Due to the failure to grow market share, the group adopted a strategy of organic growth in its early 2000s.This resulted in the launch of a large number of models with varied price and class ranges leading to further market development.
This renowned European carmaker BMW is well known for its high quality products and services which comes in wide ranges, its global brand image and its highly output cars. This report emphasizes on the company’s strategic goals and values and the impact of political, economic, social, technological, environmental and legal factors in the present competitive world on the company.
The main objective behind the case study is to understand its strategic capability, its target market, market segmentation which is keys to success in the competitive market like of any industry, also by discovering positioning options, calculating and further understanding the importance of brand management and selecting the appropriate methods for the strategic development of a company.
This report analyses the ability of the company to succeed and compete with its competitors. It will also discuss about the challenges it will come across in the near future.
Learning Objectives
The main learning objectives after analyzing the case study are:
Evaluation of Classic and Contemporary models, concept and tools used in business strategy and planning which include PESTEL analysis, Value chain analysis, SWOT analysis, Porters five forces, Industry life cycle and Cycle of competition.
The process BMW used to identify their strategic goals and values
Analysis of Political, Economic, Social, Technological, Environmental and legal factors and its influence on its strategy
The strategy used to achieve its competitive advantage
Future challenges impact on the Company
The reason for BMW considering the international business environment and its response towards it.
The use of Value chain analysis for BMW in order to improve its competitive position.
Summarization of its knowledge and understanding of its external business environment, its management and its ability to change, develop and implement business strategy.
PESTEL Analysis
In the macro-environment, there are various factors which affect the decisions of the managers in regards to the strategic development of any organisation. Some of the macro change factors include Tax changes, new laws, trade barriers, demographic change and government policy changes.
(http://www.oup.com/uk/orc/bin/9780199296378/01student/additional/page_12.htm)
According to Thomas (2007) when an organization undergoes various changes and faces complexity in upcoming situations, it is hard to keep a track of activities in external environment and its erratic effect on the strategies of the firm. In such a situation PESTEL analysis is done which helps in analyzing the key drivers of change that helps in predicting the businesses future environment.
Political factors: These factors emphasis on the government policy such as the degree of interference in the economy. In an automobile industry, the possible factors are:
Tax laws and government policies by foreign government have a great affect on the automobile industry. According to Hill, 2008 “Success of the business in the global market is determined by the probable foreign policies”.
As the laws and regulations that had affected the automobile industry also included the environmental factors affecting it adversely, it was made mandatory for all the car manufactures to consider the environment while making their manufacturing process.
Economic factors include factors affecting an organization on economic ground like exchange rates, taxation changes, inflation, and interest rates and so on. For an automobile industry the economic factors are:
The decreasing exchange rate of Euro had an adverse affect on the European car makers as due to difference in exchange rate increases the price per product and reduces the profitability for sale per product.
According to Autofacts, 2004 ” Emergence of developing states like China and India s excess capital and buying power regionally and globally”.
Global increase in GDP (market value of all goods and services) services from 2.0% to 3.1% in 2008 and regular economic downturn in the US market in 2008.
Buying capacity of people and the population figures even affects the automobile industry.
High amount investment in marketing and on the new designs production of automobile blocked huge amount of revenue although the supply was more than the demand.
Social Factors: Changes in social trends like income distribution, ageing population, and attitudes to work can have a greater impact on demand for a product by a firm and it also might result in the willingness and availability of individuals to work. Like in UK, as the population has been ageing has resulted in increment of costs to the firms who are committed to pension payments for staff who are living longer.
(http://www.oup.com/uk/orc/bin/9780199296378/01student/additional/page_12.htm)
For an automobile industry the factors could be:
As a result of recession, the buying behaviour of consumers seems to be changed.
Automobiles environmental issues and its harmful emissions (Johnson,2005)
Change in demand for a new product in terms of the launch of a new brand can be one of the social factors.
