BMW Business strategy Essay

Introduction.

Having a powerful brand image forms the foundation of the success of the BMW Company, being one of the few multi model carmakers in the world to concentrate exclusively on the premium segments of the automobile market. The authentic BMW and Mini brands with their clear profile, distinctive quality, superior Technology, high reliability and commitment to the products fully deserve their market positioning as “The ultimate driving machine.”

The company was started in Germany in 1916 building aero engines and currently has a 97,275 strong work force operating in America, Europe and Africa.

1. Business environment in the car industry

Consolidation in the global automobile industry moved forward at a breath-taking place in 2001.The six leading groups General Motors, Ford, Toyota, Daimler Chrysler, Volkswagen and Renault accounted for almost 70% of the worldwide production of 563 million vehicles in 2001.Fierce competition in the industry tends to force the surviving dominants to rapidly change the strategic positioning of their vehicles by using more sophisticated technology and Variety of models.

Most auto experts and industry analysists agreed that global outreach was essential to provide protection against foreign exchange swings and local labour crises. They also agreed that a company had to produce 2million vehicles a year to achieve necessary economy of scale.

Appendix.1 describes PESTEL frames work, which categories environmental influence in six main types: political, economical, social, technological, environmental and legal. It is a useful checklist to consider influence on global environment and identifies key issues in the automobile industry, where it has been possible to identify a number of structural causes of change in BMW.

The main driving force behind the decision of BMW to turn to globalization was competition from global players in Germany, the United States and Japan who are major competitors in the luxury segment. The automobile industry is highly globalised with many major manufactures operating all over the world. Automobiles built in one region are sold, with necessary changes, around the world. The main force for global convergence was the virtual disappearance of the national manufactures being squeezed out by the international giants and the standardization of markets across international boundaries. Forced by international regulatory bodies at regional level and fuelled by ever more intensive global communication.1

This caused problem to middle sized players like BMW and Fiat to compete with dominant players in the industry with small or differentiations not big enough to survive in the niche market.

Consolidation in the industry increased productivity and overcapacity, which lead to supply of motor vehicles in the market exceeding demand. It gave consumers more power by controlling prices. Fierce competition and cost structure lead many of the manufactures to change their strategy towards price competition.

Manufacturing in the automobile industry became more volatile with unpredictable fuel prices, parking space, increasing traffic, environmental pollution and creating a higher demand for smaller vehicles. Decreasing demand for saloons are shrinking the profitability margins for many car manufacturers.

Opportunities

BMW has a major Mini brand known all over the world which enable them to explore ways of enhancing demand in the small car segment. BMW converted the old BMC mini to a premium small car and the first such type to occupy this segment. It has become known as the first “Global small car”. The market for premium products began to grow faster than the overall market, especially in the small car segment.

The number of customers who are unwilling to compromise on safety, quality and driving performance has increased at above the average rate. The same applies when it comes to the trend towards individual cars. With mini, BMW predicted that they would win 50% more new customers. (105,000 mini brand vehicles were sold in the first 9 months of its first launch in Europe, over the budgeted figure of 100,000 cars).

Increasing demand for premium brands in the Asian market is another opportunity for them to expand their territory. According to market analysis, Asia will be the number one growth area for the automobile industry in 10 years time. China will be the dominant player in this context with a huge and booming market for BMW to penetrate.

Growing concern for environment pollution was an opportunity for BMW to gain the edge over the others by their research on environmental compatible methods of recycling end-of life vehicles, efficient waste disposal methods and research into alternative energy sources. They are the pioneers in innovative processes in final paint coating and for the introduction of power coating, which does not produce waste.

Internet and e-commerce is boosting potential for automobile manufactures by helping them to reach the customers quickly, predict the future demand, and personalize customer services and by streamlining their production lines to be more productive and efficient in distribution. BMW with their Customer-oriented sales and production process (KOVO), a logistical and production process designed efficiently and focused towards customers. This helps them to maximize flexibility when changing individual orders and minimize the waiting time in taking delivery of the vehicle. The virtual centers located internationally allow potential customers to locate dealers and inquire about facilities such as test drives.

The BMW group continued to put forward its product and market offensive in the year 2001. Introduction of new 3series, M3 convertible, 7 series and launch of mini in the world market expanded their portfolio. Because of This, BMW was able to avoid the economic recession in the international market.

Entrance to the formula one Williams team, with the contribution of the BMW V10 engine opened up a new opportunity for them to merchandise 140 F1 products in 2001 with total sales of euro 17.3 million and to expand their market in Europe.

Threats

Middle size players such as BMW and Toyota are facing merger and acquisition threats from other manufacturing giants. Since they themselves have attempted to expand their territories within the industry, they now, in turn face similar action by i.e. the merger between Ford & Volvo, the GM acquisition of 20% of Fiat automobile division and Fiat buying 5.1% stake in GM in recent years. These actions set examples major manufacturers are trying to survive in the mass market through mergers and acquisitions.

