The car industry has grown up as a very dynamic industry in the past few decades. Although the primary purpose of this industry has been to satisfy the consumer’s need to travel from one place to another with comfort, the continuously changing market, has slowly altered consumer’s needs into desires which have cleared the way for intense competition in the automobile industry.
Bayerische Motoren Werke Group (BMW) is one of the world’s leading luxury carmakers. Founded and based in the Germany. BMW group employed over 100,000 people, in 2009, making and distributing a series of successful, premium-priced passenger cars and motorcycles*34. In addition to its manufacturing operations, BMW also provides financial services to support its worldwide sales and distribution of cars and motorcycles. But in this report, we will be only focusing on the cars, which accounted for about three quarters of BMW group’s sales.
BMW was initially established to build aero engines during the First World War. By 1945, company was still country’s leading aero engine manufacturer. But by 1928, BMW has also started making cars, when it got the license. It was later when BMW became one the biggest automobiles maker in Germany. But after the Second World War, company was laid into ruins. The demand for aero engines subsequently disappeared. Its factories and other capital equipment, which were located in area now controlled by Soviets, were under serious threat. At this point of time company was not sure about its future and started concentrating on automobiles production. But in 1959, company went into financial turmoil, when it faced bankruptcy. In this hard time, company found a savior in the face of Herbert Quandt, who emerged as a powerful share holder by taking over the 50% share of the company (Anon, 2007). In BMW group’s history the turning point was 1961, when it launched BMW 1500, which soon got BMW brand, the reputation of an excellent engineering company. Now a day, BMW enjoys the ownership of three quality brands, BMW, MINI and Rolls-Royce motor cars.
This report consists of two parts. In part 1, we will be first discussing BMW’s strategies from 2002 till 2004. We will then be evaluating those strategies with the help of different tools. In part 2 of this report, we will be looking at BMW’s main strategies from 2005 to 2009. We will then be evaluating those strategies. We will also be focusing on the issues which BMW had to face because of the recession and how it managed to tackle them and still stay as a one of the only few profitable automobile companies in the current economic climate.
BMW’s Strategies for 2002-2004
In this part of the report, we will be looking at the strategies from 2002 to 2004. Rational behind this is appointment of Helmut Panke, who took over as BMW group’s new CEO in 2002. So it will be quite reasonable for us to see what policies he made out and how did they perform.
Before we start discussing BMW’s strategies, we must know what strategy is. “Strategy is the direction and scope of an organization over the long-term, which achieves advantage for the organization through its configuration of resources within a challenging environment, to meet the needs of markets and to fulfill stakeholder expectations” (Johnson, G., Scholes, K. & Whittington, R., 2006). BMW’s strategies can be categorized as multi-leveled strategies, which are discussed below.
Corporate strategies are companywide and they detail actions which guide about gaining competitive advantage and adding value, through selection and management of a mix of business decisions while competing in several industries and markets. In other words, corporate strategy guides in which sector firm should be working and how the corporate parent should manage its groups of business units. This is usually achieved by effectively using resources, capabilities and core competences that create value. We will be investigating BMW’s approach towards development of corporate strategy using Ansoff Matrix.
Like all other organizations, BMW followed some strategic development directions in order to expand them and to increase their sales. Ansoff matrix is a tool which helps organizations, like BMW, to develop strategy directions that they can follow, regarding the products range and markets, while considering the capabilities and stakeholder’s expectations of the organization. As it can be seen in the figure#1, there are four strategy development directions. BMW followed almost all of them. We will be discussing them one by one.
Market penetration involves increasing market share by achieving growth with existing products in existing markets. BMW’s strategy for this was ongoing growth and expansion. One such expansion was opening of new sales subsidiary in Malaysia “BMW Malaysia Sdn Bhd”. This was a joint venture with BMW’s local partner Sime Derby. BMW’s target was to further intensify their presence in the market so that it can fully exploit the growth in the market*1. As part of its expansion to improve its international presence BMW further expanded its sales organizations in Greece, Ireland, Luxembourg and Denmark*2. In 2003, BMW group also signed a contract for joint production and sales venture in china, which was fast-growing market for BMW*3. BMW was careful at this stage because it had to sell off its previous alliance Rover in 2000.
