BMW Group and the international automotive industry

Strategic Report

Yasir Irshad

5/7/2010

Table of Contents

A.THE STRATEGIC SITUATION...........................................................................................1

1. Introduction........................................................................................................................1

2. Environmental Analysis:....................................................................................................2

a) The macro-environment and long term trends................................................................2

b) The industry structure and competitive environment.....................................................5

c) Customers, markets and market segments......................................................................7

3. Resources and Capabilities:................................................................................................8

a) Resources, capabilities and Strategic Assets..................................................................8

b) External resources and value adding networks............................................................13

c) Structure, Culture and organisational knowledge.........................................................15

4. Strategic synopsis.............................................................................................................16

B. STRATEGIC CHOICE.......................................................................................................17

1. Identification of Strategic Options...................................................................................17

Ansoff’s Product/Market Matrix......................................................................................17

2. Evaluation of Options...................................................................................................19

Expansion Method Matrix................................................................................................19

3. Description of Recommendations.................................................................................20

C. RECOMMENDATIONS FOR ACTION............................................................................21

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A.THE STRATEGIC SITUATION

1. Introduction

In the automobiles world, few abbreviations bring to mind as much awe as BMW. Short for

Bavarian Motor Works, the company is one of the world's top 10 automobiles manufacturers.

Founded in 1916 in the Bavarian region of Germany, the company was initially focused on

making aircraft engines but then turned the attention solely towards the automobile industry.

There are about 3,000 dealer showrooms worldwide that sell BMWs.

BMW group now manufactures Luxury and Sports Cars along with Motorbike production

also a major playing field. With its three brands, BMW, MINI and Rolls-Royce Motor Cars,

the BMW Group has its sights firmly on the finest segment of the international automobile

market. To achieve its aims, the company knows how to deploy its strengths with an

efficiency that is unparalleled in the automotive industry. From research and development to

sales and marketing, BMW Group is committed to the very highest in quality for all its

products and services. The company's success to date is proof of this strategy's perfection.

The strategy of making company emerge from its Nazi past into a worldwide giant in

automobile industry has been a real success.

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2. Environmental Analysis:

a) The macro-environment and long term trends

The PESTEL Framework:

PESTEL stands for political, economic, social, technological, environmental and

legal. This forms a tool for analysis of the macro-environment of the organization.

a. Political factors:

Political factors highlight the probable government laws and regulations, security

measures and restrictions that can apply to the industry as a whole. The probable

factors that affect the automobile industry are:

Laws & regulations had affected the automobile industry since its outbreak.

These laws generally revolved around the environmental norms that were to

be fulfilled by any car industry. Thus the car manufacturers had to take care of

the environmental issues during manufacturing of cars.

Taxes and government foreign policies are critical for the automobile industry.

The foreign polices help us to decide the probability of success in the global

market.

Introduction of new schemes in the US and Europe automobile industry

wherein regulations were led to produce high mileage cars along with increase

in automobile sales and production (Hill, 2008).

b. Economic factors:

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Economic factors relate to the exchange rates, economic growth globally and the

business setting prevailing in the industry. Economic factors for the industry are:

There was excess capacity of cars produced thus giving rise to high amount of

revenue in marketing and new product designs. Thus there was lot of revenue

withheld even though demand was less than supply. For example the UK auto

market had 80% excess capacity in 2003 which freeze 1.3 billion euro of the

automobile industry (Autofacts, 2004).

The total increase in the GDP globally from 2.0 % to 3.1% in the year 2008

(Statistics, 2009)

Decrease in the exchange rate of Euro has hampered the European car makers

in a big way (Allen, 2006)

Economic downturn in the US market (Copper, 2008)

Surplus capital and buying power in the developing economies like India and

China and their personal emergence in the Global market-place.

c. Social factors:

Social factors include the changes in cultures and demographics globally apart from

change in the buying pattern and capacity of the consumer. Social factors having an

impact on the auto industry are:

Changes in the customer predilection from car being a status symbol to fuel

efficiency and low emission cars

Changes in buying pattern of the consumers due to recession in mature

markets.

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Environmental issues and awareness of the harmful emissions through

automobiles

d. Technological factors:

Increase in use of technology to gain a clear competitive advantage

Use of new and sophisticated design to overcome the decreased margins in the

industry

Modifications or restriction on technology causing environmental pollution

e. Environmental factors:

Increasing effect of awareness of global warming, greenhouse effect and

burnout among patrons (Organization, 2008)

Shift in consumer’s tastes and preferences towards use of more eco-friendly

cars, hybrid cars, fuel cell cars etc.