Technological Factors: New products are created due to new technologies. Technology reduces costs, improve quality and lead to innovation of a new product. These developments not only benefit consumers but also the organisations providing the products. (http://www.oup.com/uk/orc/bin/9780199296378/01student/additional/page_12.htm). The latest the technology is, greater is the demand for that product especially in terms of automobile industry. Examples are:
The cost of manufacturing increases with the adoption of new technologies.
Due to increment in the use of technology, the ratio of competitors is too high now.
Restrictive measure on technology which are linked to the environmental pollution are one of the most important technological factor (Allen, 2006)
Environmental Factors: The most concerned factors here are environmental issues and global warming which affects the environment. It even includes the change in climate and weather. In terms of automobile industry, the factors can be:
The taste and preferences of customers change with the change in trend. They now prefer eco friendly cars, fuel cell cars in order to environment friendly.
Due to increase in global warming and the awareness of green house effect, the consumers are more into buying environment friendly products.
Legal Factors are related to the legal environment in which the firm operates. (http://www.oup.com/uk/orc/bin/9780199296378/01student/additional/page_12.htm)
Some of the examples can be employment law, health and safety law. In the automobile industry, the legal factors are:
Rules and regulations in regards to pollution control all over the European countries.
The import export duty tax and the ethics in regards to the manufacturing process vary from country to country.
The firm is bound to follow the legal norms in order to maintain safety standards.
Porter’s five forces
“It is a framework for the industry analysis and business strategy development developed by Michael E. Porter of Harvard Business School in 1979. It draws upon Industrial Organization (IO) economics to derive five forces that determine the competitive intensity and therefore attractiveness of a market”.
(http://en.wikipedia.org/wiki/Porter_five_forces_analysis). It is a tool to assess the nature of competition by calculating the factors inside and outside an industry. It is done in order to develop business strategy and do an analysis of industry.
(http://alfrancobakerhughes.files.wordpress.com/2010/02/porters-five-forces2.jpg)
The Five Forces:
Threat of new entrants: The threat for a new entrant in an automobile industry is the minimum due to high investment in order to set up manufacturing plants and assembly liners. The time taken to be recognized by the consumers is even more than any other industry. Above are the few barriers that there is hardly a threat of new entrant in the world of Automobile.
Threat of substitutes: Although BMW is one of luxurious and renowned brand but can face a threat of substitutes due to other powerful brands like Audi, Toyota, Mercedes and so on. The other brands too as a wider choice due to huge range of products.
Bargaining power of suppliers: BMW got a long relationship with its supplier and also got a tightly controlled distribution system. Suppliers have high bargain power because suppliers can dictate the cost of raw material. Long relationship with suppliers result in reduced cost of raw materials.
Bargaining power of buyers: The bargain power of buyers is high due to availability of huge range of products as BMW and its competitors fall into exclusive car range. Consumers can choose a product on the basis of price.
Competitive rivalry: As most of the bigger automobile companies are globally establishes, their target market is the same attracting the same group of customers. This results in greater competition especially in the markets of Asia, Europe and US.
The key drivers of change
Pestel analysis helps us to overview the macro environmental factors. The factors which can have a high impact on strategy are identified with the combination of the above i.e. Pestel analysis, Porters five forces and drivers of change. The drivers of change help managers make effective decisions. Some of them are:
Consideration of environmental issues
Change of customer demand for goods quality cost of ownership.
Improvement in the use of technology and preference design due to change in taste and preferences of consumers.
Trend of using small cars.
The Industry life cycle
It is composed of five stages from the launching of the product to its declination. The stages are development stage, growth stage, shakeout stage, maturity stage and decline stage. The first stage is the start up of a company with the innovation of its assets. Secondly, during the growth stage there is a minimal threat to new entrants and high growth with low bargaining power of buyers. Thirdly, in the shake out stage the firm focuses on its managerial and financial activities and is a stage of slow growth. Fourthly, the maturity stage faces high barriers to entry with increase in competition. At this stage the highest is the sales with high market share but with time, the growth stops and stage of declination comes.