This strategy involves about how an organization can sell new or modified products into its existing markets. BMW’s approach towards this was to launch a new model every three months from 2003 to 2005*4. BMW named it as” product and market offensive” and pushed itself hard to achieve this*5. This can also be linked with BMW’s diversification strategy.
In 2003, BMW launched MINI ONE D which was followed by the delivery of new BMW 5 limousine to the dealers and customers*6. In January 2004, with the launch of the BMW X3 this year, the company established the compact Premium Sports Activity Vehicle segment*7. In the same year, BMW brought premium car status to the family class with the successful launch of X1 series*8. This smallest BMW was competing against Golf, A3 and Astra models. BMW maintained its eminent reputation for producing dynamic and engaging cars by the launch of new X6 series the same year. 6 series provides an attractive mix style, performance, modern technologies and practicality at a price that appears to hail from the past decade. BMW launched this when the international demand for luxury cars is at the high end*9. It is very important to know that many few companies balance themselves between the intersection of art and business as successfully as BMW does, because of the aesthetic sense it brings into its cars (Bangle, C., 2001). The proof of this is the regular award winnings for its designs.
This is a strategy where a business sells new products in new markets using organization’s existing capabilities or resources. BMW’s approach can be linked to related diversification by developing beyond current products and services with its existing capabilities. BMW diversified itself by producing smaller 1 series cars. One may argue that BMW was already producing MINI, but it never had small cars with their main BMW brand. BMW also entered the same year in the new market segment, car racing, with the launch of X3 Sports Activity Vehicle and the large 6 Series Coupé.*10
This is a strategy where a business aims to sell its existing products in new markets. While doing product development, BMW was following the market growth strategy at the same time. Main reasons because of which an organization decides to expand itself in the new market are its capabilities and market considerations. While Western Europe, the USA, Japan and the Pacific region have been the main markets for BMW, new markets were to be exploited as well. BMW Z4 reached in Europe and Asia and BMW X3 was also introduced in these regions, while the demand of high-end models, like 7-series and 5-series was also growing in emerging china. It was also important to exploit the fast-growing UK, the Italian and the French markets. India was also a new market for BMW where it can introduce its vehicles*11.
Business Unit Strategies:
This strategy forms the base of the competitive advantage. Essentially it deals with the way a business competes successfully in a particular market. i.e. the strategic decisions about choice of products, meeting needs of customers, and gaining competitive , exploitation or creation of new opportunities delegated by the corporate level strategy .(Johnson, G and Scholes, K.)
To further illustrate this in detail, we will be using a tool, Porter’s Generic Strategies, which is shown in figure#2. BMW followed Cost Leadership and Differentiation strategies, which we will be discussing one by one.
Cost Leadership Strategy
This strategy involves gaining competitive advantage being a low cost producer, while trying to maintain the same product or service benefits to those offered by competitors to gain profit and market share. BMW took different steps to achieve this. One of them was to have wonderful production facilities. In fact, BMW was operating some of the most flexible and productive plants in the whole automotive industry. Prime example of this was the production facility built in Leipzig (Germany), which was planned to swing from 60 hours per week to 140 hours per week, when demand would grew.
Another approach which BMW adopted was to move production plants in the growing markets, which achieved double benefits of containing the costs along with partial hedging against the currency risks. Measures were also taken to increase utilization of Spartanburg plant in the US, where X4 and X5 were being built. A plant was also opened in china. BMW would achieve double benefits from this plant, one a very qualified labour force and second it would be much cheaper than the West. Another interesting move which BMW adopted was to source locally 40 percent of the parts used in the China plant*12.
