Case Study Report Strategic Management 313 Unit Index Number 3522 Semester 1, 2006 BMW Automobiles [pic] Group Members Daniel Smentek, 13264679 Melanie Bernroitner, 13264682 Marie-Charlotte Neumann, 13264640 Submitted on, May 16, 2006 Table of Contents Executive Summary4 Introduction5 BMW and the Automobile Industry6 Aspects of the Automobile Industry6 Historical Background of BMW6 BMW in the Global Environment9 General Environment of the Automobile Industry9 Five Forces of the Automobile Industry14 Competitive Structure of the Automobile Industry17
BMW’s Direct Competition22 BMW’s Resources and Capabilities25 Tangible Resources25 Intangible Resources:28 Capabilities29 Core Competencies30 Potential Action Steps for BMW33 BMW’s Strategy towards Success37 References41 Appendices45 List of Illustrations Figure 1: Report’s Course of Action5 Figure 2: Labour Costs in EU Countries 200511 Figure 3: Outcome of General Environment Analysis14 Figure 4: Evaluation of Porter’s Five Forces of Competition17 Figure 5: Strategic Map20 Figure 6: Profit Margins26 Figure 7: SWOT Analysis BMW 200633
Executive Summary The following report analyses the automobile operations of the BMW group in regard to its competitive position in the automobile market. BMW is a German premium car manufacturer comprising the three brands BMW, Mini and Rolls-Royce. The analysis of the external environment indicates an attractive but challenging general environment. The industry environment shows low threat of new entrants, low bargaining power of suppliers, high bargaining power of buyers, moderate threat of substitute products and intense rivalry among competitors.
In order to get a better understanding of the industry’s competitive structure, a strategic map has been developed. Thereby the DaimlerChrysler’s Mercedes Car Group has been identified as BMW’s main competitor. Examining an extensive range of resources, several capabilities were discovered. These capabilities were analysed concerning the four criteria of core competencies resulting in four competitive advantages high brand recognition, exclusive positioning, pro-active behaviour and ongoing innovation. By conducting the SWOT analysis, eight strategies have been developed to cope with BMW’s internal and external situation.
These were categorised into alternative courses of action: market development, product development, public relations and diversification. These courses of action have been evaluated in terms of the criteria impact, image and costs. A related diversification in form of buying an existing brand from a lower price segment, turned out to be the most suitable approach for BMW to gain greater market power. Introduction The highly competitive automobile industry creates a need for new action steps to stay ahead of competition (Hanson et al. 2005).
The following report analyses the automobile operations of the BMW group in regard to its competitive position in the automobile market. Since the company comprises several brands, all positioned in the premium segment, corporate strategies are needed to successfully manage the whole group. As a result of a consolidated automobile industry, other corporate car manufacturers compete with the apparent niche player BMW. Following the objective of rising sales figures to gain higher market share the report will give recommendation on how to achieve this goal (Lencioni 2004).
Figure 1 illustrates the report’s approach to develop a promising strategy for BMW. Figure 1: Report’s Course of Action [pic] Source: Created by Authors BMW and the Automobile Industry Aspects of the Automobile Industry In the latter part of the 20th century the automobile industry was dominated by five companies, illustrated in Table 1. Table 1: Five major automobile companies in 2003 |Company |No. of vehicles (m) |€ (bn) | |General Motors |8. |157. 19 | |Ford |6. 7 |116. 47 | |DaimlerChrysler |3. 85 |144. 65 | |Toyota |6. 25 |125. 30 | |Volkswagen |5. 02 |87. 5 | Source: (Lencioni 2004) Whilst in the mid 1990s automobile producers aimed to improve engineering and quality of vehicles in order to gain competitive advantage, the beginning of the 21st century was characterised by a price competition industry (Lencioni 2004). Facing that most autos were well built and reliable, quality took no longer centre stage in the mid 2000s. Hence, customers focussed on design and brand reputation. Thus the issue of brand identity became the most important competitive factor in the automobile industry. Historical Background of BMW
On 7th March 1916 the German manufacturer of Automobiles and Motorcycles – today known as the ‘Bayrische Motoren Werke AG’ (BMW AG) – was launched (Metayer 2005). As a producer of aircraft engines during the 1st World War the company flourished very well. Due to the conditions of the ‘Treaty of Versailles’ the production of aircraft was prohibited in 1919 (Wikipedia – The Free Encyclopedia 2006a). In this year BMW designed its first motorcycle engine. Five years later the company offered its first automobile, produced by the ‘Dixi Company’ which was bought by BMW in 1928.
After the 2nd World War BMW was enjoined to stop car production for the next 3 years. The company did not resume its work until 1952, when it produced its first passenger car with which it tried to get into the premium car sector. When in 1959 BMW’s management suggested to sell the whole concern to ‘Daimler-Benz’ the major shareholder Herbert Quandt disapproved that proposal and increased his share in BMW to nearly 50%, which assisted to turn the company around. In order to get into mass-market production BMW bought the Rover Group in 1994. Since then the Rover, Mini, Land Rover and Triumph brands were under BMW’s ownership.