Considering the case study, BMW is in the maturity stage of industry life cycle. Although its growth is stagnant, its products like 1,3,5,7 series were standardized due to its huge market share and brand identity. Despite high barriers to entry in the maturity stage, BMW asset was a relatively high market share and status as a manufacturing excellence.
SWOT Analysis
It is a tool to analyze the internal strength and weakness with the external opportunities and threats. It helps in better understanding of how the internal strength and weakness with current strategy are capable of dealing with the changes in the external environment.
Strengths
In order to maintain good supply chain management, BMW maintains strong relationship with suppliers.
As BMW uses the most advanced technology, it helps in enabling design, quality and price to prospective consumers.
BMW has a good position in the market in terms of brand and gratitude factor.
It can rely on its strength in order to gain competitive advantage with the help of its well qualified labor force.
Brand image
High turnover
Highly qualified Labor force.
Weakness:
Low cost products of competitors and its perception of high price.
BMW had an image of being serious and conventional in comparison with the other competitors.
Environmental issues.
Consumer sophistication and understanding.
Opportunities:
The number of products sold was increased inspite of most of the countries being hit by recession.
Its attitude of advanced technology towards its products and its flexibility in development and manufacturing.
Affordability due to interest rate being less.
Its popularity increased among the developing countries like India and China.
World wide recognized brand image.
Introducing and developing a new product in the market with more advanced features.
Threats:
Economic downturn
Different Legal factors of different countries.
Increment in the number of entrants in the industry
Competition level increasing day by day and its going to be hard to survive for a company who doesn’t go along with the change in trend.
Increment in the supply costs.
Cycle of Competition
There was a strong competition between all the competitors in the market with time and in order to overcome the hurdles which could have resulted in the loss, BMW had a rise in its turnover with the use of adequate technology. Core capability and competitive advantages are not permanent in nature as per the concept of cycle of competition. ; For example BMW’s strongest competitors Toyota group. According to Kiley (2004), “Toyota’s whole assets including machinery, profit margins etc create threats for BMW as Toyota has established product in the small market region. Therefore, the available option for BMW is to compete through its core capability and competitive advantages”. By implementing the use of scientific technology that BMW restores to, higher economies of scale can be achieved.
BMW is one who serves from a small car to a bigger car like that from a mini to Rolls Royce. This is one which serves from a luxury segment to the premium segment which is not in case of all its competitors.
Strategic drift
Strategic drift refers to the change in strategy. Despite the occasional incremental development from cultural and historical factors, the reason for drift to occur is when company environmental changes negatively affect its operations.
BMW emphasises on brand development that is a result from changes in the market. Strategic drift is better off explained when considering an example of acquiring of English brand Rover was due to the company’s need of increasing production.
Resources
A resource is described as any physical entity that needs to be consumed first to get benefits out of it. (http://en.wikipedia.org/wiki/Resource). There are two kinds of resources- Tangible and Intangible Resources.
Tangible Resources are the physical assets like Labour force, machinery, finance within a firm and Intangible resources are the non physical assets like information, status and knowledge.
The resources which BMW possesses are:
It has highly qualified labour force composed of young and professional professionals.
In 2003, BMW’s financial resources the turnover was of 41.53 billion Euro, gross margins of 3.2 billion, 7.4% profit margins and annual surplus of 3.2 billion Euro.
Supply chain and dealership management
Effective market segmentation
Its universally designed physical resources
Its relationship with the it’s suppliers, quality of products, reliability and dealings makes them building strong relationship with their suppliers so that helps them in high bargain power of supplier.
Brand image getting stronger due to its reliability and inevitable product quality.
By the contribution of economies of scale, product/process design, experience and supply chain, cost efficiency at BMW is possible (Gerry, Scholes and Whittington, 2008)
Supply costs
Especially in terms of production and purchase of raw materials, supply costs play and important role within an organization. It is considered to be an important asset when input cost decides about the success of a company. With a work force of 104000, BMW has set up different locations like China, USA, UK, South Africa and Germany in order to manage its supply cost. It was guaranteed that the supply cost will be reduced if the transportation cost of raw materials is reduced.
