The global automotive industry’s second century of business Essay

The global automotive industry is entering its second century of business; the landscape of the trade has drastically changed. Successful companies will survive by being innovative in the way they design, develop, and deliver their products and services to the end user. It is up to the management of the firm to develop innovation, and provide strategies in order to reach its customers. In order to understand the opportunities and challenges that an individual company’s management may face, this analysis will first examine current trends of the industry, common business strategies, sources of competitive advantage, and other trends significant to competitors in the sector, in this case Volkswagen and BMW. Often, a company’s survival is dependent on the creation of a competitive advantage, which is designed and implemented by management.

Creative ideas and technological innovations are essential from any automobile player challenging for the status of innovation and technology leader. The global automobile industry has become very saturated. With industry overcapacity, many automobile manufacturers will either merge with other automobile companies, become acquired, or go out of business. In the face of these threats and industry trends, Volkswagen has decided to re- organize its brands and restructure its management. The company’s seven brands will be divided into two groups: a sporty grouping and a traditional or conservative grouping. The main reason for this restructuring has been brand erosion due to the similar technology used in the different brands, and a falling share price.

Despite the problems at Volkswagen, they still command one of the most impressive customer bases in the automotive industry and will continue to remain at the forefront of the industry. The management of BMW on the other hand has chosen to focus on a pure premium strategy. The company has tried in the past to appeal to the masses with the purchase of Rover, but ultimately failed to achieve synergies with the mass and premium brands and sold the division a few years later. BMW continues to have a firm commitment as a global player, and with new attempts to differentiate their product line they should be able to reach many more potential customers, thus earning a new competitive advantage.

Introduction

As the automotive industry enters its second century of business, the landscape of the trade has drastically changed. Yet, the industries’ fundamental goals remain the same. Automobile companies still strive to minimize costs by pursuing economies of scale, with long term goals of maximizing efficiency while maintaining their product quality. Successful companies will survive by being innovative in the way they design, develop, and deliver their products and services to the end user.

It is up to the management of the firm to develop innovation, and provide strategies in order to reach its customers. In order to understand the opportunities and challenges that an individual company’s management may face, this analysis will first examine current trends of the industry, common business strategies, sources of competitive advantage, and other trends significant to individual competitors. This paper will then provide an analysis of two competitors, Volkswagen and BMW.

Current Industry Trends

Mergers, acquisitions, and integrations have transformed the landscape of the global automobile industry. Examples include:

* The merger of Chrysler and Daimler-Benz

* Volkswagen acquiring Bentley and Lamborghini.

* Toyota’s growing control over Daihatsu.

* Ford acquiring Volvo’s car business.

* BMW acquiring Rolls Royce

The 1998 PricewaterhouseCoopers Global Automotive Deal Survey cites overcapacity, the pressure to increase economic profit, and the drive by Vehicle Manufactures to respond to the power shift towards consumers as all contributing to the rapid structural change in the industry. The report says that 6 to 8 global manufacturers might control the industry in the near future as small manufacturers continue to be acquired. This consolidation is the most noticeable trend in the automotive industry.

There is also a trend towards the integration of suppliers in product development systems, and the outsourcing of modular assembly to suppliers located near the vehicle manufacturers assembly operations. These changes have produced large decreases in unit cost for the global industry.

One problem burdening the industry is the excess capacity that many companies face. Worldwide excess capacity is estimated at 20 million vehicles, or 45% of current capacity. This inefficiency has cost the automobile industry billions of dollars and will continue to burden the sector over the coming years.

Another negative trend in the global automotive market is declining sales in the European sector. After years of positive growth, the European Automotive Industry is now experiencing a phase of stagnation. It is still unclear how Europe’s integration will affect this trend. . This lethargic growth has created increased competition among European Automakers. It is now more important than ever for carmakers to innovate, in order to increase quality and/or reduce cost. In addition, it has increased the need to reach out to foreign markets particularly the United States. However, for Volkswagen and BMW, exports to the United States already account for such a large part of their business they have not been as severely affected by the downturn as many of their European counterparts.