As BMW was not able to reposition the Rover brand alongside its own products, the English automaker has been disposed in 2000. The Mini, in contrast, turned out to be a success, as was the acquisition of the Rolls Royce name in 1998. When in the early 2000s BMW restyled various series of its vehicles the company was opposed to much criticism. Electronic features like iDrive and Active Steering together with the new design philosophy were said to shift BMW away from its pure, sport-focused roots and made it a uniquely styled, technology heavy luxury good (Sawyer & Kelly 2006).
Despite that criticism, BMW’s sales have increased every year – leading to the perception that the buyers liked the innovative design and technology (Wikipedia – The Free Encyclopedia 2006a). In September 2004 BMW launched its 1 Series, which from the company’s perspective fits between the grown 3 Series and the Mini Cooper line. The new model gives BMW not only entry to the compact class segment (‘BMW AG 2005 company profile edition 3: Key Events’ 2005), but as stated by Tom Purves (CEO of BMW North America), “to younger buyers at a lower price [than the 3 Series] without encroaching on Mini” (Sawyer & Kelly 2006, p. 5). Taking all this into account the main strategic issues of this report are portfolio management and innovation policy in line with BMW’s brand identity. BMW in the Global Environment The business environment of the BMW group is influenced by several external factors which lie beyond the company’s control (McDonald 2002). These should be examined carefully as they can help to evaluate and select BMW’s competitive strategies (Quester 2001). However, it is the aim to focus on key variables instead of providing an extensive list of every single factor that might influence the company’s development.
Nevertheless one has to bear in mind that the macro environment of a company is not exclusively influenced by the examined factors alone (Shaw 2004). In the following, variables of the external environment of BMW will be examined in terms of the general environment, the industry environment, the strategic group and the competitive environment. General Environment of the Automobile Industry Economic Factors A crucial economic factor for the automobile industry is the price of crude oil. As observed during several oil crises, the demand for cars dropped dramatically.
Additionally, oil price instability can indirectly affect the automobile industry by the macroeconomic effect of a recession, which leads to a further plunge in car sales. This has been experienced for the first time during the oil embargo of the OPEC in the 1970s (Lee & Ni 2002). Table 2 indicates the continually rising oil price over the last decade, which makes a reaction of the automobile industry necessary. Table 2: Spot Crude Oil Prices, 1995-2004 ($/b) [pic] Source: (Opec Annual Statistical Bulletin 2004) Another relevant economic factor is the exchange rate between Euro and US Dollar.
A weakening US Dollar leads to higher acquisition costs for US citizens. As the US is a major market for the BMW group, this development is threatening BMW’s success (Gow 2005; Wassener 2003). Socio-Cultural Factors Because BMW’s major operations are located in Germany, high labour costs are a relevant issue. Concerning labour costs Germany is an unfavourable operating environment as can be seen in Figure 2. Partly responsible for these high costs are indirect labour costs. In contrast to many other countries, for example the US, Germany is a welfare state, which makes the employer pay for social welfare of his employees.
In 2003 indirect labour costs in Germany were 42 per cent of gross salary (Wikipedia – The Free Encyclopedia 2006b). Figure 2: Labour Costs in EU Countries 2005 [pic] Source: (Labour costs in EU countries 2005) Global Factors Today’s global environment allows a company to expand its operation across national borders. World trade is growing exuberantly, including developing nations like China, India or Brazil. This development favours opening operations in other countries, which offer better production facilities concerning resources, labour or geographical location to mention only a few (Department of Trade and Industry 2006; Deresky 2003).
One example of globalisation, which strongly affects BMW, is the European Union (EU), the largest and most integrated common market in the world, which after the enlargement in 2004 now comprises 450 million consumers (Department of Trade and Industry 2006; Deresky 2003). Technological Factors The fast changing technological environment obliges companies to focus on innovation. It is common that today’s novelties become tomorrow’s standards, so companies have to keep pace. Moreover studies have shown that early adopters of new technology are more likely to gain a higher market share and to earn higher profits (Hanson et al. 005). A distinctive phenomenon of the global environment is to share technology. Especially in the automobile industry the sharing of the same automobile platform by different car makers is widespread (‘DaimlerChrysler: In tandem (at last)’ 2006). Political/Legal Factors The automobile industry is affected by several political regulations. Basically these regulations concern emission and safety standards. The US government proposed regulations to reduce carbon dioxide (CO2) emissions by 33 per cent. The regulation will be phased from 2009 to 2014 and puts car makers under pressure to boost fuel economy (McElroy 2004).
Demographic Factors One important demographic factor for BMW is income, because only people with a certain income can afford to buy a car within the BMW group. Table 3 shows the Top 20 nations with the highest income worldwide. These nations seem to be worth targeted by luxury automobile manufacturers. Table 3: Nations with the Highest Income [pic] Source: (Reichste Lander der Welt 2004) Considering the above mentioned issues of BMW’s general environment, it is difficult to identify a clear position. Figure 3 illustrates positive and negative aspects of the general environment.
