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The purpose of this paper is to critically discuss the strategic methods Bavarian Motor Works (BMW Group) applied to become one of the major leading automobile brand today. With reference of ‘BMW automobiles’ Case Study by Mr. Valeriano Lencioni, I will further examine what happened with the company, what are the different business strategy approaches the company could use to overpower the high competition in the automobile industry, and what is in the future for the company.
Like any other business companies, BMW went through rough time when they continuously keep on losing their market share and with the presence of tight competition, everything would have been unsuccessful. With the use of business strategies, BMW was able to determine what went wrong and what they could do to survive the pressure in the industry.
Organisations in a similar environment are not identical but have different capabilities. BMW has strategic advantages that sets them apart from its competitors. BMW’s resources and competences developed over years for the company to survive and grow. Every company needs a foundation to continuously keep up with its changing environment and with competition.
Presently, BMW is a multi-billion company that manufactures several of the best-known cars in the market. BMW has gone way far ahead from its competitors even with the pressure from competition and still manage to survive and even growing and expanding globally.
What are these business strategies BMW applied all these years to get there on top? How did the company even manage to be one of the biggest car manufacturers in the present time knowing the company went bankrupt in the year 1961? What is happening in the automobile industry and what is the position of BMW in the competition? Will it still manage to survive in the future? What are the challenges in store for the company for the next 10 years?
BUSINESS ENVIRONMENT AND MAIN TRENDS IN 2004
The global car market started decline in 2003, led by the drop in the market in North America and Western Europe. Other regions of the world led by East Asia are seeing further car market expansion in 2003. In 2004, projections for livelier economic growth strengthen the continuation of car market growth in Western Europe and North America.
Although how laws can get stricter and how badly it can affect the companies’ earnings, it also develop new technologies and markets. Another major external factor affecting the current situation of BMW is that industry structure is becoming more intense. BMW is a business which could face problems in the future if it doesn’t take into consideration strategic alliances. Although, the problem was that the economy in North America and Western Europe has been affected by the overcapacity in the automobile industry. It became a global economic instability as consumers from the said part of the world decided to reduce spending on non essential goods. There was lower car demand and so, sales was automatically affected.
The automobile industry is becoming more and more competitive, with 6 major groups which have recently formed. Car manufacturing presently is largely affected by external social and environmental pressures, which influence both current production practices and the development of future products and technologies. Environmental standards are mostly set by government regulation and even associations within the automobile industry. These acts aim to as anti-emission laws get stricter every year, and companies look to double or triple their fuel efficiency, alternative technologies are being developed to replace the traditional gasoline engines, and have started to hit the market. Increased fuel-economy and decreasing vehicle weight are gradual changes that slowly improve automobile performance; disruptive technologies include new fuel sources such as electricity, solar energy, and fuel cells. Please refer to Appendix III: UK car production in Year 2003.
Within the automobile industry, it had too many difficulties and the players in this field have experienced the troubles of surviving. The change is needed as equity prices drops and geopolitical tensions arised, including the related threat to oil prices, all having a negative impact on the economy. Increasing the safety standards for automobiles also mean that nowadays cars take longer time to be developed and manufacturers should now focus on pre-marketing activities, making cars look more desirable to consumers due to their safety. Competitive forces determine the market power of competitors, the kind of competition they engage in, the factors that give some of them a competitive advantage, and the attractiveness of that market compared to others.
Bayerische Motoren Werke Aktiengesellschaft (BMW) or Bavarian Motor Works is a German automobile, motorcycle and engine manufacturing company founded in 1917. The BMW Group is now one of the ten largest car manufacturers in the world and, with its BMW, MINI and Rolls-Royce brands, possesses three of the strongest premium brands in the car industry. The group also has a strong market position in the motorcycle sector and operates a successful financial services business. The company aims to generate profitable growth and above-average returns by focusing on the premium segments of the international automobile markets. With this in mind, a wide-ranging product and market offensive was initiated in 2001, which has resulted in the BMW Group expanding its product range considerably and strengthening its worldwide market position. The company’s brand is extremely strong and is associated with high performance, engineering excellence and innovation. Indeed, the BMW brand is often cited as one of the ‘best’ in the world, and the company continues to launch a stream of innovative products as part of its battle with German peer Mercedes to be the world’s largest luxury car maker.