Stern application of the EURO norms set up to curb pollution in developing

countries

f. Legal factors:

Restrictions and strict pollution norms set up in European and US markets

Strict implications of the EURO norms in developing countries e.g. formation

of BHARAT norms on the lines of EURO norms in India (CEN, 2006)

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b) The industry structure and competitive environment

Porter’s Five Forces Analysis:

Threat of new entrants:

Threat of new entrants is dependent on the challenges faced during entry into the

industry or entry barriers. The threat of new entrants in case of automobile industry is

less as large capital cost is required to set up a manufacturing plant and assembly

liner. Also it takes time for new entrants to get a place and the reputation in the minds

of the consumers

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Bargaining power of buyers

Threat of substitutes

Bargaining power of suppliers

Potential entrants

(Threat of Entry)

Competitive rivalry

Threat of substitutes:

BMW has a brand image of being powerful and luxurious. It is positioned in the

exclusive car range where there exist many substitutes for BMW like Mercedes, GM

and Toyota. Thus the threat of substitutes for BMW is high.

Bargaining power of buyers:

BMW and its competitors are positioned as in exclusive product range. Here the

bargaining power of buyers is high because the consumers can decide the product

according to the price range and buy the products accordingly. Also with

environmental issues hovering over the industry the buyers have the last say with

ample substitutes available.

Bargaining power of suppliers:

BMW had a good supply chain management system and had long relationship with

suppliers. The bargaining power of suppliers is high in this industry as the suppliers

can dedicate the price tag for the raw materials. Though long time associations with

suppliers can prove fruitful, the final word lies more or less with the suppliers.

Competitive rivalry:

The industry has cut throat competition for its products, with its products targeting the

same segment and positioned in a similar way. Competitive rivalry was high in the

industry with the dominant US and European markets facing stiff competition from

the Asian market.

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c) Customers, markets and market segments

BMW customers are mostly from the High earning ones. Basically the customers of

this brand differ from region to region as in some regions it is considered to be a

prestigious car whereas it can also be deemed as somewhat in the affordable range.

You still have to pay a very high price for owning a BMW in most of the Asian and

South American countries as the brand is of highest level in these emerging

economies.

BMW has managed to create a highly sought-after brand by successfully cultivating a

particularly loyal following of luxury-performance automobile consumers, especially

when they are facing solid competition from other manufacturers who are looking to

capture the Segment.

BMW positions itself as the product Niche market segments and has been very

successful in efforts. They have been able to associate style, luxury and extremely

reliable engineering with its brand. The first thing which comes to a consumer’s mind

after hearing BMW is nothing else but Style, Comfort and Sheer brilliance of

engineering & technology.

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3. Resources and Capabilities:

a) Resources, capabilities and Strategic Assets

Every company or organization needs and owns certain resources, capabilities or

competencies and also assets which are a necessity to endure and prosper globally. In

other words every firm has its own resources and capabilities to achieve its goals and

gain a foothold in the market and become a main market player.

The resources consist of:

Tangible resources

These can also be known as physical holdings like manufacturing plant,

people or man power and finance of the organization. Finance can be in terms

of Debt or Capital and with all the above mentioned we know that we can

have these resources quantified.

Intangible Resources

These can also be said as non-physical holdings like information of industry

involved and also the markets, reputation which a company enjoys in the

overall scenario and knowledge or the experience it has of working in the

same field.

Next a resource based analysis is presented and further conclusion of BMW’s

resources, capabilities and assets can be drawn from there.

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Resource based analysis of BMW:

RESOURCES CATEGORIES BMW RESOURCES

PHYSICAL RESOURCES Technology

Conventionally designed and

styled.

Effective segmentation.

Supply chain management.

Dealership management.

FINANCIAL RESOURCES Turnover of € 46.56 billion in

2009.

Gross margins of € 4.13

billion in 2009.

Profit of € 2.1 billion in 2009.

HUMAN RESOURCES Greatly competent labor

force.

Young and prosperous.

INTELLECTUAL CAPITAL Reputation for excellence in

engineering.

Brand image built as

powerful, reliable and

luxurious.

Strategic capability of BMW:

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CATEGORIES BMW RESOURCES

THRESHOLD RESOURCES Cohesive supply chain.

Young and affluent

workforces.

Widespread manufacturing

and assembling divisions.

THRESHOLD COMPETENCIES Quality.

Reliability.