Basically this environment is neither particularly favourable nor unfavourable for BMW. Therefore additional external factors, like the industry environment have to be examined. Figure 3: Outcome of General Environment Analysis [pic] Source: Created by Authors Five Forces of the Automobile Industry By analysing the industrial environment, five forces affecting every industry and market have to be examined (Recklies 2001). These forces, identified by Michael E. Porter determine the intensity of industry competition and therefore the industry’s profitability and attractiveness.
Threat of New Entrants Entry barriers of the automobile industry are considered high, as new entrants have to establish manufacturing capacities which come along with the need for capital (Bradley et al. 2005). The issue of brand recognition can be seen as another important entry barrier in the automobile industry (Hager n. d. ). Firstly, because customers value the product’s uniqueness and are loyal to the product and the company producing it (Hanson et al. 2005). Secondly, because brand recognition will increase the customer’s switching costs – i. e. ere the psychic costs of ending the relationship to a certain brand. Moreover, the learning curve effect, as well as the vertical integration of suppliers play a decisive role (Hager n. d. ). While established firms have already experience in their industry sector and can raise their learning curve by putting additional funds into R, new entrants have neither the experience nor the resources to invest in R. By integrating suppliers vertically new entrants are distracted from obtaining key suppliers of incumbent firms or are forced to search for alternatives, which will cause extra costs.
Bargaining Power of Suppliers Automobile producers are generally able to dictate their terms to suppliers. First, because automotive parts are standardised commodities and are merely used on automobiles (Bradley et al. 2005), which therefore means that suppliers sell their products only to a small number of large firms (Hanson et al. 2005). Second, because backward integration takes place (Bradley et al. 2005). By buying suppliers, manufacturers can reduce bottlenecking the production cycle, and moreover are able to lock up resources, needed by other manufacturers (Hager n. . ). Besides the idea of taking over suppliers, automobile companies can reduce their supplier costs by aligning with other car manufacturers. In 2000 DaimlerChrysler, Ford and General Motors have announced to combine each of their US$240 billion purchasing power into one entity in order to reduce supplier costs (Upham 2000). Bargaining Power of Buyers In the relationship between automobile companies and their ultimate consumers, which are purchasers of finished vehicles, the power is on the consumer’s side (Bradley et al. 005), as a vehicle is a standardised product and switching costs among competing brands are low (Hanson et al. 2005). However, companies like Ford, General Motors and DaimlerChrysler suffer from buyer switching in a much lesser extent, as these companies merge with other manufacturers (Hager n. d. ). Thereby it is likely that buyers who change products may switch to another subsidiary of the same corporation. Moreover, the large customer to producer ratio causes a rather powerful automotive industry (Bradley et al. 2005). Threat of Substitute Products
While public transportation like busses, taxis or trams can be seen as direct substitutes for metropolitan driving, airplanes, busses, trains and boats are also substitutes when considering long distance travel (Bradley et al. 2005; Hager n. d. ). Although these substitutes do not offer the utility, convenience, independence, and value provided by automobiles, they are on the rise. Consequently the threat of substitute products can be seen as moderate. Intensity of Rivalry Among Competitors “The world of automobile industry is fiercely competitive” (Hanson et al. 2005, p. 189).
Market growth in the established markets (e. g. US and Western Europe) is slow and companies must fight heavily to gain profits or prevent losses in market share (Bradley et al. 2005). However, looking more precisely at the industry, firms are not that competitive. One parent company may have several subsidiaries selling in various markets, hence gaining revenues from products, which at first sight seem to be competitive. Those consolidations of manufacturers as well as the differentiation of products reduces rivalry, as multiple products can be sold in one market segment (Hager n. . ). In summary it can be stated that for an already existing company such as BMW the automobile industry is rather attractive. As illustrated in Figure Figure 4, suppliers’ bargaining power and threat of new entrants is low. Also, the threat of substitutes and buyers’ bargaining power represent themself as moderate. However, rivalry among existing firms is strong even if the consolidation in the automobile industry absorbs competition to some extent. Figure 4: Evaluation of Porter’s Five Forces of Competition [pic] Source: (Industry Analysis 2005)
Competitive Structure of the Automobile Industry To get a better understanding of the industry’s competitive structure a strategic group analysis has been conducted (North Dakota State University n. d. ). Based on the results, the company is able to identify its major competitors as well as its indirect competitors within the industry. Although this analysis aims to identify BMW’s major competitor from the corporate perspective, it is necessary to analyse the single car manufacturers of each corporation to achieve better implications about the competitive rivalry.
A strategic group is defined as a set of companies within an industry that have similar business models or similar combinations of strategies (Wikipedia – The Free Encyclopedia 2005). By using the characteristics of the industry’s competitors, strategic groups can be mapped by plotting the market positions of these companies in a two-dimensional graph, using two strategic dimensions as the vertical and horizontal axes (Hunger n. d. ). The result of the analysis is heavily dependent on the chosen variables. Therefore it is important to select those criteria which lead to a meaningful grouping of the industry.
