Analysing Bmw and the Automobiles Industry

BMW – the Bavarian based luxury car producer is seen as one of the most prestigious, stable and admired companies in the world. By 2008 the company sold 1.2 million automobiles under its largest brand – the BMW. In 2001 it very successfully launched the new Mini which is the only brand kept after the failed acquisition of the Rover group with sales rising to over 230 thousand in 2008. In 2003 Rolls Royce was added to BMW’s portfolio and sold 1,212 units in 2008 – an increase of 53% compared to 2004 (BMW Annual Report 2008, pp6-7). The company has not only one of the strongest brands worldwide and exclusively high profit margins of 8 – 10% but since 2007 it has been the world’s top seller in the premium class (Hawranek, 2008).

Automobiles market in the 2000s

The next chapter will investigate the main trends within the automobile market starting with a general overview, followed by wider analyses of the environment as well as investigation of the competition in the car market.

General overview

In the 21st century the car industry can be described as mature, highly competitive and very dynamic. Despite being considered as global, automobile industry constitutes of three major areas – USA, Japan and Western Europe which together accounts for 80% of total sales (Lynch, 2006, p698) as well as almost 90% of total output (Donnelly et. al., 2002, 31). New markets, such as China, South America and Eastern Europe are emerging; however, as Lynch points out (2006, p697) the level of wealth differs among the various regions leading to highly varying customer preferences which need to be considered when entering new markets.

As a result of the fierce competition, the structure of the car industry has been changing radically. Extensive consolidation through acquisitions, joint ventures and strategic alliances has been taking place. According to Lencioni (2005), in given circumstances taking into account the BMW’s size and product range the company was at risk of being taken over, however, it successfully managed to expand their product range through internal growth as well as acquisitions.

Increased cooperation could not only be found among car manufacturers but also with their suppliers. Wide-ranging 1st tier outsourcing, including R&D, modularization, and supplier parks were being commonly used in car industry (Jung and Lee, 2006). Furthermore by the 21st century the quality and technology of the cars had risen to similar standards. In addition, companies were increasingly using the same platforms and other components in different models in order to increase profitability. The consequences were that cars produced by different companies looked very similar and the low differentiation led to increased price competition. (Lencioni, 2005). In addition to that, overcapacity had also become a concern within the industry (Oliver and Holweg, 2008). As a result companies were lowering prices as well as offering incentives which, however, had negative influence on the profitability of the whole industry. At the same time it stimulated a shift of competitive advantage to product design, marketing and brand-building (Lencioni, 2005). This was also true for the premium segment with new entrants and models coming in, particularly from the Japanese companies.

In the meantime the product variety and customer service had also increased. An investigation by ISDP identified that the sales of cars with exact specification had increased from 31% in 1992 to 78 % in 2002 while build-to-order car sales rose from 10% to 43% and the service level (in the dealer perception) increased from 80% to 95%. (Turner and Williams, 2005). A wider variety and increasingly heterogeneous market have in turn implications on car manufacturer’s organisation and technology. Assembly plants have become smaller, more flexible and new methods, like lean management, just-in-time (JIT), kanban and others have been introduced (Morris et. al., 2004).

Environmental analysis

For the company to be successful, it is crucial to analyse the wider environment carefully in order to anticipate changes and be proactive. The concept of PESTEL will be employed to analyse the different but overlapping and interrelated areas (Johnson et. al., 2008, pp54-57).

Ecological environment

The ‘green agenda’, including such issues as pollution, waste, climate change and resource deficit, has become an important topic in the 21st century. Given that the road transport contributes 20% to the EU’s CO2 emissions while passenger cars account for approximately 12% (EU Press release, 2007) there is a general concern about the future of the car industry. The producers of large, premium automobiles such as BMW that very often are very fuel-consuming are seriously affected, particularly in the long-term.