This strategy seeks to provide products or services benefits that are different from those of competitors and are widely valued by buyers. BMW offered its customer powerful, reliable and luxurious vehicles. Its technology had been very advanced. In premium car market, key requirement from customers and critical success factor is reliability and BMW excels in it. The scarcest source for its competitive edge is, which is a national advantage as well, is its work force. Because of this BMW managed to build perception of valuable differences in the mind of its buyers. Another difference was the tight control BMW had on its distribution network, supply chain and its relations with its suppliers. All these measures resulted in the benefits of effective brand management, communication and after sales services*13.
BMW’s Strategy Evaluation for 2003-2004
We will do BMW’s strategy evaluation, initially, by identifying the competitive forces using Porter’s 5 forces. The model would then be used to assess the Feasibility and Suitability of BMW’s strategies.
Porter’s Competitive Forces
The main purpose of a company formulating a competitive strategy, according to Porter, is relating it to the environment the company competes in (source of competition). Hence the key aspect of a company’s environment is the industry it competes in. Porter further suggests that the intensity of competition within an industry lies deep down in the underlining economic structures of this particular industry and it goes beyond the behavior of the current competition, such that it depends upon the five forces, which are shown in the following figure.
He further emphasizes that the collective strength of these forces decide the ultimate profit potential by identifying the key structural features to determine the key strength and weaknesses, positioning, highlight industry’s trend promise and significance. We will be using this view to evaluate the reasons behind BMW’s strategic moves from 2002 to 2004 and to further elaborate the company’s strategic choices and the level of competition it faced.*14
We will be discussing these forces one by one.
Threat of New Entrants
. Threats of new entrants in an industry usually depend on the extent to which there are barriers to entry. New entrants have to overcome these barriers if they are to compete successfully with the companies already working in this industry. This element is favorable to BMW due to huge initial overheads such as the capital requirement for manufacturing, R&D, marketing and distribution. As mentioned above about BMW’s strategy to open a joint production and sales venture in china, would cost them about $480 million and that too in just one country. Now it is very difficult for a new player to invest almost half a billion dollars for startup alone*15. The cost of entry, keeping in mind, will vary from country to country. Globalization can make capital and labour mobilization a lot easier. The pure example of this is the high-skilled labour with low costs in China and India. As mentioned above, this has been capitalized by BMW as an attempt to reduce its cost of production to become market leaders. Another barrier to entry for new comers is the economies of scale. In automobile industry and in BMW organization in particular, economies of scale are very important in producing mass no of automobiles to reduce the costs of production. The advantages BMW have, will not apply to newcomers in the industry. Also the brand loyalty of customers and suppliers which BMW enjoys will be very hard to overcome by a new comer. BMW sold one million auto mobiles in 2003. This shows the highly valued reputation which has been built by BMW over the years*16. It will be hard for new entrant to compete with such level of confidence. Customers can easily trust BMW for their vehicles and suppliers can trust BMW for the immediate purchases and payment.
Bargaining power of Buyers
It is basically linked with buyer’s ability to compete with the industry by forcing down prices, bargaining for higher quality, with competitors playing against each other. Usually buyers don’t pose a major threat towards BMW, unless bulk orders (such as orders from governments with specific requirements or from different other companies) come through. BMW brand is very important for buyers for whom quality is the key. Its customers seek product differentiation rather than price sensitivity, which is one of the strategies adopted by BMW.
Advantages/Disadvantages using Evaluation Criterion:
Feasibility is concerned with whether or not an organization has the necessary capabilities to deliver a strategy in terms of finances, resources deployment, and environmental factors. One of the main strategies for the BMW was to expand in order to get market penetration. BMW was very successful in achieving this. BMW achieved the sales of more than 1 million cars in these years. It can also be seen in figure#4 that BMW overtook Lexus in USA. Its profit margins were also up.