As one of the main strategic issues of this analysis is related to portfolio management one criterion can be seen in the diversification of product lines across the market segments (covered segments) (Subramaniam 1999). Based on the car classification of passenger cars, widely accepted in the US and Europe, the car industry can be segmented as follows (Car classification 2006): ? Segment Microcar ? Segment Super Mini / Subcompacts ? Segment Compact ? Segment Mid-Sizes / Sedan ? Segment Full-Size ? Segment Coupes / GT ? Segment Convertible ? Segment Roadsters ? Segment Super Cars Segment SUVs (Sport utility vehicle) ? Segment MPV (Multi purpose vehicle) / Minivan ? Luxury According to the first dimension, the competitors will be segmented on a basis of niche players versus broad line producers – means, how well the company’s products are spread across the car segments of the automotive industry. To measure the degree of diversification, each competitor’s current global line-up of passenger cars has been analysed considering how many models are presented in each of the defined market segments (see appendix X). By doing so the following formula has been used: [pic] N = Number of Segments
S = The percentage share of the ith segment Thus companies that have positioned all their models in only one segment (Niche Players) will receive an index score of 100, while firms that are differentiated across an indefinite number of segments (broad line producer) will receive a score tending to 1. The price segment in which each competitor is operating has been chosen as the second dimension of the strategic map. To classify each company into the segments lower price, mid-range, premium, or ultra-premium current models have been compared with their competing counterparts in each car segment.
The following strategic map (see Figure 5) displays the position of each car manufacturer along the dimensions product line diversification and price segment. Figure 5: Strategic Map [pic] Source: Created by Authors According to Figure 5, nine strategic groups can be identified. The three brands of BMW AG are positioned in the highlighted groups. ? Ultra-premium / Specialised Producer (BMW brand: Rolls Royce) ? Premium / Specialised Producer (BMW brand: Mini) ? Mid-range / Specialised Producer ? Ultra-premium / Moderate-diversified Producer ? Premium / Moderate-diversified Producer Lower-price / Moderate-diversified Producer ? Premium / Diversified Producer (BMW brand: BMW) ? Mid-range / Diversified Producer ? Lower-price / Diversified Producer Due to the definition, members of a particular strategic group tend to be more similar to each other than to rivals in other strategic groups (Hunger n. d. ). According to the chosen criteria, the group members follow the same strategy related to price policy and product diversification. Although this group analysis identifies major competitors related to these dimensions, it does not necessarily indicate direct competition.
There are manufacturers like Volkswagen, competing against BMW in almost all market segments, being a member of the same strategic group. On the other hand, brands like Mini and Hummer are obviously not direct competitors although being members of the same strategic group. Hence the positioning of the group members in each car segment has been considered additionally in order to determine major competitors. According to Table 4 above BMW is facing competition in every car segment. Table 4: Direct competitors of BMW across its Series and Brands BMW Series / Brand |Models in direct competition | |1 Series |Volkswagen Gold, Audi A3, Alfa Romeo 147 | |3 Series |Mercedes C-Class, Jaguar X-Type, Lexus IS200, Audi A4 | |5 Series |Jaguar S-Type, Audi A6, Mercedes E-Class, Volvo S80, Saab 9-5 | |6 Series |Maserati 4200, Porsche 911, Jaguar XK | |7 Series |Mercedes S-Class, Lexus LS400, Audi A8 and S8, Jaguar XJ series | |X3 |Land Rover, Freelander | |X5 |Volvo XC90, Porsche Cayenne, Range Rover, Mercedes M-Class, VW Touareg | |Z4 |Audi TT, Porsche Boxster | |M Range |M3 Coupe – Mercedes C55, M5 – Mercedes E55, Audi RS4, Audi RS6 | |Mini Brand |Ford Focus RS, Vauxhall Corsa, Mercedes A-Class, Peugeot 206 H/B, Toyota Yaris, Renault | | |Clio, Volkswagen Polo | |The Rolls-Royce Phantom |Bentley Arnarge, Mercedes Maybach | Source: (‘BMW AG – 2005 company profile edition 3: Competitor Analysis’ 2005) With regard to product diversification, price positioning, and direct competition across the car segments worldwide, one principal competitor can be identified from the corporate perspective.
The BMW AG with its brands BMW, Mini, and Rolls Royce is facing DaimlerChrysler’s Mercedes Car Group including Mercedes-Benz, Smart, and Maybach as its main competitor within the automobile industry. BMW’s Direct Competition The following competitor analysis focuses on BMW’s major competitor, the DaimlerChrysler’s Mercedes Car Group. DaimlerChrysler is one of the world’s leading automobile manufacturers, primarily operating in the automotive industry with its major segment, the Mercedes Car Group (‘DaimlerChrysler AG – 2005 company profile edition 3: Company Dossier’ 2005). The group is engaged in the design, production, and sales of premium and ultra-premium passenger cars under brands such as Mercedes-Benz, smart, and Maybach (DaimlerChrysler AG 2005).