Economics

With the car being highly sensitive to price and consumer income, the car industry is very vulnerable to economic changes (Akpinar, 2007, p175). The global economic downturn in the beginning of 21st century led to lowering demand for cars, however, as Hawranek (2008) argues that premium cars are usually not as much affected as mass-market. In fact, BMW’s performance was quite remarkable. (Lencioni, 2005). However, it has proven not to be the case in the most recent recession where the luxury car makers, particularly Mercedes-Benz and BMW have been hit hardest with BMW sales declining by 18% (Hawranek, 2009). Additionally increasing fuel prices have major implications on car manufacturers (Lynch, 2006, p701). Firstly the car makers, especially the luxury ones, will be pressurized to build more fuel-efficient cars. Secondly the demand is shifting towards smaller sized cars (Thanasuta et. al., 2009, p. 358), which has led BMW to introduce the Series 1 models.

Finally the car makers are influenced by the currency changes (Lencioni, 2005). The strong rise of Euro and the week Dollar have both had negative impact on many manufactures, particularly BMW as it still mostly produces its cars in Germany.

Political and legal issues

There are governmental regulations that affect most manufacturers, including car makers, such as health and safety, employment laws etc. Additionally different tax levels are imposed depending on vehicle efficiency (Thanasuta et. al., 2009, p358). Emission reduction regulations have also had major influence on manufacturers to produce environmentally-friendlier cars as well as develop new alternative technologies (Pilkington and Dyerson, 2006, pp81-87). Recent development even foresees fines for car manufacturers if their models exceed a certain level of CO2 emissions (Curry, 2007).

Further developments, such as congestion charges on vehicles (with exception of the hybrids) in the city, for instance in London, or subsidising electric vehicles are all affecting the future strategies of the car manufacturers (Ewing, 2008).

Technological development

There are a range of new materials (composite, ceramics, plastics etc.), new product developments, such as more fuel-efficient engines and car frames, sensors and other devices in the car as well as new manufacturing procedures that aim to increase the competitiveness of the car makers. New models, like electric, hydrogen driven or various hybrid cars are being developed; however, there are many problems with most of these new forms that have to be overcome. It is also not yet clear which of these technologies will become the most successful in the future, although there seems to be a general belief that electric cars are the ones that will take to the mass market (Ewing, 2008). So far Toyota’s hybrid-vehicle strategy over the last decade has turned out as one the best. (Lynch, 2006, pp315-318).

Social development

The 21st century customer has become very informed, more sophisticated as well as more aware of different developments, such as ecological, human and other social issues. With the ageing and always changing society, it becomes more important to study the developments of customer lifestyle and attitudes.

As Daimler CEO Zetsche points out people even if they are sufficient wealthy no longer feel that it is appropriate to drive a big car (Hawranek, 2008). Prestige for many people nowadays means that their luxury cars are not only fast and safe but also environmentally friendly or even trendsetter for green technology. However, it should be also noted that there are regional differences, for instance in China, the trend is just opposite – the consumers want the biggest cars they can buy (Hawranek, 2009).

Competitive forces in automobile industry

The following chapter is dealing with the analysis of competition in the car industry. To achieve this five forces framework developed by Porter will be used (Johnson et. al., 2008, pp59-65; Mintzberg et. al. 1998, pp100-102).

The threat of potential entrants

The threat of entry depends mainly on type and extent of the entry barriers. These are typically considered very high in the car industry, particularly in the luxury segment (Thanasuta, 2009, p355). Oliver and Holweg (2008, p3) argue, however, that cheaper cars from India or China might threaten the car industry similarly as Japanese makers did in the 1970s and the Koreans in the 1990s. They further suggest that due to the high level of competition in the car industry new entrant are threatened just as much as established manufacturers.

Due to large investments and very complex and dynamic market environment, such barriers as economies of scale, knowledge and experience are some of the most important ones that protect incumbent companies from entrants. Successful cooperation with suppliers and strong distribution network poses further hurdles for new competitors. Trade regulations are a further barrier to entry, although, these have been widely removed, for instance EU removed such trade barriers in the mid-1990s (Lynch, 2006, p715). However, the primary car producing countries will always try and support their own markets and companies.

The most important protection for the luxury car makers are their brands. These are used for differentiation and identification of the company’s products and can bring great benefits, like customer loyalty, long-term competitive advantage as well as exclusive brand premiums and in the case of BMW are extremely hard or even impossible to imitate. As Thanasuta (2009, p355) states brand premiums that customers are prepared to pay could account to more than 25% of the car prices, which makes this segment very attractive to mass-market brands. According to Donnelly e. al. (2002) it would be extremely difficult for mass-market companies to break into luxury car segments, as the example of failed VW luxury model VW Phaeton shows (Baltas and Saridakis, 2009, p151).