“Merger speculation is sweeping through the global car industry as rumors circulate about Ford tries to acquire BMW & Honda.”(BBC News in 1.5.99)

Competitors present in the luxury segment, have products with similar features and components provided by BMW, diluting the brand image.

Risk of exchange rate fluctuation against euro as BMW has production plants around the world and it affects overall profitability of the company.

2. M.E porter’s model of the ‘5 competitive forces’ being threat of new entry, buyers power, customers power, threat of substitute and threat of rivalry, and the application of them to the BMW company.

The five forces help to understand competition in an industry or particular sector of such (refer Appendix 2). When considering the automobile industry it proves a useful tool to assess the competitive forces to manufactures and identifying the element of threats.

Threat of new entry

When considering the first element, threat of new entry is favorable to BMW due to the huge initial overheads such as, the capital requirements for manufacturing, research ; development, marketing ; distribution of automobiles. Brand loyalty of the customers, towards BMW, forces new entrants to spend heavily in overcoming customer loyalty. The longstanding history of the BMW world renounced quality products poses therefore a minimal threat by the new entries.

Buyer’s power

Normally buyers pose a limited threat towards BMW unless concentration such as car rental companies, and bulk buying of Governments of large quantities of vehicles with specific components. BMW are very important to buyers where quality matters. BMW Customers seek product differentiation rather than price sensitivity, and these from the greatest majority.

Supplier’s power

Suppliers exercise considerable power towards BMW as the company uses specialized suppliers. Its product lines are dependent upon supplier’s manufacturing facilities. However the survival of BMW is an important factor for suppliers in protecting their future earnings and they will therefore compromise with BMW in pricing, R & D to ensure their future survival.

Threat of substitutes

Other forms of transport such as, trains, planes, buses and foot cycles prove a threat of substitution. Air travel become cheaper and more convenient compared with the car due to increasing traffic, unstable fuel price, parking charges, increasing accidents. Governments increasingly enforce taxes and charges on private motor vehicles to encourage motorists to use public transport thereby minimizing traffic and pollution. It cause some concerns for the automobile industry as a whole rather than individual companies but still is not a threatening substitute to premium automobile manufactures.

The threat of rivalry

BMW is facing severe competition from its rivals in Germany as well as from other giant automobile manufactures, equal in size and power that compete in the same segment aiming at the same customer groups with similar products.

Japanese competitors competing in the premium segment offer products with a competitive price, which allows buyers to switch from expensive luxuries to inexpensive luxuries but with similar comfort and product features. (Eg. Lexus is a luxury car with similar product features and specifications to BMW, but cheap compared to other luxury cars as it was produced under a low cost strategy)

The rivals are strategically diverse. They have a different approach to competition and expansion.

High entry barriers impose by national governments to BMW products, as it is a specialized niche market even if they make losses or narrow profit margins to hang on to the market.

Market growth rate severely affects the rivalry among Companies competing in the mature markets, which means they cannot achieve growth without taking a market share from rivals and BMW do this. Taking all things in to consideration jockeying for position is the major threat to BMW’s survival and the company will have to alter their strategy to gain edge over their rivals in domination in the premium segment.

3. Analysis of the strategic capability of BMW and identification of the most important strengths and weaknesses of the company.

Core competences are the activities or process that critically underpin an organization’s competitive advantage.2

Consider BMW’s core competencies

Their core competence is excellence in development, production and branding of high performance cars.3

A valuable global brand, strong presence, and a comprehensive knowledge cover of the premium segment set the criteria for that competence (Appendix 3).

Robust technology and innovative designs with the corporation of the World famous automobile designer group Steyr-Daimler-punch Fahrzeug-Technik (SFT) enabled BMW to re-develop the concept models designed by BMW engineers. Through this corporation, the BMW group has enhanced its dynamism and flexibility, making yet another milestone in the application of the BMW group’s product offensive.

Its products are not replicable, difficult to imitate by its competitors and cannot be substituted by another luxury vehicle manufacturer.

Engines with lower fuel consumption and higher performance using VALVETRONIC technology and a sequential M gear box (SMG) gained the edge over the competitors.

Management depth persistence using a more agile organizational structure with substantial economic operation and financial capability has strengthened the company. Appendix 4 illustrates good long-term share performance over the years helping to strengthen the companies’ position in the world market. BMW is ahead of other luxury manufactures due to their core products (Appendix 5).

A highly skilled work force with extensive training and development procedures coupled with a “learning organization” concept as well as with state of the art Research and development centre, helped to exploit opportunities and neutralise threats, out performing the competition.