The group’s key brand, Mercedes-Benz, continues to be the world’s top-selling premium brand, with the models S-Class, E-Class, SLK, C-Class, and SL being market leaders in their segments (‘DaimlerChrysler AG – 2005 company profile edition 3: SWOT Analysis’ 2005). The main future objective is to improve its sales by over €3 billion, targeting a return on sales of 7% in 2007 (‘DaimlerChrysler AG – 2005 company profile edition 3: Company Dossier’ 2005). The group’s mother corporation DaimlerChrysler is enjoying a strong reputation worldwide. Its brand name and prestige are related to quality and customer satisfaction. Benefiting from its brand loyalty the corporation was the only one of the big three (General Motors, Ford, DaimlerChrysler) able to increase its market share in the US, when Toyota and Nissan made significant sales gains (Bradley et al. 005; ‘US motor manufacturers face fierce international competition ‘ 2006). One of the Mercedes Group’s major concerns is the lack of significant growth in Western Europe. The sales of the S-Class in 2004 declined by 21% compared to 2003, most likely indicating that this model is at the end of its product lifecycle (‘DaimlerChrysler AG – 2005 company profile edition 3: SWOT Analysis’ 2005). As a response, the groups R&D efforts were focussed on the development of new engines, new car models and transmissions. By the end of 2005, the group consequently launched a set of new car models across several segments (‘DaimlerChrysler AG – 2005 company profile edition 3: Product Development’ 2005).
The group is increasing its focus on the Asian market, especially the emerging Chinese market, by establishing strategic alliances in the region (‘DaimlerChrysler AG – 2005 company profile edition 3: Key events’ 2005). The joint venture named Beijing Benz-DaimlerChrysler Automotive Co Ltd with an annual production capacity of 20,000 vehicles is already producing the group’s E-Class and C-Class since 2005. Although the corporation’s profits might be affected due to escalating raw-material prices, increased price competition in the US and Europe, and the weakening Dollar, DaimlerChrysler expect its Mercedes Car Group a good position for future success (‘DaimlerChrysler AG – 2005 company profile edition 3: Prospects’ 2005.
The new product launches, namely the M-Class, B-Class, and R-Class, are expected to increase the group’s revenues in the short-term. The launch of the new S-Class is further expected to underline Mercedes-Benz’s position in the market; while the sales of smart vehicles are likely to increase, due to sales promotion initiatives in Europe’s major markets. As mentioned before the automobile industry in general is of highly competitive nature. Companies are more and more trying to refine market segments to be able to cover and be present in nearly all market segments. Premium brand producer like Mercedes-Benz and BMW are seeking new market opportunities in lower price segments while mid-range producer like Volkswagen are looking for new customers in higher price segments.
Within this competitive environment, focusing solely on major competitor is not recommendable. With regard to short term decisions, BMW should certainly focus mostly on DaimlerChrysler’s Mercedes Car Group. But when it comes to long term decisions, other competitors like Toyota or Audi should also be taken into consideration (Gordon & Milne 1999). BMW’s Resources and Capabilities In the business environment of the 21rst century, nearly every firm can do the same by copying the competitive advantage of another firm. Raw material can be bought, financial capital can be borrowed and there are rarely any unique pieces of equipment which are too expensive to be bought by a competitor.
This means that it is no longer possible to gain a competitive advantage by only managing costs of labour, capital and raw material. Therefore the internal situation of a company has to be analysed closely to find its unique resources and capabilities from which they can develop a competitive advantage. While the external analysis did find out what the company might do, the internal analysis will examine what the company can do (Hanson et al. 2005). Looking at BMW’s assets one has to distinguish between tangible and intangible resources. While tangible resources can be seen and counted, intangibles can neither be seen nor counted, but valued.
This makes intangible resources hard to imitate, because they are more difficult to understand (Hanson et al. 2005). Tangible Resources Financial Resources ? BMW’s main shareholder is the Quandt family holding 46. 6% of the shares. The rest of the shares is owned by diverse shareholders (Wikipedia – The Free Encyclopedia 2006a). This leaves the group vulnerable to acquisitions if the Quandt family should decide to sell their shares (Lencioni 2004). ? In 2004 the automobile segment had a turnover of 42. 544 Mio EUR. In 2005 the turnover increased to 45. 861 Mio EUR. Automobile sales increased by 9. 9% (BMW: +10. 1%; MINI: +8. 7%; Rolls Royce: +0. 5%) compared to 2004. ? The premium car segment is the most profitable segment in the industry.