II. PESTEL Analysis for BMW; its impact and how these influenced its strategy
Organisations, such as BMW, need to look into the macro environment in which they exist, as these factors will have an impact and influence upon their industry. The macro environment is broken up into six main categories forming the PESTEL analysis. Automobile manufacturers must identify and select the issues which are most important to their industry in order to conduct a valid external analysis.
Political/ Legal Factors
Trade barriers and restrictions, import tariffs and tax policies are critical factors to consider especially for global manufacturers as they can influence the pricing levels of their products in each market and affect the profitability of a company.
Also, Environmental protection laws regarding the CO2 emissions; In 2007 the European Commission proposed binding rules to cut CO2 emissions on new cars to 130 gms/km and it shows Porsche whose cars have highest CO2 output fell 2% as a result and average BMW emissions drop to 170g/km. ‘With the threat of legislation looming BMW has shown that even premium car makers can seriously reduce CO2’, stated by Jos Dings, Transport and Environment Director. Please refer to Appendix IV: CO2 Emissions by Car Brand
The overall economic health of the car industry will have a great effect on each of the industry players. Interest rates, exchange rates and the level of unemployment can also depress demand. Most importantly the level of consumers’ disposable income is a critical issue particularly for manufacturers such as BMW and Jaguar, who compete in the luxury car market, as an economic downturn can seriously damage sales and revenues.
This is an important factor to consider especially with regard to the luxury car market such as BMW. The particular lifestyles of consumers determine which strategy the organisation should pursue in order to capture the needs of its market effectively. Levels of education also affect the industry, as a highly skilled labour force is required in order to produce high performance and excellently engineered cars. Other factors are the Population demographics, Income distribution, Social mobility, Attitudes to work and leisure and Environmental concern of the market.
With many organisations competing with one another innovation and technological developments can help differentiate the company’s product. Years ago the level of technology that was available, limited and restricted the models and designs car manufacturers could produce. Nowadays, technology has significantly moved on and companies can deliver more and more to their customers resulting in fierce competition amongst industry players to stay ahead of the market and be the best. By incorporating the latest technology advancements, car producers can lead the market in this field and achieve a competitive advantage.
Although not a major driving force, manufacturers must be aware of the advantages in producing ‘cleaner cars’ as there is now greater emphasis on protecting the environment. BMW have taken this into consideration and launched their ‘Hybrid’ model. The result is a reduction in fuel consumption by up to 20 per cent compared with a comparable BMW running on a combustion engine alone or it could be driven by electric power only, on the combustion engine alone, or with a combination of both power units.
III. BMW’s competitive advantage
According to Mr Lencioni, the car market was already full of good quality cars and consumers found very few ways to distinguish between many of the available brands and models. Quality was no longer an issue in the industry since most models were well built and reliable. Design and Brand Appeal became the distinguishing elements and customer’s choice factors. Companies that had given attention to the ‘look’ of their automobiles, even this strategy can only make small gains, rather than losing market share.
With this realisation, Design became the biggest factor in the fight for market share, as this feature grabbed customer’s attention. And with this action, automobile companies had to hire the most talented car designers which leads to massive costs for the company as well as the car prices.
Pursuing quality and appeal in design was putting pressure on companies’ resources, so was brand building and management. It had become clear that a brand identity was one of the most effective ways to be more competitive in an industry where more and more products came to the market.
BMW’ brand which is the circular blue and white logo represents an aircraft propeller. As company grew, the emblem evolved as the white and blue colours of the flag of Bavaria. The logo has made it easier for people to remember and has given the company more recognition. The BMW logo represents power, stylish and elegance, thus making BMW much more competitive in the market. Please refer to Appendix V: BMW logo.
Apart from brand and design, BMW has able to survive through developing strong customer knowledge, special levels of service and access to distribution channels. Another method we could clearly understand the competitive advantage of BMW is through its strength of five forces. Please refer to Appendix VI: The Five Forces that Shape Industry Competition.