Dealings and relationship

with its suppliers.

UNIQUE RESOURCES Engineering excellence.

Extraordinary labor force

CORE COMPETENCIES Technology.

Speed of production.

Known as “The Ultimate

Driving Machine”

SWOT analysis of BMW:

Strength:

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• BMW is a renowned company with a high position in terms of branding and gratitude

factor.

• BMW is able to sustain its market position lucratively with its hub of exclusive cars.

• BMW had exceedingly qualified labour force (Gerry Johnson, Kevan Scholes,

Richard Whittington, 2008) that could qualify as a source for gaining competitive

advantage

• BMW used advanced technology for its products that embarked its products design,

quality and price

• BMW had strong relationship with its suppliers which propagated BMW in

maintaining a brawny supply chain management

Weakness:

• BMW’s overall image was too serious and conventional in comparison with its

competitors.

• Low cost products of its competitors

• Overdependence on US and Europe market

Opportunities:

• The increase in number of products sold in spite of the economic downturn

• Use of advanced technology for the products

• Popularity in developing countries like India and China

• Flexibility in development and manufacturing

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• Low interest rates

Threats:

• Strong competition in the luxury segment of cars

• Economic downturn

• New entrants in the automobile industry

• Increase in fuel costs

• Rising supply costs e.g. steel

b) External resources and value adding networks

Value network of BMW

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It is difficult for a single organization to manage all the value based activities right from the

design of the product to delivering the final product or service to the customer. This process

is generally carried out with the help of a value network. A value network can be termed as a

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Location 1

(Assembler)

Core location

(Assembler)

Location 2

(Assembler)

Organizations

Value Chain

Location

Price

Design

Product design and price

according to the location

Price variation dependent on the product

specifications

Range of products and

designs

Suppliers

Suppliers

Suppliers

Channel value chain

Customer value chain

combination of inter-organizational process that proves beneficial to create a product or a

service.

The value network of BMW is as shown. BMW has various assembly locations as well as

manufacturing units with each assembly unit having its own supplier of raw materials needed

to create a product. Also there exists an internal value chain of the assembly liners within

themselves. The finished product is again reciprocated to the suppliers and collectively it

gives rise to the organizations or the firm’s own value chain. The organization has its own

channel value chain. The channel value chain for BMW is divided on the basic of design,

price and location. BMW offers its potential customers products ranging from a “Mini” to the

higher end “Rolls Royce”. These products are priced differently and segmented effectively in

response to the target market. BMW also has price variations according to the locations it is

striving in. For example BMW is priced on a slight lower side in the Asian markets as

compared to the UK or US market. The consumer value chain is based on the channel value

chain BMW offers namely price, design and location.

c) Structure, Culture and organisational knowledge

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There are very less companies who can boast to be as consistent as BMW in terms of

producing a product line which is always adjusting itself for the demand of the time with

seamless quality and efficiency. The adjustment which is the company is willing to accept all

the time is what makes it different from the rest.

Their philosophy of the BMW is to provide cars which are marvel of engineering but also

come with comfort and class.

4. Strategic synopsis

pg. 17

Efficient dynamics, Sustainable mobility, Sheer delight, Profitability and innovation are just

some of the strategies mentioned by members of management at BMW's annual conference

in Munich. Apart from being catch-phrases that the German auto giant leverages from time to

time for its products in terms of marketing, they serve to illustrate BMW's vision for the

metaphorical road ahead.

If long-term thinking and prudent business rationale is what effectively has saved the day for

his company in the past year, let's examine some initiatives he's laid out for the future. He

maintains that BMW will push especially hard on its mini brand of cars - a small vehicle so

far seen as "cute" but not a serious luxury car. He maintains that collective investments to the

tune of a few billion dollars will be made in pumping up production in the United States,

China and Germany. He also focuses on the ecologically sensitive and addresses lowered

emissions of carbon per kilometre travelled, and hints at using nanotech to introduce

lightweight autoframe and other materials such as carbon fiber for future cars.

Most importantly, the entire board is clear about making 2010 a year of profitability and

growth. And judging by plans for plant expansion ramp up in their China operations from

40,000 to 100,000 units, it’s clear that China is where the next youth population and wealth

drivers are in place, not to mention technological expertise in the making of auto parts.

B. STRATEGIC CHOICE

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1. Identification of Strategic Options

Ansoff’s Product/Market Matrix

Considering the approach of BMW they should continue to go with what they are doing

currently. It means stick to what they do best. I think that they do need to enter new markets

for themselves and in particular ASIA. Currently BMW is not one of the most commonly

used or known brands in ASIAN region. To pin point the region the areas to focus must be

China and South Asian markets.