Table#1 (Hand Drawn)
In order to sell more BMW had to produce more and to produce more it required capital investment. BMW was having all the financial bits to do this. As it can be seen in table#1 that automobiles revenues of the BMW Group during the financial year 2004 increased to euro 42544 million compared to year 2003, an increase of euro 4227 million or 10% over the previous year*17. The automobiles business usually counts for about three quarters of group’s sales. As mentioned earlier, BMW was expanding its production capabilities in China for better resource development. This will help them to produce more at lower cost. So, financially, it was feasible for them to open this. It is also evident from figure#3 that BMW was placed at the fourth position with respect to profit margins. It also took over the first place from Lexus in the luxury car market in United States in terms of sales.
Overall, BMW took all measures to fulfill its strategy and it was having all the required capabilities to take these actions.
Suitability is concerned with the expected performance outcomes of a strategy and the extent to which these meet the expectations of stakeholders in terms of returns and risks. In other words it’s about asking that would it work. BMW strategy was to become low cost-producer in the premium car sector. BMW was able to achieve this by taking different steps. It was using its production facilities with excellent efficiency. It also expanded its production and sales facilities in these years to developing economies such as China. These measures took BMW’s profit further up.
But the negative side was the quality issues. With huge pressure on costs, the risk of quality lapses would bind to increase. The consequences of quality defects in the premium car industry could be very severe. Expanding production facilities to other countries would make quality control more difficult.
BMW’s Strategies for 2005-till today
The main direction for strategy in terms of both corporate level and business level, for BMW, remained the same in terms of Ansoff matrix and Porter’s generic strategies. In other words, we can say that BMW carried on using existing strategies. Though, there were few additions which we will be describing below.
Corporate and Business Level Strategies:
In terms of Market Penetration and Market Development BMW continued its initiatives started in previous years. BMW set out a growth policy to increase its sales to 1.8million by 2012 to further increase its dominance*19. As its future strategic re-alignment BMW also made some alliances and joint ventures. In July 2008, BMW signed a memorandum for a possible strategic alliance with Fiat Group Automobiles. This memorandum was signed to look at the possibilities of co-operation in MINI and ALFA ROMEO vehicles.
In October 2009, BMW established a joint venture with SGL Group for carbon fibers and semi-finished textile products to be used in vehicle construction. BMW was planning to manufacture more and more automobiles to achieve its target of 1.8millions. Although, it was joint-venture but doing this will take off some responsibility from BMW’s shoulders*20.
BMW Diversified its products with some technological innovations. In January 2005, BMW introduced dynamic 4-wheel drive system to some of its vehicles. By 2012, company decided to introduce fundamentally altered concept called Progress Activity Sedan (PAS). This will introduce unique features of BMW sedan*21.
As mentioned in previous section, BMW was pushing hard in terms of Product Development to introduce new models after regular intervals. In the past few years, BMW has evolved itself from a group of 6 model families to a group of 11 model families. It helped company to get the sales of revenues of $65 billion in 2006 (Gumbel, P., 2007). BMW carried on doing this in the coming years as well.
In 2005, BMW introduced the new BMW 3 series Touring. BMW also introduced revised version of 7 series, BMW M6, BMW 6 series Coupe and Cabrio models in the same year*22.
From April to June 2007, BMW introduced two new models in the market, BMW M5 Touring and the three-door version of BMW 1 series. In 2008, the company also introduced BMW 1 series and BMW 3 series convertible*23.
BMW was also pushing hard for X1, Gran Turismo, MINI SAV, Rolls-Royce Coupe to be launched by 2012*24. A 3-series new design was due to appear in 2010 (Kurylko, D., 2008).
BMW carried on following its Cost-Leadership strategy. But in the era of 2005-2009, it took some strong decisions to cut back its costs to be more profitable, to have a better cash flow because of the severe economic climate. At some 25 billion Euros, the cost of materials is clearly the company’s biggest cost factor. BMW group made a strategy to improve its costs and performances by about 6 billion Euros by 2012. This means that if BMW can reduce its costs by 3% a year it will translate into annual potential of 750 million Euros p.a.*25. To further reduce its cost, BMW decided to build a second joint venture in China with Brilliance Automotive Holdings Ltd. As mentioned in the previous section about the lower labour costs in china, BMW will be able to produce 100,000 units, which will not only help them in getting economies of scale but it will also help them to reduce their costs to their set targets as 40% of the material used in china will be produced locally*26.