Industry Strategies

Economies of scale strategies are widely used in the highly competitive automobile industry. Recall, Profit = Revenues – Costs. Therefore, these strategies reduce costs to increase their company’s profit. The three primary cost reduction strategies are

* Globalization – to gain incremental volume leveraging “know-how” from other parts of the world

* Consolidation – to decrease the cost base supporting relatively stable volume, usually attained through the elimination of duplication in assets, such as the number of production facilities and suppliers. Note: In the second automotive century it is believed that this strategy will dominate.

* Platform deproliferation – to provide a broad end product range across a smaller number of basic design structures, thereby leveraging development and other costs for a greater volume opportunity.

Although these strategies are implemented in hope of lowered cost it is incorrect to assume that all automobile manufactures are competing solely on a low cost strategy. The analysis of Volkswagen and BMW shows that the majority of their automobiles do not compete on low cost, rather their focus is on product differentiation and focus strategies.

Competitive Advantage

Often, a company’s survival is dependent on their creation of a competitive advantage. There are many sources of competitive advantages in the automobile industry. One such advantage is the relationship between the automobile company and the end customer. The automotive business differs from other industries in that there is a continued relationship between the buyer and the seller. Often, service conducted after the initial purchase is the deciding factor for future repurchase with the same vehicle manufacturer. BMW has increased its sales and reputation through award winning service and customer relations.

Low cost and product differentiation is also a source of competitive advantage used in the global automotive industry. For example, Ford Motor Company produces the Focus that competes on low price. Therefore, Ford must find the most efficient, cost-effective way of producing this automobile while still providing value to their customers. Ford’s ability to mix these factors is the key to holding a competitive advantage on competitors. Ford also produces Jaguar automobiles that compete on prestige and unsurpassed quality.

To create a competitive advantage Ford must be able to differentiate their product from other high-end producers. These competitive battles based on cost and on differentiation are commonplace in the automobile industry. As discussed earlier, Volkswagen and BMW compete on product differentiation rather than on low cost. However, this does not mean they can produce inefficiently and without regard to cost. They still compete on price by offering similar car models as Porsche, Jaguar, and other luxury producers. For this reason, they must still be price competitive with their competitors.

Globalization

The 1998 PricewaterhouseCoopers Global Automotive Deal Survey states that “Nearly 70 percent of anticipated growth in light vehicle output between 1999 and 2006 is expected to come from outside of North America and Western Europe. The trend towards Globalization has changed the landscape of the global business environment. Automobile companies cannot ignore emerging markets, such as Russia and China. These new markets provide large, untapped customer bases allowing producers to gain further economies of scale. On the other hand, globalization will mean new entrants to compete with in their current markets. The trend of globalization has created greater competitive pressures from foreign producers, but also many new opportunities for all automotive companies.

Premium Vehicles

The automotive industry can be further broken down into car classes. These two classes are:

* Premium, sport or luxury vehicles

* Cheaper, mass produced automobiles.

This paper will deal mainly with the luxury division because of the analysis of premium vehicle producers Volkswagen and BMW. The importance of premium markets is increasing substantially in the automotive industry. One reason for this growing importance of the luxury sector is their ability to withstand growing pressures on prices. One of the key differences that separate the luxury market is the relatively low price elasticities found in the luxury sector. For this reason, many new companies have entered this market. For example, Ford and Volkswagen have both aggressively expanded their luxury vehicles business. The continued entrance of new competitors has transformed a relatively small market niche into a saturated market that will weed out its weakest parts.

GENERAL EXTERNAL ENVIRONMENT

Creative ideas and technological innovations are essential from any automobile player challenging for the status of innovation and technology leader. This is why both Volkswagen and BMW are constantly looking for new opportunities to equip the cars of the future with innovative technology and pioneering systems. In addition, the automobile industry may be strongly impacted by the Internet as much as any other industry. Consumers are increasingly using information from the Internet to determine such things as features, specifications, styles, and designs of different makes and models. One day, the industry may be able to circumvent the middleman and deal directly with the purchaser, as consumers may be able to place orders directly over the Internet.

