Michelin Tire

Commercial versus Passenger Vehicles: Compared to passenger car tire, differences in tire performance, such as durability and retreadability can give a manufacturer a considerable competitive advantage. Truck tires are five or seven times the price of passenger car tire. Though demand for passenger and commercial tires is driven by different factors, there are important synergies between the segments. For example, advances made in large tire design were often transferred to smaller tires. In addition, many larger retailers would only buy from manufacturers which provided a full range of tires. Michelin Had a product range over 3300 tires covering tire of all categories.

Original equipment versus replacement: The Original equipment market typically carried low margins due to gain the larger volume orders. There are substantial geographical differences among original and replacement tire market. Replacement tires are generally sold through wholesales and related distribution channels can be competitive advantage. As in the OE market the purchase of truck tires in the RE market is made on technical criteria rather than on brand image.

PORTER ANALYSIS of TIRE INDUSTRY (Michelin)

Entry Barriers

Entry barriers are economic and technological forces that prevent outside firms from competing in an industry. Entry barriers depend on technological and commercial relationships within the industry. The most important barriers to entry are cost advantages, product differentiation, access to distribution channels, and miscellaneous barriers such as patents and monopolistic control over raw materials.

Cost Advantages

Even though Michelin’s production costs were always higher then the competitors, which was partly due to vertical integration, Michelin still had a unique position as a price leader, which gave the company a clear advantage and allowed them to increase the prices, while the competition had to follow.

Also Michelin’s strategy is to avoid customers that deliver volume but little profit and to concentrate on premium end of the business.

Product differentiation

Even though within the segment it is rather hard for an average consumer to differentiate between different tires, Michelin had over 3,300 tires in its product range. Many of these models were developed for specific model of car, truck or other vehicle.

The main differentiation that played to Michelin’s advantage is the technological difference, the quality of their radial tires. Their products were always viewed as of higher performance.

Michelin also geared its product development toward specific regional demand.

Access to Distribution Channels

Distribution channels in tire industry include car manufactures for the original equipment market and independent retailers for the replacement segment.

Starting in 1980s Michelin began to extend their level of ownership in retailing. 25% of European sales occur through company’s own stores. Their branch network is the largest in Europe. They also received exclusive agreements with some car makers. Their strategy was to be everywhere a big car manufacture was present.

In tire industry the entry barriers are high and outsiders cannot easily join in. Michelin has quite an advantage being on the tire market for more then a century and being at the roots of the modern tire industry. Being a price leader and having vertically integrated their distribution channels helps Michelin to raise the barriers even higher, also their dedication to quality and safety as well as high level of investment into R&D allows them to prevent new players to appear in the industry.

Competition

An important determinant of profitability is the number of competitors within an industry who compete for a share of industry profits. This number of competitors depends on who can enter the industry and effectively compete in it. In Michelin’s case there is a limited number of competitors today, three giants–Michelin, Bridgestone, and Goodyear–have nearly 60% of the global tire market, followed by Germany’s Continental and Italy’s Pirelli.

Bridgestone preferred to compete on price and production rather than marketing. Continental focused on standard tires rather then high performance. Pirelli historically had been concentrating on high performance replacement segment. Goodyear focused on profitability and customer satisfaction in all the segments.

Compared to the competition Michelin didn’t invest into diversification and concentrated on making tires. They put their attention to quality and customer satisfaction emphasizing safety, because “because so much is riding on your tires”. Among the competition they invest the most into R&D.

Suppliers

Suppliers of raw materials influence industry profitability and competition by affecting the cost of production. If suppliers are powerful, they can obtain high prices for the raw materials they provide.

In tire industry about 40% of production cost is accounted by the raw materials. Many had interests in rubber production, both owning plantations and in synthetic rubber, however none were actually self-sufficient. But as other competitors in the industry Michelin’s policy is to maintain its independence in the technological and procurement aspects. They pursued the vertical integration on the grounds of assuring quality.

Customers

Customers in tire industry differ significantly between original and replacement equipment segment. In 1980s the replacement car tires were sold at 35% above the price of the same tire sold to the car manufacturer. Firms found it to be worthwhile to obtain a large share of OE sales because it was believed that sales of OE tires fed through to demand in the replacement market.

The battle for the customers was not restricted to OE market. The manufactures had tried to develop high profitability performance replacement tires to gain the larger market share. Michelin, who invested a lot into R&D was able to present to the customers tires with longer life and higher performance.

STRATEGIC GROUPS

Goodyear Tire and Rubber: The strategic focus was on being “the best tire and rubber company in the world -best in quality, cost, profitability and customer satisfaction”. Goodyear was the world’s number one during a long period, it was mostly concentrated on profitability.

Goodyear has a waste product range, but it doesn’t let them to penetrate into the global market because Goodyear’s tires don’t fit European market standards.

Bridgestone-Firestone: Company was focusing on cost reductions in its worldwide operations. Bridgestone’s business was mostly centered on Asia (73% in Japan). The company’s strategy was to compete on price and production rather than marketing.

Continental Gummi: Company had a policy of growth through acquisition, for example, European operations of Uniroyal, Semperit (Austria), General Tire (USA). There were over 80 companies in the group, located in North America and Europe. So, Continental Gummi seems to be a global company. Company focused on standard tires.

Pirelli: Company had no presence in the OE market in the US, was not global. Its tires had a good reputation in the high performance replacement segment. The company focused on cost reduction.

MICHELIN INTERNATIONALIZATION

By 1993, Michelin consisted of 66 factories in 15 countries. Michelin is unique in the tire industry realizing the majority of its sales (about 82%) outside its home market.

Michelin internationalized mostly through building plants in the country where they wanted to be present, which reduced their transportation costs and increased the price margin. On a few occasions they entered into marketing agreements with mass-retailers or participated in joined ventures or acquisitions. They have a strong presence in North America and Europe but had little done towards a strategy for the Far-East.

In our opinion Michelin has a very strong positioning and were able to enter into US market even though the entry barriers were very high, but they should have paid more attention to a developing market in Asia, specifically China. There was very little local competition comparing to US and the car industry have been developing very rapidly, while local labor costs were miniscule. At this stage we would strongly recommend for Michelin to pay more attention to Asian market and to develop a strategy to enter it as soon as possible.

MICHELIN COMPARATIVE PERFORMANCE

profit margin return on assets return on equity

1991 1992 1991 1992 1991 1992

Micheline -0,99 1 Micheline -0,9 0,85 Micheline -6,01 6,09

Bridgestone 0,42 1,63 Bridgestone 0,41 1,54 Bridgestone 1,69 6,33

Goodyear 0,68 3,12 Goodyear 0,88 4,29 Goodyear 2,73 19,03

Looking at the profit ratios in 1991 and 1992 it is clear that Goodyear is the leader in the industry. But we can see that Michelin’s acquisition of Uniroyal-Goodrich resulted in negative profit margin in 1991 but they dynamic was positive and they improved significantly during the next year.

Even though the Goodyear had a higher profit ratios Michelin still occupied a larger market share especially after 1990 and showed a steady progress.