BMW has set its sights on Chinese Niche market with view of the massive growth in Chinese

economy and the wealth generated. Working in China would also mean that they will be able

to work with the best available technology and also the fast growing consumer market that

exists within China.

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Other region of interest can be South Asian emerging markets and in particular India who are

enjoying a massive boom in economy and also buying power.

In my opinion the strategy used needs to be Business to Customer or B2C as this strategy has

already served BMW Group very well in the past.

The benefit of the strategy will be that it will be Product driven and will also maximize the

value of the transaction and plus they will have larger target markets. This will also ensure

that there will be a single step buying process and will enhance brand identity and also the

brand image will also work as an extra helping hand for the company. B2C strategy will

ensure the brand loyalty and also will promote emotional buying decisions which will base on

status, price or may be desire.

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1. Evaluation of Options

Expansion Method Matrix

The best method for expansion for BMW will be either of organic growth or with the

model of franchising.

Both the methods are discussed in detail below.

BMW has experienced in past with the acquisition style of growth but this was not

very successful. They already have had to let go Rover to Ford group previously

which became part of BMW Group in their efforts to grow by acquisition.

To explain this further we can have a look at the example of India where they

established in 2006 with it being 100% subsidiary of BMW. For the time being not all

the models or units are manufactured here but there is room to enhance the local

market by producing models which are affordable or at least encourage more and

more customers to buy BMW cars.

On the other hand it has franchised the production of BMW cars in China to

Brilliance Automotive since its start in 2004. As oppose to India, it is operating in

China as a joint venture. It gives them a chance to enter the world’s largest car market

by sales in 2009. Combined with the fact that demand for the luxurious and specially

those at the pinnacle of engineering cars are in demand in china. China is the biggest

consumer of 7 series which is the best to offer from BMW but they expected more

sales if they had not ran out of cars in China. For the very particular reason that there

is so much potential and expected sales in the region, BMW is setting up another plant

in China which is expected to open by 2012.

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2. Description of Recommendations

To consolidate its position in emerging economies and follow the growth pattern of

organic growth.

BMW should continue with its operation in the growing economies and markets and

diversify themselves to new markets where ever possible. As most of markets of

Europe and America are at a stage of maturity, the realistic option for growth is

diversion to new markets. The stable markets of Europe and America are older and

also are very established for the BMW and it also has developed a brand loyal

segment of customers behind them. That is the reason they need to consolidate the

work they have so far put in to the emerging markets and consumers.

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C. RECOMMENDATIONS FOR ACTION

BMW should continue with its operation in the growing economies and markets and

diversify themselves to new markets where ever possible. As most of markets of

Europe and America are at a stage of maturity, the realistic option for growth is

diversion to new markets. The stable markets of Europe and America are older and

also are very established for the BMW and it also has developed a brand loyal

segment of customers behind them. That is the reason they need to consolidate the

work they have so far put in to the emerging markets and consumers.

To put the strategy into action BMW needs to consider the below stated aspects so

that the transition or change over to new markets is as smooth as it can get.

The timing is one of the major aspects which need to be taken care off or estimated

beforehand. Since company already has its plants based in INDIA and CHINA; they

still need to develop them further to enhance production and meet the growing

demand of a growing market and also a growing consumer base. The time it will take

for them to either acquire or go into further and further of franchise growth model.

The other important type of strategy in which BMW has been largely successful is by

creating their 100% subsidiaries in the emerging markets so that it becomes a strategic

asset for the company and would usually mean that it will be cost effective

manufacturing by producing it in developing countries; which means that they will

have relatively less expensive labour at their disposal in comparison with already

developed countries and markets.

The constraints for company can be the rise in prices of raw materials will definitely

impact pricing and positioning of the brand.

pg. 23

They will also have to work extensively to keep up to date with taste of consumers

and also their preferences’ in terms of cars. Another factor can be the potential of the

markets suggested will definitely appeal to the competition and it might trigger a price

war and fierce rivalry amongst the industry players.

The fluctuation in international business will also affect BMW in particularly the

international currency market.

The efforts of reducing carbon foot print in today’s world will also lead towards more

and more demand of Hybrid cars and away from the conventional vehicles.

This strategic plan may be able to help BMW achieve a safer journey ahead and they

will be able to sustain a strong foothold in the world automobile market.

pg. 24

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