Ferrari Porter Five Forces Analysis
Five Forces analysis of Ferrari covering threat of new entrants & substitutes, bargaining power of buyers & suppliers and competitive rivalry.
Threat of New Entrants:
Ferrari's close association with Scuderia Ferrari, the most successful team in Formula 1 history, gives the company access to proprietary technology.
Brand name and reputation play an important role in consumer minds. The name and immediate recognition among customers are enviable.
Ferrari built brand loyalty through various initiatives throughout its value chain. It offers four levels of personalization tailor-made to meet customer requirements. This requires Ferrari to manufacture in low numbers with no significant economies of scale. Once bought, extensive warranty programs based on the age of the vehicle are offered. After 20 years, the car is given a "Ferrari Classiche" certification increasing its resale value.
Over the decades, it has nurtured a strong dealership network with strict performance evaluations. Building customer relationships worldwide would be difficult.
Vehicle safety and emission regulations, especially in the EU, are challenging. Stricter norms are being considered. Constant innovation with significant R&D expenditure is necessary.
All these reduce the threat of new entrants. However, with raising dispensable income, the luxury goods market is growing and attracting new luxury line launches from other established automotive companies.
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This concludes the threat of new entrants in the Ferrari Porter Five Forces Analysis.
Threat of Substitutes:
Below are the threats of substitute products of Porter’s Five Forces analysis of Ferrari:
Luxury cars are primarily emotional purchases, and consumer spending in this market is discretionary. The social acceptability of luxury goods affects sales.
With rising sentiments against wealth concentration, there might be a shift in demand for Ferrari's luxury cars.
With rising concerns about emissions and global warming, alternative modes of travel are being explored. The halt of road projects by the Austrian government, which said "more roads mean more cars, more traffic", is an example highlighting the changes in public sentiment.
The development of autonomous driving technology and the rising popularity of self-driving cars should also be monitored.
Consumers might be inclined to spend the extra money for convenience over the brand recognition of luxury cars.
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Bargaining Power of Customers:
In the Ferrari Porter Five Forces Analysis the bargaining power of the customers can be explained as:
Ferrari is sold in 60 markets worldwide through 168 authorized dealerships and 188 points of sale. Ferrari does not own any dealership but selects them based on reputation and track record. After sales support is crucial, especially as it is vital in increasing the car's resale value, an important metric for customers. To ensure consistent marketing standards, the dealers are trained through the Ferrari Academy on after-sales activities. The dealers are suggested a maximum retail price but can negotiate the final price and financing with the customer. The dealer turnover rate is low. Overall it seems to be a symbiotic relationship with dealers profiting off the Ferrari brand in exchange for maintaining the high standards required of a luxury car brand.
In 2020, 65% of Ferrari's sales were to repeat buyers. This is indicative of the high customer satisfaction but also the limited number of eligible customers. The period of economic expansion in Asian markets has increased demand in the area.
However customer power remains high.
Bargaining Power of Suppliers:
Following is the bargaining power of suppliers in the Porter’s Five Forces analysis of Ferrari:
Ferrari credits its suppliers for their continued excellence and acknowledges their contribution to their success. The manufacturing is done in its production facilities in Maranello and Modena in Italy. Despite low production volume, Ferrari sources over 40000 parts from 800 suppliers.
To meet these needs, Ferrari has adopted a "make or buy" strategy. Given the high specificity of parts it requires, Ferrari has moved the production of crucial parts in-house. This has helped maintain its flexibility and effectiveness.
Also, in cases where in house production from other sources is not economical, they developed strong synergic relationships with suppliers. The part, once manufactured, is not suitable for other manufacturers. With these measures, Ferrari has managed to reduce supplier power. In 2020, no one supplier accounted for more than 10% of procurement costs, and the top 10 largest suppliers accounted for 20% of total procurement expenses.
Competitive Rivalry:
The impact of key competitors in the Ferrari Porter Five Forces Analysis is as follows:
The luxury car market is fairly concentrated among a few players, including large automotive companies that own luxury bands or small producers of only luxury cars like Ferrari.
Ferrari has four ranges of cars, but most of its sales are from Sports and GT cars. Its main competitors in the sports category are Lambhorgini, Mc Laren, Ford, Mercedes and in GT category are Rolls-Royce, Bentley, Aston Martin and Mercedes.
The luxury car market is slated to grow at an 9.3% CAGR to $655 billion by 2027. This has intensified the competition between the players. However, the demand is highly susceptible to the economy and was affected by the COVID-19.
Ferrari has maintained a market share of 31% in the sports segment and 17% in the GT segment.
The presence of numerous similarly equipped companies increases rivalry while the industry growth gives opportunities for all.
To conclude, the above Ferrari Porter Five Forces Analysis highlights the various elements which impact its competitive environment. This understanding helps to evaluate the various external business factors for any company.
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