The global automobile industry has become very saturated. With industry overcapacity, many automobile manufacturers will either merge with other automobile companies, become acquired, or go out of business. More and more automakers from around the world will need to address global overcapacity within the automobile industry and make strategic partnerships or mergers with other industry players. For example, Ford Motor Company’s acquisition of Land Rover from BMW demonstrates the globalization of automotive consolidations and the shrinkage down to a handful of carmakers worldwide.

VOLKSWAGEN

History

The history of Volkswagen goes back almost 80 years, when a German auto engineer, Ferdinand Porsche had a vision to design a car for the masses. He found no backers for his “people’s car,” until he met Adolf Hitler in 1934. The German government formed Gesellschaft zur Vorbereitung des Volkswagens (Company for the Development of People’s Cars) in Wolfsburg, Germany. However, Porsche’s dream of building the car for the masses was put on hold by the outbreak of World War II. The last car came off the line in 1939 and during the war Volkswagen was forced to build military vehicles for the government.

The war left Volkswagen, (as well as most of the German industrial capacity) devastated. However, the British occupation forces oversaw the rebuilding of VW’s war-ravaged facilities and initial production of the “people’s car.” By 1949, the company had regained its production capacity and management of the company had been turned over to the German government.

The 1950’s and 60’s were a period of growth and acceptance for Volkswagen as it launched the Microbus, build foreign production facilities, and the infamous Beetle helped VW gain a niche in the US market with its cult-like acceptance. In fact, by 1968 the Beetle had become the best-selling car in history. Moreover, in 1966, it purchased Auto Union (AUDI) from Daimler Benz.

Nevertheless, the success of these 1950’s and 1960’s gave way to the stagnation and uncertainty of the 1970’s. The Beetle was discontinued in every country except Mexico, which finally shut down production this year, and VW lost market share in the US heavily during this model-changeover period. Nevertheless, it remained the largest automaker in Europe. This led to a policy of expansion and mergers in the 1980’s that saw VW purchase controlling interests in SEAT, form a joint venture in China, and initiate a merger of its faltering Brazilian unit with Ford’s Argentine operations to form Autolatina.

However, the company continued to have problems into the 1990’s when a new management led by Ferdinand Piech cut costs and boosted sales. In the latter end of the decade, VW also acquired Rolls-Royce Motor Cars, Bugatti, and Automobile Lamborghini. It also introduced a new Beetle to which helped boost US sales. In fact, in 1996, Volkswagen sold just over 130,000 vehicles in the US, by 2000 the carmaker was on track to retail about 400,000 units, most of them selling with above-average profit margins for dealers.

SITUATION ANALYSIS

Volkswagen is currently the third largest automaker in the world and the largest in Europe, making about 5.2 million vehicles annually all over the world, including Africa, the Asia/Pacific region, Europe, and North and South America. The company has currently decided to re-organize its brands and restructure its management. The company is dividing its seven car brands into two new groups centered on the VW and Audi names. The “sporty” Audi division will include Audi, Lamborghini, and Seat. The “traditional or conservative grouping,” will include Volkswagen, Bentley, Bugatti, and Skodal. The decision to undergo the restructuring was made by Ferdinand Piech, VW’s longtime chairman.

It was his last decision before announcing his retirement, and comes in response to a growing threat of brand erosion emanating from the sharing of several chassis-platforms between Audi and Volkswagen and even the lower end Seat and Skoda brands. European consumers were beginning to realize they could get Volkswagen quality in lower priced Seat and Skoda brands. Shareholders and investors perceived this consumer quality recognition as a large threat to Volkswagen’s performance and brand erosion was one of the main reasons for Volkswagen’s decreasing stock value. Despite having some of the hottest brands on the markets such as the Audi TT, VW Beetle, and Skoda Fabia, VW’s profits are significantly lower this year. A strong Euro is partially to blame.