Value Chain is another basic tool for diagnosing competitive advantage and finding ways to create and sustain it, the subject that will dominate the chapters that follow. It provides systematic way to divide a firm in to discrete activities thus can be used to examine how the activities in a firm are and could be grouped. (Appendix 6)

Appendix 7 shows the overall Strengths and weaknesses of BMW at the end of 2001.

Weakness

BMW is small in size comparison with competitors in the industry. (Further discussed in Q: 6)

Its shareholder structure creates problems for the companies’ strategic implementation of policy in a changing environment.

Lack of experience in multi brand production this has resulted in non-diversifications to other segments such as commercial vehicles and heavy vehicles, whereas competitors have spread over all the segments in the automobile industry. (Eg. Ford, GM)

BMW lost valuable time in their research and development programme due to the unsuccessful rover venture, which may have been better spend in developing research into commercial vehicle production.

4. Identification and analysis of the most important stakeholders in BMW.

Stakeholder is taking to mean a person, group or orgasination with an interest in the activities of BMW.” The strongest stakeholders view is that each stakeholder group has its own objectives, and the management has to reach a balance or compromise between them.

Stakeholder mapping can be used to help in realising their expectations and explaining to them the political context and the priorities of the ‘political agenda’ for the organization. It can be used to understand the likely reactions of stakeholders to new strategies, the ability to manage these reactions, and hence the acceptability of a strategy.

According to Appendix 8, more powerful stakeholders are those key players in the organization. The Qundit family owns 46% of the company shares and they are participating in managing the company as well. The secret for the company’s long-term success could well be their intervention in companies’ affairs.

The German government has much influence in the way that the company conducts itself, as BMW is one of their national icons. BMW’s contribution to national exports influences the economic growth of the country. Considerable tax payments and high employment ratio of German nationals gives more power to the government over BMW.

Pressure groups like the media and environmental organizations have a high level of interest in the companies’ affaires and by attaining high standards in environmental practice BMW are able to get considerable free publicity as a result.

Employees and managers are important stakeholders in the company as a result of BMW’s excellent staff relations, which is one of the best in the world automobile industry. They have obtained a strong position in the intense competition for qualified technical and management staff.

By providing a high-level of satisfaction and low level of employee fluctuation coupled with a high quality-working environment, they have been able to achieve many of an employee’s expectations and minimized the risk of know-how drift.

The project ” supplier Relationship Management”(SRM) started in 2001 to improve communication between company suppliers and integrate them in to changing management process of the BMW group via on line portal illustrate BMW’s concern for their suppliers.

B. Specific objectives for the company over the next five years

BMW’s Future strategy is to continue to concentrate on market offensives in the premium segment while continuing to focus on quality, innovation and excellence.

Stretching the brand image by diversification is another option enabling them to remain in a highly competitive position. Globalization of the Mini in the years to come could be a suitable strategy in meeting the demands of the ever increasing small car market and by concentrating on a growth strategy may well result in meeting the market requirement of 2 million vehicles per year thus achieving the required economy of scale.

A Merging with a suitable competitor or forming alliances with other large automobile manufacturers could be other options enabling BMW to remain a viable manufacturer.

Acquisition of other premium brands and improving the product portfolio by introducing an enhanced range of vehicles from time to time could increase the competitive edge.

The future market situation of the automobile industry and influence from the Quindit family will have a significant impact on the prestigious Bayerische Motoren Werken in their future success. (Appendix 9)

5. Concept of Generic strategy and indication of BMW’s generic strategy.

The purpose of pursuing a business-level strategy is to give the company a competitive advantage that will allow it to outperform its competitors and earn above-average returns. There are three basic strategies a company can adopt: cost leadership, differentiation and focus. Opposing this is the “stuck in the middle” situation, which is described, in Porter’s “generic strategies” at appendix 10.

BMW concentrates on focus differentiation as it appeals to the psychological needs of its customers such as status or prestige.

It seeks a competitive advantage based on innovation and technological competency. The key function is R&D with customer responsiveness is its goal. After-sales service, distribution, and customer service functions are most critical. As a result, BMW is not just a prestige car, it is fast, reliable and technologically sophisticated. BMW focus their strategy using “differentiation approach”. Their main German rival Mercedes follows a similar strategy. Other rivals such as Lexus and Nissan concentrate in an approach based on cost leadership whilst manufacturers such as Ford and GM concentrates on offering cars in every market niche.

5 b. Identify BMW’s “distinct competitive advantage.”