The threat of substitutes

In order to analyse the threat of substitutes two different levels can be considered – physical or intrinsic – a means of transport and emotional or extrinsic – owing, identifying with a car (Thanasuta, 2009, p358). On a physical level public transport, like bus, tube or train can be seen as substitutes to transport passenger. From a wider perspective a plane or even a ferry can be seen as a substitute as a means to travel wider distances, for instance within UK, particularly with emerge of the low-cost carriers such as Ryanair or Easy Jet. These types of substitutes, however, do not satisfy the emotional need for prestige and identification.

Motorcycles represent another substitute for cars which would offer emotional satisfaction, but limited capacity and one that is even a greener substitute – a bicycle or a mixture of the both. Countries as Germany and the Netherlands have been developing their cycle road systems since several decades and governments continually encourage people to use them more frequently. Furthermore Stuttgart has announced to introduce a rental system of the light electric vehicles (LEVs) – non-polluting electric scooters which are already being used in India and the US (Schenker, 2008).

Although people are becoming more aware of environmental problems, given the high level of comfort that a car provides and emerging new and better technologies, it is highly unlikely for cars to become widely substituted.

The power of buyers

In a mature and saturated automobiles market companies are under pressure to compete for customers. The power of the buyer’s increases as they become better informed or when the product is lesser differentiated.

The widely used platform and component sharing poses a potential threat here. Some VW customers have realised that they can buy a similar but cheaper product than VW under its other brands Å koda or Seat (Å trach and Everett, 2006).

Brand building and communication, in particular within the premium segment, could be considered as a way to increase customer loyalty. However, research (Colombo et. al., 2000) suggests that premium car customers are rather loyal to the luxury segment generally than a particular brand.

The power of suppliers

As already indicated earlier car manufacturer are maintaining a close cooperation with their suppliers as there is much higher interdependency between them which results in decreased power on both sides. However, car manufacturers in general enjoy higher bargaining power, especially with steel suppliers due to low product differentiation and fragmented market structure (Lynch, 2006, p91). The steel supplier power increased, however, as China’s economy and thus demand rapidly developed driving the prices of many materials extremely high.

Considering the further value chain it can be realised that steel producers depend on iron ore suppliers which again have very high power due to high consolidation (Jung and Lee, 2006). Looking even further all of these companies are energy-intensive and depend on the very powerful oligopoly or monopoly markets of energy providers.

The extent of rivalry between competitors

As mentioned before the rivalry in the automobile market is enormous. It should be also noted that regional difference between various areas exist, so in Europe, US and Japan – the very saturated markets rivalry is higher than in the new geographies with stronger growth, such as Brazil, China or Mexico.

High fixed costs and additionally the low product differentiation in the early 2000s were the factors that increased the competition even further.

Companies have been realising that various forms of cooperations offer more benefits to everybody than fierce rivalry. As Pilkington and Dyerson (2006, p81) emphasize particularly with regard to the future developments car manufacturers seek to cooperate with competitors in order to expand their knowledge, save costs and increase competitiveness.

BMW and Daimler are being considered to be perfect partners, although until recent economic crises they refused to work together. Under the threatening circumstances they have decided on joint purchase of components to save costs; however the initially planned capital-interlocking plans were not approved by the BMW main shareholder – the Quandt family. (Hawranek, 2009a).

Premium car segment

As seen in the previous chapter market environment can create opportunities as well as threats, to the car manufacturers; however, it is the company’s internal strategic capability that determines its success or failures and that distinguishes it from competitors (Johnson et. al., 2008, p94).

The next chapter will examine the critical success factors of the luxury car market and BMW’s performance in order to achieve them.

Critical success factors

Branding and positioning

According to Johnson et. al. (2008, p27) a strong brand allows company to gain a significant price premium, which in turn can lead to a sustainable long-term profitability. In premium car market successful branding is one the most important factors. If developed successfully brand can provide a company with a sustainable competitive advantage which is difficult for competitors to imitate. According to Nueno and Quelch (1998, pp62-63) brands are characterised through consistent quality, craftsmanship, recognizability, exclusivity, reputation, distinctive variation, timing, heritage, as well as “association with a country of origin”. According to the survey by Market Opinion Research in 1997, Germany has been considered the best automobile producing country in the world (Thanasuta, 2009). This certainly has had a positive impact on BMW’s performance.