The restructuring is being implemented by his successor, Bernd Pischetsrieder, a former chairman of BMW, who in an ironic twist spearheaded the highly unprofitable Rover acquisition. In addition to this re-structuring, the chairman also announced an end to VW’s acquisition binge of the late 1990’s that included the addition of Rolls-Royce Motor Cars, Vickers’ Cosworth auto engines subsidiary, Bugatti, and Automobili Lamborghini. In the future, VW plans to fuel growth from within, and plans to invest 31.5 million in modernizing its factories through 2004 to help attain this goal.

COMPETITIVE ENVIRONMENT

Power of Suppliers

The manufacturing of a car requires the acquisition and management of many raw materials. Volkswagen has diversified its supply base by building production facilities in five continents (Africa, Asia, Europe, and North and South America). In each of these places, it has built an extensive network of suppliers. Furthermore, it is investing in modernizing its facilities, such as its plan to pour 1 billion dollars into its Mexico plant over the next few years. Since Volkswagen is large and diversified, producing 5.2 million cars/year, the power of suppliers is moderately low.

Power of Buyers

The power of buyers in the automotive industry is extremely high. Competition is fierce and the switching costs are low. Rival car dealerships often have to offer incentives and decrease profit margins to attract customers. However, during the last few years, Volkswagens units have sold with above-average profit margins for dealers while many of its rivals have seen their profit margins erode. This is due to VW’s marketing and attractiveness to its customer base. Nevertheless, the power of buyers is extremely high.

Substitutes

There are several substitutes to owning a car, such as public transportation, motorcycles, biking, or walking. However, the attractiveness of these substitutes varies greatly from one region to another. For example, in many European cities with excellent mass transit, narrow roads, limited parking, and high speed rail networks connecting major cities a consumer may be tempted to bypass a car if the price is too steep. However, in the US where there is a lot of countryside, little public transportation, a large suburban population, getting from point A to point B without a car becomes more difficult. Therefore, the power of substitutes for the automotive industry is moderately low, yet the power of substitutes for brands is high.

Rivalry Among Competitors

The Competition in the automotive industry is fierce. During the last decade, automakers have gone through a series of acquisitions and mergers, as competitors try to maximize economies of scales and create positive synergies. In the industrialized economies, especially the US, dealers have seen profit margins dwindle while marketing soars to all-time levels. Therefore, this aspect of the competitive environment is extremely high.

Threats of New Entrants

The threat of new entrants in the automotive industry is extremely low. Production facilities require exorbitant start up costs. Furthermore, the introduction of a new vehicle into a market requires an extensive marketing campaign that is also costly. Moreover, the new entrant would also have to figure out a way to supply the vehicles in the new market, which usually requires relationships that have been developed over the years. Even a new entrant that has funding, expertise, and government backing such as Delorean found it very challenging to break into the big six and found his venture futile. Therefore, the threat of new entrants is minimal.

S.W.O.T. Analysis

Strengths

* A world leader in the manufacturer, Volkswagen’s innovative ideas have made a steady contribution to automotive development

* An industry trendsetter, defining the future with cutting-edge technology

* Product development on the core platforms, keep its various brands distinct.

* VW is an innovator in the field of sponsorship. Its long-term partnerships are the focal point in getting the best new talent off the ground.

* The company has expanded its global product portfolio to more than 100 models.

* VW Group’s cabins are the envy of the industry; the use of quality and premium materials is unparalleled.

* A strategy of offering cars for every taste

* One of the most desirable customer bases in the industry

* Crisp exterior styling

* Hip advertising that directly connects consumer and product

* VW German leaders are “100-percent American in the way they view the needs of the U.S. car market.