BMW enjoys higher margins than most other car makers (Lencioni 2004). Figure 6: Profit Margins [pic] Source: Smith Barney Citigroup, Companies cited in Lencioni 2004 Organisational Resources ? BMW does not participate in the consolidation of the automobile industry. Compared to the other companies of the ‘big five’ automobile companies (General Motors, Ford, DaimlerChrysler, Toyota, Volkswagen) BMW is only of a modest size (Lencioni 2004). Through mergers and acquisitions it may be able to enjoy higher economies of scale and a global distribution network. However BMW prefers to remain small and flexible, but has to cope with high dependence on its singular performance (Danzig 2004). The firm manages a tightly controlled distribution network. This benefits brand management, communication and after sales service. Being close to the customer allows the car maker to segment the market efficiently in regard to the needs of different consumers (Lencioni 2004). ? BMW works in a collegial relationship with its suppliers. In 2003 the BMW Group Partner portal was launched, which helps to integrate suppliers and development partners into the work process. With this ‘supplier web’ the company can retain control over vehicle software and every other quality issue. (‘BMW AG 2005 company profile edition 3: Key Events’ 2005; Sawyer & Kelly 2006) In Germany the firm has achieved some outstanding agreements with the worker’s unions. This enabled the company to enhance operations from 60 hours per week – when demand was low – to 140 hours per week in peak times. Hence they are able to operate ‘some of the most flexible and productive plants in the automobile industry’ (Lencioni 2004). Physical Resources ? With its main operations in Germany, BMW enjoys a highly qualified labour source. According to Lencioni, this labour force could even be a source of competitive advantage (Lencioni 2004). Technological Resources ? The BMW trademark is a symbol for quality and efficiency (‘What next for BMW and Cadillac? 2004), which is further emphasised by the good image of products ‘made in Germany’. Moreover the BMW group communicates the image of an enjoyable driving experience, which leads to emotional value of the brand. ? Although BMW cooperates with many companies in the work process they chose to keep intellectual property inside the company. Consequently they are able to ensure a certain standard (Sawyer & Kelly 2006). Intangible Resources: Human Resources ? The long existing relationships between BMW and its suppliers are built on mutual trust. Over the years of cooperation the knowledge of each others businesses has increased and commitment to each other has grown. This makes business easier to coordinate (Lencioni 2004). According to the periodical ‘Strategic Direction’ BMW is in possession of some of the best management talents in the industry (‘What next for BMW and Cadillac? ‘ 2004). ? BMW’s labour force is highly skilled. However these skills are in danger if employees want to leave the company (Jackson 1998). ? The firm enjoys a low level of employee fluctuation. By investing in excellent staff relations and providing a high level of satisfaction BMW can meet employees’ expectations and is thus able to minimize the risk of know-how drift (BMW Business Strategy ). Innovation Resources ? The company spends about 6% of its revenues on R. This is one of the highest R spending in the industry.
These investments seem to pay off as BMW has not only developed vehicles using carbon fibre reinforced plastic, but also a number of innovative engines, such as the Hydrogen engine or the Straight-six petrol engine (‘BMW AG 2005 Company Profile Edition 3: SWOT Analysis’ 2005; ‘BMW on the road to carbon car’ 2001; ‘Carbon roof tops BMW’ 2006). ? Between 1990 and 1993 the BMW factory in Regensburg experimented with the unusual incentive system ‘creative error of the month’. This was to encourage employees to think innovative instead of inside the same well known, well proven limits. Employees were honoured, even if the idea could not be implemented in the end. This shows BMW’s friendliness towards calculated risks – in terms of failing – if a competitive advantage can be achieved (Kriegesmann, Kley & Schwering 2005). Reputational Resources ? BMW enjoys high brand recognition. The brand image is based on exclusivity and superior performance.
A good brand image is important in an industry where more and more similar products enter the market (Lencioni 2004). ? Through its appealing brand the BMW group has won a number of loyal customers. These customers bring extra value to the company as they tend to be open for up-selling and cross-selling (Danzig 2004). ? In the 2005 Initial Quality Study of J. D. Power and Associates, BMW won the silver platinum quality award for its plant in Regensburg and the bronze platinum quality award for its operations in Munich (J. D. Power and Associates 2005). Capabilities Capabilities represent a firm’s capacity to integrate individual resources to achieve a desired end state.
They develop over time through complex interactions of the firm’s tangible and intangible resources and are based on development, transmission and the sharing of information, carried out by the firm’s employees. So the foundation of many capabilities lies in the knowledge, skills and expertise of employees. Capabilities should neither be easy to imitate, nor too complex because that would hamper internal steering and control (Hanson et al. 2005). Table 5 shows BMW’s capabilities based on the resources mentioned above. Table 5: Capabilities of BMW [pic] Source: Created by Authors Core Competencies Resources and capabilities that can be a source of competitive advantage for the firm are called core competencies. The principle of core competencies is that a company should concentrate on activities in which it is exceptionally good at.
These activities should be safe from attack by competitors, because they are the company’s sources of competitive advantage (Hanson et al. 2005; Jackson 1998) Table 6: Analysis of BMW’s Capabilities and Resources [pic] Source: Created by Authors Table 6 shows an analysis of BMW’s capabilities and resources according to the four criteria that define core competencies: valuable, rare, costly to imitate and non-substitutable. Regarding this analysis, four core competencies have been identified, which are the foundation for BMW’s competitive advantage. High Brand Recognition High brand recognition is valuable to the buyer, because driving a BMW will give the customer a certain image (wealthy and successful) (Johansson-Stenman & Martinsson 2006).