Threat of new entrants
Analyse shows that threat for new entrants is low mainly due to huge capital and cutting-edge technology. Car industry is highly depended on their suppliers, because of advancement of technology and materials needed to build car. Even though all firms produce cars, no two firms are totally different and no two firms are exactly the same.
Strategic group maps display different competitive positions that rival firms occupy. Based on Information contained in perceptual map it is easy to notice that more and more firms are going into all sort of alliances which help to offer more and more cheap cars. Additionally, there are many substitutes, but these decrease if the special features of material increase.
Bargaining power of suppliers and buyers
Overall suppliers are weak because they are spread all over the world and cannot easily integrate forward, however more and more companies move into close partnerships with suppliers, even by acquiring them in order to reduce costs and exclusivity. The buyer concentration ratio and information availability is high as well as ratio of firms producing cars, on the other hand the power of buyers is weak due to low demand for non-consumer goods- automobile, high switching costs and low ability to backward integrate. The threats of substitutes are moderately strong because there are many different and less expensive transportation facilities.
On the other hand, intense rivalry is strong because the major players are dominant in the market by nearly same technology and manufacturing processes, supplier’s relationship and distribution systems. The ease of differentiating cars and price based competition. BMW is looking at entering into alliances, joint ventures, partnerships as it is the safest way of securing a market share, product attractiveness and competitive prices. In a decision to purchase a BMW product or that of the competitor, an individual will be influenced by a group of people that he or she wants to join; people in a certain social class or in a certain income level. There are also three factors that affect the buyer behaviour that a marketer must consider; they are social, personal and psychological. It will therefore be highlighted how these factors affect the consumer behaviour and in turn how the consumer behaviour affects the buying decisions.
Competitive rivalry within industry
BMW’s attractive product variations were a very good source of strength. BMW is having a repetition of building a driving machine that respond really good and enjoyably to their driver’s commands whilst also providing the safety, style, quality, reliability, and durability that help make long term ownership. On the other hand BMW’s factories are measured very supple and most dynamic in Germany utilising the latest technology in each phase of its value chain. All the above strengths and many others has places BMW in a good position with respect to the main strong competitors in terms of performance, features, dealer networks , foreign markets, for example Lexus, Mercedes-Benz or Cadillac where rivalry among these competitors increases when they compete globally in US car market, Europe and Eastern Europe and South-east Asia, but BMW strong brand is more costly to be switched especially for quality conscious customers which makes strong competitors. Please refer to Appendix VII: Global vehicle production and financial performance 2005-2006.
Threat of substitute products
The global marketplace is in jeopardy by lower car demand in North America and Western Europe, both comparatively established car markets that have been badly impacted by high-energy prices and very less consumer response.
The global automotive market is extremely competitive. Many large businesses operate on a worldwide scale. Competitors are constantly trying to find new technologies and markets to increase global market share. Recent years have seen globalisation and consolidation strategies increase by competitors resulting in competition intensifying. BMW faces strong competition worldwide in the luxury saloon market. Traditional competition, which has always been strong from Mercedes and Audi, has intensified with the emergence of Lexus as a major player, along came Ford’s new model, Lincoln.
IV. The future challenges for BMW
BMW has modernised model almost after every few months that might shift emphasis on getting a new model to market rather than focusing on issues that may develop with existing models, issues such as software, and mechanical problems. Reflecting this possibility, BMW stock shares have dropped 41% in year 2002 as it was relying too heavily on one model, the 1 Series to uphold its high edge.
BMW also earning profits due to the strong sales of the loaded models of the Mini but need to diversify, or in other words not keep all their eggs in one basket. Although this can also be identified as strength it can also be a true weakness. Strong competition with the major players that BMW needs to look out for, Lexus, Mercedes-Benz, Audi, and even Cadillac. As an example, the Lexus RX300 SUV rivals the BMW X5; the Mercedes E-Class still outsells the BMW 5 Series worldwide; Audi 3, 6 and 8 Series compete directly with BMW’s 3, 5 and 7 Series; Cadillac which has a whole new generation of models, leaving buyers with strong power in building preferences. The ‘1’ series may weaken the BMW trademark with comparison to ‘7’ Series buyers, the ‘1’ Series models may be viewed as cheaper cars with less quality. It could also be viewed as a tactic for BMW to obtain higher sales volumes.
