be a powerful factor that attracts buyers as well. (“Who has the best 4-wheel drive system?” 2012) Table 2 shows all levels of five forces. (See Appendix.)