BMW’s Strategy Evaluation for 2005-till today
Political factors have a great influence on BMW’s policies as these factors affect the spending power of consumers and other businesses. One such factor was the rise of the VAT from German government from 16% to 19%, in 2007*27. Now this higher VAT reduces the demand from consumers especially expensive goods. Initially it did not affect BMW, as it produced record revenues of euro 56,018 million in the year 2007, which were the highest in the company’s history so far*28.
But as the recession worsened in 2008-2009, like all other industries, automobile industry went into some serious troubles. BMW being in the premium market segment was also affected by it. For 2008, its profit went down to 78.1%, in like-for-like sale*29. In quarter 1 of 2009, its sales volume in USA fell to 25%. Due to which BMW had to change its policy of mass production. It decided to reduced its production and increase its prices*30. The situation for automobile industry went so gloomy that German government had to step in to protect its whole auto industry. The government announced that it would provide the financial package of 1.9 billion Euros to overhaul the industry*31.
Another factor, which BMW had to see, is the new rule for CO2 emission, passed by European parliament in 2008. According to this car makers had to reduce their fleet average CO2 emission to 130 g/km by 2015*32. BMW is one of the pioneers in this arena. Because of the advanced technology BMW has got, it now focuses on environment friendly engine at the time of engine design and production*33.
Inflation, income distribution, economic growth and many others economic factors determine the necessities of products and consumer behavior. BMW had to consider these factors both in short and long-term to form its strategies, because it is very important for organizations like BMW to adapt themselves to their (economic) environment as no organization has the ability to change the world for its needs (Wit & Meyer, 2004).
By June 2008, the oil prices has reached to its record level of $140 per barrel, placing a huge strain on the world’s economy, especially Europe and United States*35. In UK alone, prices reached to £1.13 per litre, which were the highest since the records began. According to the Office of National Statistics, petrol prices were increased by 17% between year 2007-2008, which will be directly passed on to the industries and consequently to the consumers (Office for National Statistics, 2009). In spite of the fantastic recent boom enjoyed by BMW, this affected BMW as well. Because like other companies in automobile sector, its manufacturing costs increased. Because of this, as mentioned previously, it had to reduce its production and increase its prices to get a better grip on the economy and to achieve a better liquidity position.
Situation became so worse in UK that Bank of England lowered its interest rate to 1.5% in 2009. This was a record decrease since the bank was established in 1694*36. This step was taken to give aid to ailing industry. Because this way, though virtually, customers will feel less pain while buying automobiles on credit. Also, As part of its stimulus package, the German government announced that owners of cars which are older than 9 years could get a rebate of up to 2,500 Euros if they purchased a new car which was meeting certain environmental conditions*37.
BMW have to be careful about social factors such as lifestyle, education, profession etc while making its policies. BMW brand is being perceived as high-performance saloon automobile by the young and affluent European professionals*38, so it has to consider above mention factors. BMW did fantastically till 2007. But as the recession worsened, more and more business went bust, including some major banks like Lehman Brothers in America and RBS in UK. As a result many people lost their jobs. 5000 people lost their jobs only in Lehman Brother’s London branch*39. Now this is very important scenario to understand. BMW is a premium car brand which is an expensive segment of car industry. If so many high-flyers lose their jobs, it would definitely heart premium car segment in general and in particular to BMW. This was one of the reasons BMW lost it sales. It was till late 2009, when it saw first increase in its global sales.
Also people now like to buy green-cars. As mentioned earlier BMW is already keeping it in consideration while doing product development.