V. The Global Business Environment
A combination of strategic models and frameworks will be used to critically evaluate the competitive landscape of the car industry in order to identify the prevailing conditions in the wider environment and the dynamics of the industry that can ultimately impact and influence HONDA and BMW car manufacturers. Car industry represents oligopolistic type of market with differentiated product features, unrestricted but hard to force entry barriers, strong competition and few dominant firms that hold most of market share. Governments rely on the car sector as well as related suppliers and services in terms of employment, taxation, GDP and balance of payments.
Demand fluctuations are appearing between country markets. Increase in taxations of production which represents significant government revenue. In 1980 there were thirty car manufactures, by 2000 this had fallen to thirteen where smaller manufactures (Saab, Rolls Royce, Jaguar, and Volvo) were bought by larger companies (General Motors, BMW, Ford) Changing the upstream supply chain as component suppliers split into layers and become total solution providers. Full cell technology will replace safety as the number one technology issue. The volume of traffic in many cities around the world is forcing governments to consider a range of road pricing, congestion charging, and car and petrol taxation measures to encourage more use of public transport, potentially reducing demand for cars. High competition encourages manufacturers to locate plants in low-wage countries (Hungary, Brazil, Romania) generating job loss and resentment in traditional car manufacturing countries (Britain, America) Global demand has also emerged extensively. Please refer to Appendix VIII: Development in global demand in from the year 2004 to 2012.
VI. Development and implementation of Business Strategy
The automotive industry is always seeing new legislation appearing on matters such as safety and the environment. For example legislation on ‘end of life’ of vehicles changed practices of many car manufacturers in 2002 and 2003 regarding materials used in car manufacture and other factors. BMW successful competitive strategies are grounded on the brand representation of BMW as a constructive and powerful; BMW reflects typically style, high value, up-to-date manufacturing and good performance to an object audience. Customer Feelings BMW is perceived as Quality Company and therefore seen as producing quality products. As a result, it is accepted among customers that BMW might charge higher prices. The BMW Group stays in fifth place amongst the world’s car manufacturers. Based on the external challenges, opportunities and potential future trends in the industry BMW should consider technological innovations looking at government policies concerning environmental issues. BMW should consider product innovation to reduce toxic emissions and to develop more efficient engines such as full cell technology which will replace standard car engines.
BMW should consider all opportunities and take advantage of its strengths. Looking at the macro environment BMW should carefully examine world sales of cars, customer’s behaviour and shift in economy such as interest rates. For BMW to stay ahead in terms of competition and remain gaining market share, the company should understand the increasing weight in the global automotive market in developing countries and emerging markets. Collaboration between companies should be maximised in order for BMW to remain competitive and create strong links with suppliers due to soaring prices for steel, aluminium, precious metals and plastic. Cross boarder alliances and mergers should be considered by BMW in order to draw near to the Asian car manufacturers.
BMW has noted that sales of its 7-Series model are up in the US, the product has been met with less enthusiasm in Europe. As Germany remains the company’s most important market, this may be classed as a risk. A commonly held view is the radical restyling of the 7-Series has failed to excite the traditional BMW driver. This may be especially worrying given the releases of the new 5- and 6-Series models, as they are believed to have undergone restyling as well. If the designs prove to be too innovative or radical, the company’s short-term growth could be seriously impacted. The risks associated with the introduction of a number of new models into an underperforming segment are only likely to increase the threat of failure within the segment.
