Five Force Analysis
1. Threat of New Entrants
Huge capital investments are required for establishing a production plant, purchasing production machinery, producing the products, establishing a distribution network, and building up a brand; hence this limits the entry of new companies and their ability to be competitive in this industry. Established Companies within this industry possess highly advanced technologies, developed through years of experience and operations. New entrants would face huge difficulties in initially developing these technologies before even being able to compete with the established producers. In addition, the established firms make highly use of economies of scale, which enable them to produce machinery at lower costs and remain competitive in the market, whereas, for a new entrant who has faced a huge capital investment and is also not able to make use of those economies at a scale comparable to the established companies it is practically impossible to compete with them. Additionally, the distribution process is a key factor in this industry as it directly correlates to the costs of the products and thus its ability to perform in the market; new entrants need a huge amount of time to establish such a network, which basically creates additional costs for them and further limits their ability to be competitive. Besides that, factors such as brand recognition, customer loyalty, geographical locations, and high customer switching costs are also critical for new entrants. Moreover, considering the above-mentioned facts, for a new entrant being able to compete with a company at the level of Machine Group AG is highly unlikely and therefore it can be concluded that there is a very low threat from new entrants for the operations of Machine Group AG.
2. Threat of substitutes
In the machine tool industry brand recognition and customer loyalty are key factors influencing the possible risk from competitor’s products. Moreover, it is very difficult for a customer to change to a competitor’s product in this industry as in most cases the products coming from the manufactures are well integrated in the customers working environments. Therefore, a substitution of products in this industry would imply huge switching costs for the customer both immediate and long-term, as it would require initial capital investment for purchasing the new products as well as related cost such as service costs and perhaps employee training costs in the long-run. Moreover, at the level of Machine Group AG the companies in this industry have a similar profit margin relative to their levels of revenues, and even in case when a competitor is able to offer a product at slightly lower cost or slightly better quality the risk of substitution remains still low due to the factors mentioned previously.
3. Bargaining Power of Suppliers
Over the years, Machine Group AG was able establish manufacturing plants around different countries worldwide. Covering all these plants required a considerable number of different suppliers in the respective locations worldwide. Nevertheless, Machine Group AG, as one of the biggest companies in the industry based on revenue (Statista, 2014), finds itself in a position in which it accounts for a major part of the supplier’s revenue and thus usually faces low bargaining power from its suppliers. Despite that, there is a large number of substitute inputs and critical production inputs that are similar allowing the manufactures to be able to easily adjust for any changes in supply. Moreover, through well established and diverse distribution networks it is possible to easily avoid any supply issue for companies such as Machine Group AG.
4. Bargaining Power of Customers
Due to the kind of products and services that Machine Group AG offers worldwide, their customers are usually huge companies, organizations or even governments agencies. It is common in this industry for companies such as Machine Group AG to develop large field of customers to avoid risk of substitution, risk from new entrants, but also decreases in demand. Moreover, considering that Machine Group AG has established itself as one of the major manufactures of machine tools worldwide and has those access to a large number of customers making it almost impossible for single customers to have greater bargaining power.
5. Rivalry Among Companies
Machine Group AG faces intense competition from larger companies such as Trumpf and Shenyang Group, but also from smaller companies such as DMG Mori Seiki AG or Schuler measured in terms of revenue generation (Statista, 2014). Companies such as Trumpf or Shenyang Group, possess larger resources at their disposal and use those resource to further increase their market share, thus directly threatening Machine Group AG. Nevertheless, even companies of smaller size then Machine Group AG, such as DMG Mori Seiki AG are to be seen as a threat as they slowly expand their operations in various markets worldwide gaining slowly but considerable in market share. Moreover, considering the size of the machine tool industry and the number of companies operating in it we can conclude the Machine Group AG faces huge competition in both their manufacturing as well as service operations.