This image is one reason for BMW’s loyal customer base, which is valuable for the company. It is rare that a brand has such a strong influence on customer’s perception of an automobile and this impression is difficult to imitate. Moreover there is no substitute for a brand, as it is a strong intangible asset connected with customers’ emotions. Exclusive Positioning The BMW group has managed to position all of their cars in the exclusive level of every segment. This strategic positioning is of value because although customers may only afford a car in the compact segment, they will be able to get an exclusive quality car with the 1 series. This positioning is rare. Every car maker aims for a certain position for his cars (e. g.
Toyota is known for value for money), but not many automobile groups follow this exclusive positioning as consequently as BMW. As positioning is a long-term strategy it is difficult and costly to imitate. Similar to brand recognition there is no substitute for an exclusive positioning, because it is connected with customers’ emotions. Pro-active Behaviour Pro-active behaviour is valuable because it influences the performance of the whole BMW group. A management that feels positive about change and sometimes is even friendly towards calculated risks can drive the company to success. The sales numbers of the BMW group have increased since the new design management took over in the early 2000s (Sawyer & Kelly 2006).
Christopher Bangle (BMW’s global design director) successfully manages the relationship among designers, engineers, and business managers and thus is able to create a common pride of product (Bangle 2001). Such a management is rare, especially in large companies. It can neither be imitated, as it is a rather complex resource, nor substituted, because it is essential to the whole operation. Ongoing Innovation BMW’s ongoing innovation is essential for the company’s competitiveness and hence valuable. Its exceptional high R&D spending of 6% of revenues makes it a rare capability. Obviously this ongoing innovation process is difficult and costly to imitate, because R&D always involves much money.
Furthermore the ongoing innovation of the BMW group cannot be substituted because consumers expect innovation and it is needed to stay ahead of competition. Potential Action Steps for BMW By analysing environmental factors as well as the internal situation of the company, BMW’s strengths and weaknesses along with the opportunities and threats of the automobile market have been evaluated (QuickMBA 2004). Figure 7 shows attributes measuring BMW’s internal as well as external factors, affecting its business. Furthermore the matrix introduces some strategies that the company may use to cope with the market conditions. Figure 7: SWOT Analysis BMW 2006 [pic] Source: Created by Authors The developed strategies may help BMW to operate successfully within a competitive automobile market. SO-Strategies
Enter new regional markets Due to its high brand recognition and exclusive positioning in every covered car segment, BMW has optimal conditions to enter new regional markets. Moreover the general environment analysis emphasised that global factors like the development of the Chinese market as well as the enlargement of the EU provide a great opportunities for BMW to enter new markets. Combining this opportunity with BMW’s strength of proactive management behaviour, a successful market entry seems likely. Building partnerships BMW’s proactive management can also contribute to a successful formation of partnerships with renowned companies or public organizations.
Thus the company may establish its luxury vehicles as common company cars and become even more recognised. With a higher recognition, BMW will probably increase sales and achieve above average returns. ST-Strategies Increase promotion in US Although U. S. sales have risen 91% between 1999 and 2005 (Sawyer & Kelly 2006), the continuing decline of the US Dollar against the Euro may threaten the success of BMW in the United States (‘DaimlerChrysler AG – 2005 company profile edition 3: Prospects’ 2005). Thus the company should increase its promotion activities and thereby stabilise its high brand recognition and exclusive positioning in the United States. Product differentiation
In order to respond to the highly competitive environment in the automobile industry, BMW may follow the differentiation strategy and produce products that customers perceive as being different in ways that are important to them and create value for them (Hanson et al. 2005). In future BMW should try to be different from its competitors by putting further emphasis on new technologies such as alternative power trains. In this context BMW’s orientation towards an ongoing innovation seems to be an important strength to realise the development of inventive products. Moreover the company’s proactive management performance is likely to contribute to this differentiation strategy as well. WO-Strategies Engage in lobbyism As lobbying is accepted rather everywhere (Lobbying 2006) and BMW is characterised by a proactive management behaviour, the company should try to build contacts with political officials.