In these days of globalization, technological leadership is very vital for competitive advantage. In these days customers can go on-line and can make modular changes to their preferred styles of vehicles. So BMW must look at its products extensively in terms of technology with respect to the like of Mercedes and Lexus. Technological innovation is at the heart of BMW policy in these days. BMW has got a wonderful BMW Group Research and Innovation centre, also known as FIZ. It is located close to BMW’s Munich headquarters. This research centre is one of the world’s most modern automobile-industry development centers. BMW maintains its position as a global technological leader in the automobile industry by creating wonderful innovations. One of those innovations is BMW iPod(R) Adapter, which is the first seamless integration between iPod and a car audio system. The new system developed by Apple and BMW enables drivers to seamlessly use their iPod in BMW’s 3 Series, Z4 Roadster, X3 and X5 Sports Activity Vehicles and MINI Cooper by simply plugging their iPod into a cable located in the car’s glove compartment. Such is the technological repute which BMW has maintained throughout these years regardless of economic activity*40. Being technological leader has always been an edge for BMW to maintain its position in the premium car market.
Advantages and Disadvantages using Evaluation Criteria:
BMW has created a strong brand image in the eyes of its customers. According to Interbrand, a leading international brand consultancy, BMW is the world’s 15th best brand*41. A strong brand image provides a distinct competitive advantage in automobile industry and helps in attaining customer. BMW’s strategies in this period were feasible to some extent because of its brand image. It was going in the right way till economic downturn. Due to which it had to change some of its policy which we have already mentioned. But BMW carried on developing new models and technological innovation, because it was having all the required necessities to develop new model and to bring out some wonderful innovation.
Although BMW later decided to pull down its production, but it was very feasible for them to open second plant in China, as it will reduce its cost production, which will help it towards being Cost-Leader in the industry.
BMW operates in different competitive segment of automobile industry. The company’s competitor includes likes of Mercedes and Lexus. In this intensely competitive environment BMW wanted to grow more and more. So its decision of (Possible) strategic alliance with Fiat was a good one and leys suitable with its strategy. As this way, both companies can share a common plate form for some of their products and it will be beneficial to both of them.
BMW also decided to pull back its production and increase its prices once the recession became worse. This step was also in line with the policy of them being most profitable in the industry. Because of reduction in sales in early 2008 BMW has to take this step. Another step which BMW took and which completely suitable with being profitable was to lower its costs of as much as 750 million Euros per year for achieving some efficiency gains.
As we have seen from above discussions, strategic planning is very important for any organization to achieve its short and long term goals. Especially, with the booms and busts of the global economies in the last few decades, it has become even more important for companies to execute their strategies carefully. A very important part of the strategy is to get ready for any future changes and to be well placed to face the challenges brought by these changes. This is why; strategy should be capable of minimizing the threats and maximizing the opportunities which are brought by the changes.
BMW brand has earned the reputation of great engineering excellence over the years. It is coupled with the product developments which has been the cornerstone of BMW’s strategy for the past few years. In this report, we have identified and evaluated the strategies of BMW for two different periods of times. We discussed the strategies which were brought by Helmut Panke, as the new CEO of the company. We evaluated how well his strategies performed with respect to external environment. In the second part of the report, we discussed the strategies from 2005 till today. We especially mentioned the steps which BMW took due to the recession. We also talked about the political and economic factors which BMW had to cope with because of the recession. BMW’s sales did go down but as of today they have started to bounce back and company sees itself as one of the best and profitable company in the automobile industry.
BMW group has got the firm commitment to be a global player, which is aided by its regular attempts to further differentiate its product line, because of which it had been able to reach to different markets and thus different customers, as it products provide value for money (Brand Image). But our main concern is about BMW’s strategy of mass production along with its premium brand. BMW has to be very careful about it because it has already seen the problem with the acquisition of the Rover. Apart from this BMW’s competitive advantages will keep enabling them in the luxury market. In the near future, BMW remains on the top of the game in this sector. Although BMW has set a plan to produce 5.5 million units till 2012 (MarketWatch, 2008), but it will have to review its strategy continuously and while doing this it has to be very careful because of the economic changes. It has also to be careful from the intense rivalry of Mercedes, Lexus and other luxury brands. Because the competition in this segment of automobile industry is very high and one smaller mistake, which may be either in strategy development or in product development, can have some long term affects.