* Diversified its supply base by building production facilities in five continents (Africa, Asia, Europe, and North and South America)

Weaknesses

* Lack of shareholder wealth

* Limited shareholder base

* Lack of information reporting-not up to standards and expectations of U.S. portfolio investors

* Diminishing profit margins

* Possible takeover target by a larger OEM

* Slow order-to-delivery in North America

* Cannibalization of profits due to Volkswagen brands moving up market and Audi’s brands moving down market

* Brand erosion in Europe due to shared platforms between more prestigious VW and Audi brands with lower priced Seat and Skoda lines.

Opportunities

* Lower cost plants in eastern Europe and China

* Plan to pour 1 billion dollars into its Mexico plant.

* Due to the introduction of the EURO, exchange rate risk has been eliminated in the EU

* Joint venture in China, gives VW a foothold in the Chinese market.

Threats

* Cooling of the North American economy, which is expected to leave its traces in the automobile market in through the decade, showing a decline in the overall market.

* Increase in the price of gasoline. Pushing consumers to park their automobiles and take public transportation.

* Increase in competition due to mergers and acquisitions among the large automobile manufactures, which create synergies that, allow its competitors to take advantage of economies of scale.

* Dilution of Audi brand image by using the same platform as Volkswagen

STRATEGIC ANALYSIS

The company’s share price has dropped since 1999, despite market trends that sent most blue chips soaring. As noted previously, the problem seems to be brand erosion caused by too much sharing of technology between brands. For example, some upscale Audis share a large number of mechanical and structural components with entry-level Skodas. This strategy allows VW to take advantage of economies of scale and product development, however, consumers are wising up to this strategy and recognizing that they can buy lower priced Skodas and still get VW performance.

Nevertheless, this is not the only problem for VW. For years, the company has suffered from a lack of transparency in the financial disclosures. Shareholders believe that the company should be much more profitable. In fact, VW sells most of its products with above average profit margins, commanding up to 1000 more per unit than competitive vehicles from GM and Ford. In response to this challenge, VW has pledged to raise profits by at least 10 percent and has announced increases in target return on investment in its core automotive business. However, it will face an uphill battle to raise funds because of investor weariness. Another potential problem in making the company leaner and more profitable may arise from one of its largest and traditionally most benevolent shareholders, the German state of Lower Saxony, which has traditionally been more concerned with preserving German jobs.

Despite these challenges, the future looks bright for VW. It continues to produces and designs some of the best products on the market. Its products were clear leaders in the Total Quality Index, and its models won numerous awards in nearly every single category. This is quite notable because Strategic Vision’s TQI offers the most complete measure of the ownership experience, including the emotional response to the vehicle. Volkswagen’s owners felt especially safe, confident, in control and proud in a vehicle that was fun to drive and a smart choice. They also rated their vehicles high in exterior craftsmanship, road ability and reliability.

In addition, the company’s re-structuring has been developed in order to combat the problem of brand erosion. By splitting the VW and Audi products into different lines, the “sporty,” and “traditional,” Volkswagen is taking a positive step toward fighting cannibalization of its products. The goal is to avoid duplication of chassis platforms between its brands in the future and assure that its customers perceive clear- cut differences between brands.

BAVARIAN MOTOR WORKS

History

The Bavarian Motor Works (BMW) of Munich has an extensive history of over 80 years. It has a reputation for fine engineering and a tradition of excellence, which began with the building of aircraft engines. They have since expanded by producing motorcycles and sports cars.

During World War I, BMW aircraft engines founded a tradition of excellence and reliability. It was in 1923 that BMW built its first motorcycle, and in 1928 its first motorcar. During World War II, BMW made engines for the German air force. After the war, the company lost its car plant behind the ‘Iron Curtain’ but continued operations with its Munich plant.