Thereby BMW could promote its interests in the public and political arena and influence decisions for its own ends. Furthermore the company could take the chance and provide public/political partners with BMW cars. This may lead to higher popularity of the BMW group and consequently generate above average returns. Increase production in China An increasing sales volume of about 14% since 1999 shows that the automobile industry in China is booming (China Automobile Market Study 2004). This market potential, in addition to China’s low production costs, presents a great opportunity for the BMW group to increase its automobile production in China, consequently achieving higher economies of scale. WT-Strategies Buy another brand
By buying another automobile brand, BMW could overcome three of its main weaknesses – the limited number of models, its low economies of scale and the unbalanced positioning of its brand. With the purchase of an automobile manufacturer from a lower price segment, the BMW group would be able to sell cheaper cars without damaging its exclusive image. In times of an economic downturn the demand for such lower price cars might be higher than for premium cars. Thus BMW would be able to react to the instable economy. Furthermore the company could avoid competition by taking over one of its rivals. The new brand would have a balancing effect on BMW’s product portfolio. Launch more models
Another possible strategy to overcome the limited number of models and achieve higher economies of scale could be the launch of more BMW, Mini or Rolls Royce models in every segment. Thereby the company could counter the highly competitive environment, by increasing the probability that a car sold in a certain segment is one of the BMW group BMW’s Strategy towards Success The former proposed strategies, represent action steps the BMW group can follow to improve its position in the market. Those strategies can be categorised into the following alternative courses of action: Market development • enter new regional markets (EU, China, India) • increase production in China Product development • product differentiation through new technology • launch more models in each car segment Public relations • engagement in lobbyism build partnerships with firms and organisations • increase promotion in the US Diversification • buy another brand from the lower price segment In order to evaluate these courses of action and to decide about the most promising category, the three following criteria have been chosen and prioritised according to BMW’s current situation: • Impact on business (importance factor 0,5): Does the strategy promote development? • Image (importance factor 0,3): Is the strategy acceptable to current and future customers? • Costs (importance factor 0,2): Is the strategy affordable? Table 7 shows the evaluation of each strategic category regarding the defined criteria. Table 7: Strategy Evaluation |Market |Product |Public relations | | | |development |development | |Diversification | | |[pic] |[pic] |[pic] |[pic] | |Impact (x 0,5) | | | | | | |[pic] |[pic] |[pic] |[pic] | |Image | | | | | |(x 0,3) | | | | | | |[pic] |[pic] |[pic] |[pic] | |Costs | | | | | |(x 0,2) | | | | | | |1,7 |2,1 |2 |2,3 | Source: Created by Authors According to the evaluation results the BMW group should conduct a diversification strategy. Buying an existing brand from the lower price segment seems to be the most suitable approach for the following reasons.
The exclusive positioning, mostly argued as a strength of the group, can also be seen as a weakness, as it also represents a unbalanced positioning across the price segments of the international automobile market (BMW Group – Company portrait: Strategy 2006). By selling cars at the lower price segment the group would be able to expand its markets and to reach customers, which have previously been untouched. Expanding a product line is not without risks. The BMW group already experienced cannibalisation problems with the Rover brand (Wikipedia – The Free Encyclopedia 2006a). Rover models like the Land Rover were positioned in the same price and car segment as BMW models, e. g. the X5, which most likely led to the failure of the acquisition. By operating in the lower price segment the group may avoid such difficulties in future.
Being successful in completely different price segments of the automobile markets is most likely to be achievable by multiple brands (Button 2005). It seems to be difficult to achieve further quality reputation with their 7series, for instance, when also producing a new low end model. By buying an existing brand instead of producing own models for the lower price segment, the group might therefore not threaten its existing brand value as one of its core competencies. Suitable candidates for an acquisition with regard to the price segment and product line diversification might be the members of the strategic group ‘Lower-price / Diversified Producer’. These are: |Scion |[pic] | | | |Citroen |[pic] | | | |Renault |[pic] | | | |Nissan |[pic] | | | |Daihatsu |[pic] | | | |Subaru |[pic] | | | |Honda |[pic] | | | |Hyundai |[pic] | | | |Suzuki |[pic] | | | |KIA |[pic] | | |Mitsubishi |[pic] | | With such an related diversification the BMW group would also benefit from economies of scope by sharing operational activities and transferring core competences (Hanson et al. 2005). Thus gaining greater market power, the ultimate driving machine is most likely to speed into a successful future. References Bangle, C 2001, ‘The Ultimate Creativity Machine: How BMW Turns Art into Profit’, Harvard Business Review, vol. 79, no. 1, p. 174. Retrieved 01. 05. 2006, from Business Source Premier database. ‘BMW AG 2005 company profile edition 3: Key Events’ 2005, Just – Auto, pp. pp. 10-11. Retrieved 22. 03. 2006, from ProQuest database. BMW AG 2005 Company Profile Edition 3: SWOT Analysis’ 2005, Just – Auto, pp. pp. 9-10. Retrieved March 22, 2006, from ProQuest database. ‘BMW AG – 2005 company profile edition 3: Competitor Analysis’ 2005, Just – Auto, pp. pp. 7-9. Retrieved May 7, 2006, from ProQuest database. BMW Business Strategy. Retrieved March 23, 2006, from http://www. coursework. info/i/30354. html. BMW Group – Company portrait: Strategy 2006, from http://www. bmwgroup. com/bmwgroup_prod/e/nav/index. html? http://www. bmwgroup. com/bmwgroup_prod/e/0_0_www_bmwgroup_com/home/home. html. ‘BMW on the road to carbon car’ 2001, Reinforced Plastics, vol. 45, no. 4, p. 14. Retrieved 01. 05. 2006, from Science Direct database.
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