Experience
The two primary things while considering experience in an organization are attainment of cost efficiency and control of costs. There is also a need to generate competitive advantage through experience by the firm itself and its unit costs.
BMW has been in the automobile sector since the Second World War. Acquiring of the cumulative experience is expected to lower its unit costs. There is a need of increment in the unit produced annually from the established assembly units in this competitive market with the reduction in the cost. This reduction atleast guarantees capability of survival although the competitive advantage may not be achieved.
Product/Process Design
“Product design is concerned with the efficient and effective generation and development of ideas through a process that leads to new products.”
(http://en.wikipedia.org/wiki/Product_design)The main reason for product design is to maximise working capital, labour productivity and better yield. In order to compete with the rival, it is adopted in order to gain competitive advantage.
BMW has earned reputation in the global market as an engineering excellence due to its excellent performance in product/process design.
Value Network for BMW
BMWs assembly locations and manufacturing unit is independent on each other according to the value network. Each of the assembly units has a separate supplier of raw materials needed to manufacture the product. Internal value chain in the assembly liners exists among them. The organisation also possesses a channel value chain which is formed on the basis of design, location and price such as the product varies from a mini to Rolls Royce. As per the target market, market segmentation is done and accordingly the product ranges are priced and designed differently as per the value chain criteria. The pricing strategy differs from location to location where BMW is focussing at. Like the price for the products in related to automobile industry in Asian market is cheaper than UK or US.
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BMW Success Factor
There are various factors responsible for BMW success. These include Product quality, Product cost and experience. Firstly, the product quality is important to be maintained as per the customer satisfaction point of view. The excellence of a product helps in identifying the brand of a product. For a company like BMW, it is important to maintain its quality for further success. Secondly, the product cost is always high but its quality of the products gets balanced it in front of its competitors and justifies the reason for the price to be high. The third success factor is Experience for BMW in the automobile industry. Its presence in the industry for so many years has helped in establishing its brand image for its products together with the advanced supply chain which helps in delivering of the right product at right time.
Hereby it’s said by Radinger, 1996 that “the BMW s channel value chain of price, location and design is the backbone of consumer value chain.”
Its brand image, technology, business model, its sustainability in this competitive world and lastly its CEO are responsible for its own success.
Future Challenges that may have an impact on BMW are:
Decrease in economies of scale
Technology may become stagnant.
Consumers taste and preference might change
During the firms maturity stage, there might be increase in rivalry leading to price wars too
Ups and downs of Currency rate will have impact on the prices of products sold in different countries.
High fuel prices and increment in the cost of raw materials.
BMW possesses the strategies like Product development, Market penetration; Restructuring, Market development and liquation that will help BMW readdress profits for organizational future.
Conclusion
A company like BMW had to face lot of problems in the 1990’s as there were so many competitors in the Automobile industry and also due to the fact of global recession. After all this hassel, there came a good part in its company which proved to be a turning point for the company as the new CEO started a strategy of internal growth through market and product development in the year 2002. Due to the failure to grow market share, the group adopted a strategy of organic growth in its early 2000s.This resulted in the launch of a large number of models with varied price and class ranges leading to further market development. This strategy of internal growth and product development also brought them to a conclusion of launching a new model every 3 months from 2003 through to 2005 and this plan was implemented which gave consumers choice from Mini to Rolls Royce.. The two biggest market the company targeted on were US and Asia in order to find buyers of their top and high range models and left over the European market for its lower cost and lower range models as the buyers didn’t include people with high budget in order to buy a car as they preferred mainly basic car model. BMW is in the maturity stage as of industry life cycle. Although its growth is stagnant, its products like 1,3,5,7 series were standardized due to its huge market share and brand identity. Despite high barriers to entry in the maturity stage, BMW asset was a relatively high market share and status as a manufacturing excellence.
The company acquired the image of manufacturer of an “Ultimate driving machine” as they worked upon their weakness and landed up innovating new ways in order to distinguish itself with its competitors. This resulted in crossing over the turnover of Lexus, the US biggest automobile maker in 2004 and BMW then become world biggest automobile company.
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