Referring to brand building Baltas and Saridakis (2009, p153) point out that car brands need clear and consistent strategies over longer-term to develop successfully.

Further Lynch (2006, p700) argues that unlike in other segments in premium market branding is truly global. However, Baltas and Saridakis (2009, p153) argue that the key to successful global branding lies in understanding the different markets and effective use of brand strategies accordingly. As noted previously markets can greatly differ regarding cultural, social, economical and other factors and thus need appropriate strategies.

Another important factor is successful adequate positioning and market segmentation. This structure enables car maker to serve better their customers, as different modules match different customer needs. To achieve this, a strong marketing function is essential as well as sufficiently differentiated products. With regard to premium positioning there has been criticism about the trend of luxury brand acquisitions by companies like Ford and GM with aim to create mass demand for niche products. Despite economical appeal Å trach and Everett (2006, p110) consider it as intrinsically illogical for premium brands.

Quality and innovation

The quality standard in luxury car market is extremely high as the margins are substantial. Manufacturers cannot therefore afford to make any mistakes regarding product and service quality. Nevertheless, due to fierce competition and price pressure, premium margins can only be earned if costs are kept at minimum.

As Å trach and Everett (2006, p120) state premium cars and their customers cannot be treated the same way as mass-market products and users because “they are not average”. Thus they further argue that platform and component sharing in luxury segment is considered highly inappropriate. While Olson (2009, p213) agrees that platform sharing can create damage in inter-brand applications, he suggests that intra-brand platform sharing is safe for the brand and cost effective, however only on products with price variation between 20% to 25% . In another study, however, he (2008, p1072) discovers that a unique platform is worth high premium and gain in market share and further reinforces this by an example of successes of BMW and Porsche, neither of whom do much platform sharing. Particularly with regards to informed customer, premium price for a cheaper platform or components cannot be seen as favourable. Nevertheless, recent recession seems to have enabled Audi to do just that and what it saves in manufacturing costs can then be spent for luxurious accessories making some Audi models looking more luxurious than those of Mercedes and BMW (Hawranek, 2009). There is, however, great doubt that this strategy could be sustainable over the long-term.

Dealer networks and customer service

Although not immediately obvious the service level provided by the car maker’s networks is essential in the premium market. Christoph Stürmer – an analyst for industry watcher Global Insight (Ewing, 2008) states, regarding Lexus expansion in Europe, that buying luxury cars is all about convenience which also means that an professional dealer that provides high standard service has to be close enough. This means for luxury car makers in order to be successful need to build up and maintain widely accessible and dedicated dealer facilities that an offer the necessary quality of service.

BMW’s strategic capabilities

The next chapter will explore how BMW capabilities compare to the success factors which are critical in luxury segment. As Johnson et. al. (2008, p103) suggest that competitive advantage is more likely to be determined by competences – the way company deploys its resources than the resources itself, however, these have to be available in the first place in order to be used successfully. For the long-term success, it is important that the competitive advantage is sustainable (Lynch, 2006, p9).

Marketing management

The BMW brand stands for sporty, performance oriented cars of a high level of craftsmanship and ingenuity. Under the slogan “The ultimate driving machine” BMW has consistently delivered the same message and brand promise for the last 40 years (Kiley, 2004, p35-107). By establishing a strong brand identity BMW could extend the luxury feeling even to cars with smaller engines (Lencioni, 4). The key to BMW’s success is consistency and authenticity of their marketing strategies and policies. Other companies have experienced a lot of drifts and changes in their strategies due to the product separation from the brand and image or slogan changes, for example because of the changes in personnel or ownership. In fact, the long-term ownership by the Quandt family has certainly supported the steadiness and strengths of the company. BMW’s contribution to motor sports and appearance in films has also been key practises that helped develop the brand (Kiley, 2004).