The 1960’s and 70’s saw the emergence of BMW as a serious competitor to the established automakers, especially Mercedes Benz. During that time, BMW cars dominated touring car races in Europe and the USA, and motor sport was seen as a key factor in proving and promoting BMW’s technical superiority. BMW’s commitment to innovative engineering has led to a profusion of specialist models and concept vehicles. Although cars are, and will remain, the major part of BMW’s business, the company always remembers its beginnings with the motorcycle.

Throughout the company’s history in motor sport, every engine has been based on a production unit. BMW has won sixteen European Championships since 1966. At the beginning of 2000, BMW returned to Formula One, more than twelve years after the company’s last Grand Prix and seventeen years after winning the World Championship.

SITUATION ANALYSIS

In 1980, BMW AG of Munich established its own UK subsidiary, BMW (GB) Limited. BMW GB is the company’s second largest subsidiary, after BMW USA. In 1990, BMW and Rolls Royce engaged in a joint venture and founded a company for the manufacture of aircraft engines based in Oberursel near Frankfurt, Germany. In 1994, BMW surprised the world by buying Rover Group for $1.2 billion. In doing so, BMW created a company with nearly twice the capacity at over one million cars per year. However, BMW failed to control costs and speed up model changes. Facing losses, BMW decided to get rid of its Rover subsidiary in the year 2000. Ford took over its Land Rover factory in a three billion-dollar deal.

The Rover and MG brands were sold to a London-based investment company, Alchemy Partners. BMW only kept the Mini brand. The year 2000 was a very successful year for the BMW Group with new records in the production and deliveries of BMW automobiles and motorcycles and in financial services. BMW sales amounted to 35.36 billion Euros, an increase by 2.8% over 1999. The main reason for this was the divergence of Rover. With the new 7 series, BMW unveiled a new, edgier style of design that is carrying over to the rest of the models. The look is drastically different and the source of some controversy, yet BMW’s sales are steadily increasing. The introduction of the new Mini has also helped to boost sales.

COMPETITIVE ENVIRONMENT

Power of Suppliers

BMW has developed both creative and innovative relationships with its suppliers. For example, in 1999 BMW forged a partnership with Burmah Castrol, the British lubricants and chemical group. In the agreement, all cars leaving the BMW production lines will be filled with Castrol oil. BMW also outsourced its lubricant business to Burmah and has recommended that its strong dealer network use Castrol products. The two companies are also working together to develop the next generation of lubrication products. This sort of relationship building combined with the vertical integration that has taken place in many of the production facilities leaves the power of BMW’s suppliers at a low level of risk. BMW’s invitation for supplier generated innovation in non-core competency areas and integration in core competency areas is a sign of a competitive advantage for BMW.

Power of Buyers

In general the power of buyers in the automotive industry is very high and switching costs are very low. As the numbers of players are being reduced through massive mergers and acquisitions in this industry, few but strong competitors are fighting for customers. BMW tries to win over the buyer’s confidence and trust by showcasing their vehicles’ competitive advantages via an integrated comparison module on the official web site. The innovative tool allows potential BMW buyers to compare BMW vehicles to several vehicles from other manufacturers.

Substitutes

There are several substitutes that consumers can consider regarding the purchase of a car. When considering the purchase of a luxury car such as a BMW, the variety is somewhat narrowed; however there are still quite a few options in this category. Therefore, a BMW is easily substitutable.

Rivalry among Competitors

As mentioned before, the automotive industry is very competitive. When stepping up into the luxury car market, the players become fewer, but the rivalry among the players does not wane. The “big enemy” of BMW is DaimlerChrysler with the Mercedes line. However, with the acquisition of Jaguar and Volvo, Ford is becoming a major rival. Despite the fierce competition, BMW has positioned itself well in the luxury car market through its superior brand management. Furthermore, BMW not only understands its brand management, “but it respects the brands it acquires. And it is because of this that the brands are probably in better hands than if they had been acquired by someone else.”

Threat of New Entrants

There are high entry barriers in the automotive industry. In fact, the auto industry will continue to consolidate operations among the largest manufacturers as we approach the turn of the century. As these massive mergers and acquisitions continue, it is estimated that only six major players will dominate this industry. Therefore, the threat of new entrants is very low.