BMW’s distinctive competitive edge lies on their core competence and business strategy of focus differentiation. A powerful brand image, renowned for the quality or its products was the foundation of the success of the company coupled with its management depth and superior technology. The current view amongst motoring correspondents is that the “BMW 5-series still dominates the executive class after 6 years of presence. More unbelievable is that even now no others can come close to its superiority. In fact, the 5-Series does not show any signs of ageing at all. It still looks handsome and is of high quality. It still has the best handling and ride. It still has the best 6-cylinder engines in the world and strong performance. The 5-Series shows the best German engineering can be. It is becoming a classic!”(Autozine awards 2002.Class winners: Best full size executive sedan)

Winning the awards for best compact Executive, Best sport car, best full size executive sedan, and best luxurious sedan in 2002 illustrate BMW’s distinct competitive advantage over the rivals.

6. Analysis of Suitability, Feasibility and Acceptability of BMW’s acquisition of Rover from British Aerospace in 1994.

BMW acquired Rover in 1994 at a cost of $ 1.3bn and disposed of it to the Phoenix Consortium for the symbolic sum of 10 pounds, in early 2000 after making huge loss of more than $ 3 billion in four years.

BMW wanted to move in to other segments of the automobile industry as the business environment began to change in the early 90’s. BMW group foresaw the up rising threat from its competitors and wanted to build an empire by becoming a major player and by defending themselves from the forces ranged against them by securing their position.

Initially they had held an interest in Rover as it had �2 million threshold with product range of Land rover, Mini, Rover and GM with competitive growth rate. (Land rover 1993:growth rate 9.7%). The Rover product range had different brands all over the world and it was therefore suitable for use by BMW to expand their global production across the different segments. Similar production volume and the Rover’s performance stimulate the desire to takeover Rover.

A hidden motive behind the merger was the CEO’s personal aspirations of securing his position thereby enhancing his personal and financial prestige.

The SWOT analysis in Appendix 11 illustrates the suitability of the merger between BMW and Rover.

Mass production rule did not fit in to the luxury segment, while Rover and BMW were too different companies in innovation, financial strength and brands.

Insufficient culture management between the two teams was the major reason for the failure. Cross boarder merger bought two different cultures together where differences in the organization of two national icons could not fit together. The British found it easier to adapt to the flexibility methods used by Honda rather those used by BMW.A former Rover executive phrased it like this ” The British are too polite to be honest, the Germans are too honest to be polite.”

The acquisition of Rover by BMW proved unable to add any value to the company. There were no synergetic effects. They simply couldn’t integrate all the activities. BMW had not considered the cultural process of assimilation, hybridizing or separation. When they went in to implement their management it was too late. .

Building large batches of cars at one time with little or no variation between those in each batch was Rover’s production strategy while possesses the high expensive plat form strategy for Land rovers. But BMW’s had different approach for production whereby constructing each car individually with different features such as air bags, colour and left hand right hand driving was the norm.

BMW had sound feasibility for the acquisition as it had made a profit for last 40 years continuously and so had a strong financial position to back its idea of acquiring Rover and investing in that companies’ developments. BMW was well aware of the rover’s high break-even point and expected to incur losses for three years and thereafter commence profit making.

“BMW knew that Rover would require considerable new investment and that it was likely to make losses for some years. Also they would need to develop new models.”(Allan John MP: March 2000 “The future of the motor car industry”)

Over estimation of the synergy and underestimation of difficulties following the market pressures due to the high value of the pound cause severe problem for BMW.

“Euro-skepticism & BMW’s unimaginative ownership may finally have killed Rover, but this calamity was longer in the making than the making than the last few years. It is culmination of decades of institutional failure, managerial incompetence, government inadequacy, poorly led unions ; nerve business culture.

High exchange rate astonishingly high, fell back briefly ; then reached a new peak following the ERM debacle, making car manufactures last only for the congenitally stubborn. ” (Will hulton: Sunday march 19,2000 The Observer)

BMW runs global purchase system (GPS), which manages and administers its worldwide procurement of goods and services. The system can identify the value of purchase made with any supplier. BMW wanted to take advantage of supplier’s volume related discount on the entire group’s spending, but rover couldn’t fit into the GPS and disposed of it as an expensive and impractical project. If they had not done this they would have saved $4.8 M per annum.4

The damage done to the company’s image and reputation in the United Kingdom and resultant loss of research and development time taken together with the $ 3 billion financial loss, included the CEO of BMW to step down and a consequent reorientation of companies’ strategy, demonstrated the stakeholders expectation in the merger.

The foresight shown by the BMW executive in acquiring the Rolls Royce brand name and the resultant expenditure in a new factory at Good wood

U. K has yet to prove its worth.

1 BMW Automobiles-Case study: G. Jonson & K Scholes -Exploring corporate strategy: page 887

2 Jonson & Scholes Exploring corporate strategy vi edition pg 156

3 BMW-“changing focus”-case study, 27.09.02 www.squeaker.net /cems / London)

4 www.Candle.com /www1/can-case study-the rover group :maximum business return