Further BMW uses customer profiling in a certain way. They go beyond pure demographic statistics and carefully track the personalities, lifestyles and tastes of their customers. People who drive BMW are very particular about the brands they using, image is a high priority and a part of the deal (Khermouch and Welch, 2004, p6). They are affluent, young or young-minded people who are driven in their lives, just like the BMW. (Kiley, 2004, pp109-138).

BMW is also very successful in segmenting the market and positioning their models appropriately. As mentioned earlier the problematic product range in the beginning of 2000s could be solved efficiently, as they launched new model every three months from 2003 till 2005 (Lencioni, 2005). The acquisition of the Mini brand enabled BMW to enter a very different and totally unique segment of the automobile market whilst maintaining their existing brand (Simms and Trott, 2007, p299). The other additions Rolls Royce uniquely defines luxury and are perfectly suites BMW’s way of doing business (Kiley, 2004, p263). Thanasuta et. al. (2009, p355) investigated how brand names affect consumers “Willingness to Pay” and found out that Mercedes, BMW, and Audi brands were ranked accordingly, the highest. With such a strong brand as BMW the company was able to earn some of the highest margins in the industry.

Engineering and product development

BMW – a company dominated by engineers always puts product before anything else and is deeply committed to that principle. There are three main principles which they deploy while developing a product: balance, power-to-weight-ratio and braking power. Technical issues like this are the heart and soul of the company and something BMW engineers are obsessed with (Kiley, 2004, pp3-15). This is how they ensure the high quality of driving experience which is the base for its strong brand position.

In addition BMW has achieved a small lead in the fuel-efficient technologies, including a start-stop automatic transmission and recovery of braking energy (Hawranek, 2008). With regards to the main future developments BMW has decided to adapt combustion engines run on liquid hydrogen as this is seen as the only engine that meets BMW’s requirements in terms of dynamics (Wüst, 2006). However, there is still long way to go, as it takes a very long time to change a global energy system.

Human resources and organisation

In order to implement strategy successful company will always relay on people, from top-managers till down to line workers. With a highly diversified workforce and matrix organisational structure BMW is ale to achieve a high degree of flexibility (Kiley, 2004, p22). Additionally BMW has possibly the most flexible working hour models (Hawranek, 2008) as well as flexible plant in the industry (Kochan, 2006, p113). Another measure BMW deploys to improve innovation has been awarding creative error of the month award to its employees. This way they aim to bring about cultural change, where challenging accepted practice in the name of improving business is accepted and favoured even if the idea fails (Kley et. al. 2006, p29). To enable such a policy a very open and trustful organisational culture is needed which has to be supported from top to bottom. And as a powerful global brand, BMW has attracted some of the best management talent in the industry (Khermouch and Welch, 2004, p5).

Supplier and distribution strategies

BMW has built a strong dealer network and always executed firm control over its supply chain, to include distribution as well as suppliers. This also enabled effective market segmentation, efficient brand building and high standard after-sales service (Lencioni, 2005). BMW like other car manufacturers also seek close cooperation with their suppliers in order to

Ensure high quality standards as well as efficient manufacturing. For instance, BMW built a supply centre on the Leipzig site, where the supplier is highly integrated in the manufacturing process and supply parts just-in-sequence (Kochan, 2006, p113).

Operational and financial efficiency

Unless operational strategies are in line with the overall strategy, no matter how well it developed it is, it cannot succeed. It is at the operational level that real strategic advantage can be achieved. Efficient collaboration with suppliers and outsourcing, extensive automation (Kochan, 2006, p112) and high process quality standards makes BMW a performance company throughout. In order to maintain financial efficiency, BMW has moved part of the production to low-cost countries and expanded in the USA (Lencioni, 2005).

Future outlook

In the last 50 years BMW has built a powerful brand image and distinctive competitive advantage. However, with rising fuel prices and climate change BMW will have to work hard to develop an environmentally-friendly car that still supports the values that the company has been standing for.

Despite the fact that recent recession has hit hard the luxury market BMW considers itself in fundamentally good shape as it began preparing for a downturn in early 2008 (Ewing, 2009). However, there are no reliable predictions on how long the crises will last and how the automobile industry will develop in the future but the direction BMW has to work to is certainly clear – to a greener, more environmentally-friendly Beemer.