SWOT ANALYSIS

Strengths

* Only multi-brand car manufacturer in the world to pursue a consistent, pure premium brand strategy.

* The BMW Group concentrates in full on the premium segments of those parts of the market showing an ongoing potential for further growth, suitably reflecting the character of the respective brand and generating an attractive return.

* Brand leverage is another strength.

* The BMW brand is know for consistently developing and innovating its products for premium quality.

* The Mini and Rolls Royce will serve as premium brands to help strengthen the BMW production line.

* BMW brand is associated with high quality products and a pleasurable driving experience.

* The zero-consumption car is a strength as well. A hydrogen combustion engine offering considerable advantages in terms of cost, weight and performance over the combination of a fuel cell battery and an electric motor drives BMW 750hL. This allows the introduction of high-comfort functions such as air conditioning even when the car is at a standstill.

* BMW is highly diversified with the new Mini, which allows the company to extend its premium engineering philosophy to new sectors of the market.

* With the production of an all-new Rolls Royce in 2003, the BMW Group will cover all premium sectors of the major car market segments.

* Quality is another major strength. BMW believes that quality is of key importance in every stage of the manufacturing process, from product conception to customer feedback

* Finally, R;D contributes as a strength to BMW. Around 6,000 engineers, designers, model builders, computer experts and scientists work side by side with staff and technical specialists from supplier companies to create the BMW cars of the future.

Weaknesses

* Include high prices and diseconomies of scale.

* The brand is associated with highly expensive products and is perceived to be affordable only by those in the upper level of the society.

* Compared to its major rival Mercedes, BMW’s production volume isn’t as high.

Opportunities

* Comprise its global expansion for growth.

* Investment of 300 million US dollars in the Spartanburg Plant in South Carolina.

* May 2000 the BMW Group opened its first wholly owned plant in Asia. The plant is also in a position to export cars to other ASEAN countries.

* The development of diesel models. The undaunted demand for diesel engines and the introduction of new and improved drive units led to growing sales of diesel models in all BMW model series in the year 2000.

Threats

* Cooling down of the North American economy, which is expected to leave its traces in the automobile market in the year 2001, showing a decline in the overall market.

* Japanese vehicle manufacturers that are increasingly penetrating the European market.

* Gas price increase and cities become more crowded, public transportation may become a better choice.

* Increasing environmental legislation and direct competition from luxury car companies such as Jaguar and Bentley who are coming out with mid-size luxury cars are other threats.

STRATEGIC ANALYSIS

Upon looking at the strategic analysis, BMW believes that quality is the key importance in every stage of the manufacturing process, from product conception to customer feedback. Customer feedback influences the development of improvements and future products. At BMW all employees are involved in achieving quality standards. BMW feels that quality is clearly linked to reliability and safety, where design innovation is developed and manufactured to consistent standards.

The mission statement, “BMW’s aim to be the most admired and respected service company in the UK” seems to convey BMW’s commitment to quality. BMW’s company purpose is to form a sales and marketing organization dedicated to adding value to all their products. The company seeks to promote brand values and customer service above all else.

In 1994 BMW tried to expand its brand by purchasing Rover, maker of Land Rover. However, BMW had difficulties integrating this brand, losing billions after acquiring the British carmaker. Yet in 2000 BMW sold off Rover keeping one of its brands the Mini, and gained control of luxury carmaker Rolls Royce. The company’s current strategy is to stay focused on using these brands to build a full range of premium products.

Recently retired BMW CEO Joachim Milberg stated that there were three strategies a car-manufacturer could adopt. One was to focus on premium products. Another was to focus on mass production, or the last was to do both, which is very difficult. BMW’s strategy is now to solely focus on premium brands: the Mini, BMW, and Rolls Royce, all premium products and premium brands. Milberg acknowledged that they tried to have a mass brand and premium brand when it owned Rover. He went on to note that it was difficult to achieve synergies with mass and premium brands under one roof. The risk was that by working on both strategies the values of the premium brand was deteriorated.