Competitive Strategy fitting with the Maturing Automotive industry
Looking on the Automotive Industry in general we can see that it is in a maturing life cycle, where nearly all potential buyers are already users of the industry products, demand consists mainly of replacement, with growth totally depends on the competing firms abilities to attract new buyers and convince existing buyers to upgrade their usage, also the critical success factor (CSF) is mainly the cost efficiency. Throughout the firms Industry Life Cycles (ILC) many challenges faces the BMW corporate managers that needs to tailor BMW strategy , these changes on the strategy called the “Strategy Fit” , essentially managers will depend on certain input factors which are weighted when choosing the best strategy to fit the current ILC, these factors that affects managers decisions in choosing the company strategy depends on the industry life cycle phase introduction, growth, mature, decline, focusing on maturing and growth ILC phases as they are related to the selected companies. Maturing industries challenges are mainly the slow growth in demand which generates more head to head competition, buyer become more sophisticated more familiar with competing brands with hard bargaining due to repeated purchases, for BMW more focus is on service and price combination competition, challenge of innovating new product feature of find further use of the product current features to keep attracting buyers attention.
VII. BMW Strategic Effectiveness in the Market
BMW took good steps in driving the costs down by focusing on the design and production, it activates ‘Operation activity in the value chain’, although the shared component is a good idea for cost reduction, but also BMW high different in the prices of its product series could be an important factor in customer perception to the concept of the product features and design, perhaps focusing more on other cost reduction areas and avoid disturbance to customer perception can be a recommended option .
Based on the research it is possible to distinguish customers who follow standard patterns; buying affordable but comfortable medium size cars, are those aged between 20 and 40 years old, regardless of the sex but dependant on income and household status. These clients tend to have more urbanised and settled lifestyle. On the other hand those at middle age, male with high income and preferences tend to pay fortunes regardless comfort, fuel usage or environment issues. With regards to a variety of car models it is impossible to aim at mass market just with standard type of car. More applicable is a differentiated marketing strategy like those developed by GM, Ford and Daimler Chrysler which target clients at high and low income and offers cars with separate marketing and mixed variables.
This strategy favours merger and acquisitions to overcome mobility barriers and gain presence also in luxury car segment. Strategic success for BMW in maturing industries by introducing a wide selection of features in the products, enhancing the industry value chain for example increase use of advanced technology, integrate the suppliers by internet to streamline various value chain activities, drive down unit cost, developing more economical product design, increasing sales to present customers using promotions or more services, acquiring rival firms at bargain price, expanding internationally, adapting core competency according to customer requirements and expectations and pushing it towards distinctive competency where the firm better then rivals .
As part of BMW strategy tailoring by developing more economical product design, and focusing more on the technology innovation that reduces the cost in the overall value chain, for example BMW has been using new technology called RoDip-3, it is a new method for pre-treatment of the electro coating vehicle bodies that provides many enhancements and reduce cost to this process as explained by Christoph Klocke from BMW group. The first of these new pre-treatment and electro coating plants to be installed anywhere in the world is now operating in BMW group. Being one of the market leaders, BMW was very successful in adapting its Sales strategy with customer new needs and new preferences, BMW offered the ‘BMW financial service to facilitate the customer financial payments utilising the Internet technology and many payments facilities.
In order for BMW to compete effectively within their industry, they must first identify which issues are critical in achieving successful competitive strategies. Decisions concerning the direction and development of the company must take into consideration the whole range of external issues, which have been covered throughout this report.
The significant factors affecting BMW have been raised and are summarised below. These issues are critical to BMW’s success.
Size of organisation
There are many acquisitions and mergers between industry players and so a small sized companies such as BMW must understand their vulnerability have merged with other companies to fight off industry giants. Mass market organisations also need to achieve economies of scale to remain profitable, whereas for manufacturers in the luxury niche markets this is not as vital as they charge premium prices and achieve very high profit margins.
Quality of resources
High quality of resources can help companies achieve a competitive advantage over others. Quality is seen as a key success factors to becoming successful within the market.
Technology and Innovation
Customers are demanding newer products and developments in technology and innovation can achieve this. Using the latest technology will once again strengthen the company’s competitive position in the marketplace.
Strong Brand image
BMW has and can continue to build up a strong brand image through high quality resources. This is essential in the automobile industry as it creates a unique position in the marketplace and builds up customer loyalty making it difficult for other competitors to steal market share.
This is the key to survival. Companies can either differentiate themselves on price or through their unique characteristics of their products. Differentiating themselves from competitors gives the company a strong competitive advantage as they offer customers something exclusive, which competitors do not already provide.
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