Now BMW has reoriented and will follow a premium-brand strategy, and made the Mini, acquired from Rover, a premium brand stating that it is the safest product in the very small car class in the marketplace. By entering the small car segment and its growing market for small luxury vehicles, BMW hopes to participate and take advantage of this growth. Through the Mini brand BMW hopes to further enhance its appeal to young and modern customers. The new Mini is marketed in some countries where the old Mini was never sold. The core strategy is to expand the BMW brand with a new model, have Rolls Royce on the upper end and have the Mini as a premium small product. Executives are confident that the new vehicles will continue to push BMW’s growth, even though they want to keep the Mini separate from the BMW brand.

The BMW executives remain optimistic that the company can remain independent and still thrive, despite the consolidation of the world auto industry into few giant players. After selling off the loss making Rover Group, sales and profits are up even with the United States, yet German and Japanese markets are sluggish. BMW hopes that the Financial Services continue to be an important factor crucial to the strategic market position and economic strength. With BMW, Rolls Royce, and the Mini, BMW has the right products and claims to be a technology leader.

They also assert that they have no need to merge, because in addition to being a technology leader, they have a great product line and are extremely international. Their claims are not only optimistic but they have the statistics to prove it. They have experienced many product hits and enjoyed healthy profits. To ensure accomplishment, the executives have decided to initiate additional investment projects to expand the production capacity. With all of this success the company is preparing to unveil an arsenal of bold new products.

The BMW brand in the future will range from the upper end of the lower medium segment all the way to the luxury segment, constantly introducing new concepts. With all the premium brands, BMW hopes to strategically supplement and strengthen its brand portfolio at the lower and top ends of the range. As recent as 2000, many critics chose BMW as a prime takeover target, but with its recent success in the lethargic market this does not seem feasible anymore. The changing form of the automotive industry has prompted BMW to tackle a new strategy in its mission statement, “to ensure the company remains an independent premium automaker.”

CONCULSION

Each year companies race to produce innovative ideas that can make an impact to automotive development and firms that cannot respond to these advancements and innovations quickly find them selves in trouble. The management of a firm must not only recognize the changes taking place in an environment, but must also be capable of positioning the firm so as to minimize the threat and maximize the opportunity of change. Firms that succeed in this environment will be the ones that have successfully utilized the results of their research and development efforts, used mergers and strategic alliances to increase access to new technology and value creation, marketed their products correctly with respect to brand image, and were able to use these factors to build on revenues, competitive advantage, and global market share.

Volkswagen and BMW have both been very successful players in the global automotive industry by utilizing different strategies. Volkswagen has chosen to target the masses by offering cars for every taste; they further expand on this theme by using hip advertising campaigns that connect consumers and products, and with one of the most desirable customer bases in the industry Volkswagen will continue to remain at the forefront of the automotive industry. A major concern remains the lack of shareholder wealth and the cannibalization of profits due to brand erosion.

This concern should be corrected after a thorough re- organization of its brands and restructuring of its management. Unlike Volkswagen, BMW pursues a premium brand strategy; the brand is well known and associated with high quality products and a pleasurable driving experience. BMW continues to have a firm commitment as a global player, and coupled with their attempts to further differentiate their product line they are able to reach and to market to many more potential customers, thus giving them a competitive advantage. BMW’s main strategic issue of concern was that it was trying to create a mass production brand along with a premium brand, with the acquisition of Rover. This strategy failed to control costs and ran the risk of ruining the premium brand of BMW.

Companies in this industry must able to leverage their core competencies to deliver value, and as we have seen this value can be created in ways very specific to each firm. The management of Volkswagen and BMW has each used different methods for value creation and corporate strategies, and their successes are as unique as their core competencies and their product and marketing strategy.